NatWest Group PLC (NWG) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Today's conference call will be hosted by Nathan Bostock, CFO of RBS, and John Cummins, Group Treasurer of RBS. Please go ahead, Nathan.

Thank you very much. Well, good afternoon, everyone. Thank you very much for joining us. I thought I would just kick off, literally, with a few highlights and then really spend the time on Q&A.

So you'll have seen that we put out our Q3 results, which were in my view generally positive at the operating level, up quarter-on-quarter. So again, continuing to operate in our core franchises. The numbers themselves, though, are typically more complicated as we know. So offsetting the core operating profit is the non-core. The non-core number is higher than in the previous quarter. Actually, fully expected from the point of view of driving greater reduction in the non-core. So in terms of the tradeoff between asset reduction and price, I think a good result.

Then you come basically to a whole set of items below the line, a variety of ones. Perhaps the biggest driving one in terms of ourselves versus the general consensus is the credit adjustment, which is always a moving feast for people. But otherwise, a number of items that move us down from effectively a GBP438 million profit at the operating level down to an GBP828 million loss at the net attributable. So those were the general results. A number of good things within there, particularly in terms of probably our markets business. Who obviously had a tougher second quarter, came out much better in the third quarter, particularly against their peers. And indeed, have done a good job of continuing to restructure, and have actually met their RWA reduction target.

Perhaps the bigger news clearly from the general market perspective, is the news that we said that we would look to ultimately fully exit Citizens. Clearly, we've also said we'll do that as an IPO structure, very similar to the approach we took to Direct Line. And then perhaps the more complicated part, and indeed we had a face-to-face analyst presentation this morning, where I went through a number of slides on an incremental basis to try and take people through from beginning to end the creation of what we have called the internal bad bank today. And what it looks like and what it does versus what was a non-core division previously.

But I think if you wrap up those various different aspects, I think what you saw was basically good, strong performance. Again, in terms of capital build. But I would say a number of things which are credit positive in my view, particularly in terms of the extinguishing of the higher risk assets over the scheduled period that we indicated. But probably just the number one and most important thing was that there is no external bad bank that is being created. Indeed, there is no internal bad bank that is a separate legal entity that is being created. So I think probably that's the number one highlight in terms of simplifying for the world what the outcome of this review has been.

So I think with that, I'll open it up for questions.

(Operator Instructions)

Lee Street of Morgan Stanley.

Hello, and thank you very much for hosting this call. I have three questions. One a bit broader, and then two more narrow ones. On the first question, I think on the slide to the main pack. Those are referenced to simplifying the capital structure, I was just wondering what that meant. I think on the call this morning, there was a reference to talking about the B shares, but is it just that, or is it looking at the softer complex group structure where you've got a variety of different instruments issued out of a variety of different entities, and just any color you can give that. That would be my first question. If you want to take that one the first, and then --

Yes, let's take that. I'm actually going to ask John if he'll just pick up on that.

Referring to, as Ross discussed in the analyst meeting this morning, referring to the ongoing conversations with the B shares and the DAS. It's nothing more than that. In terms of our complex capital (inaudible), we are a prisoner of where we come from in terms of the number of instruments outstanding. Obviously, we continue to always look to simplify. But given the new rules we're following, that we continue to look at all opportunities. But is it very much -- that comment is specifically related to the B shares and the DAS.

All right. Okay. Fair enough. Secondly, obviously you've arrived that would you cap the targets, and a lot of talk on capital levels generally moving up in light of the consultation (inaudible) in the UK and the [plymet]. I was just wondering, what does that mean in terms of your targets for tier 1 and tier 2? Do they move up? How much do you think you'll have outstanding there, please?

Again, I'm just going to ask, I'm going to ask [Van] [Dieta] is here as well. So I'm going to ask Van Dieta if she will cover that.

Hi, Lee. On that, no guidance has changed on that. As you know, after the Q1 results earlier this year, we guided for issuance of GBP4 billion to GBP5 billion of capital securities to be issued in tier 2 kind of a bucket. And we still think that's the right thing to do, to build our total capital ratio. As you know, unlike some of our peers, our leverage is not under pressure, per se. Our AT1 amortization is not very heavy in the short end, and, hence, the focus I think it's fair to say will remain on tier 2 issuances with the quantum that we have earlier guided which was GBP4 billion to GBP5 billion, of which GBP1 billion is what we did in June.

Okay. And in terms -- I think you previously guided that it's a 500 basis points you're looking over and above your core capital ratio. Is that roughly still what you're thinking in terms of total size of tier 2 and tier 1?

Yes. (inaudible) as you know with the ICB of [PILAC] of 17%, our own peer group targeting being 15% plus, we have currently in Q3 as you know we are at 16.2% today that we announced. So yes, our target eventually is still around 5% of non-equity capital buildup over time, and time is on our side. Because our amortization profile in the first two years is quite comfortable.

OKay. And just then one final point. Do you think that's enough though? 500, if you're going for a 12% fully loaded as you're guidance -- (multiple speakers)

Well following what the regulators have said until they change the rules again, we'll follow that. And that's kind of where we're at. So it's pointless to speculate if that's enough or not. Whatever the rules are, we'll meet.

Fair Enough. Well, thank you very much for your answers.

Thanks, Lee. Cheers.

Corinne Cunningham, Autonomous.

Hello, thank you very much. Couple of questions. One, probably a more general one. The new assets that are going into the IBB, can you just give us an idea of I suppose how the loss severity can be quite as high as is implied by the losses that you're expecting to take over the next couple of years? So the internal bad bank you've got 60% is performing, 40% is not performing. It seems like an awfully large provision or write-off that's being charged against those assets. So I'm just wondering what are the characteristics, given the loss is quite so heavy on those assets? And I've got one other question.

Yes, no. Well I think unfortunately in this world, the calculations sort of reflect the risk. So, what we've said is that we have about 5% of our balance sheet consuming about 20% of our capital. Our belief is that the capital deducts combined with the RWAs, so we tend to use what we call RWAEs, which is sort of a grossing up of the capital deducts, and you'll see that in the IMS. And so, you can look at that. But we believe that combination does actually reflect the loss severity that sits on those assets.

And in fact, that is, in many respects, that's why I've been saying as part of this, if you accelerate the impairments because of the change in management strategy for those assets, which changes the way you calculate the time period for the IFRS accounting, then basically that is nearly completely offset by the reversal. i.e., the removal of the expected loss minus provision deduction. In fact, that's what creates the 10 basis point difference at the end of 2013.

Second question, Corinne.

The second one is about coupons. So this is going to take you into a loss for the year, and I guess earnings are under pressure next year as well because of the continued runoff of the bad bank. What guidance can you give us on coupons?

Well, there are no more banks that we're going to pay coupons. We switched the coupons back on. We have avoided the external bad bank, which may have led to EU state (Inaudible). So, we fully intend to be a normal bank and keep paying coupons.

And do you think you'll have to issue stock to pay them like you've done in the --

We'll have to see.

Okay.

Haven't started those discussions yet.

All right.

But I think, again, what we've said is over all, our aim here is to make a strategic decision that leads us to a suitable level of core equity tier 1, as we see it in the future. And we want, at the end of the process, to clearly be normal, simple, et cetera. So it's pretty fundamental to us that we continue to move on that track in all different -- in all the ways that we should do.

Thank you very much.

Tom Jenkins of Jefferies.

Yes, good afternoon, everybody. Just couple of ones, I see a few have been answered already. Firstly, just to clarify on the position of the IBB, if we may, on the balance sheet. You said it's a divisions, obviously not a legally separate entity, is not I understand been specifically ring fenced. Would I am assume then from that or I am assuming then from that, that in terms of funding that IBB it is essentially just general fund -- (multiple speakers)

It's sitting on the balance sheet. There's no change it's just general funding.

So it's just general funding. Okay, that's great. And then, just very quickly on the Citizens, I don't understand too much like an equity analyst here, so I apologize. But you had a few questions on it this morning about the trapped capital in there. Is there any chance you could let us know roughly A, how much you think that is in there that you can get out, and what sort of chance of likelihood do you have of extracting that trapped capital?

Hi, it's Richard O'Connor here. As you know, the (inaudible) is currently about 14%. I think that over time, and some discussions with various regulators you can get that down to, say, 11%.

Right.

And then clearly at some point that would then be decisions of the Citizens Board as to what level they may carry. But that will be the broad direction of travel over the next two or three years.

Yes. So and again, that has to be our aim. I just generally remain cautious in this world of subsiderization and regulators clearly looking for strength within their own domain. But we believe it's -- there's a clear rationale as to why there is excess capital, and so we start from that point of view.

Okay. And just on that, I'm assuming there's very little or none, but sort of the inter group funding towards Citizens.

Not at all. They're completely immaculately sealed. Just like W, that can't give us money. So there is no inter group funding at all.

Cool, that's what I thought. Thank you very much, guys. Have a lovely weekend.

Sure, and you.

James Hyde of Primerica.

My first question has already kind of been asked by Lee, but I still want to get a bit more on the answer. It's about leverage and the need for AT1. It seems to me that when Nathan talked this morning about CCAR plus-plus and all that, and the pressure of all any UK bank is going to be on the leverage ratio is much more than the risk weighted ratios. So I just wonder, what is the medium term target for that? And surely, yes you're talking about no immediate roll-off of non-grand fathered stuff. But grand fathering seems to be something that the PRA doesn't like or do, anyway, or unless I've misunderstood that. And so, I'm just thinking is some AT1 issuance not inevitably part of the plans?

Well not right now. So it's not an immediate requirement, and obviously given some of the comments the PRA have made about other people who have issued AT1 in terms of kind of the trigger levels, it is something we keep an eye on. But right now, no, it's not an immediate pressing need. And on leverage, we've said, without some of the issuance from our other peers have, but we obviously will obviously give further and further detail on leverage in the full year.

And Jim, you saw the number today. A core tier 1 leverage ratio of 3.6%, tier 1 of close to 4.5%. So ultimately, although those are decent levels, but our target would be to notch those up over time, [leaving] that formal target given. But you can see that (inaudible) is up from there.

Fair enough, thanks. Just second then. Then the next question is slightly sort of soft area question. But I just want to understand, in terms of management or incentivization, in what way is this different to having the non-core? Is there some more harder things that really incentivize these people running the IBB to do this beyond the fact that you've had to -- you're going to recognize a lot of losses up front, and book values will become a bit of a less of a constraint. But is there something else, a management factor that you could sum up that sort of makes this different and then makes the politicians buy this, they've taken their pound of flesh?

Well, I think we've always operated with non-core highly focused on its task in hand. And clearly, in order to be able to achieve those things, we have clearly structured our approach to incentivization and that accordingly, which ultimately at the end of the day is always based on a balanced score card. I don't see it as any different going forward from that point of view. But to the extent that, let's call it, this feels relatively ring fenced in terms of an approach, I think that just reflects the reality of what you're trying to do here. It's all about focus, clarity of objectives, and aligning the incentives accordingly. And so far, we've employed that approach to date, and we'll continue to do that.

There will be a structure, as I think Philip discussed with the media, where actually there will be two or four non-exec directors who will specifically carry an oversight for this area as well. So, there are elements of enhancement and exactly the same to do with we'll enhance the reporting and uplift that, again, from a transparency point of view. But I have tremendous faith in the people we have from the non-core side, who will be fully engaged in this. I think we've proven to date, that we've driven a tremendous performance over the last five years.

Great. Thank you very much for your answers. Have a good weekend.

Cheers.

James Campbell of [Colbers].

Yes, I actually wanted to ask about dollar, US dollar based funding. I was just curious in light of both establishment of the internal bad bank as well as the sale of Citizens, if you guys could discuss your dollar issuance going forward, particularly I'm thinking with Citizens. Is there a chance you might issue some preferreds to free up some common equity capital? Or, I just wanted to get your thoughts in general about your plans going forward.

On the Citizens specific question, which we have a strong equity position. So obviously, we'd look at anything which would maximize the capital structure. But that's about only guidance I'm keen to give on the dollar funding. Obviously Citizens is now a self-funded bank. And on our own dollar funding, it's very much driven by the size of our dollar assets and wanting to make sure we have sufficient liquidity and funding in each major currency, given some of the asset bases we have. But obviously a big chunk of our dollar funding is done by repo in the broker dealer, and the rest of it is obviously we look to always try and maximize the best currency for us issuance for long-term funding versus some of the other concerns we have about having market access in other markets such as Euros or Sterling.

So it sounds like there aren't any changes as a result of establishing this internal bad bank.

Well, as I said, the funding for the internal bad bank will be just to borrow general funding. So there will be no specific dollar funding on the back of it. And there will be no requirement to do the spoke funding for the internal bad bank.

Great, thank you.

(Operator Instructions)

Robert Smalley of UBS.

Hi, thanks for taking my question. Couple of things. First, how can we look at the loan loss provision going forward? Ostensibly, that should be going down. And what about reserves to the non performers in the core bank? We should also expect there with the derisking for these to come down as well, potentially with a reserve release at some point.

Clearly, we signaled today that there will be a higher level of provision charged in Q4, an additional GBP4 billion to GBP4.5 billion. You get the capital loss set there. Clearly, we're not in the business at this stage of giving forward-looking guidance on provisions. But directionally, you're right, into the non-bad bank part of the bank, you should see a relatively low level of impairments because we're taking bad assets out of it. And it should be a pretty clean set of numbers. Albeit, we're very much aiming to be a normal bank so you'll see a normal level of provision in Citizens, in the corporate bank, in the retail bank. So there will be some impact, positive impact in Ulster, and elsewhere. But it won't be huge, and as I say, we're not -- we put out consensus forecasts last week in terms of forward-looking provisions, and clearly we'll update those if and when we get consensus going forward.

Okay. And also back on the tier 2 question, today's announcement really takes a lot of uncertainty off the table. You have an ambitious issuance plan. Can we look for some more tier 2 issuance between now and the end of the year?

Well it's subject to market conditions, obviously. And I wouldn't say it's ambitious, given the amount of funding we've done in the past, we only do GBP4 billion. So we will, obviously, try and find the right timing for us to access whatever market gives us the most attractive. We're still very NIM driven here in terms of wanting the cheapest funding. So we've obviously lost a couple of issuance windows. So we'll have to just see what the markets are like when we try and get the best outcome for the group.

Thanks. Thanks very much.

Okay.

Corinne Cunningham of Autonomous.

Quick question I didn't ask you before, on credit ratings. Have you had any discussions or have you got any early thoughts about what you think the rating agency's response to today's news might be?

We can't really give any guidance. Obviously, we have extensive discussions all three rating agencies and they're going through their internal processes. So, I can't really give you any further help on that one, I'm afraid.

All right. Just thought I'd try.

God does love a tryer Corinne.

Lee Streets of Morgan Stanley.

Thanks, again. I'll try one as well. So this morning, the focus is very much I think with taking capital off the table as an issue in the way that you said that it's been the same was we had done with liquidity, which I think obviously is a great idea. But my question essentially is, looking ahead to 2016, having to (inaudible). I think that's fair and that would be a fair statement. But at what point in the interim in your plan do you think you will have enough capital that you can actually hand on heart, say you think it's come off the table as an issue? Because obviously, it's still quite a long way out, three years to actually get to that level. Because you need some actions on the internal bad bank, whether capital neutral, they're just not capital neutral. Any thoughts or comments there, please?

No, I think we've taken -- we have taken a strategic view, and that's why I've moved the guidance out further than 2015 and out to the end of 2016. Because I do think getting to 12% and beyond is an important part of the forward journey. And not only achieving that, but also on route to it, having understood the confidence level by which you can achieve the different ratios on route. Because clearly from a capital planning point of view, it's not a single scenario here. You've got to be able to cover -- you need to be confident you can cover a variety of different ones. But the reason I've gone out to 12% and out to 2016, is because that's really where I think you have to start thinking about this.

Okay. Fair enough. And that's essentially just going to be organic capital build and RWA reduction that gets us there, is that fair to say?

Yes, and of course. So yes, you've got those aspects, and you also have the last -- sort of the last part of the IPO of Citizens out in that territory.

Okay. Thank you very much for the color, it's very helpful. Thank you.

Can I just add that the Fitch rating has just been made public. They have reaffirmed their rating for group. It's out on the Bloomberg.

You got one answered out of two -- out of three there.

I was going to say, that's a third of an answer. Okay, any more questions, please?

Carlo Mareels of RBC.

Oh, yes. Hello, everyone. I have a quick question really on the transition into Basel III and the grand fathering and what your thinking currently is. And do you have any updates from the PRA on the treatment of the call date of step up bonds, or also in general what your thinking is on calling bonds that may be upcoming?

Just before, so I'm probably going to have to make that the last question. Because I actually have to unfortunately get to another meeting after this. But please, John, perhaps you could --

So on a general call basis we obviously look on an economic basis, we've said that before. So it's very much about we look at the whole thing in the round in terms of calls. And on the PRA Basel guidance, again on step-ups, it is quite clear when you lose this value on a lot of these capital instruments, in which case you're going to sit -- it comes back into economics in terms of is it an affective form of funding in PILAC versus other forms of funding and capital instruments.

Okay. Thank you very much. So nothing has changed really?

No.

Are there any other further questions please come through Greg and I'm happy to do them bilaterally. And I'm very sorry, we have the meeting, the call. But thank you much for your time and your effort.

Yes, and big thank you from me as well. So have a good weekend.

Bye-bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.