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NatWest Group plc (NYSE:NWG) Q1 2024 Earnings Call Transcript

NatWest Group plc (NYSE:NWG) Q1 2024 Earnings Call Transcript April 26, 2024

NatWest Group plc beats earnings expectations. Reported EPS is $0.26, expectations were $0.23. NatWest Group plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the NatWest Group Q1 Results 2024 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we'll take questions.

John-Paul Thwaite: Good morning, and thank you for joining us today. I'll start with the headlines. Katie will take you through the financial performance, and we'll then open it up for questions. I said in February that we are driving returns in 3 ways. First, by continuing to grow our businesses in a disciplined manner; second, by driving bank-wide simplification; and third, by deploying capital efficiently and maintaining strong risk management. We are focused on these priorities in order to generate capital to both reinvest in the business and make further shareholder distributions. We have continued to make good progress in the first quarter and the year has started well. So let's turn now to the financial headlines, supporting customers and the U.K. economy is central to our strategy, creating greater value for customers, resulting greater value for shareholders.

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Customer lending increased to £361 billion, making this the sixth consecutive year of lending growth. We are seeing early signs of improving demand in mortgages, and our net lending to large U.K. corporates continues to grow as business confidence improves. Our deposit balances have grown to £420 billion, ahead of expectation, with migration to higher rate savings account slowing as expected. And assets under management and administration grew to £43 billion, up £2.3 billion since the year-end. This customer activity underpins our strong performance in the quarter. We generated income of £3.4 billion, with costs of £2 billion, delivering operating profit of £1.3 billion and attributable profit of £0.9 billion. Taken together, this resulted in a return on tangible equity of 14.2%.

Strong earnings added 10p or 3.4% to tangible net asset value per share, which was 302p. Our CET1 ratio for the first quarter increased to 13.5%. This includes an accrual of £367 million towards our interim dividend in line with our targeted ordinary dividend payout ratio of around 40%. We have completed last year's £500 million on-market buyback program and started the £300 million buyback announced in February, which we expect to complete by the end of July. We have capacity for another directed buyback when the window opens in late May. You will be aware that the government has reduced their shareholding to below 29%, a reduction of more than 8 percentage points since the year-end, in line with their intention to exit fully by 2026. This is a shared ambition, which we believe is in the best interest of the bank and our shareholders.

We will work closely with UK GI and the treasury if the government does decide to launch a retail share offer. With that, I'll now hand over to Katie.

Katie Murray: Thank you, Paul. I'll start with our performance for the first quarter using the fourth quarter as a comparator. Income, excluding all notable items, was down 0.8% at £3.4 billion. Operating expenses were 4.7% lower at £2.1 billion, which includes the new Bank of England levy. The impairment charge was £93 million or 10 basis points of loans. Taking all of this together, we delivered operating profit before tax of £1.3 billion. Profit attributable to ordinary shareholders was £918 million, and return on tangible equity was 14.2%. I'd like to talk now about our income performance in more detail. Overall, income, excluding notable items of £3.4 billion was down 0.8% on the fourth quarter. Excluding the impact of one fewer day in the quarter, income across the three businesses increased by £14 million.

Retail banking was down £30 million due to lower mortgage income and a reduction in card spending fees. Private Banking was broadly stable as lower mortgage income was offset by higher fees from assets under management, which grew £1.9 billion or 6% in the quarter. Commercial & Institutional increased to £44 million, driven by stronger markets income. This was partly offset by a reduction in the Central of £13 million. Group net interest margin was 205 basis points, up 6 basis points from the fourth quarter. However, it was broadly stable across the three businesses, excluding notable items and volatility in the Center. This stabilization of margin is pleasing to see after a reduction over the prior 3 quarters. Moving now to lending. We continue to be disciplined in our approach and focus on deploying capital where returns are attractive.

A person using a laptop to access a bank's online banking system.
A person using a laptop to access a bank's online banking system.

We are pleased to see a stronger mortgage market, together with ongoing demand from larger corporates and financial institutions. Gross loans to customers across our 3 businesses increased by £1.4 billion to £361 billion. Taking retail banking together with private banking, mortgage balances fell by £2.1 billion as customer redemptions offset new lending. This led to a small reduction in our stock share from 12.7% to 12.6%. Mortgage flow share for the first quarter was broadly stable on the fourth at 10.5%. However, as the market has increased in size, this translated to higher applications. Unsecured balances were stable at £15.8 billion, with continued growth in cards, offset by a reduction in loans and overdrafts. In Commercial & Institutional, gross customer loans, excluding government schemes, increased by £3.9 billion or 3%.

Within this, loans to Corporates & Institutions increased £3.1 billion as we saw broad-based demand across a number of sectors. I'll now turn to deposits. These were up £0.9 billion across our 3 businesses to £420 billion, which is better than expected. Across retail and private banking, household deposit balances increased by £2.1 billion, and overall current account balances were stable despite annual tax payments. The reduction in commercial and institutional was mainly driven by active management of lower-value deposits and a reduction in system liquidity. Migration from non-interest-bearing to interest-bearing deposits continued at a slower pace as expected. Non-interest-bearing balances were 33% of the total compared to 34% at the end of the fourth quarter, whilst term accounts grew to 17% from 16% at the year-end.

As a result, the increase in our cost of deposits has slowed further, rising around 10 basis points to 2.1%, as you can see on the chart on the right. Our strong diversified funding base has strengthened our liquidity coverage ratio to 151% at the end of the quarter, up 7 percentage points on the year-end. Turning now to costs. We remain on track for other operating expenses to remain broadly stable versus 2023. Excluding the increase in bank levies of around £100 million. Costs of £2 billion for the first quarter were broadly stable with the fourth quarter. This includes £87 million of bank levies following changes to the cash deposit ratio scheme. We expect total bank levies for this year to be around £200 million, which is roughly £100 million higher than last year, with the remainder of the charge coming in the fourth quarter.

We also incurred higher severance branch and property exit costs in the first quarter and expect these to be weighted to the first half of the year. So you should not expect first quarter costs to be the ongoing run rate. We will continue our strong track record of disciplined cost management and investment and plan to improve productivity and efficiency through bank-wide simplification. I'd like to turn now to impairments. We have not changed our macroeconomic assumptions during the quarter. And as usual, we'll update these at the half year. Our diversified prime loan book continues to perform well. We are reporting a net impairment charge of £93 million in the first quarter, equivalent to 10 basis points of loans. Stage 3 impairments continued to normalize, but this was partly offset by good book releases.

Our balance sheet provision for expected credit loss includes £411 million of post-model adjustments for economic uncertainty, which is down £18 million in the quarter. We continue to expect a loan impairment rate below 20 basis points for the full year in 2024. Turning now to capital. We ended the first quarter with a common equity Tier 1 ratio of 13.5%, up 10 basis points in the quarter. We generated 50 basis points of capital from earnings, which was partly offset by RWA growth, consuming 24 basis points. The accrual for ordinary dividends was equivalent to 20 basis points. RWAs increased by £3.3 billion to £186.3 billion. This was driven by higher lending in Commercial & Institutional and the annual update to operational risk, which added £1.6 billion.

We continue to expect RWAs to be around £200 billion at the end of 2025, including the impact of Basel III.1 and further CRD IV model developments. Our CET1 ratio target remains 13% to 14%, and we retain capacity to participate in a directed buyback from the U.K. government at the earliest opportunity. Tangible net asset value per share has increased by 10p, mainly as a result of attributable profits. The cash flow hedge reserve was broadly stable as the impact of the yield curve changes were mitigated by ongoing decay. Turning now to guidance for 2024. We continue to expect income, excluding notable items, to be in the range of £13 billion to £13.5 billion. Group operating costs, excluding litigation and conduct to be broadly in line with 2023, excluding an increase in the bank levies of around £100 million, and the lower impairment rates to be below 20 basis points, altogether, delivering a return on tangible equity of around 12%.

Looking beyond 2024, we believe the business is well positioned to grow income, control costs and maintain strong risk management, providing a clear path to our 2026 target return on tangible equity of greater than 13%. And with that, I hand back to the operator for Q&A. Thank you.

See also

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20 Biggest Natural Gas Companies in Australia, 2024.

To continue reading the Q&A session, please click here.