Natwest Group PLC

LSE:NWG

Earnings Call Transcript 2021-Q1

[Operator]

Welcome, everyone. Today's presentation will be hosted by CEO, Alison Rose; and CFO, Katie Murray. After the presentation, we will open up for questions.

[Alison Marie Rose-Slade]

Good morning, and thank you for joining us today. As this is a quarterly update, we'll be relatively brief this morning. I'll cover progress on our performance and strategy before handing over to Katie to take you through the financial performance in more detail. We'll then open it up for questions.So let me begin with the headlines on Slide 3. We delivered a profitable performance in the first quarter as we continue to support our customers to advance our strategy and to accelerate our digital transformation in response to changing customer needs. We are reporting operating profit before impairments of GBP 844 million and have made an impairment relief of GBP 102 million during the quarter as defaults continue to remain low with little change in stage migration.Taking this release into account, we delivered an operating profit of GBP 946 million and an attributable profit of GBP 620 million, up from GBP 288 million for the same period last year. We are seeing the potential for a more rapid recovery taking shape. However, at this point, our economic assumptions remain unchanged and we will review them at the half year.Net lending grew GBP 2.2 billion, driven mainly by mortgage growth. We reduced costs by GBP 72 million year-on-year, ahead of our targeted reduction rate. And we continue to benefit from a strong capital position with a CET1 ratio of 18.2% after a GBP 1.1 billion directed buyback from the government of almost 5% of our share capital, the maximum amount possible in any given year. This capital strength continues to give us flexibility to navigate ongoing uncertainty to consider options for creating shareholder value and to return capital to shareholders. As you know, we intend to maintain a payout ratio of 40% of ordinary shares with distributions of at least GBP 800 million each year up to and including 2023.The purpose-led strategy we set out last year, shown on Slide 4, is designed to drive long-term sustainable shareholder returns by serving customers across their lifetime, powering the organization through innovation and partnerships, simplifying and digitizing the business and maximizing capital efficiency. Our purpose is also exemplified by 3 focus areas: enterprise, financial capability and climate change, all of which strengthen our ability to drive returns.I'm not proposing to cover these focus areas in detail today, but I do want to mention our EUR 1 billion affordable housing social bond, the first of its kind issued by any U.K. bank. This is the third issuance under our green, social and sustainability bond framework. Our first social bond in 2019 has helped to create almost 7,000 jobs to date, and our first green bond, issued last year, has allocated proceeds to renewable energy projects around the U.K., supporting customers' transition to a low-carbon economy.So let me move on now to how we are serving customers to generate growth on Slide 5. It is too early to comment on the impact of this month's easing of lockdown, but credit and debit card activity has already been trending towards more normal levels. Spending on debit cards is now above levels in March last year before we saw any impact from COVID-19, whilst credit card spending is approaching those levels. We're also seeing recovering demand for personal loans and new cards.Across the retail and commercial businesses, net lending grew by GBP 2.2 billion during the quarter, excluding government schemes. And we continue to see strong deposit growth of GBP 12.1 billion, bringing the total to GBP 415 billion.In the retail bank, gross new mortgage lending was resilient at GBP 9.6 billion, with healthy margins as we maintain strong pricing discipline. Commercial Banking lending has been more muted as businesses take a cautious approach during ongoing uncertainty and continue to deleverage. Demand for government support schemes continues to taper and the majority of those who ask for payment holidays have now returned to normal payments in both retail and commercial banking.Two new government schemes were introduced in early April, Pay As You Grow and the Recovery Loan Scheme. Pay As You Grow enables businesses which have started repaying their bounce back loans to request an extension of their term from 6 to 10 years, take a repayment holiday or pay interest only for 6 months. We have received around 14,000 applications to date and the majority of which are to extend the term of the loan. But this number could increase as we have recently contacted over 100,000 customer accounts to advise it is 60 days or less to the first repayment date.On the Recovery Loan Scheme, we received around 3,000 applications in the first week, although demand has dropped since then to between 100 and 150 applications a day.I want to move on now to talk about how we are using innovation and in particular, digital transformation, on Slide 6. The acceleration of digital adoption that we saw last year has continued during the quarter. 61% of our retail customers now use only digital means to interact with us, up from 50% a year ago. This means people are able to access our services at any time of day, from any place they want, making their lives easier and more convenient.In Commercial Banking, 68% of sales are now via digital channels. And use of our chatbot Cora has grown 58% year-on-year, with over 40% of interactions completed without human intervention. We are also using video banking for an average of 13,000 interactions a week, up from around 7,000 a week in the fourth quarter last year. This enables us to deliver personalized customer service efficiently despite the pandemic and without the need for customers to travel. These are all good examples of how we are creating a relationship bank for a digital world.We are also actively managing capital to drive returns, which I will cover on Slide 7. As I mentioned earlier, in March, we announced a directed buyback from the government of almost 5% of share capital for GBP 1.1 billion, the maximum amount possible in any given year. We've also made strategic choices in relation to capital in NatWest Markets and Ulster Bank.In NatWest Markets, we're ahead of plan as we reduce risk-weighted assets, which are now GBP 26.5 billion. And we expect to achieve the majority of the remaining RWA reduction by the end of the year. On Ulster Bank, negotiations are ongoing with AIB about the performing commercial loan book as well as with other third parties about retail and SME assets, liabilities and operations. We will update you in due course when we have anything new to report.In addition, we are actively managing portfolios and using synthetic trades across the business to reduce capital consumption and to manage risk. For example, in Commercial Banking, active capital management has resulted in a reduction in RWAs of GBP 600 million in the quarter.We also optimize our regulatory capital with ongoing liability management exercises. And we repurchased GBP 1.6 billion of Tier 1 and Tier 2 securities during the quarter.So before I hand over to Katie, let me update you on Slide 8 on the progress we're making towards the targets we announced in February. We are pleased to report that our progress is on track, but of course, we do not expect this to be linear on a quarterly basis.Net lending of GBP 2.2 billion in the quarter equates to annualized lending growth of 3%. Costs fell by GBP 72 million or 4.5%, ahead of our targeted reduction rate of about 4% per annum. And our CET1 ratio of 18.2% is down from 18.5% at the year-end as we move towards our target ratio of 13% to 14% by 2023. Our intention remains to return capital to shareholders or pursue other options that create value as we move towards that target. Though bear in mind, we have yet to experience any procyclicality.And with that, I will hand over to Katie to take you through our performance in more detail.

[Katie Murray, Group CFO & Executive Director]

Thank you, Alison, and good morning, everyone. I will start with the group income statement, taking the fourth quarter as a comparator. Total income of GBP 2.7 billion was up 4.9% on the fourth quarter. Within this, net interest income was down 2% to GBP 1.9 billion and noninterest income was up 29% to GBP 728 million. This increase reflects seasonally higher trading income and higher lending volumes.Operating expenses fell 22% to GBP 1.8 billion, driven by the absence of the annual U.K. bank levy, lower strategic and conduct costs and of course, ongoing cost reduction. This means we are reporting an operating profit before impairments of GBP 844 million, up from GBP 194 million in the fourth quarter. The net impairment release for the first quarter of GBP 102 million represents 11 basis points of gross customer loans and compares to a charge of GBP 130 million or 14 basis points in the fourth quarter. This release reflects improvements in underlying credit metrics. Taking all of this together, we reported an operating profit before tax of GBP 946 million. And attributable profit to ordinary shareholders was GBP 620 million, equivalent to a return on tangible equity of 7.9%.I'll move on now to net interest income on Slide 11. Banking net interest income for the first quarter was GBP 35 million lower than the fourth, as strong mortgage growth and improved mortgage margins were offset by lower commercial balances and 2 less days in the quarter.Turning to bank net interest margin, this reduced by 2 basis points to 164 basis points. The lower yield curve accounted for a 3-basis-point decline due to the structural hedge, which was partially offset by a 1 basis point increase for mix and pricing as a result of stronger mortgage margins. As you can see, liquidity had no impact as our TFSME repayment was offset by an increase in deposits. Turning to the drivers of net interest margin on Slide 12. Asset yields and funding costs were stable in the quarter after a period of decline following base rate cuts in March last year. On the asset or lending side, gross yield for the group was broadly stable at 184 basis points despite a slight reduction in the retail banking loan yields as a result of lower unsecured balances. On the liability or deposit side, group funding costs were broadly stable at 49 basis points, with a further small reduction in retail deposit costs to 8 basis points.There are 3 main factors to consider in relation to net interest margin for the second quarter. First, ongoing pressure from the structural hedge. We have increased the hedge by GBP 8 billion in the quarter due to increased deposit growth in line with our policy. If deposits stay broadly stable, we would expect to add a further GBP 15 billion over the next 12 months. Taking into account the current yield curve and our expectations for the size of the hedge over 2021, we now expect a reduction of income of around GBP 250 million from our hedge portfolio compared to 2020. This will not be completely linear and equates to around 3 basis points per quarter.Second, a change in liquidity, which as you know, affects average interest-earning assets and therefore NIM. The third factor is mix and pricing. In the first quarter, mortgage margins on the front book increased from 161 to 179 basis points. This is above the back book, which improved 12 basis points to 159. These improvements include around 5 basis points from our transition to SONIA from LIBOR at the beginning of the year, which has no impact on group income, but does affect individual product lines.Average application margins in the first quarter were 180 basis points. However, these reduced towards the end of the quarter due to higher swap rates and market pricing. And our March margin was around 165 basis points, slightly above the back book.Mix is also affected by demand for higher-margin unsecured and corporate lending, which will ultimately depend on the shape of economic recovery.Moving on now to look at the volumes on Slide 13. Gross banking loans were stable in the first quarter at GBP 363 billion. Mortgage growth of GBP 2.7 billion was 1.4%, reflects continued strong demand in the U.K. post the stamp duty extension. Our mortgage flow share in the first quarter was 13%, above our stock share, which increased from 10.9% to 11%. Gross new lending in the quarter was GBP 9.6 billion.Unsecured balances declined in the first quarter across both personal advances and credit cards. Demand for government schemes also slowed, but they still accounted for GBP 600 million of additional lending. However, this was offset by repayments from commercial banking customers, including GBP 300 million of RCF repayments and utilization stable at 22%. Average interest-earning banking assets grew by GBP 7 billion or 1%, driven by mortgages.I'd like now to turn to noninterest income on Slide 14. Noninterest income, excluding notable items, was up 15% on the fourth quarter to GBP 742 million. Within this, income from trading activities increased 33% to GBP 162 million. This reflects a stronger performance in fixed income with higher levels of customer activity, though it is clearly lower than the first quarter of 2020, given the volatility we experienced last year.Moving now to fees and commissions for the Retail and Commercial Bank, which decreased 4.3% from the fourth quarter to GBP 470 million. This was driven by lower card and lending fees as a result of lockdown. The outlook for fees and commissions is uncertain given the ongoing restrictions due to COVID-19 across Europe, but we expect them to grow as the economy recovers. So to round off my comments on income, there is no change to our guidance from February. We continue to expect income, excluding notable items, to be slightly lower this year than 2020 due to 2 main headwinds: The impact of the structural hedge; and the lower income in NatWest Markets as we refocus the business to better serve corporate and institutional customers.I will now move on to look at costs on Slide 15. Other expenses, excluding operating lease depreciation and the direct cost base of Ulster, were GBP 1.5 billion for the first quarter. That's GBP 72 million or 4.5% lower than the first quarter last year. Naturally, these cost reductions will not be linear and we continue to expect savings of around 4% for the full year. Strategic costs in Q1 were GBP 160 million, and we expect these to be around GBP 800 million for the full year.Turning now to impairments on Slide 16. We are reporting a net impairment release of GBP 102 million or 11 basis points of gross customer loans in the first quarter. This compares to a charge of 14 basis points in the fourth quarter.The release was driven by a continuing low level of defaults in the commercial book and Stage 3 defaults broadly in line with our historical experience in the retail bank, coupled with further positive migration of Stage 2 loans back to Stage 1, following improvements in the underlying credit metrics. The economic assumptions we presented in February are unchanged and we include these in the slide appendix. We will update these in line with our usual practice in Q2.Our post-model adjustments for economic uncertainty are also broadly stable over Q4. We have not changed our guidance for impairments for 2021 and we do expect these to be at or below our cycle range of 30 to 40 basis points. Though clearly, if economic outlook continues to be favorable, then we would be below 30 basis points.Turning now to our credit risk profile on Slide 17. There has been some positive migration during the quarter, reflecting improving credit metrics as government support measures continue and customers build healthy cash balances. 80% of our loan book is in Stage 1, up from 77% at year-end, reflecting migration of Stage 2 loans back to Stage 1. In particular in the retail bank, over 98% of loans are in Stage 1 or Stage 2. Stage 3 loans are slightly down to GBP 6.1 billion or 1.6% of gross loans. ECL coverage of 1.6% is down slightly due to write-offs, with Stage 3 coverage of 39%.As you know, some of our wholesale loans are in sectors that we monitor particularly closely. These amounted to GBP 27 billion or 7% of gross loans. Similar to the trended group, Stage 3 gross loans in these sectors was down slightly at around GBP 700 million and we remain comfortable with coverage at 47%.Turning now to look at capital and risk-weighted assets on Slide 18. We ended the quarter with a common equity Tier 1 ratio of 18.2% on a transitional basis under IFRS 9, which is 30 basis points lower than Q4. The GBP 1.1 billion directed buyback and associated pension contributions together accounted for an impact of 72 basis points, and an accrual of GBP 200 million for the 2021 dividend reduced the ratio by a further 11 basis points. This was largely offset by a 48-basis-point benefit due to lower RWAs and a further 31 basis points from attributable profits. The impairment release had negligible impact on our CET1 ratio as this relates to Stage 1 and Stage 2 expected credit loss that is currently added back to our capital position, in line with the IFRS 9 transitional rules. RWAs decreased GBP 5.6 billion in Q1, including a GBP 1.3 billion benefit from currency exchange rates and a GBP 900 million benefit from our annual operational risk recalibration exercise.Credit risk reduction of GBP 4.8 billion was driven by lower commercial and unsecured retail balances as well as a benefit of GBP 1 billion from procyclicality largely arising in the retail bank. NatWest Markets RWAs reduced to GBP 26.5 billion. And as Alison mentioned, we still expect to achieve the majority of our targeted reduction to around GBP 20 billion this year.Our guidance on RWAs remained unchanged and we expect them to be in the range of GBP 185 billion to GBP 195 billion at the end of 2021, including all regulatory impacts effective on January 1, 2022. Where we are in this range will depend on procyclicality and loan growth throughout the balance of this year.Turning to my final slide on our strong balance sheet. Our CET1 ratio is now between 420 and 520 basis points above our 13% to 14% target range and more than double our maximum distributable amount despite the directed buyback and 2021 dividend accrual. Our U.K. leverage ratio of 6.2% is 295 basis points above the Bank of England minimum requirement.We have also maintained strong liquidity levels with a high-quality liquid asset pool and a stable diverse funding base. Our liquidity coverage ratio decreased in the quarter to 158% due to the GBP 5 billion of TFSME repayment, and our headroom above our minimum requirement is now GBP 65 billion.So to conclude, we have delivered a good operating performance with strong lending growth and continued progress on both cost reduction and capital optimization.And with that, I'll hand back to Alison.

[Alison Marie Rose-Slade]

Thank you, Katie. So in summary, we have delivered an operating profit of GBP 844 million in the first quarter with an impairment release of GBP 102 million as default levels remain low, whilst government support schemes are still in place. We are comfortable with our position, but we recognize there may be economic challenges ahead. And against this backdrop, we remain focused on supporting our customers whilst advancing our strategy and accelerating our digital transformation.We're making good progress on our targets and have increased net lending by 3% on an annualized basis, reduced costs ahead of our target reduction of about 4% a year and used our capital strength to make a GBP 1.1 billion directed buyback from the government as well as meet our commitment to distribute a minimum of GBP 800 million in dividends each year for the next 3 years.Our focus remains on driving improved shareholder returns by growing income, reducing costs and maximizing capital efficiency. And with disciplined execution in each of these areas, we aim to deliver a return on tangible equity of 9% to 10% by 2023. Thank you very much, and we're now happy to take your questions.

[Operator]

[Operator Instructions] And we will take our first question from Aman Rakkar from Barclays.

[Amandeep Singh Rakkar, European Banks Analyst]

A couple of questions, actually, if I may, on income, please. I was just trying to stitch together your commentary on the net interest margin. So you're flagging structural hedge drag, the benefit of mortgage margins in Q1 probably is going to be a bit lower going forward. So rough ballpark, a couple of basis points off NIM each quarter, I guess is the first part of the question.And then in terms of what that implies for the full year net interest income, I mean if that is the case, you should probably be able to offset that with some balance sheet growth in retail and commercial, such that -- can we take Q1's net interest income as a decent run rate for the full year, because I think that would imply a number above 2021 consensus? So sorry for asking a question relative to consensus, I know we do that a lot.I guess second was just around your expectations for NatWest Markets for the full year. I guess it was probably a touch softer than what we were looking for. Does that guidance that you gave us before, GBP 800 million to GBP 1 billion, still stand? That would be really helpful.

[Alison Marie Rose-Slade]

Great. Thank you. Well, look, on NatWest Markets, yes, our guidance for NatWest Markets is unchanged, GBP 800 million to GBP 1 billion. Katie, do you want to take a walk through the NIM, the first question?

[Katie Murray, Group CFO & Executive Director]

Yes, sure, absolutely. So in terms of the Q1 performance, as we know, fell by 2 bps. The low yield curve was 3 bps of that decline and then that was offset by the mix and pricing in terms of a positive 1 basis point, which was largely driven by the higher mortgage margins. And this quarter, central liquidity was flat. So as you know, Aman, when we look at the NIM, there's 3 buckets that we think about. The yield curve we expect to continue with a 3-basis-point decrease in Q2 through lower hedge income driven by the higher yields on [ certain ] positions due to the roll-off that's happening in 2021. You will have noted my comments that we are helped by an improvement in the swap curve in that piece, but it's still going to be around a 3 basis points number.Liquidity, of course, remains sensitive to the movements. We'll leave you to decide what might happen in terms of liquidity. But when we get to mix and price, there's a few things to consider. The positive mortgage trend that we saw in Q1 is reducing. The average application margin in Q1 was 180 basis points for the quarter. But this decreased to the 165 basis points kind of from March and primarily due to the higher swap rates as well as some competition in the market.We know that the commercial loan book will continue to be impacted by lower front book yields. And we do also continue to see a bit of a mix effect in terms of lower unsecured balances. So I think you're right, it does all kind of come back a little bit to what's the volume story to make sure that we manage that margin impact as well as on the volume. And I think we've obviously done well on that in terms of mortgages. And I think we'll then see customer behavior dictate ultimately what happens in terms of volume across retail and commercial and unsecured and corporate lending as we return back to a post-lockdown world.

[Amandeep Singh Rakkar, European Banks Analyst]

Thanks for that. Do you think then the Q1 net interest income might be an indicator of a full year? Do you think we could annualize that?

[Katie Murray, Group CFO & Executive Director]

So what I would probably do with you there, I would take you back rather than give you kind of total income guidance and kind of just refer to the revenue guidance that we gave in February, which I'm sure we'll get into more later as other questions kind of go on. But I would go in that basis and we'll come into that, I'm sure, later.

[Operator]

Our next question is from Jonathan Pierce from Numis.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

I've got 2 actually. The main one is on the hedge. And I have to confess I'm a bit confused about the margin guidance as it relates to the hedge drag, because if we're seeing 3 basis points in Q1 and we're going to see something similar in Q2, don't know what happens towards the end of the year, but that applies to the interest-earning assets. It's suggesting there's a sort of annualized impact each quarter for the next few quarters of about GBP 150 million, which given you're only rolling, I don't know, probably GBP 8 billion a quarter, something like that, it's pretty mechanical, right?The delta on the reinvestment rate is huge. It's sort of 150 to 200 basis points. And that's before the benefit you're going to get from the scaling up of the hedge that you've just talked about. So I don't know whether I'm missing something here, whether you're being ultra prudent on the drag from the hedge that's coming through, maybe that drag just abates completely into Q3 and Q4, but what am I missing on the hedge? The 3 basis points a quarter, given where swap rates are at the moment, is just -- it's very big.

[Katie Murray, Group CFO & Executive Director]

Yes. So I mean I think the important thing, just to really reiterate there on the hedge, is what I said in the speech. It's around GBP 250 million impact full year on full year. Jonathan, I know you understand our hedge well, but just for the sake of others, it's all about sort of being very mechanistic and very consistent. We've got the average size of GBP 177 billion in Q1. So we added GBP 8 billion on to the hedge since year-end. So you're right, about GBP 8 billion a quarter. That's GBP 20 billion since the end of 2020. We work the hedge on a rolling 12-month basis. So if deposits were to stay stable as they are -- broadly stable as they are today, we'd expect a further GBP 15 billion to come on over the next 9 months, which would take the hedge size to GBP 192 billion, kind of further growth on that would be more upside. Clearly, some outflows would have a little bit of an impact, but given the rolling 12-month basis, it takes a little bit of time to come through on that. When we look at the hedge, you know it's a blend of a product hedge with an average -- with a 5-year maturity, an average life of 2.5 years; an equity hedge with 10-year maturity and average life of 5 years. And together, they have an average of about 2.9 years. We have -- we've given you the sensitivities around what would a 25 basis point move do. So we know that in year 1, it only adds about GBP 37 million. But by year 2, you see that increasing up to GBP 118 million. When we did our base case budget, I think we'd have seen the swap rate down at about 8 basis points. The current 5 year is about 47 basis points. So you've got a delta of 39. You can kind of work out what the math would do in terms of the yield compared with the growing of the hedge within there. So I would just reiterate, we're looking at GBP 250 million this year as long as rates and our expected volumes stay the same. Jonathan, you said you had a second question. Sorry I didn't give you a chance to ask it.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Yes. Thanks for that. The second question actually is just much more simple, consensus income ex notable items for this year is down 3% on the income last year ex notable items. Is that within the bounds of your slightly lower and consensus is being too optimistic, too pessimistic? I'm thinking in particular of the miss in Q1 on NatWest Markets. But if you could talk in around whether you're happy with consensus income this year, that would be helpful.

[Katie Murray, Group CFO & Executive Director]

Yes. I mean there's no change to our 2021 revenue guidance that we gave you in February. So that gives you some guidance as well. So just to remind you what we said, we're expecting the 2021 income ex notable items to be slightly down on 2020, driven by the 3 factors: Lending growth across U.K. RBSI retail and commercial, excluding obviously government schemes that will be above the market rate. We're comfortable with our performance on that in Q1. The impact of the structural hedge we've just talked about, the reduction of GBP 250 million. And I think Aman asked in the last question around the income reduction in NatWest Markets, so GBP 0.8 billion to GBP 1 billion. There's then a few puts and takes. We obviously -- in February, we talked a lot about the fact that we had a rate cut. Clearly, that's no longer there. We've got this soft curve movements we've talked about. We've had a little bit of a longer lockdown, but then at the same time, we're quite -- we can see a scenario of a positive growth out of where we are. So I think comfortable kind of in the round and that guidance still works.

[Operator]

Our next question is from Benjamin Toms from RBC.

[Benjamin Toms, Analyst]

First one is on cost of risk. I think your guidance is at or below through the cycle of 30 to 40 bps. I think to hit a cost of risk of 30 bps for 2021, taking into account the buyback in Q1, implies something like 33 bps cost of risk the remaining 3 quarters of the year. Given that you also need to update your economic assumptions to market's more positive outlook, can you just give us some more color on why you're not happy to get more positive on cost of risk guidance?And then secondly on buybacks. You've executed your directed buyback of 5%. I think I'm right in saying that you now have to wait 12 months to do another one. But I think there's also technically scope to do a general buyback, although it's not favored by investors. Can you update on your thoughts on this method of capital return for the rest of '21 versus special dividends?

[Alison Marie Rose-Slade]

Great, thank you. Well, look, on the cost of risk, I mean I think we expect impairments to be below. We will update our economic guidance at the half year. And I think as I said, we are seeing potential for a more rapid recovery to take place. If you look at the impairments that we've released, the GBP 102 million in this quarter, that's really reflective of the low level of defaults that we're seeing and an improvement in the book and things migrating back from Stage 2 to Stage 1. So we would expect to be below our 30 to 40 that we guided. Katie?

[Katie Murray, Group CFO & Executive Director]

Yes. Thanks very much. When we looked at the directed buyback, you're absolutely right. It's a rolling 12-month calendar, maximum 4.99%. So we did the transaction on the 19th of March, which means we couldn't do it again until the 19th of March next year.At the AGM last week, we would have sought permission and would have received permission -- so it was only this week, a lot happens in a week. But to get to do an in-market buyback. Look, I think it's something when we talk with our investors, our preference has always been directed. I think what we did at the year-end was to be very clear in terms of the guidance, that we wanted to return a minimum of GBP 800 million, which should be across a mix of ordinaries and specials, in line with our dividend policy and to make sure that we had capacity to do the directed buyback. We're very pleased that we managed to do that in Q1 and I think let's see how the rest of the year unfolds, but we've always been very clear around our preferences to return capital to the shareholders.

[Operator]

Our next question is from Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

I had a question on revenue, which is kind of a follow-up of what you've already touched on, and then on provisions. On revenues, I mean I duly noted that you're sticking to your guidance. But with the rate cut now out of the equation, bigger structural hedge is steepening, the stamp duty extension, you obviously bought back some of the sub debt. What -- and you're keeping NatWest Markets guidance. So what's gone worse for you to keep your overall guidance unchanged? And are you building any buffer for NatWest Markets given the slow start? I don't know if there's any change in seasonality that gives you more conviction that GBP 800 million to GBP 1 billion is still valid?And the second question on provisions. Can you sort of update us how much your stock of provisions related to the management overlays, where it is, because I haven't seen it. I think it was close to GBP 900 million in Q4. And is there any reason, sort of assuming your macro assumptions aside, any reason why we -- I mean you can release those over time?

[Alison Marie Rose-Slade]

Great. Thank you. Well, look, I won't repeat what Katie has given you on the revenue guidance. I mean as I said, it's relatively early days in terms of coming out of lockdown. We are, as I said, we see potential for more rapid recovery to take place and I gave you some information on what we're seeing around debit and credit card spending and activity.I think where we're seeing more muted recovery at the moment is in the Commercial Banking side, where I think we're seeing our customers be very cautious. They've deleveraged quite significantly and well prepared for the recovery. And I guess the degree of Commercial Banking loan growth in 2021 remains uncertain. I think what you will see is 3 real sort of dynamics coming through and we'll see more of that over the coming quarter.Firstly, customer behavior in relation to paying down current government schemes. Secondly, how customers use the Pay As You Grow features as well as the new schemes and I can give you some more information on that if you'd like. And then the degree and speed of the economic bounce back and that's where we see more potential for a more rapid recovery.We also see scope for growth within large corporates in areas such as infrastructure, ESG lending, all of which will recover. So I think we're not seeing anything bad. We actually see opportunity there.On the NatWest Markets side, our guidance remains the same. We're comfortable with our GBP 800 million to GBP 1 billion revenue guidance as the business completes its refocus and reaches steady state. And it's making good progress and significant progress on reshaping the business. So I'm very comfortable. In Q1, that business has performed well in the areas where we support our customers. So there's been good growth. Clearly, we haven't had the same volatility in the market that we had last year, but the business is performing in the way we expect it to and our guidance remains the same. Katie, do you want to pick up?

[Katie Murray, Group CFO & Executive Director]

Yes. No, let me pick up that PMA question. Look, our PMA for economic uncertainty, it's unchanged from the year-end, it's GBP 878 million that we disclosed. We're continuing to hold that at this stage. When we look at it, we're looking at -- we have a lot of conversations to talk about what would be the hurdles that you need to cross to trigger that release.So if I look at some things, for example, in retail, you would reference factors such, obviously, as unemployment, what's happening in your arrears trends, what's happening in your high-risk sectors. For wholesale, you'll be looking at variables such as the performance of different wholesale sectors as well as what the government scheme debt performance is doing in terms of take-up of further schemes and deferral of debt.We expect to be continuing to assess this economic adjustment each quarter over the next 12 to sort of 18 months, I would imagine. There's no specific time line on when we would release it. I would say, overall, I don't want you to go away thinking, "Oh, that means they're going to hold it in perpetuity till that time." I think it will be a number that will start to evolve as we get later on to this year and we start to see the real impact of what's actually happening in the economy. But at this stage, it feels the appropriate thing, as we've literally just left lockdown, to continue to hold that.

[Operator]

Next question is from Andrew Coombs from Citi.

[Andrew Philip Coombs, Research Analyst]

I think Alison Rose answered both of my questions actually. So let me just throw in one, which is on the FCA investigation. Obviously, you have flagged this in your annual report. Previously, there was a news flow in March, and I think the case is due to be heard on the 26th of May.In your commentary, you talk about substantial potential costs or provisions, but my understanding is that this investigation is into a single customer and it's around GBP 365 million that's being investigated. So can you just elaborate on a, if there's any provision that's already been booked for this case? And b, what your definition, broadly speaking, of substantial is? I'm slightly surprised by the wording in the context of what's being investigated.

[Alison Marie Rose-Slade]

Thanks. Well, look, I think as I said, we're disappointed by the announcement, obviously, but we have been fully cooperating with that. There's nothing more that we can say at this point. The only other thing I would reiterate is how seriously we take our money laundering and financial crime responsibilities. It's an area of significant investment that we have in the business. We have over 4,000 people doing that as their full-time job. But beyond that, nothing further to add at this point.

[Katie Murray, Group CFO & Executive Director]

The only 1 thing I would add on to that is that there's a confirmation is that we have not taken any provisions. And Andrew, you wouldn't, I think, expect me to do a definition of what substantial might mean, as it would be quite dangerous if a number out there as a point of negotiation. So no provisions at this point and we're comfortable with all the points Alison made. Thanks very much.

[Operator]

Our next question is from Omar Keenan from Credit Suisse.

[Omar Keenan, Research Analyst]

I just had a quick question on customer behavior and what you've seen since the exit from the lockdown. Just on Slide 5, the debit and credit card spending is very helpful. I think it was to the middle of April. Do you have any data, perhaps a little bit later than that? And just on a related question on the corporate side. So for what you've seen so far, what kind of clues have you got on business behavior with respect to the business loan schemes and how much they might pay down? I think you've given a number historically of what the utilization rates were of those loans versus what may just be sitting inactively in deposits on the balance sheet. So any color there would be very helpful.

[Alison Marie Rose-Slade]

So I think we've given you some sort of data on activity on debit and credit card spending that is tracking up. Let me talk about the, the government lending schemes and give you a little bit more color. So in terms of, as you know, our lending under the government schemes is around GBP 14 billion. In terms of the bounce back loans, around 20% to 30% of the cash that has been borrowed under that is still sitting in the current accounts of the businesses.The new schemes that have launched, so the Pay As You Grow scheme, that launched on the 6th of April. As of yesterday, we've had 14,000 applications coming through the bounce back loan Pay As You Grow portal as we call it. And of that, 75% of the applications coming through are asking for an extension, where customers can extend from 6 to 10 years. Now we expect those volumes to increase quite significantly. We've recently written to 100,000 of our customers to give them 60 days' notice that their first payment under the bounce back loan is starting in 60 days. And that would be the trigger for the application in the Pay As You Grow.So I think the behavior that we will expect to see is something that you'll start to see more data on. I think, initial very, very early days show a reasonable uptick in requests for taking that extension. And I think at this point, we -- that's not -- that's exactly what we would expect. If you're a small business, bear in mind, most of these loans are average size, GBP 37,000, extending them, so 6 to 10 years as you come out of lockdown, to give you a bit more breathing space, I think is not an unexpected behavior we would expect to see. But I think as the economy and the lockdown sort of releases and businesses come back online, I think you'll either see them paying down their loan, commencing repayment or extending through the Pay As You Grow. But that's the early data that we're seeing at the moment.

[Omar Keenan, Research Analyst]

That's wonderful. Can I just ask a quick follow-up question? The 20% to 30% of cash that's still sitting in the current accounts of the businesses, how has that changed since a couple of months ago? I seem to remember a 50% number, but I could be mistaken.

[Alison Marie Rose-Slade]

No, it hasn't changed significantly. We haven't -- so for example, we haven't really seen the cash burn that we've talked about of people spending the money. I think as businesses come out of lockdown, the question and the dynamic behaviorally you may see is them using that cash for working capital purposes as they ramp up. But broadly, that's stable. And I think it's really then as -- the trigger point is really as the loans start falling due for repayment. So if you think about the history, the bulk of drawdown, the big rump of drawdown in application of bounce back loans was in May, June, July. And so May, June, July is when those loans will start falling for their first repayments. And I think that is the trigger point at which you'll see whether they will repay their loan, whether they'll advance through the Pay As You Grow or use the cash for working capital purposes. So I think we'll get more granular data over the next quarter that we can share with you.

[Operator]

Our next question is from Martin Leitgeb from Goldman Sachs.

[Martin Leitgeb, Analyst]

Yes. Could I have 3, please? And the first one, I think along your earlier comments on excess capital and obviously, the intention to return it to shareholders. You also mentioned that you might look to pursue other options which might be accretive to shareholder value. And I was just wondering if you could shed a bit of light what you mean with that? Are these essentially potential deals similar to the mortgage book acquisition last year in terms of size? Or could this be potentially bigger items?Secondly, I was just wondering if you could elaborate on your credit card strategy in the U.K. I mean you have made tremendous progress in increasing mortgage stock share over the years and where the market share of NatWest compared to the current account still remains markedly below is credit cards in particular. How should we think about progression and particular share gains going forward as the economy recovers?And thirdly, just to come back to the unchanged revenue guidance on the back of one peer yesterday slightly improving the guidance, I was just wondering what is driving that conservatism. If so, is this essentially a view that mortgage competition could continue and potentially mortgage growth could slow? Or the other way around, are you still targeting 13% flow share? Or is it simply could this be driven that NatWest Markets is obviously a range of GBP 800 million to GBP 1 billion, given the first quarter [indiscernible] that we might end up in what's the lower end rather than the upper end?

[Alison Marie Rose-Slade]

Great. Thank you. Well, look, I think we've answered the revenue guidance. I think Katie went through the sort of 3 buckets of that and we are pretty confident about our position and no update to the guidance. We've been pretty clear on NatWest Markets as well. So I don't think there's anything more I can add to that.In terms of capital and our position, now I'm very clear, my clear preference is to return capital to our shareholders. We have a capital-generative business and we intend and expect to operate within a CET1 ratio of 13% to 14%.We have robust capital levels, as you can see, and we're at 18.2% now on CET1. And my intention is to distribute capital to shareholders and we've given you the guidance as a minimum GBP 800 million. In terms of other options, we would look at other options that we would consider would be accretive of value to shareholders. So the Metro mortgage acquisition that we made is a good example of something that adds value to shareholders, is in line with our strategic priorities and aspirations and areas of growth. So we would always look at those options opportunistically and proactively, but it would be in those sorts of ranges. But clearly, preference is to return capital to shareholders.On the credit card strategy, as you know, that's an area where we have significant capacity to grow and we would look to grow it in the unsecured space within strong risk appetite and we are starting to see a good uptick in that space. So I think that is an area which David Lindberg is very focused on as an area that he will look to grow and he can probably give you a bit more detail on that when he has the spotlight later in the year.

[Operator]

Our next question is from Joseph Dickerson from Jefferies.

[Joseph Dickerson, Head of European Banks Research & Equity Analyst]

Most of my questions have been answered, but just -- can you just describe briefly the philosophy around the hedge? I know it gets -- we ask it like every other quarter, but I suppose just in the current rate environment, why wouldn't you be more dynamic with the hedge in terms of duration, et cetera, in addition to the amount that you're deploying into the hedge?

[Katie Murray, Group CFO & Executive Director]

Thanks, Joe. I think the thing for us is we're not looking to take punts on where rates are and where they're going. This is about being consistent and mechanistic in our approach. It's an approach that served us incredibly well over the last number of years, rather than taking actions in 1 quarter that you could regret in quarters to come. So we're very comfortable in the way that we manage this. And it's growing nicely in terms of the size of it. And as I said, we expect to put another GBP 15 billion on over the next 9 months and that will benefit us. And if the rates continue to improve, well, we will take the upside as it comes through, but very comfortable with the approach rather than taking punts on what won't be happening on the interest rate at any one time.

[Operator]

And our next question is from Ed Firth from KBW.

[Edward Hugo Anson Firth, Analyst]

I have 2 questions. The first question was the fixed income business in NatWest Markets. I just wondered if you could help us understand a little bit what's going on there, because my recollection was that the reason you were restricting the size of that business or making it smaller, was to focus on customers and produce a more stable income stream. And I'm looking at the quarterly numbers in your financial supplement. And I mean it's like a random walk. It's anything between minus GBP 12 million and plus GBP 230 million a quarter. So I'm just trying to get a sense of what drives that business? And can you give some sort of idea of is it going to stabilize soon? Or was there something one-off in last year that was sort of throwing it around? And if so, can you, roughly, what sort of level might it stabilize at? So I guess that's my first question.And then the second question was on surplus capital. You talk a lot about group surplus capital, but I guess we can all see a stack of it is, for example, in somewhere like Ulster. So I'm just trying to get a sense, I suppose you must know the number. So I guess, could you just tell us or give us some indication of how much surplus is actually at group and distributable today, I guess, is the easiest way I could ask that question.

[Alison Marie Rose-Slade]

Okay. Thank you. Well, look, on NatWest Markets, what I would -- as you know, we're strategically refocusing that business and the team are making good progress. In Q1, sort of the FX and capital markets income was in line with our expectations. Rates income was lower due to reduced activity levels across the market. And also, our rates income was also impacted by one-offs in the quarter from an LME exercise. But in terms of having that business focused around the areas that we wanted to in supporting our customers, it's doing exactly what we want it to do. So and...

[Edward Hugo Anson Firth, Analyst]

One-off -- sorry, could you give us roughly what -- so I mean sort of order of magnitude, so we can sort of get some sort of idea of what our run rate might be?

[Katie Murray, Group CFO & Executive Director]

I think, Ed, [indiscernible] it was about GBP 50 million in terms of the number that was in that piece. If I look at how I would look at the numbers, so we've said GBP 800 million to GBP 1 billion. What we've also said is currencies are going to be relatively stable. Capital markets, that's where our core work is, that's working with our numbers. You can see the revenue share. The revenue share doesn't impact rates. The revenue share on that given its capital intensity is not there. And then that kind of gets you to your -- well, the rates is kind of the balancing number of what might go on.You know and you're being a little bit naughty in saying looking at the numbers over the last number of quarters. We made very specific decisions because we didn't like the volatility of this business in history. So I think what we'll get to is a kind of a steady-state number where the business is balancing as it should be in that GBP 800 million to GBP 1 billion number in terms of that place.And in terms of cash we're sitting with the holding company just now, I mean happy to share that with you, it's about GBP 4 billion that's what's sitting here today. So I mean there's no issue at all around our capital commitments. We've got the cash in the right place to be able to make that. So there's no -- there's nothing hidden in terms of the numbers there and as well as the capital commitments that we made over the year.

[Edward Hugo Anson Firth, Analyst]

So the GBP 4 billion and that's above your MDA then?

[Katie Murray, Group CFO & Executive Director]

Yes. Comfortably, I mean there's absolutely not an issue in terms of -- and clearly, that number will move as dividends flow up within the group as well. So if you ask me in a few weeks, it would be a different number again. But I wouldn't look for a ghost in terms of the capital distribution around where capital is sitting, there are none.

[Operator]

Our next question is from Chris Cant from Autonomous.

[Christopher Cant, Former Partner, United Kingdom and Irish Banks]

I just wanted to come back on the hedge again, I'm afraid. And I understand you don't want to take punts on the rates market as you put it. But I guess, do you worry that you're leaving money on the table there at the moment? And again, thinking about some of the commentary from your nearest domestic peer yesterday, they have improved their guidance on the drag from GBP 400 million to GBP 300 million. And I don't think previously, they were assuming a rate cut this year. And you were previously assuming a rate cut this year. You've gone for a more modest improvement in that guidance. And obviously, you're not being as proactive in the hedge. So just wanted to get your view on whether that's something you might revisit in future.And in terms of the longer-term outlook for the hedge, could I invite you to comment on what you expect the drag to be into 2022 and 2023, again, thinking about some of the commentary from your nearest competitor, they do not expect a drag in 2022 at all, for example, year-over-year?And then on the NatWest Markets, answer to the previous question, could I just confirm, is that a GBP 50 million negative one-off in the rates business, which you have not put as a notable item in terms of how you presented the numbers this morning. I just wanted to make sure, but it seems like a notable item. But yes, could I just confirm that I heard that correctly?

[Katie Murray, Group CFO & Executive Director]

So Chris, let me deal with that last point first. Obviously, the -- it's an LME -- it was an internal LME. So actually, it sorts itself out for the group. So therefore, in the group result, it is not a notable item. But on that line, within their NatWest Markets results, it is obviously of interest in that line. So it is not a notable item for the group.If I look at the hedge and Chris, you understand the hedge well, so I won't go through the whole kind of long question. But what we know is the kind of 25 basis points kind of uplift is GBP 37 million in year 1, GBP 180 million in year 2. So clearly, given the spread where it is today, that will be a kind of a further benefit into year 2 as well. And that will grow a little bit given the -- that we're putting a bit more on in terms of volume. But it's not something that we're looking to change our approach on. We spend a lot of time looking at it, talking about it, but ultimately, when you look at it on a multiyear basis, we're very comfortable that we're doing the right approach. And we're very comfortable that we provide the clarity and visibility for you so that you're able to see what we're doing in that space. Thanks for the question, Chris.

[Christopher Cant, Former Partner, United Kingdom and Irish Banks]

Could I just ask the -- where is the other side of that LME, just in terms of our understanding of the divisional numbers. I presume there's a...

[Katie Murray, Group CFO & Executive Director]

I mean it will come through the center and then it will disappear on the consolidation. And the center, as you know, is always a mishmash of many things. The number -- that number is not big enough to call out anywhere particularly.

[Operator]

The final question for today is from Guy Stebbings from Exane BNP.

[Guy Stebbings, Analyst of Banks]

I'll refrain from asking another question on your guidance. So can I just come to RWAs first, actually. It's up to GBP 165 billion today, even pro forma for some of the volume growth, the regulatory changes at the start of next year and some credit migration, the 2022 guidance does look quite conservative. I think you said, Katie, the extent sort of where you sit in that range will depend on the extent of credit migration. But is it not possible that if credit migration was quite modest, you could be even below that range? Or am I being too optimistic there?And then the second question, just on India, actually. I think you've got quite sizable middle, back-office operations in India. So just wondered whether the current situation there is having any impact on how you operate, any associated costs with that?

[Alison Marie Rose-Slade]

Thank you. Well, in terms of -- let me take India. So we do have back office operations in India. We're working very closely with our team. There are no operational impacts from what's happening. Clearly, we're very concerned on behalf of our colleagues in India with the situation. We're putting a lot of support in there and have relieved some of the pressure just in order to help the human side of the equation for our colleagues there who are doing a great job. But no business impact. And as you know, we have no direct customer call centers or service centers in India, although we do have some web chat services, but no disruption to business. And all of our incident management and operational side and our main focus is really on supporting our colleagues at the moment on what's a pretty tough situation.On RWA, look, I think we've given you the guidance. I would say we've been surprised by the resilience of the credit environment. And I think the ongoing government support measures have clearly -- they've lasted longer than we anticipated and the tapering off of that, I think, is really, you will start to see procyclicality, if it's going to come in, later in the year. But yes, absolutely, it is possible that we will come in below that guidance if the procyclicality doesn't come through.I think the dynamic we're all managing is clearly the support measures have been extended, which we think is very helpful. The economy is opening up. The lockdown is ending. So as I said, we're seeing potential for a more rapid recovery to take place. And the opportunity for businesses to get going again and recover faster means that, that procyclicality is either deferred or may not come in as much. So it is possible. And that's something we're obviously keeping a very close eye on.

[Operator]

There are no more questions.

[Alison Marie Rose-Slade]

Thank you. Well, look, thank you very much for your questions. As always, Katie and I really appreciate you taking the time to join us. As I said, we're happy with the performance this quarter. We're on track and delivering on all the guidance that we gave you, a strong, good operating performance in our core franchises. I think as you will see, we are taking an appropriate and conservative approach to impairments and we'll update our guidance at the half year, but we are seeing potential for a more rapid recovery to take place. So we are cautiously optimistic. I'd like also just to remind you, later on in the year, we have our 'Meet the Exco' Spotlight and then we'll be putting a spotlight on the commercial bank in NatWest Markets. That's on May 20, which will give you a chance to talk to our team more directly there. So I hope you'll be able to join us for that. But thank you very much.