Earnings Call Transcript - NWG Q2 2020

Operator, Operator

Welcome, everyone. We will now play a prerecorded audio presentation of our H1 results. This will be followed by a live Q&A session with Howard Davies, Alison Rose, and Katie Murray.

Alison Rose, CEO

Good morning, everyone. Thank you for joining us today for our first half results presentation. Our agenda for the call is as follows. I will start with the first half headlines and update you on how we have been managing the business through the COVID-19 pandemic, the progress we have made on our strategic priorities during the first half, and then Katie will take you through the numbers in more detail before I wrap up and we open it up for questions. So let me start with the headlines. As you know, we had a strong start to the year before the impact of COVID-19 and our pre-impairment operating profit for the first half was £2.1 billion. Since we spoke in May, however, the economic outlook has worsened. And as a result, we are announcing a first half net impairment charge of £2.9 billion. This is based on extensive modeling carried out during the second quarter, which I'll talk about on the next slide. Costs were slightly lower year-on-year. And taking into account impairments, we made an operating loss of £770 million and an attributable loss of £705 million. Given the ongoing economic uncertainty, we are pleased to be operating from a position of strength in terms of liquidity, funding, and capital, even after absorbing prudent provisions through impairments. This is a sign of the strength of our franchise. Our common equity Tier 1 ratio for the first half was 17.2%, and our liquidity coverage ratio was 166%. I'll talk about impairments and capital on Slide 5. Given the current level of economic uncertainty, we are managing impairments carefully. Our impairment charge for the second quarter was £2.1 billion, an increase from £802 million in the first quarter. This charge is based on modeling that takes into account a wide range of macroeconomic factors as well as expert views on risk and reflects the deterioration in economic indicators. We have provided you with a lot of detailed information on our approach, which Katie will take you through later. As a result of this modeling, the majority of provisions have been taken in the first half, providing coverage of 1.72%. We anticipate a significantly lower charge in the second half with full-year charge in the range of £3.5 billion to £4.5 billion based on current economic assumptions. Despite this increase in provisions, we have a CET1 ratio of 17.2%, one of the strongest capital ratios in Europe. Now of course, this ratio partly reflects the cancellation of dividends earlier in the year in consultation with the regulator. And we plan to return to paying dividends as soon as this is possible. We continue to believe with the current shape and mix of our business that we should be operating with a CET1 ratio of 13% to 14% over the medium to long term, which means we have clear headroom of somewhere between £6 billion to £8 billion above our target capital ratio, and £15 billion above the maximum distributable amount. This gives us the flexibility to return capital to shareholders as soon as that is possible, to manage an uncertain outlook and to consider other options that offer compelling shareholder value. So having given you the headlines, let me move on to talk about how we have been running the business during the pandemic. We set out a new purpose in February to champion potential by helping people, families, and businesses to thrive. What you will hear today is how we are taking advantage of our strong customer franchise and market positions to advance that purpose. We have supported our customers in difficult circumstances, and we have done so safely with a prudent approach to risk and impairments and with careful deployment of our balance sheet. We have taken swift action to address COVID-19, but we have also focused on the key strategic priorities I set out in February. For example, we have made real progress refocusing NatWest Markets onto the needs of our core customers and expect to complete the majority of our targeted RWA reduction by the end of 2021. We are also on track to deliver our £250 million cost reduction target despite the disruption of COVID-19. Finally, we remain focused on maintaining a strong balance sheet, which, as I said, gives us significant advantage in this environment and will allow us to assume dividend payments to shareholders when it is appropriate to do so.

Katie Murray, CFO

Thank you, Alison, and good morning, everyone. There are three main areas I will spend time on this morning. Naturally, I'll start with the group income statement, and I'll be using the first half last year as a comparator. For the businesses, I'll also show the income progression from the first to second quarter this year. And as Alison mentioned, I'll give you a detailed breakdown of the impairment charge and the scenarios we have used to predict our model expected credit losses under IFRS 9. And finally, I will cover our capital and liquidity position in a little more detail. So starting with the group income statement. We reported total income of £5.8 billion for the first half, a decrease of 5% year-on-year, excluding the impact of last year's disposal of Alawwal. Within this, net interest income decreased 4% to £3.8 billion. And non-interest income reduced by 6% to just under £2 billion. These reductions were driven by a fall in rates, the impact of regulatory changes discussed in the last 2 quarters, and the effect of COVID-19 trading. We reduced overall operating costs by 9% to £3.75 billion. Within this, other expenses, excluding operating lease depreciation, decreased by 1%, while strategic costs were 26% lower at £464 million. Litigation and conduct costs for the first half were an £89 million release, reflecting a PPI release of £250 million, offset by some other historical litigation matters. We are reporting operating profit before impairments of £2.1 billion, up 3% from last year, mainly as a result of lower strategic and conduct costs. The impairment charge for the first half was £2.9 billion, which represents 159 basis points of gross customer loans. I'll talk about this in more detail later. Taking all of this together, we reported an operating loss before tax of £770 million and an attributable loss of £705 million. On tax, the credit of 27% is higher than the standard rate of 19% due to the rate impact of FX recycling, the tax surcharge, and other tax adjusting items. I'll move on now to take you through the income by business line. Total income for the second quarter was £486 million lower than the first, reflecting the contraction of the yield curve, reduced business activity, and lower customer spending resulting from government measures in response to COVID-19. In U.K. Personal Banking, total income decreased by £115 million, due to lower overdraft fees and significantly reduced card spend, which resulted in reduced fee income and lower unsecured balances. Total Commercial Banking income was down slightly as a result of lower deposit funding benefits and reduced business activity. This was partially offset by strong balance sheet growth as government lending initiatives helped to increase net interest income, albeit at a lower margin given the agreed government rates. Finally, NatWest Markets income was up £270 million. But excluding own credit adjustments and asset disposals, revenue grew by £50 million. Income from financing increased as credit markets stabilized with support from central banks, while rates and currencies decreased as market volatility towards the end of the first quarter eased. Moving on now to look at net interest margin. Bank net interest margin decreased 22 basis points in the second quarter to 167 basis points. This is the result of 3 factors. You will recall we talked about interest rates and margin pressure in May. Lower interest rates accounted for 10 basis points, while 5 basis points was the result of the impact of a change in mix of lending. I would note, of course, that the level of lending has been beneficial to income, particularly in the commercial area. The high level of liquidity we are holding accounted for a further 7 basis point reduction as average interest-earning assets grew by over £35 billion. This, of course, had a negative impact on net interest margin, though it had no impact on income or ROE. Looking to the second half, there are 2 main factors to consider. One, the impact of holding excess liquidity, and of course, the ongoing pressure from the fall in hedge income. Moving on now to look at costs. Other expenses for the second quarter were £50 million lower than the first, excluding operating lease depreciation. As Alison mentioned, the shape and timing of our cost reduction program has changed as a result of COVID-19. Fixed costs will be higher as we have delayed some of our restructuring plans. Our change spend will be lower as we prioritize a smaller number of key programs to focus on maintaining critical services for customers. Some run-the-bank costs will also be lower, such as travel and the cost of running buildings. So we have, of course, encountered additional costs in our response to COVID-19. Alison and I both believe it's absolutely critical we remain very disciplined so that we continue making sustainable strategic change where we can. Strategic costs in Q2 were £333 million. This includes £86 million as a result of restructuring NatWest Markets, £44 million on technology spend and £148 million related to London property charges, which includes an additional property exit. This building was already part of our longer-term property rationalization plan, so it did not make economic sense to make it COVID-19 compliant. This will be beneficial for us in the long run, but it means strategic costs will now be within our projected range of £800 million to £1 billion. Before I hand over to Katie, I want to talk on Slide 16 about our progress on enterprise, learning, and climate change. Our initiatives here are more important than ever as we start to rebuild the economy, which is why we have accelerated our digital offering during the pandemic.

Alison Rose, CEO

On enterprise, we are supporting people who want to become entrepreneurs through our 12 U.K. accelerator hubs around the country, and we have migrated these hubs to digital delivery. As a result, we welcomed 1,200 new entrepreneurs to virtual accelerator programs in April. And we extended our Dream Bigger program, which encourages young women aged 16 to 18 to become entrepreneurs by offering it online. On learning, the need for financial education and capability has also become ever more important as people look to manage their own personal balance sheet. We have now completed financial health checks for over 0.5 million customers, and we reached 2 million people in the first half through MoneySense, our free financial education program for 5- to 18-year-olds, which we made available online when schools closed down. We also launched the first-ever financial education console game, Island Saver, which has had over 1 million downloads. We continue to invest in the next generation, and we have committed to growing talent by creating 1,000 intern, graduate, and apprenticeship opportunities over the next 15 months. On climate change, we remain focused on making our own operations climate positive over the next 5 years and halving the climate impact of our financing activity by 2030. During the first half, we issued a $600 million green bond with all proceeds allocated to renewable energy assets across the U.K. NatWest Markets was ranked #1 book runner for U.K. corporate green and sustainable bonds by Dealogic, and we helped raise about £4 billion of new sustainable financing and funding. Since 2019, the business has helped 33 clients issue green, social, and sustainable bonds, totaling about £29 billion. So in summary, our first half results demonstrate that we have a strong business franchise and have supported our customers well at a time of uncertainty. We are managing risk carefully and providing for impairments thoughtfully. We continue to execute on our strategic priorities and even after absorbing increased provisions, we have a robust capital position and resilient capital-generative business. This gives us the flexibility to return capital to shareholders as soon as that is possible, to manage an uncertain outlook and to consider other options that offer compelling shareholder value. With that, I'll hand over to Katie to take you through the numbers.

Katie Murray, CFO

Operator, Operator

Your first question comes from the line of Rohith Chandra-Rajan at Bank of America.

Rohith Chandra-Rajan, Analyst

I would like to ask a couple of questions regarding income and capital. Firstly, regarding income, it would be helpful to understand your revenue expectations for the second half of the year, particularly in terms of volume growth and the margin drivers, including hedged loan and deposit pricing, as well as mix. Secondly, on capital, you've provided a range for risk-weighted assets, which is useful. However, could you elaborate on the factors affecting the numerator of the CET1 ratio? I'm interested in earnings but also any expectations regarding the reversal of the IFRS 9 impacts and any potential impacts from software intangibles, along with anything else to consider for the progression of CET1.

Alison Rose, CEO

Thank you. Katie, do you want to take that?

Katie Murray, CFO

Yes, Rohith, I believe you combined multiple questions into one. Let’s break it down. Regarding our revenue outlook for the remainder of the year, we initially provided comprehensive guidance and confirmed the £200 million related to the HCCR. We will discuss our net interest margin outlook as we progress. Currently, we are comfortable with the consensus expectations for the end of the year. In terms of revenue opportunities, focusing first on Personal banking, as the economy starts to recover, we anticipate an increase in retail sales, which will enhance our customer fee income and net interest income from our unsecured balances. While credit card volumes decreased significantly in Q2, we expect new lending demand to emerge. Our mortgage lending in the first half was £16 billion, split between £10 billion and £6 billion, and it’s encouraging to see that activity is picking up again. In the commercial sector, the government lending and business bank-backed loans, although lower margin, contribute to our income due to the volumes we’ve processed, supporting us in the latter part of this year. Overall, we feel relatively secure about our income, although it’s important to note that this is against the backdrop of a significant drop in rates.

Martin Leitgeb, Analyst

I just wanted to follow-up on the kind of the question tied to revenue and revenue outlook and just in terms of the growth opportunity. So very strong growth in mortgages during the half-year despite, obviously, the impact of the lockdown. And I was just thinking, how should we think about mortgage growth in particular going forward? Could you just update us on where you see pricing at the moment, how that compares to your pricing target, and if you potentially see scope here for increased growth opportunity or where else you could see more opportunities for the group as the year progressed as in maybe into next year, just considering, obviously, your strong capital and funding position at this moment in time?

Alison Rose, CEO

Well, let me start a little bit on the mortgage side. And you obviously saw pre-COVID our strong pre-provision profit performance and a good performance in mortgages. We expect to continue to grow market share in mortgages, consistent with prior years, with new business share sort of ahead of our stock share that has now grown to 10.5%. Our retention levels continue to improve and that is key to supporting improving mortgage margin and overall profitability going forward. Clearly, we've shared with you the impact of COVID as obviously, the market went into lockdown, and we're now seeing a strong recovery with mortgages coming back. But our retention levels are running around 79%.

Katie Murray, CFO

No. I'll just help with that last number; it's 79%.

Alison Rose, CEO

Yes, 79%. 79% on retention level, and our flow share is about 15%. So it's sitting nicely. Martin, we always talk about how long it takes to move your share of the group. So it's nice to see the growth from 10.2% up to 10.5% in this first half of the year. So we're pleased with that. If I just pick up your comments around pricing in there. The back book is rolling off 138 basis points. Our blended rate is 124 basis points. What you would see given that mix of that £6 billion, it was much more remortgage business rather than new mortgage. So therefore, that kind of helps lift your blended rate up a little bit. I would expect and hope as we move into the year, probably more into Q4, I would say that you'll see the new mortgage kind of grow a bit more significantly as the activity of today feeds through into the system, which, of course, is great for income, pools down your margin a little bit, would be great for income. So we're very happy with that.

Katie Murray, CFO

In terms of rate outlook and the structural hedge. So at the moment, in terms of the structural hedge, it's rolling off about 115 basis points at the moment. And it's coming on at around 13 basis points. So clearly, that's a big disparity. What I would say people often say, "Oh, why do you still do the hedge?" If we look at the average of what we added on and where spot rates were averagely for the first 6 months, 48 basis points compared to where it is today. So it certainly helps us at this stage. Negative rates, look, it's a great question. In our own economic scenarios, we've only got a 10% likelihood of negative rates coming in. So we don't see that as something that's particularly impactful. What we've given you our usual kind of disclosure, and it's on Page 74, 75 of the accounts, Martin, you can see what the earnings would be if we're at a 25 basis point fall. That 25 basis point fall is structured with actually kind of rates flooring out at 0, in line with a lot of what our contracts would actually have at this moment, and that would be minus £162 million in year one. Hopefully, I think I got them all there.

Jonathan Pierce, Analyst

I've got two questions. The first actually just clarifying what you were just saying, Katie, on consensus for this year. Can I just confirm? Were you talking about net interest income forecast for full year 2020 look in the right place? Or was it more broadly on income or the second half? Just clarify that for us.

Katie Murray, CFO

Total income consensus, we are very comfortable within the range.

Jennifer Cook, Analyst

A couple of questions on, clearly, the kind of two themes from this reporting season. Firstly, I'm trying to get a sense of the underlying revenue expectations. So if I adjust to the disposal losses and loan credit, it gives me about £5.9 billion of underlying income for H1. You've told us that you're broadly happy with consensus this year. If I then plug in the revised disposal losses, you get that. It points to just over £5.1 billion of underlying income for H2. Clearly, an annualization of H2 would give me in FY '21 income from distance below consensus. So I just wanted to ask kind of which of those half-yearly revenue run rates you are more comfortable with? And then second, just on RWAs. On the kind of bridge between where you printed today and your full year guidance? Because given that a large component of your lending in H2 will be government guaranteed, NatWest Markets RWA should reduce a further £3 billion by year-end. And you'd assume some of that commercial, say, RCF utilization will unwind as well. Are you trying to tell us that you could potentially have £17 billion of RWA procyclicality just in H2? That's about £0.10 inflation in 6 months?

Katie Murray, CFO

Let me address those points one by one. You're correct that we are comfortable with the consensus overall. Looking at the consensus for 2021, there are many variables that need to be considered. We need to assess how much of these impairments will impact us, as you know, when they go into default, we stop recognizing interest in the income statement, which will have an effect. Right now, I would say we are generally comfortable with the situation as it is. There is significant pressure, headwinds, and uncertainty, but it doesn’t seem overly concerning at this point. We will definitely discuss this in more detail in Q3 and Q4. Regarding RWA guidance, it will consist of a few different factors, and you have touched on the key points, such as the reduction in NatWest Markets and the growth in government lending.

Alison Rose, CEO

Subject, of course, to the economics being as we see them today. Moving on now to look at risk-weighted assets. Risk-weighted assets decreased £3.7 billion in Q2 as counterparty and market risks were both down £1.5 billion, while credit risk was down £700 million. Counterparty and market risk reductions were driven by NatWest Markets where RWAs decreased by £3.8 billion as the business works towards its full year reduction target. Counterparty risk in NatWest Markets decreased by £1.5 billion, reflecting the exit of specific positions. And market risk also decreased by £1.5 billion as markets normalize during the second quarter. Credit risk reduction was mainly driven by personal banking, where lower spending by credit card customers resulted in reduced undrawn RWAs. Withdraw on balances, new lending under government schemes offset general credit risk migration. Looking forward, RWAs at the end of 2020 are expected to be in the range of £185 billion to £195 billion. We have seen little procyclicality in RWAs in the quarter, in line with the low level of overdue payments we are seeing. Moving on to capital, liquidity, and funding. We ended the quarter with a common equity Tier 1 ratio of 17.2% on a transitional basis under IFRS 9. This is 60 basis points higher than Q1. We are benefiting from 70 basis points of transitional relief in Q2 as well as a reduction in RWAs of 30 basis points. Following a change in the rules, the banks are now required to take 100% IFRS 9 transitional relief on expected credit loss movements in Stage 1 and Stage 2 provisions from the 1st of January 2020. The movement in ECL from 2020 is subject to a full add back in 2020 and 2021 and then unwinds over the following 3 years to 2024. This change aims to reduce the procyclicality impact caused by increasing ECL. And on a fully loaded IFRS 9 basis, our CET1 ratio was 16.3%. This gives us a strong position, both on transitional and fully loaded basis terms.

Operator, Operator

We do indeed. We have two questions from Raul Sinha of JPMorgan via the web. The first question, could you discuss the outlook for loan growth for the rest of 2020, in particular, unsecured balances, which fell significantly in H1?

Raul Sinha, Analyst

And the second, can you discuss how the franchise within NatWest Markets is performing in the context of the strong industry-wide trends? Would you consider making refinements to the plan for NatWest Markets if demand for hedging activities improves relative to your expectations?

Alison Rose, CEO

Thank you. Let me discuss NatWest Markets. I want to highlight why we are refocusing this area of our business. We are pleased with how it has performed, especially in response to market volatility and activity related to financing and balance sheet restructuring. However, a refocus was necessary, and we are confident in our plans, which we are now accelerating. The performance is improving as we adapt to market needs, and by concentrating on our core clients that align with our strategy, we expect our products and services to benefit from their activities. The restructuring plans remain suitable. Regarding unsecured lending, it will largely depend on the economic recovery. We are lending to our existing customers, but the overall trend is linked to the economy. In July, we observed some positive trends as growth is starting to return to the economy, along with the details we previously discussed.

Katie Murray, CFO

Yes. And the only thing I would probably remind you on, Raul, is obviously, we've got a very small unsecured group. It's £3.7 billion. It's strong by £0.6 billion over the last kind of 6 months. So it's not a big driver of either our income or our impairments obviously, which is important at this time.

Operator, Operator

Your next question on the phone comes from the line of Andrew Coombs at Citi.

Andrew Coombs, Analyst

I think my questions have pretty much just been asked actually, but perhaps just a further clarification on NatWest Markets. I mean the outlook was always for it to be a breakeven business as you alluded to the first half and particularly strong. The restructuring is actually going ahead of plan. Is the expectation that this will still be a breakeven business in the medium term and predominantly used to support other areas of the bank like the commercial bank?

Alison Rose, CEO

Yes, absolutely.

Katie Murray, CFO

No change in that strategy.

Operator, Operator

And our next question comes from the line of Fahed Kunwar at Redburn.

Fahed Kunwar, Analyst

Just a couple. The first one I want to ask on impairment. If I look at your particular Stage 3 coverage and your GDP assumptions, they're a lot stronger and a lot more conservative than your peers. If I'm thinking out to 2021 loan losses, what's kind of natural run rate you're seeing at the provisions? So we think about that 2021 number. And also, when you set those provisions for this half, how much of the fact that you've got a very, very strong capital position, make you be a bit more prudent in your forecast? Because your unemployment forecast is even more prudent in Bank of England's desktop stress test. So that's my first question. And my second question is on margins as well. Obviously, thanks for your answers on negative rates earlier, but we saw in Europe, a lot of the European banks are willing to charge corporate core deposits. If we got into negative rate territory, I appreciate the sensitivity you called out, but is there any headroom to actually cut corporate deposits as they get charged for having deposits with a bank, so that's something that you wouldn't do?

Alison Rose, CEO

Let me begin with the impairments. I believe in taking a cautious and thoughtful approach to provisions. As Katie mentioned, we've discussed our assumptions. It's important to highlight that despite these provisions, our balance sheet remains very robust and we have strong capital strength. We believe our perspective on the situation is appropriate. Regarding impairments and our underlying portfolio, the government support measures have effectively helped businesses navigate this challenging period. We do have some small impairments in our commercial sector, but the risk of significant losses is limited. My focus remains on being careful, thoughtful, and prudent regarding impairments, while also emphasizing the strength of our capital. Katie, would you like to address the question about margins?

Katie Murray, CFO

Yes. To wrap up on the topic of impairments, I want to clarify that I don't agree with the notion that we took significant risks because we have ample capital. Our approach is consistent. Regarding the discussion on margins, we have a few areas where we are already dealing with negative rates and we are seeing some charges to corporates. I can foresee that, similar to Europe, we might reach that point eventually, though it has taken time for them to get there. However, we are not planning for that at this moment since we don't view it as likely as we look ahead.

Howard Davies, Chairman

Yes. It's Howard Davies here. Let me just try to pick that up. The PRA came out with the statement earlier this week to the effect that they would be reconsidering their policy on dividends in the fourth quarter. And that means that for the moment, this is all or rather theoretical question.

Alison Rose, CEO

Let me pick up the Ulster question. So as you know, our strategy was and is to grow that business organically and safely. And we have been successful in growing both the personal mortgage and some of the commercial share in 2019. That strategy hasn't changed. Clearly, COVID-19 presents different challenges to the economy, and we will continue to consider all strategic options in relation to that business. Thank you for the question.

Operator, Operator

We have a 3-part question and comes from Gary Greenwood of Shore Capital.

Gary Greenwood, Analyst

The first part, can you expand on your comment around using surplus capital to explore other options that offer compelling shareholder value? Are you considering acquisitions? And if so, what areas of the business do you think need doing?

Alison Rose, CEO

Thank you. Well, I think we've probably answered 3, and I'll get Katie to answer the IFRS 9 transitional release. But let me start with the first question. Clearly, we are very pleased to operate with the sector-leading capital strength that we have. And as I mentioned, and let me reiterate, we see our medium- to long-term CET1 ratio of 13% to 14% as being appropriate for the nature of our business. It is our clear intention to return to our dividend policy as soon as possible and when it is appropriate and returning capital to our shareholders is our clear preference.

Katie Murray, CFO

Absolutely. What I'm trying to convey is that this is a complicated adjustment. If you reflect on it, you're essentially receiving relief at Stage 1 and Stage 2. However, once things progress to Stage 3, you will experience a loss. Currently, we have £1.6 billion of relief, which corresponds to approximately 90 basis points of CET1. If we consider the midpoint of our range, you would notice a natural shift of certain items into Stage 3 at that point. Therefore, I would expect the transitional relief to decrease from £1.6 billion to approximately £1.2 billion. The calculations behind this are fairly complex, but assuming there's significant migration into Stage 3, this explains the loss of that portion. Additionally, this would result in a cost of about 20 basis points to your CET1 if we reached that midpoint in your impairment summary. I hope this provides clarity.

Operator, Operator

And your next question comes from the line of indiscernible with Deutsche Bank.

Unidentified Analyst, Analyst

If I could just explore the range on impairments here that you've given, what's the underlying impairment at the moment? And if I look at guidance now, there's maybe £321 million per quarter. Is that an elevated level? And at the top end of your guidance, is that just assuming more Stage 3 migration? Or is there macro assumption changes assumed at the top end of your impairment level?

Katie Murray, CFO

The ECL charge for the half was divided into £308 million for Stage 1, £2.1 billion for Stage 2, and £400 million for Stage 3. In Stage 2, over 90 percent of the debts are still being serviced. Regarding the Stage 3 migration of £400 million for the half, it's a reasonable figure and not particularly high for us; in fact, it is slightly lower than what we have occasionally observed. So, this is essentially the output based on our models.

Alison Rose, CEO

Moving on to capital, liquidity and funding. We ended the quarter with common equity Tier 1 ratio of 17.2% on a transitional basis under IFRS 9. This is 60 basis points higher than Q1. We are benefiting from 70 basis points of transitional relief in Q2 as well as a reduction in RWAs of 30 basis points. Following a change in the rules, the banks are now required to take 100% IFRS 9 transitional relief on expected credit loss movements in Stage 1 and Stage 2 provisions from the 1st of January 2020. The movement in ECL from 2020 is subject to a full add back in 2020 and 2021 and then unwinds over the following 3 years to 2024.

Katie Murray, CFO

Moving on to the structural hedge, I think we talked mostly about this, but you're seeing quite a lot of deposit growth, but no growth in particular reason for that?

Alison Rose, CEO

As a summary, I hope you’ve seen today that the strength of our franchise remains very clear.

Operator, Operator

Those are all the questions we have time for today. I would now like to hand the call back to Alison for any closing comments.

Alison Rose, CEO

Thank you very much, and thank you, everyone, for joining and for all of your questions. So just to conclude our call this morning, you hopefully have seen the strength of our franchise is very clear. We've supported our customers well during the first half while also taking a prudent approach to risk and impairments and deploying our balance sheet carefully. We've taken swift action to address COVID-19, but also maintain focus on our key strategic priorities. We expect to achieve the majority of our RWA reduction in NatWest markets by the end of 2021, and we are on track to deliver our cost reduction target of £250 million for this year. More importantly, we have a capital-generative business with a strong CET1 ratio, giving us headroom of £6 billion to £8 billion above our medium- to long-term target ratio of 13% to 14%. I'll reiterate this capital strength gives us flexibility to navigate the uncertain outlook to resume dividend payments to shareholders as soon as it is appropriate to do so and to consider options that deliver compelling shareholder value. Thank you, again, for joining us today.