NatWest Group PLC (NWG) 2026 Q2 法說會逐字稿

Good afternoon and welcome to NatWest Group's H1 2026 results fixed income presentation.

Today's presentation will be hosted by CFO, Katie Murray, and Group Treasurer, Donal Quaid.

(Operator Instructions)

Good afternoon, everyone. Thank you for joining our H1 2026 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 for the half year and the detail for the quarter. Donal will take you through the balance sheet, capital and liquidity, and then I'll go through the forward look and targets, and then we'll open up for questions.

So turning to the headlines.

Our results today show how we have created a bank with increasing momentum through our focus on sustainable growth and returns. By delivering growth across all three businesses, improving operating leverage, and managing our capital and risk well, we have created the most efficient large UK bank with the lowest cost of risk, delivering the strongest levels of capital generation, and highest returns. Our performance makes clear we have the capability and capacity to grow at scale. The momentum we're seeing in customer growth, efficiency, and returns gives us confidence for the future. We have created a business capable of delivering strong, compounding, sustainable returns through the cycle.

In February, we set out how we plan to deliver our 2028 targets by pursuing disciplined growth, leveraging simplification and actively managing our capital and risk. Our aim is to grow customer assets and liabilities at an annual rate of more than 4%, to reduce our cost-income ratio to below 45% and to generate over 200 basis points of capital before distributions with a return on tangible equity of more than 18%. Our strategy is delivering excellent results as we make good progress against these three ambitions.

So let me give you the financial headlines.

We have deliberately built a scale business that benefits from structural UK growth drivers to deliver strong returns on a sustainable basis. Our return on tangible equity was industry leading at 19.7%. Our acquisition of Evelyn Partners has now completed and boosts our exposure to the fast-growing UK wealth market. Customer assets and liabilities grew 13.4%, including Evelyn Partners. We continue to drive operating leverage. Income growth of 8.9% is significantly ahead of 4.5% cost growth. And our cost-income ratio reduced 2.8 percentage points to 46%. Getting close to our 2028 target. We also generated high levels of capital at 137 basis points and our balance sheet remained strong with a CET1 ratio of 13.2% after the acquisition of Evelyn Partners. Given the strength of our performance and our confidence in the outlook, we are upgrading our 2026 returns guidance to more than 19%.

I'll now take you through the performance of the second quarter.

My comments for the second quarter use the first quarter as a comparator. Our strong performance in the first quarter continued in the second with broad-based growth, income momentum and improved operating leverage. Income excluding notable items increased 5.4% to GBP4.4 billion and total operating costs grew 1.8% to GBP2.1 billion, driving a 1 percentage point improvement in the cost-income ratio to 45.5%. The impairment charge was GBP140 million, equivalent to 13 basis points of loans. This resulted in 12.4% growth in operating profits to GBP2.3 billion. Profit attributable to ordinary shareholders was GBP1.6 billion and we delivered a return on tangible equity of 21%.

Turning now to income.

Income, excluding notable items, was up 5.4% at GBP4.4 billion. Income across our three businesses continued to grow, supported by an increase in CAL, margin expansion and higher non-interest income. Non-interest income grew 15% or GBP124 million. Given the strength of our performance and the inclusion of Evelyn Partners, we now expect full year income, excluding notable items of around GBP17.9 billion.

Turning now to customer assets and liabilities or CAL.

We are pleased with our continued track record of growth. CAL increased by GBP86.8 billion in the quarter or 9.6% to GBP986.9 billion. This comprises GBP9.7 billion of broad-based customer lending growth, GBP2.8 billion of customer deposit growth, and a GBP73.9 billion increase in assets under management and administration, including Evelyn Partners.

I'll touch on each of these elements in turn.

We are reporting another quarter of strong broad-based loan growth across the group, with growth loans to customers up by GBP9.7 billion. Retail banking and private banking and wealth management balances grew GBP4 billion or 1.7%. This comprises GBP3.9 billion in mortgages and GBP0.1 billion in unsecured lending. Our mortgage stock share increased to 12.7% with record applications in March. Commercial and institutional lending increased by GBP5.7 billion or 3.6%. Within this, growth is strongest for larger corporate and institutions where we see continued strong demands driven by structural trends, including digitization and decarbonization. Our mid-market customers are showing healthy demand driven by manufacturing and social housing.

Turning now to deposits.

Customer deposits grew by GBP2.8 billion in the quarter. This was driven by commercial and institutional, where deposits increased by GBP2.5 billion with broad-based growth across business banking, commercial mid-market and our large corporates. Private banking and wealth management deposits were up GBP0.3 billion, mainly as a result of growth in savings balances. Retail banking deposits were stable with further migration to fixed and [variable rate ISAs] as customers prioritized tax efficient savings options.

Turning now to assets under management.

Assets under management and administration closed the quarter at GBP130.6 billion. This includes the addition of GBP71.7 billion from Evelyn Partners and a GBP4 billion reduction following the sale of Cushon in May.

Turning now to costs.

We are pleased that once again we have driven operating leverage as income growth outpaced cost growth. Other operating expenses were GBP2 billion in the second quarter, taking the total to GBP4.1 billion for the first half. Our cost to income ratio reduced by 2.8 percentage points to 46%. And we now expect other operating expenses to be around GBP8.5 billion for the full year.

Turning to impairments.

Credit performance remains strong and we benefit from a structurally low loan impairment rate and strong asset quality. The impairment charge for the quarter was GBP140 million, equivalent to 13 basis points of loans. We saw no new signs of stress across our three businesses and we continue to expect a loan impairment rate below 25 basis points for 2026. So our guidance is unchanged. We carry economic uncertainty post-model adjustments of GBP284 million with total PMAs of GBP316 million.

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

Thank you, Katie. Good afternoon and thank you for joining today's call.

I'll start by sharing some highlights from the first half of the year before moving into more detail on the balance sheet covering capital, liquidity and funding. I'll then update you on our progress on funding plans across the group.

Starting with an overview of the key metrics on slide 15.

We ended the first half with strong capital, MREL and leverage positions, comfortably above the regulatory minima with a CET1 ratio of 13.2%, a total MREL ratio of 30.6% and a leverage ratio of 4.7%. Our average liquidity coverage ratio was 140%, giving us a comfortable surplus over minimum requirements. Our average net stable funding ratio was 132% and primary liquidity was GBP152 billion. The Group's funding is very well diversified. Our loan to deposit ratio was 90% and we have a strong retail, private and corporate deposit franchise with around GBP448 billion of customer deposits across our three businesses.

We've made good progress with our 2026 funding plan with GBP2.7 billion sterling equivalent of benchmark issuance from NatWest Group across HoldCo Senior, AT1 and Tier 2 capital securities and GBP3.7 billion sterling equivalent from NatWest Markets. Thank you for your continued support of NatWest in both the primary and secondary markets. We saw another positive step in our credit ratings journey as Fitch upgraded a number of rated subsidiaries by one notch following an update to its bank ratings criteria.

Moving to capital generation on slide 16.

Our business continues to be highly capital generative. We've ended the first half of the year with a common equity Tier one ratio of 14% before distributions in line with the year end. Our earnings power is reflected in 197 basis points of CET1 capital generation, which was boosted by 31 basis points of capital generation from RWA management. Our ongoing investment spend consumed 19 basis points and organic lending growth consumed 61 basis points. This means all our investment in growth was funded with just six months of capital generation, and we are reporting a CET1 ratio of 13.2% after accruing 50% of a attributable profit for ordinary dividend payments. We expect to continue generating strong capital from earnings with active [RWA] management and for 2026, we now anticipate capital generation before distributions and the impact of Evelyn Partners of more than 240 basis points. This is before the impact of Basel 3.1 on the 1st of January 2027, where we continue to assume around GBP10 billion of RWA uplift.

Turning now to our approach to capital allocation on slide 17.

We have a robust balance sheet and aim to operate with a CET1 ratio of around 13%, giving us appropriate headroom above minimum requirements. Our strong capital generation enables us to invest in our business to grow and deepen customer relationships. We are both disciplined and dynamic in our deployment of capital and our diversification across three businesses gives us optionality through the cycle to optimize risk-adjusted returns. We also apply a high bar as we consider acquisitions to accelerate our strategy through additional scale or capabilities. Our strategy is delivering attractive and growing shareholder returns and we remain committed to a dividend payout ratio of around 50% and to returning surplus capital to shareholders via share buybacks.

Turning to our total capital position on slide 18.

Our total capital ratio of 18.9% reflects the strength of our CET1 ratio and higher levels of AT1 and Tier 2 capital relative to our minimum requirements. We currently have an AT1 ratio of 2.5% with GBP5.1 billion of securities outstanding, inclusive of the GBP500 million we issued in May. This is above our minimum requirement of 2.1% and I expect to move closer to this requirement during the course of next year after the implementation of Basel 3.1. Our Tier 2 ratio is 3.1% with GBP6.3 billion of securities outstanding. Including the GBP750 million new issuance in the first half.

Turning to our total MREL position on slide 19.

Our total MREL is very healthy at 30.6%, significantly higher than our risk-weighted asset requirement, leaving us well positioned for the growth and the upcoming impact of Basel 3.1. Having built out the maturity curve of our MREL stack, issuance requirements will be driven primarily by refinancing needs.

Turning to our total leverage position on slide 20.

Our spot UK leverage ratio is 4.7% with an average ratio of 4.8% compared to our 4.3% minimum requirement. I welcome the proposed reforms to the leverage framework that were announced as part of the financial stability report in July, which the PRA intend to consult on in the near future. As you can see from this slide, if the proposals are adopted, the minimum leverage ratio for NatWest Group would reduce by approximately 40 basis points to 3.9%. While this will ensure leverage remains a backstop measure going forward, it will not bring any day one benefit to the group, given the risk-weighted asset framework is our binding constraint.

Turning to liquidity on slide 21.

Our liquidity position remains very strong. At the end of the quarter, the LCR was 140% on a 12-month rolling average, reflecting around GBP44 billion of surplus primary liquidity above minimum requirements. Our total liquidity portfolio was GBP224.6 billion. Comprising primary liquidity of GBP152 billion and secondary liquidity of GBP72.6 billion. Primary liquidity decreased during the first half, driven by an increase in lending and the acquisition of Evelyn Partners, partially offset by new issuance. Secondary liquidity decreased through the amortization of eligible collateral pre-positioned at the Bank of England. Our central bank balances are held at both the Bank of England and the European Central Bank with 70% of balances held in sterling.

Looking at the composition of the securities portfolio, 69% are held to collect and sell and fair value through other comprehensive income, and 31% are held to collect and held on the balance sheet at amortized cost. The remaining primary liquidity is a smaller percentage of level 1 high-quality covered bonds and level 2 securities.

Turning to slide 22 on our funding composition.

Although customer deposits account for over 80% of the group's funding, we also have access to stable and diverse sources of wholesale funding across a range of products, maturities and currencies. Of the GBP93 billion of wholesale funding outstanding, the large majority is Senior HoldCo and regulatory capital issuance from NatWest Group and senior unsecured issuance from NatWest Markets. Drawings under the Bank of England's TFSME scheme are part of our funding mix and our current drawings are GBP8.2 billion with GBP5.2 billion repayable in March '27 and GBP3 billion in March 2031.

On slide 23, you can see that we've made progress against our issuance plans for 2026, including benchmark transactions from the group holding company, NatWest Markets and NatWest Bank. From NatWest Group, we've issued around GBP1.6 billion sterling equivalent in HoldCo Senior against our guidance of approximately GBP3 billion for the year. In addition, we also issued GBP0.5 billion of AT1 and around GBP0.6 billion sterling equivalent of Tier 2 capital during the year, including our longest maturity dollar Tier 2 capital transaction to date, a very well supported 21 non-call 20.

While for NatWest Markets PLC, our benchmark trades totaled GBP3.7 billion sterling equivalent across Euro and US dollar markets. We also returned to the covered bond market for NatWest Bank in June with a GBP1 billion issuance, our first since 2024. As we come into H2, we continue to look for opportunities to further balance our funding mix to support our customers. Following the success of our covered bond issuance, we expect to return to the market with another transaction later in the year. Investor demand remains strong across a broad range of asset classes, including short-term markets, providing the flexibility to access funding where we see the best value and as we approach the year-end, we will consider pre-financing opportunities across asset classes, taking into account balance sheet growth assumptions.

And finally, turning to credit ratings on slide 24.

We are a composite strong A rating across our senior ratings, and it was pleasing to see progress in our credit ratings during the first half as Fitch upgraded a number of rated subsidiaries by one notch following an update to its bank ratings criteria.

With that, I'll hand back to Katie.

Thank you, Donal.

Given our first half performance and the inclusion of Evelyn Partners, we are strengthening our 2026 guidance. We now expect income excluding notable items of around GBP17.9 billion. Other operating expenses of around GBP8.5 billion, capital generation before distributions and the impact of Evelyn Partners greater than 240 basis points, and a return on tangible equity of more than 19%. Finally, we now expect to announce our next buyback with our full year results in February.

With that, I'll hand back to the operator for Q&A.

Thank you.

(Operator Instructions)

Our first question today is, what is your take on the July FSR proposals? I see that the new slide on leverage, any other opportunities that you see that would impact capital targets or planning?

Donal, would you want to take that?

Yeah, quite a generic question, so there's a lot to unpack. Let me cover a few elements.

Overall, what we'd say is we welcome direction of travel to date, but reiterate what we said in [KD7 Nicole] this morning and I also said in my opening comments, there has been no change to our capital requirements to date. But if we look at some of the proposed reforms that were discussed as part of the FSR review, firstly on leverage, again, in my opening remarks, I talked about the changes that we see from a NatWest Group perspective. If implemented as proposed, we see about a 40 basis points reduction in our leverage requirement, but that will not bring any day one benefit to the group given we are constrained by the risk way framework and not leverage. However, I would say it is a positive move because it moves and ensures that leverage remains a backstop measure and will not become a binding constraint in the foreseeable future.

We've also had a lot around buffer usability. So the FPC has signaled an ambition to support the move towards a simpler framework centered on a single buffer that is releasable in stress. Again, very much welcome that. Anything that increases the size of releasable buffers in stress and simplifies the framework is a positive. However, I think given that any changes there will be in conjunction with international authorities, I don't expect any changes in the near term that will probably evolve over a number of years.

And then we also had the proposed change to the [O-SII] buffer where the PRA have clarified that it could release the O-SII buffer in the event of a systemic stress under existing discretionary powers. Now, again, this is not going to have any impact on the way we manage capital or our CET1 target for a number of reasons. Firstly, the O-SII is applied at the ring fencing holding group level and the related group risk add-on that is at NatWest Group does not form part of MDA threshold. So therefore, in a stress, there will be no change to our MDA. There would obviously be a change to our minimum requirement.

As you know we give careful thought to the calibration of our CET1 target with consideration to multiple factors, not just the consideration of MDA or buffers and stress. And we also look to balance the expectations of various stakeholders as well as consideration to our minimum supervisory requirements in both BAU and stress requirements. And also probably the last point I would just call out is that the releasability of the O-SII buffer would only be in the event of a systemic stress and would afford no benefit against an idiosyncratic capital event, which is an integral part of our management planning and target setting.

So I think they're the key I think proposals that were outlined is the FSR. The other probably more meaningful element from an NatWest Group perspective is the work that still needs to be done on the overlapping elements of the domestic capital framework. That's one that we see the most potential upside and that has been deferred to Q4, but we look forward to constructively engaging with the PRA on the case for reducing that overlap within the framework.

Thank you. Our next pre-submitted question is, covered bonds were mentioned on the management call this morning. Can you just set out your thinking on the requirements and how it links to the deposit outlook?

(multiple speakers) I'll take this one again. So covered bonds, we guided to a billion of covered bonds for the year. So we did execute our first covered bond a number of years in June. And as Katie outlined this morning, given the success of that transaction, we look to come back to that market at some stage in H2. I think the likelihood is, as we move to a more normalized liquidity position, we expect cover bonds to be more core part of our issuance requirements going forward.

Our next question is going to come from [Violetta]. If you'd like to unmute and ask your question.

Thank you very much for organizing the call. And obviously, congratulations on the results.

Look, just a question from me. I'm looking at your funding slide and, you're halfway through your funding for 2026. And shall I just take that we're still expecting you in H1 to 2 and a little bit of MREL, is that if you can confirm just that, and then you mentioned pre-funding. What if we could quantify that a little bit, maybe on which part of the capital structure? Any comment also on currencies would be highly appreciated.

Thank you.

Sure, let me cover them, Violetta. Thanks for the question.

Yeah, I think your expectations from a holding company are pretty much there, thereabouts. So I would expect from an MREL perspective to be active in H2, given we have to date issued about GBP1.6 billion sterling equivalent of our GBP3 billion guidance, probably expect that to be done over two transactions over H2.

Additional Tier 1, we're running headroom at the moment, 2.5% for a sale requirement, 2.1%. Obviously, I need to consider the impacts of Basel 3.1 on the January 1, '27, but also we do have a GBP1 billion sterling call in May. So we'll keep optionality there if there's a follow on transaction to the GBP500 million we've done earlier on this year. I think we're done in Tier 2 capital for this year, given the transaction that we did earlier in the year.

And then if I move on to the pre-financing question, I suppose it's becoming quite a regular occurrence, I think, just given the strong market dynamic. But we'll look at market conditions into H2 once we've completed this year's requirements. If we think from an issuer perspective and spreads are attractive, then we will give that some consideration probably later in Q4.

The question around, I think, going forward, capital requirements, you can actually see post-Basel 3.1. Really, what you're looking at is refinancing of existing calls and maturities with some balance sheet growth built in there as well. But we do have a slide in the deck that shows you post the AT1 call next year in May, we have, I think, only GBP400 million in 2028. And then there's nothing from an AT1 perspective for call until 2031. So do expect that capital issuance to be quite light, I think, over the next few years.

Currency-wise, we'll be open to, I think, just different pricing dynamics in each market. But again, given a large portion of our outstanding capital in MREL is in dollars, expect kind of dollars to play a big role in that as well over the next few years.

Robert Smalley.

Good to hear from you both, and thanks for taking my questions and doing the call.

Some of my question was just answered, but with respect overall to AT1s and then Tier 2s, first, given the amount of capital generation that the bank is currently producing, do you see going forward even a bigger decline in the use of AT1s and Tier 2s? I know you don't -- other than this call next year, you don't have anything for a while. So it seems like you'll just grow the balance sheet without keeping pace on the AT1 side. How about on the Tier 2 side?

Number one. Secondly, you did 21 non-call 20, very successful issue here in dollars. US investors still, for whatever reason, struggle with the 15 non-call 10 structure. Could you talk about how the 21 non-call 20 worked from your point of view, from a treasury and cost point of view? Because I think that that would be something that would be more attractive going forward to US investors rather than the 15 non-call 10 for whatever reasons.

And then third question on the call this morning, a question was asked about data centers. If you want to give any more color on your exposure there, just as a percentage of balance sheet. What you want to do in that sub-sector going forward, that would be great. Thanks.

Donal, do you want to take the first couple and we'll take the third? (multiple speakers)

Yes. Hi, Robert, good to hear from you.

So first question, just around AT1 Tier 2, any reducing requirement there? I wouldn't say reducing requirement because obviously we still expect the balance sheet to grow and with that we expect RWAs to grow as well. It really is the refinancing calls and maturities, I think, across the AT1 and Tier 2 stack as opposed to actually the overall requirement going down. And as I said, just on the answer to the previous question, it is quite staggered because we have extended the duration, particularly, I think, within our AT1 outstanding issues. So a lot of that refinancing is back-ended beyond 2030.

On the question on the 21 non-call 20, yeah, your comments resonate. I think we've definitely seen at times from a US investor perspective that they aren't as comfortable with the 5-year non-call. So if it's 15 non-call 10 or 10-year non-call 5, saying that we have successfully issued both in the US over the last number of years. So I think even though all investors aren't completely comfortable with that structure, there is a strong cohort of people who are invested in our debt that are -- but the 21 non-call 20 was a very successful transaction for us. I think it just looked attractive from an issuance and spread perspective with the longer duration and that's something that we're open to in terms of looking at longer duration issues as well if the investor demand is there.

So hopefully that answers those questions.

Sure, thanks very much, Donal. And good to hear from you as ever, Robert.

So if I look at the kind of data center piece, it's not a separate classification that we pull out to say it would be x within here or there. But to get a kind of a view of kind of some of the detail of where we have different exposure, probably one of the easiest places to look is in the pillar three. I think if you go to page 34, within that, you can see we have all different kind of, it's the kind of [sic] code kind of classification of different amounts that we have on the balance sheet by kind of subcategory of lending. And you'll be able to pick up in there the category that they're obviously part of in terms of that but it's not in itself a meaningful number as part of the total bank.

We obviously focus on long-term contracted aspects with kind of strong operators and things like that. But have a look there and you'll be able to get a little bit of a flavor of the makeup of the total book by subcategory. Hopefully that's helpful.

Thank you for all your questions today. I would now like to hand back to Katie for closing comments.

Thanks very much. I'd just like to say thank you as ever to all of you for the support you give us on our debt issuances. It's really much appreciated and particularly when we come out with classes that we don't use as regularly as we've obviously done a little bit this year with covered bonds. Thank you for joining the call and I wish you all a lovely weekend when you get to it.

Take care. Thanks very much.

Thank you.

That concludes today's presentation. Thank you for your participation. You may now disconnect.