Earnings Call Transcript - NWG Q1 2026

Operator, Operator

Good morning, and welcome to NatWest Group's Q1 2026 Results Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we will take questions.

Paul Thwaite, CEO

Good morning, and thank you for joining us today. As usual, I'm here with Katie. I'll start with a brief introduction before Katie takes you through the numbers, and we'll then open it up for questions. We started the year with strong momentum across our 3 businesses and made good progress against each of our 3 strategic priorities. First, we continue to pursue disciplined growth. In Retail Banking, we increased our share of the mortgage market as we expand our offering and announced new partnerships such as becoming the exclusive mortgage provider for Rightmove. In Private Banking & Wealth Management, our acquisition of Evelyn Partners makes a strong addition to the group. The transaction is progressing well, and we expect it to complete in the second quarter, subject to the usual regulatory approval. In Commercial & Institutional, we are the leading bank for U.K. start-ups, and we grew our share this quarter as we onboarded 24,000 new start-ups, a 25% uplift on the same period last year, supported by easier agentic onboarding. Second, we are leveraging our investments in simplification and have delivered over GBP 100 million of additional cost savings in the first quarter. We employ over 12,000 software engineers, and we are complementing that talent with artificial intelligence. So over 40% of our code is now written by AI, and we are scaling agentic software development. Typically, our development process for new customer propositions requires 12 engineers and takes 6 weeks. But in some scenarios, with a team of 3 engineers and 7 agents, we can deliver in just 6 hours, making us more productive and delivering faster for our customers. Third, we continue to manage our balance sheet actively, helping to free up capacity for further growth and allocate capital dynamically in this fast-changing environment. So let's turn now to the financial headlines. Customer lending grew 6.6% year-on-year to GBP 400 billion, whilst customer deposits grew 2.6% to GBP 445 billion. Lending growth of GBP 7.3 billion in the first quarter was well balanced across our businesses, including GBP 3.3 billion in mortgages and GBP 3.8 billion in Commercial & Institutional. We also provided over GBP 10 billion of climate and transition finance, taking the total to GBP 29 billion since last July, making good progress towards our GBP 200 billion 2030 target. Deposits increased by GBP 3.1 billion in the first quarter with growth in Corporate & Institutional, partly offset by an expected decrease in Retail and Private Banking as customers use their savings to make annual tax payments. Assets under management and administration grew 16.9% year-on-year to GBP 57 billion. 23,000 people invested with us for the first time during the quarter, with net inflows to assets under management of GBP 900 million. Taken together, client assets and liabilities have increased to just over GBP 900 billion, up 5.2% year-on-year, in line with our 2028 annual growth rate target of more than 4%. Income grew 6.9% to GBP 4.2 billion, and costs were up 4.8% to GBP 2 billion as we increased our operating leverage and reduced our cost/income ratio by 2.1 percentage points to 46.5%. Our return on tangible equity was 18.2%, driving strong capital generation of 65 basis points in the first quarter. Earnings per share grew 15.5% year-on-year to 17.9p. Tangible net asset value per share was up 15.1% to GBP 4, and we continue to maintain a strong balance sheet with a CET1 ratio of 14.3%. Since we announced our full year results in February, conflict in the Middle East has clearly increased geopolitical uncertainty. While sentiment is now more considered, we have yet to see any material impact on our customers. Both households and corporates remain resilient with historically high levels of savings and low levels of debt and arrears. In light of this uncertainty, we have revised our economic scenarios and now expect higher inflation with interest rates remaining at 3.75% for the rest of the year, resulting in slower economic growth and a modest increase in unemployment. This means we have taken an additional provision in the first quarter of GBP 140 million, which reflects our macroeconomic assumptions, not our credit performance, which remains strong. With rates staying higher for longer, we now expect full year income to be at the top end of the GBP 17.2 billion to GBP 17.6 billion range we set out in February. So we remain confident about the outlook and our 2026 guidance. That confidence is underpinned by the knowledge that we have built a resilient business, which is well positioned for a broad range of macro environments. We have a clear strategic focus on growth that delivers good returns with a prime lending portfolio that's well diversified and largely secured. We have invested and simplified so that we are now the most efficient large U.K. bank with a cost-to-income ratio that continues to improve, and we are actively managing our balance sheet. For example, we have taken the opportunity of a sharp move upwards in the yield curve to accelerate the increase in our structural hedge, supporting income growth in the years ahead. We have also increased our capital efficiency significantly in recent years, driving high levels of capital generation. All these factors have contributed to our strong performance in the Bank of England stress tests, giving us confidence in our outlook and guidance not just this year, but over the medium term. With that, I'll hand over to Katie to take you through the numbers in more detail.

Katie Murray, CFO

Thank you, Paul. My comments for the first quarter use the fourth quarter as a comparator. Income, excluding notable items, reduced 1.1% to GBP 4.2 billion, and total operating costs were 9.2% lower at GBP 2 billion, delivering 11.6% growth in operating profit before impairment to GBP 2.3 billion. The impairment charge was GBP 283 million, equivalent to 26 basis points of loans, including the charge for our updated economic scenarios that Paul mentioned. This resulted in operating profit of GBP 2 billion, with profit attributable to ordinary shareholders of GBP 1.4 billion, and return on tangible equity was 18.2%. Turning now to income. Income, excluding notable items, was GBP 4.2 billion. Excluding the impact of 2 fewer days in the quarter, income across the 3 businesses continued to grow, supported by both volumes and margin. Net interest margin was 247 basis points, up 2 basis points due to deposit margin expansion and a small benefit from funding and other, with lending margin declining by 2 basis points, mainly driven by mortgages. As you heard from Paul, our 2026 guidance now assumes that the Bank of England base rate remains at 3.75% this year rather than coming down to 3.25%. Together with our revised economic scenarios, this means we now expect income, excluding notable items, to be at the top end of our GBP 17.2 billion to GBP 17.6 billion range, excluding the impact of Evelyn Partners. Turning now to customer assets and liabilities, or CAL. You will recall we introduced our 2028 growth target for CAL in February. I am pleased we are entering another year with strong growth, continuing our track record. Our CAL increased by GBP 8.4 billion or 0.9% in the quarter to GBP 900 billion. This includes lending growth of GBP 7.3 billion, deposit growth of GBP 3.1 billion and a reduction in assets under management and administration of GBP 1.8 billion as strong AUM inflows were offset by market movements. I'll touch on each of these elements in turn. We are reporting another quarter of strong broad-based loan growth across the group with gross loans to customers up by GBP 7.3 billion. Retail Banking and Private Banking & Wealth Management balances grew GBP 3.5 billion or 1.5%. This comprises GBP 3.3 billion in mortgage lending and GBP 200 million in unsecured lending. Mortgage stock share increased marginally to 12.6%, and we have a robust pipeline following record applications in March. Commercial & Institutional lending increased by GBP 3.8 billion or 2.4%. This includes growth in corporate and institutions, driven by good demand across a broad range of sectors, including project finance, renewables and utilities and funds lending, together with increased lending in commercial mid-market, notably in commercial real estate and the housing sector. You will also see we have provided a detailed breakdown of our financial institution exposures, including private credit in the appendix of our presentation. Turning now to deposits. Customer deposits increased by GBP 3.1 billion despite the expected higher seasonal tax outflows. Commercial & Institutional deposits increased by GBP 5.1 billion. This was partly offset by a slight decline in Retail Banking and Private Banking & Wealth Management deposits as a result of higher customer tax payments of GBP 10.3 billion. Retail Banking outflows were partly offset by growth in current account and ISA balances. Overall, our deposit mix remained broadly stable. Turning now to assets under management. Assets under management and administration closed the quarter at GBP 56.7 billion. We are pleased with positive AUM net inflows of GBP 0.9 billion, which equates to 8.2% of opening AUM, demonstrating continued client confidence and strong momentum. There was a reduction in assets under administration of GBP 1.4 billion, driven by gilt redemptions to support client tax payments. Overall, balances were impacted by negative market movements of GBP 1.7 billion. However, these were reversed during April. Turning now to costs. Other operating expenses were GBP 2 billion, an increase of 4.8% year-on-year and a decrease of 8.3% compared with the fourth quarter. Our cost/income ratio in the quarter was 46.5%. We are pleased with the progress we've made on our transformation, and we made decisions to accelerate investment spend and incur higher restructuring costs in the first quarter, which drove the overall cost growth year-on-year. The reduction from the fourth quarter is mainly due to ongoing cost savings as well as lower bank levies. We remain confident in the delivery of our full year 2026 cost guidance of around GBP 8.2 billion, though our cost profile will be uneven throughout the year. Turning now to our updated macroeconomic assumptions. Following a period of global macro uncertainty, we have revised our economic assumptions. In our revised base case, we assumed inflation now means CPI will peak at 3.5% in 2026 rather than fall to 2% by the end of the year. This means interest rates stay higher for longer, and we assume the bank rate remains at 3.75% throughout the year. We expect lower GDP growth of 0.4% and a modest increase in unemployment to a peak of 5.7%, above our previous assumptions of 5.4%. This remains at levels we are comfortable with in terms of lending risk appetite and credit quality. We will continue to review our assumptions as the situation progresses. Our balance sheet remains well provisioned with an expected credit loss of GBP 3.7 billion and ECL coverage ratio of 84 basis points. Our latest scenarios also show that even if we were to give 100% weight to our new moderate downside scenario, this would increase Stage 1 and 2 ECL by GBP 99 million or 2 basis points. Turning now to the impairment charge. The impairment charge for the quarter was GBP 283 million, equivalent to 26 basis points of loans. This includes a charge of GBP 140 million as a result of changes in economic scenarios and total post-model adjustment releases of GBP 34 million as elements were effectively consumed by changes in our economic scenarios. Excluding these, our underlying impairment charge was 16 basis points. There were no new signs of stress across our 3 businesses, and the current credit performance of our book remains strong. We continue to expect a loan impairment rate below 25 basis points for 2026. So our guidance is unchanged. Turning now to capital. We ended the quarter with a common equity Tier 1 ratio of 14.3%, up 30 basis points since the end of the year. Capital generation before distributions was strong at 65 basis points. This includes 69 basis points from earnings. Other regulatory capital movements added 16 basis points. Growth in risk-weighted assets consumed 21 basis points of capital, and our usual accrual for ordinary dividend payments reduced capital by a further 37 basis points. Risk-weighted assets increased by GBP 2.7 billion. GBP 4.3 billion of business movements broadly reflects our lending growth and increased market risk. This was partly offset by a reduction of GBP 2.2 billion as a result of actively managing our RWAs to create capacity for further growth. Other movements included FX and immaterial CRD IV model updates. We remain confident in our ability to continue generating strong capital from earnings and to manage risk-weighted assets and expect around 200 basis points of capital generation before distributions this year, whilst operating at a CET1 ratio of around 13%. Turning now to guidance. We now expect income, excluding notable items, to be at the top end of our range of GBP 17.2 billion to GBP 17.6 billion, excluding the impact of the Evelyn Partners acquisition. All our other guidance and targets remain unchanged. And with that, I'll hand back to the operator for Q&A. Thank you.

Operator, Operator

Operator: Instructions to participants on how to ask questions

Andrew Coombs, Analyst (Citi)

If I could just have one on loan and deposit growth and then I guess the second on average interest-earning assets. On the loan and deposit growth, again, it's a strong performance Q-on-Q, again, led by C&I. If I speak to any investor, particularly those outside the U.K., they always struggle to link the economic performance in the U.K. with the strong loan growth and loan demand that you're seeing. So perhaps you can just touch upon what drove the loan and deposit growth, particularly in C&I, where is that demand coming from? How sustainable do you think it is throughout the remainder of the year and into next year? And then the second question, I mentioned that loans are up Q-on-Q, deposits up Q-on-Q, but your average interest-earning assets are down 0.2% Q-on-Q. And it seems to be due to a reduction in the liquid asset buffer. So perhaps you could just touch upon that as well and what's driving the disconnect between the average interest-earning assets and the movement in the loan balances.

Paul Thwaite, CEO

Thanks, Andy. Okay. Katie, why don't I take lending and deposits and then you come back on AIEA.

Katie Murray, CFO

Okay.

Paul Thwaite, CEO

Good stuff. So Andy, as you say, good, strong growth on both sides of the balance sheet, pleased on lending and deposits, especially as you know the context of quarter 1 deposits is always higher outflows because of tax payments. Why don't I give an overview, and then I'll drop down into C&I because I'm conscious you wanted some specific color there. So lending overall, I'd say it's pretty broad-based. You can see growth in mortgages. You can see growth in C&I. You can see growth in unsecured within Retail as well. And within C&I, you can see it through different business lines. I'd also add that the pipeline remains pretty strong as well in both businesses. So we're encouraged by that. So not only is the activity good, the pipeline, I was going through it yesterday and Wednesday actually, and it looks strong looking ahead into quarter 2 and quarter 3. And as you know, we've consistently grown above market on the lending side. I'll come back to some of the reasons why I think that's true. On deposits, two sides to this. As I said, we've got the tax outflows in Retail and Private Banking. They were up 28% year-on-year. So it's a big number, GBP 10 billion of deposits. And that was offset by growth in C&I, which was from a combination of things. Some of that was operational deposits, some of that was interest-bearing deposits. I think there, when you think about the size of our corporate and commercial franchise, the reality is we benefit as deposits flow onto corporate balance sheets. If you look into Retail, actually, personal current accounts were up, which is good. That's obviously healthy from a number of factors. And we are starting to see the impact of what we call our Boxed proposition, where we're providing savings products to companies like AA, Saga at Sainsbury's, et cetera. So that's also supporting Retail deposits. So that hopefully gives you a kind of big picture view. On C&I specifically, demand has been strong. I think we're very well positioned on what I'd call some of the structural drivers. So project finance, infrastructure, transition finance, utilities, funds lending, energy transition, et cetera. And I think what you can see is the growth in those parts of the market is bigger than, let's call it, the U.K. systems growth. So I think that helps to explain why our C&I franchise captures the opportunities there, but also outperforms the market. As I said, the pipelines are strong. So to your point on sustainability, I think those trends are structural trends, not short-term opportunistic trends. So I think the lending growth and the lending pipelines will continue to support sustainable growth. So net-net, good balance sheet performance. C&I, yes, but also on the Retail side of the business as well. So hopefully that gives you a bit of color. Katie?

Katie Murray, CFO

Sure. Thanks very much, Andy. So you're absolutely right. When you look at AIEAs, they were sort of stable in the quarter. They were down kind of 0.2%. A couple of things within there. So reduction reflects the optimization of our surplus liquidity. We repaid around GBP 4 billion of TFSME at the end of Q4, and we deployed surplus liquidity to meet our customer loan demand, which we've just been talking about, in a quarter of seasonally lower deposit growth. If you look at the kind of the Q1 loan growth of GBP 7.3 billion versus the GBP 3.1 billion of deposit growth, there's a natural kind of mismatch within there. What I would say is we're 3% higher than AIEAs a year ago, and we do expect them to grow from here going forward as our customer lending increases.

Operator, Operator

Our next question comes from Alvaro Serrano of Morgan Stanley.

Alvaro de Tejada, Analyst (Morgan Stanley)

Hopefully, you can hear me okay.

Paul Thwaite, CEO

We can hear you clearly.

Alvaro de Tejada, Analyst (Morgan Stanley)

I actually had two questions related to spreads. The first is on mortgages. I had expected a step down in mortgage spreads in Q1 given the roll-off of the COVID-era ones, but the spread has held up reasonably well versus my expectations. I think they contributed three to four basis points. Maybe this one is for Katie, but can you talk about whether there are still headwinds ahead and discuss mortgage front-book spreads? And similarly on commercial, those spreads, compared to base rates, have been increasing steadily for about eight quarters as you grow the book. What kind of business are you underwriting there, and do you think it should continue to improve? How do you see the outlook for pricing on corporates and commercial?

Paul Thwaite, CEO

Okay. Great, Alvaro. Katie, do you want to start with mortgage?

Katie Murray, CFO

Yes, absolutely. Thanks very much. Alvaro, so if we look at Q1, we continue to write mortgages at front book spreads that were below the back book as we did through last year, which we talked about a lot, very much in line with our strategy of delivering steady growth at attractive returns. So I'd say our year-to-date margins are in line with expectations. We did see a bit of volatility in March. We repriced every 2 days, so that's 11 kind of changes in 22 days, which I think is a great testament to the flexibility we've built into the system. And we can even see that ability to handle that increased mortgage demand as a result of that investment in the platform and digitization, which has meant we've been able to execute new business at margins which are ahead of the back book in April, which is great to see. You're absolutely right to mention the COVID mortgages. We are seeing a little bit of the book margins being impacted by that churn of the 5-year COVID era mortgages, and they're rolling off at spreads that are higher than we're currently writing. I would expect that to have worked its way through during the rest of this year. So we expect a little bit of pressure from this on the book margin over the coming quarters. But I guess as I go to where we are today, where we're writing the mortgages at front book spreads, which are below the back book, what we're seeing is it's starting to bring that back book margin down. We're kind of writing now, you've heard me talk a lot about this kind of below 70 basis points over the last number of quarters. That's kind of continued. And as I look at that number, I think that we will see the book margin to reprice to around 60 basis points over the course of this year. Interestingly, April margins have been above the back book, and we're pleased we were able to capture that. So I talked to you, remember at the year-end, Alvaro, around 1 to 2 basis points impact on our NIM walk per quarter throughout this year. You absolutely saw that already in our walk. This quarter, you should expect to see that. What I'd also really encourage you is don't forget to see that you have the deposit margin expansion that's going to more than offset that negative. Hopefully, Alvaro, that gives you what you need. Paul, are you going to do the commercial spread or shall I...

Paul Thwaite, CEO

Yes, happy to. Thanks, Katie, and thanks, Alvaro. On commercial spreads, a couple of general points first. I would say, Alvaro, commercial lending margins are fairly stable on a product-by-product basis. That's how I'd think about it. There's always a mix effect depending on where you write the business, but there have been no material changes in the recent past nor would we expect any going forward. So that's one positioning piece. Secondly, in our commercial book, a significant proportion of customers are paying variable rates, so you will see rates reprice in line with short-term rates and how that changes. Hopefully those two points contextualize what you'll be looking at in terms of the commercial lending book. If you drop down into the individual businesses or asset classes within the commercial and institutional bank, there are different dynamics. At the very small end, margins are much higher, but the total value of lending there is small relative to the overall commercial book. So while we're growing that business and it's higher-margin, from a weighted-average perspective the impacts are relatively limited. In the commercial mid-market, that's a competitive space across the field, but depending on the asset class margins can vary quite a lot. For social housing, lower margins but very high risk-adjusted returns; commercial real estate has thinner margins and is more of a commoditized product. At the large corporate side, you have the revolver aspect, but also project financing and infrastructure finance, which have similar dynamics to social housing. At a spread level, margins are relatively tight, but given the capital treatment the risk-adjusted returns are very attractive. They're all very good areas to deploy capital at good returns. So nothing major to call out on commercial spreads, but that hopefully gives you a bit of the contours of how that business works. Thanks, Alvaro.

Operator, Operator

Our next question today comes from Benjamin Toms of RBC.

Benjamin Toms, Analyst (RBC)

The first question is about your income guidance, which you've upgraded to the top end of the previously provided range. Could you give some color on whether you would characterize this guidance as conservative? I note that consensus is still considerably above your guidance — are you comfortable with that gap? Secondly, there has been fairly intense competition in the cash ISA deposit market, with NatWest Group competing while one of your large peers is not. How do you weigh collecting deposit volumes against preserving margins at a group level right now?

Paul Thwaite, CEO

Great. Thanks, Ben. I'll take the guidance and income, Katie, and then you can talk a little bit around Retail savings and ISAs. Okay. Yes, as you said, Ben, we've strengthened the income guidance. We're guiding to the top end of the range of GBP 17.2 billion to GBP 17.6 billion. We're doing that for a couple of reasons. First, you can see the momentum in quarter one, so the underlying performance has been good. Second, there's the net effect of the change in economics. We've changed our rate assumptions; we had assumed two cuts and now assume zero. You have to follow the logic through: if you don't have rate reductions, it's reasonable to expect some small softening in demand, and we've assumed that. But on balance, we see that as positive for income. That's how we're positioning at the top end. We haven't changed the guidance for RoTE; we're maintaining greater than 17 percent and we're increasingly confident in that. As I said in February, and I'll say again, it's always been a greater-than guidance, and we always aim to beat our target. So we haven't changed that, but we're increasingly confident because the conditions are supportive. I should point out, I think it's obvious, that all excludes Evelyn. Overall, Ben, I would say it's a good start. We're confident around 2026, hence the nudge up in guidance. We haven't changed 2028, but from the trends the conditions are supportive towards the medium term as well.

Katie Murray, CFO

Thanks very much. Ben, so I guess if I look at our ISAs and the kind of recent activity, I think the first thing I would really say is we see really strong relationship value in our fixed term deposits. We have high retention rates, greater than 80%, and some of those are retained in the higher-margin instant-access products as well as us also having an opportunity in the future to engage with these customers on investment products, and we've seen good growth there as well this quarter with a lot of new investors coming in, but we also expect that ambition to kind of grow and that's supported by the acquisition of Evelyn Partners, obviously, in this last quarter. During Q1, with the volatility that we saw in the swap markets, we actively managed our hedging across both our assets and liabilities, which enabled us to really price effectively on the fixed rate deposits. Overall, you can see our deposit mix has been stable, both at the group level and in Retail. When I look at fixed rate ISA specifically, the balances are small in the context of the group, low single-digit percentages of deposits. And in terms of overall deposit dynamics and margins, really very happy with the progress, particularly around things like current account growth, and we expect to see ongoing group deposit margin expansion in the coming quarters. So overall, a real comment on balance across the portfolio. Thanks.

Paul Thwaite, CEO

I'd add one small thing on that, actually, Ben, because I've got the pricing tables in front of me. It's quite interesting when you look through. And as Katie said, we've been very thoughtful about how we manage the volatility in swap rates and how we play that back into pricing to maintain margins. And you can see you've got 3 or 4 of the larger banks ahead of us on pricing. But as Katie alluded to, the volumes have been encouraging. So I think we've been very thoughtful in how we're playing in that market.

Operator, Operator

Our next question comes from Guy Stebbings of BNP Paribas.

Guy Stebbings, Analyst (BNP Paribas)

I think, I just have one sort of broad question on the income guidance for this year and the assumptions sort of underpinning it. It's clear in terms of what you're doing on policy rate. But in terms of the long end of the curve, when you're thinking about the hedge reinvestment, could you confirm what the assumption is there? Then in terms of volumes, I'm just trying to work out whether you're assuming slightly more sort of conservative macroeconomic assumptions as per the ECL models, but that would be going against sort of the positive comments you're saying in terms of what you're actually seeing on lending volumes, et cetera. So can you clarify what sort of expectations are on volumes? And then on mortgage spreads, just in light of the comment you made there, I'm just trying to understand whether anything has changed. So you've talked about the stock of the back book trending down towards 60. I presume that's kind of entirely consistent with what you were expecting a few months back. And actually, your comment on April being above the back book is slightly encouraging. So could you just confirm if those mortgage spread trends are sort of in line, better or worse than what you were thinking a month or 2 ago?

Paul Thwaite, CEO

Great. Thanks, Guy. Very clear. Katie, you got any preference on order? We've got hedge, volume...

Katie Murray, CFO

I'll start off with spreads and hedge, and then why don't you jump back in on volume, yes? Perfect. Thanks so much. If I look at the hedge, a few things to share. When we talked about the hedge at year-end, we said we would increase our structural hedge this year above GBP 200 billion as deposit balances have grown and the equity base will increase with business growth. Earlier in Q1, as yield curves moved sharply higher, we decided to accelerate the increase of our product hedge, adding about GBP 5 billion in Q1. That means we’ve locked in income for the outer years and modestly reduced our rate sensitivity. In the first three months of the year overall, we're reinvesting our product hedge at about 3.8%, against the guidance I gave at year-end of 3.5%. I now expect the reinvestment rate on average for the whole year, given what we’ve seen and April’s performance, to be around 3.9% on the product hedge and 4.7% on the equity hedge, up from 4.5%. Looking at current rate assumptions and the growth we’ve seen, I continue to expect total hedge income to grow annually through to 2030, as we outlined in February. On mortgage spreads, you’re completely right. Mortgage margin is very much in line with our expectations and currently a bit better. I wouldn’t bank that forever, but we’re happy with how the team is managing the book. The reduction in book margins is clearly driven by refinancing. About 30% of the book will reprice this year and the roll-off is a little over 90 basis points on a blended basis. That drives the stock margin lower over the course of the year, entirely in line with our expectations and the income guidance we’ve given and updated this morning.

Paul Thwaite, CEO

On volumes, Guy, we've tried to thread the needle between the mechanistic logic of our economic assumptions and the year-to-date activity and pipelines. That's the balance we're aiming for. If you carry the economic assumptions through — higher for longer, a slight tick up in unemployment and slower growth — the implication is some softening in, for example, the mortgage market versus our original projections and similarly some softening in business lending. That's what the economic assumptions drive. But when you look at activity, as you rightly point out, quarter one has been very strong on the lending side and the pipelines across the businesses look robust. We're trying to strike the right balance between optimism about that activity and the reality that how the economy plays out over the next nine months could impact demand, and we factored that into guiding to the top end of the range. Hopefully that helps explain how we're thinking about it.

Operator, Operator

Our next question comes from Jonathan Pierce of Jefferies.

Jonathan Richard Pierce, Analyst (Jefferies)

Good. I've got two questions, please. First, the other C&I noninterest income has been running at about GBP 230 million to GBP 240 million a quarter for the last six quarters, but it dropped to GBP 170 million in the first quarter. It feels like there was a bit of a one-off in there. Can you quantify how big that was and whether you've seen anything else coming through since the end of March? Secondly, more broadly on this impairment sensitivity, I'm trying to get a feel for how much confidence you have. I've asked you this before, Katie, actually, regarding the IFRS 9 ECL models. You're telling us today that the weighted average assumption for GDP growth is about 0.3% to 0.4% a year over the next couple of years. The downside is minus 0.4% this year and minus 1.6% next year. It's also got unemployment going up to 6.2% next year, I think. But you're telling us your ECL in that scenario would only increase by about GBP 99 million. I get that that's a general provision measure. But by definition, the ECL on those Stage 1 and 2 is reflective of losses you expect in the future on the performing book. So are you genuinely confident? If so, why, more qualitatively, do you believe that even if we saw a recession, even if we saw unemployment moving into the 6s, your impairment charge, excluding any initial ECL build, would not move up very significantly at all?

Paul Thwaite, CEO

Good. Thanks, Jonathan. I'll take the first one. Katie, you can take the second one.

Katie Murray, CFO

Sure.

Paul Thwaite, CEO

So Jonathan, your characterization is right. Actually the income line has been pretty stable over the last six quarters, but C&I noninterest income dropped off in quarter 1 '26. If you look at that compared to '25, it's, I think, GBP 20 million versus GBP 64 million. Not exclusively, but almost exclusively, it's explained by sterling rates, as you say, so it's kind of a one-off. You've seen that across lots of desks and lots of banks. We have a relatively small rates business. It's indexed to sterling, given what we are as NatWest. That really explains the delta that you're seeing there. And you'll see, yes, GBP 64 million in quarter 1 '25 and GBP 20 million in quarter 1 '26. That's a big part of the difference versus the previous quarters. A couple of things I'd say: it's obviously very small in the context of the overall revenue line. And also, given the more subdued volatility, we'd expect improvements as we go through quarter 2 onwards, not just in that line, but overall on C&I noninterest income. So I think you're seeing it and reading it pretty accurately there. Okay, Katie?

Katie Murray, CFO

Sure. On impairments, thanks Jonathan. These are models we test extensively. They undergo both our own verification and independent verification, and they are also reviewed closely by external parties, so I am comfortable with them. I also like that IFRS 9 includes the PMA concept, which helps in moments of discomfort. You can sometimes see those moments when classifications are wider than purely economic uncertainty; when other numbers appear, it can indicate where the model is being adjusted. So I am completely comfortable with the models. If I look at the ECL for Stage 1 and Stage 2, a 100% downside would suggest an additional GBP 99 million. But I would remind you that Stage 1 and Stage 2 do not capture some Stage 3 losses, and those are impossible for us to quantify, so we do not attempt that. The actual charge could be a bit higher in that scenario, although that is not our base case right now. At this stage we are happy with the base case and the guidance we've provided. We have added a bit on the mezz, GBP 110 million net, a little out of the PMA; that is just a mechanics of the calculation and has taken us to a 26 basis point charge this quarter. If I take out that mezz we've overlaid, it is about 16 basis points. What we can see is a well-diversified, well-performing book to date. We have given you a reasonable estimate of the impact if we were to move, but at the moment we are comfortable and content to hold that extra buffer as we enter a bit more uncertainty than we've seen recently. So comfortable at this stage, Jonathan. Thank you.

Operator, Operator

Our next question comes from Benjamin Caven-Roberts of Goldman Sachs.

Benjamin Caven-Roberts, Analyst (Goldman Sachs)

Just 2 for me, please. First, a follow-up on the cost of risk. I see you mentioned about 60% of mortgage balances now with customer rates above 4%. How are you thinking about the refinancing profile for that remaining portion and the extent to which those customers are moving on to rates a fair bit higher than what they had expected when entering those mortgages? I know you do stress rate assumptions as well when issuing the mortgage originally, but clearly, a lot of volatility in swaps and rate expectations right now. So just keen to hear your thoughts on that. And then secondly, thanks a lot for the extra disclosure on the financial institutions. If we look at that business and private credit altogether, how are you thinking about the growth of that book? Is it something you expect to grow more quickly or more slowly relative to the recent past? And have you changed your strategy at all in terms of the underwriting there?

Paul Thwaite, CEO

Great. Thank you, Ben. Katie, you go for first question.

Katie Murray, CFO

Yes. In terms of cost of risk, Ben, you're absolutely right. You've obviously gotten far in the pack this morning. Slide 32 lays it out really nicely. A couple of things as we look at our prime mortgage book: the level of security gives us a lot of comfort. Our arrears greater than three months are well below the sector average, quite significantly, so the book is well underwritten. As a guide for financing the remaining 40% that aren't on customer rates over 4%, we use developments over the last couple of years to help guide us. During that time there has been wage growth across different areas and borrowers approaching resets are very aware of it. What we've seen over the last couple of months is a greater increase in the use of the 2-year compared with the 5-year. Our 5-year fixed as a percentage of our fixed book is about 66%, but recently that has flipped almost completely and we're currently writing about 77% 2-year. Customers understand what they're doing and how to manage their exposure. We see them locking in refinancing early to get the benefit of the rate, and they have been preparing for this. As we talk to them through those transitions, it's clear it's a big change to go from a COVID rate to the new rate, but people have been preparing and managing it very well, I would say. And Paul, on the...

Paul Thwaite, CEO

Yes, yes. So Ben, so yes, so I'm glad you liked and have seen the new disclosure. We hope that's helpful to everybody. In terms of the areas that you referenced, we have been growing the business, I guess, over a number of years, but it's been in a very disciplined way. If you look at limits there, they haven't really moved since this time last year, so quarter 2 '25. Likewise, we haven't materially changed our risk appetite. We're always very focused on being senior lender, good protection from first loss, making sure that the risk-adjusted returns are supported. So our strategy really has been not around growing limits, but prioritizing risk-adjusted returns versus volume-driven growth. As you know, we haven't been involved in any of the recent public names. Looking forward, what I would expect actually is to see some of the spreads to widen, so i.e., the same business, the same risk, but actually better risk-adjusted returns. That would be my assumption because as you know, a lot of that business is relatively short term in nature, so you get to reprice. So that's how we're seeing. Hopefully, that gives you a sense of it in terms of limits, but also, I guess, business strategy, which is returns led rather than volume-led.

Operator, Operator

Our next question comes from Chris Cant of Autonomous.

Christopher Cant, Analyst (Autonomous)

Two, please. On corporate banking, commercial banking, in the context of what we've got going on in the Middle East, are there any areas of your book that you'd be more nervous on, please? And I'm not thinking specifically just about oil price as an input here. I guess there is the potential for product shortages or oil-related product shortages regardless of price if this persists. So are there any sectors that you're nervous on when you're speaking to your corporate customers, what are they worried about? And on the comment around refi of the mortgage book, my understanding there is that customers essentially have sort of a bit of a free option to lock in, but then change products if rates shift after they've preemptively locked in. Are there any risks to you and to kind of NII later in the year given swap volatility. Just conscious, I guess, the value of that option being given to customers is arguably higher right now. So any comments on how you manage that, how we should think about that would be appreciated.

Paul Thwaite, CEO

Thanks, Chris. I'll take the first. Katie, you take the second. On the, I guess, kind of core mid-market commercial bank, Chris, obviously we're staying very close to all the various sectors and also the different regions there. It's very consciously a very diversified book. We gave you quite a lot of breakdowns on the relative sectors and segments. In terms of your specifics around sectors or subsectors that might see greater impacts, probably similar to some of the previous kinds of challenges, I would say sectors like agriculture and aspects of hospitality and leisure. Where you see not just what you call pure energy input prices, but fuel, fertilizer, food, etc., where you see exposure, those would be areas we will pay more attention to. And as we've done in the past, we work closely with those sectors if support packages are needed. We're not at that stage yet, and we're seeing no deterioration. I think generally, if you think back through what we're seeing in the Middle East, what we saw through the tariff period, a similar time last year through Ukraine and even through the pandemic, business customers are a lot more adaptable and resilient than maybe they were prior to the pandemic. Their ability to change their cost base and/or pass on costs, the way in which they've engineered their business models over time, has given them more flexibility. So what we see is a faster response but also greater adaptability, which ironically I think is down to the fact that a lot of these businesses and sectors have had to face a lot over the course of the last four or five years. So that's how we see it. But there are probably two sectors that are on our minds. Katie?

Katie Murray, CFO

Sure. Chris, that's a great question. We've seen this historically and experienced other peaks, but it's something we manage very tightly. We use sophisticated modeling that focuses on individual customer behavior and on what happened during other periods of interest-rate volatility to determine who would move and who would stay. As I mentioned earlier, our investments in our mortgage system have allowed us to react very quickly; for example, we repriced 11 times over 22 days in March, which is a significant change from where we were several years ago. We're very comfortable with the overall dynamic. I would add that most customers who refinance with us ultimately stay with us, which demonstrates strong customer engagement and is critical. We're largely locked in already for our forthcoming roll-offs. All of these factors are reflected in the guidance I discussed today about the book actively repricing by 60 basis points over the course of the year, and while we manage it actively, I do not expect this to change what I stated this morning about that number.

Operator, Operator

Our next question comes from Sheel Shah of JPMorgan.

Sheel Shah, Analyst (JPMorgan)

First question on corporate deposits, please, because this is a line item that has remained under GBP 200 billion or so for the last 2 years, and we're finally seeing a lot of growth come through the business. And not only the growth, but also the rates that you're paying on these corporate deposits, looking at your other disclosure looks to be declining as well. So I'd be interested to get some insight as to what's happening there? And then secondly, on the cost base, I know the first quarter had some increased investment in restructuring costs, but you also mentioned on the call earlier that the cost profile will be uneven through the year. So just wondering how you're thinking about that across the remainder of the quarters?

Paul Thwaite, CEO

Thanks, Sheel. I'll take deposits. Katie, cost, yes? So I'm pleased you've noticed the trajectory there, Sheel. Deposits in the commercial bank is a big area of strategic focus for the team and has been, I would say, increasingly over the course of the last 18 months. So part of the performance momentum there is around focus. Given also the growth we've seen in lending, there's been a natural need to increase deposits in the commercial bank. So focus has played a part. But we've also broadened the product range. We've also digitized parts of the product range as well. So we've got business focus. We've got enhanced proposition for different segments within the commercial and corporate bank. And as you'd expect us to have, we also have a much broader focus on transaction banking, which obviously brings high-value operational deposits. And to your point, depending on the nature of those deposits, high liquidity value, but also in relative terms versus interest-bearing deposits, good cost of funding. So it's a strategic focus supported by a number of operational and tactical activities that support our client base but also help the LDR. Katie?

Katie Murray, CFO

Costs, sure, absolutely. So you're absolutely right. Q1 is a little bit higher than normal, reflecting some of our decisions to front-load investments and restructuring costs alongside staff and inflation-related increases from 2025. But you'd expect me to say this; it's our history. It's what we deliver every single year. We are really confident in hitting our cost guidance of around GBP 8.2 billion. That excludes the impact of Evelyn. I'm just going to take the opportunity to talk a little bit about Evelyn costs. We'll share more about that as well once we've finished the acquisition and things like that, which is going well. But there are a few things that you need to be thinking about that will impact some of those Evelyn costs as they come through. Obviously, first, we've got day 1 transaction costs. That was included in our guidance of the 130 basis points of capital. We've obviously got the operating costs that will come through from the point of consolidation in terms of Evelyn's own costs. We're then familiar, we talked a lot about the cost to achieve in terms of the GBP 150 million total cost to achieve to drive the GBP 100 million of cost synergies. And finally, we are going to have ongoing amortization of the intangibles that will be created upon completion. That doesn't impact our capital generation going forward as we've incurred that as part of the capital impact of the 130 basis points. Obviously, I'll give you more detail when we get to the point of completion. But when you think of lumpiness, they're absolutely rock solid on their 8.2. That's where they'll land because they always do. But there will be a little bit as Evelyn comes in. So think about that in your models of those four different categories. Hopefully that's helpful to you, Sheel, as well.

Operator, Operator

Our next question comes from Aman Rakkar of Barclays.

Aman Rakkar, Analyst (Barclays)

Hopefully you can hear me okay, sorry.

Paul Thwaite, CEO

We can. Yes.

Aman Rakkar, Analyst (Barclays)

I had 2 questions then. So could I just trouble you on the deposit margin, please? I think that 2 bps deposit margin Q-on-Q contribution, I think it's the softest uplift Q-on-Q. And obviously, you've got multiple moving parts in that, notably a massive structural hedge tailwind, but presumably offset by compression on kind of actual deposit spreads in the quarter. So I was interested in your sense of the deposit margin contribution on a sequential basis in coming quarters, please? And to what extent do you think this kind of intense deposit competition dynamic, particularly for term deposits, I mean, lots of people writing term deposits at negative spread kind of feeds into that would be really helpful. And then the second question was a broader question just around actually the income dynamic beyond this year because it feels like there's a building confidence around the income profile beyond this year, principally because of the interest rate environment. It's not really materially moving the needle on this year's guide as much as it perhaps will do on the forward look, not least because of the structural hedge. But I'm thinking about the cadence for net interest income through the course of this year is presumably going to be quite robust, right, in terms of what it means for next year. So is that the right characterization? And kind of what do you as a management team do with that, the kind of building confidence on the income outlook in the medium term versus what is quite an uncertain near-term dynamic in the Middle East?

Katie Murray, CFO

Perfect. So deposit margin was 2 basis points this quarter. I think you need to consider the overall movement in balances during the quarter. We had tax outflows of GBP 10.3 billion, which were predominantly in January, with some drifting into February. We're confident deposit margin expansion will be greater in the coming months as we move forward. Looking beyond 2026, we expect annual income growth from 2026 to 2028 and we're confident in that trajectory. Obviously, disciplined growth across lending, deposits and AUMAs will continue in line with our CAL target of greater than 4%. That will be boosted by the Evelyn Partners acquisition when it comes online. In the higher-for-longer interest rate environment, we now have a terminal bank rate of 3.75% alongside the actions we already took in Q1 to move higher in the yield curve, meaning we are increasingly confident in the income tailwind from the structural hedge, supporting income through to 2030. There are other variables like customer behavior, competitor pricing and macroeconomics, and we'll see how these develop. But again, you can see our economics, and given the interest rate sensitivity we have, we see this as a net positive for income beyond 2026. Overall, we remain confident and are building on the confidence we expressed in February. Thanks very much, Aman.

Paul Thwaite, CEO

Yes. And as to your final point, Aman, how do management characterize that? I think as Katie finished there, net-net, it feels like we're in a stronger position on income and returns, both '26, but also looking out to '28.

Operator, Operator

Our next question comes from Amit Goel of Mediobanca.

Amit Goel, Analyst (Mediobanca)

Hopefully, you can hear me okay.

Paul Thwaite, CEO

Yes, we've got you crystal clear.

Amit Goel, Analyst (Mediobanca)

So one, just kind of following up. I suppose on Slide 30, on that deposit margin and contribution, I'm trying to reconcile across each of the divisions: it seems like the cost is coming down, but at the group level it's flat. What's driving that? And secondly, on Evelyn, I'm curious how the business has been developing since the acquisition announcement and during the first quarter and beyond in terms of AUA. Any color on that would be helpful.

Katie Murray, CFO

You go first. The first one, absolutely. So if you look at the businesses, what that is, is that's representing the customer rate on deposits or loans, whereas if I look at the group number, it's the overall cost, including hedging. So it's not perfectly like-for-like as you look across those 2 lines. Paul, Evelyn?

Paul Thwaite, CEO

Yes. So Amit, obviously I can't comment on a business that we don't yet own, so that wouldn't be appropriate. What I would say is that planning to closure is going very well. We're moving at pace and hope to announce that in the coming months. The appropriate work on integration is progressing really well. You can see from our AUM performance in NatWest: strong net new money above 8% despite market movements, and top-quartile investment performance. Going back to the AUM, it's roughly 10% up year-on-year, which is great. There are obvious limits to what I can say, but in the work we're doing so far we're very encouraged. I've spoken at length about the scale and the capabilities that Evelyn will bring. If you look at the success we're starting to have around retail and premier investment in the NatWest space, the acquisition of Evelyn will only accelerate that. To me, the demand signals and the performance signals are good. Once we've closed, as Katie alluded to earlier in relation to the cost question, we'll share a lot more detail on the overall numbers and the plans, and we are eager to do that as soon as we can. Thanks, Amit.

Operator, Operator

Our final questions come from Ed Firth of KBW.

Edward Hugo Firth, Analyst (KBW)

I just have 2. The first one is just on detail. I think at the time of Evelyn, we were talking about GBP 300 million of revenue and GBP 300 million of costs in the first year. Is that still the right number we should be getting? So that was just my first question.

Paul Thwaite, CEO

Yes, nothing has changed since the original disclosures, Ed. That's the best way to think about it.

Edward Hugo Firth, Analyst (KBW)

Perfect. And then the second question relates to Jonathan's question about risk, because I noticed that in your worst-case scenario you're talking about a low few hundred million pounds of credit losses, something like that. I know it's more than GBP 99 million, but it's not huge. And that's on a GBP 30 billion tangible equity investment, and you're making pre-provision profits of GBP 10 billion a year. So I'm wondering how you think about appetite for risk. Do you really feel confident that you're taking enough risk? Because it seems to me there may be quite a gap for you to be doing a lot more and growing revenue much faster than you are. Related to that, can I ask about Slide 33 again? It's a great slide, thank you for providing it, and I wish all the other banks would do the same. It strikes me that your funds lending looks much bigger than I would have imagined. I don't know the market that well, but you do — you're a market leader in that space. Would you say you are bigger than most people, or are you just one of the players? Unfortunately, other people don't give us that type of disclosure.

Katie Murray, CFO

Yes, I'll crack on impairment, and you can jump in after that. So Ed, what I'd probably do is guide you a little bit. If you go after the call, on Page 27 of our IMS today, we gave you, I think helpfully as a nonstandard Q1 disclosure, what our new change in scenarios would be. You can see that on the downside scenario for Stage 1 and Stage 2 it's an additional GBP 99 million. But if you went to the extreme downside, that's a GBP 1.7 billion hit, so really very different in terms of numbers. You can also see that that's obviously greater than the hit we would have had at the year-end in that space. So I would probably just rebalance your numbers a little bit on that. That's obviously just Stage 1 and Stage 2. I would point out that that extreme downside is really quite far away from our base case, but obviously it's blended into the number. I think we gave about a 14% probability weighting. So quite far out there, but it is something to consider as you look at the numbers. And Paul, shall I come to you for the other?

Paul Thwaite, CEO

Thank you, Katie. On funds lending, I'm glad you liked the disclosure. This is a long-standing business for us, in excess of 20 years. A large part of it sits in RBSI, our Channel Islands business, and has been in our disclosures throughout that period. To give a bit more detail, I would not call us a market leader but rather a strong player where we choose to participate. About 80% of the funds lending business consists of subscription lines or capital call facilities, which gives you exposure to limited partners and against which we take security over the LPs. These facilities are typically short dated, generally one to three years. Of the line, roughly GBP 17 billion is subscription lines, with the remainder being NAV lending of around GBP 3 to 4 billion, where we act effectively as a senior creditor when lending against a particular asset. Average loan-to-values are around 30%, and the borrower base is institutional. It is a very long-standing business, primarily run out of our Channel Islands business, with no historical losses. It is a good business, but as you look across European and US banks you will see different levels of exposure. I would say we are strong, but certainly not a leader. And in terms of risk, do we feel we've got the balance very much we're taking to get to his last question? Yes. I think I hear both. I guess, Ed, I hear both sides of the story. From some investors, I hear they really value the low-risk business model, well-diversified credit base, and high risk-adjusted returns that you see. And then you hear the other side asking, could you take more risk. I think the way we've approached our different asset portfolios, both in retail and commercial, has stood us in good stead. It allows us to perform well with a low cost of risk. We generate a high amount of capital. Our RoTEs are obviously sector-leading. So it feels like we have got the balance right. We do at times increase our risk appetite. If you go back over the course of the last couple of years, you can see some of the moves we've made in retail. We've broadened our addressable markets in mortgages and credit cards. But I kind of feel that a U.K.-centric low-risk business model and high capital generation serve us well. So it feels like we're in the right space. Hopefully that gives you a bit of insight into how management think about it, Ed. Thanks.

Operator, Operator

Thank you for all your questions today. I will now hand over to Paul for closing comments.

Paul Thwaite, CEO

Yes. Thanks, Oliver. So I just want to close with, I think, a couple of key points, which I think are particularly important given the context we're in and I think demonstrate why we think we're very well positioned as a bank. The first one is our deposit franchise and the gearing that gives us to rates. Obviously, that's driven by our corporate franchise. It supports our revenue growth, especially in a higher for longer environment. The second thing I would point to is the growth track record that we've built and continue to build and the targets that we've put out there. We think we've got a good track record and further opportunities across our 3 businesses. You can see also the progress we're making around cost management and our cost/income ratio and continuing benefits of operating leverage. And then to link it to Ed's question, if you look at the loan book and you look at the Bank of England stress tests, we are the most resilient bank under stress. I think that's as a consequence of our diversified business mix. So the lowest stress drawdown of any U.K. bank. So you add all that up together, superior returns, high capital generation, which can drive stronger distributions. So from my perspective, we feel very well placed as we look into the circumstances that face us. Thanks for your time. I hope you have a good weekend. Cheers.

Katie Murray, CFO

Thank you.

Operator, Operator

That concludes today's presentation. Thank you for your participation. You may now disconnect.