NatWest Group PLC (NWG) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the NatWest Group H1 Results 2022 Fixed Income Presentation. Today's presentation will be hosted by CFO, Katie Murray; and Treasurer, Donal Quaid. After the presentation, we will open up for questions. Katie, please go ahead.

Good afternoon, everyone, and thank you for joining our half year 2022 fixed income results presentation. I'm joined today by Donal Quaid, our Treasurer; and Paul Pybus, our Head of Debt IR. I will take you through the headlines of the half year, give an update on our strategic priorities and then move on to some of the detail. Donal will then take you through the balance sheet, capital and liquidity, and then we'll open it up for questions. So starting with the headlines on Slide 3. We announced a strong first half performance today with operating profit before tax of GBP 2.8 billion, up 12.8% on the first half last year, and attributable profit of GBP 1.9 billion.

Our return on tangible equity was 13.1%, up from 11.7%. We're reporting strong income growth of 16.2% and costs were down 1.5%, resulting in a positive jaws of 17.7%. We continue to target a reduction in costs of around 3% for the year and remain on track to deliver that. In a challenging macro-economic environment, we can maintain a strong balance sheet and disciplined risk management. The bank is highly capital generative, and we have declared an interim dividend of 3.5 pence per share. We have also announced a proposed GBP 1.7 billion special dividend with a share consolidation.

In addition to the directed buyback of GBP 1.2 billion in March, this brings total distributions announced in the first half to GBP 3.3 billion. We have also recently completed the GBP 750 million on market buyback and announced in February. Just over 2 years ago, we set out our purpose-led strategy, placing customers at the heart of our business, as you can see on Slide 4. The rationale was simple by helping our customers to thrive, we too will. Against the backdrop of economic uncertainty, we continue to focus on our 4 strategic priorities in order to drive long-term sustainable value, and that starts with supporting our customers, which I'll talk about more on Slide 5.

While we're not currently seeing any immediate signs of stress, we are acutely aware of the pressures customers face this year with higher inflation, rising interest rates, a steep increase in energy costs and supply chain disruption. Many of our customers built up savings during the pandemic. So household finances are in relatively good shape and businesses have healthy balance sheets. But we know that spending on utilities and fuel bills is up between 20% and 30%. So we are proactively targeting support to help customers navigate this economic uncertainty. And you can see on this slide the ways in which we are doing this. So let me turn now to how we are delivering on our strategic priorities on Slide 6. We have an extensive franchise.

We currently serve 19 million customers and of the largest business bank in the U.K. This means we start from a position of strength with opportunities to grow even in an uncertain economic environment. And we do this by first deepening our relationships with existing customers as well as acquiring new ones. And secondly, supporting customers as they transition to a low-carbon economy; and third, diversifying our income streams. Turning to Slide 7. We continue to proactively manage capital allocation and risk in order to maintain a strong balance sheet. We have a well-diversified wholesale book and 93% of our personal lending book be secured. 92% of our retail mortgages are fixed with an average loan-to-value of 52% and the level of defaults across the group remains low.

Our phase withdrawal from the Republic of Ireland continues to progress well, and we now have binding agreements in place for 90% of the loan book. We continue to expect the majority of sales to be largely complete in 2022 and are withdraw to be capital accretive. Turning now to Slide 8 and looking at the performance of the go-forward group in the second quarter, using the first quarter as a comparator. We reported total income of GBP 3.2 billion for the second quarter, up 7.1% from the first. Excluding all notable items, income was GBP 3.1 billion, up 12.3%. And within this, net interest income was up 13.9% at GBP 2.3 billion, and non-interest income was up 7.7% to GBP 797 million. Operating expenses fell 1% to GBP 1.7 billion, driven by lower conduct costs. We made a net impairment release of GBP 39 million compared to a release of GBP 7 million in the first quarter.

Taking all of this together, we reported operating profits before tax of GBP 1.5 billion in the second quarter. Attributable profit to ordinary shareholders was GBP 1.1 billion, equivalent to a return on tangible equity of 15.2%. I'll move on now to net interest income on Slide 9. Net interest income for the second quarter was GBP 2.3 billion was 13.9% higher than the first as a result of higher margin and strong lending. Net interest margin increased by 26 basis points to 272 basis points, driven by wider deposit margins, which added 34 basis points. This reflects the benefit of higher U.K. base rates, which increased by a further 50 basis points in the quarter and higher spot rates on our structural hedge. Lower mortgage margins on the front book reduced NIM by 4 basis points. And repayments of higher-margin loans in commercial and institutional decreased it by a further 3 basis points.

Moving on now to look at volumes on Slide 10. Gross loans to customers across our 3 franchises increased by GBP 4.4 billion or 1.3% in the quarter to GBP 338 billion. In Retail Banking and Private Banking, mortgage balances grew by GBP 3.6 billion or 1.9% and unsecured balances increased by a further GBP 500 million, the strongest quarterly growth since the onset of the pandemic. In commercial and institutional, gross customer loans increased by GBP 500 million, while lending to large corporate and institutional customers increased by GBP 1.4 billion, driven by growth in our funds business and greater use of credit facilities. This was partly offset by continued repayments on government lending schemes.

I'd like to turn now to non-interest income on Slide 11. Non-interest income, excluding notable items, was GBP 797 million, up 7.7% on the first quarter. Within this, income from trading and other activities increased by a further 8.3% to GBP 222 million as we benefited from ongoing volatility and increased customer activity across our suite of markets products. Fees and commissions increased by 7.5% to GBP 575 million, driven by higher card and payment fees as consumer spending increased and demand for corporate credit generated higher lending and financing fees. I'll talk now about what this means for 2022 income on Slide 12. We are strengthening our guidance and now expect 2022 income, excluding notable items of around GBP 12.5 billion, up from GBP 10.1 billion in 2021.

Our year-on-year interest rate benefits through managed margin and the structural hedge adds around GBP 1.9 billion, and Donal will go through this in more detail later. You then need to consider the impact of lower mortgage margins, which will partially offset this. We also have the additional net benefit of higher average lending volumes and higher non-interest income. This guidance is underpinned by our assumptions that the U.K. base rate increases to 2% by the end of the year. And U.K. spot rates remain broadly in line with where they were at the end of June, leading to bank non-interest margin above 270 basis points for the full year.

Turning now to costs on Slide 13. I won't spend too long on this, but you can see that other operating expenses for the go-forward group were GBP 3.2 billion for the first half. That's down GBP 50 million or 1.5% on the same period last year as we continue to work to meet our targets. This cost reduction, combined with the improvements in income has supported a 9 percentage point improvement in the cost/income ratio to 55% in the half. Like other businesses, we are experiencing the impact of inflation on our cost base.

Despite this, we are confident that we can deliver a reduction of around 3% for the full year. And looking into 2023, we expect some of the currently inflationary impacts to be more significant, and we now expect our cost base to be broadly stable next year. Turning now to impairments on Slide 14. We have a well-diversified loan book and are not yet seeing any significant signs of stress. In the first half, we saw ongoing improvement in the performing book with migrations of balances from stage 2 back to stage 1. This underlying strength in the loan book with low levels of default has resulted in a reduction in ECL provisions and coverage to 93 basis points at the end of June, down from 103 basis points at the year-end. This has driven a net payment release for the group of GBP 54 million in the first half. We are strengthening our guidance for the full year loan impairment charge from below 20 to 30 basis points to under 10 basis points. This guidance is underpinned by our updated economic assumptions on Slide 15.

We have summarized the changes to our base case and economic assumptions at the top of the slide. While we have not changed the 45% weighting to our base case scenario, we have increased our weighting to the extreme downside scenario from 5% to 14%. We have also adjusted down our expectations for GDP growth and U.K. unemployment to reflect the latest consensus of economists. And as I said earlier, we have increased our U.K. base rate outlook to 2% by the end of the year to reflect higher inflation. The net effect of these changes was a GBP 41 million increase in the ECL provision as shown on the ECL walk at the bottom of the slide. The post-model adjustment for economic uncertainty is broadly stable over the first half at GBP 583 million.

However, the components have changed as we have reduced COVID-19 overlays and increased provisions to reflect the challenges our customers face, including the increased cost of living and supply chain disruption. We continue to be cautious on the release of these provisions as we have yet to see the full impact of these challenges play out. And with that, I will hand over to Donal.

Thanks, Katie. Good afternoon, and thank you for joining today's call. I will start by sharing some of the highlights from the first half of the year before moving into more detail on capital and liquidity. I will then give an update on progress across our funding plans for 2022 before we open up for questions. Starting with the highlights on Slide 17. We ended the quarter with a strong capital, MREL and leverage position, comparably above the regulatory minimum with a CET1 ratio of 14.3%, leverage of 5.2% and a total loss absorbing capital ratio of 31.7%. We continue to operate with a robust liquidity position with a liquidity coverage ratio of 159% and a strong deposit franchise.

We successfully executed several funding transactions in H1, making good progress against our 2022 funding plans, leaving us with plenty of flexibility for the remainder of the year. I was also very pleased with the Bank of England's first assessment under the resolvability assessment framework in June with no shortcomings identified in NatWest Group's preparations for resolution. Turning to our capital and leverage position on Slide 18. Our CET1 ratio at the end of H1 was 14.3%, which is well above the current maximum distributable amount of 8.7% and our 13% to 14% full year 2023 CET1 target range.

In December last year, the Financial Policy Committee announced an increase in the U.K. countercyclical buffer rate from 0% to 1%. And this will take effect from December this year in line with the 12-month implementation period. A further increase in the countercyclical buffer to 2% was announced earlier this month and will take effect in July 23. A 2% countercyclical buffer will translate to a requirement of approximately 170 basis points for NatWest Group. The PRA also confirmed late last year that Pillar 2A will revert from a nominal amount to a variable percentage of risk-weighted assets later this year as part of the supervisory review and evaluation process. Our maximum distributable amount and supervisory minimum requirements will start increasing from December of this year as the countercyclical buffer increase takes effect. However, these changes will have no impact on our 2023 CET1 target of 13% to 14% as they are already built into our capital forecast and plans.

The U.K. leverage ratio was 5.2%, leaving circa 200 basis points of headroom above the U.K.'s minimum requirements of 3.25%. The leverage of ACO minimum requirement will also move higher as the cancer cyclical buffer increases. Moving to Slide 19 and our quarterly movements in CET1 and risk-weighted assets. The CET1 ratio is down 90 basis points compared to the first quarter, primarily driven by the special dividend of GBP 1.75 billion and ordinary dividend accrual of EUR 250 million. This was partially offset by GBP 1.1 billion of attributable profit. The 14.3% CET1 ratio includes IFRS 9 benefit of 16 basis points. Risk-weighted assets increased by EUR 3 billion in the quarter to GBP 180 billion. The increase was driven by higher credit risk, mainly reflecting lending growth and model changes.

Turning to Slide 20. This is a capital generative business demonstrated by the fact that we delivered operating profit before impairments of GBP 2.8 billion in the first half, which is broadly in line with the entire year in both 2020 and 2021. This capital strength gives us the flexibility to invest in the business for growth, consider other options that create value as well as return capital to shareholders. Turning to our liquidity position on Slide 21. We have maintained very strong liquidity levels during the first half of the year with our LCR ratio at 159%, reflecting over GBP 76 billion of surplus primary liquidity above minimum requirements. The decrease in the ratio since full year '21 is due to an increase in lending, redemption of own debt and share buybacks, offset by continued but slowing growth of customer deposits. We continue to manage a high-quality liquid asset pool with primary liquidity of GBP 198 billion and secondary liquidity of GBP 70 billion.

Moving to funding on Slide 22. We operate with stable and diverse sources of funding. Customer deposits represent approximately 86% of total funding. Our wholesale funding is at GBP 76 billion, and around 40% of that figure is to meet our senior MREL and non-equity retry capital requirements at the group holding company. We continue to look at all options available to us to assess the optimal blend and most cost-efficient means of funding. Looking at customer deposits in more detail on Slide 23, you can see that deposit levels continue to grow but at a slower pace. Customer deposits in the go-forward group increased GBP 14.8 billion during H1 with a GBP 2 billion increase in retail, GBP 6 billion in commercial and institutional and GBP 2 billion in private. Retail banking deposits are now GBP 191 million, and commercial and institutional banking deposits are GBP 23 billion. We have seen Ulster Bank deposits decreased by approximately EUR 4 billion in H1, in line with our expectations as we pursue our phased exit from the Republic of Ireland.

Our loan-to-deposit ratio is 71%, underpinning our robust liquidity and funding position as well as our strong ability to grow our core lending franchises. Turning to Slide 24 and rate sensitivity. The strength of our deposit franchise, growth in our deposits over the past couple of years and increases in the U.K. base rate and the yield curve provide us with a sizable tailwind on income into the second half of this year and 2023. The 115 basis points increase in the U.K. base rate since December last year has added around GBP 0.4 billion of managed margin benefit in the first half of 2022 versus prior year. We are projecting a year-on-year increase for the full year of GBP 1.1 billion based on the increases in the U.K. base rate to 1.25% in H1.

We now expect the U.K. base rate to increase to 2% by the end of 2022 and for it to remain at that level throughout 2023. This would add a further GBP 0.2 billion of managed margin benefit for the remainder of 2022 with the full run rate benefit in 2023. Turning to the structural hedge. Total hedge income for the first half increased GBP 0.1 billion compared to the first half last year as notional balances grew to GBP 230 billion at the end of June, up from GBP 206 billion at full year '21. Assuming both balances and swap rates remain broadly stable, we expect an increase in structural hedge income of approximately GBP 0.6 billion versus full year 2021. This would bring the total year-on-year benefit from higher rates in 2022 to GBP 1.9 billion.

Clearly, the actual benefit will depend on the timing and size of rate increases, movements in the yield curve, the trend of deposit balances and actual deposit pass-through rates. Turning now to our MREL position on Slide 25. Our total loss-absorbing capacity ratio continues to look healthy at 31.7%, significantly higher than our RWA requirements of 24.7%. Total loss absorbing capital ratio has reduced from 39.8% to full year '21. That reduction has been driven by the increase of risk-weighted assets on the 1st of January of this year due to the impact of [notional] uplifts, the removal of GBP 0.6 billion of legacy Tier 1 and Tier 2 capital from loss absorbing capacity resources and a reduction in our CET1 ratio for share buybacks and distributions. Our senior unsecured MREL stock is now approximately $22 billion or 12.4% of risk-weighted assets compared to our RWA requirement of 11.1%. As you can see from the profile on this slide, $7 billion of senior unsecured MREL loses MREL eligibility during 2022 with new issuance planned in the region of GBP 3 billion to GBP 5 billion.

Now turning to total capital on Slide 26. Our total capital ratio at the full year is 19.3%, with an AT1 ratio of 2.1% and a Tier 2 ratio of 2.9%. So we are well positioned on both AT1 and Tier 2 with no expected issuance requirements this year. Our future AT1 and Tier 2 requirements will be subject to the evolution of risk-weighted assets.

Now turning to Slide 27 on legacy capital. At the year-end 2021, we had GBP 2.5 billion of outstanding legacy securities, which had no notional value after the 1st of January of this year. We continue to proactively take opportunities to reduce our legacy capital stack via liability management exercises and calls. And this has continued into 2022.

In Q1, we announced the call of 3 legacy Tier 1 instruments with a notion of $0.6 billion. These actions reduced the outstanding balance to below 2 billion. A further 1.2 billion will mature this year, significantly reducing the balance to approximately 0.7 billion by the end of the year. Looking back at our issuance during the first half of 2022 on Slide 28, I'm very pleased with the transactions we executed during the year. And again, thank you for your continued support for NatWest Group and NatWest Markets. Despite challenging market conditions, we are well positioned from both the HoldCo and OpCo perspective. From NatWest Group, we've been active in sterling and dollar markets year-to-date with a GBP 750 million 7 non-call 6 MREL transaction in March and a $1 billion 6-year non-call 5 MREL transaction in June.

From NatWest Markets operating company, we issued approximately 3.3 billion in 4 benchmark transactions across euro, dollar and Swiss markets and are very well positioned looking ahead for the remainder of the year.

Turning to credit ratings on Slide 29. NatWest Group Plc and NatWest Markets Plc and NatWest Markets N.V. ratings remain a positive outlook for Moody's. In June, Moody's aligned the rating of UBI DAC to that of NatWest Bank, upgrading the long-term deposit rating to A1 from A3. Ratings outlook from S&P and Fitch are stable across all group entities. And finally, turning to our ESG ratings on Slide 30. Sustainalytics rating was affirmed as low risk, and I was pleased that we were recently upgraded to C+ by ISS ESG and are awarded a prime status. We aim to continue our positive progress across our credit and ESG ratings over the next few years. With that, I'll hand back to Katie.

Thank you, Donal. So to conclude on my final slide, we reported a strong performance today and continue to make good progress on all our strategic priorities in an uncertain economic environment. Our strong capital generation and robust balance sheet enable us to continue supporting customers as well as to invest in growth and consider other options that create value and return capital to shareholders. The special dividend we have announced this morning bring distributions for the first half to GBP 3.3 billion. And on the back of a strong performance, combined with a robust balance sheet, well-managed risk and significant capital generation, we have upgraded our guidance today and now expect to deliver returns in the range of 14% to 16% in 2023. And with that, we'll open up the call for questions.

(Operator Instructions) Our first raised hand comes from Daniel David.

I've just got a couple of questions. First is focused on capital. Given there's been quite a few movements in the capital in your CET1 ratio and regulatory impacts at the start of the year, I just thought it would be helpful if you could maybe refresh us on the upcoming headwinds or any other regulatory impacts you expect maybe in the short term or looking a bit longer? And then also just on the target of 13% to 14%, is that likely to move when the CCYB becomes fully phased in? Or is that something that already bakes that in? And then finally, just on issuance. I realize that you don't seem to have much in the issuance fund for this year, but I just want to check if you would look at [30] markets if primary conditions stabilize somewhat.

And the second one, just on a different topic with regard to the exit from Ireland. The same as part of the PTSB deal, that there'll be the acquisition or investment of the stake that you're holding in the bank. Is there anything you can say on your intentions there? And I realize that might be quite academic given the direction of travel. Thanks.

Yes. Sure. Thanks so much. Let me take the second one and then we'll touch on a couple of your capital points. So in terms of the Ultra exits progressing well. The transaction was structured in terms of us holding a stake within PTSB. And we look forward to doing that as the transaction completes. No particular comments on in terms of [preview] it as a longer-term holding and a strong relationship with PTSB as well. In terms of the 13% to 14% guidance that was set considering things like the CCYB so it doesn't have an impact on that. But do you want to pick up reg-impacts and any issuance…

Yes. In terms of headwinds, reg impacts, I think it's fair to say in terms of the big changes we've seen are already reflected in terms of the RWA inflation on the 1st of Jan '22. So what lies ahead, [case software talked about] in plan expectation to go to 2% in July '23. And then I suppose, outside of that, the only thing we have outstanding is about 3, 3.5. So what we said previously there was roughly potentially up to 5% of all related inflation, but that will be over multi-years. Probably one thing to note there is we expect that to probably be more than offset by the ordinary reduction will still come through from our withdrawal of which all from the Republic of Ireland.

In terms of your question on issuance, we have relatively light issuance calendar for the year from the holding company. On Tier 2, what we've said previously is no intentions as we sit here today, however, that is driven by evolution of risk-weighted assets and the expectation is that we start to see some of them roll off with some of the asset sales in Ireland completing in H2. If that wasn't to happen or it was delayed, which is not our expectation, then we could look at some prefinancing of Tier 2 in H2, but as we kind of sit here today, no plans.

Our next question comes from Robert Smalley from UBS.

A couple of questions on some slides. First, on Slide 15, and the movement in the ECL provision. Could you talk about the changes in the risk metrics and exposures stages 1, 2, and 3? How much of that was model-driven. And then you've got the GBP 159 million for judgmental changes. Could you talk about the thinking that went into that? Secondly, also staying with asset quality, and I'm sorry to jump around, but going to the presentation earlier this morning, on Page 46. There's mortgage LTV distribution by stage and commercial real estate. I want to ask more about affordability and how you're looking at affordability as interest rates go up in the Stage 3 mortgages with less than 50% LTV, there was a jump and is that an affordability issue?

Also, while we're on that slide, on commercial real estate, Stage 3, 70 to 100, we saw a big decline, was that a charge-off or restructuring or recovery. And then finally, with capital moderating and strong capital generation. Are you starting to think about a corresponding decrease in some of the liquidity ratios as you're carrying a lot of excess liquidity?

Do you want me to start with the second question?

You start with the second question. I'll just track your various references to on the first (inaudible) Thank you very much.

Already jump around like that.

No, that's fine. No worries.

So Rob, in terms of the liquidity ratio, yes, we said 15%. So a significant amount of excess liquidity sitting in the ring-fenced bank. It's fair to say we are carrying that at quite attractive rates, and it is a significant contributor to the income upside that we guided to today from a rate perspective as well. So very, very happy to run excess levels of liquidity. It also gives us the ability to grow our core lending franchises over the next few years as well. Now saying that, I think I would roam at excess equity, but to probably expectation is that we do see some reduction in LCR over the next couple of years as we start to see some active asset sales from the Bank of England, but comfortable where we are at present.

And Robert, if I missed anything, do come back to 2 years, when I get to the end. If I look at it, the core ECL is really quite model driven. Obviously, there's assumptions within those models as we build them. So in terms of that improvement that we've seen in terms of the coverage within there, that is something that is driven by the model. Within the PMA, you've seen some significant movements in the PMA in terms of volume, it went from GBP 1 billion to GBP 800 million from the end of the year to this. Within there, there's 3 different PMAs that we hold. And if I think of the ones in terms of the modeling impact, what we saw is that they fell quite significantly from GBP 219 million down to GBP 66 million and that's because some of the calibrations that we have. Now we moved out of PMAs into the actual models, which moves those amounts. But what you saw is the economic uncertainty PMA was incredibly stable at GBP 584 million to GBP 53 million.

Now that actually hides quite a lot of complexity in that stability because what we did within there was we released a portion of the covered provisions that we've put in place. And then we also added provisions in relation to cost of living and supply chain type challenges. It looks to you that they net off perfectly. That's not quite the story. There's a few other movements hitting within the detail on that, but those are the PMA ones. And that, I guess, is what gives us comfort as we move forward into what we think will be slightly more troubling quarters ahead to make sure that those are sitting there. In terms of affordability, for new business, we haven't changed our approach, particularly, but one change that has happened how we do the risk [appetite] work as we've updated our inflation assumptions, you'd expect us to do that, but it's something we look at quite regularly.

Historically, we haven't moved it up. Obviously, as we've entered a bigger inflationary environment that has come into that space. And we're going to have to really congratulate you on Page 42 in terms of the movement there in Stage 3 for the coverage piece. What you can see in terms of the percentages, it's almost more a narrative of the numbers over the percentages moving because the underlying numbers are actually so small. So there's nothing unusual in that. We've got Stage 3 mortgages over 100% at GBP 7 million versus our GBP 4 million ECL provision. Previously, it was GBP 6 million and GBP 2 million. So it looks like a bigger jump than it actually is, but it's a game of percentages on small numbers. There's nothing particularly in there that I would call to your attention.

(Operator Instructions) Our next question comes from Corinne Cunningham from Autonomous.

Couple of questions please. First one is just a follow-up on the LCR. Just in terms of how you think about what is a sensible LCR going forward? I think we're going to be seeing a bit of shifting on this over the next 12 months as particularly some of the European banks change their funding mix. So how do you think about what a reasonable target range is? And you just mentioned that you think it will come down as you see asset sales from the Bank of England. Is the [commentary] of that that you think corporate deposits will drop? I'm just trying to connect the dots on that one. And my other question is something entirely different but perhaps we can start on the LCR please.

(inaudible) the LCR then we'll come back for part 2.

Yes. So I think it's a difficult question in terms of what is a sensible level. I think previously pre-COVID, we said 125%, 130% is kind of a level that we would think about internally as sensible. So that's probably still sticks, obviously, plenty of [headwinds] to the 159% we have today. I think probably one element to think of that is a number of banks that LCRs are elevated on the back of the TFSME drawings. We draw GBP 12 billion. That will also be repaid over the next few years as well, which will reduce that ratio.

In terms of the asset sales, I think we run a number of different scenarios internally just around potential impacts that could have. It could be a shifting of deposit balances potentially between retail and commercial. And there's a number of different ways that could play out but our overall probably expectation is probably peak of LCR we've seen and for its trend down towards more sensible levels over the next few years just for a variety of different reasons of which asset sales is one.

Thank you. So your comment about Bank of England, should I read that through as lower corporate deposits?

It's hard to say, because I think it depends. I suppose the question will be who is the marginal buyer of [Gilds] once asset sales start. So like you could have some asset managers and pension funds who do look a bit of rebalancing, but we'll just have to see how that plays out.

Okay. And the other question was just a bit of a practical one incoming that we've had from the client. And I guess we all think we know how it works. But from a practical perspective, how does the special dividend with share consolidation work? How does that actually physically happen?

Yes, sure. I'll pick that one up. There's a simple cycle in Page 27 of the equity pack this morning, which lays out for you. So basically, we'll publish the general meeting in circular notice on the 9th of August, so just the week after next, and then we'll have our general meeting on the 25 of August. But the key thing is whereas in a normal dividend, you have an active date for a special where you have a record date. So the record date is the 26 of August. So if you hold our stock on that day, then you'll get the GBP 1.75 billion dividend paid out to you.

Then we take the shares from that record date, and we'll do an exchange of shares based on what's the market price at that date. And it will be something like you'll get 12 shares for 13 shares and 12 new shares for 13 shares. They have the same voting rights, they have the same shares. You'll see some complexity to the nominal value will move a little bit. And at that point, the share count gets to be balanced on basically on the 30th of August, and then the special dividend gets paid out on the 16th of September. That payment is based on your number of shares from before the consolidation, but reality it wouldn't matter in which number it was based on.

Just obviously, it's the per share amount would be slightly different, but the total that you would receive would be the same. And then as you move on from there, it's ends business as usual with a slightly lower share count. So therefore, you have the benefit of the metrics if you had done in market buyback, which is why we chose to do the [special] with the consolidation.

I have a question that has come in. It reads, can I follow up on the income guidance and how you see that flowing into 2023? Does the prospect of recession impact 2023 revenue?

Sure. Thanks very much, Dave. So as we look at that, there's a number of things to think about as you look into 2023. Clearly, you have the ongoing flow-through in the income from the structural hedge that we shared and talked about this morning. We also have the benefit of the full year annualized impact of the various rate changes that have come through today. And then you also have to think that against that, there will be some where we are in mortgage margins and what might be happening in customer activity. And what we gave you today was the royalty guidance of 14% to 16% to try to pull those income pieces together.

In our economics, we are not predicting a recession. And so at this stage, it doesn't have any recessionary impacts on that. Obviously, the 14% to 16% gives you a little bit of flexibility in terms of that number, but that's not something we're seeing at the moment in terms of our economic assumptions.

Our next question, what is the catalyst for Moody's to take action on their positive outlook for NatWest and for S&P to move from this stable outlook?

I'm happy to take that one. So we know the progress on restructuring and an improvement in the group's profitability and business stability of the key areas of focus for the rating agencies. And I'm very comfortable that we're moving forward and making excellent progress on that front. We've been delivering on the withdrawal from the Republic of Ireland. As we mentioned this morning, sales agreed on 90% of the loan book, and we've also completed the restructuring of NatWest Markets. I think then in terms of group profitability, I think the results today and the updated guidance or evidence of the progress we've made there. So confident if we just continue to deliver on our strategy, the credit rating upgrades will follow.

We have no further questions. I would now like to hand back to Katie for closing comments. Thank you.

Lovely and thanks very much, and thank you. And I know there's a number of you on the call this afternoon. We really do appreciate you taking the time and for your ongoing support of our debt issuance program as well. If you do have any further questions or anything afterwards, Donal and Paul will be very happy to take them. Thanks very much, and enjoy the rest of your day.

Thank you.