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

Good afternoon, and welcome to the NatWest Group Annual Results 2021 Fixed Income Presentation. Today's presentation will be hosted by Katie Murray and Treasurer, Donal Quaid. After the presentation, we will open up for questions. Katie, please go ahead.

Good afternoon, everyone. Thank you for joining us for our full year 2021 fixed income results presentation. I am joined today by Donald Quaid, our Treasurer; and Paul Pybus, Head of Debt IR. I will take you through the headlines for the full year, give an update on our strategic priorities and then move on to some of the detail. Donald will then take you through the balance sheet, capital and liquidity, and we'll open it up for questions.

So starting with headlines on Slide 3. We reported a strong performance for 2021 with a 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're 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 are reporting a CET1 ratio of 18.2% or 15.9% on a pro forma basis for regulatory change introduced in January 2022.

To remind you, we have committed to an annual dividend distribution of at least GBP 1 billion for '21, '22 and '23. And we announced today a final dividend of GBP 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 announced 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. So those are the headlines. I'll move on now to our strategic priorities on Slide 4.

Two years ago, we set out our purpose-led strategy, which places customers at the heart of our business. 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% with the aim of getting to 14% by the end of 2022, and we have upgraded our return on tangible equity target for the group in 2023 to comfortably over 10%.

So let me talk in more detail about how we are putting customers at the heart of our business on Slide 5. We already hold strong positions serving 19 million customers, including 1 in 4 U.K. businesses. And we know 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 investments in data and technology means that we can better understand our customers, create deeper relationships and support them more effectively 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 this slide how we are gaining traction. To give some examples, since March 2020, we have gained almost 0.5 million new customers who have their primary banking relationships with NatWest Group, and almost 90% of our retail customers now have their needs met digitally compared to 53% 2 years ago. Another way in which we are responding to changing customer needs is by helping them transition to a low carbon economy, where there is a strong commercial, economic and social imperative.

On Slide 6, you can see that we are 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 EUR 100 billion by the end of 2025 and have contributed over GBP 8 billion towards that target in the second half of the year.

For smaller businesses, last week, we announced green loans 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 gave a discounted interest rate on energy-efficient priorities.

We're also working with other organizations to accelerate change and better serve our customers. I'll now turn to capital management on Slide 7. We reduced the capital intensity of the business with a reduction from 54% to 43% over the last 2 years.

In Commercial, we have exited portfolios with low returns, delivering a reduction of RWAs of GBP 1.5 billion in 2021. We have largely completed our refocusing of NatWest markets reducing RWAs from GBP 38 billion in 2019 to GBP 24 million in 2021. During the year, NatWest Markets also returned GBP 1 billion in dividends to the group.

Now that the refocusing of NatWest Markets is largely complete, we will be further simplifying the group by bringing together our commercial NatWest Markets and RBS International businesses to create a new franchise called commercial and institutional. This will enable us to deliver more products and services for our customers through the full life cycle from right across the franchises.

We continue to make good progress on our withdrawal from Ulster Bank. In December, we announced a binding agreement with Permanent TSB for the sale of EUR 7.6 billion performing retail and SME loans. Together with our agreement with Allied Irish Bank on EUR 4.2 billion of performing commercial loans, this means that around 60% of the Ulster loan book is now agreed for sale. We expect the majority of AIB and permanent TSB asset sales to be largely complete by the end of 2022. Now let me turn to some of the detail on Slide 8.

As we progress with our withdrawal from the Republic of Ireland, over time, all of this will move to discontinued operations as the withdrawal completes. From now onwards, my comments are predominantly for the go-forward group, which excludes all of Ulster Bank. 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.

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.

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 9.

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 the 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 rates 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 10. Gross yield for the group fell by 5 basis points to 168, reflecting the 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.

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. We anticipate an increase in net interest margin through 2022, driven by changes in the yield curve and mix and price. So starting with the yield curve.

As we enter a period of rising U.K. base rates, we have taken action to increase our customer mortgage rates given the sharp rise in spot rates from October last year. Customer deposit rates have remained low. This led to an increase in customer spreads, which will come through in higher deposit income and is only partially offset by lower mortgage income.

And the other side of the equation is the benefit we derive from higher swap rates through our structural hedge. For our hedge deposits, the ongoing increase in swap rates will be reflected through an increase in our product structural hedge income.

Looking now at customer assets on Slide 11. Gross loans increased 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. Our retail banking mortgage stock share grew to 11%, driven by flow share of 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 positions. Overall, 2021 was a year of strong growth in lending as we supported our customers to buy homes, grow their businesses and manage their spending.

Turning now to noninterest income on Slide 12. Noninterest income, excluding notable items, was GBP 598 million or 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 business in NatWest markets performed well, but there was continued weakness in fixed income, driven by an underperformance in rates.

NatWest Markets performance at the beginning of 2022 has been in line with expectations, and this includes the fixed income business. 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.

Turning now to impairments on Slide 13. 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 full year to GBP 1.3 billion. The Q4 release was driven by an update to our economic assumptions in line with prevailing market conditions at the year-end, improved underlying risk metrics in our performing book and a continued low level of defaults.

Following the actions taken to derisk the book, we are updating our through the cycle impairment loss rate 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 '22 and '23.

Turning now to expected credit loss on Slide 14. Our group ECL provision at the end of the year was GBP 3.8 billion, down from GBP 2.4 billion at the start. GBP 1.5 billion of this reduction was driven by improved economics with a further GBP 166 million reduction due to the reclassification of Ulster portfolios that we have agreed to sell to AIB and PTSB. The EUR 3.8 billion ECL includes EUR 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 ACL coverage to 1.03%, 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 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. And with that, I'll hand over to Donald.

Thanks, Katie. Good afternoon, and thank you for joining today's call. I will start by sharing some of the highlights from 2021 before moving into more detail on capital and liquidity. I will then give an update on our funding plans for 2022 before we open up for questions. Starting with the highlights on Slide 16.

We ended the year with a strong set of balance sheet metrics against our capital funding and liquidity requirements with a liquidity coverage ratio of 172% and a CET1 ratio of 18.2% or 15.9% on a pro forma basis as at the first of January 2022. We successfully executed a number of milestone transactions across the capital stack, meeting our 2021 funding plans and making further progress on capital optimization.

On ratings, Moody's upgraded NatWest Group and subsidiaries earlier in the year, and both Fitch and S&P revised their outlooks on the long-term issuer ratings for all entities in the NatWest Group from negative to stable. We have also seen further progress on our ESG ratings with Sustainalytics reducing our risk score to low risk.

Turning to our capital and leverage position on Slide 17. Our CET1 ratio at the year-end was 18.2%. You'll recall that regulatory changes impacting capital and risk-weighted assets took effect on the 1st of January of this year. In line with our expectations, risk-weighted assets increased by approximately GBP 19 billion, with the majority or GBP 15 billion related to new mortgage models. The increase in RWAs reduced CET1 by 200 basis points.

Taking that change, together with the removal of the software intangible capital benefit of 20 basis points and the tapering of IFRS 9 transitional relief of 10 basis points, results in a pro forma CET1 ratio on January 1 of 15.9%. This leaves our CET1 ratio well above our current maximum distributable amount on our 13% to 14% full year 2023 target range.

In December last year, the Financial Policy Committee announced an increase in the U.K. countercyclical buffer rate from 0 to 1%. This rate will come into effect from December this year, in line with the 12-month implementation period.

The Financial Policy Committee also indicated that if the economy recovery proceeds broadly in line with central projections and absent a material change in the outlook for U.K. financial stability, it would expect to increase the rate further to 2% in the second quarter of this year, which would take effect in Q2 2023.

In addition, the PRA confirmed late last year that Pillar 2A will revert from a nominal amount to a percentage of risk-weighted assets later this year as part of the supervisory review and evaluation process.

The U.K. leverage ratio was 5.8%, leaving 255 basis points of headroom above the U.K.'s minimum requirements of 3.25%.

Moving to Slide 18 and our quarterly movements in CET1 and risk-weighted assets. The CET1 ratio is down 50 basis points compared to the third quarter and fully reflects the final dividend accrual and the GBP 750 million buyback announced this morning, which together reduced the ratio by 75 basis points. This reduction was offset by approximately 40 basis points benefit due to lower RWAs and an increase in attributable profit, net of changes to IFRS 9 transitional relief.

Our IFRS 9 transitional relief is 40 basis points, down from 60 basis points at Q3. This reflects the release of Stage 1 and Stage 2 expected credit loss, which would previously have been added back to our capital position. RWAs fell by GBP 2.8 billion in the quarter to GBP 157 billion. This was driven by lower credit risk, which decreased by GBP 2.2 billion, mainly reflecting lower commercial lending balances.

The regulatory changes that took effect on the 1st of January 2022 have increased RWAs by GBP 18.8 billion to GBP 176 billion. We expect the majority of the AIB and Permanent TSB asset sales to be largely complete by the end of 2022 and for RWAs to follow this trajectory.

Turning to our liquidity positions on Slide 19. We have maintained strong liquidity levels during the year with our LCR ratio increasing from 165% to 172%, reflecting over GBP 89 billion of surplus primary liquidity above minimum requirements. We continue to manage a high-quality liquid asset pool with primary liquidity of EUR 209 billion.

The increase in primary liquidity was mainly driven by continued growth of customer deposits, a drawing of EUR 12 billion from the TFSME scheme in Q4, offset by Ulster Bank's repayment of TLTRO drawings of GBP 3.1 billion. Secondary liquidity is lower due to a reduction in prepositioned collateral with the Bank of England in support of the TFSME funding received.

Moving to funding on Slide 20. We operate with a stable and diverse source of funding. Our wholesale funding is GBP 77 billion or about 14% of our total funding and reflects a range of different sources and maturities. Around 2/3 of our wholesale funding is to meet our Senior MREL and nonequity regulatory capital requirements. We continue to look at all options available to us to assess the optimal blend and most cost-effective means of funding.

Looking at customer deposits in more detail on Slide 21. And you can see that deposit levels remained elevated. Customer deposits increased GBP 48 billion during the year with a GBP 17 billion increase in retail, GBP 10 billion in commercial and GBP 7 billion in private. Retail banking deposits are now GBP 189 billion, and commercial banking deposits are GBP 178 billion.

As Katie mentioned, we've made good progress in our plans to withdraw from the Republic of Ireland. We currently have EUR 22 billion of customer deposits in our Ulster Bank legal entity, and we expect those balances to substantially reduce over the next 12 to 18 months. Our loan-to-deposit ratio is 75%, underpinning our strong liquidity and funding position as well as our strong ability to lend.

Turning now to our MREL position on Slide 22. Our total loss absorbing capacity ratio continues to look very healthy at 39.8%, significantly higher than our RWA requirement of 25.7%. Our senior unsecured MREL stock is now approximately GBP 23 billion or 12.9% of risk-weighted assets on a pro forma basis, compared to our RWA requirements of 11.6%. As you can see from the profile on this slide, we expect around GBP 7 billion of senior unsecured MREL to lose eligibility during 2022. And last week, we announced the call of our first callable senior unsecured MREL security. I expect to be issuing in the region of GBP 3 billion to GBP 5 billion senior unsecured MREL in 2022 to maintain our steady state requirement of GBP 19 million to GBP 21 billion.

Now turning to capital on Slide 23. Our total capital ratio at the full year is 24.1% on a CRR endpoint basis and 20.9% on the 1st of January '22 pro forma basis. With the uplift in RWAs to GBP 176 billion on the 1st of January '22, our AT1 ratio is 2.2% and our Tier 2 ratio is 3%. So we are well positioned on both AT1 and Tier 2, and I have no expected issuance requirements this year. However, this is subject to the evolution of risk-weighted assets throughout the year, including the planned reduction in Ulster Bank's RWAs.

Now turning to Slide 24. We continue to practically take opportunities to reduce our legacy capital stack via liability management exercises, calls and maturities. In 2021, we purchased GBP 1.7 billion of securities through liability management exercises that targeted Tier 1 and Tier 2 legacy capital and bullet Tier 2 securities with less than 5 years to maturity, reducing inefficient capital and generating ongoing reductions in our interest expense.

Additionally, we called 6 Tier 2 securities for NatWest Group and NatWest Bank, including our 4 outstanding discounted perpetual Tier 2s, totaling around GBP 750 million. At the year-end, we had GBP 2.5 billion of outstanding legacy securities, which have no regulatory capital value after the 1st of January '22.

Our strategy and focus on taking action on legacy instruments has continued into 2022. Earlier this month, we announced the call of 3 legacy Tier 1 instruments with a notional of $1.1 billion that lost regulatory capital value of approximately GBP 575 million on the first of January 22. These actions reduced the outstanding balance to below GBP 2 billion and a further GBP 1.3 billion matures during the year, which will significantly reduce the balance to approximately GBP 600 million by the end of this year.

Looking back at our issuance in 2021 on Slide 25. I'm very pleased with the transactions we've executed during the year. And again, thank you for your continued support for NatWest Group and NatWest Markets.

On MREL, we achieved the targets we set out early last year, and we've made good progress on our ESG issuance plans with a EUR 1 billion senior MREL social bond and a GBP 600 million senior MREL green bond issued under our green, social and sustainability bond framework. We have now completed 4 transactions in green, social and sustainable format, and this continues to be a key area of focus for us.

In addition to our GSS issuance, we were also active in the dollar and euro markets with both a $1.5 billion and a EUR 1 billion transaction. On capital, we returned to the sterling market with the GBP 400 million additional Tier 1, followed by a EUR 700 million additional Tier 1. We also issued GBP 1 billion and EUR 750 million Tier 2, meeting our requirements for the year.

Finally, from NatWest Markets Opco, we issued approximately GBP 4 billion in 4 benchmark transactions in both euro and dollar markets. I expect NatWest Markets to target GBP 4 billion to GBP 5 billion in public benchmark transactions this year, and we may also look to be active in the NatWest Markets NV name through private placements.

Turning to ratings on Slides 26 and 27. I'm very pleased with the ratings upgrades by Moody's. For NatWest Group, the senior unsecured debt rating moves to Baa1 from Baa2 while retaining a positive outlook. For NatWest Bank Plc and the Royal Bank of Scotland plc, the issuer ratings moved to A1 from A2 with a stable outlook.

For NatWest Markets and NatWest Markets N.V., the senior unsecured debt ratings moved to A2 from A3, retaining a positive outlook, and the short-term ratings moved to P1 from P2. S&P and Fitch changed their outlook to stable from negative for all group-related legal entities in June and July, reflecting a stronger-than-expected U.K. economic recovery and NatWest Group's strong financial profile. We also continue to make progress on our ESG ratings, reflecting the increased focus and engagement effort we've had with the ESG rating agencies and our purpose-led strategy.

Sustainalytics announced an improvement in our risk score to 17.3 in May last year, which now places NatWest Group as low risk. Finally, finishing on our investment case on Slide 28. We're a capital generation business with capital and leverage ratios well above minimum requirements and improving return on tangible equity. We're reducing state ownership through directed buybacks and efficiently deploying excess capital through dividends and on-market buybacks.

We have a robust liquidity position with a high-quality liquid asset pool and a disciplined approach to risk with resilient asset quality. We continue to make progress on ratings across both credit and ESG, and we've diversified issuance needs with a continuing focus on green, social and sustainable issuance in multiple currencies and tenors. And with that, I'll open up to Q&A.

(Operator Instructions) And our first question asks, could I get your thoughts on there being no Tier 2 issuance requirements for the year?

Donald will have that one.

Yes. Thanks, Katie. So based on our risk-weighted assets of GBP 177 billion as of 1st of January '22, you can see our current Tier 2 percentage is approximately 3%. So I think just a number of points to consider here.

Firstly, I've talked previously around the bullet tier 2 securities that we've had with about GBP 7.5 billion notional letter less than 5 years to maturity. So amortizing 20% per annum. We've obviously made a lot of progress on liability management exercise on those securities over the last couple of years.

So at the end of '21, they just had about GBP 1 billion notional -- GBP 1 billion of regulatory capital value add standing at the end of the year, and that should reduce to about GBP 400 million at the end of this year. So hence, reducing the previous annual requirements we had in tier 2.

Secondly, given expectation of the Ulster Bank asset sales with AIB and Permanent TSB being materially complete by the end of this year, you can expect a corresponding reduction in group risk-weighted assets. So again, reducing Tier 2 requirements. So remind you, we've about GBP 11.6 billion of risk-weighted assets in the Ulster Bank entity at present.

And finally, then there's also potential for further reduction in our Pillar 2 requirements when we return to a fixed percentage of risk-weighted assets later this year. So we'll wait and see how that lands later on in Q3 or Q4 of this year. And I suppose the last point to note is we still run excess CET1 through '22 and into '23 as well. So as I sit here today, no requirements for Tier 2 for the year. But as I said in my opening remarks, that is going to be driven by the evolution of risk-weighted assets through the year. If that changes, we'll update later on in the year.

Our next question comes from Robert Smalley of UBS.

Three questions. First, on deposits. In a rising rate environment, we're obviously going to see deposit rates go up. Are there certain breakpoints or certain interest rates where it becomes very competitive or that you have contractual deposits, where you have to raise rates? And if so, could you give us an idea of how much?

On mortgages, how much of your book reprices this year and next year? And then also on mortgages, we're seeing loan to values go down as house prices go up, in some cases, pretty quickly, usually, as credit analysts, we worry about it the other way. But when we see house prices go up so much, is there any kind of rule of thumb or metric that you look at for any kind of extra provisioning there or extra caution around the market given the robustness of the housing market?

Donald, do you want to talk to deposits and I'll pick up the mortgage one?

Yes. So thanks for the question, Robert. So in terms of breakpoints, I think the answer is not that we see visible at this stage. So we have talked around our rate sensitivity and the fact that we expect at assumptions to increase as rates move higher and that's reflected to the lower rate sensitivity that we provided this morning based on a higher yield curve as of the end of the year.

But you're right, I think in terms of rising rates, higher inflation and also say, tightening in the U.K. That is likely to have an impact, I think, on the, I suppose, huge surplus levels of liquidity that we've seen in the U.K. economy over the last few years. But I do expect kind of any reduction there to be slow. It's probably expected that we will see more competition in the deposit market as we move into probably H2 of this year and into next year. But no real breaking points to call out.

And then in terms of mortgages, our fixed rate book is a mix of 2-year and 5-year products, of which GBP 60 billion is about 1/3 of the book and churns each year. And you'd see that kind of mixture coming through as 30 kind of new to bank customers and 30 billion of kind of internal switches. So there's no -- so that's the kind of third of it is that.

We have 10% -- less than 10% is on SVR. And that -- they don't stay on SVR for a terribly long time, so it's generally relatively transitory. In terms of loan-to-value, you're absolutely right, it's come down about 3% for us this year. So that is positive in terms of, obviously, absolute recovery. But I think more important is also just how well that book is performing and the level of deposits that the mortgage owners are holding. So that also gives you some comfort around that piece. So there's not a particular trigger when we sort of say LTVs get below this level and then we're kind of worried. I think we're very much focused on actually how the book is performing rather than the absolute LTVs for the total group. So we're very comfortable at those levels.

Our next question comes from David Covey M&G. David, would you please unmute and ask your question.

I hope you can hear me. A couple of questions. First, just to clarify the loan impairment guidance of 20 to 30 basis points. Does that include potential releases of post-model adjustments for the next couple of years? I know you said it would be much lower than the 20, 30 basis points. I'm curious to know what the breakdown is between potential releases and actual defaults or losses? And if the answer is yes, then how do you expect actual credit defaults and losses to evolve over the next couple of years?

And then second, you did mention the ongoing derisking. Just to confirm, you said the derisking since 2019. Is that primarily Ulster and maybe a little bit in NatWest markets? Or is there other areas where you feel like your loan book has been derisked?

Yes. So when we talk about the derisking point, David, it's very specifically in terms of what we've done in our commercial book. So we managed down GBP 1.5 billion of RWAs this year, primarily in real estate exposures. So it's actually a conversation separate from Ulster, and NatWest markets where we would see them as much more strategic restructuring of the group. So this is kind of within the core book, managing the day-to-day risks within that, but has been principally focused on real estate, I think, in this last year.

If we then look to the loan impairment guidance, yes, 20 to 30 basis points through the cycle, and we do expect to be lower than that over the next couple of years. So -- and that would be as a result of some of the unwind of the PMA. We haven't shared specifically how we think that might unwind. I think we're, as we go into this year, obviously, we ended last year strong. We made a relatively big release. So you could imagine that now it's still relatively stable in terms of the quality of that book.

So what you could see is some initial releases. And then as things start to get tighter and the impact of things like inflation and rising rates might start to impact the book, if they are not today, then you'll see more of those charges coming through. But certainly lower than the 20 to 30 for the next couple of years.

(Operator Instructions) Our next question comes from Daniel David of Autonomous.

Hopefully, you can hear me okay. I've got 3, if that's okay. So the first one is just on ESG and noting your credentials. Clearly, we've got a stress test coming up this year. Just a bit worried that we're going to get a lump of data, which is aggregated and not being able to decipher much in terms of bank by bank. I was wondering, are you planning to disclose anything in terms of the results, so we can, I guess, so you can maybe benefit from any good outcomes or we can maybe read into a bit more along those lines.

And maybe if there's anything you can tell us in terms of the process or how it might have impacted your ESG systems or outlook would be really interesting. The second was just on LIBOR. Given that we've been through the sterling LIBOR cessation date, just interested if you've got any contracts which are referencing the synthetic extension, if there's any operational challenges? And also how long do you think that will be available?

And then finally is just on MREL. So you've got an awful lot of MREL, and I hear what you just said on the Tier 2 answer to the question. Is there a way that we should think about the actual target for your MREL stack? So close to 40%, clearly, it's large. But is it 30% more realistic? Or is it should it be 200 basis points above the regulation? I'm just trying to get a sense for where we should see it longer term.

Thanks so much. So in terms of the ESG piece and the publication of the stress test, I don't believe there'll be a lot of bank-by-bank analysis. I think it will be much more kind of sector-wide. We are, as I'm sure you're aware, doing a little bit further follow-up work as the PRA have come back with additional questions.

I think following all of our submissions. They are more qualitative rather than quantitative in nature. But I think we will wait to see what ultimately they disclose and if there's any other comment we can make on that though initially, we don't when it's in terms of stress test, it does generally standalone. I do think though that the stress test was really helpful for the organization in exactly along those lines, as you mentioned, around making sure that we established our systems and processes. So you could start to do some of these calculations. So while it's a stress test, it's very specific to work out an impairment number. It doesn't look well enough or at the rest of the income statement and balance sheet.

I do think it was incredibly helpful to kind of start the process of to really understanding what it makes. Donald, would you want to pick up the LIBOR question?

Yes. I will take. So on library I think it's probably a say, a large majority of the sterling exposure is now transitioned. There is a very small ramp that will avail of the synthetic extension, mainly around kind of tough legacy products.

In terms of my view on how line, that will last. I think that's just something that we review on an annual basis from a Bank of England regulatory perspective. But as I said, I would expect that room to actually roll off as well from our perspective over the next couple of years as deals mature. So not an issue and no real operational complexity that we can talk about with the transition either. So we're very comfortable with where we are -- on the MREL question, probably Slide 22, in the fixed income deck is the best place to look at us.

You're right, we're showing a full year '21 lack ratio of 39.8%, so quite high. But I suppose a number of different moving parts there. CET1, which we've guided to already today of approximately 14% by the end of '22 and 13% to 14% kind of range between -- by the end of '23. So you will see obviously a reduction there. We're moving closer to our book. It's in AT1 and Tier 2. And we're also kind of giving some steady state requirement on our senior MREL there of GBP 19 billion to GBP 21 billion as well. So that will obviously bring you closer to the 30% than where we're standing today.

Our last question comes from Aileen Amidei of Longfellow.

Just 2 things really for me, and these are mainly target questions. So the first one is just trying to get your timing target for sale of the remaining Ulster book that is not under the agreement. Obviously, we've got the permanent TSB and the allied agreements in place that you mentioned will complete this year. But for the remaining ones, do you have a target for that?

The second question I have is also a target timing target in terms of the pace of the state ownership reduction. Are you more opportunistic in that? Or has there been a thought of how you want to reduce that ownership? That's it for me.

Yes, sure. Thanks very much. If I think of the Ulster piece, first of all, there are 2 main groups of loans left that are not covered by the binding agreements: the tracker mortgage group of about EUR 6 billion and [EUR 1 billion] portfolio of nonperforming loans.

So discussions are ongoing with other strategic counterparts about the potential interest in other parts of the bank. So those conversations are ongoing. And we will continue to update you as and when we conclude any discussions. But we do, as you know, expect the withdrawal process to continue to be capital accretive as well.

In terms of the government ownership, so we're at 50.94%. If I take that back to a year ago, we were about 62%. So there's been a lot of progress made on that ownership this year. The sell-down of the stock is at the U.K. GI discretion not ours, the job that we have to do is to make sure that we're building an organization that tells a good quality equity story so that there is the interest to kind of make that purchase. And I think what you've seen over the last year kind of supports that, that build has been made and the actions that they have taken. They are actively selling in a program at the moment and we would look to participate in any direct to buyback that they might do at a future date. Thanks, Aileen.

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

Well, thanks very much, everyone, for your time. It's always really appreciated that you take time to come on the call today. If you do have any further questions, please don't hesitate to contact Paul Pybus in our Debt IR. And also, do we -- Donald and I look forward to talking to you in July, our next call after H1 results. Thanks very much indeed, and thanks for the ongoing support.

Thank you.