NatWest : Bank of America Financials Conference transcript

NatWest Group plc

Bank of America Conference Fireside Chat 21st September 2021

This transcript includes certain statements regarding our assumptions, projections, expectations, intentions or beliefs about future events. These statements constitute "forward- looking statements" for purposes of the Private Securities Litigation Reform Act of 1995. We caution that these statements may and often do vary materially from actual results. Accordingly, we cannot assure you that actual results will not differ materially from those expressed or implied by the forward-looking statements. You should read the section entitled "Forward-Looking Statements" in our H1 announcement published on 30th July 2021.

Page 1

Moderator: Good morning, everybody. Thank you very much for joining us. Before we move on to NatWest, I'd like to ask you three questions on domestic UK banks. You can see them on your screen and please do respond online. I'll just run through them very briefly. The first one is expecting UK domestic banks to distribute over £20 billion of capital in the three years to 2023 compared to £13 billion in the three years to 2019 is (1) reasonable, (2) optimistic, or (3) pessimistic.

The second is on volume growth. Question number 2, UK mortgage growth is currently 5% a year. That compares to 2% in the decade post-financial crisis, at 10% pre-financial crisis. This pace of growth is (1) sustainable, (2) can accelerate, we're only just beginning, (3) all slow, current demand is temporary.

The final question on profitability, a 10% ROTE for domestic UK banks is that

1. realistic, near-term, and sustainable, (2) will be reached in the medium- term, (3) can be achieved, but only after further restructuring, or the fourth option is competition and interest rate expectations make it too hard to get there.

	Do please respond to those. You can see them on your screen. Please also
	submit any questions that you'd like to ask in this session with NatWest. With
	that, I'm very pleased to welcome back Alison Rose, CEO of NatWest Group.
	Morning, Alison. It's a pleasure to have you with us again.
Alison:	Morning, nice to see you.
Moderator:	Perhaps we could just kick off with strategy. The strategy that you outlined
	last year is focused on growth, balanced risk, and cost in capital efficiency,
	with a target of delivering a 9 to 10% ROTE by 2023, along with attractive
	capital distribution. I guess since you set the targets, the outlook for both
	lending volumes and rates has improved, but there's also more competition
	around now than there was back then. I wondered how much your confidence
	in reaching or perhaps even exceeding that level of profitability has changed.
Alison:	Thank you. Look, we remain comfortable with the full year target of 9 to 10%,
	and I think it's worth sort of remembering the assumptions that we have in
	terms of how we're going to achieve that. We're continuing to target above
	market growth, lending growth in our UK and RBS international, retail and
	commercial businesses. You can see from our Q2 results, we are continuing to
	deliver that.
	Continued cost reduction of around 4% as we reengineer the business and
	invest in digital and innovation and technology to make sure that we're
	creating that digital transformation as well. I've been clear that although we
	had a very strong performance at the half year, 5.9% in cost reduction, our
	target remains 4% as we continue to invest in the business.

Page 2

	We will, over time, reduce our strategic costs to a normalised level, and of
	course, you're going to get a normalisation of impairments as well as the
	economy and the businesses come out of the impact of COVID. And then an
	important part is our CET1 ratio of 13 to 14%. I think we remain - those are
	the component parts that sort of drive that strategy.
	Clearly, I think interest rate rises and the forecasts there are helpful, so I think
	that could give us more confidence around our 9 to 10%, but the market
	continues to remain competitive. I think my guidance remains pretty much at
	the 9 to 10 and supported by the good progress [break in audio]
Moderator:	I think we may have lost Alison there. Sorry, Alison, I think you cut out slightly
	right at the end.
Alison:	Sorry. Hopefully you heard my final comment, which is I think we're delivering
	on our plan, and we remain comfortable.
Moderator:	That was sort of the profitability part. You mentioned reducing the CET1 ratio.
	I think compared to a lot of other banks you've got a very clear capital
	distribution policy, and with the share buyback that's currently underway, that
	should deliver at least £7 billion of capital back to shareholders over the three
	years through 2023, potentially with more depending on how you decide to
	use surplus capital.
	I was wondering, in terms of what informs the decision of how you decide to
	use surplus capital to get that CET1 ratio down, and what sort of hurdle rates
	do you think about when deciding to either invest capital in the business or
	distribute it to shareholders?
Alison:	One of the advantages we have is we've shaped a very capital generative
	business and I'm very comfortable with the risk diversification we have within
	our business. If you look at the different components in terms of a
	predominantly secure book, comfortable LTVs on our mortgage side, strong
	capital management in terms of risk distribution across our commercial
	business, and some of the decisions we've made around reshaping parts of
	our business to be less volatile.
	A good capital generative business and very strong excess capital, as you can
	see. The 13 to 14% I think still gives us a very, the right shape for a business
	with our risk diversification. I think in terms of how we're thinking about it,
	those robust capital levels, anywhere between 420 to 520 basis points, or
	around £7 billion of excess capital above those headlines.
	My clear - hopefully I've been very clear - my clear intention continues to be
	to distribute capital back to shareholders. We've given clear guidance and
	updated that recently at the half year that we look to distribute a minimum of
	£800 to £1 billion over '21, '22, and '23. We also want to continue to
	participate in any activities around government sell-downs, so if there are

Page 3

	further directed buybacks, we would look to take part in those and we think
	that is a good use of our capital.
	Obviously, I can only do 4.99% of that in any 12-month period, so obviously
	just recently announced a share buyback as well of the 750. A clear intent and
	hopefully a clear path to the use of our capital and distributions, but also in
	terms of continuing to support the sell-down of the government stake, which is
	in their hands, but we would look to participate.
	I think then, in terms of what we want to do with the excess capital above and
	beyond that, we would look at acquisitions and to the extent that they were in
	line with our strategic ambitions and make sure that we could manage and
	integrate those in the right way, and they would be adding shareholder value.
	Inorganic growth we would consider, but they would need to be compelling
	shareholder value.
	I think preference for capital distributions, we obviously want to help the
	government to continue to sell down and normalise our shareholding structure
	and then any inorganic if that was a good use of our strong capital position.
Moderator:	The 13 to 14% CET1 ratio is a very clear target by 2023. Feels still like a long
	way off, but as we get beyond 2023, do you think that's still the right ratio?
	Some of your peers are talking about reducing their capital targets.
Alison:	I think we would review at that time. I think clearly getting to that level is a
	good stage to get from where we are, and we continue the strong capital we
	have. I'm always going to make sure that we've got a very robust and safe
	balance sheet. I think that's really important, and that sort of management of
	risk distribution in a good way, but certainly we would continue to [audio
	interference] evaluate that as we go forward.
Moderator:	In terms of the above market growth that you mentioned as one of the pillars
	of profitability, to what degree do you think that growth can drop through to
	the bottom line given some of the margin pressure that we're seeing from
	competition and also the cost base?
Alison:	One of the questions I get asked quite a lot is on the dynamic between sort of
	volume and revenue. I think the position, the way I would look at it is we have
	capacity to grow within our business, very strong franchises, but room to
	grow, and I think that's a good position to be in.
	What we will, particularly as the economy recovers and ramps back up as we
	are coming out of COVID and lockdown in various jurisdictions, I think a lot of
	that lending growth will be delivered by economic confidences as things come
	back, and we see continuing strong growth in mortgages. The way I would
	think about it through a volume lens, on mortgages we would expect volumes
	to continue to be robust through to 2022, and as you know, we have capacity
	to grow and continue to show increases in that market.

Page 4

On unsecured, we are, we have very low market share there and starting to grow in that market. Certainly, what we're seeing, demand there will be driven by consumer behavior, and I think in particular, pick up in travel as well. There's a lot of liquidity that's sitting on personal balance sheets, but we are seeing spending levels come back.

In commercial banking, where we would continue to grow, I think that is largely going to be driven by a demand side issue. There's a lot of liquidity that's been put it and support and as this business confidence comes back, we will see growth come back. That's on the volume side. How that translates into revenues, I think we manage very carefully the interplay between volumes and margins and risk.

I think you can see there's a lot of competitor pressure in the mortgage market at the moment. We don't see that easing, but we're very comfortable that we can compete effectively and manage that volume pricing risk dynamic. The average LTV on our book is around 57%. We manage it very much through that lens and we also target retention, which is sitting up at 80%.

In terms of fees and commissions income, we have a number of initiatives where we're seeing growth there. Certainly, as more customers become active and transaction volumes are coming back, travel comes back, we'll see growth in fees of commissions and also new initiatives that we have coming online, like Tyl, our merchant acquiring or Payit or our strategy on affluence where our digital advisory journey is plugged into our app. All of those elements will support and drop into the revenue line as well. Those are sort of the interplay between volumes and pricing across the market, we think.

Moderator: I wonder if we could maybe dig into some of those dynamics in a bit more detail, perhaps starting with mortgages. You mentioned you think, you expect volumes to be robust and I guess the recent approvals data, even with stamp duty tapering, what we're seeing in house prices is quite supportive. I guess, what would your response be to that question about the level of mortgage growth in terms of if sustainable at these levels can go up or might fade a little bit?

On pricing, we're seeing continued price competition I guess over the last few months. How much further do you think that has to run if you've got a crystal ball? I guess the final piece of that is, I guess one of the newer things that you're doing is expanding into new market segments of which Buy to Let is one. How much can that help both on the volume, but also on the margin side of things?

Alison: I mean, the fact that there's so much competition in the mortgage market tells you how attractive the market continues to be from a return perspective. I think in terms of customer behaviour dynamics, the stamp duty holiday has

Page 5