NatWest Group PLC (NWG) 2020 Q4 法說會逐字稿

Welcome, everyone. Today's presentation will be hosted by Katie Murray, Chief Financial Officer; and Donal Quaid, Group Treasurer. After the presentation, we will open up for questions.

Katie, please go ahead.

Good afternoon, everyone. Thank you for joining us this afternoon for our 2020 Fixed Income Results Presentation. I am joined today by Donal Quaid, our Treasurer; and Paul Pybus, our Head of Debt IR. I will take you through the headlines for 2020, give an update on our strategic priorities and then move into 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. Against the backdrop of economic uncertainty, we have delivered a resilient performance while supporting our customers through the pandemic. Today, we reported an operating profit before impairment of GBP 2.9 billion for the full year with impairments of GBP 3.2 billion, below our guided range of GBP 3.5 billion to GBP 4.5 billion. Our well-diversified loan book remains resilient. And there has been little change in stage migration, which I'll cover in more detail later. Taking impairments into account, this resulted in an operating loss before tax of GBP 350 million, an attributable loss of GBP 750 million.

Despite the challenges of the pandemic, we have continued disciplined execution of our strategic priorities and delivered on our targets. During the year, we grew retail and commercial lending by 7% versus our target of 3%. We reduced costs by GBP 277 million, above our target of GBP 250 million. And we continue to reshape NatWest Markets, reducing RWAs to GBP 27 billion, well above our GBP 32 billion target. This resulted in an initial dividend of GBP 500 million from NatWest Markets to the group this month.

As a capital-generative business, we continue to operate with one of the strongest capital ratios of our European peer group at 18.5%. And today, we announced a final dividend of 3p, which is the maximum allowed within the PRA guardrails.

You will see that we have also announced this morning the conclusion of our strategic review on Ulster Bank. Despite the progress that has been made in recent years, it is clear that Ulster Bank's business in the Republic of Ireland will not be able to generate sustainable, long-term returns. So we have decided to make a phased withdrawal from the Republic of Ireland over the coming years. We will do everything we can to ensure that customers and colleagues are well supported and that service is maintained.

In the near term, there will be minimal change for customers and colleagues. We have also made a commitment that there will be no job losses or branch closures in the Republic of Ireland this year.

As part of this phased withdrawal, the group has entered into a Memorandum of Understanding with AIB to sell Ulster Bank's performing corporate loan book and to transfer Ulster Bank colleagues supporting this loan book. Naturally, our transaction is subject to the usual due diligence as well as regulatory approval.

We are also in early stage discussions with other strategic partners about retail and SME assets and liabilities. We expect this withdrawal to be capital-accretive over the duration of the process. This decision has no impact on Ulster Bank in Northern Ireland.

So those are the headlines. I'll move on now to talk about our strategic priorities on Slide 4. This time a year ago, we set out a purpose-led strategy just before COVID-19. And the experience of 2020 has shown that it has never been more important to put purpose at the heart of our business, helping people, families and businesses to thrive. And throughout the year, we have done everything we can to put this purpose into action.

Our purpose is underpinned by 4 strategic priorities with a plan to drive sustainable returns by serving customers across their lifetime to generate growth, powering the organization through innovation and partnerships, simplifying and digitizing our business to improve customer experience, increase efficiency and reduce costs and by deploying our capital to maximize returns.

Our purpose is also exemplified by 3 focus areas: Removing barriers to enterprise, building financial capability and leading on climate change, which delivers benefits for our stakeholders and will deepen our ability to drive long-term sustainable returns. Donal will talk about what that means for our fixed income stakeholders a little later.

Moving on to Slide 5. Our clear priorities are, first, to build sustainable growth with a continued risk discipline. We have led above the market rate in 2020 and expect to do so over the life of our 3-year plan. Second, we are simplifying the business and delivering cost efficiencies. We expect to continue to reduce costs by about 4% a year over the next 3 years, leveraging our investment in technology. And third, we are actively managing capital in order to maximize returns and aim to operate with a CET1 ratio of 13% to 14% by 2023.

I'll now give you a flavor of what putting purpose into practice has entailed in 2020 on Slide 6. Over the last year, our people have done everything they can to support our customers in the face of exceptional challenges. At the start of the pandemic, we set up remote working for 50,000 colleagues and kept 95% of our branch network open for customers who need us while also accelerating our digital offering.

We provided mortgage holidays, capital repayment holidays and approved over GBP 14 billion of loans under government lending schemes. Demand for this support has tapered since the second quarter. And despite the ongoing pandemic and extension of government lending schemes, current trends show no increase in demand, no increase in impairment and continued growth in mortgage lending. Nevertheless, we recognize there are tough times ahead for some of our customers as the pandemic continues, and we continue to work closely with them to understand their needs.

I now want to move on to the balance sheet, particularly loan growth and impairments. So starting with Slide 7. Gross banking loans increased by GBP 9 billion in the fourth quarter, driven by mortgages, which grew by GBP 6 billion or 3%, reflecting strong demand ahead of the stamp duty deadline and the GBP 3 billion portfolio acquired for Metro Bank. Our retail banking flow share in the fourth quarter was 13%, above our stock share of 10.9%. Mortgages now make up 51% of total customer loans across the bank.

Unsecured balances declined slightly in the fourth quarter across both personal advances and credit cards. Demand for government schemes also slowed further. This still accounted for GBP 1.6 billion of additional lending. However, this was more than offset by GBP 2.4 billion of RCF repayments in Commercial Banking with utilization in Q4 at 22%, lower than the usual pre-COVID level of 27%.

Looking now at changes year-on-year. Gross banking loans increased by GBP 36 billion or 11%, driven by mortgage growth of GBP 16.5 billion and government lending schemes of GBP 12.9 billion.

Moving on now to look at ECL on Slide 8. You will remember from the half year that our modeling is based on 4 different economic scenarios to which we attach our probability weighting. We use the 2 central scenarios to reflect our expected outlook, each with the same probability weighting of 35%. Given the stabilization of economics, we have now increased the probability weighting to 40% for our base case.

This scenario anticipates: GDP growth of around 4.5% in 2021 and gradually moderating thereafter. The unemployment rate averages 6.3% in 2021 with an improvement expected from Q4. A decline in house prices in low single digits is forecasted for this year before steadily reversing from 2022 onwards. And interest rates are expected to remain low with an anticipated reduction in the Central Bank rate to 0 in the second quarter this year.

We have included GBP 878 million of post-model adjustments for economic uncertainty in our ECL provisions until further credit performance data becomes available as government support protection unwinds. These assumptions are reflected in our expected credit loss provisions of GBP 6.2 billion for the full year.

You can also see our updated sensitivities on this slide. If we were to weight 100% to the extreme downside scenario, this would increase ECL by GBP 2.2 billion. And if we weighted on 100% to the upside, it would reduce our ECL by GBP 840 million.

So let me now cover how this impacts the impairment charge on Slide 9. We reported an impairment charge for the fourth quarter of GBP 130 million or 14 basis points of gross customer loans. This was down from 28 basis points in Q3, largely driven by a reduced charge of GBP 10 million in the Commercial Bank compared to GBP 127 million in Q3. This reduction reflects a number of releases, the impact of refreshing our economic assumptions and the post-model adjustments I talked about earlier. Our active capital management in the Commercial Bank has contributed to this low impairment charge, and we've had no tall tree exposures in 2020 or, indeed, this year.

In retail banking, the GBP 65 million charge is a slight reduction mainly reflecting Stage 3 default charges and updated economic scenarios. Any potential flow of new defaults is still being delayed by government support. Our impairment charge for the full year of GBP 3.2 billion is equivalent to 88 basis points of loans. We expect impairments for 2021 to be at or below our through-the-cycle guidance of 30 to 40 basis points.

I would now like to talk about our risk profile on Slide 10. There has been little change during the quarter as government support measures are ongoing and customers have built up healthy cash balances over the year. 97% of our loan book is in Stage 1 and Stage 2 not past due, where customers remain up-to-date on payments. Stage 2 past due is 0.8% of the book, down from 0.9% in Q3. And Stage 3 is 1.7%, down from 1.9% at Q3, reflecting write-offs of legacy mortgages in Ulster. Our ECL coverage ratio is 1.7% with Stage 3 coverage of 41%, in line with Q3.

Some of our wholesale loans are in sectors that we monitor closely. These amounted to GBP 27 billion in Q4, which represents 7% of gross loans. In these sectors, similar to the transit group level, Stage 3 gross loans were broadly stable at around GBP 800 million and we remain comfortable with coverage at 52%.

And with that, I'll hand over to Donal to talk through the balance sheet in more detail.

Thanks, Katie. Good afternoon, and thank you for joining today's call. Let me start off by thanking you for your continued engagement with NatWest Group during 2020. It was disappointing not to be able to meet you all in person last year, but I certainly hope we can meet face-to-face once again in the not-too-distant future.

I'll share some of our highlights from last year before moving into more detail on capital and liquidity and conclude with our funding plans for 2021.

Starting with Slide 12. We ended 2020 with a strong set of balance sheet metrics against our capital, funding and liquidity requirements. The economic uncertainty as a result of COVID contributed to significant market volatility during the year. And in those market conditions, I was pleased that we were able to successfully execute a number of milestone transactions across the capital stack. I would like to thank all investors who participated in our primary deals and those who continue to provide support in the secondary market.

We continue to proactively take opportunities to optimize our capital stack, including a $2 billion liability management exercise that targeted legacy Tier 1 and bullet Tier 2 securities with less than 5 years to maturity, reducing inefficient capital and generating ongoing reductions in our interest expense. We were also in a position to call our additional Tier 1 in July following a successful dollar additional Tier 1 issuance in June.

On ratings, I was delighted to see our progress on ESG being reflected in MSCI's upgrades and our Sustainalytics score reducing to leave us just outside the low-risk category. Earlier in the year, in line with much of the U.K. banking sector, both Fitch and S&P revised the outlooks on the long-term issuer ratings for all entities in the NatWest Group to negative from stable. And in November, Moody's upgraded NatWest Markets to A3 as it refocuses its product and service offering and reduces risk-weighted assets.

So turning to capital and leverage position on Slide 13. Our CET1 ratio at the full year was 18.5%. That includes the benefit of IFRS 9 transitional relief of GBP 1.7 billion or 100 basis points. Our total capital ratio was 24.5% with a total loss-absorbing capacity ratio, including senior MREL, of 37.5%. That leaves us comfortably above our minimum ratio requirements on all of our capital metrics. Our maximum distributable amount is at 8.9%, reflecting headroom of 410 basis points above the lower band of our 13% to 14% CET1 target. The U.K. leverage ratio was 6.4%, leaving 315 basis points of headroom above the U.K.'s minimum requirements of 3.25%.

During the year, the PRA announced a number of modifications to the U.K. leverage framework, including the netting of regular weight purchase and sales settlement balances and the exclusion for bounce back loans. These measures, combined, reduced the U.K. leverage exposure by GBP 10.5 billion. In addition, the change in the regulatory treatment of software assets increased the U.K. ratio by 8 basis points.

Moving to Slide 14 and quarterly movements in CET1 and risk-weighted assets. Our CET1 ratio at the end of the year was 30 basis points higher than Q3, driven by lower RWAs and a software intangible benefit of 23 basis points. This was partially offset by the 3p proposed dividend and linked pension contribution. Excluding IFRS 9 transitional benefits, our CET1 ratio was 17.5%. We ended the year with RWAs of GBP 170.3 billion, a decrease of GBP 3.6 billion in Q4, driven by credit risk and counterparty credit risk reductions, primarily in NatWest Markets, where we reduced RWAs by GBP 3.1 billion to GBP 27 billion versus our GBP 32 billion target.

Moving on to the drivers of our CET1 outlook on Slide 15. We have shaped the business to operate at a CET1 ratio of between 13% to 14%, and we plan to reach this level by 2023. There are a number of factors to consider in the evolution of our CET1 ratio.

First, we expect to generate capital as we move towards our 9% to 10% return on tangible equity target in 2023. Distributions to shareholders are a key priority as is retaining capacity to participate in directed buybacks subject to the government's discretion. Linked to dividends, we have committed to pay up to a further GBP 1.1 billion pretax into the pension fund over the coming years. IFRS 9 transitional benefit, which accounts for 100 basis points of our ratio, will taper down through 2024 and is affected by Stage 3 migration. On the denominator, we expect RWAs to increase relative to full year '20, driven by a combination of lending growth; procyclicality; and regulatory uplifts, including mortgage floors.

As a result of these factors, we anticipate RWAs in the range of GBP 185 billion to GBP 195 billion at the end of 2021, including all regulatory impacts effective 1st of January 2022.

So moving to Slide 16. In response to the COVID-19 pandemic, a number of relief measures were announced by regulators to support banks' capital and leverage positions. In March, the Financial Policy Committee announced a reduction in the U.K.'s countercyclical buffer to 0%. And in December, they announced that countercyclical buffer will remain at 0% until at least Q4 2021. Therefore, no increase is expected to take effect before Q4 2022 due to the implementation lag of 12 months.

The PRA confirmed in July that our Pillar 2A requirement is temporarily converted to a nominal amount. The impact of the change had a minimal impact on our Pillar 2A percentage, but will result in a percentage reduction to our capital requirements and in MDA if we experience future RWA inflation. The proposed reduction in Pillar 2A announced in the December 2019 financial stability report came into effect in December 2020 and is included in our year-end Pillar 2A requirement. As I guided to earlier in the year, the reduction in the Pillar 2A requirement is offset by an increase in the PRA buffer. And as a result, our supervisory minimum remains unchanged.

Finally, the systemic risk buffer, which is now called the Other Systemically Important Institution, or O-SII buffer, for the ring-fence bank was unchanged at 1.5%. And the PRA have announced they next expect to set O-SII buffers in December 2022 with any decision taking effect from January 2024.

At NatWest Group consolidated level, the O-SII is held within the PRA buffer and therefore does not form part of the MDA for the group. It does, however, form part of NatWest Group's supervisory minimum and therefore informs the group's risk appetite when setting our steady-state CET1 ratio of 13% to 14%. The total loss-absorbing capital is 37.5%, well above our end-state requirements, and that reflects both our strong capital levels and our progress in building our senior MREL stock.

Moving on to liquidity and funding on Slide 17. Our LCR ratio increased by 13% to 165% during the year, reflecting over GBP 70 billion of surplus primary liquidity above minimum requirements. The elevated liquidity levels were primarily driven by deposit inflows, and our total liquidity portfolio increased by GBP 63 billion to GBP 262 billion.

During Q1 of this year, we took a decision to repay GBP 5 billion of TFSME given the high levels of deposit funding. This is the first time since 2016 we have had no outstanding drawings of TFS or TFSME. We retained drawing capacity in the region of GBP 77 billion which gives us funding optionality to support our customers with future net lending needs, if required, ahead of the TFSME drawing window closing later this year.

On Slide 18, you can see that retail banking deposits grew by 14% or GBP 22 billion to GBP 172 billion with most of the growth in current accounts as a result of lower consumer spending in the face of lockdown and increased savings. Commercial Banking deposits grew 24% or GBP 33 billion to GBP 168 billion as customers built up liquidity during the pandemic and retained a percentage of the government lending scheme drawdowns on deposit.

Our deposit base is well balanced across our commercial and retail franchises, and our wholesale funding mix reflects a range of different sources and maturities. Our loan-to-deposit ratio is 84%, underpinning our strong liquidity and funding position as well as our strong ability to lend. We will continue to look at all options available to us in light of the impact of COVID to assess the optimal blend and most cost-effective means of funding.

Looking back at our issuance in 2020 on Slide 19. Given market conditions in the latter part of Q1 and early part of Q2, I'm very pleased with the transactions we executed during the year. We issued USD 1.6 billion of senior MREL in dual-tranche transaction, including our inaugural green bond issuance, which was the first green bond issued into the U.S. onshore market from a U.K. bank.

On capital, we returned to the sterling market in May with a GBP 1 billion Tier 2 transaction, our first sterling Tier 2 since 2006. We followed that in August with an $850 million Tier 2, which was the first Yankee Bank capital trade to use a 3-month par call.

In June, we were pleased to be in a position to issue a new $1.5 billion AT1, our first AT1 issuance since 2016, and to announce a subsequent call of our $2 billion AT1 later that month. In addition, I was delighted to issue our inaugural sterling AT1 from NatWest Group with a GBP 1 billion transaction in November, ensuring we are well placed when considering refinancing requirements in 2021. From NatWest Markets, we issued a EUR 1 billion and a $1 billion trade as well as completing circa GBP 650 million in private placements.

Turning to Slide 20 and our issuance plans for 2021. On capital, our expectation is issuance of approximately GBP 1 billion AT1 and GBP 2 billion Tier 2. In senior MREL, our guidance is a range of GBP 3 billion to GBP 5 billion as we look to finalize the steady state MREL stock requirement while being mindful of our 2022 calls and the maturity of some of our earlier MREL issuance maturing in 2023. As this is in bullet format, these securities will lose their MREL value from Q1 2022 onwards.

From the operating companies, I expect limited issuance from NatWest Markets legal entity given its balance sheet reduction and reduced funding requirements. We are also unlikely to be active in covered bonds or RMBS from NatWest Bank this year given our significant funding surplus. We will, however, keep this under review going forward, subject to funding requirements. Finally, on legacy securities, we will continue to look at further opportunities to optimize the efficiency of our capital stack.

I'd like to finish off by covering a couple of areas of focus for us in 2021, firstly, our ESG agenda and then the work we are doing on LIBOR transition.

Starting with our progress on ESG on Slide 21. Last year, we saw a marked improvement in our ESG rankings, reflecting the increased engagement effort we've had with the ESG agencies and is aligned to our purpose-led strategy. Our rating from MSCI improved to AA from BBB in Q4 after Sustainalytics announced a reduction in our risk rating score from 27.7 to 20.5 in July. A score below 20 would characterize NatWest Group as low risk. These rankings leave us very well placed from an industry perspective.

We announced plans last year to do more issuance in green, social and sustainable format, and I'm pleased that last year's green bond represents our second GSS transaction following 2019's social bond. We have issued approximately GBP 1.1 billion under our GSS framework to date. And this year, we're looking to further increase the volume of senior HoldCo issuance in GSS format, providing dedicated funding for loans and investments that bring a positive environment or social impact in the U.K.

And finally, on LIBOR transition. We now have just over 10 months remaining until the expected cessation of sterling LIBOR. We continue to be actually engaged in industry working groups to ensure a smooth transition to new risk-free rates. Huge progress has been made over the past number of years as it's now nearly 2 years since NatWest completed the first-ever SONIA loan and issued our first SONIA covered bond. There is still a huge amount left to do over the remainder of the year, and we are fully supportive of the sterling risk-free rate working group road map and targets, including the cessation of sterling LIBOR-linked loans, linear derivatives, bonds and securitizations by the end of Q1.

So in summary, substantial economic uncertainty remains, but we continue to build and operate with very strong levels of capital and liquidity.

And with that, I'll hand back to Katie.

Thank you, Donal. And so on to my final slide to summarize. We delivered a resilient performance in 2020, and despite the challenges of the pandemic, exceeded our targets on growing lending, cutting costs and reducing RWAs. In an uncertain economic environment, we continue to do everything we can to support our customers while advancing our strategy and accelerating our digital transformation. Our focus is on driving improved returns with targets set to grow income, reduce costs and maximize capital efficiency over the next 3 years. With disciplined execution in each of these areas, we expect to deliver a return on tangible equity of 9% to 10% by the end of 2023.

We are pleased to be able to recommence dividend payments, and our intention remains to return capital to shareholders with a payout ratio of 40% for ordinary dividends and distributions of at least GBP 800 million per annum in 2021, 2022 and '23, giving us the capacity to participate in directed buybacks from the government for which we have approval from the regulator today.

Thank you very much. We're very happy to open it up for questions.

(Operator Instructions) We will take our first question, and the question comes from Lee Street from Citigroup.

I have 2 for you, please. Just firstly, on issuance. So you've obviously got a very strong capital position and that's going to stay strong for some years. And at the same time, there's been a lot of pressure on net interest margin. You've undertaken the legacy tenders last year to help manage that. So my question is, why the focus on issuing AT1 and Tier 2 this year given your huge headroom with capital position? To me, it seems like you don't necessarily need to. That's the first question.

And secondly, linked once again to capital. Obviously, a lot of discussion about capital dividends and directed buybacks. Given that, is it fair to say you wouldn't consider any form of M&A beyond sort of the small sort of bolt-on acquisitions like you've undertaken with Metro for the mortgage assets? Those are my 2 questions.

Thanks, Lee. I'll take your second and then Donal will come back on the first, the issuance.

So in terms of capital and dividend, we're definitely not seeing that on M&A. What we're seeing is our preference is to return our capital back to shareholders and to participate in the directed buyback.

We will and continue to look at M&A. I think the Metro deal was a good example of that, where it was adding nice volume, a very good-quality book and building where we've got real capacity to build. We'll continue to look at those deals. So we're really interested in things that are volume or things that are adding capability that we don't have. But it's not the primary driver of the use of excess capital, but it is something we're definitely open to. And when there are opportunities, we do look at them.

Donal, do you want to talk to issuance?

Yes, sure, Lee. So in terms of additional Tier 1 and Tier 2, you can pretty much see what our end-state requirements are. So we don't tend to run kind of buffers at present. So I guess what you're linking it to is our strong cap CET1 position of 18.5%. So the way I would look at that, as Katie and Alison announced this morning, we've guided to an RWA inflation of GBP 185 billion to GBP 195 billion by the end of this year. That obviously includes our mortgage floors, RWA inflation that we expect in the first of January. We also have built in there a potential for a directed buyback of 4.99%, dividends of a minimum of GBP 800 million. And then the linked pension contributions as well. And then I suppose our expectations as well with the software intangible benefit of 22 basis points roll off, too. So there are headwinds to that current CET1 position, so we do expect it to come down during 2021.

And then where we're guiding to from an issuance perspective, we have, in our plan, about GBP 1 billion of additional Tier 1. Obviously, just noting there, we do have a $2.6 billion call in August. So again, just retaining close to what our end state requirements are. And in terms of Tier 2, really, which I've talked about before, is we have about $6 billion, $6.5 billion of dollar bullets outstanding that are amortizing down 20% per annum. So again, that issuance just keeps us in and around what our end state requirements are.

All right, so a very small question, just keeping up to your current levels rather than worrying too much about the CET1. All right. That's clear.

And your next question comes from the line of Robert Smalley from UBS.

Thanks for doing the call in U.S.-accessible hours as well, greatly appreciate it.

A couple of things. First, on LCR up at 165%, realize that, as you said, it's a lot to do with the inflow of deposits. But how do you bring that down? And how do you more efficiently manage that? And is there any -- do you judge any like trapped profitability in there? Is my first question.

Second question. On Slide 20, on the legacy capital, GBP 2 billion left, really just a couple of CUSIPs. Is the plan just to do the rest of the lift this year and take all of it out?

And then my third question, you talked about LIBOR transition last year. Your AT1s, you did one with a treasury reset, one with a gilt reset. Will you continue to do your AT1s in that format until LIBOR has fully transitioned? Or would you look to use different reference rates?

Donal, do you want to take that?

Sure. I guess, let me try and take them in order, Robert.

So LCR full year, 165%. What we have done, obviously, since full year, we paid GBP 5 billion of TFSME and we also had the purchase of the mortgage -- of the Metro mortgage book of GBP 3 billion. So what we have seen is that 165% come down in and around the kind of mid-150s at this stage since that full year position.

In terms of managing that, we have been managing excess liquidity now for a number of years so we kind of consider that BAU. And it does link into some of our 2021 and longer-term targets around lending above market levels. So again, the large majority of that liquidity is sitting within the ring-fence bank, and there are constraints around what we can do with it and how we put it to work.

In terms of the legacy capital of GBP 2 billion, I think we have a very -- obviously, you know we have a very good track record of dealing with legacy instruments with -- I think we had about GBP 11 billion of legacy Tier 1s outstanding back in 2014. So we've seen a gradual reduction there. I think that we'll -- our view is that we will look at opportunities to optimize the capital stock again during '21. But our expectation is that there will be some securities and notionals outstanding because even with a very successful LME, we'll never get 100% take up. So particularly around the OpCo Tier 2s, the likelihood is that there will be small notionals remaining outstanding.

And finally on LIBOR transition and the additional Tier 1. Yes, I think as we go forward -- and we were happy with the resets against gilts, but we could look at that on a SONIA basis as well going forward. So we will keep that under review just based on timing and investor demand as well.

We will take our next phone question, and the question comes from Daniel David from Autonomous.

The first is just touching on the legacy securities that you were just commenting on. The first point is, if you could give any more guidance on the regulatory time line post-March '21, that would be appreciated.

And secondly, as you just noted, I think it's safe to assume that it'd be hard to remove 100% of legacy instruments post Jan '22. So my question is, if that deemed an inflection risk, is there any consequence, regulatory consequence, of leaving them outstanding? And also, do you think the regulator might provide a bit of leniency if you've attempted to LME in the past or in the future?

Just moving to ESG and noting your issuance and your developments in the space. I was just wondering if you've got a target size of ESG issuance in 2021, and also whether you consider capital issuance. And more broadly, post-Brexit, can you comment on how the EC's taxonomy factors into your ESG strategy going forward, or if it does or not?

Sure. Let me start off in there as well. Paul, you correct me if I'm missing any of these. In terms of -- I think you touched on around the legacy instruments. So as you're aware that dear CFO letter that came in, in November. So we're just finalizing our risk-based assessment of the impact of those legacy instruments. The PRA have outlined that they're taking a prudent risk-based approach to that. So I think in terms of anything we have outstanding in terms of small nominals and where we've tried to address it through LME, I think they will take a pragmatic and prudent approach to that.

On capital, I think, in terms of ESG, we guided last year our expectations where we were hoping to do about GBP 1 billion in -- of MREL issuance in ESG based at the time of -- we guided to about a GBP 2 billion to GBP 4 billion MREL requirement last year. Obviously, we issued less than that. We only issued in total $1.6 billion, of which, $600 million was in -- was our first inaugural green bond. So about -- I think about 38% of our total issuance.

Again, when I look at it this year, we've guided to senior MREL of GBP 3 billion to GBP 5 billion. And our expectation is, again, that we would look to do minimum about 25% of that in ESG format. Obviously, depending on demand, we can do higher than that as well.

We've previously considered, from a capital perspective, Tier 2 in an ESG format. But additional Tier 1 is not something we're considering at this stage.

And Donal, do you want to pick up the question on post-Brexit taxonomy?

Yes. So I suppose the initial one we've seen is obviously PRA's views on software intangibles, which obviously we expect to disappear at some stage this year or by the 1st of Jan '22. But apart from that, we will just wait to see, I think, on the outcome of a number of consultations that are expected this year to see where we'll land. But I'm not expecting any major divergence to where we currently stand.

Our next question is a web question from Kevin Mass of Wells Fargo Asset Management.

It asks, can you discuss the key drivers of your 2022 base case U.K. GDP forecast? Which macro drivers would lead you to expect higher GDP growth in 2022?

Sure. Thanks very much. So in terms of the drivers, they're all across the whole suite. They're all laid out within the accounts. I think [certainly 1 73], if you want to go there, at some stage, come in to have a look at it. But when we look at kind of the 4.5% growth this year, then we kind of see it muting off after that.

For us, it's a real -- it's going to be a story of how we come out of lockdown, how the country has kind of opened up. And then I think what's going to be interesting is actually what happens with a lot of the cash flow that people have built up. We see 17% levels of savings in the retail space. That's compared to normally a 5% level. So there's a huge amount of cash that's sitting in people's accounts. And I'm sure you, like we do, read accounts of actually what it might feel like post-lockdown. And if we do actually go into a big spending boom, I think that will have an impact, obviously, on that growth.

You counter that as well. We see kind of slightly worsening unemployment. We believe unemployment will get worse this year as well, peaking at sort of 7% then coming down to sort of an average of, I think 6.3% it was, for the year in 2021.

So for me, it's definitely going to be, as you would expect, the blend of what's happening in that kind of emergence and post-lockdown periods, and then I think what's the story is on unemployment that are going to be the 2 biggest drivers as we look at it.

I think we're pleased to see the rate curve kind of going up a little bit in the outer end. That's helpful, obviously, to us. And that could drive a little bit of growth as well over time. Thanks, Kevin.

Thank you very much. Our next question is actually going to come across from the phone line, so we're going to hand back to the phone line for the next question.

Great. Thanks, Sharon.

Your next question comes from the line of Christy Hajiloizou from Barclays.

So my question is on your Stage 2 balances. I was just looking at the fourth quarter. And obviously, there was a fairly big reduction Q-on-Q. I think it looked like you moved a chunk of your commercial loans back into Stage 1. I'd just be interested, actually, if you could give us a little bit more color on what drove the even move back to Stage 1 for those loans? Is it because you've moved those below that threshold for migration? Or did you change the threshold in any way? Just a little bit of color about the movement from -- back from Stage 2 to 1.

And also if they can give us any sort of color around the type of loans that consisted of that went back into Stage 2 versus those that are still in -- that went back into Stage 1 versus those that are still in Stage 2. So basically just some color around the movement of Stage 2 balances would be great.

Sorry, I had a second question also on -- just on NatWest Markets, actually. Given the sort of ongoing reduction of risk-weighted assets, I'd just be interested in just understanding a bit better the long-term ambition for this entity in terms of how you see it fitting into the group. What's its steady-state size? Do you still consider it as strategic?

Yes, sure. Thanks very much. What I'll do is I'll take the second one first. So in terms of NatWest Markets, no, look, we definitely consider it as a strategic, which is why we kind of announced the strategy that we did last year. So I mean, if you just recall, it was very much around taking it's RWAs, which we're sitting at GBP 39 billion this time a year ago. And what we're saying, we were on -- we wanted to go to a journey in the medium term to get down to GBP 20 billion, and have that GBP 20 billion of RWA use will be focused at supporting the corporate customers who use NatWest Markets for us to be able to service a much broader range of their demands. Now what we've seen happen this year is as we were trying to get to GBP 32 billion, and the team did a truly outstanding job in reality and got down to GBP 27 billion.

So we're a nice way through that transformation. But I think even more importantly, just on the day-to-day operations and mechanics of what you see is the NatWest Markets teams and the corporate and commercial teams working so much more closely together, making sure we're able to give the right service out to our customer base.

So it's important. We expect income to fall a little bit in this year from the GBP 1.2 billion, really benefited from a lot of volatility, down to about GBP 800 million to GBP 1 billion, except remembering, of course, we've also taken the RWAs down a lot within there. But comfortable that in time, it will get to a kind of a contributor towards the RoTE of the group and very, very pleased with that.

If we look at the Stage 1 to Stage 2, and for those that haven't picked up on this yet, there's a handy little table in the company announcement on Page 22. And if you just go year-end to year-end, you miss the fact that actually the loans in the wholesale space have moved around quite a lot in terms of the shape. We had sort of GBP 12 billion in Stage 2 at the beginning of the year on a gross basis, then it went up to GBP 66 billion, back down to GBP 59 billion and then back to GBP 44 billion.

What you're really seeing in there is the improvement in economics. So we haven't changed any of our criteria. We haven't changed the kind of cyclical criteria we talked a lot about at H2. But what has changed is our view of economics. And if you're a wholesale loan, the minute that your PD improves, we move you immediately up and down the stages. Whereas in the retail space, there's a 6-month kind of cure time, to say you might be getting better, but actually, we're going to wait before we move you. And so it's literally the improvement in economics has caused that movement to happen. No more than that. And it would be across various, different sectors. I wouldn't call out one specifically.

Thank you. I will now hand the call back to Katie for any closing comments.

Thanks very much, Sharon. And I just to say thank you very much to everyone for joining us. We really do appreciate your time and coming in to touch base on results day and also your ongoing support. And we look forward to chatting with some of you in more detail over the coming weeks and then as [effective] as part of Q1 announcements. Thank you very much for your time today. Take care.

Thank you.

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