Earnings Call Transcript
NatWest Group plc (NWG)
Earnings Call Transcript - NWG Q4 2022
Operator, Operator
Good morning and welcome to the NatWest Group Annual Results 2022 Management Presentation. Today's presentation will be hosted by Chairman, Howard Davis; CEO, Alison Rose; and CFO, Katie Murray. After the presentation, we will open up for questions. Howard, please go ahead.
Howard Davies, Chairman
Good morning, everyone. And thank you for joining Alison, Katie, and me for our full year 2022 results presentation. Against a difficult and uncertain backdrop with at times turbulent financial markets, NatWest Group delivered a strong financial performance in the year. We achieved continued growth in our lending and further progressed against our strategy. In addition, the government shareholding fell below 50% for the first time since the financial crisis. They have continued to sell in the market and their stake is now well below 44%. While the majority stake in itself had no material effect on the way the bank operates, and the government did not and does not interfere in our commercial decisions. It was an important milestone, underlining the progress we have made in recent years. The outlook for this year remains challenging, with a decline in economic activity expected and a further tightening of real incomes, which will inevitably affect spending and borrowing. But our strong financial performance, continued capital generation, and robust balance sheet mean that we nonetheless look forward with confidence. Our strong capital position also allowed us to continue lending through the pandemic, while investing to create a simpler and better banking experience for our customers and delivering on our purpose about which Alison will say more shortly. I'm confident that the bank's strategy will ensure we can continue to support all of our stakeholders and deliver sustainable growth and returns in the years to come. With that, I'll hand over to Alison, who will take you through our results and our future priorities in more detail.
Alison Rose, CEO
Thank you, Howard, and good morning. I will start with a business overview and our priorities going forward before Katie takes you through the bank's performance for 2022. We will then open it up for questions. You can see the strength and resilience of our business and the results we are announcing today. In a difficult macroeconomic environment, we remain well-positioned as a result of our strong customer franchise, disciplined risk management, and robust balance sheet as we continue to support customers in order to generate growth. So let's start with the highlights. We delivered operating profit for the full year of £5.1 billion, up 34% on the prior year, with attributable profit of £3.3 billion. Our return on tangible equity was 12.3%, up from 9.4% in 2021. We are reporting income of £13.1 billion, and we have continued our tight cost discipline, reducing expenses by 2.9% in line with our target. This resulted in a much-improved cost income ratio of 55.5%, down from 70% for 2021. During the year, we distributed or accrued a total of £5.1 billion for shareholders, which comprised £1.3 billion in ordinary dividends above our committed distribution of at least £1 billion; a special dividend of £1.75 billion announced at the half year; the directed buyback of £1.2 billion completed last March; and our third on-market buyback announced today of £800 million. As a result, our common equity Tier-1 ratio at year-end was 14.2%, in line with our target. We have made excellent progress on the strategic priorities we set out three years ago. Despite the disruption caused by a global pandemic and the Russian invasion of Ukraine, we have remained focused on supporting our customers and delivering on our commitments. We have delivered organic growth as we improve both our offering and service for customers. We have maintained tight cost discipline yet continued to invest for the future in our digital transformation. We have refocused our markets business and made significant progress on our phased withdrawal from Ulster Bank Republic of Ireland. So we are now much more capital efficient. This has delivered an excellent outcome for shareholders with very significant distributions and a return on tangible equity of 12.3%, well above our initial target. In an uncertain economic environment, our strong balance sheet, high-quality deposit base, and disciplined risk management continued to give us a competitive edge. Whilst arrears are currently broadly stable, we are very aware of the pressures that customers face as a result of high inflation, a steep increase in energy prices, and a challenging macroeconomic environment. The strength of our balance sheet evidenced here by our capital leverage and liquidity ratios, together with the quality of our loan book, which is almost all secured in personal lending with prudent loan-to-value ratios, make it possible for us to continue supporting customers and the U.K. economy through difficult times. Given the uncertain economic outlook, our purpose-led strategy has never been more relevant. We have continued to support customers by lending responsibly and helping them save for the future with lending across our three business segments up 6.7% year-on-year. We have also proactively contacted customers with advice on managing the cost of living, carrying out free financial health checks, delivering hardship funding through charities, and offering targeted support such as forbearance for those in need. Our colleagues face the same challenges as our customers, so we have supported them with targeted pay rises for the lowest paid, as well as enhanced parental leave and ongoing training and development. Three years ago, I outlined four strategic priorities designed to achieve sustainable returns for shareholders. So I'd like to update you on our progress since then. By supporting our customers across every stage of their lives, we have continued to grow organically and build on our strong franchise. Customers want a bank that is easier to deal with. So we have invested in digital transformation to simplify our processes and improve customer journeys at the same time as reducing costs and increasing efficiency. For example, 72% of new retail accounts were opened with straight-through processing in 2022 compared to just 14% in 2019. 88% of retail customer needs were met digitally, and over 60% of our retail customers are now digital-only. We're also using data analytics more effectively. So around 12 million personalized messages were acted on by customers last year, up nearly 40% on 2021. All of this has significantly improved customer satisfaction. Since 2019, our retail net promoter score has increased from 4 to 22. Our affluent net promoter score has gone from minus 2 to 25, and we have the leading Net Promoter Score for commercial banking in the U.K. at 22. We also set out to deploy capital more effectively within a culture of strong risk management. We have reduced our RWA density from 53% to 47%. And by refocusing NatWest markets and making significant progress on our phased withdrawal from Ulster Bank Republic of Ireland, we have decreased RWAs by £20.8 billion within these entities. We actively manage risks by maintaining a well-diversified loan book, where we monitor at-risk sectors closely. Our focus on driving innovation and developing strategic partnerships is enabling us to offer customers a wider range of services. As the leading commercial bank in the U.K., we are proud of our digital-only business bank Mettle, which now serves 44,000 customers. And we're building out a comprehensive payments proposition for our commercial customers, which includes our payment provider Tyl and a platform using the U.K.'s open banking infrastructure called Payit. Our new strategic partnership with Vodeno Group is just one example of how we're accessing the expertise of others and combining it with our own to deliver innovation by putting Vodeno's technological capabilities and cloud platform together with banking technology developed by Mettle, we aim to create a leading U.K. banking-as-a-service business. In short, we are now serving existing customers better and gaining new ones as a result of our focus on deepening relationships, digital transformation, and the provision of a wider range of innovative services. I'd like to move on now to our plans moving forward. Over the past three years, we have successfully delivered our transformation. This is now a simpler organization that is more focused, more capital-efficient, and easier for our customers to interact with. The purpose and priorities we set out three years ago will not change. We will continue to be a purpose-led organization, helping our customers to thrive, to focus on becoming a simpler organization that is highly cost-efficient, to allocate our capital and resources to areas that generate the best returns for shareholders, and to advance digitization, as well as foster innovation through strategic partnerships to better serve our customers. But we are shifting our investment over the next three years more towards growth. And we are now focused on further acceleration. First, by increasing our personalized engagement with customers at every stage of their lives, we've shown that we can generate value for both customers and shareholders by deepening relationships. Second, by leveraging our competitive edge as a leading U.K. provider of renewable financing to support customers in their transition to a net-zero economy. And third, by further embedding our services into customers' digital lives. Our customers spent more time online than ever before, and we have to be where they are. We are doing all this to deliver sustainable growth and diversification of income as we participate in areas which are set to outgrow traditional banking revenue pools. So let me give you some examples in each of our businesses. In retail banking, we start from a strong position with 17 million customers, strong net promoter scores, and a growing share in mortgages and credit cards. We have capacity to grow further by driving higher levels of engagement and enhancing our customer proposition. For example, we are strengthening our youth and family offering to build on the success of our RoosterMoney acquisition, which helps young children manage money. Last year, we connected Rooster with our own app, which resulted in 90,000 new card openings during the year. We know that customers who join us in childhood have greater lifetime value than those who join us as adults, and that when we serve a full family, parents become more valuable. Supporting households to act on energy efficiency is not just an essential part of making a transition to a net-zero economy, but also commercially valuable. That's why we are funding a green home retrofit pilot, helping customers to decide what improvements they need to make, and then financing solutions such as insulation upgrades, heat pumps, and solar panels. Our green mortgages offer a discounted interest rate to customers who buy a property with an energy efficiency rating of A or B. As part of our ambition to provide £100 billion of climate and sustainable funding and financing, we aim to make at least £10 billion of lending available for homes with these ratings by the end of 2025, helping homeowners to improve energy efficiency and reduce emissions. Further embedding our services in our customers' digital lives allows us to improve both customer experience and our own efficiency. A good example of this is our digital-only mortgages. We were the first U.K. bank to offer a paperless mortgage, so that the offer can be made within 24 hours. This has completely transformed the process of buying a property as well as increased our market share, and we are building on this success to grow our share further. We will also support financial well-being by extending our free credit score service, which is currently available just for our customers to everyone in the U.K. One of the major changes we have made in our private bank is making better use of our asset management expertise to serve our customers more effectively across the Group. This has enabled us to grow assets under management to £33.4 billion since 2019, delivering a strong performance despite significant macroeconomic challenges, with £6.5 billion of net new money and a 60% increase in digital net new money. We saw new customer inflows of 5% into our private bank in 2022, of which a fifth were referrals from other parts of the Group. We see a significant opportunity to grow assets under management further by increasing the number of referrals. We also plan to scale our wealth offering, which includes not just investing but also saving, lending, and financial planning. We want to help more people invest sustainably and have set a target for our own discretionary funds to achieve net zero by 2050. As we continue to embed our services in customers' digital lives, we're enhancing and expanding our digital investment platform, NatWest Invest. This week, we have also announced our intention to acquire a majority stake in FinTech Cushion. This allows us to enter the workplace savings and pension market, which is expected to double in size to well over £1 trillion by 2031. After a successful pilot last year, we plan to extend their offering to our commercial customers in order to improve financial well-being as well as drive long-term fee income. Last year, we created a new business segment bringing together commercial and institutional banking. This is now a less capital-intensive business, helping to extend our expertise in foreign exchange, interest rate management, and capital markets to more commercial customers. As we look to the future, we plan to continue growing our share in startups and high-growth businesses. We are the number one U.K. high street bank for startups with a share of 16.4%. Last year, we opened 99,000 new startup accounts, almost 40% of which were via Mettle. This is supported by our regional network of free accelerator hubs, which offers a program specifically tailored to high-growth businesses. We also plan to launch a new enhanced trade finance platform to meet more customers' international needs. We have an important role to play in helping our business customers transition to a net-zero economy. We are already a leading underwriter and provider of renewable financing in the U.K. and have delivered over £27 billion of climate and sustainable funding and financing towards our £100 billion target. We have led a collaboration with other banks to launch carbon place, the world's first marketplace for carbon offsets. We are rolling out the NatWest carbon planner launched last summer, which is a free platform to help SMEs reduce their carbon footprint. Good examples of embedding our services in customers' digital lives included building out our comprehensive payments proposition delivered through Tyl and Payit as well as extending our foreign exchange offering via digital channels. At the same time as focusing on targeted growth, we will continue our strong track record of disciplined cost management and investment. Since 2020, we have made an 18-percentage point improvement in our cost income ratio. We are targeting a ratio below 52% this year and less than 50% on a sustainable basis by 2025. We are now two years into our £3 billion investment program with a significant proportion going into our digital transformation. We expect to invest in the region of £3.5 billion over the next three years. But you can see the mix of spending change as our digital transformation advances. We will also continue to deploy capital effectively across the business. You can see here how our allocation of capital has changed since 2019, with a reduction of RWAs in commercial and institutional and Ulster Bank, Republic of Ireland, and an increase in the retail bank. This more effective deployment of capital, combined with our strong capital generation, has enabled us to support our customers in difficult times, as well as invest for growth, consider other strategic options, and make shareholder distributions of almost £11 billion since 2019. By continuing to deliver targeted growth, to manage costs in a disciplined manner, and to deploy our capital effectively, we plan to operate with a CET1 ratio of 13% to 14% over the medium term and deliver a sustainable return on tangible equity of 14% to 16%. We expect to generate and return significant capital to shareholders in 2023 and intend to maintain our payout ratio of 40% with the capacity to deploy any excess capital by making additional buybacks. Thank you very much. And I'll now hand over to Katie to take you through our full year performance in detail.
Katie Murray, CFO
Thank you, Alison. I'll start with performance in the fourth quarter using the third quarter as a comparator. Total income increased 14.8% to £3.7 billion. Income excluding all notable items was £3.8 billion, up 10.9%. Within this, net interest income was up 10.2% at £2.9 billion, while non-interest income was up 13.2% at £857 million. Operating expenses rose 12.8% to £2.1 billion, including Ulster exit costs and the annual U.K. bank levy. The impairment charge decreased to £144 million or 16 basis points of loans. This brings the full year charge to 9 basis points, in line with our guidance of less than 10. Taking all of this together, we delivered operating profit before tax of £1.4 billion. Profits attributable to ordinary shareholders was £1.3 billion after the benefit of deferred and other tax credits. The return on tangible equity was 20.6%, including a six percentage point benefit from tax credits. Before I take you through our performance in more detail, I'd like to share some of our assumptions about the economic outlook on my next slide. We will show you here our current expectations for interest rates and economic activity. Clearly, the backdrop of low economic growth and high inflation makes it a challenging time for our customers. There are some signs that inflation peaked in October last year, though it remains high at around 10%. Our base case assumption is that inflation will fall to the Bank of England's 2% target by mid-2024, resulting in interest rates reducing from the second quarter of that year to 3.25% by the year-end. We have not modeled any further rise in interest rates beyond the Bank of England's decision earlier this month to increase them to 4%. It is also worth noting that we assume the five-year swap rate will steadily decline from 3.6%, averaging 3.3% over 2023. This is important for the rollover of our hedge positions, which I will talk about later. All in, our outlook is aligned to the consensus of forecasts from economists with both upside and downside risks. We will monitor and react to market conditions as they develop during the year. However, we are pleased that the macroeconomic environment has stabilized since we spoke at Q3, and we note the improved outlook from the Bank of England this month. I'd like to move on now to net interest income on Slide 19. Strong momentum continued as net interest income increased 10.2% to £2.9 billion. This was the result of higher lending volumes with growth across all three businesses and higher margins. We also incurred a one-off £41 million impact from the redemption of legacy debt in line with our disclosure in December. Net interest margin, excluding notable items, increased 26 basis points to 325. Wider deposit margins added 44 basis points, reflecting the benefits of higher U.K. base rates, which increased by 125 basis points in the quarter, net of pass-through to our customers and higher swap rates on our structural hedge. This was partly offset by a 10-basis point reduction as a result of lower mortgage margins on the front book and a 2-basis point reduction from commercial and institutional fixed-rate lending. Net interest margin for the full year of 285 basis points is in line with our guidance of more than 280. If the current U.K. base rate remains at 4% throughout 2023, we expect NIM to average around 320 basis points for the full year. This takes into account the run rate benefit of recent base rate increases net of further pass-through to customers, the reinvestment of the hedge into higher swap rates, lower front book mortgage margins, the reduction in deposits towards the end of 2022, and further mix changes in deposits. Average interest-earning assets increased by 1.5% in the quarter to £355.8 billion driven by higher lending. The future impact of these assets on NIM is dependent on lending volumes, since they do not include the liquid asset buffer. Turning to loans on the next slide. We're pleased to have delivered a strong year of balanced growth across the Group. Gross loans to customers across our three businesses increased by 6.7% or £21.9 billion to £350 billion year-on-year, of which £3 billion was in the fourth quarter. Taking retail banking together with private banking, mortgage balances grew by £4.7 billion or 2.4% in the quarter. Gross new mortgage lending for the full year was a record £45 billion, representing flow share of 14%. Combined with good retention, this resulted in our stock share growing from 11.8% at the end of 2021 to 12.3% at the end of 2022. Unsecured balances increased by a further £200 million in the quarter to £14.2 billion, driven by higher spending on credit cards. In commercial and institutional, gross customer loans decreased by £2 billion. This was driven by continued repayment of government lending schemes, which reduced by £1.4 billion in the quarter and £3.4 billion over the year. Within this, mid-sized corporates increased borrowing by £1 billion, driven by working capital demands and asset financing. This was offset by net repayments from large corporate and institutional customers, reflecting usual year-end balance sheet management. I'd like to turn now to deposits on Slide 21. Customer deposits across the Group were £450 billion at the end of 2022, down 4.8% in the quarter. This includes a reduction of £5.1 billion in Ulster Bank, as customers moved to other banks as planned. Across our three businesses, deposits amount to £433 billion, over £80 billion more than loans, resulting in a loan-to-deposit ratio of 80%. During the fourth quarter, deposits reduced by £15 billion, of which £12 billion was in commercial and institutional. When I look at this £12 billion, one-third was the result of typical year-end movement, including a reduction in system liquidity. Another third was caused by lower foreign currency balances as a result of market volatility. The final third was balanced attrition, where we took the decision not to compete aggressively on price for balances with low margin and low liquidity value, given our strong funding and liquidity position. Across retail banking and private banking, deposits were down £3.5 billion as a result of lower current account balances in line with trends across the U.K. banking sector. Around 60% of our deposits are interest-bearing and 40% are non-interest bearing, in line with the third quarter and prior years. Within interest-bearing balances, there is some migration from instant access to term accounts, which is positive from a relationship perspective, but clearly has an impact on deposit margins. We launched a new fixed-term savings product for retail customers in January to meet rising demand, and this is going well. We remain competitive across our customer savings rates and continue to pass-through higher interest rates, including recent pricing decisions after the base rate increased to 4%. Our cumulative pass-through is now around 35% across interest-bearing deposits, up from 25% to 30% in Q3. As I said earlier, in our current modeling, there are no further base rate increases from here, and we expect rates to start coming down in the second quarter of 2024. Our disclosures show the third-party funding rate for all three businesses, which reflects the average cost of all deposits, including those that are non-interest bearing. Here, you will see that the rise in customer deposit rates has lagged the increase in base rates. The outlook for customer deposit rates will be a function of customer behavior as well as competition. We expect the average cost of customer deposits to continue trending higher in the coming quarters as a result of recent pass-through decisions as well as a change in mix as customers move to term and higher-yielding accounts, though the pace of this change is clearly uncertain. Turning now to our structural hedge on Slide 22. As you know, we hedged the majority of our current accounts and a smaller proportion of our instant access savings. From deposit balances totaling £450 billion, £184 billion are included in the product structural hedge. The notional amount was stable during the quarter. Given the reduction and mix change of deposits in Q4, we do not expect to reinvest all the balances maturing during 2023, which is approximately £40 billion. As we show in the chart, before we consider reinvestment, product hedges already written will deliver income of £2 billion in 2023. In addition to this, you should consider the reinvestment yield available with five-year swaps. We model an average reinvestment yield of 3.3% for 2023 compared to a rate of 3.75% today and relative to an average redemption yield of around 1.1%. The volume of hedges that are reinvested will be a function of both the flow and the mix of deposits. If there are no changes to year-end deposit volumes or mix, we would expect the product hedge notional to reduce by £5 billion over the course of the next 12 months. I'd like to turn now to non-interest income on Slide 23. Non-interest income excluding notable items was £857 million, up £100 million on the third quarter. This was driven by fees and commissions, which increased £62 million to £650 million due to higher lending fees, increased investment fee income, and the end of our no-fee foreign exchange offer for retail customers. Looking back over the full year, we are pleased that non-interest income increased by 19% year-on-year to £3.2 billion. There was a more stable trading performance following the completion of our market restructuring, and net fees and commissions grew by 8% as a result of increased customer activity, combined with the impact of inflation on nominal spending. Going forward, non-interest income will be influenced by economic activity and customer confidence as you would expect. I'll summarize our income performance and outlook on the next slide. 2022 income, excluding notable items, was £13.1 billion, up £3 billion or 30% year-on-year. This exceeded our expectations largely due to our strong lending performance and the pace of interest rate increases, which resulted in a net interest margin of 285 basis points. In 2023, we expect Group income, excluding notable items, to grow about 13% to around £14.8 billion, with net interest margin of about 320 basis points. This is modeled on the assumption of a stable U.K. base rate of 4% throughout the year, with full run-rate benefits into the second quarter. Income will also be driven by the positive impact of our hedge reinvestment, the negative roll-off on mortgage refinancing, volume and mix development across the balance sheet, as well as consumer and market activities. Turning over to costs on Slide 25. Other operating expenses for the go-forward Group were £6.6 billion for 2022. That's down £201 million or 2.9% on the prior year, in line with our guidance. This was driven by continued automation of customer journeys. I'm going to break down our cost guidance to give you full transparency on this and our ongoing tight management of expenses. Now that Ulster is in sent items, we start with £6.6 billion for 2022. We incur £221 million of Ulster indirect costs, which we expect to reduce over time, but as these costs are shared, they will not disappear entirely. This takes us to £6.9 billion. Ulster direct costs of £433 million include £195 million of exit costs, most of which were booked in the fourth quarter. This brings us to Group other operating expenses of £7.3 billion as per the income statement. Turning now to 2023 costs on the next slide. We start with £6.9 billion of operating expenses for 2022, excluding Ulster direct costs. Acquisitions include the impact of both Vodeno and Cushion, which we announced this week. So pro forma for acquisitions, 2022 costs are around £7 billion, which I view as the business-as-usual cost base of the Group. In 2023, we expect this to grow by around 5% to £7.3 billion, and with another £300 million of Ulster direct costs, this takes us to expected Group other operating expenses of £7.6 billion. We also expect a further improvement in operational leverage with a reduction in the cost-income ratio from 56% to below 52% for the year. Litigation and conduct costs totaled £385 million for 2022, and we expect them to be broadly in line with this in 2023. As you know, these costs can fluctuate. So let me tell you more about the drivers of costs in 2023 on Slide 27. Staff costs represent around half of our operating expenses, a further 23% are admin costs, with the remainder being property and depreciation. In 2023, we expect other operating expenses to increase by 4% on a reported basis to around £7.6 billion, including reduced Ulster direct costs. This increase is driven by staff and admin costs. We manage salary costs carefully and will continue to do so. Staff costs were broadly stable in 2022, as the impact of a 3.6% pay award, and the cost-of-living support was offset by lower average headcount. In 2023, the average pay award is 6.4% effective from April. In addition, we made one-off payments of around £60 million to staff in January to support ongoing cost of living pressures. Admin costs increased 8% in 2022, as a result of strategic investment in data and financial crime prevention. We are now seeing higher inflation feed through into supplier contract renewals, which is the main driver of growth in 2023. We expect premises and equipment costs to be broadly stable this year, and for depreciation and amortization to increase slightly as a result of higher investments. I'd like to turn now to talk to credit risk on Slide 28. We have a well-diversified prime loan book. Over 50% of our Group lending consists of mortgages where the average loan to value is 53%, or 69% on new business. Overall, we have low levels of arrears and forbearance in our mortgage book. 92% of our book is at a fixed rate, 4% of trackers, and 4% is on standard variable rates. Two-thirds of mortgage balances are on five-year fixed rates, and a quarter are two years, 17% of the book is interest-only, most of which is our buy-to-let book, with the rest concentrated in our private bank. Our personal unsecured exposure is less than 4% of Group lending and is performing in line with expectations. Our corporate book is well-diversified, and we have brought down concentration risk over the past decade. For example, our commercial real estate exposure represents less than 5% of Group loans with an average loan to value of 47%. Whilst we have a well-diversified high-quality loan book, with low levels of defaults, we are mindful of the economic uncertainty. So let me tell you how we have addressed this on Slide 29. We have four economic scenarios where we have updated our forecasts and relative weightings. For 2023, this has driven a slight improvement in our weighted average expectations for GDP, but a deterioration in levels of employment, which are the two key drivers of expected loss. In terms of sensitivity, a 100% weighting to the extreme downside scenario would increase Stage 1 and 2 expected credit loss by a further £1.6 billion or around 40 basis points of loans. In this scenario, Stage 3 expected credit loss would also increase. Though this is not modeled here. The net effect of changes to economic forecasts in the fourth quarter is an increase of £171 million in the Good Book expected credit loss provisions. Overall, expected credit loss reduced during 2022, reflecting the phased withdrawal of Ulster Bank, stable trends in portfolio performance, and a related net release of post-model adjustments and write-offs. The post-model adjustment for economic uncertainty decreased by £193 million in the fourth quarter to £352 million. We continue to be cautious on the release of these provisions, as we have yet to see the full impact of economic and cost of living challenges play out. Turning now to look at impairments on Slide 30. We reported a net impairment charge of £144 million in the fourth quarter, equivalent to 16 basis points of loans on an annualized basis. This took our charge for the full year to £337 million, equivalent to 9 basis points of loans. You can see that our impairment charge has largely been driven by unsecured lending and commercial property where we have relatively small exposures. You will also see that our ECL coverage of unsecured and property exposures compares favorably with pre-COVID levels. As you know, our through-the-cycle impairment guidance is 20 to 30 basis points. And I continue to see this as an appropriate level for 2023. Given both the economic outlook and relatively benign trends in our book. Turning now to look at capital and risk-weighted assets on Slide 31. We ended the fourth quarter with a common equity Tier-1 ratio of 14.2%, down 10 basis points on the third quarter. We generated 59 basis points of capital from earnings. This was net of deferred tax credits, which are not recognized in CET1 capital and changes to IFRS 9 transitional relief. This was offset by accruals for shareholder distributions of 79 basis points, which includes the impact of the £800 million market buyback that we announced the day before, a 45 basis point, and final pension accrual of 5 basis points. Given the strong funding position of the pension fund, we have reached an agreement not to make a final £500 million cash payment in 2023, but have set it aside in case of future needs, which we view as a low probability. We do not expect any further capital deductions for pension contributions going forward. RWAs decreased by £2.4 billion due to lower counterparty credit risk and market risk, partly offset by a £0.4 billion increase in credit risk. Our phased withdrawal from the Republic of Ireland delivered a further reduction of £2.6 billion as the majority of the residential mortgage portfolio was transferred to permanent TSB. Procyclicality has remained positive throughout 2022, leading to a total RWA reduction of £4 billion, of which £0.5 billion was in the fourth quarter. Changes in risk weightings are typically driven by events that increase the probability of default. So we would need to see an increase in defaults and Stage 3 charges before RWAs are meaningfully impacted. We expect a normalization of risk parameters in our medium-term RWA guidance. We anticipate an increase in RWAs of 5% to 10% between the end of 2022 and 2025, which includes possible procyclicality and the day-one impact of Basel 3.1. Turning now to our balance sheet strength on Slide 32. Our CET1 ratio of 14.2% is moving towards a range of 13% to 14% as planned. Our U.K. leverage ratio of 5.4% increased from 5.2% at Q3 and remains well above the Bank of England's minimum requirements. Our liquidity coverage ratio of 145% is down from Q3 due to higher lending across our three businesses and the reduction in surplus deposits. We maintained strong liquidity levels with a high-quality liquid asset pool and stable diverse funding base. Headroom above our minimum is £52 billion. Turning to guidance on my final slide. In 2023, we expect income excluding notable items to be around £14.8 billion, net interest margin of about 3.2%, and Group operating costs excluding litigation and conduct to be around £7.6 billion, delivering an improvement in the cost-income ratio to below 52%. We anticipate a loan impairment rate in the range of 20 to 30 basis points. Together, we expect this to lead to a return on tangible equity of 14% to 16% and to be at the upper end of this range. As Alison said earlier, we expect to return significant capital to shareholders in 2023 and we also have permission from the PRE to participate in a directed buyback from the U.K. Government of up to 4.99% of issued share capital. And with that, I will hand back to Alison.
Alison Rose, CEO
Thank you, Katie. As I look back over the past three years, I think it's fair to say that we have dealt with the shock of a global pandemic, the invasion of Ukraine, and economic uncertainty by remaining focused on supporting our customers and delivering our strategic objectives. We now have a simpler, more capital-efficient organization, which is benefiting from digital transformation and growing customer franchises. We have met our targets by growing income, reducing costs, and making significant shareholder distributions which have helped us to achieve our 2022 target CET1 ratio of 14.2%. As we continue to focus on delivering long-term sustainable value for shareholders, we are investing in growth in three ways; by accelerating our engagement with customers at every stage of their lives; by supporting customers in their transition to a low-carbon economy; and by further embedding our services into customers' digital lives. We expect to operate with a CET1 ratio of 13% to 14% over the medium term and to return significant capital to shareholders in 2023 with a payout ratio of 40% and capacity for additional buybacks. By building on our strong customer franchise, and continuing to deliver targeted growth, to manage costs in a disciplined manner, and to deploy our capital effectively, we plan to deliver a sustainable return on tangible equity of 14% to 16% over the medium term. Thank you very much. And we'll now open it up for questions.
Operator, Operator
We will take our first question from Raul Sinha of JPMorgan.
Raul Sinha, Analyst
The first one is on NII and kind of your NIM assumptions. Thank you very much for the long list of assumptions that you've made. They do look very conservative. I guess the one question I have related to your assumptions is around the deposit pass-through. I think you've talked about 35% so far on interest bearing balances. Can I ask what you might have assumed on that going forward? And I guess related to that, perhaps Alison, if I can ask you, at the Treasury Select Committee meeting, you talked about how 80% of your depositors had less than £5,000 in their accounts? Can I ask about the customer behavior for the remaining 20%? Are you seeing elevated levels of switching amongst people with higher deposits? And do you expect that to be a driver? Then related to that, if I can ask on the NII medium term. Just to try and understand given your rate assumptions, you obviously expect rate cuts from 2024? Should we assume that NII follows the direction of interest rates medium term? Or do you think that some of the positive drivers like the structure hedge, the growth in your loan book, and unsecured could offset and you end up with a more flat outcome more medium term on NII? Thanks.
Alison Rose, CEO
Great. Thank you very much. So I'll let Katie pick up some of those. Let me pick up the points around customer deposits and what we're seeing. Look, I think we've got strong capital and funding levels, what we've focused on, particularly on consumers, is helping build the savings habits so that 80% of customers with less than £5,000 in their deposit accounts, we've really targeted something called our digital regular saver on that. And building sort of saving habits that the balance between our NIBs and NIBs remained broadly stable, which is what we're seeing from a behavioral perspective. And then, in terms of competitive products, we've offered some fixed-term products out to our consumers around 3% to 4%. And we've seen good uptake on that which remain competitive. So broadly, we've seen customers engage a little bit more in their financial capability and management of their deposits. But NIBs and NIBs broadly stable, we've got competitive products, and we’re targeting regular savings. We're not seeing any shift in customer relationships, and the liquidity value of outflows have been very low. Katie, do you want to pick up the NIM assumption on pass-through?
Katie Murray, CFO
Yes, certainly. As we examine the pass-through MPC, we are currently at 35%. We have provided structural hedge sensitivity based on a static balance sheet that operates with a 50% pass-through rate, which serves as a reasonable estimate. Looking ahead to 2024, we anticipate similar factors influencing this. Our analysis indicates that the rate is likely to decrease towards the end of the first quarter and continuing into the second quarter. While there is some uncertainty in how rates will develop during that period, we do expect to see advantages from this structural hedge. In my earlier comments, I mentioned that 3.3% is the average; if you check the current five-year swap rate, it is slightly higher, which should provide some benefit as we progress year-to-date. Additionally, we expect fluctuations regarding mortgage headwinds as we transition from 2023 into 2024. I hope this information is helpful, Raul.
Operator, Operator
Our next question comes from Alvaro Serrano of Morgan Stanley.
Alvaro Serrano, Analyst
Follow up on margins, and another one on cost, please, on margin should help us assess the headwinds, I suppose you can share with us the proportion of term deposits within the balances. And on the mortgage side, I realized there's been some adjustments in the product margin of mortgages in the quarter, but to assess the headwinds going forward. Could you share with us the application margins in Q4 and early trends in January maybe? And the second question on costs, it's more about a sense of how much visibility you think you have now on costs. Obviously, a year ago, you were looking for a reduction of 3%. Now it's more like five. Do you feel you've got more certainty now? Is the outlook has narrowed in terms of going forward? What you could expect? And when I think about Ulster costs, when should we expect that to effectively shut down? Is that included in your less than 50% cost income in 2025? Thank you.
Alison Rose, CEO
So let me start with that. Fixed terms, single digits, mid-single digits, and they don't move very quickly. Cost visibility, I think we've given you some really clear visibility on costs and some guidance there. We're starting to see inflation come down. And we actively manage our costs, as you can imagine. So I think, yes, on that. On Ulster costs, yes, those are included. So I think that covers that one. Mortgages. Katie, do you want to pick that one?
Katie Murray, CFO
Yes, sure. Absolutely. I'll take that. So in terms of the mortgage pieces, as you know, Alvaro, we try not to get drawn to too deeply on the ins and outs on particular quarters. And I guess as I look at it, the Group, that Group declined from 150, sorry, 141, in Q3 down to 126. But if we think of how we're kind of managing this book and how we think about it, what we seek to do is to kind of manage it with an application margin, it's in an arrange around at basis 80 bps. It will move a little bit up and down. But that's kind of how we think of the managing of it. I would, of course, as you'd expect, encourage you to focus on the retail NIM, which at 274 is very strong, up 47 basis points in the quarter as well, that should help you a little bit on your math.
Operator, Operator
Our next question comes from Chris Cant of Autonomous.
Chris Cant, Analyst
If I could just come back on the margin debate really? On your mortgage comment just then is the 126. Is that the whole book or is that just the fixed book, please? And in terms of the manifestation of that headwind? When I think about the 320, it doesn't actually feel like that's going to be as pronounced as I might have guessed, given that two-thirds of your book is in five years. Is there anything in particular you call out on the progression of the mortgage churn through '23? Is there a particularly fat spread piece of the back book churning, which means it's a more acute headwind, because given the two-thirds in five years, I guess that's going to play out over a slightly longer period than we might have anticipated? And then, if I could just come back on a previous question really around your deposit pass-through assumptions. Again, thinking about the various puts and takes it feels like you must be making a fairly conservative assumption in respect of deposit pass-through this year. Could I again just ask around your expected migration upwards in that deposit beta assumption, the 35% across the interest-bearing book? How high are you assuming that goes in the coming quarters? Thank you.
Alison Rose, CEO
Well, let me do deposit pass-through. So as we said, at the moment, our average pass-through is around 35%. We're actively managing very carefully both sides of our balance sheet. The guidance we gave you previously was, as interest rates go higher, we would expect to pass a higher proportion through. The assumption we talked about is you should broadly assume sort of 50%. We're currently sitting at 35% on pass-through, and we'll continue to actively manage that based on the competition, our need for funding and liquidity, and you can see our funding and liquidity and capital position. So I think that probably gives you a sense of how we're managing that. On mortgages, obviously, we have a predominantly fixed book, as you know, we have a small SVR book and tracker book, our mix is 66% on five year, and we know exactly which customers are rolling off during the course of this year. We contact them six months before they roll off their fix. So we'll actively manage that book. We'll continue to target in the same way we have done, and I think you've seen we've managed pretty turbulent markets very well, the balance between volume and value. Katie, do you want to pick up anything else on mortgages?
Katie Murray, CFO
Just on the mortgage, just to answer your quite specific point. So yes, there is the whole book, in terms of what we're talking about 4% AUM tracker, 4% SVR, 92% fixed, as Alison says. In terms of the kind of color, you're absolutely right, the fact that the book is now 60% five year that that kind of dampens some of the effect a little bit, but I would probably encourage you to cast your mind back to 2021. And what margins we were writing, they're obviously rolling off a little bit. It's not particularly significant as far as a drag on that. But there's nothing exceptional to call out, but there will be a little bit of an impact from that piece.
Operator, Operator
Our next question comes from Aman Rakkar of Barclays.
Aman Rakkar, Analyst
Could you provide insights on the comments regarding deposits? I appreciate the elaboration. I'm curious about how you have considered the potential risks of deposit outflows moving forward, especially since you've been a significant beneficiary of deposit inflows since 2019 due to various support initiatives. This has enabled you to surpass your own rate sensitivity and maintain low deposit betas. However, as the outlook is changing, how do you view the risk of outflows in relation to your deposit mix and profile? Additionally, could you clarify the possible earnings impact you expect, particularly in relation to your 3.20 basis points NIM guidance? My second question pertains to the balance between net interest income and fees. It seems your guidance indicates a shift towards higher fee income than the consensus expects. However, if we take your guidance at face value, you are projected to derive around 77% of revenues from net interest income, compared to about mid-60s in 2019. I would like your perspective, particularly from Alison, on whether this balance might change in the future. What do you foresee as your steady-state fee income contribution? Moreover, are you confident that this can be achieved through your recent investments or through ongoing acquisitions? Thank you.
Alison Rose, CEO
Let me discuss deposits. Currently, deposits are still around £80 billion, even without inflows this year. We have provided competitive rates on our balances. We will evaluate deposits through several perspectives. First, we maintain a robust funding and liquidity position supported by our strong customer deposit franchises. This £80 billion gives us a competitive edge, enabling us to be disciplined in managing our deposits for long-term value as rates have increased. We focus on both relationship margin and liquidity value. Our approach is disciplined; we will protect the deposits we need and won’t pursue volume at the cost of our existing relationships. We have not lost any customer relationships, and the outflows we have experienced have been modest, reflecting the nature of our customers and their balances. Overall, we manage this effectively while aligning with our strategy to assist customers in saving, offering competitive products. When considering deposit outflows, we prioritize managing both volume and value carefully. Our strength in funding and liquidity is noteworthy. We are gaining new customer relationships across our franchises due to our strategy. Thus, we are focusing on managing for value while remaining competitive and retaining customers. Clearly, customer behavior is shifting, and there are excess deposits compared to pre-COVID levels, but we are navigating that sensibly.
Katie Murray, CFO
In terms of revenue guidance, as we consider the impact of deposits, Alison is completely correct; the sensitivity I mentioned should provide some direction. We are working with a base rate assumption of 4% and are not anticipating any further increases. This will naturally affect the net interest margin. Additionally, I recommend reflecting on the guidance I provided earlier. Assuming no further changes to the volume and mix of deposits, by the end of 2022, we anticipate that product hedges will gradually decrease by around £5 billion over the year, keeping in mind that this is an average and the decrease will occur slowly. The reduction in balances during the second half of the year will have some impact, but this is countered by the reinvestment yields we're currently seeing, which stand at about 3.7%. There are a few moving parts to consider, but those are the key points to think about.
Operator, Operator
Our next question comes from Benjamin Toms of RBC.
Benjamin Toms, Analyst
Firstly, on your RoTE guidance of 14%, 16%, which is considered sustainable in the medium term. And by saying this target sustainable presumably you feel you can hit the target under a range of base rate outcomes. What's the lowest level that you think rates can go to in the bank still hit a 14% to 16% range? Or I guess, put another way, what rate assumption does the bottom-end of this guidance assume please? And then, secondly, sorry if I miss the answer to this question, but in relation to old costs, for your full year '23 guidance assumes £300 million indirect costs, what will that number go to overtime. And how long would it take to get there? Thank you.
Alison Rose, CEO
We are very confident in our guidance of a sustainable 14% to 16%. This guidance takes into account various elements, including our economic assumptions. We are projecting a 4% interest rate for this year, which is expected to decrease gradually. It's also important to note that the guidance includes a 1.5% deduction for 2023, which will lessen over time. While there are multiple factors at play, we feel assured about our guidance moving forward, even as we anticipate a slow drag from Ulster and a reduction in interest rates. I apologize if we didn't address the situation with Ulster.
Katie Murray, CFO
Let me just close off the Ulster question. So you're absolutely right, direct costs expect to fall to £300 million end of this year. We've always said that we'd be largely complete in sort of 2024. So you'd expect another material reduction on that. I'm not going to be drawn on the specific number but making good progress. Really delighted with what the team are delivering.
Operator, Operator
Our next question comes from Omar Keenan of Credit Suisse.
Omar Keenan, Analyst
Thank you for taking the time to answer the questions. I'm afraid I've got another question on deposit migration. And I didn't really want to throw too many numbers around because it's not fair to the other conference call. But I just wanted to double-check my thinking around some of the assumptions. So the idea that the cumulative pass-through on interest bearing deposits at NatWest, so it's currently sitting at 35%. And the assumption that will end up at 50% with Bank of England rates fairly unchanged from where they are today at 4%. I've just done a bit of back of the envelope math, but it seems to imply we need to get to that number. And given the 400 bps of rate hikes roughly we’ve seen so far, that you're assuming an interest increase in deposit costs, all else equal about 60 basis points. And if I look at the difference between fixed-term deposit costs and access accounts, I'll just come up with a number that looks like you're assuming that's about a quarter of the interest-bearing deposits migrate into time deposits. Can I just double-check ballpark with my thinking is accurate on that, that the deposit migration assumption within the interest-bearing account looks to be around 25% moving into time deposits? And I've just got a second question after that.
Alison Rose, CEO
Yes. I'm not going to comment on your assumptions. That's not an appropriate one to make. Let me take a step back for you. So we will manage our past three years, we have consistently said, taking into account our liquidity and funding and our competitive position that we need to own deposits. Our liquidity and funding position is very strong. At the moment, we're at around 35% pass-through. We've not said we will end up at 50%, but we've said that's an appropriate level to think about as an incremental level of pass-through. What we are seeing is broadly stable between NIBs and NIBs. We are seeing customers take advantage of some of the fixed-term deposits that we're offering, which are competitive. I've given you some guidance around what the deposit levels of our customers in terms of what they have in their accounts. We're very comfortable that we're able to compete effectively. We're very comfortable with our position. And of course, our liquidity and funding remains very strong, so the way I would think about it, in terms of how we're thinking about our deposits, we'll manage volume and value. We'll keep it broadly stable over the period. That's what I would think about for your assumptions, and leave it there for you to model.
Omar Keenan, Analyst
Okay. Fair enough. I think we could play around with our own numbers. But so that's very helpful. Thank you very much. So just a question, sorry, another one on costs. I don't know you don't want to be specific around how quickly stranded Ulster costs may come down when we look forward into 2024 and 25. But perhaps could you talk around some of your maybe inflation assumptions beyond 2023? Because I guess we can look at your inflation forecasts. But do you think there's any lagged inflation effects from high inflation '23 that we need to consider in '24 or '25? Or can you help us a little bit with the absolute moving parts looking beyond '23?
Alison Rose, CEO
Hopefully what we've given you, and I think Katie covered quite a lot in the presentation of the mix of our costs. So you can see really clearly what's happening. I think with regard to Ulster, that's all included in our numbers as we go forward. Ulster indirects, they're part of BAU. There will be some reductions, but there are lots of puts and takes in costs. Overall, we're very comfortable with the guidance. I think in terms of our economic scenarios, those are in the presentation on what we're assuming on inflation. But what we've given you is clear guidance on where we expect costs are today, our cost-income ratio, and that we're actively managing our costs as we go forward.
Operator, Operator
Our next question comes from Jonathan Pierce of Numis.
Jonathan Pierce, Analyst
I got two questions. I'm sorry, back on this short and medium-term RoTE guidance of 14% to 16%. I'm still struggling a bit with it. I mean, the NIM has obviously got this circa 7 basis points a quarter tailwind coming from the hedge for the foreseeable future. I mean, even if the hedge is reduced in size, the overnight rate is now ahead of the five-year swap rate anyway. So I'm not sure that's particularly relevant, except in the near term mortgage headwinds are bigger than they might be moving forward because of the two-year fixes from two years ago coming off. You got the deposit migration. But again, those latter dynamics should recede, I would think later this year and into next year. But you've still got that powerful hedge tailwind. But you're telling us into 2024 that RoTE is still going to be 14% to 16%. You're also telling us, of course, that the income this year at £14.8 billion was a very specific number six weeks into the year. My question getting to the point, it feels to me that you've almost decided that a 14% to 16% RoTE is the maximum acceptable return in the medium term and you'll do whatever you need to do on pricing, particularly deposits to prevent it going above that. That's not necessarily a bad thing because, of course, it's going to make the RoTE more defendable when rates start coming back down again. But is there anything in that? That would be my first question. And then I got a question on some accounting movements in the TNAV, if that's okay?
Alison Rose, CEO
Okay, I'll let Katie take on TNAV when you get to it. So let me try and get you comfortable on RoTE. The answer very simply is, what we want to give you is a very clear view on the sustainable return on tangible equity of this business. There are a number of economic scenarios that we have given you and the assumptions that we have there. We're actively managing the business to deliver sustainable RoTE uncertainty for you. I think what I would say is, on your point that the hedge is a positive tailwind. There are some economic uncertainties which we're taking into account. We're very well placed with strong capital, good risk discipline, and capacity to grow. And so what you can expect to see is us continuing to deliver a strong position. I'm not actively managing the business only to deliver a 14% to 16%, which was, I guess, the opening part of your comment. I think that is a good performance of our business in pretty turbulent markets. And obviously, there are headwinds and tailwinds, but we're very comfortable with the guidance that we've given to you. What I would say is, when we think about some of the ups and downs, EBITDA is no longer going to be a material drag once we get through the end of this year. Interest rates, we would expect to decline as we go forward. We've got customer behavior and competition and the procyclicality and regulation coming in as well. So I think you should feel comfortable that we're managing the business well for growth; a 14% to 16% is sustainable, without huge peaks and troughs within that. Why don't you ask your TNAV question to Katie?
Jonathan Pierce, Analyst
That's really useful. But sorry, just a quick follow up on that, this point on sustainability, I think it's really important. And to the question before me, sustainable RoTE, the word sustainable, I think, is used about 30 times in the slides today. That the message coming out is regardless of the income guidance, and all the rest of it this year, that looks perhaps a little softer than consensus. Your very clear message is you're going to do 14% to 16% and that is going to be sustainable for the next several years, not just this year and next year.
Katie Murray, CFO
Yes, that's right. We're giving you a view on what RoTE will be. We don't give out targets without a great deal of thought and analysis. They're based on various economic scenarios, and we've tested them against upside and downside risk scenarios. So as a result, based on the economics given today, our current views of market competition, customer behavior, we're confident on the RoTE range we've given you.
Operator, Operator
Our next question comes from Martin Leitgeb of Goldman Sachs.
Martin Leitgeb, Analyst
And also, thank you for all the disclosure provided in the slide deck, which is really helpful. Just to follow up on probably the last one, I guess, a follow up on the kind of headwind assumption within a NIM in terms of consumer solar deposit side, consumer behavior and what you have assumed. How quickly do you assume that this change in consumer behavior sort of shifted out of deposits in form of attrition or into other deposit products in form of migration to savings? So time deposits, how quickly would you expect that shift to happen? Would you expect everything to be pretty much front loaded into '23? I mean, similar to other questions earlier today, I'm just trying to square up obviously, the NIM guidance, particularly considering the back-end loaded nature of rate hikes in 4Q and obviously further rate hikes in 1Q, which would suggest quite a material headwind, particularly this year. And then, secondly, on cost, just briefly, obviously, historically, a very strong focus on reducing the absolute cost base of NatWest Group in terms of efficiency measures, should we assume this efficiency measures on now mostly done? So the cost base to grow broadly in line with inflation? Or do you still see scope for the cost base to lag behind inflation in terms of cost growth from here? Thank you.
Alison Rose, CEO
Well, look on consumer deposits, it's very early days. What we're seeing is a very strong funding and liquidity from our perspective. We're seeing real stability in NIBs and NIBs. We are seeing customers engage more actively in their deposits, and we've got competitive rates. But I think it's very early to say, obviously, there is, if you take a step back, there is excess deposits from post-COVID. People will increasingly spend those deposits. We'll see more seasonality. Don't forget seasonality and deposit flows. January is a big, big tax month. So you'll definitely see a bit of activity in January, and then we expect it to return some more stable levels. But I think from our perspective, what I would say is, we have a very disciplined approach, we have very competitive products. We've not lost any relationships. We're managing our liquidity, and it’s very early days in terms of customer behavior. On costs, we have a good track record, you would expect us to continue to manage costs, actively continuing investment in customer journeys, digitization, which part of our strategy will continue, obviously, we factored in the impact of inflation. Katie has given you some really good visibility on what's happening with our costs. You've got our guidance going forward of what we expect to see on costs. You can expect both Katie and I to continue to manage costs very actively going forward.
Operator, Operator
Our last question comes from Joseph Dickerson of Jefferies.
Joseph Dickerson, Analyst
I have a quick question. The net interest margin has been discussed extensively. On Slide 22, could you clarify what you mean by stating that we have already written, assuming no further majorities in the hedge are effectively reinvested? So, we see the improvement in 2023 from the current portfolio, but by 2024 and 2025, you're effectively not reinvesting because a significant portion of the rate sensitivity in those later years comes from that.
Alison Rose, CEO
So thanks. I'm glad we did met. We haven't left without talking about this slide, the IR team worked hard on it. So as I think we already said, they are already written is the hedges we already have in place that are going to just roll through. So what I'm trying to tell you here is, £2 billion, £1.6 billion, and £1.4 billion of stuff that's already kind of in the tank. What you know is that we have maturing each year about £40 billion a year, which comes across the year. So you have to think about averaging of returns there. In our own models, we've modeled 3.3%. In terms of that, I would note that today, if I was putting on today, it's closer to 3.7%. But I would expect, in addition to this already written, there's the reinvestment of that £40 billion per annum. I talked about as well, if I looked as of today, if balances didn't change, it's very static, we would expect that the size of the hedge would reduce over the year by about £5 billion. But there certainly is a significant reinvestment to come as we go on top of this, this Group has already written.
Operator, Operator
Thank you. I'd like to hand it back to Alison for any closing comments.
Alison Rose, CEO
Great. Thank you. Well, thank you everyone for your time and your questions. As always, I guess the message, just to leave you with. I think from our perspective, we're very well positioned for the current environment. We have a well-diversified, largely secured balance sheet, which means we're positioned well in terms of the macroeconomic for any downside risk. We're also positioned well for the future. We have attractive growth opportunities, very strong franchises with capacity to grow. We will maintain our proven experience on expense and investment discipline as we go forward. We're well diversified. We're derisked. We have a high-quality loan book. We will effectively manage our capital and deploy our capital returns to shareholders. So I think good and sustainable returns and attractive capital distributions as we go forward. Thank you very much everyone.
Katie Murray, CFO
Thanks for your time.
Operator, Operator
That concludes today's presentation. Thank you for your participation. You may now disconnect.