Natwest Group PLC

LSE:NWG

Earnings Call Transcript 2018-Q4

[Howard John Davies, Chairman of the Board]

Good. Thank you. Good morning, ladies and gentlemen, and thank you for coming. In 2018, the bank delivered, in our view, a good financial performance despite an uncertain economic outlook and a highly competitive environment, especially in the mortgage market. Paying a dividend for the first time in a decade showed the progress we've made in building a stronger, safer bank that's capable of delivering improving returns for shareholders. We also managed a smooth transition from our excellent previous CFO, Ewen Stevenson, to his equally outstanding former deputy, Katie Murray.Last year, the bank resolved its last remaining major legacy issues: the final settlement with the U.S. Department of Justice relating to RMBS; strengthening the bank's pension fund; and the progress we made on an alternative solution to reducing our market share in the small business market, the former Williams & Glyn program, where all important steps in putting the steps in the past behind us. With those problems resolved, there are now 3 key areas of focus for the board and management team: cost reduction, improving customer service and continuing capital distributions. They are all vital to the future success of the bank. The first 2, costs and customer service, are closely linked. Customers' expectations of all service providers are high. And the range of competitors in the market using diverse, mainly digital delivery mechanisms, is as wide as it has ever been. To compete effectively, the bank has to continue to focus on reducing costs so that we can invest more in delivering better service, and at the same time, continue to simplify processes that are too cumbersome for our customers. On capital distributions, we're giving more detail today on the proposed dividend payout for 2018. And it was good to receive approval from our shareholders last week to participate in share buybacks, should the Treasury deem that appropriate. We're grateful for the support we've received from all our shareholders and are pleased we are now in a position to reward them tangibly for their support.The Brexit process continues. And we have planned for a range of scenarios associated with exiting the EU. We now have a subsidiary in Amsterdam that will be operational beginning of April and have applied for licenses to operate in Frankfurt, which we expect to be functioning at the same time. These entities will allow us to continue to serve our large corporate and financial customers in Western Europe and continue to clear euro payments. As a predominately U.K. and Republic of Ireland-focused bank, our performance in lending growth in the future will broadly reflect the development of those economies. U.K. economic growth remained below its long-term average in 2018. And the prospect for this year is of continued below return to growth. The inflationary pressure induced by sterling's depreciation after the EU referendum has subsided. And wage growth has been stronger, but consumer confidence remains fragile. It remains to be seen what fiscal and monetary policy levers the Treasury and the Bank of England will pull in the event of a sharper economic downturn. But lower interest rates the longer would affect the bank's ability to deliver significant income growth. Overall, the board was pleased with the bank's performance in 2018. We still have more work to do to reach our 2020 ambitions, but we continue to make good progress on improving returns to shareholders and delivering better service for customers.I'll now hand over to Ross and then subsequently to Katie for more detail on the results.

[Ross Maxwell McEwan, CEO & Executive Director]

Thanks very much, Howard, and good morning, everyone. And welcome to our new presentation room. We will be exiting 280 Bishopsgate, the building next door, by the end of 2019 with a saving to the bank of GBP 25 million a year. This is just one of the ways that we continue to simplify this bank and make it far more efficient. It certainly feels like a different bank to the one I took over 5.5 years ago. As I recall, 4.5 -- 4 years ago, I spent the majority of these presentations speaking about our past or the problems that we faced. So it's great that today, with the turnaround complete, we can focus on the future, speaking to the simpler, more efficient and digitally focused bank we are building.In 2018, we've delivered a pretax operating profit of GBP 3.4 billion, which is up 50% from the full year 2017 with income resilient and cost down; an attributable full year profit of GBP 1.6 billion, more than double that we achieved in 2017; a pretax operating profit of GBP 572 million for Q4 2018, and this is our first fourth quarter bottom line profit in 8 years of GBP 286 million; a proposal to pay a final dividend of 3.5p and a special dividend of 7.5p. This will take our total dividend payments to shareholders in 2018 to GBP 1.6 billion, of which around GBP 1 billion will be paid back to the U.K. taxpayer. We finished with a very strong capital position with a 16.2% common equity Tier 1 post dividend payments. And with our balance sheet reshaping largely complete, we are focused on growing lending in our target markets and continuing to improve the returns of this bank. This is a good performance in the face of economic and political uncertainty. And we recognize that the potential impacts this uncertainty will have on the delivery of our 2020's sub-50% cost:income target ratio.Now turning to Brexit. As Howard mentioned, we've put in place plans that will enable us to continue to serve our customers. And we stand ready and willing to support customers from a position of capital and liquidity strength. In 2018, we have delivered GBP 30.4 billion in gross new U.K. mortgage lending in the U.K. PBB. We've made or renewed commitments for around GBP 30 billion of term lending facilities to mainly U.K. businesses. And our Commercial and Business Banking businesses supported total lending of over GBP 100 billion. Given the Brexit uncertainty, we also made GBP 3 billion of funding available through our growth fund to help businesses ready their supply chains for the U.K.'s departure from the EU. But I don't think I'm alone in saying that the political uncertainty around Brexit has gone on far too long. Our corporate clients are pausing before making financial decisions. And this is, of course, damaging the U.K. economy and will affect our income performance. While our financial performance is more assured, we are aware that there is a significant gap to achieve our ambitions to be the best bank for U.K. customers. Today's CMA scores provide further evidence of that. We must do better and we will do better. We've taken the difficult but necessary decision to reshape our branch network over the last few years in response to customers shifting to our digital channels. This continues to have a negative impact on our scores. And the Royal Bank brand also carries a reputational drag from our past legacy issues. We have to get our core services right first time more consistently. And we're investing GBP 1 billion in 2019 to upgrade legacy infrastructure and deliver better products and service for our customers. There is some positive signs of encouragement in some of the CMA scores, where our mobile and online NatWest has improved by ranking 2 places. Now looking at the overall financial performance in more detail. In a highly competitive market, we continue to see unprecedented pressure on margins across the business. In this context, our income, excluding NatWest Markets and one-offs, is resilient on 2017. Costs are down for the group by GBP 278 million or 3.6% against 2017. And in the last 5 years, we have removed over GBP 4 billion from the operating cost base of this bank. We know we still have much more to do to get the bank's cost base to a more sustainable level. And we'll focus hard on cost control again this year. Our full year bottom line attributable profit of 1.6% represents a return on tangible equity of 4.8%. But it's worth noting that excluding the conduct, litigation and strategic costs, our full year cost:income ratio would've been around 54.5% and our return on equity would have been 10.9%. In the recent Bank of England stress test, we obtained a clear pass, a good example of how our strategy of derisking the balance sheet is paying off. And finally, our capital position remains very strong with common equity Tier 1 capital position post dividend payments of 16.2%. In our U.K. PBB, gross mortgage lending was GBP 30.4 billion in the year. This represents 11.3% mortgage market share, supporting a stock share of around 10% and while maintaining an average stock LTV of circa 56%. We are piloting a new innovation in our mobile app, which allows our customers to access preapproved unsecured lending of up to GBP 25,000. Personal loan growth in the U.K. PBB was up 7% and it was of GBP 500 million and it's compared to our full year in 2017. Our exposure in the credit card market remains low at GBP 4 billion or 2% of U.K. PBB's gross lending. Supported by the launch of RBS and NatWest FX-free credit card in May 2018, new business account volume increased 31% compared to 2017.The new management team in Ulster Bank are taking tough but necessary actions to continue to drive change in their business. In the past 2 years, Ulster has reduced its portfolio of nonperforming loans by 41%. At full year 2018, both NPLs and tracker portfolio taken together now represent less than half of the total loans and advances. Ulster also achieved good lending growth in 2018 with new mortgage lending up 13% compared to the full year 2017.In Commercial Banking, we have reshaped the balance sheet through capital initiatives. We have removed lending which flares under stress and grown lending with a lower RWA intensity. We've achieved strong underlying net growth with GBP 3.5 billion increase in 2018. Our Private Banking continued to improve its performance and delivered financial targets a year ahead of schedule, delivering return on equity of 15.4% and net lending growth of GBP 900 million. This is a really strong business.2018 was an important year for NatWest Markets since it became a stand-alone, non-ringfenced bank. In line with competitors, performance was impacted by tough market conditions, particularly in Fixed Income in Q4 2018. NatWest Markets is now nearly at the end of its legacy portfolio rundown and continues to reduce costs and invest in the core business as it delivers its transformation plan that we set out back in 2015.I know many of you will be keen to understand more on our capital distribution strategy. We paid our first dividend in a decade of 2p per share at our interim results. And we're pleased today, we could deliver further returns to shareholders. We are proposing to pay a final dividend of 3.5p per share and a special dividend of 7.5p. Looking ahead, we intend to progress towards a circa 14% common equity Tier 1 capital ratio by the end of 2021. We are committed to returning more capital to shareholders in 2019. And we'll update the market at the appropriate time.In 2018, we continued to invest in our infrastructure, improving systems resilience and migrating to the latest in cloud technologies. In 2018, we experienced 19 Critically 1 Incidents compared to 318 4 years ago. You can see on the slide examples of how customers continue to shift to our digital channels. We are building a high-tech, high-touch customer proposition. In the U.K. PBB, we now have 6.4 million regular mobile app users. That's up 16% on 2017. Today, close to 3/4 of active current account customers in the U.K. PBB are regular digital users. Sales through our digital channels in the U.K. PBB are up 19% on last year and now represent almost half of all product sales. And in 4 years ago, this figure was 26%. In 2018, our U.K. PBB customers sent 57 million more payments via the mobile app. That's up 43% on 2017 volumes. This channel has the lowest marginal cost to serve our customers. It's the fastest and has the great Net Promoter Score of plus 41% for NatWest. We are the first U.K. bank to take the paper out of mortgage applications. Customers like the speed and efficiency, generating Net Promoter Scores of plus 57. It has helped us maintain our market share despite the competitive rate environment that we operate in. And it is a similar story in our commercial bank for our commercial customers. We have upgraded bank loan with improvements, including the reduction of the time to make a payment circa 30%. And this is proving popular with our customers. Not only are we improving our products, we're also investing in our colleagues. Our NatWest relationship managers have market-leading customer satisfaction scores. The engaged colleagues are also more productive. Income per RM has increased from GBP 1 million in 2014 to GBP 1.4 million in 2018.Customers' expectations continue to rise. They want a proactive, easy and personal service which is available to them when they need it. We have taken a dual approach to our innovation strategy. Firstly, we're looking at our customer journeys in the core bank and seeing how we can simplify, automate and digitize these to improve for customers. I've already mentioned paperless mortgages as one example, but we have many more. Cora is our artificial intelligence chatbot, which we launched in partnership with IBM Watson. She now handles an average of 83,000 queries per week. Our innovations are focusing on making our customers lives easier. NatWest Mimo is a good example of this. It's a new app we're piloting that complements our main app, giving customers peace of mind when it comes to their finances by providing personal insights around income and things like day-to-day spending, subscriptions and utilities. For commercial customers, we've taken the great services from Bankline and put them into a mobile app. Bankline Mobile offers core bank loan servicers but with the convenience and accessibility of the mobile phone. Although early days, this is proving very popular with customers with a 4.7 out of 5 rating in the Apple App Store. In NatWest Markets, FXmicropay makes it simpler for businesses operating globally to accept payments in multicurrencies, reducing costs and increasing revenues. And we now have made it available on SAP's Commerce Cloud, a business-to-business e-commerce platform, to support their customers with multicurrency payments.Secondly, we're innovating outside the core business to meet more customer needs, so I'd like to share a few of those with you today. Last year, we launched -- we purchased FreeAgent. This provides cost-effective cloud-based accounting software to our business customers. FreeAgent are the U.K.'s first accounting software platform to offer open banking feeds and is proving really popular to all and enables our RMs to broaden the range of services we can offer with 15,000 NatWest and Royal Bank of Scotland customers choosing to take out the service since acquisition. It's also driving positive advocacy. For example, following adoption of FreeAgent, the average customer Net Promoter Score is 25 points higher than customers without FreeAgent. Our digital lending platform Esme shows again that when we get the product and service offering right, we can generate strong customer advocacy. We've taken the learnings from Esme and applied these to the core. For instance, over half of all business in Commercial Banking accounts are now open within 5 days. We can also now offer preassessed loans to existing customers up to GBP 750,000. This is the largest value offered by a U.K. commercial bank, giving customers rapid digital access to funding decisions with close to 50% of the loan applications given a decision in principle under 24 hours.In the personal bank, we are piloting Home Agent in partnership with Zoopla. This innovation focuses not just on mortgages but the wider home-buying process. For instance, Home Agent helps customers set a budget, find their next home and apply for a mortgage. We also strengthened post-purchase customer loyalty through the latest pricing information and helping customers manage their new mortgage.We're also piloting Bó and Mettle as 2 stand-alone digital banks. Bó is our digital personal bank targeted at helping people to manage their money better. And Mettle is our digital bank for business customers. We're taking key learnings and applying them back into the core bank. And I want to be clear that not everything we pilot will be a complete success. But as long as we learn as we go, we are very comfortable with this approach.I'm sure many of you will recognize this triangle. It's our plan on a page and has served this bank well for the last 5 years. Focusing on priorities with specific 2019 goals will help us deliver on our ambition. In 2019, we want to do the following: move closer to a greater than 12% return on tangible equity; progress towards our circa 14% common equity Tier 1 capital ratio; close the gap to #1 for service, trust and advocacy by achieving a 2-place improvement in CMA rankings for both NatWest and Royal Bank brands; take a further circa GBP 300 million out of our operating cost base; grow net lending in CPB and PBB by 2% to 3%; and of course, continue to improve our colleague engagement.Taken together, these represent a strong investment case for this bank. We are building a leading U.K. retail and commercial bank with strong non-ringfenced banks in NatWest Markets and RBS International; strong brands supporting growth in key markets; a lower cost, customer-led digitally enabled model. All of this is underpinned by the strong financial targets that I've outlined. I'd like to echo Howard's thanks to shareholders for their continued support. And it's pleasing to be able to repay their patience with further capital returns. And with that, I'll hand over to Katie for the detailed run-through of the financials. Thank you.

[Katie Murray, CFO & Executive Director]

Thanks, Ross. Good morning, everybody. It's a good set of results. The last time we had a Q4 operating profit was 8 years ago, and we have achieved that today. Not only that, we have achieved it in a highly competitive market and against the backdrop of continued economic uncertainty. Our operating profit was up. Our return was up. Our bottom line profit more than doubled versus last year. And we delivered a strong build in our core capital ratio. We have sorted our key legacy issues and we passed the BOE stress test. That has allowed us to pay our first dividend in 10 years. Today, we are clarifying our medium-term CET1 guidance to circa 14%. And we aim to reach this in 2021. We expect to get there through capital distributions over the coming years. And we'll do this using the most appropriate method that the board sees fit at that time. Our 2020 targets are below 50% cost:income ratio and a return on tangible equity of more than 12% as we progress towards a circa 14% level in 2021.There are growing risks to income as Brexit, global trade issues and economic uncertainties continue. And we now carry additional costs to deal with the ongoing operational costs of Brexit and ringfencing. And we also need to continue to innovate and invest in our business to meet our customers' needs. We are, however, comfortable on our 12%-plus ROTE target. But in the round, these are challenging targets to achieve.Having given you the overview, let me take you into some detail. We continued to execute against our 4 priorities during 2018: resilient income, continuing cost reduction, actively managing capital and delivering capital returns. If I look at income first, excluding notable items, NatWest Markets and central items, income was broadly stable. And this was despite the challenging markets. We are growing in the areas that we like with the mix heavily weighted toward secured lending. Looking at costs, cost reduction continues. Excluding the VAT recoveries, we have taken GBP 278 million out in 2018. This makes GBP 4.2 billion over the last 5 years. This is an ongoing significant change in our cost base by any standards. If I focus on capital, our RWAs are down GBP 12 billion or 6% in 2018 at GBP 189 billion. This is ahead of our guidance. And we have come to the end of this phase of active capital management. We are comfortable that we have exited the areas that we wanted to. We have entered the year on a CET1 ratio of 16.2%. And you'll be aware that we are subject to IFRS 16, which deals with the accounting treatment for leases. It requires us to bring our lease commitments on to our balance sheet as at 1 January 2019. This will take our CET1 ratio to a pro forma of 16%.As a result of our strong capital build, we've been able to propose a final dividend of 3.5p, supplemented by a special dividend of 7.5p, of course, both subject to shareholder approval. That's a distribution of over GBP 1 billion -- GBP 1.3 billion to taxpayers and shareholders or GBP 1.6 billion if you include the interim dividend or looking at it another way, 97% payout ratio for the year.Following last week's general meeting, we are in a position to do a directed buyback of shares from the government of up to 4.99% of our market cap over a 12-month rolling period, should the opportunity arise. And finally, as we previously outlined, we intend to target a regular payout ratio of around 40% of attributable profits via ordinary dividends.So let me get into our financials on a line-by-line basis. Our income was 2% higher than 2017. Although to be fair, the comparison is impacted by a number of positive one-off items. In reality, underlying income was down 5%. This was largely driven by NatWest Markets. Excluding this and central items, underlying income was, in fact, flat. But this was despite a very competitive environment and uncertain economic times. In short, I believe that this is a real testament to the resilience of our franchises. Q4 NIM was a little better than when we last discussed it as the management of our excess liquidity helped to offset ongoing competitive pressures in the market. And as I mentioned, excluding VAT recoveries, our cost reduced by a further 3.6% or GBP 278 million, bringing our other costs down to GBP 7.4 billion. As a result, our all-in cost:income ratio fell from 79% in 2017 to 72% in 2018. Looking at impairments, they're still at historically low levels, only 13 bps in 2018. And to finish on the P&L, there was GBP 1 billion of strategic costs in the year, GBP 1.3 billion of conduct and litigation, which was primarily related to the DOJ. But taking all of this together, we produced a very strong operating profit of GBP 3.4 billion, up 50% on the prior year.Let me spend a few minutes looking at Q4 income by franchise. U.K. PBB's total income decreased by GBP 7 million versus Q3, primarily due to a charge of GBP 18 million following the annual review of mortgage customer behavior. This was combined with lower credit card fee income and partially offset by a debt sale of GBP 35 million. On lending, we maintained our prudent risk approach and priced into a very competitive market. Q4 mortgage flow share was approximately 12%, supporting a stable stock share of 10% and our Q4 approval share was 14%. Our momentum continued in personal advances, which were up 7% in 2018. This increase was largely driven by our investment in technology, making it easier for our customers to do business with us. Ulster's total income decreased by GBP 4 million as a result of a reduction in NPL income following a portfolio sale. This was also combined with reduced fees. In Commercial, after adjusting for transfers, total income increased by GBP 18 million, primarily reflecting higher fee income, fair value gains and lower disposal losses. As you know, we've been actively managing our capital at the same time as reshaping this portfolio. Excluding the planned capital initiatives, underlying lending growth was strong, up GBP 3.5 billion in 2018 or 3.8%. Private Banking is a great improvement story. It generated a 12.3% ROE in Q4 and 15.4% for the full year. That's up from 6.4% in 2017. Income was broadly stable, reflecting higher deposit income. This was offset by asset margin pressure and lower investment income from AUMs, driven by the market volatility we all saw in Q4. RBSI has seen its business change significantly this year as we completed our restructuring as a result of ringfencing. However, during this time, income has remained broadly stable versus Q3. And RBSI generated a 20% ROE in Q4 '18 and a 24.4% for the full year. NatWest Markets had a challenging Q4, driven by market conditions in the credit and rates business, which similarly affected our peers. Total Q4 income decreased by GBP 417 million versus Q3, which you will recall, benefited from GBP 165 million of insurance indemnity recovery. Overall for the franchise in 2018, income increased from GBP 1.1 billion to GBP 1.4 billion due to lower legacy disposals and the insurance gain, which offset the reduction in the core business.If we turn our attention to NIM, Q4 2018 net interest margin was 195 bps or 197 bps excluding one-offs, up 2 bps compared with Q3 2018. This was the result of the management of our excess liquidity, which more than offset competitive pressures. Going forward, there are a number of factors presenting both tailwinds and headwinds to NIM. To name some, we are very sensitive to interest rate rises. These benefit us via the managed margin as well as the structural hedge. The hedge income benefit will depend on the market rate movements and the reinvestment of historical hedges. We will continue to manage our liquidity position in response to market conditions, as we have done this quarter. And furthermore, the mortgage market, of course, continues to be very competitive, and we do not expect that to change in the near term.Costs continue to come down. We've taken GBP 4.2 billion of other operating costs out over the last 5 years with FTE down 11,000 in the last 2 years. Conduct and litigation have also materially reduced. As we put the larger legacy issues behind us, the GBP 1.3 billion full year charge includes GBP 1 billion for the DOJ and an offset for the GBP 241 million RMBS litigation indemnity release as well as a GBP 200 million PPI top-up that you will recall we took in Q3. You will see in our financial statements that we have a number of smaller legacy issues we are dealing with, so we continue to inspect -- expect to incur conduct costs that would not represent our long-term expectations of these costs on a normalized basis. On strategic costs this year, we have utilized GBP 1 billion out of the GBP 2.5 billion guidance for 2018 and '19.On RWAs, we are down GBP 12 billion from last year at GBP 189 billion, ahead of our target range of GBP 191 billion to GBP 196 billion. And this is without the benefit of the Alawwal RWAs coming off. This reflected reductions in NatWest Markets, the impact of the actions in Commercial Banking and the asset sale in Ulster Bank. And as I said, we are comfortable we have exited the areas we wanted to.Turning to capital generation. 2018 was another strong year, a very healthy CET1 ratio of 16.2% or 16% following the pro forma IFRS 16 impact. This strong capital position is after we have taken account of GBP 4.1 billion of payments in relation to pensions, dividends and the DOJ settlement in the year. Excluding these items, the CET1 ratio increased by 240 bps in 2018, driven by profits of 130 bps and reduced RWAs of 110 bps. This confirms again the inherent capital-generating nature of our franchises. It is quite clear that we have built a very strong capital position through organic capital build and optimizing our capital usage. We are in a very good place to generate and distribute sustainable returns. We have achieved a 40% ordinary payout ratio in 2018. But that won't be enough to distribute capital down to a level we think is appropriate for this bank. Therefore, as we have done this year-end, we will look to other ways of giving capital back. We also want to help the government reduce its stake, should the opportunity presents itself to do so.I thought it might be helpful if we put all of our current guidance on 1 page. Our 2020 targets, a cost:income ratio of less than 50% and a return on tangible equity of more than 12% as we progress towards a circa 14% CET1 level in 2021. There are growing risks on the downside on this as the lack of ongoing certainty on the Brexit way forward continues to elude us. While we are not seeing issues occurring in our financials today, what we do see is our customers seeking approval for funding and then delaying actually using these facilities as they await for certainty. This clearly impacts on us as well.On other costs, we plan to reduce other expenses by a further GBP 300 million in 2019. And we will see this growing into 2020 as the actions we are taking today bear fruit. We are now also required to carry additional extra costs which are around GBP 100 million per annum as a result of Brexit and ringfencing. And of course, we continue to innovate and invest in our business. All together, these are challenging targets for the business. And we do continue to drive the organization towards these targets aggressively. But the current environment does make them ambitious.On strategic costs, we expect these to be around GBP 1.2 billion to GBP 1.5 billion in 2019. On RWAs, as we move into 2019, you will see further reduction as a result of the Alawwal transaction being completed. And we would expect to see a gentle rise in RWAs from that point such that we end the year in the GBP 185 billion to GBP 190 billion range. Specifically on the NatWest Markets franchise, we've guided you to RWAs of GBP 35 billion with GBP 30 billion in the core and GBP 5 billion in legacy. However, given our Brexit plans, this has increased to GBP 39 billion going forward as we transfer our Western European business into NatWest Markets over time. This, of course, has no impact on the total RWAs of the group. Our previous guidance on RWAs beyond 2020 was an estimated 10% increase in 2021 relating to the Basel III amendments. In addition to RWA inflation, as a result of IFRS 16 of GBP 1.3 billion in 2019 and the Bank of England mortgage floors, which we now estimate to be GBP 10.5 billion in 2020, we now expect the overall impact of Basel III amendments to be in the range of 5% to 10% and phased across 2021 to 2023. The details are still subject to significant regulatory uncertainty.And finally, on capital. Today, we clarified our medium-term CET1 ratio guidance to circa 14%, which we aim to reach in 2021. And we remain comfortable on our 12-plus percentage return on total equity target by 2020.So to summarize. We are pleased with our full year results, a doubling of profits in the year, continuing cost reduction, very strong capital generation and a substantial cleanup of our balance sheet being complete. We have started the process of significant capital return to our loyal shareholders. And we remain grateful for your years of support. We are driving towards our 2020 financial targets, recognizing the challenges existing in the economic and political landscape and the inherent ambition of these targets.And with that, ladies and gentlemen, I will now hand back to Howard to host some Q&A. Thank you.

[Howard John Davies, Chairman of the Board]

Thank you very much, Katie, and indeed, Ross. We now come to your questions which is always the most interesting part of the morning. Yes, you've just about won with the -- on the hands-up competition. Go for it. Yes, it's coming to you.

[Martin Leitgeb, Analyst]

It's Martin Leitgeb from Goldman Sachs. I would like to ask you a first question, if you could elaborate a little bit on your earlier comments on Brexit and what Brexit -- how Brexit is impacting customer behavior. You mentioned -- you touched on commercial clients holding on with some investment decisions. I was wondering, do you also see some change in behavior on the consumer side at this stage or an overbook of the bank? And the second question is related a little bit in terms of risk costs. I was just wondering, risk cost obviously historically low in 2018. And I was just wondering if there's pockets of risk, whether it's within consumer, whether it's within select corporates, where you have seen a deterioration over the last couple of weeks or months.

[Howard John Davies, Chairman of the Board]

Thanks. On the first question on both corporate and retail, so I think I'm going to ask Alison to say briefly about what she's seeing on the corporate side and then Les on the personal side.

[Alison Rose, Deputy Chief Executive]

Thank you. On the commercial side, as Howard and Ross mentioned, what we're seeing is a pause in investment. And we've seen that slowdown really since post the summer last year. So inevitably with the uncertainty, people can't make investment decisions, and so we're seeing a lot of pausing. What we're seeing on the other side is, however, a drawdown of funds which are not yet being -- sort of committed funds but not being drawn down as people prepare. So there's a sort of bubble of lots of investment paused. And I think that's an inevitable action, given the uncertainty of people waiting to make investment decisions. And that's really accelerated over the last 3 months. In some pockets, we've also seen people divesting assets and sitting on cash rather than reinvesting it. And we've seen that particularly in the large commercial real estate side of the market.

[Howard John Davies, Chairman of the Board]

I'm not sure we've seen a huge impact on the personal side. But Les can say that in a more interesting way.

[Lesile D. Matheson, Chief Executive of Personal & Business Banking]

Well, that's a bit of a tough ask, obviously. Yes, look, as Howard says, we have really not seen very much impact. If I look even at the first 1.5 months or so, we're seeing largely the markets staying the same. Mortgages are slightly subdued but really not that different from where we've been coming from. Maybe to make it look slightly more interesting, although actually probably not, if I take your second question in terms of any pockets of pressure on the portfolio, the answer is no, we're not seeing anything really in any area. Whether it's secured or unsecured, we're not seeing pressure right now.

[Martin Leitgeb, Analyst]

On the risk point?

[Katie Murray, CFO & Executive Director]

I mean, certainly as we look at impairments for the year, 13 bps charge compared to the 16 bps in last year. I mean, last year, you'll recall we had a couple of tall trees that came through and we haven't had them to the same extent this year. We are one of the biggest lenders in the country. And so we know that as things happen, we will ultimately get a thing on one of them at some stage. But we have done such huge amount of work in the capital management of that portfolio that we think that, that sets us in quite good stead in terms of where we are just now. But we're not seeing anything particularly flaring in any part of the portfolio.

[Howard John Davies, Chairman of the Board]

Thanks. Could you come back around to the next question right immediately next door?

[Raul Sinha, Analyst]

It's Raul Sinha from JPMorgan. If I can have 2 areas, please. Just the first one on -- obviously, you flagged that 50% cost:income ratio target is increasingly challenging for the business to deliver. And I was wondering if you could maybe talk about whether the challenges come predominantly from the income side or from the cost side. And if you could give us some sense of how much additional cost you think the business might have to put through because of what you're flagging. And then the second question is on the income outlook. I think you talked about 2% to 3% loan growth for 2019. But when I look at the outlook for NIM, I think we've talked a lot about NIM in the past. But it's fair to assume that liquidity management probably doesn't help NII going forward. So what will remain within the business is the competitive pressure versus the rate outlook. And so I was wondering if you think that the NII outlook is actually still upward tilted for the business in 2019. And is there any other sort of moving parts in the income line we'll lose again or anything else that we need to be aware of?

[Katie Murray, CFO & Executive Director]

I think that was about 6 questions in there, but I'll do my best.

[Ross Maxwell McEwan, CEO & Executive Director]

Go for it.

[Katie Murray, CFO & Executive Director]

Shall I go, and then you can pile in, Ross, if I head off and lose myself in the selection. So if I start off at the 50% income ratio. The income -- the cost to income ratio, there are 2 halves to it. I think we can all see the challenges in the market at the moment, and we'll continue to sort of deal with them as we go through, making sure that we're able to adapt. On costs, we as a bank have delivered GBP 4.2 billion of cost savings. It's something that we drive, have driven very aggressively. We will continue to drive that. What I think I'm flagging today, as you know, that, structurally, we continue to have to add extra costs into the organization. We've estimated them for you at about an additional kind of GBP 100 million. That doesn't mean to say we're not going to go after that GBP 100 million, but it's hard. The more hundreds that you added on, it just is increasingly challenged, but we have a great reputation in this space, but it is a reality. If I look to loan growth, we talked -- we've talked to 2% to 3% net lending growth in 2019. We've got comfort in that number. If we look at the mortgage market, it has grown by 2 plus percent for the last few years. On secured lending, we grew at 7% last year. Underlying growth in the commercial book was 3.8%. We've grown well in our Private Banking. Overall together, that gives us really a lot of comfort in that 2% to 3% guidance. We're comfortable in that space.

[Howard John Davies, Chairman of the Board]

And I think there's a difference between the 2% to 3% as net lending growth, and yes, you're going to get some contraction across the book in some areas and maybe some expansion, but that's -- so the net lending growth we see is 2% to 3% for us as realistic. We've been doing it in the past and we continue to do so, but the NIM pressure is the one that I won't give you any projections on. Who knows what's going on.

[Katie Murray, CFO & Executive Director]

Yes, but we've -- Les...

[Howard John Davies, Chairman of the Board]

We'll ask you. We'll ask Les so that he can give you that. On the cost to income ratio, we're still going after that. But we are signaling, we set that target back in 2014, and it's stood us pretty good stead as is the 12-plus percent return on tangible. But we've taken on board -- we've now got 2 Treasury systems because of ringfencing. We've got an operation in Amsterdam that we were getting rid of under the old structure. We've got 2 branch structures now up in Frankfurt. We've got 6 branches across Europe. Passporting was a wonderful thing for the U.K. and we no longer have that, likely so. We are having to get ready for those, and there's probably an embedded GBP 100 million, that's just been those 2 measures alone. So we'll go hard at it. As you know, we've done in the past, and we're signaling a circa GBP 300 million take out this year, which, when you look across the marketplace, is pretty good considering wage inflation, all the other things going on. So we're okay at that.

[Ross Maxwell McEwan, CEO & Executive Director]

We'll take the third of this triumvirate.

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

It's Joe Dickerson from Jefferies. You had in Q4 about a 4 basis point tailwind at the net interest margin from liquidity management. And when I look at the liquidity bucket, actually grew by GBP 3 billion. So I'm wondering if -- what's the ability to actually bring down that portfolio over time. Or what explains the current levels of liquidity you're holding? And so is this tailwind just the start of something more once we get past Brexit or whatever else you need to hold liquidity for?

[Howard John Davies, Chairman of the Board]

Katie?

[Katie Murray, CFO & Executive Director]

Yes, absolutely. So as I look at liquidity, I mean you're absolutely right. We had liquidity coverage ratio of 158 at the end of Q3 and we're at the same place at the end of Q4. And in fact, our spot liquidity has grown by GBP 3 billion in that time. I mean in that time, we took a number of actions. So we paid back GBP 5 billion of TFS. We paid back GBP 2.5 billion in terms of the -- some of our legacy and preference securities. And we also paid GBP 2 billion to the pension scheme. So we are managing it. The reality is that we're also generating quite a lot of liquidity. We'll continue to manage it. The small matter of the dividend we declared today will obviously have a bit of an impact on that as we kind of continue to pay it out. But it is a number that we continue to manage down, but we were pleased with those actions that we took, that they helped NIM a little bit this quarter, but we are much more interested in balancing the entire book rather than just focusing on the NIM number.

[Ross Maxwell McEwan, CEO & Executive Director]

The other point that we are holding higher liquidity levels is wait and see; let's see happens with Brexit. We've put this bank over the last 5 years, I think, in a fantastic position for whatever comes, good or bad. And we're not about to give that away, going into probably one of the most uncertain times in 4 years with Brexit. So let's see what comes out of that before we start giving the liquidity back, but our intention is to reduce liquidity and the NIM against that factor will move up. So I think that we're going to be cautious over the next 3 to 4 months and see what happens.

[Howard John Davies, Chairman of the Board]

We'll move over to that, the left.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Alvaro Serrano from Morgan Stanley. Two questions for me, please. You've paid out 97% payout, GBP 1.6 billion, which was higher than anybody expected despite the Brexit uncertainty. That's not going away. But on that 97%, that GBP 1.6 billion, I would actually add the GBP 700 billion of the cost to buy back the prefs, so -- which, on my numbers, comes to, give or take, 140% payout. Is that something doable when we look forward with all the caveats of we don't know if -- when and if the government will place, et cetera, et cetera. But is that a reasonable outcome going forward? And the second question is on the mortgage market competition. If you could give us a bit more color about front book spreads. And in the PBB presentation in September, I think you gave a back book margin of, I think it was, around 1.8%. I don't know if you can maybe share with us how that's come down in the second half.

[Howard John Davies, Chairman of the Board]

Just one brief comment from me before I hand over to Katie. From the board's perspective, up to last June when we settled our MBS, we were sitting with a very difficult-to-quantify obligation there. And therefore, our bias was let's keep the firepower so that we can survive whatever the outcome of that turns out to be. As you know, it was $4.9 billion, which was not the occasion to throw a party. It's a huge figure, but it could have been considerably worse. So we were in a position where we had retained a very high capital ratio in potential expectation of a very large penalty. So we were in an unusual position, and therefore, I think that explains why we can do what we've done now. But as for the future, I think that's a rather different matter. Katie?

[Katie Murray, CFO & Executive Director]

Yes. And also, I'll try to give you a relatively fulsome answer on capital return because I dare say it's going to crop up a few times as we go through this morning. So we're sitting at 16% today after taking account of the impact of IFRS 16. We're guiding you that we're seeking to get to 14% in 2021. We know, just looking at this year, that we're a very naturally generative business in terms of additional CET1, 130 bps this year in terms of what we've added from that. We've highlighted relatively small amounts of RWA progression in 2019, a little bit more in 2020 as we get to the mortgage floors. So what I would say is as we look at it, it's very, very hard to get tied up in what payout ratio you should expect here and there. We know that the actions we want to take will be lumpy by their very nature. If we manage to execute on the directed buyback, that's important, but it will be a transaction that will naturally be lumpy in the way it comes out. So I think you need to look at the round of where we are, what we produce, what Alawwal will give us back, which we know is an extra 40 bps that will come back through, and then sort of think what might look like a reasonable capital payout ratio. I think the really important thing today is that at Q3, we said to you we'd look at specials and we'd look to get our position in directed buybacks. We've done both of those things. And actually, I think we've really signaled our intent very strongly today. So you're in, I think, a good position on that side of things.

[Howard John Davies, Chairman of the Board]

Thank you. Just that -- do you want to...

[Katie Murray, CFO & Executive Director]

Mortgage market, yes.

[Ross Maxwell McEwan, CEO & Executive Director]

Yes. Mortgage book. At the moment, Les, it's around 80, 85 basis points front book. I know some have been saying it's lower than that in the marketplace but that's about where we're at, at the moment. I'm looking at Les getting confirmation.

[Katie Murray, CFO & Executive Director]

It's closer to 90 and...

[Ross Maxwell McEwan, CEO & Executive Director]

Closer to 90.

[Katie Murray, CFO & Executive Director]

It's been 100 for the year, so we're not seeing what we've observed in others in recent announcements as well. So we're comfortable where we are and the front to back book margin has remained fairly static since we did the update with Les earlier in the year.

[Ross Maxwell McEwan, CEO & Executive Director]

Yes. It's a very competitive marketplace and we are seeing some of the very small players actually pausing and staying out of it. I mean, it's competitive. So the team, I think, are doing a very good job in a competitive market. Our issue in that market is retention. It's not putting it on the front book; it's the retention that the team are working through.

[Katie Murray, CFO & Executive Director]

And we're comfortable that at the end of Q4, we've really built our retention up nicely. We retain about 70% of the book and that's kind of what we're interested in. The important thing with our mortgage book is to look at the margin, which is important, but also really important is to look at the ROE. And this is very strong ROE business both today and it will remain very strong once we add the mortgage floors on as well. So it's business that we like and we do well.

[Howard John Davies, Chairman of the Board]

Back up and to the same row, next, next one.

[Christopher Robert Manners, Co]

It's Chris Manners from Barclays. Just one question, if I may. You've raised your capital target from sort of greater than 13% to circa 14%. Could you just explain to us how you get to that 14% and how you make that up? And presumably, that is fully loaded for the PRA mortgage review, it's fully loaded for Basel III finalization. If there's things that are actually going to jack up the density, presumably, your capital requirement could actually fall because there's a few add-ons for that. So just understanding how we get to that, that 14%.

[Katie Murray, CFO & Executive Director]

Yes, sure. Happy to. And what I would really like to signal at, it's not actually kind of a new number. It's much more of a confirmation of the number that we had. When we spoke to you throughout last year, we said, look, for the medium term, we're going to run above 13%, and above that 13% because of things like IFRS 9, Brexit, the Basel IV, where was that going to go exactly, the mortgage floors. And what we felt was it would be actually helpful this year to clarify to you when we talk about at above 13%, what are we actually talking about. And really, it's above; it's at circa 14% in the medium term. So I don't think we're saying that's where we are forever. It's very much the kind of the guidance to 2021, and we'll continue to update you on that as and when there is something to update. But for the moment, ourselves and the board are very comfortable that, that feels like the right place to land.

[Christopher Robert Manners, Co]

Doesn't that leave you with a pretty chunky management buffer or a stress buffer or any way we think about that? Or should we thinking about something in Pillar 2B that it's harder for us to observe?

[Katie Murray, CFO & Executive Director]

No. We're not kind of trying to hide anything within that. I think that we are in a period of uncertainty. We have a lot of capital that we need to return. And there's -- while we're also very capital generative, that almost makes it more challenging to return the level of capital. So it's as much to say, look, we know there are some things that are coming towards us in terms of changes of rules and regulations and to give you some guidance of when we talk about above 13%, what do we actually mean. And we feel that circa 14% gets you to the right kind of number.

[Howard John Davies, Chairman of the Board]

Just along, 2 along, yes. Thanks.

[Guy Stebbings, Analyst of Banks]

Guy Stebbings from Exane BNP Paribas. Two questions if I can, please. The first one on NatWest Markets. It's obviously quite a tough quarter, mostly so in rates. But we saw market risk RWAs coming down perhaps more than expected. I'm just trying to understand the extent to which it's you trying to take actively risk out of that business, which is driving a tough revenue performance, or it's just the competitive environment itself. And how we should think about that going forward? And then secondly, on mortgages. Approval share up again in Q4, continue to price as far as secured over other areas. Are you pleased at all by what you're seeing in pricing? Or is it still a very difficult environment and your prioritization towards secured over other areas is purely perhaps less appetite elsewhere rather than any changes that you're seeing in the mortgage market itself?

[Howard John Davies, Chairman of the Board]

Thank you. Have a go for Chris and then Les. Chris Marks from NatWest Markets.

[Chris Marks, Chief Executive Officer of Natwest Markets]

Thank you. Yes. So Q4 was a challenging quarter. As Katie and Ross have said, where we are, about -- the large part of the business is in the European fixed income markets. It was very turbulent, particularly in December. We saw some real outside moves in periods of low liquidity. And you've seen that sort of track across a number of our competitors, too. So we've come in the pack really in terms of that performance. In terms of how we're managing the book, we look to hedge it carefully and well. That obviously can have an impact. A lot of our risk, obviously, is in VAR. And therefore, as we manage the book carefully with turbulent times, we run daily stress tests, we know what the impact could be of unforeseen events, as well as foreseen events. We're able to run our capital more efficiently. And that's kind of built into the plan Katie's talked about. Our plan sees us trending towards the GBP 39 billion of RWAs once we get to 2020. And we've been working to improve the way that we take risk, the way we manage risk and also, in term -- the throughput and velocity of the capital that we employ in the organization. That's what you're seeing play through in terms of the market risk numbers.

[Howard John Davies, Chairman of the Board]

Les, on mortgage and unsecured?

[Lesile D. Matheson, Chief Executive of Personal & Business Banking]

Yes. Look, as far as mortgages are concerned, the pricing is relatively stable compared to the fourth quarter, and we're not really seeing much change. As Ross pointed out, we have seen 1 or 2 small competitors actually stop lending. We take that quite positively. And it may be that there is an opportunity to move pricing up a little bit, but that isn't happening yet. But we're not seeing any deterioration. What I would say in mortgages is there are 1 or 2 pockets where we haven't been growing as much last year where we may be able to grow a little more this year, in a couple of areas where we are actually underweight. The other thing I'd say is on unsecured, we're not seeing any dramatic change there. You should expect to see us continuing to grow somewhat above the marketplace.

[Howard John Davies, Chairman of the Board]

Thanks, Les. Yes, one directly behind there, and then we'll come back on the other side.

[David John Lock, Research Analyst]

It's David Lock from Deutsche. I've got one on capital and one on costs. On capital, I just wondered, probably, Ross, if you could just give us an update on Ireland. I think you've got a 78% risk weight there, even after the NPL sale. It's clearly very high. I think if you were to compare it with some of the locals, you're probably holding maybe GBP 5 billion more RWAs there. Just wondered how fast you could perhaps get those risk-weighted assets out. And to clarify whether that is in your guidance for sort of 2019 and 2020. And then, secondly, just on costs. I wondered if you could update us on what you see as a normal quarter -- or sorry, a normal year for remediation costs once we've got through PPI for this year? Because I appreciate there's cost pressures, but do you think those remediation costs should come down over time as the positive lending and the cultural changes that you've been putting through over the last few years kind of come through?

[Ross Maxwell McEwan, CEO & Executive Director]

On Ireland, we've got a new management team, and they're led by Jane Howard, doing a very good job. There are a series of remediation pieces that they're working through that'll take, I'd say, most of the share. The big ones probably done by half year. I don't think we'll get capital relief out of that business until we get a lot of those concluded, particularly ones around the mortgage book and SMEs, but we're on track there, working very hard to get those done. The bank itself, needs to get rid of those, then start focusing on a go-forward bank. You saw it. I put -- I gave you some stats about the mortgage growth there. It's starting to happen, but it's got a long way to go. And I think between us and the regulator up there, they've got a program of work that they want to see us deliver before we get capital out. I would assume for your modeling to think more 2020 than 2019. It's probably safer to think that. We'll endeavor to get some out this year, but I would say 2020. And a lot of that work is in our hands that we need to deliver, but we've started well the year. On costs, on conduct and litigation, look, it's very hard to know what that number is. But if you think about last year, this year and going forward, the number will decline. And I think it's somewhere around the GBP 200 million to GBP 300 million that's probably a more normal number. But you get one big one and that gets blown out, and you get nothing. And so it's a pretty hard number to pick. But I think around the GBP 200 million to GBP 300 million on an annual basis nowadays for a bank our size. And that could be made up of one large one or multiple small ones, but I think that's the world we're in.

[Howard John Davies, Chairman of the Board]

Okay. We'll come back on this side, back row, gray sweater. Back row, gray sweater, that's it.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

It's Jonathan Pierce from Numis. I've got 2 questions. The first coming back to liquidity. The 4 basis point improvement in the group margin in the quarter is a lot in terms of absolute revenue, sort of GBP 150 million a year or something. Moving away from the question on the actual quantum of the liquidity portfolio, it looks like it's quite a big mix shift going on within it. Is that what is driving this improvement in revenue there? And is that an area you would continue to explore moving forwards? The second question, on the 2020 return on tangible equity target. Clearly, you're still comfortable with that despite challenges on the cost/income ratio. I'm just trying to get a feel for your thinking on impairments next year, the stage 3 gross charge in the 2018 full year was only about 12 basis points; through the cycle, 30 to 40. What are you implicitly baking, I guess, into your numbers for next year on that line? That will be helpful.

[Ross Maxwell McEwan, CEO & Executive Director]

Can I just say before I hand over to Katie on those ones? Given that we did get a NIM increase, so I could cheekily ask for the 5% price decrease you took out of the share price last year -- or last quarter. Please, could you give it back again seeing it's gone up, the NIM? But Katie, we've been doing a lot of work on the liquidity of the bank and therefore NIM.

[Katie Murray, CFO & Executive Director]

True, absolutely. Look, as we look at the NIM, we will continue to manage our liquidity position. I've talked already about what we have done. And I think we'll continue to look at ways that we can manage that to improve the return. We're comfortable at the levels that we're holding today and comfortable that some of the actions we've taken will continue to flow through into kind of Q1. But what we know is there's rate sensitivity, reduction in liquidity, as well as the asset and liability pressure in terms of the mix on that. In terms of looking at impairments, I think that we could all say as we look out at it, 13 bps, given we'd entered this whole new IFRS 9 world, feels actually lower than I think than we were expecting, but it really is reflecting what's happening in the business today. You wouldn't expect in IFRS 9 to see that massively accelerating because we should be considering everything that's in the book at the moment already, but you'd -- certainly, in our own plans, we would expect a bit of deterioration in there. We'd be foolish not to as we move forward. I think the one other item you might want to just think about in your model is around also our preference costs, that's GBP 300 million for next year as we move forward. And that, I think, is a number given the repayment that we did, the GBP 140 million of saving, it's quite good just to make sure you get that locked into your numbers as well.

[Howard John Davies, Chairman of the Board]

There's one just in front, 2 in front, yes.

[Unknown Analyst]

Just a couple of -- well, one new question and one clarification. Starting with the clarification to Chris' previous question. The 14% or circa 14% core Tier 1 ratio target in the medium term, you'd also set that as a target for 2021. Is that pro forma for the 5% to 10% RWA inflation or is it as reported? Second question, just on the point about Net Promoter Scores, the CMA table, the -- talking about trying to uplift by a couple of places, overlapping that with the digital dashboard that you've got in the appendix, you're still seeing branch transactions coming down quite substantially. We've just seen one of your largest competitors announce another series of branch closures. You previously said you didn't plan to do any more, in part because you wanted to improve your Net Promoter Score. So just trying to tie those 2 together, what your latest thought process is there, and what that also means for the cost outlook, both in '19, but also 2020?

[Howard John Davies, Chairman of the Board]

Katie, deal with the first and then I'm sure Ross will want to comment as well.

[Katie Murray, CFO & Executive Director]

Yes. No, the first one's a very simple quick answer; it's as reported.

[Ross Maxwell McEwan, CEO & Executive Director]

On the branches, we're pretty comfortable with the branch network we have. It actually does remain one of the largest branch networks in the U.K., which probably showed it was out of shape beforehand. We've taken those steps in the last 2 years, they've been very painful, both for our customers and for us to readjust to. We think we've put in place other moves that are quite good for customers in the sense that we do run the largest fleet of mobile vans around the countryside to 700 sites. We've got more community bankers than anybody else. We're connected with the Post Office with 11,000 positions, but it was a change for our customers and many of them didn't like it and that's hit our Net Promoter Score. We have said there will be no more branch closures in 2019. The last ones we announced in 2018 closed in January, so just so we're clear about that, those were the ones that were announced last year and they were to do with the Williams & Glyn changes that were made. So that's happened, and there will be no more in 2019. There'll be movements of branches. There's one on the building next door that needs to be moved across here. But when I say changes, we're not closing any more. In 2020, we have no plans. So we think we've got a network for the short to medium term that's fine. But let's see what customers do. And as you've seen, the transfer -- the way customers are now doing payments and the likes, there's a dramatic shift, but we need to be there. Cash is the same. Cash is no longer the medium of payment, #1 medium of payment, but it is clearly a second medium of payment, so we need to be there on cash. 63,500 ATMs out there in the marketplace and which we've got about 3,200 of them; 11,000 Post Offices, people can get cash in and of; supermarkets, we get -- people get their cash at the end of the -- at the counter. Those sort of things are where it's starting to happen now, so we do need to make those shifts. But they have been very painful for our colleagues and also for our customers. And now we're focused pretty much on getting that faith back in the structure that we can maintain.

[Howard John Davies, Chairman of the Board]

Let's get on this side, yes.

[Ian David Gordon, Head of Banks Research]

Ian Gordon, Investec. Two please. One, capital; one, Williams & Glyn. On capital, very clear what plan a is in terms of the GBP 1.5 billion of directed per annum, and then join the dots for the ordinaries and specials. However, if we get a continued standoff, i.e., if your share price stays low, if the government's an unwilling seller, do you maintain your religious objection to doing accretive buybacks in the market? And then secondly, just on Williams & Glyn. Can you refresh my memory on how long you think it's going to take you to transfer the accounts out? The expectations of some of the would-be acquirers seem to be a bit quicker than what I'd understood from your timescale.

[Ross Maxwell McEwan, CEO & Executive Director]

I'll pick up on the W&G. And Katie, do you want to take on the capital?

[Katie Murray, CFO & Executive Director]

Sure.

[Ross Maxwell McEwan, CEO & Executive Director]

And if I start with Williams & Glyn. My understanding is the program of work that -- where offers go out to customer starts at the end of this month. We had thought that it would take probably 12 to 18 months for that to happen, and that -- but if the other players are thinking it'll happen faster, we stand ready to deliver. There'd be nothing nicer for us than to get that over and done with. But we suspect it'll probably be an 18- to even 24-month time frame. We have been communicating strongly with our customers, letting them know that these changes are coming and that there will be offers being made. We've got tens of thousands of them registered, so I think that group could move quite quickly, but where they haven't registered, it becomes a bit more difficult. It's going to be person-to-person contact with them to make offers. So we believe from our end, we're ready to go. The reintegration of all of the other facilities of Williams & Glyn is pretty much finished, Simon?

[Simon McNamara, Chief Administrative Officer]

Yes.

[Ross Maxwell McEwan, CEO & Executive Director]

And the team have done a very good -- yes, the last one was the branches because it enabled us to close down one of the -- one system that was pretty old, so we've done, I think, a superb job on that. And credit to Les, Simon and the teams that have worked on that, it's been -- and all their teams because it's been a big HR exercise as well.

[Howard John Davies, Chairman of the Board]

And the religious question, I'll put to Sister Katie.

[Katie Murray, CFO & Executive Director]

Yes. Thank you Father Howard. Look, I think -- and what I tried to tell you a little bit in with my script is that we'll return capital in any way that the board sees fit at that time. We haven't ruled anything out. We really sought last week, in terms of the directed buyback, to give ourselves as much flexibility as we could because I think we can all accept that this is going to be an interesting journey as we wind our way through and we'll go on that journey merrily seeking the counsel and advice and input from all our shareholders as well as we make that transition.

[Ross Maxwell McEwan, CEO & Executive Director]

So I'd just reiterate the other thing Katie said, that it's very likely to be very lumpy, just because of the types of transaction that'll happen, but our intention is there.

[Howard John Davies, Chairman of the Board]

Third row there in the middle. No, well, that's not third, is it? But anyway. Third row.

[Katie Murray, CFO & Executive Director]

Third from the back, Howard. You weren't clear.

[Fahad Usman Changazi, Equity Analyst]

It's Fahad Changazi from Mediobanca. Could I just ask a follow-up question to Commercial? It was mentioned that clients are being cautious. Could you just give an idea of the quantum of drawdown versus actually committing? Okay. And the other question was I just curious to understand the interplay in terms of keeping the powder dry for the directed buyback versus doing a special. Going forward, as we go forward, is there any sort of level that you're happy that the government is to have, in which case they can go to the market themselves, be it 30%, 20%?

[Katie Murray, CFO & Executive Director]

So I think on the first question, that we won't share where we are in terms of drawdown in facilities. Those are obviously conversations we have with our customers. In terms of the shape that it might take and the level that it might take, I'm a willing buyer. The government needs to obviously do what they can to get to position. They've been very clear that their desire is to sell down over the next 4 years, and that's been very helpful. And I think, as I said, we'll go through this as we go through the journey with them, so -- and with our other shareholders. So I can't, unfortunately, give you any more guidance or thoughts on percentages. And I don't think it's, unfortunately, as easy for any of us to be able to give you that level of guidance.

[Howard John Davies, Chairman of the Board]

Yes. That's it, great.

[John Cronin, Financials Analyst]

Just coming back to your recalibrated RWA intensity uplift expectations accruing from the Basel III final reforms package -- sorry, it's John Cronin from Goodbody, by the way, the -- that slight change in the guidance, or slightly more favorable guidance, is that, in any way, likely to potentially influence you directionally more towards mortgages in terms of your thinking about new flows from a lending perspective? And just with reference to your ROE comments on that as well, influencing the question. And then secondly, Katie, I recall you calling out that newer entrants into the U.K. banking market have resulted in a slight diminution in the average current account balances. Is that trend continuing to play out? Is there anything material to call out there as a consequence of new competition, whether it be outright attrition or just reducing average balances?

[Howard John Davies, Chairman of the Board]

Do you want to deal with the first, then I'll get Les back in for the second?

[Katie Murray, CFO & Executive Director]

Yes, great. No, thanks very much. So as we look at the recalibration, the 5% to 10% from where we were last year is literally just better and more understanding and a little bit more guidance. The item that impacts more on mortgages is actually the BOE mortgage floors which we're pretty comfortable on. They're sort of 10.5 basis -- GBP 10.5 billion, sorry, which will come in, in 2020. That's a slight improvement again from where we were a year ago when we said GBP 12 billion. But the reality is it's actually that's kind of beginning to start to flow into our numbers via the economics, so there's no particular change. So I don't think that we'll view our changes in our current views on one lending source over another. Here, we're very focused on the ROE, as well as capital consumption of all of these different products. Les?

[Lesile D. Matheson, Chief Executive of Personal & Business Banking]

Yes. It's a quick answer. There hasn't really been any material impact on our deposits from the entry of the digital banks. So if you look at our current accounts, our volume's up about 1% last year. And on savings accounts, it's up about 2%. So it's about in line with the market. You -- what I would say is what you're seeing is that those digital banks that are offering really high rates are attracting the hot money within the marketplace, if you like, which generally circulates, but it's not really having any impact, at least on us.

[Howard John Davies, Chairman of the Board]

That's not a comment on markets, is it? Not particularly.

[Lesile D. Matheson, Chief Executive of Personal & Business Banking]

No.

[Howard John Davies, Chairman of the Board]

The blue sweater right at the back, thanks.

[Edward Hugo Anson Firth, Analyst]

It's Ed Firth from KBW. Can I just bring you back to this return on tangible target which I guess I'm struggling a little bit with? If I look at the consensus, which I guess is maybe plus or minus 10%, but you're pretty predictable these days so it's not going to be a million miles away. Then in order to get to 12%, you need to be starting next year with an equity base of about GBP 28 billion, it seems to me. Anything much over that, you can't get near the 12%. So that implies somewhere around, what, between GBP 5 billion and GBP 7 billion of capital return this year. So I guess my question is, firstly, do you recognize my numbers, or am I -- have I picked up something wrong? And secondly, can you just confirm that this 12%, it isn't a -- we're not going to get thrown a sort of adjusted capital return or so an adjusted return on tangible halfway through the year or excluding restructuring or with normalized provisions or something? It is an all-in, like what everybody considers to be a proper 12%. I suppose that was my first question. And forgive me, having covered the banks here for a while, I'm getting a little tired of how we hit targets these days. But that was just sort of question 1. The second one was I think in the past, you talked about NatWest Markets having a normalized revenue level of around GBP 1.4 billion. That -- might have got that wrong, but I think it was -- you're currently at about GBP 1.2 billion, I think, if I strip out the GBP 165 million indemnity and -- but again, tell me if that's wrong, but -- so are we still looking at GBP 1.4 billion? And are we now, therefore, saying that for NatWest Markets, we're looking at growing revenue and falling costs, which, I mean, a lot of investment banks tell us that, but I don't think I've ever seen it? So just is that really what you're expecting in terms of your 12%?

[Howard John Davies, Chairman of the Board]

Thanks. Ross, on the first, and then I'll pick up.

[Ross Maxwell McEwan, CEO & Executive Director]

Yes, first off, it is all-in. We gave up doing all those excludings and addings and taking aways last year when we just started doing the accounts. The biggest feature really is making sure that we can get some capital out of the business because that's the piece that does it most rather than even cost. Yes, income has to be okay. We will continue to take cost out, but our numbers show that we still can get to that 12% or 12% plus in 2020. But those are the numbers we're working towards, but it does rely on a capital level lower than we are sitting at, at the moment.

[Edward Hugo Anson Firth, Analyst]

Because [indiscernible] my numbers, do you recognize that they're not -- those sound like -- I mean, obviously, not to the GBP 100 million, but broadly speaking, those sound like the sort of right sort of ballpark?

[Lesile D. Matheson, Chief Executive of Personal & Business Banking]

Well, as I said, we've been working on an income level, a cost level and a capital level that gets us to 12% plus, so -- and as Katie said, just if you follow the dots on -- particularly on the capital, down to sort of circa 14-odd percent by end 2021, this sort of gets us to those numbers.

[Howard John Davies, Chairman of the Board]

Chris?

[Chris Marks, Chief Executive Officer of Natwest Markets]

Yes, I'll correct your numbers in just a little bit. I think our core numbers of GBP 1.3 billion for the year, the write-back was actually in our legacy numbers. So we've obviously got a differentiated franchise and core that obviously play through. I think the key point, we're not moving away from the GBP 1.4 billion, GBP 1.6 billion guidance that we've given historically. And last year, we made -- in sort of 2017, we made GBP 1.7 billion. And we continue to improve the business as we go. Actually, whilst revenues were down in 2018, our customer volumes, the amount of trades and transactions we completed with customers went up by 6%. So we're very confident that we can hit that range with the capital that we have. And as we continue to make the refinements that I talked about earlier, we're on a good trajectory.

[Howard John Davies, Chairman of the Board]

Thank you. We're almost out of time. Can I take one more if there is? Otherwise, I'm going to ask Ross to -- no, perhaps we're done, in which case, Ross, do you want to just summarize as we close?

[Ross Maxwell McEwan, CEO & Executive Director]

Yes. Look, thanks very much for the questions. I think they've been really good. And we did think that we'd get lots of questions on the capital position, and thank you for those. I think this has been a very good performance from this bank in really uncertain times, doubling of profit from last year and giving you a position on this bank going forward. Probably the best thing that we saw here was the start of capital returns and the fact that we're putting, really, close to GBP 1 billion back in the hands of the government for -- who've been, I think, a very, very good shareholder for us. We are a simpler, safer bank, and we will continue to work on how do we continue to make us a much, much better bank for our customers. Now, that's what we need to focus on in 2019. But can I say it is a completely different bank to what we started with 5 years ago. And it's starting to feel like that internally. The conversations are quite different. So I look forward to catching up with you on the quarterly results. Thanks very much for joining us here, and look forward to catching up.

[Howard John Davies, Chairman of the Board]

Thank you.