NatWest Group PLC (NWG) 2021 Q4 法說會逐字稿

Good morning, and welcome to the NatWest Group Annual Results 2021 Management Presentation. Today's presentation will be hosted by Chairman, Howard Davies; CEO, Alison Rose; and CFO, Katie Murray. After the presentation, we will open up for questions.

Howard, please go ahead.

Good morning, everyone, and thank you for joining Alison, Katie and me for our full year 2021 results presentation.

NatWest Group delivered a strong financial performance in 2021, delivering on our strategic priorities and returning to profitability. The bank's share price also saw a steady recovery throughout the year, increasing by around 35%. And UKGI announced 3 separate transactions, taking the government stake down to just above 50%.

The U.K. banking industry as a whole has held up well during the pandemic, remaining open for business and well capitalized. The NatWest Group retains a very strong capital ratio. And we once again comfortably passed the Bank of England's stress test in December, further demonstrating the resilience of our balance sheet to future crises.

Our commitment to helping people, families and businesses to thrive has never been more important. We're building from extremely robust foundations as a bank which holds strong market positions, serving 19 million customers, including 1 in 4 businesses throughout the U.K.

For the moment, a number of the key economic indicators remain relatively positive. Growth has returned, unemployment is low and the bank is seeing a little in the way of significant defaults among its customers. And while there's no doubt that the recovery from the pandemic and the rising cost of living are causing challenges for our customers, we also see considerable opportunities for growth.

The progress that Alison and her strong and capable leadership team have delivered in the last 2 years has helped to ensure that the group is well placed to succeed and grow as the needs and expectations of our customers evolve. We are delivering on our purpose underpinned by our strategic priorities, helping customers transition to a low-carbon economy, playing a positive role in our communities and driving sustainable returns to our shareholders.

With that, I'll hand over to Alison and Katie, who will take you through our results and our future priorities in more detail.

Thank you, Howard. Good morning, and thank you for joining us today. As usual, I'll start with a strategic update, Katie will take you through the results and we'll then open it up for questions.

We are reporting a strong performance today. We are now 2 years into our transformation program and have made good progress on our strategic initiatives. Our refocusing of NatWest Markets is largely complete and our withdrawal from the Republic of Ireland is well underway. With the economy starting to recover, the business is now positioned for growth, supported by our long-term investment program and digital transformation.

So let's begin with the financial headlines on Slide 4. We're reporting a strong performance for 2021 with profit before tax of GBP 4.3 billion compared to a loss of GBP 351 million in the prior year. We generated attributable profit of GBP 3 billion. And our return on tangible equity was 9.4%. We are also delivering on income growth, cost reduction and capital. Net lending grew GBP 7.8 billion or 2.6%, driven mainly by growth in mortgage lending. We reduced costs by 4% or GBP 256 million. And we're reporting a CET1 ratio of 18.2% or 15.9% on a pro forma basis for regulatory change introduced in January 2022 as we previously indicated.

As you know, we have committed to an annual dividend distribution of at least GBP 1 billion for '21, '22 and '23. And we are announcing today a final dividend of 7.5p, bringing total dividends for the year to GBP 1.2 billion. We have also executed on-market buybacks of GBP 750 million. And we are announcing today a further GBP 750 million. Including the GBP 1.1 billion directed buyback we made last March, this brings total distributions for 2021 to GBP 3.8 billion.

Two years ago, we set out our purpose-led strategy, which places customers at the heart of our business, as you can see on Slide 5. The rationale is straightforward: By helping our customers to thrive, we, too, will thrive. We are delivering our strategy through 4 strategic priorities with the aim of driving long-term sustainable value and delivering on our 2023 targets, which we are now updating.

In 2022, we expect to deliver income of more than GBP 11 billion, excluding Ulster Bank. We are amending our cost reduction target to 3% per annum for '22 and '23, reflecting higher inflation and ongoing investment in the business but maintaining our strong focus on continued cost discipline. We retain our 2023 CET1 ratio of 13% to 14%. And we have upgraded our return on tangible equity target in 2023 to comfortably above 10%.

So let me talk in more detail about how we are putting our customers at the heart of our business on Slide 6. We already hold strong position, serving 19 million customers, including 1 in 4 U.K. businesses. But as we have seen during the pandemic, customer needs and expectations are changing rapidly. This represents an opportunity for banks that can stay close to their customers and anticipate their evolving demands. Our investment in data and technology means we can better understand our customers, create deeper relationships and support them more effectively and efficiently at key stages throughout their lives, whether it's helping to buy a house, save for the future, set up or grow a business.

You can see on the slide how we are gaining traction. To give some example, since March 2020, we have gained almost 0.5 million new customers who have their primary banking relationship with NatWest Group. And whilst we continue to provide face-to-face support through our extensive network of branches and relationship managers, almost 90% of our retail customers now have their needs met digitally compared to 53% 2 years ago.

So let me turn to how we are investing to further improve customer experience, deliver growth and increase productivity on Slide 7. We have just entered the second year of our GBP 3 billion investment program, the majority of which is being invested in technology, digitization and data. We're investing in digitization of products and services to drive growth, investing in customer journeys to improve the customer experience and productivity and investing in data analytics to deepen our understanding, develop real customer insights and personalize our approach.

I want to focus on 3 growth areas today: small- and medium-sized businesses, affluent customers and helping our customers transition to a low-carbon economy. And I'll talk about each of these in turn, starting with small businesses on Slide 8. We are already a leading bank for small and medium businesses in the U.K. with a leading Net Promoter Score. Last year, we supported SMEs with GBP 2.2 billion of gross lending and we processed 1/4 of all U.K. payments. As the economy recovers, we continue to invest and support these businesses, which drive around half of U.K. turnover and employ 60% of the private sector workforce. We are doing this by creating an ecosystem of digital and technology-led solutions, combined with a specialist relationship manager model covering all the regions in the U.K.

One example of our investment is our payments proposition. Our merchant-acquiring platform, Tyl, allows businesses to take payments from customers via a card, phone or online. And Payit uses open banking technology, so businesses can manage online payments direct to their customers' bank accounts in near real-time without needing to know or store their card or account details. As we further integrate Tyl and Payit, this will provide customers with a combined digital solution across both card payments and open banking. And we're also investing in international payments to give us a competitive global payments proposition, enabling us to grow our share of customer wallet.

Another priority as the economy recovers is to support high-growth companies as they scale up. We're well placed to do this both through our network of accelerator hubs, which offer entrepreneurs access to sector experts on the ground in every region, and through collaborating with others such as the Business Growth Fund, where we can invest equity in businesses they want to scale.

So let me turn now to our affluent and high net worth customers on Slide 9. In 2020, we brought all our wealth management businesses together within Private Banking. We did this to drive greater value from the affluent customers we already serve as well as to attract more of this growing segment to our wealth management business and deliver real growth. We have the leading private bank in the U.K. with Coutts. And we are focused on supporting affluent customers across the group by improving financial understanding, creating more flexible tailored lending and helping people save and invest for the future.

Over the past year, we have made good progress. We successfully onboarded 25,000 new affluent customers. We have improved our affluent Net Promoter Score by almost 20 points. And our investment products are now the best rated for the affluent segment. In 2021, we grew assets under management and administration by GBP 5.3 billion to GBP 35.6 billion. And we doubled net new inflows to GBP 3 billion. Our investment in digital platforms enables customers to access a range of funds online that are managed by the bank's investment team. GBP 800 million of net new inflows in 2021 was via digital platforms, which is evidence of our ongoing digitalization and growth.

Another way in which we are responding to changing customer needs on Slide 10 is by helping them transition to a low-carbon economy, where there is a strong commercial, economic and social imperative. Of course, we also have to ensure our own house is in order. And having achieved a net zero in 2020, our focus is now on becoming climate-positive across all operations by 2025.

As you know, we're a leading underwriter of green bonds. And we reached our 2021 target of raising GBP 20 billion in sustainable funding and financing early. So we announced a new target to deliver a further GBP 100 billion by the end of 2025 and contributed over GBP 8 billion towards that target in the second half. We are now consolidating our position as an industry leader for green underwriting by expanding our range to include not just sustainability-linked bonds and loans but also financing, derivatives and repo products.

Turning to smaller businesses. Research we carried out last year shows that there is a GBP 160 billion revenue opportunity for SMEs as a result of the drive to tackle climate change. Last week, we announced green loans with no arrangement fee to help SMEs finance assets such as solar panels, electric vehicles or heat pumps in order to achieve their sustainability ambitions. For consumers, we have completed GBP 728 million of green mortgages since their launch in Q4 2020, which give a discounted interest rate on energy-efficient properties. And we're also working with other organizations to accelerate change and better serve our customers.

For example, we are collaborating with Microsoft to help U.K. businesses create plans to reduce their carbon emissions. And we're working with Octopus Energy on a scheme that helps customers transition to electric vehicles. And we have partnered with CoGo, who are experts in carbon tracking to help our customers measure emissions associated with their spending via the NatWest banking app. And last year, we also led a collaboration with other global banks to launch Carbonplace, the world's first transparent global marketplace for carbon offsets using blockchain to offer customers clear and consistent carbon pricing at liquid markets and seamless post-transaction settlement.

We continue investing to deepen customer relationships through our digital transformation and are reaping the benefits of creating a relationship bank in a digital world, as you can see on Slide 11. 60% of retail customers now interact with us only via digital and just under 90% have their needs met digitally. Use of our chatbot continues to grow with about half these interactions completed without human intervention. And video banking is now well established as a convenient means for customers to meet us without having to travel to a branch.

And as you know, we have been investing in customer journeys to make the experience fast, easy and frictionless. As a result, in 2021, 70% of new account openings in the retail bank were automated with straight-through processing compared to 14% in 2019. And this level of digitization is creating a virtuous circle. Improving the customer experience has increased retail Net Promoter Scores from 4 to 13 within the same time span. And it has also improved productivity and strengthened our internal controls. In Commercial Banking, digital service requests have grown from 6,000 in 2019 to 220,000 in 2021 as we migrated more services to digital channels. And our online Net Promoter Score increased from 4 to 24.

I now want to turn to capital management on Slide 12. We are working hard to reduce the capital intensity of the business and have made good progress with a reduction from 54% to 43% over the last 2 years. We continue to actively manage capital in the Commercial Banking book to exit portfolios with low returns and delivered a further reduction in RWAs of GBP 1.5 billion in 2021. We have also made strategic choices on NatWest Markets and Ulster Bank as you know. We now have largely completed our refocusing of NatWest Markets on currencies, fixed income and capital markets. And as a result, we reduced RWAs from GBP 38 billion in 2019 to GBP 24 billion in 2021. During the year, NatWest Markets also returned GBP 1 billion in dividends to the group.

We continue to make good progress on our withdrawal from the Republic of Ireland. In December, we announced that we have reached a binding agreement with Permanent TSB for the sale of EUR 7.6 billion of performing retail and SME loans. Together with our agreement with Allied Irish Bank of EUR 4.2 billion of performing commercial loans, this means that around 60% of the Ulster loan book is now agreed for sale. We continue to progress transactions for other elements in the portfolio, and we'll update you during the course of this year. We expect the majority of AIB and PTSB asset sales to be largely complete by the end of 2022 and for our withdrawal to be capital-accretive.

So our business is now much more capital-efficient than it was 2 years ago. And we maintain a strong risk profile with a well-balanced and diversified portfolio. 94% of our personal lending is secured. And we have limited exposure to at-risk sectors, which we manage carefully.

Now that the refocusing of NatWest Markets is largely complete and with our withdrawal from the Republic of Ireland well underway, we are further simplifying the structure of the group to focus on customer segments and growth, as you can see on Slide 13. We are doing this by bringing together our Commercial, NatWest Markets and RBS International businesses to create a new franchise called Commercial & Institutional. This will enable us to deliver more products and services for customers through the full life cycle from right across the franchise, just as we've done by bringing together our wealth businesses in Private Banking to leverage our asset management expertise across the group.

From Q1 onwards, we will have 3 major businesses: Retail, Private and Commercial & Institutional. And we will report on this basis excluding Ulster Bank. Katie will talk more about this later. This is a further step in removing complexity and becoming an easier bank for our customers to deal with.

Turning now to Slide 14. Our focus on efficient capital allocation is driven by our desire to maximize returns to shareholders. As you know, this is a capital-generative business and our CET1 ratio is well above our target of 13% to 14%. As I said earlier, we have committed to an annual distribution of at least GBP 1 billion for '21, '22 and '23 with a payout ratio of 40% for ordinary dividends. We also made a direct buyback of GBP 1.1 billion in full year '21, the maximum possible in any given year at almost 5% of our share capital. We plan to maintain capacity for further directed buybacks.

In addition, we will consider further on-market buybacks as part of our distribution policy. And whilst returning capital to shareholders remains our preference, we retain the option of looking at inorganic opportunities, which offer a strong strategic rationale and compelling value creation. You will also have seen that the government has sold around 350 million shares since our Q3 results. And its shareholding has decreased by 11 percentage points during the year to just under 51%.

So with that, I'd like to hand over to Katie to take you through our financial performance for the year.

Thank you, Alison, and good morning, everyone. I will start with the group performance for the full year and introduce the go-forward group financials before I cover our performance for the fourth quarter.

As you know, Ulster Bank is divided into continuing and discontinued operations as we progress with our withdrawal from the Republic of Ireland. In time, everything will move to discontinued as the withdrawal completes. However, when I'm reviewing the full year performance, I believe it is important to talk to the total group, including Ulster Bank's discontinued operations.

Group income was GBP 10.8 billion, as shown on the far right. Total operating expenses were GBP 7.8 billion, down 1% on the prior year. We reduced other expenses by 4%, in line with our commitments. We made a net impairment release of GBP 1.3 billion compared to a charge of GBP 3.2 billion in 2020. And this resulted in operating profit before tax of GBP 4.3 billion, up from a loss of GBP 351 million. Attributable profit to ordinary shareholders was GBP 3 billion, equivalent to a return on tangible equity of 9.4%. From now onwards, my comments are predominantly for the go-forward group.

So turning to our Q4 performance on Slide 17. We reported total income of GBP 2.6 billion for the fourth quarter, down 1.9% from the third quarter. Within this, net interest income was up 3% at GBP 1.9 billion and noninterest income was down 13% to GBP 660 million. Excluding all notable items, income was in line with the third quarter. Operating expenses increased 21% to GBP 2.2 billion, driven by higher strategic costs and the U.K. bank levy.

The net impairment release of GBP 328 million represents 37 basis points of gross customer loans and compares to a release of GBP 226 million or 26 basis points in the third quarter. This reflects improvements in underlying credit metrics and a continued low level of defaults. Taking all of this together, we reported operating profit before tax of GBP 710 million for the quarter.

I'll move on now to net interest income on Slide 18. Net interest income for the fourth quarter of GBP 1.9 billion was GBP 53 million higher than the third. This increase reflects continued mortgage and unsecured balance growth and a higher yield curve. Turning to net interest margin, this increased by 3 basis points to 238 basis points. Higher structural hedge income and a change in the bank rate in mid-December added 2 basis points. Mix and price developments added a further basis point driven by higher unsecured balances.

Turning to the drivers of margin on Slide 19. On the asset or lending side, gross yield for the group fell by 5 basis points to 168, reflecting further growth in lower-yielding liquid assets. There was moderate pressure on Retail Banking loan yields due to lower mortgage rates while Commercial Banking yields improved due to mix in the U.K. base rate change. On the liability or deposit side, group funding cost declined by 3 basis points to 28, a more typical quarterly level. Retail and commercial deposit costs were stable. There are two factors to consider in relation to 2022 net interest margin: first, the yield curve; and second, mix and price. I will talk more about these factors on Slide 20.

Starting with the chart on the top of the page, which we showed you in Q3 when we spoke to the mortgage margin. As we enter a period of rising U.K. base rates, it is important to appreciate broad balance sheet dynamics concerning mortgages, deposits and unsecured lending to understand how the higher yield curve will be reflected in retail and bank net interest margin. We have taken significant action to increase customer mortgage rates, given the sharp rise in swap rates from October last year.

Customer deposit rates, however, were unchanged in the quarter. This led to an increase in customer spreads, the difference between what we charge customers for their mortgage and what we pay for deposits. This increase will come through in higher deposit income, which is only partially offset by lower mortgage income. If we look at profitability across the franchise, taking into account mortgages, unsecured lending and deposits, you can see that despite volatility in mortgage margins in 2021, retail NIM remained stable, and we are comfortable with this performance.

Turning to our updated interest rate sensitivity disclosure at the bottom of the page on the left-hand side. The improvement in the yield curve is reflected in the market-implied interest earnings at year-end. So the incremental benefit has reduced from that, that we showed at the half year. This is because we will pass more of the change in base rates through to customers at higher absolute interest rates. The benefit in year 1 from a 25 basis point increase in all yield curves would be GBP 329 million. And GBP 267 million of this relates to the U.K. yield curve. The benefit from 100 basis points increase in U.K. interest rates is GBP 969 million.

For our hedge deposits, the ongoing increase in swap rates will be reflected in our product structural hedge income, which we expect to increase over 2022. For our large unhedged deposits, the higher U.K. base rate is more relevant. And this is highlighted in our managed margin sensitivity. As you know, changes in asset mix and price are not included in this sensitivity disclosure. But taken together, we expect the yield curve benefit to more than offset the competitive pressure from mortgages. So we anticipate an increase in bank net interest margin through 2022.

Moving on now to look at volumes on Slide 21. Gross loans increased by GBP 4 billion or 1% in the quarter to GBP 356 billion. U.K. mortgage lending grew GBP 1.4 billion or 0.8%. Net mortgage growth of GBP 10.9 billion for the full year includes a record GBP 36 billion of gross new lending in retail banking. Our Retail Banking stock grew to 11%, driven by flow share at 11.5%. U.K. unsecured balances grew a further GBP 200 million, following a return to growth in Q3.

In Commercial Banking, gross customer loans reduced by GBP 1.9 billion, reflecting continued repayments on government schemes and targeted sector reductions, mainly across real estate, to manage our risk. There was a small drawdown of revolving credit facilities, but utilization is broadly unchanged at 19%, which is well below pre-COVID levels. Overall, 2021 was a year of strong growth in lending as we supported our customers to buy homes, grow their business and manage their spending.

I'd like to turn now to noninterest income on Slide 22. Noninterest income, excluding notable items, was GBP 598 million, 7% lower than the third quarter. Within this, income from trading and other activities decreased 71% to GBP 39 million. Our currencies and capital markets businesses in NatWest Markets performed well, but there was continued weakness in the fixed income, driven by underperformance in rates.

NatWest Markets' performance at the beginning of 2022 has been in line with expectations. And this includes the fixed income business. As Alison mentioned, we will create a new franchise, Commercial & Institutional, which combines NatWest Markets with our Commercial Banking and RBSI businesses to better support our customers. You can see the combined performance in the appendix.

Fees and commissions in our retail and commercial businesses grew by GBP 31 million to GBP 516 million. This was driven by higher payments income due to increased corporate activity as well as growth in card and lending fees, supported by the successful rollout of our new credit card proposition. So what does all this mean for 2022 income? We expect to deliver income, excluding notable items, above GBP 11 billion, up from GBP 10.1 billion in 2021.

I will move on now to look at costs on Slide 23. Other expenses, excluding operating lease depreciation and the direct cost base of Ulster, were GBP 1.7 billion for the fourth quarter. That's down GBP 59 million in the fourth quarter in the prior year, taking annual cost savings to 4%, in line with our targets. Strategic costs were GBP 378 million in Q4, bringing the total for 2021 to GBP 787 million, again in line with the guidance of around GBP 800 million.

Going forward, we are simplifying our cost target to align to the go-forward group, excluding litigation and conduct costs. On this basis, other operating expenses in 2021 were GBP 6.8 billion. Looking to 2022, we continue to invest in the business as we seek to improve operating leverage. Taking into account this investment and higher inflation, we are targeting further cost reduction of around 3% per annum for '22 and '23 from this base of GBP 6.8 billion.

Turning now to impairments on Slide 24. We made a net impairment release of GBP 328 million or 37 basis points of gross customer loans in the fourth quarter. This brings the overall release for the year to GBP 1.3 billion. Our Q4 release was driven by: an update to our economic assumptions, in line with the prevailing market conditions at the year-end; improved underlying risk metrics in our performing book; and a continued low level of defaults. Following actions taken to derisk our book, we are updating our through-the-cycle impairment loss rate guidance to 20 to 30 basis points, down from 30 to 40 basis points. We expect to be below this through-the-cycle average for both 2022 and 2023.

Turning now to expected credit loss on Slide 25. Our group ECL provision at the end of the year was GBP 3.8 billion, down GBP 2.4 billion from the start. GBP 1.5 billion of this reduction was driven by improved economics and a further GBP 166 million reduction due to reclassifying the Ulster portfolios we have agreed to sell to AIB and PTSB. The GBP 3.8 billion ECL includes GBP 1 billion of post-model adjustments. GBP 584 million of the PMA relates to economic uncertainty, down by a further GBP 145 million in the quarter.

The ECL release has reduced our ECL coverage to 103 basis points. And we are comfortable with this level of coverage. Our PMA for economic uncertainty accounts for 15 basis points. And the remaining coverage of 88 basis points is below the 2019 levels, which feels reasonable, given the derisking we have undertaken. There are no particular issues in the book, and we continue to be comfortable with how it is performing.

Turning now to look at progress on Ulster Bank on Slide 26. As Alison said earlier, we now have binding agreements for around 60% of the Ulster Bank loan book. We expect the majority of AIB and Permanent TSB asset sales to be largely complete by the end of 2022. As you know, these are asset deals, and we also expect a gradual decline of deposits as customers choose their new bank. This will probably lag the asset sales slightly. Income will follow the balance sheet trajectory, but the reduction of the cost base will lag.

However, we do expect total Ulster Bank other operating expenses, excluding withdrawal-related costs in 2023, will be around EUR 200 million lower than 2021. We expect to incur withdrawal-related costs of around EUR 600 million over the next 3 years, including EUR 500 million of this by the end of 2023. As I said earlier, these costs are excluded from our cost target, which is focused on the go-forward group.

In addition, we expect to incur disposal losses through income of around EUR 300 million in 2022. Ulster Bank in the Republic of Ireland continues to be very well capitalized and had a CET1 ratio of 27.8% at the end of 2021. We continue to expect the withdrawal to be capital-accretive. And you can assume a reduction in RWAs in line with the timing of asset sales. As transactions complete, we will look to restart dividend payments from Ulster Bank back to the group.

Turning now to look at capital and risk-weighted assets on Slide 27. We ended the quarter with a common equity Tier 1 ratio of 18.2%, down 50 basis points over the third quarter. This ratio fully reflects the final dividend accrual, bringing the dividends of the year to GBP 1.2 billion, ahead of our GBP 1 billion commitment, and the GBP 750 million buyback we announced today, which together reduced the ratio by 75 basis points. This reduction was partially offset by a 32 basis point benefit due to lower RWAs and a 5 basis point increase from attributable profit net of changes to IFRS 9 transitional relief.

Our IFRS 9 transitional relief is 39 basis points, down from 60 basis points at Q3. The reduction reflects the release of Stage 1 and Stage 2 expected credit loss, which would previously have been added back to our capital position. Looking down over the full year, we started with a CET1 ratio of 18.5% and generated 240 basis points of capital. This allowed us to announce capital distributions of GBP 3.8 billion and pay GBP 500 million of associated pension contributions, equivalent to 265 basis points, and end the year at 18.2%.

RWAs fell by GBP 2.8 billion in the quarter to GBP 157 billion. This was driven by lower credit risk, which reduced by GBP 2.2 billion. Given the strong performance of our credit book, there was a benefit from positive procyclicality, which reduced RWAs by GBP 0.8 billion, including GBP 0.4 billion in Commercial Banking and GBP 0.3 million in Retail Banking.

The regulatory changes that took effect on January 1, 2022, have increased RWAs by GBP 18.8 billion to GBP 176 billion, in line with our guidance. This should be your base moving forward, and we expect RWA movements to reflect changes in the loan book and the Ulster Bank withdrawal. RWA inflation, combined with other regulatory changes on the 1st of January, reduces our CET1 ratio by 230 basis points to 15.9%.

Turning to Slide 28, which shows the key drivers of our CET1 ratio. As we transition to our 2023 target of 13% to 14% with an aim of ending 2022 at around 14%, these are the factors to consider. We will continue to generate capital both from earnings and our withdrawal from the Republic of Ireland. We will also consume capital via loan growth. Distributions are a key priority. We have committed to distribute a minimum of GBP 1 billion per annum through dividends, which would consume around 115 basis points of capital through to 2023. We have GBP 500 million of distribution-linked pension contributions remaining, which would consume a further 20 basis points of capital during 2022 as we accrue distributions to be paid in 2023.

The buyback we announced today is fully included in our 15.9% ratio. Were we to do further directed buybacks in 2022 and 2023, in line with the one that we completed last March, this would consume around 160 basis points of capital in total, naturally dependent on pricing at the time. We also have flexibility to do further on-market buybacks and consider organic opportunities if they provide compelling shareholder value. You will find more details of these drivers in our appendix.

Turning to Slide 29, which shows the strength of our balance sheet. Our pro forma CET1 ratio on the 1st of January of 15.9% is now 190 to 290 basis points above our 13% to 14% target range. Our U.K. leverage ratio of 5.8% is down from 5.9% in Q3 at 255 basis points above the Bank of England minimum requirements. We have also maintained strong liquidity levels with a high-quality liquid asset pool and a stable diverse funding base.

Our liquidity coverage ratio increased to 172%, largely due to a further GBP 12 billion TFSME drawdown before closure of the scheme, taking the headroom above our minimum to GBP 90 billion. We continue to optimize our capital base and have called our last remaining U.S. dollar preference shares. This will deliver an annual saving of GBP 80 million following redemption in March 2022. Due to the change in FX rates since the press were issued, we will realize an FX loss in Q1. This will reduce our 1st of January CET1 ratio of 15.9% by around 15 basis points.

Turning to my final slide. I want to leave you with some guidance. Let me start with income. Over 2022, we expect margin to increase, driven by higher U.K. base rates, lending volumes to underpin income growth and ongoing recovery in customer activity levels to support fee and commission income. Together, we expect this to deliver income excluding notable items of more than GBP 11 billion, up from GBP 10.1 billion in 2021.

As I said earlier, we are planning to reduce other operating expenses by around 3% in both 2022 and 2023, reflecting our investment in the business to accelerate operating leverage and higher inflation. And we anticipate a lower impairment rate below our updated through-the-cycle guidance of 20 to 30 basis points through to 2023. Looking at the whole group, we expect our CET1 ratio to end 2022 around 14% and reach our target range of 13% to 14% by 2023. Taking all of this together, we have enhanced our return on tangible equity for 2023 to be comfortably above 10%.

So to wrap up, we have delivered a strong performance in the fourth quarter. And we are well positioned to grow income, reduce costs and increase sustainable returns to our shareholders. And with that, I'll hand back to Alison.

Thank you, Katie. So to conclude, we are reporting a strong performance today and the business is positioned for growth now that our refocusing of NatWest Markets is largely complete and our withdrawal from the Republic of Ireland is well underway. This growth is underpinned by our long-term investment program and the benefits of our digital transformation. Our capital strength enables us to continue investing in the business to consider other options for creating shareholder value, at the same time, as returning capital to shareholders.

We made total distributions of GBP 3.8 billion in 2021 and have committed to a minimum dividend distribution at least GBP 1 billion for '22 and '23. Of course, we also retain the capacity for further direct and on-market buybacks. In short, we continue to execute on our strategy to generate income growth, reduce costs and achieve a CET1 ratio of 13% to 14% in order to deliver a return on tangible equity comfortably above 10% in 2023.

Thank you very much, and we'll now open it up to questions.

(Operator Instructions) We will take our first question from Aman Rakkar of Barclays.

Hopefully, you can hear me. Well, a couple of questions. First of all, on your revised cost guidance, appreciate you're now kind of replacing the basis of cost to include strategic costs. Could you help us kind of understand the drivers into 2022? I guess, it's difficult for us to work out the delta versus consensus, and our estimate is probably guiding for GBP 300 million higher next year than where The Street is.

What are the moving parts of this? Is this more kind of underlying cost inflation than where The Street is? Or maybe perhaps part of the answer there would be, what are your expectations for strategic costs going forward? I don't know if you mentioned that in the release, but I wasn't quite clear on your expectations for that.

I guess, secondly was around capital. And you're indicating a faster rundown in the CET1 ratio, a CET1 ratio of circa 14% versus The Street at 15.4%. I guess, back of the envelope math on capital generation, outlook for RWAs, it does look like there is capacity for you guys to deliver a buyback well in excess of the around GBP 2 billion that consensus is looking for. I mean, could you elaborate a bit further on that? And noting the comments around inorganic appetite, is there anything on the horizon that you can see that might be of interest?

Thanks very much. Well, let me start with capital and Katie can pick up on costs. Look, I think my -- hopefully, we've given you very clear guidance on distribution and I'll just reiterate. Our preference is to distribute capital to shareholders, and that remains our key priority. We intend to maintain that ordinary dividend of around 40% of attributable profit with a minimum of GBP 1 billion per annum for '22 and '23 via a combination of ordinary and specials. We maintain the capacity to participate in directed buybacks of the U.K. government stake. As you know, that's limited to the 4.99% of issued share capital in any 12-month period.

And in addition to the GBP 750 million announced today, we will consider further on-market buybacks as part of our overall capital distribution approach. As I mentioned, we also will look at if there are any inorganic opportunities, providing they provide compelling shareholder value and strategic rationale. We're not considering anything at the moment, but we have capacity to do that, shouldn't do so. But I'll go back to distributions remaining our key priority. And obviously, what we have, as you can see, is a very capital-generative business. Katie, do you want to pick up the cost question?

Sure, thanks so much. So in terms of cost, just you know, Aman, for a while, we wanted to simplify the cost narrative as we've done a huge amount over the last number of years to reduce the spend on strategic costs from GBP 1.4 billion of a few years ago down to GBP 800 million just now. So we felt now was the right time to kind of pull those together. So the cost guidance for this next year is 3% down on the GBP 6.8 billion. That will naturally have some reduction in the strategic cost line that would be built into that as well as the reductions that we'd see in our other operating costs as we continue to invest to digitize the business going forward. Thanks, Aman.

Is there any more detail around the actual strategic cost expectations going forward?

No, that's not something we're going to be focusing on as we go forward. So we've just folded it all into that one line, the GBP 6.8 billion base, take 3% off in '22, take a further 3% off in 2023.

Our next question comes from Jonathan Pierce of Numis.

I've got a couple of questions. Can I just come back on the strategic cost point first? Because I think it is important, given you were targeting a 4% drop a year in costs ex those. Now it's 3% including those. And obviously the base in 2021, the strategic cost is much higher than you previously led us to believe was the sort of go-to strategic cost number.

So maybe putting the question in a slightly different way. By 2023, do you think the strategic cost component of the overall cost number is going to be above medium-term guidance you've given before the strategic cost of about GBP 300 million? I think it's important for us to understand that because it is quite a big delta to the 2023 consensus in your guidance today.

The second question is on the rate assumptions that are behind the income guidance for this year, the RoTE next year, really important to the NII sensitivity. So the GBP 282 million on the managed margin for a 25 basis point move, what's the sort of starting level of base rate that, that is assuming we're moving from? And then sorry, one quick final question. I think Basel IV has disappeared completely from the commentary today. Is that because you're now expecting Basel IV to have no impact at all in the next year?

Thanks, Jonathan. Katie, do you want to take this?

Yes, sure, absolutely. So I'll pick off strategic costs as we go through. So I mean, Jonathan, I'm conscious of the guidance we've historically given. I would say that's still broadly appropriate, though it's not a line that we'll be talking about specifically. What I would obviously remind you, obviously we have given you very specific guidance on Ulster, which will continue to appear in our discontinued disclosure within that. So that's obviously separate from there. So the guidance of 3% is on the go -- approximately 3% down on the go-forward bank as we move forward. And we'll share with you the progress against the specific Ulster numbers that we've given you.

I'll take on Basel IV. Look, it's taking a long time to come. I would say our guidance has been in line with what we have said historically. The absence of commentary on that is more that, I think, we're not sure of implementation dates. I wouldn't read anything more into that. And we'll just see what the twists and turns we go on, on that as we go through this year.

And then if we just kind of get into interest and revenue guidance, along with the RoTE, so in terms of the interest rate assumption around the more than EUR 11 billion guidance and the comfortably above 10%, I would obviously start by saying that the interest rate assumption is just one of the many factors incorporated into our guidance and that our total income guidance is above GBP 11 billion. Clearly, the degree to which it exceeds this will be driven by the magnitude and the timing of the U.K. base rate rises.

And we do note the market expectation of further Bank of England rate rises have increased significantly over the last couple of weeks. Our guidance of above GBP 11 billion includes our assumption of further Bank of England base rate rises this year reaching 1.25% in Q4 2022. You can see our updated interest rate sensitivity disclosures in the table. And so any number is clearly above that. We've given you good guidance to take your own views as to what the external outcome could be.

Okay. But previously, the managed margin, that NII sensitivity, was quite mechanically -- the reason it drops as the years go on was because you would see that the curve was moving up. So it would be helpful to know what the GBP 282 million is based off, what level of base rate.

So as we look at it, the base rate, we're assuming that the base rate will rise up to 1.25% in Q4 2022. So from the 50 basis points a day, by the time we get to Q4, that would have gone up to 1.25%. Clearly, we've got the swap mechanism coming through as well, where we get the benefit through the structural hedge. And I know you're very familiar with that, so I won't go into that in detail. But that's the assumption that we're working towards.

Our next question comes from Rob Noble of Deutsche Bank.

Can I just ask on the capital ratio again, specifically the RWAs? You said driven by loan growth and then the Ulster runoff. So should we expect RWAs to grow at the same rate as loan growth or below loan growth? And I think consensus relative to your pro forma at January 1 is up 1%. Is that about right? And then just to square that off with the top of the capital ratio, consensus gets you to 15.4%. Is there any one-offs in the capital line that would mean that, that was lower for one-off reasons other than distributions?

Katie, do you want to take that one?

Yes, sure, absolutely. So in terms of the RWA guidance, I mean, what we've been quite clear, we're definitely expecting RWA growth in line with lending growth. We are expecting to have lending growth across the book. The delta obviously will be the Ulster Bank ROI. And as you see that -- those sales complete, you will see the RWAs roll off in time with the asset roll-off on that. And we've given you guidance on that this morning.

In terms of the CET1, there's nothing, I think, particular that I would mention in terms of your consensus. I mean, our aim is to get to 14%. That will be done by a combination of distribution of capital, obviously offsetting the growth that we'll naturally create during this year as well, so very focused on that distribution with a little bit of it being used off in terms of RWA growth.

Our next question comes from Jason Napier of UBS. Okay, can we please go for Alvaro Serrano of Morgan Stanley?

Can you hear me okay?

Yes, we can hear you.

There's kind of two follow-ups and one question on mortgages. The follow-ups are on cost and the question on rates from Jonathan. When you think about what consensus had it in the numbers, which looked like 5% higher cost this year than the GBP 300 million delta and the cost they have for 2023, when you look at what consensus was missing versus your guidance, is it more restructuring costs? Is it inflation? Or is it investment?

I note, Katie, that you said the GBP 300 million is still a reasonable sort of normalized restructuring spread. I'm trying to figure out if we were all too optimistic around the cost of getting BAU costs down or we were too optimistic around inflation. I just want to get a sense of what the delta is. Is it investment? Is it inflation? Or is it really cost, which may be in '24, '25 or beyond, there's still more room to normalize? That's kind of clarification.

The second question on rates is quicker and simpler. So the GBP 282 million managed margin delta, that's off the 50 basis points we are in today. I think that was a question from Jonathan. So from -- when the next 25 basis points in March or in May, we should take the EUR 282 million and it's the starting point is the 50 basis points rate hike -- rates, current level of rates.

And the more -- the real question is on the mortgage spreads, when we think about how much of that latency could be competed away, can you give a bit of color of how the current environment is? Because correct me if I'm wrong, but I think you started the year lowering offer yields, now it has come back up. But how would you characterize the sort of the current environment around the mortgage spreads? Because it looks like it's taking a turn down. I just want to get a sense of what you may have sort of factored in for that GBP 11 billion guidance.

Thank you. Katie?

Sure, lovely. Thanks very much. So overall, I'm not probably going to comment too much on what may or may not be in your consensus model. I'll leave that with you. I think, historically, we've tried to be very clear on our cost takeout. Clearly, we're updating that guidance today. And that will account, I think, for a little bit of the delta within there. If I look to the managed margin delta that we have within the numbers there, look, I think there's good understanding in terms of the sensitivity, but let me give you a little bit more background.

So our updated interest rate sensitivity disclosure is illustrative using a point-in-time balance sheet. It's assumed to remain static over 3 years and does not incorporate any changes to mix or to price. It shows the benefit in year 1 from a 25 basis point increase in all yield curves, would be GBP 329 million in total. And you're absolutely right, that GBP 282 million would relate to the managed margin. So that's across all yield curves. If you look at the GBP 329 million only in related to the U.K. yield curve, that would give you GBP 267 million of a benefit. And this benefit from a 100 basis point rise in U.K. interest rates could be GBP 969 million in year 1.

It's important to understand that sensitivity has reduced since the first half due to the increase in the yield curve and expectations for the U.K. base rate. So we're now showing the sensitivity at a much higher level of absolute rates. And as you know, at higher interest rate levels, there's naturally a greater assumption of higher pass-throughs on our managed rate deposits through -- therefore, the sensitivity decreases as we go through. This sensitivity is built bottom-up, incorporating different rates, different pass-through assumptions for different products.

In terms of your specific question, Alvaro, on what happens with the next rate rise, so if the rate rises to come through in the next in the next MPC meeting, I kind of bring you back to the guidance we've given you. We've given you guidance of income above GBP 11 billion. And that is based on a rate rise -- the rates rising to 1.25% in Q4. So therefore, the assumptions around the next rate rise are in that GBP 11 billion already in terms of that piece there. So that would be from the GBP 50 million to GBP 75 million or whichever your assumptions might be.

In terms of the mortgage spreads, I do think as a group and kind of putting this question into context, we are running a retail business which is across mortgages, deposits and unsecured. And as you look across all of these products, we're seeing a business with strong returns. It's very well positioned for the higher yield curve. And we expect Retail Banking NIM of 208 basis points in Q4 to increase over 2022.

It is important to recognize that we've been through a period, I think, of unprecedented disruption in the mortgage market with fiscal stimulus and sharply lowering market interest rates moving sharply higher towards the end of last year and also the beginning of 2022. We have taken significant action to increase the customer rates. We've now made 15 upward basis points -- 15 upward price adjustments, excuse me, since the swap rates started to rise in October.

And although mortgage applications are under pressure, impacted by the steep rise in swap rates, overall, retail margins are widening with most of the overall margin widely taking place in deposits, including through the structural hedge benefits. And you can see in our income disclosure for Retail Banking, the Retail Banking NIM, which shows in Q4 that the higher deposit income more than offsets any lower mortgage income that might be coming through. I hope that helps, Alvaro.

No, it does help.

Again, to come back to Jason Napier.

Can you hear me now?

We can hear you, Jason.

Apologies. So I have two as is tradition. First one on the comfortably above 10% RoTE -- and I enjoyed the emphasis on the word comfortably in your scripted comments, Katie. I guess, on past disclosures around rate gearing, 100 basis points in rates would have added 3.5% to your old 9% to 10% RoTE. So I guess, I would have been expecting somewhere in the region of around 12%. Part of the reason, I guess, you wouldn't get that on a group target, would be the drag from Ireland and Ulster. So I wonder whether you could talk to sort of the phasing and magnitude of that. That's the first one.

And then secondly, the guidance around greater than GBP 11 billion of go-forward income. I guess, again, two components to the top of mind there. One would be NatWest Markets clearly underperforming expectations and medium-term aspirations last year. So where did that go in 2022? Is the old GBP 800 million to GBP 1 billion in sight?

And then secondly, just when you think about your NII increase, the sensitivity tables, they may sort of be an accurate representation of what happens to NII if the curve moves from here. But your current NII does not reflect the benefits of the movement that the curve has already seen. And I sense of danger amongst investors that we might be confused around the two. So I wonder whether you could have a crack at telling us what the change in curve to the end of last year might be worth to NII on a run rate basis. Appreciate that's a tough one, but...

Thanks, Jason. It's always a very comprehensive question. So look, why don't I just talk about NatWest Markets first? And then I'll leave Katie to take you through the others. So in terms of NatWest Markets, as I said, we've largely completed the refocusing of that business. And we did say, which is probably one thing just to remind everyone, about that, that refocusing would be capital-accretive. So, so far, we have returned GBP 1 billion of capital back to the group in 2021.

In terms of looking forward, obviously, we were disappointed with the performance of the fixed income business in Q3 and Q4, and we've taken action on that in the quarter. As you know, as I talked about, that was the business we were doing the most of the restructuring on, which is now complete. So as we look forward, we remain confident about our medium-term guidance of between GBP 0.8 billion to GBP 1 billion of income. We continue to expect growth in our capital markets and currency businesses, which, as I said, last year had performed as we expected.

And in particular, you can see our ESG expertise is driving an increase in our share in green, social and sustainable bond issuance. And we continue to invest in our digital FX and increasing that penetration. We'll also expect to see improved funding costs in NatWest Markets, helped by our improved credit ratings, and then in terms of that fixed income business, a stabilization of the fixed income revenues from that improved trading and lower funding cost now that the refocusing is largely complete. So I think we remain confident about our medium-term guidance as we move into 2022. Katie, do you want to pick up the other points?

Lovely. Thanks so much. And Jason, thanks on your comments on my best amateur dramatics on comfortably above 10%. I'm glad that you picked that up. But look, I mean, just to repeat a couple of things I've said already. So it's our view on interest rates, getting to 1.25% in Q4 this year. So if you have different views, you've got the sensitivity, and I'll talk a little bit more about that in a moment. And you're absolutely right to pick on the Ulster guidance. That will be a drag into 2023.

And in fact, you can see this year, that drag on our RoTE return. So it's 9.4% for the group but 9.9% ex Ulster. So you can see that there's already 50 basis points in there. We've given you, I think, good guidance on how we think this will play out in terms of the cost of the exit. And so you can build your views of them into sort of 2022 and in 2023. But I think what gives us comfort is the retail spread has widened and will continue to do the same as we move forward. So all in all, we are comfortable above that 10%.

If I then go into the NII increase, look, I'll leave the kind of run rate to you today. But what I would probably say, we've laid out both the curve at H1 and H2 in terms of the sensitivity. It's on Page 47 of the slide pack. Bear in mind that our income guidance has got you to 1.25% already. So therefore, those early rate changes and the pass-through assumptions within there are already built in that. So if you're thinking about where might they go from here, I would use the curve that we published today to think about the -- each additional 25 basis point move as to what that would do in terms of impact on our profitability going forward.

Our next question comes from Benjamin Toms of RBC.

Firstly, on the current account survey data that came out this week, arguably NatWest Group were relative winners compared to peers on a year-on-year view, but the bank still comes in the second half of the league table. So wondering whether you have any feeling on why NatWest Group is underperforming peers here and whether you have any sense of how much of your EUR 3 billion investment spend is just keeping pace with competitors and how much is creating something that's unique that other banks do not have.

And then secondly, what are your expectations for any potential announcement this year from the government or from the regulator on mortgage book EPC requirements? Do you expect a carrot-or-stick approach at this stage? And do you see this as a threat to demand or an opportunity for incremental lending? I guess, the most relevant for buy-to-let book, as requirements here for landlords are likely to spike much sooner than for own occupied properties.

Thank you. Well, let me pick up the question on our investment in our current accounts. I mean, obviously, we're into the second year of our GBP 3 billion investment, which is really focused on digitalization and a couple of -- and technology and data investments. What we are seeing is 90% of our customers' needs are being met digitally, which is up from 53% in 2019. And on our current accounts, for example, we've significantly invested in the end-to-end journey there, 71% straight through processing and account opening versus 14% in 2019.

And we have seen significant improvements in our NPS, i.e., our customer scores on that. So we are seeing big differentials in terms of the benefits of that investment. And obviously, we've also increased our primary account market share. We've taken on almost 0.5 million new customers in our retail bank as a result of the improvements that we have there and strong performance. So I think we are differentiating. We're seeing the benefits coming through in our technology and digitization. And we are seeing our NPS scores increasing very significantly.

The one thing I would say is we serve a broad church of customers. We compete across a whole range from both the fintech startups, the challenger banks right up to the global banks as well and from very small customers and vulnerable customers right up to the most sophisticated. So we need to make sure we're serving all of them. But I think that investment is really giving us dividends both through more efficiency in our cost reduction, better engagement scores with our customers and proof points in acquisition of customers as well. So we're pretty comfortable with how that's performing. Katie, do you want to take the question?

The MPC -- EPC, sorry, forgive me. So in terms of mortgage requirements, you'll be aware that we have an ambition that 50% of our mortgage book is on MPC -- sorry, I've got Monetary Policy Committee on the mind clearly. Forgive me, EPC rating of C or above by 2030. We made some nice progress on that. It was baselined against the 2019 number, where we were at 36%. We've moved up to 38%. That sounds like a small percentage move. It's significant when you convert that into kind of numbers of homes and mortgages and things like that.

So happy with the progression on that, and we continue to work with our customers. You do know -- you may be aware that we have some preferential rates for those mortgages to kind of help encourage people to move on to that basis. So we're comfortable to see the move. I think more to do on this and work with government as well as they help the economy transition as well. So we'll wait to see if the PRA make any statements or guidance on that. Alison, I don't know if you'd add anything.

Yes, the only thing -- just to answer, overall, we see the transition to a net zero economy as an opportunity. We published some research last year particularly looking at the opportunity for small businesses. Bearing in mind, SMEs represent 50% of the turnover in the U.K. and 60% of private sector employees, we could see GBP 160 billion revenue opportunity for SMEs in the U.K. as they transition. So we put in place our new target for GBP 100 billion of climate sustainable funding and financing, of which -- and we did GBP 17.5 billion this year.

So look, we see this more as an opportunity as we help our customers transition to a net zero economy. As Katie mentioned, on the mortgages, we've got green mortgages. We've also launched SME green loans for our customers, and we're putting practical help in place. So we see it actually as an opportunity. And particularly, when you look at the shape of our book, we see more opportunities for our customers and us to help finance and support them to do that.

Our next question comes from Martin Leitgeb of Goldman Sachs.

Can you hear me?

Yes, Martin. We can, Martin.

I have three, please. The first one, I was just wondering on the mortgage market -- to follow up on an earlier question, I was just wondering, the 11.5% flow share, what we have seen in 2021, are you broadly happy with that level? Or could there be a scenario that this will increase going forward? And I was wondering if you could update us on front book versus back book pricing and the kind of your volume expectation for this year. Obviously, FY '21 was an extremely benign year in terms of overall system growth. Would you expect that to normalize?

The second question, on interest rates and the broader impact of interest rates on your P&L, if you like. I mean, it seems like from the 1.25% expectation of rate level and your guidance on risk costs, it seems that you're not particularly worried in terms of what the potential rate hike cycle has on your asset quality. Are there any other areas of the -- of your business, of your balance sheet that you worry about, where you think you might see some stress as and when rates go up?

And lastly, on capital, I was just wondering if you could update us if there's anything you can say in terms of capital upstream plans from Ulster. I think last reported CET1 is 28%. And secondly, in terms of capital range, 13% to 14%, is that something that you think you could achieve from 2023 onwards to operate well within that 13% to 14% range?

Thanks, Martin. So let me pick up a couple of points and then I'll let Katie go from there. So just in terms of Ulster on capital, as you know, we're making very good progress. I'm very happy with the progress we're making on the phased withdraw with the two transactions that we've now signed, which is around 60%. I think in terms of when we look at capital returning, as those transactions complete or any other transactions that we may do, we'll engage with the regulator on restarting dividend payments back to the group at that point. But as you say, CET1 in Ulster is very high at 27.8%.

Just on mortgages, I'll touch on that and then Katie can give you the detail. We're very happy with the flow share there. In terms of our Q4 flow share, it was 12.3%. We will always balance, as we've said, volume and value as we do that. And that remains a very attractive asset class for us supporting our customers. But we're always going to balance in terms of that. But we absolutely have capacity to grow. Katie, do you want to pick up this?

Yes, sure. Thanks so much. So in terms of the specific question on the completion margins, you can find them all -- what I'm about to say also, Martin, on the IMS on the retail section. So if you don't catch it, well, they're easy to pick up there as well. So in the fourth quarter, mortgage completion margins decreased from 143 basis points in Q3 '21 to 102 basis points. So it's now below the back book margin of 161 basis points, which declined from the 164. The average application margins in the fourth quarter were 60 basis points. But they increased to 70 basis points in the latter part of Q4.

We have obviously seen some significant increase in the swap funding costs in 2021 with that 2- and 5-year swap increases, over 160 basis points in the last 12 months. Obviously, I think we all saw them come back a little bit in the last couple of days as well. You have seen us take a lot of action in terms of the pricing. And we've done pricing-up of new business sort of 15 times since October to make sure that we're seeking to offset some of that swap pressure. So we do look at it very carefully. We've always said that volume -- won't seek to manage volume and margin to make sure that we're not putting that down. So we do seek to continue to be competitive in that space.

In terms of the capital range, we do think that we can operate between the 13% to 14%. We see no reason not to do that. And obviously, these statements we've made today, sort of sticking to end this year at 14% so that we would be operating in that level in 2023. And Martin, I'm really sorry, I didn't get your second question there.

So I pick that up. You asked if there were interest rate hikes, would that affect our asset quality and whether we were worried about the stress. I mean, I think, what you can see, when you look across, we've always talked about managing the risk diversification on our book, 94% secured. We're not concerned about the asset quality of our book. You can see the RWA intensity is reducing. We actively manage our book. We are seeing very low levels of impairments. Obviously, we work very closely with our customers, and we're keeping a close eye on the pressures that we'll be facing consumers and businesses, but we're not concerned about that. But obviously, we actively manage our book very carefully.

Our next question comes from Omar Keenan of Credit Suisse.

I've got three questions, please. So the first one is on inorganic opportunities. When you think about NatWest's product and market share footprint, what areas do you think would benefit the most from inorganic option, just given that you mentioned that you would consider inorganic opportunities, I think, twice in the presentation.

My second question is on mortgage margins. And thank you for the retail NIM dynamics explanation, it was very helpful. But just thinking over the medium term, when you think about hurdle rates, specifically on mortgage margins, how would you encourage us to think about kind of more stable mortgage margins over the medium term?

And my last question is on inflation. Could you possibly give us a little bit of color as to what you think NatWest's experienced underlying inflation is for '22 and over the medium term? And any color around which salary increases but also perhaps IT and contracts and other costs that might be specifically CPI-linked?

Thank you. So let me pick up your first question on inorganic. As you can see, we have a very capital-generative business and the preference for distribution to shareholders, and we are investing significantly in the business with our GBP 3 billion investment program. On inorganic opportunities, I think when we look at our business, we have the opportunity to grow and expand our business organically very significantly.

I've talked about unsecured, where we're seeing good growth there, 33% in new cards growth from the new products that we've launched. And our share has now gone up to 6.4%. But there's significant capacity to grow there. In our wealth business, you've seen 7% increase in our assets under management and administration and a doubling of our net new money over the year. But our wealth business has significant capacity to grow as well.

When I look at inorganic opportunities, I think we're very clear on the shape of our business, where we want to grow, where we have capacity to grow. And to the extent that anything offered shareholder -- compelling shareholder value, both from either a capability perspective or enhancing our position in growth areas, such as unsecured and wealth, on top of the very strong organic growth we're getting, then we would consider them. But as I said, that is an option we would consider. Our preference remains distribution, as you can see from the commitments we've made there. Katie, do you want to pick up?

Yes, sure. In terms of mortgage margins, so if we look and think more back to sort of prior to pandemic, when we were in a very much lower rate environment, the mortgage market seems to be settling in a kind of mortgage corridor of 80 to 100 basis points. Post pandemic, in a higher environment, it remains to be seen, I think, where we'll settle. I talked about the significant actions we have taken. We've seen that in general across the market. So I think sort of time will tell where that ultimately settles.

But I think by those pricing actions, what we're demonstrating to you, there is a floor that we're not -- that we wouldn't go to. It's important that the business overall remains kind of positive, our ROE, which you heard as well, it's a very good product for us and for the market. And I think we'll just see where that floor settles. And I would encourage you to sort of -- that number is obviously very important and the margins are under pressure.

But I think it is the understanding of what's actually happening across the Retail Banking spread as a whole, which I think is something that we're entering into now as we get into that rising rate environment. And also as we see the growth in our credit card book as well as we go forward. And kind of in terms of inflation, I'd probably rather than get into that too deeply, I would take you to our 3% cost guidance in terms of that. And that's obviously been kind of built in rather than kind of getting into the nitty-gritty of different contract terms.

Our next question comes from Guy Stebbings of Exane.

The first one was just back on costs if I can try it one more time. I guess, a lot of us is what we're trying to work through is if you take consensus expectations for strategic costs in 2022 and 2023, assume they're broadly correct, then the guidance would imply no real reduction in the underlying costs ex strategic costs. So I guess, is that what we should be thinking about as a clean trajectory as we roll forward? Or are there still some chunky items in the next couple of years that you would have previously categorized as a strategic cost, so indeed, the 3% is a clean cost takeout?

And then the second question was just on the rate sensitivity. I was just intrigued by the decision to increase the deposit beat. So what's behind that? Is it anything to do with what you're seeing in the market at all, following the first couple of rate hikes? Or is it just putting a layer of prudence, if you like?

So look, as I look at the cost guidance, we've given you cost guidance across '22 and '23. And we'll see strategic costs come down, but we still definitely expect to see a reduction overall in that other -- in that kind of other operating cost category as well. And you -- the levers for that would be our traditional kind of areas that we've taken costs out before and increasing our investment in digitization is really important to do that.

In terms of the rate sensitivity, I guess, Guy, it's slightly differently. What we had said in Q3 that the -- as we build the sensitivity up, we do it product-by-product in terms of how we build it. What I would say is that the lower rate increases, so the kind of 25 -- first couple of 25 basis points, that pass-through level would be lower. Then as you got up to the kind of 100 basis points level, which is where the sensitivity is now operating, because it's cut from a curve at the end of December, which would have been up at that 100 basis point level, you would see that the pass-through rates would be a higher proportion. That's very consistent with what we said at Q3.

And the guidance of our income being above GBP 11 billion at that 1.25% level, you've seen those lower rate rises come through already, so that's already in there. And when you get to the higher rate levels, there's much less sensitivity going through in terms of the variation of those pass-through levels. Clearly, pass-through levels will be absolutely dependent upon what's happening in the market at that time. And so they will probably vary a little bit from our assumptions. But we believe by building it bottom-up, we've given you some quite good guidance on that today, Guy.

And our last question comes from Joe Dickerson of Jefferies.

Just quickly on the rate assumption, so if the Bank of England is going to 125 basis points on your assumptions this -- by Q4 this year, what's the outlook in your opinion for loan demand, firstly? And then kind of related to that, the industry, when loan demand comes in a bit, tends to get more competitive on pricing. So I'm just trying to think through the various dynamics, particularly as the 2-year product you would have put on in late 2020 starts to mature in the back end of this year.

Sure. Thanks so much. So I mean, Joe, as I look at it, if we go to the kind of 125 rates, we would still see there would be quite good demand as we move on from there. I mean, certainly, as those maturities come through, they're clearly going to come on at a lower level in terms of where they were when we wrote them in 2021 sort of thing. So we'll see that natural piece come through. So what I would expect to see is you'll see strengthening coming through of the -- of NIM as we move into 2022.

And then in terms of where we actually land in 2023, that will impact what kind of happens on that basis. But we do still see strong demand coming through. Whether that's being the refinancing or whether a new demand, you can see from our -- if it's now kind of assumptions that we do still expect to see nice growth coming through on that mortgage house pricing levels, so comfortable that we will get demand coming through as we move forward. Then we'll further obviously enhance the above GBP 11 billion guidance of 2022.

Thank you. I'd now like to hand the call back to Alison for any closing comments.

Great. Well, thank you very much, everyone, for joining us and for your questions. And just to reiterate, a strong financial performance for the year, GBP 4.3 billion, a clear guidance on distribution and revised targets, just to remind you, income above EUR 11 billion, as Katie outlined, and RoTE comfortably above 10%. So thank you very much.

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