Earnings Call Transcript - NWG Q2 2022

Operator, Operator

Good morning, and welcome to the NatWest Group H1 Results 2022 management presentation. Today's presentation will be hosted by CEO, Alison Rose; and CFO, Katie Murray. After the presentation, we will open up for questions. Alison, please go ahead.

Alison Rose, CEO

Good morning, and thank you for joining us today. I'm joined by our Group CFO, Katie Murray this morning, and I'll start with the business update before Katie takes you through the results. We'll then open it up for questions. So let's start with the headlines on Slide 3. We're announcing a strong first half performance today with operating profit before tax of £2.8 billion, up 12.8% on the first half last year. And attributable profit of £1.9 billion. Our return on tangible equity was 13.1%, up from 11.7%. We're reporting strong income growth of 16.2% and costs were down 1.5%, resulting in positive jaws of 17.7%. We continue to target a reduction in costs of around 3% for the year and remain on track to deliver that. In a challenging macroeconomic environment, we maintain a strong balance sheet and disciplined risk management. We have a well-diversified wholesale loan book. 93% of our personal lending is secured, and we are well provisioned. We continue to deploy credit to support our customers and net lending grew 2.6% to £362 billion during the first half. The bank is also highly capital generative. Our common equity Tier 1 ratio is now 14.3%, and we have been clear about our intention to return excess capital to shareholders. We are declaring an interim dividend of £0.035 per share which represents £366 million towards our distribution of at least £1 billion this year. We're also announcing today a proposed special dividend of £1.75 billion with a share consolidation. In addition to the directed buyback of £1.2 billion in March, this brings total distributions announced for the first half to £3.3 billion. And we have also recently completed the £750 million on-market buyback announced in February. Just over 2 years ago, we set out our purpose-led strategy, placing customers at the heart of our business as you can see on Slide 4. The rationale was simple, by helping our customers to thrive, we too will thrive. Against the backdrop of economic uncertainty, we continue to focus on our 4 strategic priorities in order to drive long-term sustainable value, and that starts with supporting our customers, which I'll talk about more on Slide 5. While we are not currently seeing any immediate signs of stress, we are acutely aware of the pressures customers face this year with higher inflation, rising interest rates, a steep increase in energy costs and supply chain disruption. The strength of our capital generation and balance sheet enables us to stand alongside customers and colleagues as they face these challenges. Many of our customers built up savings during the pandemic, so household finances are in relatively good shape, and businesses have healthy balance sheets. To date, we are not seeing an increase in arrears or requests for help, but we do know that spending on utilities and fuel bills is up between 20% to 30%. So we are proactively targeting support to help customers navigate the economic uncertainty. We have launched a £4 million hardship fund to provide support for individuals and businesses delivered through organizations such as systems advice, money advice trust, and step change. We are also proactively contacting 2.7 million personal and business banking customers to offer information on managing the increased cost of living as well as support on supply chain and working capital management. And we're taking a range of actions if people do get into difficulty, including waiving fees where appropriate, agreeing repayment plans and loan forbearance. In addition, we continue to carry out 3 financial health checks, as well as helping customers to understand and improve their credit rating. The commercial customers we are tailoring support to sectors most likely to be impacted, for example, in agriculture, which has been hit by rapidly increasing fertilizer prices, we are helping 40,000 customers, including providing an additional £1.25 billion in lending for U.K. farmers. We also have a well-established ecosystem for small and medium businesses with sector specialists and business hubs around the U.K. We are monitoring our customers carefully to identify early signs of those who are having difficulties and have frozen any increase in tariffs for our smaller customers. We cannot support our customers without also supporting our colleagues who face the same challenges. So we are making targeted pay adjustments for our lowest paid employees across the group. So let me turn now to how we're delivering on our strategic priorities on Slide 6. We have an extensive franchise we currently serve 19 million customers, and we are the largest business bank in the U.K. This means we start from a position of strength with opportunities to grow even in an uncertain economic environment.

Katie Murray, CFO

Thank you, Alison. I'll start with the performance of the Go-Forward Group in the second quarter, using the first quarter as a comparator. We reported total income of £3.2 billion for the quarter, up 7.1% from the first. Excluding all multiple items, income was £3.1 billion, up 12.3%. Within this, net interest income was up 13.9% at £2.3 billion, and noninterest income was up 7.7% to £797 million. Operating expenses fell 1% to £1.7 billion, driven by lower conduct costs. We made a net impairment release of £39 million compared to a release of £7 million in the first quarter, which reflects a continued low level of default. Taking all of this together, we reported operating profit before tax of £1.5 billion for the quarter. Attributable profit to ordinary shareholders was £1.1 billion, equivalent to a return on tangible equity of 15.2%.

Alison Rose, CEO

So I'm going to focus on 3 areas in particular this morning: first, deepening our relationships with existing customers as well as acquiring new ones; second, supporting customers as they transition to a low-carbon economy; and third, diversifying our income streams. I'll talk about each one in turn, starting on Slide 7. We are working to deepen relationships with customers by serving them at all stages of their lives and by engaging more effectively with them. Our recent acquisition of Rooster Money is a good example. Rooster Money helps young children learn to manage money with real-time notifications of their spending. And gives parents the assurances they need by being able to block payments and freeze lost cards. We acquired Rooster along with 130,000 customers last October. And by connecting it with our own app have gained 17,000 new customers during the first half. This is a perfect example of how we can serve the needs of our customers in a responsible way while also generating growth for the bank. Our share of the youth segment has grown from 13.8% to 14.5% since 2019. Another way in which we're deepening our relationships is by using data analytics to make our communications much more personalized. Data-driven prompts now play an important role for customers across the bank. For example, 5.7 million personalized messages have been acted upon by customers to date this year compared to 1.4 million for the whole of 2021. We're also acquiring new customers by delivering a wider range of products and services across our franchise and by improving the customer experience through our digital transformation. For example, in Retail Banking, we opened 310,000 new client accounts during the first half. In Private Banking, we added over 1,000 new customers, of whom 20% were referred from other parts of the group. And in commercial and institutional, we opened 49,000 new accounts or start-ups, almost 40% of which were via our digital-only business bank metal. This takes our share of start-up banking to 12.4%, up from 10.4% in 2021.

Katie Murray, CFO

Turning to Slide 8. Another way in which we're meeting customers' needs is by helping them transition to a low-carbon economy, where there is a strong commercial, economic and social imperative. In Retail Banking, we have completed £1.4 billion of green mortgages since they were launched in Q4 2020, which gives us slightly discounted interest rates to energy-efficient properties. This is a 90% increase from £736 million at the year-end. We also have a carbon tracker on our app, which over 300,000 customers have access to so far this year. Our Private Bank is well recognized as having one of the best sustainability offerings in the U.K. And in February this year, we committed to achieve net zero alignment in at least 50% of the assets in each fund by 2025. We are also the U.K.'s leading underwriter of green, social and sustainability bonds. Last year, we set a target of delivering £100 billion of sustainable funding and financing by 2025 and have contributed £20 billion towards that target to date. We also led a collaboration with other banks to launch Carbon Place, the world's first transparent global marketplace for carbon offset using blockchain to offer customers consistent carbon pricing and liquid market and seamless post-transaction settlement.

Alison Rose, CEO

Turning to smaller businesses. We launched the NatWest Carbon Planner at the end of June, which is a free platform to help SMEs work out their carbon footprint and then prioritize actions and targets to reduce it. We're also helping smaller businesses with green loans to finance solar panels, electric vehicles or heat pumps with no arrangement fees. The investments we're making to improve our customer propositions is also helping us to diversify income streams by both product and customer.

Katie Murray, CFO

When considering the return on capital employed, several factors will influence our position within the 14% to 16% range. One important aspect is how our tangible equity evolves by the end of 2023. With today's announcement, we are accelerating our progress towards our CET1 target of 13% to 14%, aiming for around 14% by year-end. The timing of further distributions and their impact on tangible equity will play a role in this.

Alison Rose, CEO

Thank you, Katie. So to conclude. We are reporting a strong performance today and continue to make good progress on all our strategic priorities in an uncertain economic environment. Our strong capital generation and robust balance sheet enable us to continue supporting customers as well as to invest in growth, consider other options that create value and return capital to shareholders. The special dividend we have announced this morning brings distributions for the first half to £3.3 billion. And on the back of a strong performance, combined with a robust balance sheet, well-managed risk, and significant capital generation. We have upgraded our guidance today and now expect to deliver returns in the range of 14% to 16% in 2023.

Operator, Operator

Our first question comes from Aman Rakkar of Barclays.

Aman Rakkar, Analyst

Alison, hopefully, you can hear me okay?

Alison Rose, CEO

Yes, we can hear you.

Aman Rakkar, Analyst

Great. I had a question on the ROTE guide for next year, the 14% to 16% range does imply a range of outcomes on profit. I suspect that relates to your view of revenue. But I was interested in where you see the kind of sensitivities to ROTE next year. What gets you to 14% versus, say, 16% next year? The second was around your assumed interest rate benefit as base rate goes to 2% managed margin benefit of £200 million this year. Thank you very much for that disclosure. I was interested if you can help us understand what you thought a kind of full 12-month run rate for that number would look like? And what kind of deposit pass-through assumption are you embedding as part of that?

Alison Rose, CEO

Great. Thank you. Well, I'll get to Katie to take you through the detail. But when you look at our rate guidance, I mean, there are a number of drivers to that. Clearly, what we've demonstrated is a well-positioned business and we're growing revenue. Our transition plan is delivering operating leverage, strong balance sheet and risk diversification and obviously, the capital base with a clear commitment to the capital returns. And so taking that together gives us the ability to strengthen that 14% to 16%. But Katie, do you want to take through a little more detail in that and then the other questions.

Katie Murray, CFO

Yes, sure. Absolutely. So if I look at the ROCE, there's obviously a number of factors that will impact where we end in that 14% to 16%. And one to think about is the progression of that tangible equity through to the end of '23. So with our announcement today, we've increased the pace on our journey down to our CET1 target of the 13% to 14%. Clearly, the timing of further distributions from here and when they actually hit tangible equity has a little bit of an impact. So the £200 million reflects the proportionate share of the full year benefit of 325 basis point increases in the second half. Clearly, the actual benefit depends on the timing and the size of rate rises and also the ultimate level of pass-through, which may vary from the illustration. And then finally, the £0.6 billion of structural hedge benefit that represents the year-on-year increase we expect in total hedge income in 2022.

Operator, Operator

Our next question is from Rohith Chandra-Rajan of Bank of America.

Rohith Chandra-Rajan, Analyst

I would like to revisit your informative slide, Slide 17, and request that you provide more details regarding the progress observed in the first half of the year. Additionally, could you explain how the dynamics differ for the second half or the entire year compared to what we have already experienced in the first half? You mentioned the deposit pass-through, and I believe there is also a significant increase in hedge benefits.

Katie Murray, CFO

Rohith, thanks very much. Yes. No, look, it's a good slide and we enjoyed kind of pulling it together to try to give you some good guidance. I'll give you a bit of a fuller answer so that you can understand the 3 component parts of that £1.9 billion. Firstly, it's important to remember the margin profile during 2021. The low point for margin was in Q3 '21 when NIM was 2.28%. And the year-on-year growth will be more significant in H2 than in H1. If I just take the different components first. So the £1.1 billion of managed margin benefit from the base rate at 1.25%. This is effectively the full year benefit from the base rate increases through to June across retail, private and commercial institution institutional, there's been limited pass-through in H1. We have, as you may know, announced the deposit rate change for our retail customers, which becomes effective on August 1. And following that change, the cumulative deposit pass-through for the group is approximately 15% of the 115 basis points increase in the U.K. base rate since December 2021. Now that we're at this level and considering the level above 2%, we've conducted an illustrative analysis using 50% of potential rate increases moving forward. I want to remind you that we have only accounted for 15% of the total to date, but this approach provides a reasonable estimate for future projections.

Operator, Operator

Our next question comes from Martin Leitgeb of Goldman Sachs.

Martin Leitgeb, Analyst

Congratulations on the strong numbers today. I wanted to follow up on your comment about the 15% pass-through regarding deposits. Does this pertain only to personnel deposits, or does it also include commercial deposits? Additionally, I noticed you mentioned a significant deposit margin benefit from commercial and industrial deposits. Can you clarify if there will be any differences in the behavior of C&I deposits and deposit pricing compared to personnel deposits going forward?

Katie Murray, CFO

Yes, absolutely. So as we look at the pass-through assumptions of what we've done to date, so 15% of the total as we've come through. So limited pass-through across all areas. What I would say is it does differentiate across the different sectors. So if you look at the pass-through rate that we've got within our managed rate within retail savings, it's 17%, so an increase of 20 basis points compared to the 115 basis points since the rates have gone through. Within C&I, that is 9%, sorry. It's only 10 basis points that have gone through. So you can see that decisions are not uniform across the bank.

Alison Rose, CEO

So, let me take this opportunity to say thank you for your continuous support and engagement. We are proud of our achievements and remain focused on delivering strong and sustainable results while supporting our customers through these challenging times.