Natwest Group PLC

LSE:NWG

Earnings Call Analysis

NatWest Group's Q3 2024 Results Show Growth and Upgraded Guidance

In Q3 2024, NatWest Group's income reached GBP 3.8 billion, up 5.1% year-over-year. Operating expenses fell 9% to GBP 1.8 billion, boosting operating profit to GBP 1.7 billion. Customer loans increased to GBP 367 billion, with a notable rise in mortgages. Deposits rose by GBP 2.2 billion to GBP 427 billion, reflecting strong retail savings demand. The bank has upgraded its full-year income guidance to GBP 14.4 billion and expects a return on tangible equity exceeding 15%. Loan impairment rates remain low, projected below 15 basis points, indicating a resilient loan book performance.

Solid Financial Performance in Q3

In the third quarter, NatWest Group demonstrated robust financial health, reporting a 5.1% increase in income, reaching GBP 3.8 billion from the previous quarter. This growth stemmed from improvements in both net interest income and noninterest income across all business segments, contributing to an operating profit before tax of GBP 1.7 billion. Notably, return on tangible equity stood at an impressive 18.3%. The group experienced net interest margin expansion of 8 basis points, now at 218 basis points. With this solid foundation, the bank's year-to-date income totals GBP 10.8 billion, highlighting ongoing positive momentum.

Enhanced Guidance and Future Projections

NatWest has upgraded its revenue guidance for 2024, now anticipating total income, excluding notable items, to approximate GBP 14.4 billion. Furthermore, the return on tangible equity guidance has also been increased to more than 15%. This optimism is supported by disciplined lending growth and effective balance sheet management, reinforcing the bank's confidence in its future financial trajectory.

Disciplined Lending and Deposit Growth

The bank's lending portfolio showed broad-based growth, with gross loans to customers rising by GBP 8.6 billion (2.4%) to GBP 367.2 billion. Retail banking reported a significant recovery in the mortgage sector, with balances increasing by GBP 3.8 billion, partly due to the acquisition of Metro Bank's GBP 2.3 billion prime residential mortgage portfolio. On the deposits side, customer deposits increased by GBP 8.3 billion to GBP 427 billion, showing strength across all business lines and a continued transition to interest-bearing accounts.

Operating Expense Management

Operating expenses for the quarter declined by 9% to GBP 1.8 billion, thanks to reduced severance costs. However, the management anticipates higher expenses for Q4 compared to the previous year due to planned enhancements and additional levies. Despite this, overall operating costs are expected to remain stable relative to 2023 figures, excluding new bank levy costs.

Impairments and Credit Quality

NatWest reported a net impairment charge of GBP 245 million for Q3, translating to 25 basis points of loans, while the full-year rate is expected to remain under 15 basis points. This reflects ongoing confidence in the quality of the loan book, driven by low historic impairment rates and a well-managed portfolio.

Capital Strength and Future Distribution Plans

The bank's common equity Tier 1 (CET1) ratio improved to 13.9%, with substantial capital generation allowing for continued support of customer financing and shareholder distributions. The government has been progressively reducing its stake from 38% at the start of the year to under 16% currently, aligning with its strategy to exit by 2025.

Strategic Focus on Growth and Simplification

NatWest's management emphasized a strategic focus on disciplined growth, simplification, and rigorous risk management as the core tenets of its business plan. This approach appears to be paying dividends, as evidenced by the ongoing positive financial metrics and supportive economic conditions, particularly in the commercial and institutional sectors.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the NatWest Group Q3 Results 2024 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we will take questions.

[Paul Thwaite, executive]

Good morning, and thank you for joining us today. I'll start with a brief introduction before Katie takes you through the financial performance, and then we'll open it up for questions. You will have seen that we are upgrading our full year income and returns guidance this morning as we continue to make good progress on our three strategic priorities: disciplined growth, bank-wide simplification together with active balance sheet and risk management. This progress, together with our ongoing support to customers is reflected in our performance.

So let's turn to the financial headlines for the first 9 months of the year. Healthy levels of customer activity continue on both sides of the balance sheet. Customer lending growth of GBP 8.1 billion to GBP 367 billion was broad-based. In commercial and institutional, this was driven by both our large corporate and commercial mid-market customers, including lending to the social housing sector.

We provided GBP 23.5 billion of climate and sustainable funding and financing, bringing the total to GBP 85.4 billion since July 2021 in reach of our GBP 100 billion 2025 target. Our existing mortgage book returned to growth in the third quarter as volumes and margins improved during the year, making returns more attractive. The acquisition of a GBP 2.3 billion prime residential mortgage portfolio from Metro Bank completed last month and is included in these numbers.

In addition, we grew our share in credit cards from 8.5% to 9.3%. On the other side of the balance sheet, customer deposits increased by GBP 8.3 billion to GBP 427 billion, with growth across all 3 of our businesses and migration to term deposits continuing to slow. In our Private Bank, assets under management increased by GBP 5.7 billion to GBP 46.5 billion, including GBP 2.2 billion of net new inflows. This activity clearly underpins our financial performance. We generated income of GBP 10.8 billion for the first 9 months. Costs were GBP 5.7 billion, and we remain on track to meet our full year guidance. Together, this resulted in operating profit of GBP 4.7 billion and attributable profit of GBP 3.3 billion.

Return on tangible equity was 17%. Our strong capital generation allows us to continue supporting our customers, investing in the business and making distributions to shareholders. We generated 197 basis points of capital in the first 9 months through strong earnings and actively managing our risk-weighted assets. Our CET1 ratio of 13.9%, includes an accrual for final dividends in line with our ordinary payout ratio of around 40%.

Strong earnings, together with a lower share count have increased tangible net asset value per share to 316p. Earnings per share were 38p, up 12% year-on-year. You also be aware that the government has reduced its shareholding from 38% at the start of the year to under 16%, in line with their stated intention to exit fully by 2025, '26.

With that, I'll now hand over to Katie.

[Katie Murray, executive]

Thank you, Paul. I'll comment on the third quarter using the second quarter as a comparator. Income, excluding all notable items, increased 5.1% to GBP 3.8 billion. Operating expenses were 9% lower at GBP 1.8 billion, mainly reflecting lower severance and other staff costs. And there was an impairment charge of GBP 245 million or 25 basis points of loans. Together, this delivered operating profit before tax of GBP 1.7 billion. Profit attributable to ordinary shareholders was GBP 1.2 billion and return on tangible equity was 18.3%.

Turning now to income. Income, excluding notable items of GBP 3.8 billion was up 5.1% with growth in both net interest income and noninterest income. Across the three businesses, excluding the benefit of an extra day in the quarter, income grew by GBP 206 million. All three businesses delivered higher net interest income. Balance sheet growth was supported by margin expansion as tailwinds from the product structural hedge and treasury more than offset the impacts of the first base rate cut.

Group net interest margin increased 8 basis points to 218 basis points, with expansion across deposits, funding and other. Growth in noninterest income was driven by commercial and institutional, reflecting continued strong lending and payment fees as well as foreign exchange. The first cut was in line with our expectations, and we continue to assume rates will fall further in the fourth quarter, reaching 4.75% by the end of the year with a further 5 cuts in 2025 to 3.5%.

Of course, the actual outcome may differ from this assumption. We are pleased with the year-to-date income of GBP 10.8 billion, reflecting a strong performance across the balance sheet. As a result, we now expect 2024 total income, excluding notable items, to be around GBP 14.4 billion and we are upgrading our 2024 return on tangible equity guidance to greater than 15%.

Moving now to lending. We continue to be disciplined in our approach and focus on deploying capital where returns are attractive. Lending growth was broad-based across our businesses. Gross loans to customers increased by GBP 8.6 billion or 2.4% to GBP 367.2 billion. Taking retail and private banking together. Our mortgage book return to growth as expected, with balances up by GBP 3.8 billion, supported by higher gross new lending and the addition of a GBP 2.3 billion mortgage book for Metro Bank at the end of September.

We continue to grow our share of unsecured lending and balances increased by GBP 500 million to GBP 16.6 billion across both credit cards and personal lending. Within commercial and institutional, lending to mid-market customers grew by GBP 1.5 billion, driven by increased term lending. There was also strong growth of GBP 3.2 billion in Corporate & Institutions, including demand for supply chain finance and sustainable finance.

I'll turn now to deposits. Deposits increased by GBP 2.2 billion to GBP 427 billion, with growth across all three businesses. In Retail Banking, there was strong growth in savings driven by instant access products and variable rate ISAs. In Private Banking, there was also good demand for instant access savings. In commercial and institutional, deposits grew across both commercial mid-market and business banking customers. Migration from noninterest-bearing to interest-bearing deposits continued at a slow pace as expected. And there was no material change in customer behavior following the first base rate cut.

Noninterest-bearing balances remained at 32% of the total, and term accounts remained at around 17%. The average rate of interest we pay on our customer deposit funding has remained flat, reflecting the lag effect on pass-through and small changes in mix. Turning now to costs. We remain on track for other operating expenses to be broadly stable with 2023 at the full year, excluding the increase in bank levies of around GBP 100 million and costs associated with the retail share offering.

Other operating expenses of GBP 1.8 billion for the third quarter were 7.5% lower than the second, mainly as a result of lower severance and other staff costs. You will remember the severance and property exit costs were elevated in the first half as we accelerated our work on simplification, including our announced exit from Poland. Other operating expenses for the first 9 months were up 0.7%, excluding bank levies and the retail share offer costs.

As we look ahead to the fourth quarter, other operating expenses are expected to be higher than the same quarter last year. As we expect to incur further deference and property costs as well as a higher bank levy charge of around GBP 120 million.

Turning now to impairments. Our diversified prime loan book continues to perform well. We are reporting a net impairment charge of GBP 245 million for the third quarter or 25 basis points of loans. This takes a 9-month charge to GBP 293 million, equivalent to 10 basis points. Key drivers have changed in the second quarter, but the absence of post-model adjustment releases, together with a single name charge. Our balance sheet provision for expected credit loss still includes GBP 299 million of PMAs for economic uncertainty, similar to the second quarter.

In retail banking, the third quarter charge of 28 basis points reflects both the absence of a PMA release and unsecured growth, along with a charge of 31 basis points in Commercial and Institutional. However, we still expect a full year loan impairment rate below 15 basis points.

Turning now to capital. We ended the third quarter with a common equity Tier 1 ratio was 13.9%, up 30 basis points. We generated 57 basis points of capital pre-distributions, driven by attributable profit, which added 65 basis points. RWAs increased by GBP 0.9 billion to GBP 181.7 billion, consuming 7 basis points of capital. Strong lending growth and the addition of the Metro mortgage portfolio added GBP 3.4 billion of RWAs, and this was partly offset by GBP 1.3 billion reduction, mainly as the result of another significant risk transfer transaction.

As usual, we accrued 40% of attributable profits towards our final ordinary dividend. We are pleased to receive the PRAs policy statement on Basel 3.1 and have spent time digesting this. We estimate this will result in RWA inflation of around GBP 8 billion on the 1st of January 2026, largely driven by the removal of the SME and infrastructure support factors. The outcome of the PRA, Pillar 2 consultation will give us a better understanding of how this RWA inflation will be mitigated as the PRA intends.

We continue to expect RWAs of around GBP 200 billion at the end of 2025, including the impact of Basel 3.1 on the 1st of January 2026, and we continue to target a CET1 ratio in the range of 13% to 14%.

Turning now to tangible equity per share. Tangible net asset value per share increased 12p to 316p. Earnings added 14p and the unwind of the cash flow hedge reserve added a further 5p as rates came down in the quarter. This was partly offset by the payment of our interim dividend of 6p. TNAV per share has grown 26% over the last 2 years, supported by a 40% reduction in share count in that time.

Finally, turning to the full year guidance. As I mentioned earlier, we are upgrading our income and returns guidance. And for the full year, we now expect income, excluding notable items, to be around GBP 14.4 billion. Other operating costs to be broadly stable with 2023, excluding additional bank levies of around GBP 100 million and the retail offer cost of GBP 24 million. A loan impairment rate below 15 basis points and a return on tangible equity greater than 15%.

And with that, I'll hand back to Paul.

[Paul Thwaite, executive]

Thank you, Katie. So to conclude, we're pleased with the continuing momentum in the business. As you've heard, we have upgraded our 2024 income and returns guidance today, and we're increasingly confident about the future. As we continue to grow income, control costs and actively manage both our balance sheet and risk, the business remains well positioned to deliver strong shareholder returns. We'll update you on our guidance for 2025 at the full year in February. Thank you. We'll now open it up for questions.

[Operator]

[Operator Instructions] We will now take our first question from Guy Stebbings, BNP Paribas Exane.

[Guy Stebbings, analyst]

Apologies for that. Hopefully, you can hear me now.

[Paul Thwaite, executive]

We got you now.

[Guy Stebbings, analyst]

Brilliant. Sorry about that. The first question was on margins and then I had a second question on NatWest Markets. So on margin, Slide 21, deposit spreads were positive again. I presume that's the hedge more than compensating for the base rate impact. I was wondering if you could perhaps talk a little bit more about the timing of the base rate cut, sort of timing of the past to help us think about it in future periods? Or perhaps another way to ask it is looking at Slide 23, where the deposit curves were also pretty flat Q-on-Q. If we're still yet to see sort of the benefit from the August rate cut work through there?

And then on the funding and other line, 4 basis points positive this quarter. It feels like quite a hard one to model from the outside. So just any help there as to how to think about that into future periods? And then on NatWest Markets, another good quarter. Capital markets are up, I think, 50%. And year-to-date, we're about [indiscernible] or so already. And that's more than you used to talk about in terms of the contribution from NatWest Markets. I recognize you sort of report it a bit differently or talk about it a little bit differently than you used to in the past. But how should we think about the contribution there? And if that's sort of base we can grow into next year?

[Paul Thwaite, executive]

Thanks, Guy. Katie, I'll take the markets one and then you comment on the...

[Katie Murray, executive]

Yes. Sure, perfect. Perfect.

[Paul Thwaite, executive]

So Guy, on markets, I'd encourage -- I wouldn't encourage you to think about that any differently. It's an important part of the commercial and institutional franchise. As you know, we've done a lot to simplify that business over many years. It's got a strong FX franchise. It's got a strong capital markets franchise and a smaller rates business. Obviously, market conditions this year have been supportive. You can see that the business has traded well through quarter 3 in respect of the Capital Markets business.

Its performance will be very much dependent on market conditions, but we feel like we've made over the last 18 months, 2 years, big steps in terms of rightsizing that business and aligning it with the opportunity there is in our core commercial base. So that's how you should think about it. Katie, on deposits?

[Katie Murray, executive]

Yes, sure. There was a lot in that one question, Guy. So I'll try to make sure I pick the right things off. So what I would say in terms of the kind of flatness of that customer rate that we're seeing, it has been impacted by the rate cut. But what you've also seen is that we've also had a benefit coming through in terms of the instant access. We -- I said in my prepared comments earlier that we're seeing, for example, within the Private Bank, customers having greater preference for that. And the problem is when you pay with these kind of margins at this sort of level, it wasn't enough to kind of move the piece.

So you do have different -- a couple of different things going on within that line. In terms of the base rate cuts, you know that we have it in our sensitivity. We model the delay within there. The way to kind of think about it is, obviously, there's a kind of statutory of 14 days that everybody has. We found that when you -- for our retail bank that when you cut the rate, it's about a month until it hits the customer from when we first start that decision or when the rate cut goes down, we make the decision to when it actually hits the customer. The commercial is a little bit longer in terms of that time, but you can see them kind of coming through.

So I think you started to see the impact of it, but obviously not a whole quarter of the impact given where it was. And then your last question around the funds and other. So that was increased by 4 basis points, as you can see on the slide, very much supported by active treasury management. There's a few things within there that I would kind of highlight that have kind of helped that treasury tailwind within income, which you see coming through in the NIM walk.

So we have had strong deposit growth, as I mentioned already, that led to sort of GBP 2 billion growth in our average interest earning assets. We've also done some redeployment of a part of the liquid asset buffer from short-dated gilts during Q2 through the whole quarter benefit of those in Q3, and we see most of those gilts maturing off during Q4. And then we've also benefited a little bit from the spread widening that we've seen in the treasury repo activity. And those kind of combined together to kind of show that strength of that funding and other line. Thanks, Guy.

[Operator]

Our next question comes from Chris Cant from Autonomous.

[Christopher Cant, analyst]

I had 2, please. The first was on your revenue guidance for '24 and specifically the implied decline in revenue sequentially into the fourth quarter versus 3Q on a clean basis. I was just wondering if you could unpick your thinking there for us how much of a sort of normalization in other income you're expecting within that because obviously it has implications as to how we'll think about 2025.

And the other question I had was in respect of Basel 3.1 and your capital target. So your 13% to 14% range has within it headroom to your sort of effective group MDA of 130 to 230 basis points. And that's a bit above your U.K. peers. So how should we think about how much a Pillar 2A reduction would convert into a potential reduction in those target bands in your case? Would we see more or less a full pass-through of a Pillar 2A reduction given the comparatively high level of headroom you currently allow for?

[Paul Thwaite, executive]

Thank you Chris. Katie?

[Katie Murray, executive]

Sure, lovely. Thanks very much. So if I look at the kind of Q4 income versus Q3, there's a couple of things I would sort of unpick in there. So first of all, in Q3, all three businesses delivered higher income, supported by the balance sheet growth and margin expansion. And it's also important to remember there was one extra day in the quarter that gives a benefit in that quarter of about GBP 31 million.

Noninterest income was also strong given the markets activity that Guy was referring to and also the transaction and lending-related fees as well. And also those income tailwinds that we saw in treasury, I spoke about a moment ago. When I do look at Q4 income and I do expect it to be lower than Q3. I expect some seasonality in that noninterest income as market activity normalizes. The income tailwinds from treasury are not expected to repeat. And also remember that in our assumptions, we've got further base rate cuts, which we're expecting in November. I do think it's important before we all overly focus on that Q4 income being lower than Q3 is to remind you that we have upgraded guidance today to around 14.4%.

And part of that upgrade is also because of the strength that we've seen coming through in our own view of Q4 from when we last spoke in July, and it's been a big contributor to the upgrade of the guidance as well. So although the shape is maybe not what you exactly like, it's important to feel that and to remember that. And that's also why we feel positive as we move forward from here.

In terms of your question on other income, I know the other income line is more frustrating in terms of that center income. What I do say is that you should always work to this number being roughly 0 since we do seek to allocate this out to the business. In Q3, it was minus GBP 9 million, down from GBP 46 million in Q2. What we try to do -- so in Q2, then there's income left in the center, we would normally allocate that out. We kind of did a bit of a catch-up in Q3. So I do think as you think about that line, it is to think about it as 0. And I know that's a little bit frustrating for you all as well when we have little bits left within there.

If I move on to Basel 3.1, I'm not going to surprise you too much here, I suspect, Chris, by sort of saying, we're looking at Pillar 2, the guidance is out. We're obviously talking with the regulators and things like that. But at the moment, it's really too early to give you a guidance on that. We're comfortable with the 13% to 14% headroom and target that we're working with just now. And we've always said that we'll look at that in time, and we just need to go a bit further on with Pillar 2. So we'll talk -- we'll update you as soon as we feel comfortable to, and we've got a bit more clarity on how the actual mechanisms will work to achieve the aim that the regulator is seeking.

[Paul Thwaite, executive]

Thanks, Chris. The consultation, obviously, Chris, is ongoing.

[Operator]

Our next question comes from Benjamin Toms at RBC.

[Benjamin Toms, analyst]

Your cost of risk number has been a bit erratic year-to-date. But given that you still have about GBP 300 million of overlays, is it sensible to assume that the rate trends are below through-the-cycle levels over the next 12 months? That's the first question. And secondly, the Sainsbury's transaction is due to close next year in the first half. Can you help us with the potential contribution this might have to the P&L? And will there be any day one impacts to impairments that we should think about in our modeling?

[Paul Thwaite, executive]

Okay. Thanks, Ben. I'll say a few words on impairments and cost of risk. So if you look at year-to-date, our cost of risk is 10 basis points, so relatively low. The performance of the portfolios remains very strong. Customers have been very resilient. There is a delta between quarter 3 and quarter 2. You'll remember that we had some releases in quarter -- PMA releases in quarter 2, both on the retail and the C&I side. There's no material releases in the quarter 3 number.

So that explains some of the differences between quarter 2 and quarter 3. We upgraded our guidance or improved our guidance at the half year around cost of risk, I think less than 15 basis points. Katie outlined in her pre-prepared words that we confirmed our guidance on that. We believe we've got a good business mix that's low-risk, high-quality prime assets, and we're very confident in the credit performance of the portfolios.

On Sainsbury's, you're right, the acquisition is planned to close in the second half of the year. We said at the time of the announcement that it's RoTE accretive. It's around GBP 2.5 billion of loans and deposits. We haven't given any more detail at this stage, but I'd emphasize that at the point of announcement, we said it's RoTE accretive upon completion.

[Katie Murray, executive]

Just one thing, Ben, on your specific question there. We will recognize an ECL on day one. That's absolutely standard. As you know, it will be a good book charge that we'll bring in at that time as we complete it in H1 next year.

[Operator]

Our next question comes from Armaan Raka from Barclays.

[Unknown Analyst]

I've got 2 questions, but -- sorry, I have to just ask 0.5 of another one because I'm just getting loaded inbound on it. Katie, just on this funding in other, 4 bps positive, I guess, not to repeat next quarter. I mean, I'm never quite sure if that's a headwind because the non-repeat of income to me is a headwind.

So should I be shaving off a couple of bps on my NIM as I go into Q4? Or is it literally this is not -- don't expect plus 4 in the NIM bridge in Q4? Because I need to get that one out of the way because I've had about 4 or 5 questions on that this morning.

[Katie Murray, executive]

Well, why don't I deal with that one very quickly for you? So I would say not -- we're not guiding on NIM, as you know, but we don't expect that to repeat, but I would think of it more in the way that you're describing it is don't expect another 4 bps uplift from it because we're also not expecting it to reverse. Your real question one.

[Unknown Analyst]

My real question. Okay. Two, hopefully quick ones. On your RWA guide for '25, so thank you very much for the clarification on Basel. There presumably is some other bits and pieces as well though, right, CRD IV and other. So is there any color? I mean, ideally, if you could tell us a number, would be great, but really helpful. And the more pertinent point to that question is there is an implied loan growth that you're kind of pointing to which is pretty decent. And I know we've got a couple of billion coming from Sainsbury's. But to me, it looks like you could comfortably budget for mid-single-digit loan growth.

Given the performance in Q3 and I think forward lead indicators that are building from here, presumably, you're confident on your loan growth prospects next year and mid-single digit sounds very achievable. That's the question. The second question is on the capital. 13.9% is a great print. You have the capacity to participate in a directed buyback if there was one to come in November and December.

My question is, how comfortable are you running your CET1 ratio at the bottom end of your target? Indeed, would you tolerate it being below 13.0% intra-quarter because presumably you're very confident in cap generation. I guess I'm trying to get a sense of to what extent you'd be willing to participate in the DBB and what the kind of range is around that.

[Paul Thwaite, executive]

Okay. So I'll take the capital one and then...

[Katie Murray, executive]

And I'll take RWAs and loan growth. Perfect.

[Paul Thwaite, executive]

[indiscernible] and lending. So Armaan, on capital, as you've highlighted, it's a very strong print, 13.9%. We're very pleased with the capital generation through the quarter, 57 basis points in the quarter before distributions and obviously, around 197 basis points year-to-date. So that's good. As you highlighted, given the change in the U.K. listing rules and obviously, the shareholder approval we got at our AGM, that does provide another DBB opportunity before the 1-year anniversary next May.

That, as I always say, is ultimately a decision for the government on the timing of that in terms of directed buybacks. So our preference hasn't changed. Our preference is DBBs, and we remain keen to support the government's exit and participate if indeed that's what they want to do. In terms of the -- where we're happy to operate, we -- Katie has talked in the past about being happy to toggle within the range. But what I wouldn't say is you shouldn't expect us automatically to pay down to 13%. We've got to think about the wider path to our RWA target of GBP 200 billion. And obviously, as you alluded to, some of those -- some of the capital will be consumed by the growth given the momentum we've got in our three businesses.

[Katie Murray, executive]

Perfect. On RWAs and loan growth. So let me talk about RWAs a little bit more widely. I mean, as you say, I mean there's a number of different things that will come to us on RWA. CRD IV, we obviously have the op risk charge that we have in every quarter one. Sainsbury's is coming in. I think one of the things as I look at the walk we've got given you for RWAs, we had book growth of GBP 2.5 billion in Q3. We're very pleased to have seen that. What we're pleased about it's really across the broad book and across the whole bank, which I think is really a demonstration that the machine is working and our customers are responding to kind of more positive economic scenarios.

We also were pleased to mitigate that with the RWA management. We've done a lot of RWA management this year. We're close to kind of GBP 6 billion. I wouldn't take that as a run rate. Necessarily, there's obviously when you start, you get a natural kind of first sort of push, but it is something that we do expect to see as a feature as we go through here. CRD IV, we're not quoting numbers on that. We -- our philosophy always is to tell you things when we are comfortable to do that, and we will as that goes through. But we are -- we're very pleased today to confirm -- reconfirm that around GBP 200 billion number, reflecting the acquisitions we've done since the start as well. And I think the clarity that we've now received on Basel 3.1 is very helpful to us.

[Operator]

Our next question comes from Alvaro Serrano from Morgan Stanley.

[Alvaro de Tejada, analyst]

Can you give some details on the hedge in the quarter because -- and going forward, you've now sort of posted several quarters of deposit growth. Can we start thinking about growth in the hedge next year? And where I'm coming from is, obviously, your guidance is pretty cautious for Q4 on revenues, and it sounds like NII sort of is part of it. What we've seen here in Q3 among U.K. banks and you in particular, is it what component is front-loading of growth versus sustainable growth in 2025 as we think about 2025?

Any commentary there would be appreciated. And then a quick one on the provision and the single name provision. Can you reassure us or give us any details on coverage on that single name? Are we going to see more top-ups in the coming quarters? Anything you can reassure us on there would be appreciated.

[Paul Thwaite, executive]

Okay. Thanks, Alvaro. Katie, I'll let you talk to the hedge. But Alvaro, just to comment, I guess, in our view, it's not cautious guidance. We're obviously upgrading today both on previous expectations and consensus. So that doesn't sound too cautious to me. Katie, hedge?

[Katie Murray, executive]

Sure. I'll do the hedge, and I'll pick up that little impairment question at the end as well. So in terms of the hedge, I don't have much more to say than I've already shared with you quite extensively. And our -- we repeated the H1 disclosure in the back of the pack as well, so you don't need to go searching for that. But at the moment, the product hedge H1, GBP 175 million. We're expecting that to reduce to GBP 170 million by the end of 2024. We do expect to continue to have that moderate increase in the hedge income year-on-year in '24 and then that tailwind really increasing as the notional stabilizes.

A stabilization of deposits supports that expectation. And we do think the hedge income will grow into 2025 and continue to improve into 2026. We talked about GBP 800 million in 2025. And look, our real confidence in that comes from the mechanistic approach that we continue and the amount of income we've already got locked into both of those years.

When I think of the C&I impairment, I think in any quarter where you have -- you're recognizing impairment, naturally, you see a bump up in that quarter. If I look at the C&I impairment charge for the year-to-date, it's 5 basis points. So it really reflects an incredibly strong group book that is performing well. And when you compare, and I'm sure you will, Alvaro, the kind of where we were Q3 and where we are Q2 in terms of their impairment, you can see that in C&I, our Stage 3 loans have gone up by GBP 148 million in Q3.

Our ECL has gone up by GBP 123 million, and our ECL coverage has gone from 37.5% to 40.3%. So really, we're well provided for in there, and there's a real strength of the book within those provisions. And the 5 basis points for the year is really a historically very low number.

[Paul Thwaite, executive]

Yes. And we wouldn't Alvaro comment on individual clients, but I think it's fair to say, we believe that we're very well covered in respect of that particular name.

[Operator]

Our next question comes from Jonathan Pierce from Jefferies.

[Jonathan Richard Pierce, analyst]

It's good to be back, having seen the numbers this week and yours today. I've just got a couple of small ones actually in the scheme of things, but I'm interested nonetheless in the answers. The customer funding rates across the three divisions in the third quarter were only down about 1 basis point. If you wait by the deposits of the businesses versus Q2. And obviously, that's because you haven't passed on much in the way of the rate cut until later in August on the retail side and then I think October on the corporate side.

Can you give us a sense as to what the impact of that deposit repricing lag was in Q3. I mean I presume it's going to be a bit bigger in Q4, but I'm just thinking a bit more out into next year when this becomes possibly at some point, a tailwind rather than a headwind. So the deposit repricing lag in Q3. The second question, obviously, last summer, I think in Q3, your term deposit base increased by about GBP 20 billion net. So a very big set of inflows in those 3 months. And a lot of those, I guess, matured in the third quarter of this year. I think the default was for those customers to drop into a primary saver account, which has got about 200 basis points of margin.

So maybe you can tell us what those customers did in the third quarter and whether there's a sort of bit of a temporary benefit in Q3 as well from a brief period whilst customers decided what to do with their money. And at the same time, we're earning you 200 basis points of margin.

[Paul Thwaite, executive]

Okay. Katie, why don't you take the deposit repricing lag, and then I'll talk more generally about the customer deposit trends.

[Katie Murray, executive]

Sure. Perfectly perfect. Thanks, Paul. So as I look at it in terms of the funding rates, you're absolute right. We've seen very little kind of movement in those rates in the quarter. They do vary a bit by franchise. It's largely the impact of the lag effect, but it also reflects kind of net flows. And importantly, as you understand, the mix of where those flows are going. I'm not quantifying the repricing lag, but one of the things I think that you could look at and work out from is some of our disclosures. You can see on the deposit margin expansion that we've had within the NIM that if I looked at Q2 and I compare that to Q3, it's gone from 6 basis points to 4 basis points.

So that would be a little bit of a proxy, I think that could help you in terms of kind of quantifying what that might look like. Paul, do you want to take that?

[Paul Thwaite, executive]

Yes. Thanks, Jonathan. On deposits, generally, we're very pleased with the growth in all three of our businesses actually, and that's three quarters -- consecutive quarters for all three businesses. So we're pleased with that. You can see, as you alluded to, the level of term deposits has stabilized over the last couple of quarters. On your point around automatically defaulting into instant access, that actually isn't correct. Customers had a choice at origination around which account they'd go into. But more interestingly and more importantly, is a high proportion of customers are renewing into fixed-term accounts.

Obviously, the pricing of those accounts has changed given we're a year on, but a significant majority are renewing. We've done an awful lot of work over the course of the last 12 or 18 months in terms of developing our savings product range. Our customer journey is making it much easier for customers to understand that the products are available. And I'm really pleased those investments are paying off. We've also invested considerably in our savings kind of analytics, which has given us great insight into kind of customer behaviors. So I think we're seeing the benefit of that, both in terms of overall growth in deposits, but also surfacing offers to customers and allowing them to renew if they want to. Hopefully, that gives you a sense of it.

[Operator]

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

[Benjamin Caven-Roberts, analyst]

Just one on the macro front. So looking ahead to the budget on the 30th of October, what is the key outcome that you're monitoring as a management team? And are there any particular areas which give you either cause for confidence or cause for concern? And then just one follow-up on noninterest income. So overall, that was notably stronger than expected in the quarter and grew obviously 5% year-on-year. I mean looking beyond the NatWest Markets element, is there anything within that, which you would not consider underlying growth? And how should we think about sort of run rating that forward?

[Paul Thwaite, executive]

Thanks, Ben. Good to hear you. I'll take the first one, Katie. So on the budget, you won't be surprised, Ben, I'm not going to get drawn on individual measures. I think there's enough speculation, and it will continue to be over the course of the next 4 or 5 days. In terms of what I'd like to see and what we'd like to see at NatWest from the budget, I think we'd like to see a budget that helps support growth and investments in all the regions and all the countries of the U.K. So we'd like to see a pro-growth budget.

Obviously, that needs to strike a balance between stability in the public finances, but also supporting and driving investment. So we're monitoring all the measures that would contribute to that at a macro level. Obviously, there's a broad range of individual measures that will affect different parts of our client base, whether that's our wealth client base, whether that's our retail customer base, whether that's our businesses looking to invest. So we have, I guess, a set of data points and a set of metrics at a more micro level as well.

So we're prepared for that. And I guess we'll all find out next Wednesday exactly which measures the budget will contain or not, Katie?

[Katie Murray, executive]

Sure. Perfect. Thanks very much, Paul. So look, as I look at noninterest income, we are pleased with our performance in noninterest income. We increased by 7.1% over the last 9 months, which I think is a very kind of strong print. For the quarter across our three businesses, that was up by 3.8% compared to Q2. That was driven payment services, lending and finance fees, currencies income and market and also the AUM fees.

As I look forward from this, you know, Ben, that we don't guide on noninterest income specifically. We give you total income guidance. There is obviously some seasonality that we see that comes through more in Q4, but has different reactions, obviously, when you get to Q1, that capital markets activity has slowed down a little bit in the run-up to the budget and U.S. election. Markets activity does normally reduce a little bit in December. So we'll see how that kind of flows through. And obviously, within retail, some of the things like FX-related spend is just less within the -- outside of the summer months.

But over the medium term, we are confident in our investment initiatives for noninterest income that they can deliver growth for us. Some of the areas that we're working on is investment raise and fees as we grow our AUM stack. You saw some really strong growth in that this last quarter. Our payment services offerings and areas of our markets businesses such as FX, where we performed really very well. Obviously, there's other things around customer confidence and GDP growth as well as the kind of markets environment being conducive for C&I. So there are a few things to think about as you look -- take that noninterest forward. Thanks very much, Ben.

[Paul Thwaite, executive]

Thanks, Ben. I think it's another example of where our focus and our investments, we're now starting to see the benefits as we get into delivering the strategy that I talked to earlier in the year.

[Operator]

Our next question comes from Robert Noble of Deutsche Bank.

[Robert Noble, analyst]

Just the point you made on short-term gilts maturing in Q4, what impact does that actually have? Presumably, the gilts are at lower yield than cash at the moment. So all else equal, doesn't that improve income? And then secondly, can you just walk us through the economics on the credit card product? So how much of the lending is balance transfer? What rate do you book it in that? And how do the returns work against 100% risk weight on the assets there?

[Katie Murray, executive]

Yes, sure. So if I look at the treasury tailwind, first of all, so just to kind of be really clear on what I said, what we did in Q2 was that we moved some of our liquid asset buffer from cash into short-dated gilts, and we're seeing them maturing in Q4. So what you had there was the benefit of a whole quarter in Q2 -- sorry, in Q3, forgive me. And then obviously, we've -- some of them have already matured. We'll continue to look at that as we move forward in that, but we're comfortable that has given us a real benefit.

We do look at it on a spread basis as we do some swapping out as well. In terms of the credit card growth, as we see them coming on, obviously, a portion of -- a large portion of the growth of the initial part is done by the 6-month transfer. And then -- so that's the kind of 0% led. So at the moment, you obviously -- your income is kind of delayed for those sort of 6 months, we reflect that in the EIR and things like that. And then as they mature, we have assumptions of how many we retain. And then obviously, you can start to see with the improvement that we're seeing in the returns within that area that we're getting the benefit of that.

It is interesting. We've also just launched our travel card, which has been launched now. That's not 0% balance transfer and it's going -- it's working quite well. We're pleased with its launched within there. So obviously is generating income as you go through. I think what Paul and I are pleased about with the credit card book is it's really maturing very well in terms of from where we started to the share it has of market today up to 9%. The addition of Sainsbury's when it comes on in next year will be important to really build that growth. And we do see this as an important contributor as we move forward from here.

[Paul Thwaite, executive]

And Katie, I'd just add it. We've consistently maintained a very kind of high-quality credit book. So it's very much a prime book. We haven't needed to change our risk appetite in terms of our ability to grow that. A lot of the growth comes from our existing customers and providing great credit card facilities to existing banking customers.

[Operator]

Our next question comes from Andrew Coombs at Citi.

[Andrew Coombs, analyst]

If I could just kick off, I think, the one line item we haven't addressed yet, which is OpEx. You obviously haven't changed your full year guidance, but the Q3 has come in somewhat better than consensus expectations. I appreciate that Q3 is always usually a lower seasonal OpEx charge given where the levy gets booked and given when severance usually gets booked. But it does look like there is an underlying headcount reduction in the quarter, notably in the retail bank. You talk about some lower severance property exit costs. So just anything you can say in terms of trajectory on the OpEx base, not only into Q4 but into 2025 as well, given some of the steps you've been taking?

[Katie Murray, executive]

Yes, sure, absolutely. So I think -- and you have heard me in my comments is when you think about Q4, we do expect our costs to be higher in Q4 than they were in the fourth quarter of 2023. So I would compare them there, I think, as you're doing, Andrew. I think it's important to kind of take a step back and think about what we're trying to do on costs. What we're working really hard in terms of simplification is to make sure that we can create capacity within the costs so that we can deliver on our full year guidance, but still do the structuring and simplification changes that we want to make. We're not looking to add additional costs on top.

So very clear that we will deliver on our full year guidance of broadly flat. And then some of the changes that you'll see coming through in terms of severance and property and things in the fourth quarter are all built into that guidance so that we can make a head start on the 2025 numbers. I'm not going to give you guidance today on what we're going to do on 2025. But I think what's really important is this is something that Paul and I are incredibly focused on, and we do see that it's really important that we make sure we create capacity within our cost base to be able to enable the investment that we want to do within the business.

[Operator]

Our next question comes from Amit Goel of Mediobanca.

[Amit Goel, analyst]

So I have maybe one main kind of follow-up question. Just coming back actually on the RWA progression, and thank you for the guidance on the inflation of the GBP 8 billion. So I guess that gives you about GBP 10 billion factoring in Sainsbury and so forth. Just curious how much RWA management you think you could achieve, whether that kind of steps up or whether a lot of RWA management is done. So just thinking about that in terms of your capacity for incremental loan growth. And then also what you're thinking about the pacing as we get rate cuts? Are you expecting it to kind of step up later? Or is it kind of fairly even as we move forward?

[Paul Thwaite, executive]

Okay. I'll take -- thanks, Amit. So on, I guess, capital management and RWA. So it's clearly one of our key strategic priorities to work the balance sheet harder. You can see the progress that we've made this year, the capital management actions that have happened in quarter 2 and quarter 3. We will have a systemic approach to that. So we will be driving more capital management activity. We don't guide on the exact amounts. But I guess if your question was kind of is it done, the answer is no. We believe there's more opportunity around capital management activity.

If you look at our relative position compared to our peers, that would suggest we do have the ability to drive more good capital-efficient activity. We'll continue to do that. As you know, the way these transactions work, I wouldn't read forward from a particular quarter that, that's going to be the output for the next quarter. But we definitely have potential to drive capital management harder, and we will do over the course of the plan. Katie, on rate cuts?

[Katie Murray, executive]

Yes. So rate cuts, we've got 5 for next year. First one is in line with the first MPC meeting in February, and they will kind of -- they're spread sort of throughout the year. The kind of various meetings that come up some that we don't -- we're not assuming any, but we do assume that they start early in the February meeting.

[Operator]

Our next question comes from Ed Firth of KBW.

[Edward Hugo Firth, analyst]

I actually had one, but just one sort of supplementary. There have been a few questions on the impact of the rate cut. But just to be absolutely clear, in your sensitivity, I think you said it was about GBP 160 million for a 25 basis point cut. That's an annualized number, so I guess 40 for a quarter. Just to be clear, that is broadly what you saw in Q3. Should we assume that, maybe a little bit more because of the delay on the deposits, but orders of magnitude, your sensitivity is playing out as expected. I guess that's my -- that's a question rather than a statement. That's my first question.

And then the second question is slightly more left field. Looking at your balance sheet, you still got about 15% of your assets now sitting with the Bank of England, even after quite a lot of QT has gone on. Am I right in thinking that as we roll that forward, you would expect that to come down as the Bank of England continues with its tightening, firstly? And secondly, if we do see that come down, how should we expect that to impact the P&L? I mean, is that like a headwind or a tailwind for the margin? And what sort of spreads -- how do you actually manage that as a revenue pod?

[Katie Murray, executive]

Thanks. I'll take the first one, first of all. So in terms of that sensitivity, we've repeated it at the back of the slides on Slide 26. So you're absolutely right. So it's GBP 167 million, GBP 42 million on the structural hedge and GBP 125 million on the managed margin. Obviously, you're right, that sort of happens on day 1. We've got assumptions of 60% pass-through. We've got -- there's the lag effect. So in theory, 40% a quarter, but actually, the rate cut only came in August, so you're halfway through the quarter, but everything is there for you to be able to do that as we go through.

Look, if I look at it, cash balances will come down. And what we will see is allocation back into securities from cash. You saw us do a little bit of that as we took the opportunity in Q2. The income impact will be driven by the market dynamics and by credit spreads as well. Thanks very much, Ed.

[Edward Hugo Firth, analyst]

Sorry, but just in sort of conceptually, I mean, is that a positive contribution to your margin at the moment? Do you make a good spread on that?

[Katie Murray, executive]

I mean, yes, absolutely. And that's what you saw in those treasury and tailwinds coming through in this quarter is that additional 4 basis points, coming through in funding and other. So -- and what [indiscernible], our Treasurer does is he looks very much to try to make sure that we're managing that kind of liquid asset buffer in the right way so that we're within the rules we set, which are very strict, but that we do a little bit of margin maximization.

[Operator]

Our next question comes from James Invine of Redburn Atlantic.

[James Frederick Invine, analyst]

I just had a question on loan growth. I mean, generally, you sound pretty positive on it. But one area in particular that's been growing really well is that Corporate and Institutions line, so up very strongly in the quarter. I think versus a year ago as well, it's a double-digit percentage increase. Is that kind of growth sustainable? I mean you really think this kind of momentum can continue?

[Paul Thwaite, executive]

Okay. Thanks, James. So as you say, I think the lending growth we've shown this quarter and year-to-date has been encouragingly broad-based. Actually, you can see the mortgage portfolio growing in quarter 3. You can see the cards business. But as you rightly point out, the commercial and institutional franchise has been growing well. I'm particularly pleased actually that the mid-market business has grown for 3 quarters on the run because to me, that's the barometer of the U.K. economy. That's the kind of the mid-market customers all around the U.K. So to see that growing 3 quarters in a run is very encouraging.

And I think testament to some of the development work we've done around the product and the lending journeys. On the true -- the very large Corporate and Institutional, the nature of that business, as you know, is it can be a little lumpy. It depends on big transactions. The growth was particularly strong in quarter 3. It might not be so strong in quarter 4, given the growth that we've seen in quarter 3. But what I would say more broadly is if you think about the lending demand there, it's for things like the energy transition, it's for infrastructure, whether that's physical or digital infrastructure, it's supporting large -- our large corporate clients.

So you would expect through the cycle, assuming a healthy economy, demand in that segment to remain robust, and we're very well placed to take advantage of it given the expertise we have in some of those specialist areas I mentioned.

[Operator]

We will now take our final question from Jason Napier from UBS.

[Jason Napier, analyst]

Well done on a very good set of results, all the right trends are there, and I think we've probably handled most of the P&L line items so far. Just one area I wanted to probe if I could. The question on C&I growth and the budget next week. There's a lot of talk about quite a lot of investment going into things like infrastructure, a place where banks has a strong heritage. I wonder the 2 things you could talk about.

One, does Private Credit change any of that in terms of competitive dynamics, the share of the debt growth that the banking sector can sort of own? And then secondly, things have changed on that front. There are probably, I don't know, 15 or 20 banks that have now got linkups with private credit funds they put in place to originate the distributed infrastructure. Is that the right sort of plan to have? Is that part of the SRT future for NatWest?

[Paul Thwaite, executive]

Thanks, Jason. I think I got most of that. For your benefit, the line was a bit distorted. I think that I'll answer what I thought the questions were and you can come back and tell me. I mean one was around just a general view on private credit. And then I think you're alluding to, I guess, the series of announcements there's been on kind of private credit partnerships. So I'll try and I'll cover those 2 points, but do let me know if that wasn't.

I think generally, obviously, there's been a lot of coverage around, I guess, the private credit market given the increasing role that nonbanks are playing, whether that's capital to real economy, residential mortgage, resi loans, corporate loans, be that real estate or infrastructure. So there's no doubt it's an important asset class. I think for large incumbent banks like ourselves, it's important to remember that we've been engaging with, I guess, with these customers for an extensive period of time.

Many of them are customers in themselves, all the participants that you know are customers of ours. Some of those have been customers actually for over 20 years and both for financing, but also for risk management. So from our perspective, it's not really a new area. We think in terms of the business we do, we're very comfortable. We understand the risk and the returns profile. We've also been very considered in the past around the partnerships that we do have. So we do have and have had for quite a long time, almost 10 years, actually, some distribution partners in terms of the Private Credit space to support our commercial lending business.

The lending business, but also, as I think you alluded to in your second question, the -- to support our RWA and risk management activities. So yes, we've got a number of partnerships in that space. It helps us from the lending front, helps us on the risk management space. There's obvious benefits for us. It allows us to originate and distribute, improves our balance sheet velocity. For the partners, it's very attractive because obviously, they can access the distribution that our bankers and relationship managers have across the whole of the U.K. So it's multiple benefits. We've participated and had partners for a while.

And my personal view, it's an asset class that's only going to expand over the course of the medium term given the historic change in regulations, but also the funds that are flowing into those private credit funds. So I hope, Jason, because it was quite difficult to hear you. I hope that was the sense of it.

[Operator]

I'd now like to hand back to Paul to close the session.

[Paul Thwaite, executive]

Okay. Thanks, Matt. Thanks, everybody. Thanks for joining. Thanks for being very diligent around two questions each. We appreciate that. I hope you have a good Friday, and I hope you enjoy your weekend when it comes. Good to speak to you. Thank you.

[Katie Murray, executive]

Thanks, guys.