NatWest Group PLC (NWG) 2013 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. I'd like introduce CFO of RBS, Nathan Bostock and John Cummins, Group Treasurer. Please go ahead with them.

Hi, good afternoon, it's John here just to say welcome everyone I've also been joined here by Vandita Pant, Group Head of Capital Management and Richard O'Connor Head of Investor Relations. We are happy to do a short introduction and then we'll take questions. Just to warn people Nathan will do the first half an hour and then we will cover off the rest. So Nathan?

Sure thank you very much John and welcome to everyone whether you're in the UK or the US time zone. I think yesterday to me was really a big day for us in terms of moving from what I would call the sort of financial restructuring period of the bank and we showed just how dramatically we had brought down the overall balance sheet of the organization. I think I described it yesterday as the size of one [Swede] bank every year for the last five years.

And the go forward which is all about us having a clear strategy sustainable earnings, sustainable business model and basically focusing in on our cost space and reducing that down to also make us a competitive and effective organization. I think at the heart of all of that is our focus around customers and ultimately our focus to be a retail, and commercial, and corporate bank focused on the UK and Europe.

I'm building on our November announcement around the bad bank. We announced how we plan to return the sort of 95% of the good bank into a company that is great for customers and also attractive to investors. I spent some time on the capital plan, particularly the journey, why the targets that we've set, credible targets in terms of how we will deliver them. I focused on the reduction of risk in terms of reducing the NPLs, reducing the stress losses which was another fundamental part of our November 1 strategy of setting up the bad bank.

We announced further deleveraging around our corporate institutional bank, so basically bringing down further our markets and, more marginally, our international banking balance sheets. Again all is part of our overall sustainability of returns in the long-term. And we focused on the fact that ultimately this generates albeit slightly lower earnings than previously, a much lower volatility and high return focus organization.

We also talked about reducing costs and the overall complexity of the organization very much the case that despite the financial engineering and coming down as much as we had in balance sheet, there's a tremendous job that needs to be done as we take breaths and look at how we have become more efficient for customers and indeed it is not surprising given the size of the balance sheet change. We also said that we had come out at 8.6% on our core equity tier 1 so slightly above the pre-trading statement 8.1% to 8.5% guidance and we came out with a total capital on the Basil 2.5 basis at 16.5%.

We focused on how stable the core franchise had been and how our underlying impairments in those franchises were actually trending down. We talked about how the non-core business had continued to deleverage, in fact had accelerated, had beaten its targets by a pretty decent margin actually in that fourth quarter and how that was positive to the starting point of our CR which starts at circa GBP29 billion versus the GBP38 billion that we said less the 4.5 of impairments, so again significantly better starting position.

Asset quality overall continues to improve, positive trend now in Ireland both economically, generally from an employment point of view, certainly in house prices more generally, and we're seeing positive news in terms of the impairments in our retail side. Further reductions in the outstanding wholesale debt, deposits stable, so again very strong ratios around loan to deposits. Liquidity profile remains at least at the gold standard, still possibly almost touching the platinum standard.

CRE is down so down to about to GBP53 billion gross and our markets, RWAs continue to come down, so again I think all in all a general trend towards a lower risk, lower volatility earnings organization but still a journey to do in terms of building our capital ratios up above the 12% that we've targeted at the end of 2016 and we have given a clear plan as to how we intend to achieve that. John I don't know if you --

Sure, I thought I'd say we have a [little ask] over the wholesale markets, we believe it to be positive technical to our spreads. We have reduced our previous issuance guidance, it was about GBP5 billion of sub debt issuance over two years from the full year 2012 results. I will now talk GBP4 billion in sub debt with one year left to achieve.

We've issued GBP2 billion year to date so we've got GBP2 billion left to do and we think that is a quite a modest and achievable number. We don't see any funding requirements for our main operating entity. We may have a small requirement for holding company senior unsecured debts for cash flow purposes. We expect further tier 2 issuance of this GBP2 billion left to do. We're still weighing up additional tier 1, we're not in a rush to do any so this year, and I am very happy then to take, to open up the line to questions.

We do have one pre-submitted question which we will do; we will do at the end. I suggest if people have got questions on strategy or the overall financials we start with Nathan first and then we can cover more of the bond questions in the second half of the call depending on how we get on. Operator can you open up the questions please?

(Operator Instructions)

Lee Saint, Morgan Stanley.

A couple from me, two strategy and one a more [bondy] question, on the strategy you mentioned the order broad ring fence approach yesterday. I was just wondering what degree of comfort you have that the non-ring fence can get a subscription rating to make it a credible counter party. Given I guess, there would be a fair amount of [room] to the entity and whether that entity will be basically simply funded from the downstream funding from the holding company. That would be question number one.

Question number two, was just on systems I think yesterday you reiterated the start of IPO in 4Q. I was just wondering, could that actually be brought forward at all? Or is just a certain amount of form filling in the administration that has to be gone through and that is the earliest possible date?

The final one, a bit more bondy's side, is what is your expected policy to meet the plaque requirements are you intend to do all of it with a CET1 an additional tier 1 and tier 2 is that how you think about it or have you got this approach? That is my three.

Good questions. The broad ring fence in terms of our strategy we have concluded that, that is the right place for us to be heading towards. There was some explanation I gave yesterday as to why the alternative of having a broad non-ring or large non-ring fence bank was not the correct one in our view for us going forward. So I think from that point of view the decision is a sound one and is one that is also robust in the longer term, so it is not one that we would feel that we need to alter.

The precise details of how ratings will work for that non-ring fence bank I think remains open. We still think there are a number of questions and we said that we think this is future proof, 75%, 80%. Because we to get some interpretations from the PRA, we need to see the secondary legislation. Generally I think there is a mix of some people are quite optimistic generally about the ratings that might be achievable. I tend to be a pragmatist in this particular one.

It will need to work and it will have to work for UK Inc to be able to work, given that obviously the likes of the Lloyd's and SLS sit in that space and I suspect that the construct ultimately that need to be put in place will reflect that. And that ultimately it may be that the holding company has to form some form of the key component in all of this, but my belief is it will be solved, I just don't quite know exactly how at this precise moment. Again, we still have a three-, four-year period for that journey and for that resolution.

In terms of Citizens, really don't see the date moving forward from the ones that we have talked about, I will call it end of Q3 into Q4. The reality is there is a lot to do and there is a lot to do in terms of just general preparation for these types of things. There are certainly forms, there certainly things you need to do, but there is also discussions you have to have with regulators, all sorts of preparation that needs to be there.

That is what we are working on, it is what Bruce is leading. He is also leading of course, actually the growth in income that we are expecting to see there as he is making good progress on both the loan side and the mortgage side and we are also expecting to see as well some benefit from on the cost side. John?

On the plaque side obviously we've given guidance we're going to get to 12% core tier 1 ratio and a 5% hybrid so that is 17%. We think that is a very, very strong position for any plaque. Obviously the regulators do retain the ability to offer further above the 17%. In terms of out knifing robust resolution plans we fully intend to have robust plans as well. So that we do believe that will meet the requirements obviously if things change then we will change our plans accordingly but a 12% core tier 1 ratio is very significant. And I think Ross mentioned yesterday we will see what some of the other UK banks end up with as well in the future we will see.

Ron Porto from Goldman Sachs.

First on, there's, you guys have some tier 1s that were not call previously but I think they are step ups that are callable on March 31. Just wanted to get your thoughts around that, we haven't seen a redemption notice on those yet, but I believe they do not qualify yet at all for capital purposes. That is my first question.

Secondly, if you guys can maybe address a little bit on the recent rules out from the Federal Reserve on the FPO proposal and just in light of the markets restructuring that you guys talked about yesterday. How does that impact those rules impact the business and how you think about the restructuring of markets going forward?

Well Vandita do you want to do the first one.

Sure, on the first one in terms of calls just to be clear we have said that our call policy is an economic one which will include concentrations of which get into the mix including the capital rate recognition or not, any funding benefit and then to do that we want to get out of, to see that there is a bit of a [income] position on economics of calling certain securities.

And given that there are regulations around C LEC, [MREL], et cetera still to land fully. To take those into account as well for any call decision so I think of course we can you give any guidance on call decisions but fair to say that our policy remains of assessing calls on an economic basis.

I will pick up at least some of it in John might add to this. In terms of the broader strategic picture, we were very conscious of, I see in fact we have looked at a number of different things that we felt could be deterministic in terms of ultimate strategy. But also if you have a strategy how these things might influence is so we have looked at it from both directions.

IAC clearly we have two elements to the extent obviously we have Citizens and Citizens as you know is going to be effectively moving out of that arena from our perspective so there is an element of timing in that, that one needs to be able to discuss and agree with the regulators, but again we see that as perfectly reasonable and perfectly acceptable from both parties.

Then there is the second part which is if you look at our overall strategy here we are bringing down our markets business over the medium to long term. Target is for the overall business on a global basis to be circa GDB45 billion sterling of RWAs, so it is our view that we will actually fall under the IHC rules with the footprint that we will ultimately have in the US servicing our clients. John is there anything you --

I think that covers it quite well so think that is where we went up on those places and obviously we will continue to meet our regular requirements as and when they change. Anything else Ron, do you want a follow up --

No that's helpful. Just on the first one that is very helpful thank you, on the first one about the call should then should we assume that the securities are not going to be called then on the March 31 date or not?

As I mentioned I will not be able to guide you on that right now, but just to reiterate all the call decisions will be on an economic basis.

Tom Jenkins, Jefferies.

Apologizes in advance for the nerdiness of this question but when thinking of your dollar capital securities, you've got outstanding in the old-fashioned tier1s and some depressed. In terms of can you just share your thinking in terms of whether they need to be single point of entry securities going forward or under EU law and also forgive my ignorance, can these be eligible for capital assets to as it were back fee the dollar assets we think of the new federals that have been sort of brought into place.

Again on the federals we gave the answer before it really will be driven by the size of the operation we have left in the states when Citizens goes, but coming back to the trust preferreds on the dollars it is very much on -- it has got to be on the English law going forward, or at least have a clause understanding point of non-liability and secondly, whatever systems we do have outstanding a different currencies going forward, as and when we look at things maturing, amortizing we'll have to be very clear on which entity issue for capital it's likely to be single point venture which is a holding company and again we have to look at which is the most efficient market as to issuing whether it's dollars, euros, or sterling, or any other currency for that matter.

So the tress prices are not -- just to be clear the tress prices are group securities so they do not interact in any which way but the FBO or ISC requirements as they make comments and as Nathan just mentioned ISC is likely not to be a constraint for us given the size of operations going forward in the US.

In terms of whether they will or will not fully be eligible for MREL P-lag or any other version of SP related requirements as you know the details are yet to fully land on that. We have that is one of the concentrations, but not all the answers yet.

Sure thanks very much indeed, appreciate it.

Hope that was chirpy enough for you. (Laughter) I just read everything.

Robert Smalley from UBS.

Couple of things, first just to clarify on the amount of tier 2 left to do that is GBP2 billion sterling for the rest of this year.

Yes, that is GBP2 billion over the next 12 month period.

Over 12 months. Okay.

Secondly, in the strategic presentation that you had yesterday, you laid out a number of goals particularly on capital that are going for the medium term goals are for 2016, 2017. Could you talk a little bit about how we get there? Are we -- I'm assuming we are not straight lining from 8.6 to 12 that is kind of back loaded and what kind of discussions with the regulators have you had about this and the trajectory there?

We have had an incredibly full and comprehensive discussion with our regulator. I would say joined at the hip is probably a fair description, Vandita will know that from the ongoing nature of our interaction, but also very helpful ones in my opinion. I think we both have been very transparent about both our aims and the journey.

The medium term quotation of 2016 and 2017 we generally used for the presentation, but in terms of capital where we are still much crisper in terms of actually the circa 11% by the end of 2015 and the greater than 12% by the end of 2016. You are right to think that the journey is not a straight line, it is not a Y equals MX plus C type approach and the reality for that is because when I gave the breakdown of the key components, that these are the key components that drive the journey, Citizens divestment is the largest, that is worth between 200 and 300 basis points in terms of that journey.

The reason it varies is not because of the price variance, it is not one is a low price one is a heroic price, we have not assumed a heroic price at all in this it's merely to do the fact that as I showed in the presentation yesterday. Today we sit at about 429 billion of RWAs and by the end of 2016 we expect to be at 300 billion RWAs or some of them being citizens themselves and GBP1 billion worth of capital sat over those two different denominators gives you quite a different amount of ultimately ratio contribution.

The other key components are our what we call our RBS capital resolution which is what were describing as the bad bank previously and it is the rundown of those, let's call them, higher risk assets and extinguishing that and we gave a profile for where we expected those to be over the life. So we said it would be GBP23 billion, so GBP29 billion today as opposed to the GBP38 billion we mentioned that the November 1, the GBP29 billion today, GBP23 billion by the end of this year, GBP11 billion to GBP15 billion by the end of 2015, and that is below GBP6 billion by the end of 2016, so there is a contribution from that.

There is earnings generation obviously during the period, we need balance that off obviously with the overall presentation that I gave in the various things that we will be doing in order to reshape the bank, so again it is a contributing factor, but we need to think of it in that light. There is the Williams and Glenn divestment which is more towards the far and this particular period, so don't think of it as being a first or second year at that three year picture. And then as the further de-risking of our markets and IB business which over that period is a circa GBP50 billion of RWAs.

I am sorry there is quite a few moving parts and yes, they do not add up to a straight line, you are quite right but they are all shall we say firmly understood, firmly planned. And I think again if people want an element of confidence that we do what it says on the tin then I think again if you look at DLG, the direct line group and the approach that we took and the last trench of that we got away on Wednesday night, again that gives you a real pro forma for how we do things. And certainly funny enough for me I cannot think in my history anyway of somebody getting something where with zero discount, but we did. There we go.

One more if I would, yesterday you were asked on the equity call about paying hybrid coupons by issuing equity. I guess my question is, have you received more and more inquiry and concern about that from the equity community and what is the discussion with the regulators about that going forward? Is that something that you have to revisit with them quarterly, semiannually and annually or is it something that is taken as a given at this point.

It's Richard O'Connor here I'll kick off and maybe John will join me as well. Clearly we have been speaking to the equity markets yesterday and today and we have an active program over the next few weeks, to have conversations with our shareholders. We have met any direct concern is a continuation of previous trends, it is understandable to investors given that we are still loss making.

As a said on the call yesterday it is certainly far from ideal and you have to weigh the cost of benefits very carefully. The conversation with the regulator so far has been an annual conversation with Nathan and Group Treasury, and myself. I would expect that to continue for this year. After that, we will just have to see.

I think is the answer obviously the group pay quarterly dividends both ordinary dividends and perfect dividends, so maybe we might go to a different time period but that's too early to tell.

Okay any other follow up or can we move onto the next question, please?

Cindy Hollow, Imperial capital.

My question is around how you gauge what is economic as a call for RBS now given that tier 1 securities no longer serve the purpose they were issued for. I would love a little bit more color as to how you gauge it. Is it based on overall average cost of funds for the company, do look at is senior perpetual, can you give a little bit of comment please?

Again I would not get drawn into the answers that you may be looking for unfortunately, however, in terms of consideration, yes, as I have said capital recognition are not that the security funding profile of that entity from which the security is issued, the average cost of funding to that security. As you know some of the securities we have hedges on it and whether we have a P&L position on that or not also means that a crystallization of that can have another economic concentration that we need to take into account.

I would say, in totality all of those issues will get into the mix along with the regulatory uncertainty that might mean that a particular security may be used less under one yardstick, but may still be useful from some other yardstick and if we do not know we may not want to take a front from that process.

If I look at the internationally legal entities, local regulation and other types of regulation. It is too complex an issue just to pin down to one or two variables, it is a multi variable problem we are sorry we can't give you more guidance than that.

Christina Hadiwijaya Barclays.

I had a question on the dividend access share, could you just give us an update and I apologize if this is something that was covered in one of yesterday's presentations, just an update on the negotiations here with the government on the meeting list. And I guess the follow-up on that depending on the answer and given that the company loss making would this have changed the thinking around the access scheme at the moment?

In terms of negotiation, we are in advanced negotiation. I think it is fair to say that this is really now with, it is not us that, because it is the government that interacts on this, but this is with Europe and it is our hope that we will be in a position to actually cover this off by the time of our EGM.

In the approach that we have taken to it is that we think this is a sensible and logical time to actually put all of this type of thing to bed. Clearly, we also though want to within this recognize the fact that it would be most sensible for the timing of any payment or anything in relation to it, to be much more correlated to its usage. That is the sort of logic and that is where we are on the situation at the moment, I do not know Richard if you want to --

Yes, to get an agreement would be good in principle, but very much the policy would be to make the payment as close to our first ordinary dividend as possible.

Okay that is the last you are going to get from Nathan, so can we please carry on the questions directly.

Can I just say thank you all very much and I apologize for having to leave part way through, but unfortunately I have a prior commitment that I have to get to so thank you for your time. It is appreciated.

Tom Jenkins, Jefferies.

John, I just want more information, so since Nathan nipped out. Just thinking in terms of the 200 to 300 basis of capital uplift you are looking to get from the sale of Citizens. I think it was mentioned yesterday. You said obviously it is, that is quite a broad range but depends on RWAs at the time of whenever the transaction goes through.

We can have a stab of what the RWAs are, but when that denominator to the equation, but when looking at the numerator of that equation what kind of range of multiple to book value are using and indeed what size of quantum book value are you using? Can you give us any color on that as well?

Richard will do that.

There is no need to make a stab at odd, we gave very clear guidance it's (multiple speakers) at the end 2016 and that's the medium term and longer term thereafter. Why are they flat by the way, that is because we expect a bit more deleveraging in the markets in the baking business, 2017 and 2018 and growth in the retail commercial businesses.

In terms of the Citizens currently only has GBP8 million or thereabouts of equity capital, its refinanced statements are public each quarter so you can obviously keep your eye on that number. In terms of how we would look at a multiple now based on current, ROE price to book equations it would be around 1.2 times look across obviously the first tranche we would expect to pay discount to that. And then as the Citizens get going into markets have become more credible we would have that discount evaporate over the second and third tranche or gets less over the second and third tranche you saw with [Diet] Lane group actually the last tranche was done at zero discount, so clearly you wouldn't expect that for Citizens but certainly that will be our policy.

Lee Saint, Morgan Stanley.

Just wondering on Moody's if you have gotten any update there have you have been in discussions with them and if you were to get a downgrade if you might, is there anything you could quantify for us as it might pertain to that and what impact would you expect that to have, that would be my question?

On Moody's they did issue a comment yesterday which is worth the read, the last section, paramount of the rating consideration they talk about execution risk, obviously we have got a very good record of execution risk. We have got a good plan on capital and they had mentioned already sell liquidity and funding position.

We continue to have dialogue with all three rating agencies, Fitch has just come out affirming our rating a stable outlook as well so we will continue to talk and discuss with Moody's and the other rating agencies in terms of impact. In terms of potential impacts I don't want to get what would happen if Moody's were to downgrade because we are still hopeful that we can continue to give them enough information and comfort that.

We can meet these risks and execution and do our plan. Without you we have a very strong liquidity position and it would not cause us any concern. When we put in an annual report and accounts as well as when S&P was downgraded we saw minimal outflows, we still have an excess liquidity position and as part of the drive towards improving our liquidity coverage ratio we have continued to focus on financial institutions type deposits, type A deposits that incurred liquidity buffets incur stresses in individual liquidity guidance as well as LCR we are pushing those type of deposits away from us because we don't that type, but that would reduce any outflow risk there is from Moody's.

That's a bit of a convoluted answer but did include the S&P example we had which would put the end report accounts and also the Fitch stable outlook affirmed today.

There are no further questions at this time. I would now like to turn back to John for closing comments.

On a grey and gloomy afternoon I hoped this cheered everyone up and thank you all for dialing in. If you have any further questions please come through your regular contacts and (inaudible) investor relations and thank you for taking the time to dial in and listen to us. Thanks again. Goodbye.

Ladies and gentlemen that will conclude today's presentation. Thank you for your participation. You may now disconnect.