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Natwest Group PLC
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Good morning, ladies and gentlemen. Today's conference call will be hosted by Ross McEwan, Chief Executive.Please go ahead, Ross.
Thanks very much, Jeannie. And good morning, everyone. Thanks for joining Katie and I.I'm going to give you an overview of the bank's progress in the first quarter, and then we are happy to take any questions.Before I get to the results for the first quarter. I'm sure you will have seen that, yesterday, I let the Board know that I will be stepping down as CEO. To reiterate what Howard and I said yesterday: I'll be around for a while to ensure an orderly transition, and there is no change on our commitments to delivering our 2019 and 2020 targets.For the first 3 months of 2019, we made a pretax operating profit of GBP 1 billion and a bottom line attributable profit of GBP 707 million. These results reflect the challenging environment we are in.Looking at our financial performance in more detail. Total income of GBP 3 billion was GBP 265 million lower than the same period last year. In Q1 2018, we had a number of positive one-offs which would increase income in the retail and commercial businesses. We also continued to see competitive pressure affecting our margin.Personal & Ulster and Commercial & Private Banking grew lending by GBP 0.6 billion in the quarter, which is 0.8% on an annualized basis. Across the retail and commercial businesses, net interest margin of 2.07% was flat on Q4 2018. However, group NIM decreased by 6 basis points to 1.89%, reflecting a reclassification of funding costs in NatWest Markets and an IFRS 9 accounting change for interest in suspense recoveries. And I reiterate that the -- in the retail and commercial businesses, where it matters, NIM was flat.On other operating expenses, compared to Q1 2018, we have reduced costs by GBP 45 million. We don't see our cost reduction as linear, and we'd expect to see further reductions throughout the year. In particular, we continue to see benefits of our property exit strategy coming through in the latter part of 2019. We remain committed to the GBP 300 million cost reduction target for the year. On strategic costs, we expect to be closer to the lower end of our GBP 1.2 billion to GBP 1.5 billion range by the end of 2019, with the remaining GBP 300 million coming through in 2020.Taking all these together, we generated a return on tangible equity of 8% for the first quarter. Our capital position remains very strong with a capital -- common equity Tier 1 capital ratio of 16.2%. That's up 20 basis points on our IFRS '16 pro forma position. This represents around 30 basis points of underlying growth before the dividend accrual of 2p.Looking at Q2, we hope to see the completion of the Alawwal merger with Saudi British Bank. You already know about the potential capital benefit from the reduction in risk-weighted assets, but in addition, if the Alawwal share price continues to perform, we could see a P&L benefit. You should also note that there could be a significant positive recycling of FX reserves. As we outlined in our full year results, we expect further capital returns in 2019 based off our target of circa 14% common equity Tier 1 ratio by the end of 2021. We are making good progress on our 2019 issuance plans, with around GBP 3.8 billion in benchmark public transactions in the quarter, including NatWest Markets' first onshore U.S. dollar issuance and our first SONIA-linked issuance in the form of a covered bond from NatWest Bank.Just a brief note on Brexit. The sustained uncertainty is causing customers to pause some investment decisions. As we continue to support them, this week, we announced the doubling of the funding available through our Growth Fund to help businesses prepare, taking the total fund to GBP 6 billion. With those customer appetite for new lending, and it's within our risk appetite and hurdles, our return requirements, we stand ready to lend. As we said at year-end, the continuing uncertainty poses a risk to income. Add to this a flatter yield curve, and you'll have seen this impacting both our lending and income in the quarter. In terms of our own preparations for Brexit, our NatWest Markets N.V. office in Amsterdam is now operational and has started to serve some European customers from March 2019. We've also received approval for 2 license applications in Frankfurt, 1 inside the ring fence and 1 for NatWest Markets plc, which will allow us the main access to the European payment structures.Turning to the financial performance in our franchises.In personal banking, the U.K. mortgage market continues to show unprecedented levels of competitive pressure. Average rates across a range of loan-to-values remained at historic lows. And payment losses were GBP 44 million higher than in Q1 2018, reflecting lower provision releases and recoveries and the IFRS 9 model updates on Q1 2019. With this in mind, we are pleased to report that, in the first quarter, personal banking achieved an operating profit of GBP 498 million and a return on equity of 25%. This was underpinned by gross new mortgage lending in the quarter of GBP 7.6 billion and net new lending of GBP 1.7 billion.At the same time, personal banking has grown personal loans by GBP 0.2 billion or 3% in the first quarter. And we're now seeing 40% of all sales being carried out digitally, which is 17% higher than Q1 2018.Ulster Bank Republic of Ireland reported an operating profit of EUR 23 million. New mortgage lending was higher than in the quarter prior -- sorry, first quarter last year. And the tracker mortgage book is more than GBP 1 billion -- EUR 1 billion lower than it was a year ago. As I've said before, the focus for 2019 is on resolving outstanding customer remediation issues and addressing more of the nonperforming loan portfolio. We're on track to do both of those.And commercial bank, which now includes Business Banking, delivered an operating profit of GBP 437 million and a return on equity of 12% for Q1 2019. This was helped by impairments being at historically low levels of just GBP 5 million for the quarter. Commercial Banking orientated -- sorry, originated or refinanced GBP 4.6 billion of utilized term lending in the quarter. However, net loans to customers were down GBP 0.6 billion to GBP 10.8 billion, reflecting customer caution.Private Banking delivered operating profits of GBP 80 million, a return on equity of 17%, so a 3 basis point increase in NIM compared to Q4 2018. Other expenses reduced by GBP 2 million compared to Q1 '18.NatWest Markets income in the core business was down 8.5% on Q1 2018 but in the pack with our peers. NatWest Markets franchise made a GBP 62 million loss for the quarter, impacted by a change in funding cost allocations post ring-fencing and credit spreads tightening. RBS International generated operating profits of GBP 93 million, it's up GBP 15 million on Q1 2018; and a return on equity of 29%. With income of GBP 151 million, it's up 10% on Q1 2018. The business delivered a 39% cost-to-income ratio.We continue to innovate both inside and outside the core bank, investing GBP 1 billion this year to upgrade legacy infrastructure and improve our products and services. We are holding a technology and innovation seminar in June where we will provide you with further updates on how we are looking to improve for our customers.So in summary. These results reflect the challenging environment we are operating in. We expect further capital returns in 2019 based on our target of 14% CET1 capital ratio by the end of 2021. We're investing in digital innovation, responding to customer shifts to our digital channels and providing a lower cost -- more cost -- more efficient operating model.And with that, Katie and I are very happy to take any questions that you may have.
[Operator Instructions] And our first question comes from the line of Jonathan Pierce from Numis.
Can I ask 3 questions, actually, all fairly short? The first one, I was hoping, Ross, you can maybe give us some sort of quantification of the Alawwal benefits that you just talked about, FX reserves, P&L benefits, those sorts of things. Secondly, can I quiz you a little bit on this flat margin comment in PB and commercial? Because clearly some of the more expensive debt from the 1st of Jan is loaded into NatWest Markets. And there wasn't a restatement going backwards, so my assumption is actually margin outside of NatWest Markets is falling. Is that correct? And if so, can you give us an idea what it was down on the fourth quarter and the first quarter? And then the final question is on this return on tangible equity target for next year. I mean, clearly, with the revenue currently annualizing, it's the sort of low 12s. Historically, you were talking about a mid-13 type revenue, a high-6 costs number and impairments of 30 bps to get to the 12% return target. That looks very difficult now, certainly at the pre-provision profit level. Can you give us an idea of the shape of the P&L if you are to get to that return target next year, which you're clearly still sticking to on some level?
Yes. Yes, it's great. Thank you for that. Katie will go through the Alawwal. Because we -- on the current Alawwal pricing, if it remains at that level or around that level, there's a profit coming through there on the sale. What's that likely to be about?
I mean a low kind of few hundred sort of thing, somewhere in that kind of range, couple hundred...
Yes. We've also got FX recycling going through there that could be absolutely -- could be significant on there as well. And the churn is probably up to -- I would say, probably even 1.5 billion across Q2 and Q3 and will probably come through in 2 phases. So you're seeing this is why we're warning here that there are some numbers coming through if the sale progresses on the time frame of both P&L uplift and also FX up but remembering the FX changes will be capital neutral.
Yes. And of course, Ross, we mustn't forget that actually it releases 5 billion of RWAs at that point as well, which is an important addition to that number.
Yes.
Sorry. On that because it's quite important. The FX reserve, capital neutral but TNAV positive. Or is it just a recycling?
Recycling.
So it's recycling. We've currently -- if you look on the balance sheet, you'll see we've got GBP 3 billion of FX reserves there. Those are obviously things that are built up from our foreign holdings. And this is one of our last significant kind of foreign holdings that we've got, so as you either dispose of these holdings or redesignate them back to a different activity, it will be absolutely -- it's normal accounting practice that you recognize those FX gains or losses. In our case, they're gains that you build up on the balance sheet over the time of the holding of that, so they get recycled in. So they're already in our TNAV. They -- it's capital neutral. Then what it will do, it will change the shape of your -- the sheet balance, but when we do the Alawwal transaction, obviously we'll do an RNS at that point. And we'll give you these numbers in some detail, but I think what -- we wanted to make sure that -- people forgot -- because FX is -- FX recycling is a more unusual item, it's not one that we talk about very often. And we wanted to make sure we kind of made sure it was on your radars today.
Yes. Just on the NIM, Katie, it'd be worthwhile -- I think, just because it's we have made some adjustments here, it's worthwhile if you just spend here a couple of minutes taking people through the NIM changes and their impact. And thanks for asking that question, Jon.
Yes, sure. No -- yes, happy to also. I'll just spend a couple of moments kind of talking you through the -- all the different pieces because there are a number of things that's in there. So if you look at the group NIM, it's obviously decreased by 6 bps to 1.89%. There's 2 main drivers for this. Firstly, it's our IFRS 9 accounting change for interest in suspense recoveries; and secondly, a reclassification in NatWest Markets of funding costs. I'll take the first point, first. The IFRS 9 accounting change relates to accounting treatment of interest in suspense, per recent IFRIC guidance. When loans become impaired, the interest income is held on the balance sheet. And if the loan returns to the performing book, the interest is now released into the impairments line rather than as NII as was previously the case. The impact of this is around GBP 1 million or 1 bp of NIM in this quarter. The second point relates to NatWest Markets funding reclassification. As part of the stand-up of the entity, NatWest Markets now carries all of its own funding capital and liquidity costs, which means in reality they are carrying more expensive debt in totality. We've reviewed treatment of these costs, and as a result, all NatWest Markets funding costs will be -- now be included in the banking book as part of NII despite being utilized and driven by the requirements of the trading business, which generates noninterest income. This has created the larger part of the group NIM reduction. As a result of the inherent mismatch in NatWest Markets, we feel now is the right time to introduce a retail and commercial NIM. All this does is take the group number and strip out the NatWest Markets number. There are no other adjustments. It's an all-in number including all of the funding, capital and liquidity costs of the group. Across the retail and commercial business, NIM was 2.07%. It was stable versus Q4 2018. There was a 3 bp reduction within there from a reduction in central liquidity balances driven by the actions in Q4 with which you are all familiar. However, this was offset by the impacts of IFRS 9 accounting change, which I've already called out, and also a couple of bps of competitive pressure largely reflecting the ongoing reduction in mortgage margin in UKPB. As we look forward on retail and commercial business, we expect to face continuing competitive pressure. And we will look to actively manage liquidity whilst, of course, noting the Brexit delays and continued uncertainty. And of course, be accompanied -- or this is all accompanied by the current flatness of the yield curve. So hopefully, that covers most of your queries on NIM. Ross, there was a last question as well on revenue.
Yes, as it related to -- and the impact on tangible equity -- return on tangible...
Yes, exactly. Shall I, do you want me to try kick that off?
Yes, please.
So if you look at our Q1 number on the income side, as you know, it's GBP 3,037 million. If we just take a straight kind of time forward with that, you're absolutely right, Jonathan. You'll get to the low 12s. However, I would -- we suggest -- as you know, if you take out some of the negatives in Q1, of which there aren't many, though there was some things we've called out in the notable items, a little bit of NatWest legacy which we know is negative this month and some other central one-offs, what you'll get to is a kind of normalized number that is closer to 3.2. And then if you take that up and then annualize that number, it probably gives you a slightly better view of where we think income might be headed. So then if I take them -- and there's -- obviously there's many different shapes and pieces on the income statement that would drive a 12% return. On impairments, I feel that to get to 30 bps in 2020 feels quite an aggressive assumption based that we're on 11 bps today. And I think it's one of the things that we've all debated many times as at what point do we see us get into the 30 to 40 through-the-cycle number. So that bit is probably a little bit [ toppy ] of where we are. So I look at those different bits and pieces, the fact that actually on an underlying return basis we're north of 10%. I accept impairments are very low. So that would impact this, but it's not a huge step from that 10% to the 12%. And absolutely the really important thing is capital out because that's going to be the differentiator in getting that 12%. Thanks, Jonathan.
Our next question is from the line of Joseph Dickerson from Jefferies.
I guess, just a quick one conceptual one, you've answered my -- Jonathan had similar questions than I had on the net interest margin, but I guess, well, just a conceptual one, which is if I look at your NatWest Markets business, yes, it's got the legacy, some legacy funding, and it's dragging down the business. But you still have negative PBT, pretax losses, if you will, in that business and therefore a negative 2% return on equity. I guess, what's the strategic rationale for actually having this NatWest Markets business? And if it's the commercial bank, why wouldn't it be integrated into the commercial bank if it's there to serve the commercial bank? So it's more of a conceptual question around that business. I know we've been through it before over the years, but if you -- as you go through the results, there's still a very good story in these core businesses that seem kind of overshadowed by this business. So how important is it from a network perspective to the overall RBS?
Yes. No, no, that's -- it's a really good question, Joseph, to ask on there. And when we set out the strategy for those business 4 years ago, it was around just repositioning it for 3 particular areas that have had a strategic advantage and just get rid of income out of everything else. And about 40% of that business links back into our commercial business and sort of the mid-market, where we are incredibly strong. Some of those things, yes, we could bring back inside the ring fence, but our view was we were better off having them out because of the size and shape that you get. There's still a lot of restructuring going on in that business this year to take costs out of it. And Chris and the team have been delivering against that, but it does get overshadowed by a lot of legacy activity that's showing through. So here you see it on income. Today, it's well down, but actually the underlying income is about 8%. So whether we've got NatWest Markets in its current shape, we would still be having to deal with these issues inside the core bank from funding and from bringing the costs of the systems and applications down, whether inside the ring fence or not. And the [ magical cost to be caught on this ] is not that great, probably a treasury operation and in small amounts, and other things. So our view at this point is they're doing exactly what we asked them to do. It's been hard yards. Ring-fencing, Brexit probably haven't helped us one iota, but at this stage we're confident with what the team are doing. Still lots of work to be done. And the big parts of these restructuring stops at the end of this year, and the investment which was being expensed drops quite dramatically as well.
And talking about -- I mean the only thing, Ross, I would add, of course, is that we couldn't combine it completely with CPB because of the ring-fencing rules as well. So it's -- that's obviously a challenge, but I think, well, that's -- you've covered everything else.
The next question is from the line of Ed Firth from KBW.
Yes, I guess I've got 2 questions. One was just a quick one on Commercial Banking and your volumes. I'm just trying to square that a little bit with the Bank of England data which seems to suggest that corporate lending is actually looking pretty healthy relative to where it's been in the past. So I'm just trying to get a sense as to why is it that you think that you're finding that more difficult to take your share in that. So I guess that was the first question. And then the second question was bringing you back -- shall I just go ahead with the second one?
Yes, yes, yes. Go on...
Sure.
Yes. The second one was, I guess, back to the 12%-plus. I guess, 2 things. One is I'll be honest. I'm a little bit confused about your messages on capital because I think, if I look at yesterday's AGM statement, you were talking about towards 14% this year. You're now going back to saying 14% by 2021, which I guess you can square those in the detail, but I guess the sort of broad message is very different one. It's like a smooth, steady decline till 2021. The other suggests it's going to be something more radical this year, so I wonder if you could just try and help me in terms of squaring those two what, on the face of it, would appear to be slightly different sentiments. And I -- Sorry. Yes.
Yes, look -- no. That's okay. I'll cover that.
And then I guess the final point is just connected with both -- to what we're talking about with revenue. Your 12%-plus target was, I understand, reliant on a NatWest Markets delivering a revenue of, I think you said, GBP 1.4 billion to GBP 1.6 million. Now I think we can all accept that's extremely unlikely, so if that is unlikely, is there something you can offset elsewhere? Or do we just accept that, that flows to the bottom line and it's we're going to be probably somewhere light against the 12%?
Okay, I'll -- [ a lot of them. I'll just ] take them in a reverse order actually...
Yes...
[indiscernible] feel free to jump in.
No, no. It's fine.
NatWest Markets, if you take out the negatives they're wearing from all structuring and -- activity coming off the books, are still predicting that they'll be around the GBP 1.4 billion of revenue this year. And that's what they're still at, whether they get there or not, but at this stage kind of 8% off in the first quarter. But let's say it's a number I probably should never have moved away from GBP 1.3 billion to GBP 1.4 billion which I started with about 4 years ago...
But if they're running at -- sorry. Just coming back on that, Ross. If they're running at a run rate of minus 8% on last year, that's not going to get you to the GBP 1.4 billion, is it?
Yes, but it's going to be closer -- it's close to a 4 -- what did they do in the first quarter [indiscernible], [ 3 80 something ]?
[ 3 77 ], they did.
[ 3 77 ] in the first quarter.
Yes.
And with all the disruption that went on. So I'll say, if we stay around that GBP 1.3 billion to GBP 1.4 billion, I think it was we -- and remembering we had a poor Q2, 3 and 4 in 2018...
I think, Ross, on the GBP 1.4 billion to GBP 1.6 billion. We're sitting here in Q2 at the moment, 2019. We're talking about numbers that are going to be a year from now plus in terms of the 2020 targets. And one can [ only assume there's ] some new normal, whether pre, post in or out kind of Brexit's do we land at some stage in those next 7 quarters -- I certainly hope it does.
[indiscernible].
But I guess my question was more about if there's a shortfall. Do we just see that flow straight to the bottom line? Or do you have a sort of arsenal of other levers that you can pull to offset that?
Well, you've got it. If it looks like it's a permanent pull down on the revenues of any part of the business, you've got to go after the cost structure.
Yes.
You have to go after the cost structure, but I -- we're still saying that, that business [ pulled at ] around that GBP 1.4 billion is where we're targeting that for 2020. And our problem was we did a lot higher in 1 year. And it's been around that numbers probably for the last 4 years, other than 1. On the [ capital ], I think we've been quite clear that we're sitting around the 16%, 16.2% at the moment. By the end of 2021, we want to be circa 14%. We set GBP 1 billion a year given that there may be some larger chunks that come out if the government does do a directed buyback and we participate, but we are targeting circa 14% by end of 2021. If you do take a linear line from that 16.2% to 14%, in 2020 we'll be sitting with a number in the high -- mid 14s is what we -- mid to high 14s. And it's quite crucial we get to that to get ourselves to a 12% or 12% plus. And that's probably, in my mind, the biggest swing factor of getting the capital out of the business because we don't need it. I mean the only reason you'd need it if we did do a -- some form of acquisition -- and let's be quite clear there's nothing on the cards, but I will say, if we wanted to grow the business and there was something there that was valuable, we would have a look at it, but otherwise it's a return to our shareholders. And it is a line from 16.2% down to circa 14% by the end of 2021. We haven't changed our view on that. Sorry if there was any confusion at the AGM yesterday, but that was not our intention. And it hasn't changed from an executive or Board perspective.On the Commercial Banking. What we've been seeing is customers are paying down and just sitting in cash more. And I'm surprised that it's not showing through in the industry stats because that's what I thought was happening there. It's certainly happening with some of our large corporates. And it's even happening -- starting the people pausing in places like our business in the Channel Islands, where they're just waiting to see what the results are and they're not investing at this point in time. So we have seen paydowns in some of our property areas, the commercial property areas, and people are just sitting on the sidelines. So I'm surprised the industry stats say anything different than that.
Yes.
Our next question is from the line of Andrew Coombs from Citi.
If I could just ask a couple of clarifications. Firstly, on the NWM's funding costs reallocation. I'm sorry if you said it, but could you just quantify how much that is moving from other operating income to NII in terms of the drag? The second one, on dividend. You talk about a 2p accrual in the quarter. Can I just confirm that that's for an ordinary dividend only and any special dividend accrual will be taken in the fourth quarter? And then my...
Yes. I [indiscernible] and guarantee, if we do anything on specials, we'll announce it very loudly. We wouldn't slip it through on capital.
Yes.
Okay. So you're annualizing for an 8p ordinary dividend for this year.
In essence, yes.
It will be on a 40 basis points -- 40%.
Yes.
And then the final question, just trying to drill down on -- into the UKPBB top line. You talked about the interest margin being up 2 basis points Q-on-Q. Loans there are actually strong, in contrast to the commercial bank. You've seen very good loan growth, and yet the NII still appeared to be down Q-on-Q. So is that just the impact of the number of days in the quarter? Or what's driving that?
Okay. I'll just have a quick dig on that one. Just could be -- just so on the dividend one. We're going to update you in...
H1.
At the end of H1, but we've only accrued for the ordinary dividend at a 40% ratio at this point in time. And as we go through, if we haven't been able to get the capital out in any other way, we're going to have to do proposals to the Board to do something in H1 because we can't keep accruing...
Keep growing.
Or keep growing our capital at the rate we are. We'll end up well over 17% by the end of this year, which is not where we want to be. And then we've got a major problem of getting anywhere near a 12% or greater. UKPBB, you're absolutely right. We had a very strong quarter. And what happened, why we've stayed with our 2% to 3% growth in assets over the year, of CPB and PBB, is that the renewal of loans and the roll-off actually drops off quite dramatically in the next 3 quarters. Our height of roll-off was in the fourth quarter of last year and a bit running in through to Q1. So we see strong growth of the book going through there. I haven't got the answer on the -- there were 2 fewer days in the quarter. So that's probably about, what, 25 million?
Yes, yes. And you know what, we -- the reality is the margin is -- still is obviously -- in terms of what -- front book, back book, margin is still lower. So you'll see there's that coming through as well, yes. So I mean I think it's sort of flat by the difference in day count, so...
Yes. And look, there's lots of pressure on that, but our view is keep growing the business at the volumes that we have because it's good, profitable business; and use the liquidity that we can have -- currently have.
Yes. And then well, if I can just take that first one. [indiscernible] because, Andrew, it's actually in our slide pack, which you can kind of do afterwards, but on Slide 16 you can see the NIM for the whole bank, including NatWest Markets; and then also for the piece of other than NatWest Markets. And if you look in the difference in the other line, there is 1 bp that remains in the rest of the bank, which is the number I referred to in terms of the IFRIC interpretation we talked about earlier. And then the one including the whole bank is the [indiscernible]. So the difference between those two correlates basically to the fuller interest charge that they are now carrying as they're carrying that legacy debt. I think Alexander...
The rest of the other is all due to the funding cost reallocation.
Basically, yes, exactly. Exactly. And we know that, on terms of that legacy debt, I think Alexander shared some of the roll-off patterns with you all this morning as well, but it's debt that will go -- 2/3 of it will mature by this time next year. And at the end of 2020, it will all be gone. And it's currently being couponed at kind of 5.5%. And as we renew and replace that debt, it will be half of that price, so structurally, you'll see a natural improvement coming through as that debt does roll off.
Our next question is from the line of John Cronin from Goodbody.
Just a few. If I can come back to Ed's question on the arsenal of levers and when you referred to the costs flat potential, can I just probe that a little more specifically? So I suppose what I'm looking at there is 2 things. One is your strategic investment spend, which you've always said is lumpy. You've guided it down to the lower end of the range this year but with the remaining coming through next year. I'm just trying to understand again, and I know this has been asked before, but [ what else kind of fat ] might there be in that? And then separately, on underlying operating costs, is there -- beyond what you've already committed to in terms of recalibration, is there more that can be done that we're not seeing? And so just some specifics around that would be helpful. And then the second question I have is just zoning in on the U.K. mortgages particularly and going back to your comment around unprecedented levels of competitive pressure in the U.K. mortgage markets. And anything more specific on that in terms of latest run rates? And we're beginning to see that graduating, I guess, in the industry data and indeed some comments made by -- in Barclays' numbers yesterday. So if you can help us, help me there, that would be great. And then finally, just on the time frame around the CEO appointment. And obviously, you have to run an external and an internal process, but kind of how long roughly should -- would you imagine that will take?
Yes. No, that's is fine. Maybe if I just start with the strategic costs. And we have sort of guided down to the lower end of the range of the GBP 1.2 billion to GBP 1.5 billion. The reason for that is, look, I think there's only so much that an organization can absorb and change. We -- remembering we're doing a base of GBP 1 billion of investment in the bank and a GBP 1.2 billion to GBP 1.5 billion to make up for the full GBP 1.5 billion we see we do over a 2-year period. As we're getting into the year, it's pretty clear that we'll be at the lower end. We've got some quite significant properties coming out and 280 Bishopsgate, big property in Manchester, one in Mumbai, one in Birmingham that I can think of right now. We've got 12 regional centers. That will probably take up about GBP 500-odd million and maybe slightly more of that GBP 1.2 billion. The rest of it will be around technology write-down as we take systems out but also obviously some staff costs as we go through this. You can't flex that. We would -- we are choosing not to because we do need to move quickly from bricks and mortar to a much more digital framework for the bank, but our view is that there'll be 300 of that 2.5 spill into 2020. And that's the way we've been thinking about it. Yes, we could flex that. If we could find some things to bring forward, we'll do so rather than push them into 2020, but we do have some things that we'll push back into 2020, things like our data centers that'll take 3 or 4 years to get out. We can't write them off until we get, I think, until 12 months from the day of close. So there are some of those things that we've still got that'll flow through into 2020 and 2021, but they will be more minor.
Yes. And I think, Ross, what we've always said on strategic costs is, as we look into 2020, that a kind of GBP 500 million number over strategic and conduct on a kind of steady run rate basis isn't an unrealistic number to be looking at. So it's not really a particular change in that guidance.
And we should -- there can be a better update later in the year on both of those numbers that make the GBP 500 million up because, I mean, as we have stabilized the bank, made it much better for customers, we are seeing a lot smaller flow into the sort of conduct areas. So we'll -- I think we'll give you a better indication later on this year on -- particularly on the conduct costs as well. Underlying operating costs, a major pressure on the bank. We run a weekly meeting either run by myself or Alison Rose, and Katie is always at them, on -- and we're monitoring staffing levels; commitments made by people; things like travel, entertainment, consulting fees just about line by line, with a spotlight each month. And we are determined to take the GBP 300 million out this year and a bigger number next year. So it is getting the focus, and we're now starting to focus more on the 2020 than the 2019, so -- but the point I was making: If a business is not performing and it will not -- and if we don't see it performing long term, that is a strategic decision you have to make. And you've got to take the costs out of it. And the business that has been doing as we asked it to do is NatWest Markets. Ulster Bank, slightly different. It's, we've just given it 2 major tasks to do this year so that we can actually see the business next year. One of those is around remediation. And we had at one state 16 remediations, customer remediations, going on, 2 of them incredibly large. Both of those big ones finished mid- to second half of this year. And -- but there's hundreds of people involved in those. They're not in our expense rate, but the problem with having those remediations going on, you can't see your own business. And so we're working very hard and determined to get those finished and also the nonperforming loan book down so we know the business. Interesting enough, the Irish lending business is going very well.
Yes.
So Jane and the team have -- are starting to see growth coming through in the book, but you don't see it because we're taking EUR 1 billion of the old tracker mortgages off that make us no money whatsoever. So -- and costs have to come out. If we don't -- if we're not making money in a business, we have to close them out or restructure them to get them out. And we're committed to doing that.
And I think, Ross, John's last comment was on the -- a question on U.K. mortgages and what we're seeing there. So I mean we are still seeing some levels of competition. We're seeing nicely kind of 13% flow, which we're pretty comfortable with. And what we do see is our stock is keeping up. It kind of went up by 0.1. And we'll see that it's continuing to do. The reality is this flow will move faster than -- as it converts into stock. So we're kind of comfortable with that, but it is competitive out there. We -- you will have seen we did a little bit of work on our pricing in April. And we feel that's been received quite positively, and we'll update you more on that at the end of this quarter.
And the most important thing, we've got lower roll-offs each quarter for the next 3 quarters as well and remembering the 70% of the book that we've been writing in the last year or so is on a 5 year. Now you see that staying on the book for a lot longer. So that's why we're staying with our 2% to 3% growth in the Commercial & Private Banking -- sorry, commercial and [indiscernible] business.
Retail and commercial [indiscernible], yes.
And private has been doing well as well.
No, it has indeed.
And John, just on -- and just on [indiscernible]. I look purely in the hands of the Board, but the Board have the -- have started the process. And as you can imagine, the Board will be looking both internally and externally and taking both of those very seriously. I'm not involved in that process, and it's quite right that I shouldn't be. It's a question for Howard, but the Board has started that. I've been very open with the Board about sort of my thinking and timing over the last 6 to 12 months. And so it's no surprise that, the Board and quite rightly, they have been working with the headhunters on should Ross go, what does it look like. So I think a good, orderly process; and I have committed to staying on to make sure that there's an orderly process. Then I've got a 12 month’s notice, so you might still be talking to me at the beginning of next year if things go badly in the process. I hope, not, and I don't think so either.
The next question is from the line of Christopher Cant from Autonomous.
I had a couple of quick ones and following up really from some of your responses to the earlier questions really. You mentioned that you think a GBP 3.2 billion type run rate for revenues quarterly is a more representative figure for how you feel the business is performing and sort of a steer as to where you think revenues can go to. That would point to about GBP 12.8 billion as a sort of annualized basis. And consensus for next year is GBP 13.2 billion. I think, in the past, you have talked about wanting to do more than GBP 13 billion there, so are you trying to steer us lower there on revenues? Is that what you're trying to communicate by giving us that GBP 3.2 billion figure, please? And on costs, you just referenced expecting to take out more than GBP 300 million of costs into 2020. It sounds like that process is underway. Is there any more line of sight you can give us on how much cost you expect to come out in 2020, again looking at consensus? Consensus has about GBP 300 million coming out next year, so that would feel a bit light potentially given your comment. One of the things that I've always struggled to get my arms around is this point around OpEx of investment spending in NatWest Markets. We don't get much visibility on how much is coming out there. Are you still expecting GBP 1 billion of costs in NatWest Markets? And then finally, Ross, you've talked about the trajectory down in capital as a key determinant of whether you hit your 12% or not. It sounded from your commentary like, if you don't get a directed buyback away in the next few months, you'd be looking at an interim special dividend. Is my interpretation correct there?
Look, just on the last one, first. If we don't start to get the capital levels down, we are having to find other ways of getting it down. And now specials: Remember our specials. They shouldn't be seen as ordinary every-year dividends, but we will have to start investigating doing another special if we can't get it away because we don't have a use for the capital. We will make sure that we hold back well and truly enough if the government should go at any point in time and in that 4.99% in any year rolling 12 months, but there -- we are building capital. And we have lots of excess capital we want to get back to you, so our commitment remains there.On the cost piece, yes, we've said GBP 300 million this year. And our view is that we will build for a number equal or greater than that next year. We have to, to get the cost base in the right shape. And that's what the team are working at the moment. We'll give you a clearer indication later on in this year, but we can't sit at just taking GBP 300 million out. We've got to take more out. And the flow-through from some of the activities this year falls pretty much into 2020, anyway, but we have to do more than GBP 300 million.
Yes. If you look at some of that we're spending on property, you'll naturally get to...
That will let you get some numbers that are helpful, but look, it's always difficult, particularly when you've got inflationary -- or wage inflationary pressures coming through. And about 60% of our costs relate to people in one way or form [indiscernible] the technology they use, the space they operate in, the management of them, et cetera[Audio Gap]So it's going to be a lot more[Audio Gap]income.
Yes. So I guess what we're trying to do, Chris, just on the income is to try to guide you that to take the GBP 3,037 million of this quarter as the run rate for the rest of the year would be -- in our view, be a little bit punitive. So that's kind of, as you take the quarter, take out some of the negatives. It gets you closer to the GBP 12.7 billion. I'm not trying to give you a new income number for 2020. We've always been very open that we had expected a yield curve pickup this year. That hasn't come through yet, but at the same time we also see some lending that's being held back. As that, if that comes through, you will naturally see this number begin to improve as well. So really, as I look at the income going forward, we've talked about it's under pressure. And those pressures are very much around what's happening on the yield curve and what's kind of happening in the economy as a whole, but what we are comfortable with is that we see nice flows coming through in terms of the volumes within -- particularly within personal, the personal bank. And they're all coming, making sure that we continue to hurdle at the right level as well. So I think, as you look at this year, those just don't matter -- businesses won't matter anymore [indiscernible] to work because you're -- I think you'll be a little bit on the low side.
Our next question is from Jenny Cook from Exane.
At Q4 results, you flagged that your 50% cost/income ratio target for 2020 was looking challenging in the current environment and also that you were expecting a rate hike in H2 '19. Today, you're flagging once again that it's looking challenging. Is that characterization of challenging still including that benefit of a rate hike this year in your numbers? And then I guess...
And you were getting -- sorry.
And then I guess, sorry, following up on that. You guided for strategic costs to come in lower this year, so say GBP 1.2 billion but the residual falling through in 2020, 2021 but shifts around maybe GBP 50 million to 2020 given consensus on about GBP 450 million across strategic and litigation, GBP 100 million to 2021. So that kind of increases total consensus OpEx to, say, GBP 7.2 billion-ish in 2020. If I adjust the top line to reflect the slightly lower base this year, it gets me to around 55% cost/income for next year. Is that a fair characterization?
I think, Jenny, what I would say is it's 9 weeks since we spoke to you last time in terms of it being challenging, and we've not seen anything that's kind of changed that -- since that time. You know that we work on consensus and view of economics. So the consensus view just now would be that the rate rises moved out. It's in possibly very late 2019 or early 2020. I think that, that will continue to jump around. And we will continue to react as is. I would say -- on the cost side of things, I would say I think the number is a little bit [ toppy ], but we'll see how, I think, this year evolves and as we go into next year.
And the other thing we'll say, Jenny, going forward is restructuring of a bank and conduct and litigation don't go away. Now I think -- but the -- for us, the numbers drop dramatically after 2019 when we go from GBP 1.2 billion to GBP 300 million in strategic. And conduct and litigation, we've sort of put a placeholder in there of around GBP 200 million per annum. Whether you use it or not, there's going to be [ an interest among them ]. And our problem at the moment is we are still expecting quite high conduct and litigation this year. The question is do they fall in this year -- into this year or do they drop into the year after or 2021. Because there's not been a lot of action on a number of these things for quite some time. So some of -- but it's really around just strategic costs dropping dramatically from GBP 1.2 billion to the GBP 300 million then your conduct costs being around that GBP 200 million per annum ongoing is sort of the numbers, I think, you should be thinking about not just for us but other banks as well.
Yes. And we're not looking to kind of type change that view, Jenny...
We're not changing our views.
As we give you kind of better guidance on this year's strategic costs.
Okay. And just to clarify: You do have a rate hike in your numbers in the [ second half ]...
No, no, Jenny. So we work on consensus. So the consensus says it's moved out this year. So if it comes into next year, we will be happy to take it, but I think at the moment we don't have a lot of confidence as to what's actually happening on yields.
Our next question is from the line of Fahed Kunwar from Redburn.
I just had a few actually. So on the margins. It's always come back to it. You used GBP 8 billion of liquidity in this quarter. And then you talk about kind of as a positive in that slide, I think it's Slide 16, that you'll continue to kind of use liquidity. Now obviously you've kept that liquidity because of Brexit uncertainty which you're saying is still around, so how should we think about that liquidity benefit offsetting the competitive pressure you're seeing on margins over the course of this year? Can that come down? And will you try to work that LCR down closer to the kind of 120% mark? You're obviously still at 150-odd? And the other question on margin I had, just to supplement it, was how much of the decrease is from the structural hedge roll-off. Obviously, the swap curve is very low. And you reinvest automatically right now, so when we think about, I think it was, 3 basis points of margin pressure in the quarter from competitive pressures, how much -- if you were to split that out, how much of that was due to the roll-off of the structural hedge? And that's question one-ish, on margins. The other question is on Ulster Bank. Shall I give all the questions now...
You go first, yes. Go.
Yes.
On Ulster Bank, it looked like it was a pretty bad performance. So you had 8 basis points of margin contraction, and your [ AIA ] was down 4% as well. Was there something specific that happened there? Or is that something we should think about going ahead? That the team has seen like quite an aggressive Q-on-Q performance on both volumes and margins. And the final question is on the commercial bank. I know you talk about the GBP 12.8 billion, but how much of an impact have you had from the incentivization scheme? How much kind of volumes and [ BCAs ] have you -- kind of have actually transferred away from you to those challenger banks? And how should we think about the impact of that, considering it's been going for a couple of months now, on your income line going forward?
Okay. I'll leave you to go...
Shall I start and you join, cut me off...
I'll deal with the Ulster Bank, and we'll see who takes on the next one.
Okay.
Just on Ulster Bank, look, we -- the margin will have contracted because we have been competitive in the market there on the interest rates but remembering [indiscernible] from that market that a lot of people do a cash-back. It doesn't come through the NIM. It comes through the expense line. We're choosing not to do that, so we're taking it through the NIM line, but we are seeing good volume uplifts in the mortgage business, of accounts bought. I'd say a fair better than 8 basis points. Will that continue? I suspect it will. And there's also been, I think, some IFRIC impacts that have had -- at Ulster Bank as well in the last quarter. I don't know the exact amount, but there will be some impact there. Katie has already, I think, talked about that. Well, it's a competitive marketplace but still quite good margin there, and we are competing well in it. Not to be stupid, but we are competing well and not doing cash-backs, but at the same time we do take a lot of NIM on it. And Ulster Bank, I think it's starting to just sort of become a more normal bank and getting back into the marketplace with home mortgages, business banking. And we'll get into the unsecured market there as well this year in a slightly more aggressive way.
And if I just then start with also the margin and liquidity benefits. You'll remember we talked about it at the year-end, that we had done quite a few liquidity actions in Q4, where they were kind of in the latter part of Q4. So what you're really seeing coming through in this quarter is the full quarter impacts of those liquidity actions. As we look at it, we have said that we will continue to hold excess liquidity until we kind of get through this kind of Brexit uncertainty. It's interesting to see how long that will go. You'll be aware that we've done quite a lot of debt raising, so we're not looking to further increase. I mean our LCR was 153% for the quarter, so down a bit from Q4. So we will -- our management is more to look at things like TFS repayments; well, kind of tying of debt where we are; and also where we -- what's kind of happening on the lending and deposit side of things as well. But I wouldn't expect at this stage that you'll see us do any particular movement down to the 120%. And of course, those of you I know who will be shareholders will be looking forward to a dividend next week as well. And that will be a nice little bit of our liquidity of GBP 1.3 billion that will come out next week. So those things all together but certainly at this stage comfortable to stay at that kind of 150-ish sort of number. And we'll -- [ will it be not ], we'd be looking to increase. In terms of the structural hedge, we haven't shown you that split-out entirely or within there, but on the structural hedge what we disclosed and we gave you at year-end, our average is 1.03%. [ And the one we've guided ] was a tailwind, as the long wave of the curve is supporting that, but it's a little bit better than that. But at the moment, we're pretty much -- it was pretty -- we're pretty close to the average of what you're actually seeing in the swap markets as well.And I -- commercial banks. Sorry. Nearly forgot the incentivization. It's been running for a couple of months, but in terms of these results it's really only been running for 4 weeks, so I would say there's little impact of any meaning of that in these results. Remember that we talked about historically that from the Williams & Glyn book in total there's 200 million benefit we get from income within that space. There is some activity and we're working hard to make sure that there is, but it's too early to say. And what we'll do is, in Q2, an agreement with the body that runs the whole incentivization scheme. We'll agree with them what kind of numbers we can disclose, but at this point the impact is pretty minimal and if anything really in Q1.
Perfect. And can I just follow up on that last points? If there is little impact and not that you don't see the kind of current account market share that you needed to over the next year, I mean those corporate customers have always been very sticky, then what happens after that? What's the next step there??We had Williams & Glyn not obviously being divested. If this doesn't work either, is it [ you see ] going to try something different? Will there be a cost to this? How does it work going forward?
Yes. Well, first off, we've got targets of numbers of customers we've got to move across through the process in the first 12 months. And then I think it's either 18 months or 24 months. On the current rate we're running at, we'll hit the 12 months target quite nicely because of the volumes of customers won. We've got about 70,000 customers registered to take offers. We're now just starting to see those coming through the process and to -- you're starting to see the first shift of those customers going across. And we're of the view, if those keep running at this rate, we will hit the first, 12-month target quite nicely, but the question is if we don't get to a certain number by a certain time, the offer can be expanded out into the NatWest customer grouping. Now of course we won't be able to do that, so we're doing everything we possibly can to actually make sure we're complying and encouraging customers to go to other players. And at this stage, nothing quite favorable.
Our next question is from the line of Chris Manners from Barclays.
So just 3 questions, if I may. And the first one was just on -- sorry, on mortgage margins again. I guess, just looking at the system data, it looked like they'd improved as the swap rates fell. And you mentioned you're writing more 5-year product than you have been historically and presumably, if you're writing a 5-year product today, that you're going to hold on the balance sheet till 2024. So when you're pricing those, how do you think about the first stage of implementation of Basel III out to the floor; the PRA risk weight review, where I think you've given a guidance for a doubling of the mortgage risk weight? And how does that impact your pricing? And do you still think that you're making competitively above your hurdle rate on front-book mortgage pricing where it is? Obviously, we saw the action you took in April.And the second question was just on the Term Funding Scheme. Obviously, you did pay GBP 5 billion of that back, and arguably 75 basis points is potentially extensive for you. And what are your sort of plans around that to normalize that? Could you pay off any more? And the third one was just on PPI. So if we look at the Q1 claims rate, the GBP 136 million that you sort of spent, and compare that -- we've only got sort of 5 months since the end of March. And on PPI you've got GBP 559 million provision still on the balance sheet, yes. Is there potential for a write-back there? How is the claims volumes going? Do you track a surge in complaints before we get to the deadline? And I saw you mentioned Deloitte being appointed to try and identify some PPI claimants and, well, PPI policyholders who haven't claimed yet. Could you just maybe share a little bit of a color on what that means and how that process is working? Does that mean things could drag beyond the deadline in August for you?
Chris, let me start at the back and work our way forward. On the PPI, look, we're pretty comfortable where we are at the moment because we wouldn't want to be certainly adjusting anything between now and the end of this time. We do expect to see a surge. And we've always thought that there'd be a surge in the last probably 3 to 4 months, so we'll hold on for that. And the Deloitte piece is really working with the official receiver on where they had help with people who did go into some sort of liquidation receivership and was there a claim to be made on NIM. We've been working with Deloitte and the team to just to work through whether this is a big thing or not. Some of the details haven't been that accurate. And some of them that thought were claimants weren't, so I think there is a lot of water to go under the bridge on that one, but we'll be holding on to that provision until the last minute, I'd say. We will review again at the half year, if there is a surge, whether we've got enough, but at this stage we're pretty comfortable with it.
And I think, Ross, we -- in our forecasting we -- obviously we planned for the fact we'd expect some claims to kind of go up. And Chris, in terms of the extension of the deadline, there's been no suggestion that the receiver writer would extend the deadline at all. I think they are just looking to see if there's something to pick up on there. So it may become something, or not. We'll wait and see what kind of happens.
TFS?
TFS. So we did a bit of a repayment. It's expensive debt, but you put your excess liquidity on deposit for the same price, so it doesn't actually -- in the end, it doesn't really cost you anything. But it doesn't make you anything. So we're seeing -- so it's we did a bit of a repayment last year. We -- I said earlier about just we are not looking to grow our liquidity coverage, so we will look at it as we go through. And we [ will ] take some action on that at some stage in this year as well. And then in terms of the mortgage margin question: When we price these products, it's interesting. Pricing is very much what's happening in the markets. So when we look at it and then when we look at their overall return, we build in the change in the capital rules in all of that and make sure that we're still very comfortable with the returns. So we've given you the guidance. That's the same guidance as we're using internally, but we are comfortable that -- for these longer-dated products that they do hurdle well. So not uncomfortable on that basis. And I think that was all, Chris.
Yes. So you're saying so they hurdle well at the current spreads, but can you tolerate much more from the margin compression?
At the moment, we're comfortable, I think, is what I would say.
And we do take account of the fact that those changes to risk weightings do happen after a period of time, and they have to be spread over the loan period.
Yes.
So we're still comfortable, Chris, at this point in time.
Yes.
Okay. So you look at the average ROE over the product life, so as time goes past and we get closer to those RWA inflations happening, then that will get factored into the calculation. Okay. That's understood.
Yes, each mortgage effectively gets allocated the capital based on the period of time and beyond, knowing that we're actually doubling the risk weightings on it as well. So each tranche -- I should say the tranche of mortgages must hurdle.
Our final question today is from the line of Martin Leitgeb from Goldman Sachs.
Yes. Just to follow up on the mortgage space. And the question here: I was just wondering whether you could shed a little bit more light on what the profitability of the new business in mortgages is at the moment. Are we talking around -- because, I mean, just looking at the return on tangible you quote in the disclosure, for UKPBB was just around 25%. It would imply that even at current rates the front-book business in mortgages is still fairly -- are still fairly "high return on equity" proposition. And tied to that question, I was just wondering, just looking at the excess deposit base RBS has within the ring-fenced bank. And I think it seems to be roughly 40 billion. Wouldn't there be scope for, I think, a bit more pronounced growth within UKPBB within mortgages in order to try to offset some of the pressure coming through in -- on the commercial side? Or is there potential there to cannibalize existing revenues out of the mortgage book and that's why the current growth rate of around, I think the current rate implies around, GBP 7 billion a year is where you feel more comfortable?
Yes, look, I -- you're right. You've got to be very careful you don't cannibalize yourself by driving the pricing down just to get some more business. I think it's a sort of a nil-sum game on it. So we are -- Les and the team are quite careful about our pricing strategy so that we -- one, it's a great offer to customers, but at the same time we've got to make some money. At the moment, we'd still think there's a greater than 15% return on the mortgage business we're writing, so we're comfortable writing it, but it's a highly competitive market. And I don't think it's going away because I think we've got plenty of liquidity in the marketplace. And as I said before, be very careful of the credit quality and how long you write it for.
Yes.
So at this point, our -- we are using some of the excess deposit base. Yes, you're right. It's massive but be very careful that you don't cut your own revenues down dramatically while you do it. Katie, any other comments on there?
No. I mean it's I think what we -- at the seminar which we had last year, we talked about on the new capital rules we'll hurdle over 15%, and at the moment, we're over 20%. So we're not looking to change that. We did, since that seminar actually, relatively small changes in front- and back-book margin. We kind of -- we jump around between that kind of 80 to 90 sort of range. So no difference on that.
And the spread differential is still around 80, 90 basis points as before. Or has that slightly improved in the meantime?
Yes [indiscernible]. So it's still in there in the round. As the yield curves flatten, you get little upticks, but we're taking bits at this point. So I mean I think that kind of 80 to 90 is a good number to use.
Thank you. And there are no further questions, so Ross, I'll hand back to you for closing comments.
Yes, look, okay. Thanks very much for joining the call.Look, in a very competitive marketplace with lots of uncertainty, I think this is a good set of accounts for our first quarter. We know we have still a lot of work to do to get costs out and to keep growing the business, and we are concentrating on that, but let's see how the next quarter goes. And we have called out the Alawwal. If it does transact in this quarter, expect some noise in the numbers. Some of it should be very positive.But thanks very much for joining the call, and we'll talk to you again.
Thanks very much.
Ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may now disconnect.