NatWest Group PLC (NWG) 2022 Q4 法說會逐字稿

Good afternoon, and welcome to the NatWest Group Full Year 2022 Results Fixed Income Call. 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. Thanks for joining our 2022 fixed income results presentation. I'm joined today by Donal Quaid, our Treasurer; and Paul Pybus, Head of Debt IR. I'll take you through the headlines for the 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 up for questions.

So starting with the headlines on Slide 3. We delivered operating profit for the full year of GBP 5.1 billion, up 34% on the prior year with attributable profit of GBP 3.3 billion. We're reporting income of GBP 13.1 billion, and we have continued our tight cost discipline, reducing expenses by 2.9%, in line with our targets. This resulted in a much improved cost income ratio of 55.5%, down from 70% for 2021. During the year, we distributed or accrued a total of GBP 5.1 billion to shareholders, which comprised GBP 1.3 billion in ordinary dividends above a committed distribution of at least GBP 1 billion, a special dividend of GBP 1.75 billion announced at the half year, the directed buyback of GBP 1.2 billion completed last March and our third on-market buyback announced today of GBP 800 million. As a result, our common equity Tier 1 ratio was 14.2%, in line with our target.

Turning to Slide 4. We have made excellent progress on the strategic priorities we set out 3 years ago and we have remained focused on supporting our customers and delivering on our commitments. We have delivered organic growth as we improved both our offering and service for our customers. We have maintained tight cost discipline, yet continue to invest for the future in our digital transformation. We have refocused our markets business and made significant progress on our phase withdrawal from Ulster Bank in the Republic of Ireland. So we are now much more capital efficient. This has delivered a return on tangible equity of 12.3%, well above our initial target.

Turning to Slide 5. Given the uncertain economic outlook, our purpose-led strategy has never been more relevant. We have continued to support customers by lending responsibly and helping them save for the future with lending across our 3 business segments, up 6.7% year-on-year. We have also proactively contacted customers with advice on managing the cost of living, carried out free financial health checks, delivered hardship funding through charities and offer targeted support for those in need. We have supported colleagues with targeted pay rise for the lowest paid as well as enhanced parental leave and ongoing training and development.

Turning now to Slide 6 and the performance in the fourth quarter using the third quarter as a comparator. Total income increased 14.8% to GBP 3.7 billion. Income, excluding all notable items, was GBP 3.8 billion, up 10.9%. Within this, net interest income was up 10.2% at GBP 2.9 billion and noninterest income was up 13.2% at GBP 857 million. Operating expenses rose 12.8% to GBP 2.1 billion, including Ulster exit costs and the annual U.K. bank levy. The impairment charge decreased to GBP 144 million or 16 basis points of loans. Taking all of this together, we delivered operating profit before tax of GBP 1.4 billion. Profit attributable to ordinary shareholders was GBP 1.3 billion after the benefit of deferred and other tax credits. And return on tangible equity was 20.6%, including a 6 percentage point benefit from tax credits.

Before I take you through our performance in more detail, I'd like to share some of our assumptions about the economic outlook on Slide 7. We are showing you here our current expectations for interest rates and economic activity. Clearly, the backdrop of low economic growth and high inflation makes this a challenging time for our customers. However, there are signs that inflation peaked in October last year, but remains high at around 10%. Our base case assumption is that this will fall to the Bank of England 2% target by mid-2024, resulting in interest rates reducing from the second quarter of that year to 3.25% at the end of 2024. We have not modeled any further increase in interest rates since the Bank of England's decision earlier this month to increase them to 4%. All in, our outlook is aligned to the consensus of economists forecast with both upside and downside risks.

I'll move on now to net interest income on Slide 8. As I said earlier, we saw continued strong momentum in net interest income and net interest margin, excluding notable items, increased 26 basis points to 325 basis points. The increase was driven by wider deposit margins, reflecting the benefit of higher U.K. base rates, net of pass-through to our customers and higher spot rates on our structural hedge. This increase was partly offset by lower mortgage margins on the front book and by commercial and institutional fixed rate lending. Net interest margin of 285 basis points for the full year is in line with our guidance of more than 280 basis points. If the current U.K. base rate of 4% continues throughout 2023, we expect NIM to be 320 basis points for the full year.

Turning to loans on Slide 9. We delivered a strong year of balanced growth across the group. Gross loans to customers across our 3 franchises increased by 6.7% to GBP 350 billion, of which GBP 3 billion was in the fourth quarter. Taking retail banking together with private banking, mortgage balances grew by GBP 4.7 billion or 2.4%. Gross new mortgage lending for the full year 2022 was a record GBP 45 billion, representing flow share of 14%. Our stock share is 12.3%, up from 11.8% at the end of 2021. Unsecured balances increased by a further GBP 200 million in the quarter to GBP 14.2 billion driven by higher spending on credit cards. In commercial and institutional, gross customer loans decreased by GBP 2 billion, driven by continued repayment of government lending schemes.

I'd like to turn now to noninterest income on Slide 10. Noninterest income, excluding notable items, was GBP 857 million, up a GBP 100 million in the third quarter. This was driven by fees and commissions, which increased GBP 62 million to GBP 650 million due to higher lending fees, increased investment fee income and the end of our no-fee foreign exchange offer for retail customers. It was a more stable trading performance in 2022 following the completion of our markets restructuring. And net fees and commissions grew 8% year-on-year as a result of increased customer activity combined with the impact of inflation on nominal spending.

Turning now to costs on Slide 11. Other operating expenses for the Go-forward group were GBP 6.6 billion for the full year. That's down GBP 201 million or 2.9% on the prior year, in line with our guidance. This was driven by continued automation of customer journeys. Now that Ulster is in central and other items, on this slide, we show the walk from GBP 6.6 billion Go-forward group expenses to group other operating expenses of GBP 7.3 billion as per the income statement.

Turning to 2023 costs on Slide 12. We start with GBP 6.9 billion of operating expenses for 2022, excluding Ulster direct costs. Pro forma for acquisitions, 2022 costs are around GBP 7 billion, which I view as the business-as-usual cost base of the group. In 2023, we expect this to grow by around 5% to about GBP 7.3 billion. And with another GBP 300 million of Ulster direct costs, we expect operating expenses of GBP 7.6 billion, excluding litigation and conduct costs. We also expect a further improvement in operational leverage with a reduction in the cost/income ratio from 56% to below 52% for the year. Litigation and conduct costs were GBP 385 million for 2022, and we expect them to be broadly in line with this in 2023, though these can fluctuate.

Turning now to credit risk on Slide 13. We have a well-diversified prime loan book. Over 50% of our group lending consists of mortgages with the average loan to value is 53% or 69% on new business. Overall, we have low levels of arrears and forbearance in our mortgage book. 92% of our book is at fixed rate, 4% on trackers and 4% on standard variable rate or SVR. Our personal unsecured credit exposure is less than 4% of group lending and is performing in line with expectations. Our corporate book is well diversified, and we have brought down concentration risk over the past decade. For example, our commercial real estate exposure represents less than 5% of group loans with an average loan-to-value of 47%. Whilst we have a well-diversified, high-quality loan book with a low level of default, we are mindful of the economic outlook.

So let me tell you how we've addressed this on Slide 14. We have four economic scenarios where we have updated our forecast and relative weightings. For 2023, this has driven a slight improvement in our weighted average expectations for GDP but the deterioration in levels of employment, the key drivers of expected loss. In terms of sensitivity, a 100% weighting to the extreme downside scenario would increase Stage 1 and 2 expected credit loss by a further GBP 1.6 billion or around 40 basis points of loans. In this scenario, Stage 3 expected credit loss would also increase, though this is not modeled here. The net effect of changes to economic forecast in Q4 is an increase of GBP 171 million in the good book expected credit loss provisions.

Overall, expected credit loss reduced during 2022, reflecting the phased withdrawal of Ulster Bank, stable trends in portfolio performance and a related net release of post-model adjustments and write-offs. The post model adjustment for economic uncertainty reduced by GBP 193 million in the quarter to GBP 352 million. We continue to be cautious on the release of these provisions as we have yet to see the full impact of the economic challenges play out.

Turning now to look at impairments on Slide 15. The net impairment charge for the group of GBP 144 million in the fourth quarter took our charge for the full year to GBP 337 million, equivalent to 9 basis points of loans. You can see that our impairment charge has largely been driven by unsecured lending and commercial property, where we have relatively small exposure. Our through-the-cycle impairment guidance is 20 to 30 basis points, and I continue to see this as an appropriate level for 2023, given both the economic outlook and relatively benign trends in our book.

And with that, I'll hand over to Donal.

Thanks, Katie. Good afternoon, and thank you for joining today's call. I will start by sharing some highlights from the full year before moving into more detail on capital funding and liquidity. I will then give an update on our funding plans for 2023 before we open up for questions.

Starting with the highlights on Slide 17. We ended the year with strong capital MREL and leverage positions, comfortably above regulatory minima with a CET1 ratio of 14.2%, leverage ratio of 5.4% and a total loss absorbing capacity ratio of 31.5%. We continue to operate with a robust liquidity position with a liquidity coverage ratio of 145% coupled with a strong deposit franchise. We successfully completed our wholesale funding requirements for the year and saw an opportunity in early December to prefund some of our 2023 Tier 2 requirements. We continue to reduce our legacy capital stack via calls and liability management exercises. At the end of 2021, we had GBP 3 billion of outstanding legacy securities, which had no regulatory value from the first of January 2022. Our capital actions and maturities during the year reduced the outstanding balance to below GBP 600 million, and this will reduce to approximately GBP 300 million by year-end with further maturities this year.

I was also very pleased with the Bank of England's first assessment under the resolvability assessment framework in June, with no shortcomings or deficiencies 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 the year was 14.2%, including the full impact of the GBP 800 million share buyback announced this morning. The CET1 ratio is well above the current maximum distributable amount of 9.5% and well positioned versus our 13% to 14% medium-term CET1 target. In December, the U.K. countercyclical buffer increased from 0% to 1%, in line with the Financial Policy Committee announcement in 2021. And this equates to a requirement of 80 basis points for NatWest Group. A further increase in the Countercyclical buffer to 2% is expected to take effect in July 23. A 2% Countercyclical buffer will translate to a requirement of approximately 170 basis points for the group.

Our maximum [distributable amount] and supervisory minimum requirements increased in the second half of the year as increases in the countercyclical buffer took effect. However, these changes, in addition to the changes expected in July this year will have no impact on our medium-term CET1 target of 13% to 14% as they are already built into our capital forecast and plans. Our U.K. leverage ratio was 5.4%, leaving around 185 basis points of headroom above the minimum requirement. The leverage ratio minimum requirement also moved higher in the second half of the year as the increase in the countercyclical buffer took effect. The slide also shows the impact of the other systemically important institution group risk add-on, which, although not part of our minimum ratio requirements or combined buffer requirements is included in our minimum supervisory requirements.

Moving to Slide 19 and our quarterly movements in CET1 and risk-weighted assets. We ended the fourth quarter with a CET1 ratio of 14.2%, down 10 basis points in the third quarter. We generated 59 basis points of capital from earnings net of deferred tax credits which are not recognized in CET1 capital and changes to IFRS 9 transitional relief. This was offset by accruals for shareholder distributions of 79 basis points including the share buyback and final pension accrual of 5 basis points. Given the strong funding position of the pension fund, we've reached an agreement with the trustees not to make a final GBP 500 million dividend linked contribution payable in 2023, but have set it aside in case of future needs.

While we view this as a low probability, we have deducted the potential impact from our CET1 ratio, and we do not expect any further capital deductions for pension contributions going forward. In addition, we have received (inaudible) approval to participate in a directed buyback from the U.K. government for up to GBP 1.5 billion, which equates to 4.99% of our issued share capital. The 14.2% CET1 ratio includes IFRS 9 benefit of 20 basis points. Risk-weighted assets decreased by GBP 2.4 billion in the quarter to GBP 176.1 billion due to reductions in counterparty credit risk and market risk and progress on our phase withdrawal from the Republic of Ireland. Procyclicality has remained positive throughout 2022 across the group, leading to a reduction in orders of GBP 4 billion. We have incorporated our expectation of a normalization of risk parameters into our medium-term RWA guidance. We now expect RWAs could increase by 5% to 10% by the end of 2025, which includes the day 1 impact of Basel [3.1].

Turning now to our total capital and MREL positions on Slide 20. Our total capital ratio at the full year is 19.3%, with an AT1 ratio of 2.2% and a Tier 2 ratio of 2.9%. Given our medium-term 13% to 14% CET1 target range, we expect to operate with optimal levels of AT1 relative to minimum requirements. Our future AT1 and Tier 2 requirements will be subject to the evolution of RWAs. Our total loss-absorbing capacity ratio continues to look healthy at 31.5%, significantly higher than our risk-weighted asset requirements. The total loss absorbing capacity ratio has reduced from 39.8% at full year '21. That reduction has been driven by the increase in risk-weighted assets on the first of January 2022 due to the impact of rotary uplifts, the removal of approximately GBP 600 million of legacy Tier 1 and Tier 2 capital from loss absorbing capacity resources and a reduction in our CET1 ratio for share buybacks and capital distributions.

Turning to our liquidity position on Slide 21. We have maintained strong liquidity levels during the year, although we are now seeing a reduction from elevated levels with an LCR ratio at 145% and reflecting over GBP 52 billion of surplus primary liquidity above minimum requirements. The decrease in the ratio since full year 2021 is primarily due to growth in lending, reduced customer deposits and shareholder distributions during the year. We continue to manage a high-quality liquid asset pool with primary liquidity of GBP 162 billion and secondary liquidity of GBP 64 billion.

Looking at customer deposits on Slide 22. Customer deposits at the end of 2022 were GBP 450 billion, resulting in a loan-to-deposit ratio of 79%. During 2022, balances reduced from the elevated position built up during the pandemic, reducing by approximately GBP 30 billion. The two key drivers to note here are a GBP 12.2 billion reduction from UBI DAC due to our phased withdrawal from the Republic of Ireland and a GBP 14.2 billion reduction in commercial and institutional due to seasonality an overall market liquidity contraction in the second half of the year, including a reduction in foreign currency balances and a disciplined pricing approach with a focus on customer relationship, margin and liquidity value.

Looking at the deposit mix, excluding UBI DAC and Treasury, around 60% of our balances are interest-bearing and 40% are noninterest-bearing. And while this has remained stable during the year, we have seen some migration within interest-bearing balances as customers move from instant access into term accounts.

Turning to Slide 23 and the impact of deposit volumes on income derived from the structural hedge. Our structural hedge notional balance at the end of the year was GBP 230 billion, of which around GBP 184 billion is allocated to the product hedge. Although the hedge notional was stable during the quarter, deposit balances reduced into year-end, and we do not expect to reinvest all the balances during 2023, which is approximately GBP 40 billion. If there was no change to deposit volumes or mix from the end of year position, I would expect the product hedge notional to steadily reduce by GBP 5 billion over the next 12 months.

Looking at income. As you can see in the chart, product hedges already written will deliver income of GBP 2 billion in 2023. That is before we consider any reinvestment of maturing hedges. The actual amount of reinvestment will be driven by changes in the flow and mix of deposits going forward. We assume an average 5-year reinvestment yield of 3.3% in 2023, compared to the current 5-year swap rate of 3.75% and relative to an average redemption yield on maturities of around 1.1%.

Moving to funding on Slide 24. We operate with stable and diverse sources of funding. Customer deposits represent approximately 86% of our total funding. Our wholesale funding is GBP 74 billion and around 40% of that figure is to meet our senior MREL and nonequity regulatory 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 back at our issuance during 2022 on Slide 25. I'm very pleased with the transactions we executed during the year, particularly in light of challenging market conditions. And again, thank you for your continued support for NatWest Group and NatWest Markets. We've ended 2022 well positioned in both a Holdco and Opco perspective. From NatWest Group, we issued around GBP 3.7 billion equivalent in senior MREL format across sterling, dollar and euro markets, including a EUR 1 billion 6-year non-call 5 green bond, demonstrating our continued focus on issuance and in green, social and sustainable format. We also took the opportunity to prefund a portion of our 2023 Tier 2 requirement with a GBP 650 million issuance in December. For NatWest Markets Plc, we issued approximately GBP 4.6 billion in benchmark transactions across sterling, dollar, euro, Swiss Franc and our inaugural Aussie dollar deal.

Looking at our 2023 funding requirements on Slide 26. From NatWest Group Holdco, our issuance is expected to be in the range of GBP 3 billion to GBP 5 billion, primarily to refinance maturing senior MREL, and we aim to issue approximately 25% of this in GSS format. On capital, we will look to raise Tier 2 again this year with an anticipated volume of up to GBP 1 billion. We have no AT1 requirements given our next call is in 2025, and although that will, of course, be subject to the evolution of risk-weighted assets. We intend to be active in dollar, sterling and euro markets, and we'll also look for opportunities to diversify into other currencies.

Turning to our operating companies. NatWest Markets will have senior unsecured funding requirements of GBP 3 billion to GBP 5 billion in 2023, primarily to refinance maturing legacy debt and we expect to be active with an inaugural benchmark public issuance from our Eurozone operating entity, NatWest Markets N.V.

Turning to credit ratings on Slide 27. It was pleasing to see progress in our credit ratings during the year. In September, Moody's upgraded the rating of NatWest Group plc to A3 and [Baa1] and upgraded the ratings of NatWest Markets plc and NatWest Markets NV to A1 from A2 with a stable outlook for all three entities. Moody's also upgraded the deposit rating of RBSI to A1 and the issuer rating to A2. S&P and Fitch assigned a rating to our ring-fenced subsidiary, NatWest Bank Europe in January, which is aligned to the ratings of our U.K. ring-fenced banks. Ratings outlook from S&P and Fitch are stable across all group entities. Our ESG ratings, including Sustainalytics, continued to remain strong with MSCI at AA and ISS ESG upgrading us to C+ in 2022. We will continue to proactively engage with the agencies to support ongoing progress in our credit and ESG ratings.

With that, I'll hand back to Katie.

Thank you, Donal. I'd like to finish on Slide 29 and our guidance for 2023. We expect income, excluding notable items, to be around GBP 14.8 billion, net interest margin of about 3.2% and group operating costs, excluding litigation and conduct to be around GBP 7.6 billion, delivering an improvement on the cost-income ratio to below 52%. We anticipate a loan impairment rate in the range of 20 to 30 basis points. And together, we expect this to lead to a return on tangible equity of 14% to 16% and to be at the upper end of this range.

And with that, I'd like to open the line for questions.

(Operator Instructions) Our first question comes from Lee Street.

It's Lee Street from Citi here. A couple of questions, please. Firstly, just on the funding path for NatWest Markets, GBP 3 billion to GBP 5 billion is that the sort of run rate we should just be expecting sort of every year. And I suppose I'd expect it to come down a bit given sort of the restructuring. So any comments there. And secondly, on the risk-weighted exit guidance of 5% to 10%. Obviously, it's got the Basel part, and I presume there's a loan growth in there. What else being calculated within that 5% to 10% guidance, please?

Let me take the RWA and then I'll hand over to Donal on the funding question. So when you look at RWAs, we ended the year GBP 176 million Within that, there's GBP 6 billion of Ulster RWAs, you would expect them to come down materially as the rest of the books kind of move off next year. I don't think they'll completely disappear in 1 year. There'll be a little bit left because of the [op risk] and things like that.

And then the guidance we've given you a plus 5% to 10% is on the GBP 176 million number. So therefore, kind of loan growth would be dealt with in terms of an offset to kind of Ulster. And then as we look at that 5% to 10% increase, there's two things going on within there. One is any procyclicality that might come through. It's been positive the last couple of years, but we'd expect as impairments increase it, we start to see a little bit of that and then the impact of Basel 3.1 as well. And across both of them, we think the 5% to 10% would cover it. Clearly, the consultation document is still out in draft, but it's that kind of gives you a little bit of a guide.

And Donal, do you want to take the funding plan?

Yes. Sure. Hi. So on NatWest Markets, yes, GBP 3 billion to GBP 5 billion is not a bad run rate for the next few years. As you know, it's a non-ring-fenced bank, primarily wholesale-funded. So in fact, that requirement is really purely refinancing the maturing benchmark issuance. And if I look at kind of over the next 3 years, we're GBP 4.3 billion maturing this year, GBP 3.7 billion in '24 and about GBP 5.2 billion in '25. So that 3% to 5% gives us a bit of flexibility within that range, but it's a good run rate for the years ahead.

Our next question comes from Robert Smalley from UBS.

I have two. First, you mentioned the post-model release on reserves. Could you talk about what your thinking will be on that going forward? What you'll be looking for in the environment, et cetera, to do more. Can we expect this to be consistent over quarters? Or will it be lumpier? And then secondly, on deposits. Last year, we saw outflows of commercial and industrial institutional deposits that makes sense as I'm assuming most are noninterest-bearing, but retail held up pretty well. which is notable given digitalization in the bank. So would you expect these retail deposits to stay? Or as rates change, will we see a migration of those into either interest-bearing or out of the bank.

Sure. Thanks, Robert, nice to hear your voice. As I look at the PMA, we did do a release within the year on that. And I think as I look at it, it's something we look at kind of multi-quarter I probably expect some movements each quarter, but nothing -- it's not a question of there's GBP 352 million left. I don't have a plan that would be [80%] each quarter for the next 4 quarters. We'll just assess it as it comes through. We've been quite conservative on kind of holding it back and we're comfortable with that. I think we'll just continue to assess it as we go through.

What's been good is that it basically is now a PMA for economic uncertainty. I mean that's GBP 352 million of the GBP 412 million that we've got. And if you look at the analysis in the accounts or it's also in the main area in GBP 192 million, you can see that it's split work quite well over commercial and institutional and retail banking. So I think retail banking is very cost of living focus. And I mean, as is kind of energy and gas kind of pressures on the commercial institutional space. So we'll just see how that kind of rolls through.

If we move to deposits, I think it's probably worth spending a couple of minutes on C&I. So deposits went down GBP 15 billion in the last quarter, GBP 12 billion of that was from C&I. The way I look at them, there's kind of three more or less equal reasons for that. First one, year-end balances and some just natural kind of -- and liquidity kind of actions going on. The second was around foreign exchange balances that left the U.K. at the time were the kind of mini budgets. And so they were making more statement on U.K. kind of plc. And then the third is us very much managing our book. We're not looking to pay up for deposits that are kind of hot money or pure income or liquidity value or by paying we'd end up kind of capitalizing the book. Very comfortable with what we lost.

Overall, the GBP 12 billion had about GBP 4 billion liquidity value, given our very strong liquidity position, that wasn't a big kind of story. I think when I look at the retail piece, what we've seen is that the balance between [ads] and NIMs has been quite standard even from the end of 2021. And I think one of the important things, Robert, that you have in the States that we don't have here is a very active money market investment process, and we -- that's not a feature of our kind of savings environment.

So I think what we'll see -- and what we have seen and it started very much in November is customers beginning to look much more for interest return. And I think at that point, we didn't have a term deposit account. We've now got one. It's in place. It's been up since January, and that's really kind of helped, we think, any kind of particular migration. So the way I look at balances, is probably over the year that they'll be relatively steady. They'll move around on quarters. January is tax paying season. So that has a bit of an impact on it as well, but kind of that's probably how we're viewing it and then we need to manage what we're rewarding on that as we move forward. And that's probably the bit that we're learning more and more about as we work out customer behavior and kind of market dynamics.

Our next question has been e-mailed into us from Paul [Fenner] (inaudible) of Societe Generale. Split into three sections, and the first section asks what are you seeing in forward-looking metrics like debit connectivity, spending or deposits that signal potential weaknesses or yellow flags and asset quality. The second part, asks, are you seeing any change in behavior for mortgage borrowers coming off fixed rates and into new higher rates? And the last part is for Tier 2 supply, what currency is most likely, euro?

Okay. Perfect. Let me take the first couple. So as we look at asset quality, I would say at this stage, we're really seeing very little. When I look to those customers that are in arrears or what we call kind of heightened monitoring on the commercial side, those numbers aren't really yet back up to what they were pre-COVID. So there's not any real kind of flag within the what we can see, and it was confirmed again with some of the U.K. spend that came out today that people are continuing to spend continuing to kind of use their funds. So though there's a lot of narrative about the concern of the cost of living. The reality is we're also -- we're not really seeing that coming through in our numbers.

I think in terms of change of behavior. So when we look at our mortgage portfolio, it's 66% 5-year and then 25% 2-year and then balances on sort of tracker and SVR. What's been quite interesting, as people mortgages were maturing last year, particularly when they were maturing into an environment where the rates were getting up into the 5-point something in the very low 6-point something, that's when we launched our tracker book. So what we saw is people moving on to tracker to kind of wait until rates start to fall.

Now if you look at rates, you can see that they're much more kind of low 4-point something, and so we can see people kind of moving back into those rates. So definitely, people leaving it as long as they could or taking a different product. And with us, if you go on to tracker, you can move on to a fixed within 3 months free of charge. So I think that has also kind of help them kind of take opportunities there.

And then I'll take the 1 on Tier 2. So I think we've guided up to GBP 1 billion. I think we'll probably see that with over two deals, and we'll keep our options open, I think, across Europe sterling dollar.

Next question comes from Alexander Latter of PGIM.

Just a couple of questions from me. So firstly, I just wanted to ask about kind of stage 2 balances. So you haven't had a big increase in kind of total provisioning as you've kind of flagged, but the actual stage 2 balances have gone up quite significantly sort of quarter-over-quarter. It seems like you've added about GBP 9 billion in retail and GBP 4 billion in commercial and institutional. Given that the IFRS 9 scenario hasn't changed massively, what exactly is driving that increase in Stage 2 loans?

And then the second question is with your plans to issue from NatWest Markets N.V. What exactly is the rationale for issuing out of that particular entity. Why not just issue at all from NatWest Markets plc, keep the kind of structure simple, then adds more boxes to issue out of is kind of much easier to understand and then just pass it down internally?

Yes, sure. I'll take the first one and then Donal, you can jump in on the NV. So if we look at the NatWest Group loans, they decreased by GBP 8 billion Q3 to Q4, driven by the significant reductions in the center, which was obviously the withdrawal of Ulster Bank and then that's also offset by growth. Now when you look at the stage 2 balances, they're up overall GBP 12.8 billion or sort of 37% to GBP 47 billion, and that's 12% of the group loans.

I would probably highlight two items in there. The first one is retail mortgages. That move was driven by our low (inaudible), which is a significant increase in credit risk threshold that we have, and it makes it very sensitive to model changes in the probability of default, which has caused the update that we did on our economic assumptions in the quarter. I would say it's very high quality and movement within there. So it's not really a sign of an underlying problem. It's just that as you made those economic changes. And when you look at the Stage 2 mortgage, the actual ECL, although you had movement in the balances, the ECL decreased by GBP 19 million. So I'm not concerned about that migration.

And then if I look at the unsecured, much, much smaller book, but there was a GBP 0.4 billion increase there, and that again was our unsecured balances moving up. And given that it's a smaller level of the book, we're kind of covered very comfortable with the coverage levels and arrears trends that we've seen there. So there's more, I guess, sensitivity rather than an underlying problem.

Donal?

Yes, let me take the NV question. So just in terms of rationale for that (inaudible) , it's our European [non-ring fence] bank entity is here to support our U.K. clients operating in Europe and also some European clients as well. So the reason why we're looking to issue out of that (inaudible) , obviously, as the balance sheet grows, it is, again, similar to NatWest Markets Plc going to be wholesale funded. But the restrictions that we would have is issuing more unsecured at NatWest Markets PLC is the intergroup lending constraints just given the low capital base of those entities. So that's really the primary reason why we'll go directly from the [NBN]

(Operator Instructions) Next question comes from (inaudible) from Autonomous.

I just follow up on the RWA increase. Because on the credit side, we've been used to you running with very high ratios of late. So in 2022, your payout ratio, if you include buybacks, et cetera, was over 100%. So how should we think about the 5% to 10% growth in RWAs against the distribution policy. Is it coming down below the 100%? Just I think understanding the glide path from here with that kind of RWA headwind would be very helpful.

And then the other one was on the NIM trajectory or I should say, the NII trajectory. So you got to a flat margin over the course of the year. But in terms of quarterly NII, when would you expect that to actually peak if rates stay flat as you forecast at 4%?

So I think on distribution, it's important to remember a little bit of the journey that we've been on. So if I go back -- we were sitting at sort of 18.4% CET1 with a target to get into 13% to 14%. So we're now at 14.2%. So clearly, the significant payout of last year and this year, we've paid over the last few years, GBP 10.9 billion of distributions out by a variety of mechanisms, whether they're dividends, direct to buybacks. So that's been a lot of that story is about getting from that 18% cost number down to the 14.2% .

What you would expect going forward from here is the 40% payout ratio in terms of our dividend. We've also said that we are -- we will maintain capacity to take part in buybacks. Our principal focus is the directed buyback, which we can buy up to 5% of the company from the U.K. government in any 1 year. And then this morning, we also announced a further GBP 800 million buyback. But I'd say the next year is much more about using the capital generated rather than trying to run down that excess capital. So comparatively, we will see a slightly smaller number, but still an excellent kind of payout ratio, which will be in addition to that 40% piece.

In terms of the NII, what I would probably guide you on revenue, there's lots of different things that are obviously going on in that line. The interest rate is just one of them, and we've guided you to so around about 3.2% for the year. I think it's important also to think of what's happening in volume growth around the businesses. Clearly, a really strong growth last year at 6.7%. We don't expect to be quite as strong in mortgages this year, just given that, that's a bit -- that market is a little bit smaller. And then commercial, obviously, the level of growth will depend on the macro environment, and we're comfortable with, I guess, how the year has started.

And then we've also talked a lot this morning on the equity call around things like the structural hedge and how that will be reinvested. Obviously, that's been considered in NIM. But if I look at that in terms of where the 5-year swap rate is, that's something else to kind of have a think about. So we're not calling out quarterly NII at this stage and what we're guiding you to is GBP 14.8 billion in total income for the year.

There are no further questions. I'll pass it back to yourself, Katie, for any closing comments.

Lovely, thanks very much. Thanks, Dave, and thanks, everyone, for your time this afternoon. We really do appreciate you getting on the call and having a chat with us. As [ever] Paul Pybus from our debt IR is very happy to take any questions. And Donal and I look forward to meeting with you over the coming months. And then again, when we talk again at H1 more formally. Thanks very much for your continued support. It really is appreciated.

Thank you.