Half Year 2020 Natwest Group PLC Earnings Call (Fixed Income Investors)
No, we no longer hold and economic uncertainty overlay in our numbers.
So let me take you through our approach on slide eight.
In order to arrive at the impairment charge, we have broadly taken a three step approach.
First we developed for different economic scenarios based in the range of future economic indicators and made an assessment of the respective probabilities.
After applying probability waiting to these scenarios and given the continued uncertainty we are using two centers scenarios to reflect not west groups extended outage.
The both of the 35% waiting for the upside scenario has a 20% waiting and the downside has a 10%.
Over the four scenarios our assumptions for Twentytwenty included a drop in GDP growth ranging from 8.9% to 16.9%.
UK unemployment rate between 7.4% and 14.4%.
And a fall in house prices of 0.1% to 11.5%.
All assume returns GDP growth and lower levels of unemployment from Twentytwenty one onwards.
At the second step we made model adjustments to reflect the effect of government support aimed at delaying impairments and reducing the likelihood of defaults.
We also tied expert judgment on specific sectors.
The third set with supply further judgments, specifically for high risk customers and other uncaptured risks.
I also wanted to cover our approach to stage migration.
As a starting point, our post payment holidays and government lendings gains as continued in the second quarter, you or extended payment holidays will not on their own trigger a stage migration.
The key trigger for state to migration in each one is its creation and probability of default driven by the adoption of the for you at macro economic scenarios.
We used a very conservative threshold for a significant increase in credit risks or sicker of just 10 basis points increase in PD.
This has led to a large majority of high quality up to date balances from stage one stage to.
These deliver lower NGL coverage from past you stay to balances.
First day to load to migrate back to stage, one it must revert back to the PD threshold for a three month period.
Assets only moved to stay three in the event of default typically once the account is 90 days past June.
Over the next side I will cover state migration and expected credit loss coverage in more detail.
Before going into the detail I want to reiterate the fact that the vast majority of the movements I will be discussing on the following two slides are anticipated rate and not in response to observe default.
Our starting point is that we've continued to use and appropriately conservative approach to stage migration and El and personal.
Our trigger criteria increased persistence, where we keep balances stage three typically for at least 12 months.
For mortgages, 13.5% of mortgage loans now sits in stage, two which are not passed you against 5.6% in December.
The majority beater up to date as of the balance sheet date.
In fact of our total but mortgage book only 0.9% is astute and 1.6% is in phase three.
Similarly, 30% of total load the credit cards and personal advances now sits in stage two not past June I get 24% at December.
You see a similar pattern repeating in credit cards, and personal finances in terms of payments being up to date.
Looking at 34% balances across personnel, we have 1.9% in stage three at June against 2.1% a December.
However, given our guidance we expect this to change over Q3 in Q4, SBC default started to come through.
Turning now to wholesale migration over the next slide.
As you would expect has been clearly being a larger migration here with 38% to clauses stage two driven by forward looking PD.
Across wholesale 36% of loans now sits in stage two not pass gene, while 1.7% a stage to past June and 1.9% stage three.
Our overall coverage for wholesale increases from 1.13%, 2.16% reciting the mix of PD migration across the group.
Stating with a slight offset from a small reduction in our Stacy coverage.
From what we can see today it may not be until Q4 that we start seeing event based stage migration as furloughs ends on search principal Colbert and the various government lending schemes codes.
These movements conditional on development and economics will combine to deliver our expected 3.5 to 4.5 billion pounds of Twentytwenty impairment charge expectations.
Moving on now look at risk weighted assets.
Risk weighted assets decreased 3.7 billion pounds in Q2.
As party and market risks were both down 1.5 billion pounds of not with markets work towards his full year reduction targets.
Which I'll cover in a bit more detail on the next slide.
Credit risks was down 700 million pounds, and mainly driven by personal banking with reduced Undrawn RW A's and credit cards.
Metro imbalances, new lending on the government schemes offset general credit risk migration.
Looking forward RW aided end twentytwenty are expected to be in the range of 185 million to 195 billion pounds.
Turning now to slide 12.
Although we have taken swift actions to address covered 19, we have maintained focus on our key strategic priorities.
Now with markets is one of those and we set a target to reduce RW ace in the business to 32 billion pounds and twentytwenty at almost half and 20 billion pounds over time.
To date, we've reduced our WH by 2.8 billion pounds, making good progress towards our Twentytwenty targets.
And we expect to have largely achieved our 20 billion target by the end of Twentytwenty one.
We have confirmed over baby is well known to you all it is post the CEO and appointed David King as CFO.
We have started to refocus the business in the U.S. and Asia Pacific by reducing our footprint.
And we have started aligning the business. So one bank model by centralizing technology within the group.
We've also formed a new partnerships with BNP Paribas for both the execution and Tiering of listed derivatives.
So onto my final slide and to summarize we have strong business franchise and that we get supported our customers at the time of uncertainty.
We are managing risk carefully and providing for impairment hopefully.
We continue to execute on our strategic priorities.
We have robust capital position and the resilience capital generative business.
And with that I will hand over to tonal who will take you through the details of our capital and liquidity position.
Thanks Casey.
Good afternoon, and thank you for joining todays call.
Let me start off by thanking you for your continues engagements with that was group through these unprecedented times.
Im pleased that we've been able to meet with many of you virtually in the weeks. Following our Q1 results as we all the justice to new ways of working.
Starting with the capital unleveraged positions on slide 15.
We have entered current period of economic uncertainty with a very strong capital position from an absolute and relative basis.
Our cetone ratio ended the half year of 17.2%.
This includes the RFS nine transitional benefits of 1.6 billion or 90 basis points of C. One.
At this level of Cc, one we operate with significant headroom of 830 basis points or $15 billion above our MD of 8.9%.
The decisions call or additional tier one transaction resulted in an FX translation loss of 345 million or 19 basis points impact to see one.
Which was realized on the announcements of the coal and as reflected in our hedge form factor.
Excluding the RFS mine transitional benefit RCC, one ratio was 16.3%.
In response to the covenants in pandemic, a number of relief measures have been announced by regulators to support banks capital and leverage positions.
In March the financial Policy Committee unanswered reductions in the UK countercyclical buffer to zero percent.
And the central bank of armed reduced through public of Orleans, Canseco buffer to zero percent in April.
The combined changes reduced natwest groups MD, 88.9%.
The clearly confirmed in July that our color to a requirements has temporarily converses to a nominal amounts.
The impacts of the change currently has a minimal impact on our pillar to a percentage, but will result in a percentage reduction to our capital requirements and MD, if we experienced future order below inflation.
Deteriorate also confirms that the proposed reduction and pillar two way announced in the December 2019 financial stability report, which come into effect in December of this year.
Our expectation, which remains to be confirms this at the reduction in the pillar to a requirement will be offset by an increase in the period buffer.
We are expecting approximately 35 basis points from reductions in our pillar to a requirements, which will result in a 20 basis points reduction to our MD.
But our supervisory minimum will remain unchanged due to a 20 basis points increase in the period buffer.
The hedge one total loss absorbing capital is 36.8% well above the bank of England interim minimum requirements.
Our notwithstanding this entry ended the quarter, we'll see tier one ratio of 18.9%.
Total capital ratio, 26.5%.
On Emerald a 43%.
Inclusive of internal Emerald issued by its the holding company.
The Natwest market CR or leverage ratio was 5.3%.
After including the nursing effects of regular way purchase and sales settlement bounces in line with zero or amendments.
The notwithstanding obscure or leverage ratio was 5.1%.
This included a reduction in leverage exposure of 6.9 billion. Following a modification by the European Commission in June to bring forward the messaging of the regular way purchase and sale settlement bonuses.
The UK leverage ratio was 6%, leaving 275 basis points of headroom, both the UK is minimum requirements.
The period against a number of modifications to the UK leverage framework in June and that was group received permission to apply these changes, including the nursing a regular way purchase and sale settlement bounces.
And the exclusion of UK leverage exposure for bounce back loans.
These measures combined reduce the UK leverage exposure, but 12 billion.
Onto liquidity in funding on slide 16.
Our LCR ratio for hedge one increased by 14% to 166%.
Reflecting significant excess primary liquidity of 68 billion above minimum requirements.
The elevated liquidity levels were primarily driven by deposit inflows in each one with customers puzzles, increasing by 39 billion.
Our total liquidity portfolio increased by 44 billion to 243 billion.
Of which 33 billion was an increase in primary liquidity.
Secondary liquidity increased by 11 billion as we pre positions more eligible collateral at bank of England.
During which one we took a decision to repay 5 billion of the bank of England term funding stream.
Andrew 5 billion from the new term funding stream with additional incentives for SMB use or TFS Anthony.
This leaves a total of 10 billion outstanding with 5 billion of TFS and 5 billion of GFS Emily.
Our current drawn capacity for TFS EMEA is in the region of 70 billion. Following continued lending growth in Q2.
I would expect our joint capacity to increase further enrich too as we continue to support our customers with further net lending primarily through the government blending screams.
Wholesale funding has remained stable at 86 billion.
On Slide 17, you can see that retail deposits grew by 11 billion to 161 billion with most of the growth in current accounts as a result of lower consumer spending in the face of long term and increased economic uncertainty.
Commercial banking deposits grew 25 billion to 160 billion as customers builds up liquidity during the pandemic and retained a percentage the government lending scheme drawdowns as deposits.
Our deposit base as well balanced across our commercial and retail franchises on our wholesale funding mix reflects a range of different sources and maturities.
Our loan to deposit ratio remains healthy at 86% underpinning, our strong liquidity and funding position as well as referenced considerable capacity for lending to support our customers.
We will continue to look at all options available to us and the lives of the impacts of covert to assess the optimal blends and most cost effective means of funding.
Turning to slide 18, and issuance plans for the remainder of the year.
Given market conditions in the latter part of Q1, we're very pleased with the progress we've made on our issuance plans in Q2.
We took the decision to step away from capital and Emerald issuance in March and April given the market volatility.
Our guidance for senior unsecured Emerald for the year from the holding company within the range of two to 4 billion.
On an h., one we issued $1.6 billion in a jewel traunch transaction.
Comprising a 1 billion HR noncore seven maturities on a shorter basis 600 million four year noncore three green bonds.
This was not what's groups and all go green bond issuance with the proceeds allocations to renewable energy assets across the UK.
This was also the first green bond issued into the us onshore markets from UK Bank.
We announced plans earlier this year its do more issuance in green social and sustainable formats.
I'm pleased with the Green bond represents our second transaction under our GSS framework following last year's social bond.
Last week, we published first in term impact report relating to the social bond transaction.
We're also making progress with our ERP racing with sustainable Essex recently announcing reduction in our risk ratings racing score in 27.7 to 20.5.
Leaving us very well placed from an industry prospectus.
On capital from the holding company, we guided up to two and a half billion of tier two.
And we were very pleased to return to the Sterling Marcus with a 1 billion tenure noncore five transaction.
Our first Sterling tier two since 2006.
We also guided up to one of the half billion of additional tier one to give the flexibility to refinance the outstanding 2 billion dollar seven half cent coupon with an August 2020 call.
We were pleased to be in a position to issue a new one of the half billion dollar perpetual noncore six transaction on the 24th at June.
Our first additional tier one issuance since 2016.
Onto subsequently announced the call at the $2 billion security on the 29th assume.
The decision to refinance and called the outstanding security finely balanced from an economic perspective, given both the movements in FX impacting the 345 million impacts to see T. One.
On the movements, we experienced in additional tier one pricing.
Impacting the potential coupon savings on a new transaction.
From an Atlas markets operating company, we guided three to 5 billion senior unsecured thousand 20.
And in the public markets, we have issued a 1 billion euro five year on a $1 billion three year transaction.
In addition, Natwest markets have completed a number of private placements.
The progress we made in each one gives us plenty of flexibility for the remainder of the year and we'll continue to assess opportunities and life of market conditions.
It is unlikely that we will consider secured issuance from Natwest Bank. This year, given the introduction of GFS semi and our significant funding surplus.
However, we will keep this under review going forwards subject to funding requirements.
On slide nine team.
The hedge one total capital ratio was 22.5% or 21.6%, excluding our first nine transitional benefit as.
Well above the bank of England, 2020, interim minimum requirements and reflecting our progress on Emerald issuance.
As a hedge one we have a senior Emerald stock of 21 billion against an estimated end state requirements of 23 billion.
Thus based on indicative orderly ways of 200 billion.
On legacy Securities. We are focused on a couple of areas of grocery chains that are on the horizon.
Firstly capital optimization opportunities have not been an area for priority so far this year.
Given the significant focus on our response to covert nine team and the actions we have taken on additional tier one and tier two issuance.
However, this is something that the team will be reviewing as we think ahead to the end of 2021.
And secondly on LIBOR transition, we've undertaken a comprehensive due diligence exercised on our outstanding Securities for reference LIBOR.
And we will continue to engage with the industry working groups to support the smooth transition to new risk free rates by the end of next year.
And to Racing's on slide 20.
In March both Fitch and S&P revised our outlook for banks sizing the increase downside risks to asset quality and earnings from the economic and market impacts of the cobot 19 pandemic.
Fitch affirmed the long term senior debt ratings of Natwest Group plc as a.
And that the Royal Bank of Scotland plc National Westminster Bank plc, and Ulster Bank limited at a close.
Fitch also upgraded the senior debt Racing's of Natwest markets plc, and Netlist markets NV by one notch as a result of methodology changes.
S&P affirmed the racing's of networks group unrelated subsidiaries.
In line with much of the UK banking sector, both Fitch and S&P revised the outlooks on the long term issuer racing's for all entities in the networks group to negative from stable.
So in summary, substantial economic uncertainty remains but we continue to build and operate with very strong levels of capital and liquidity.
With us I will now open up the call security.
Thank you very much ladies and gentlemen, if you like to answer your question. Please press star followed by the digit one on your telephone keypad, we will pose permit to give everyone an opportunity to signal for questions.
Hi, Steve.
We will take the fits question from Samir potato from Citibank. Please go ahead.
Higher Ron Thank you for the call today I've got a number of questions Firstly.
Can you discuss show stage, two balances weidler optically higher than your peers, particularly within wholesale funding wholesale lending sorry, as you point out on slide 10.
Secondly are you able to share any thoughts on what proportion of your state departments will migrate to stage three under your base case for cost.
And then finally able to provide any guidance of how much of your IRS nine transitional benefit, which I see around US 90 basis points do you expect to be you stop by year end driven by the risk migration of stage two inter stage three.
Thank you.
Hi, and thanks, very much if any let me MTN in order and quite candidly safety balancing against where we're now.
Overly concerned around the level, we executed our safety for the group were at 26% and which is slightly higher and then at Barclays and lower the reason you again.
He that.
Is the way that we and basically frequently hold sector, which is significant in an increasing credit risk. We have a 10 basis points and needs that we think the a 10 basis point and Dave in the am probability of default in the PD. They will move those loads in HP, what that does Italy.
At least 15 billion of loan I stage, one eight HP and when that will basically explained some of the different other banks see higher percentages and than that what's impacting the with all of that pays for that only the only for about 60 million time of and all actual additional underwriting.
And impairment losses, So February to easier now ruling empty into that that ATSI. What you would say generally high quality and so you we still expect lower amounts at the low levels of of losses on Mac and if we then to see they transitional adjustment it is today and into.
I think kind of.
Conversation if he added you today around what is moving into the from phase two athree. The reality is that would be based on kind of really is and so we probably three states. We already so we can make some assumptions you might hear me talk about the on the equity or earlier on day. So a significant number in terms of.
That range and that was to me predominantly from where it is now 80 80, and Athree agency in a 20 basis points and tuck in and not in that race in those numbers will will gauges, obviously as you moving into stage three quite possibly having new things moving into phase two is now it obviously you've taken out.
It will take more energy and lower and payment in the last in the last stage of that and.
Let me also added last like Atlanta based funded transitioning away from 90 basis points, and obviously that evolve over time. So I think thank you very much on also highly EDA evault eight six day Huxtane, what we're seeing it.
Foreign after the end of year, if we kind of go up and mid and late number of the all that being very I would say by 20 basis point and the with no mbct, one because that save what we see more migration honey Athree, we of course, it doesnt attract and antibody.
Okay. Thank you. Thank you.
Thank you very much the mix question today.
Excuse me the Linkswitch and taken from the line of Robert Smalley from units.
We have from Robert.
Hi, how are you.
Just thank you are offered the detailed greatly appreciated.
I want to go back to the economic scenarios that you had.
And.
Uh huh.
I'm wondering which one.
Or which one include the Brexit.
Hard Brexit.
And how that factors in.
And and where your probabilities lie on that.
I also just wanted to ask a broader question.
As we start to look through.
To the other side of our government assistance and mitigation programs.
How do we avoid.
Some more cliff like experience in terms of credit quality. What are you looking for in terms of early indicators.
I know you you're very formulaic in terms of.
In terms of.
Provisioning et cetera, and that makes sense, but.
But are there any other indicators are what's on your dashboard that might be a little softer than that that we can look yes.
Thanks.
Yes sure Tonight. Thanks, Robert So if you look at the economic scenarios the way, we will probably end Luca.
David the downside is much more of a disorderly Brexit stack, that's really hard safety has defined what we really need by that they naturally all aspects of all of now you've got some level of Brexit and the reality is the moment given that we as out.
As a group is kind of economies, where we'd certainly even create and a consensus forecast say heart separate sports and Covidien doing economic turmoil, what Brexit might be doing.
I would say late Wednesday, disorderly, you kind of get more toward the downside that how we viewed it fits and.
I think there has to be more art than science is in some of that intended the government assistance in the program.
We believe the government has done I think you'll be getting every faster in a lot of stimulus end today is the economy I don't think that we should be seen that when photo ends at the end of October when the banking fees enter that they do their job is done. They wanted the best sensitivity done a great level of coordination between regulators business and and the government.
And they will continue to either happening over the next.
Your next number of uses the all work our way through day. So they are asking turnover by plus age as as we are what I would say income early indicators. The credit ratings are obviously, a big part for us and looking at the personal lending and they were looking for things like our people starting to see payday lending it kind of help cover themselves what's happening on them.
So I mean, clearly one of the key staff that we thought and then what PVC slag being raised on the credit periods and things of that for the Delaware and a conflict for other.
Although flagged this wide and there might be issues in some of the loan.
Of that that's very healthy and greatly appreciate the level of detail in in the presentation and what you did earlier today too. Thanks.
Okay.
Thank you very much once again, if you'd like to answer your question. Please press star followed by the digit one of your telephone keypad.
We'll take our next question from the line of Daniel David from Autonomous. Please go ahead.
Hi, Thanks for the coolant consequently more consistency.
The first one just question on depending on the base the show on slide how I just want to just drill and may be to what you're seeing is the main drivers behind the kind of consequence holidays, whether its unemployment will then on some other factors.
The second one is just on your macro aftermarket assumptions on science move up.
On cognizant of the comments last night, but just looking at the capabilities that you are selling you also put 70% on central one two and then there seems to be more upside.
Moreover, probability given clear plus nine rather than downside and we've touched upon provision Phil green quite a lot larger than some of European so.
Just holistically if there's more.
When can given we're placement and is it just to the significant increase in credit risk in talked about Orange is the central assumptions converted more severe than your peers, how do you see Rob.
And finally, let me with a clear question just on your 81, I guess from the outside the premium.
Let me shoes and talk about looking at economics Nicole.
Just looking at the recent level on the 81 did COO and obviously the exit that you took it didnt, perhaps in the class our economic is a good.
With that decision. So maybe if you could just stepping through some of the the points in consumer making that cannot be really helpful. Thanks. Lenny noted first couple and then turn it will comment on 81 and in terms of opioid holiday season will be many different regions. Almost as there are there are people items in the payment holiday some of them we'll start.
Maybe on unemployment the at that point now how many we would be slagging and so therefore, you. We stated that another kind of sicker event, so you'd start it all kind of migrate and.
Many of them it will Jesse.
Sensible and financial planning you might be complete as employees look away by the income and when you look at the lifetime of your mortgage the reality is that at the rate that you pay the extra months across the South East excitedly mentioned that and delighted by itself a little there's no baseline I think was really feeling is that you know at a peak paid 20% of debate by volume.
That was on holiday at the moment is only about a third of vendor pricing extension. When we look at the third suppressing essentially they do not only did and in terms of because of their immediate financial situation.
The Mega TV and cash flow management from from their side.
In terms of the macro factors I was wondering if that in your question around our provision being larger than appeared.
We probably just to kind of crack to wording Adobe I think are.
Exposures as being moved quickly to safety of probably bigger than the peer to peer system and some of the case, which have higher up the provisions enough so that the provision.
In apps they might there be an I explained earlier today and if the security.
We really is a waiting.
You'll be familiar with this as as I am at the moment in terms of today, where we're awaiting city in terms of whats coming out from economics, and what we found is that the when we look to the way is that with much more of our a balance states to the upside in Kansas lulled into the data insight waiting.
As a disclosure on page and 34 of the the document. It shows you if we had 3% to 100% of either the upside or the downside waiting.
If you read 100% upside you would add back 1.4 billion all the provisions that we have today in terms of the 2.9 or if you went today. The downside you would add on another 1.9 billion the theory for IP uptake EMS of.
Today within the numbers as well as outcome. So don't you want to talk to yes, I'll take the 81, so no change to our strategy that any call decision. We make is on an economic basis on a decision on additional tier one call was no difference.
So the considerations include onto the replacement cost of the instruments as you said the potential FX impacts as well, but its important remember the local decision does not removed that FX impacts in the defers the impacts to Mexico days for which security the vehicles in five years time. So we look at economics over the life the transaction not just a day one impacts.
And we look at sea to an impact Mexican call up to now versus in the future on and compare that to the coupon savings over the five years.
So from a lower notional and also lower coupon at the new security developing the new.
Security, we issued $1.5 billion that provided pretty much a similar amounts for additional tier one benefit in Sterling terms and the outstanding 2 billion transaction and then the reseller not new transaction as well with approximately 19 basis points lower on a like for like basis.
Post coupon savings IC were greater than that incremental cc, one impact from FX translation. We concluded that it was an economical decision.
Great. Thanks, a lot.
Thank you very much there no further questions at this stage I'd like to him the Qubec Katy Murray for any closing comments.
Thank you very much Stephen Thank you very much equity on Nicole and integrated you take time CVM ask on the further questions and we are as Don said earlier digital and feature very appreciative of the sport the support that you've given us, particularly in this year attempt to some of the issuance is receiving rate really immediately devalue very highly if youve any.
Other further questions that you'd like any more details. Please don't hesitate to contact for fibers from our IR team to be very happy to MLP occupancy gain touching the thanks very much and enjoy the rest of your day bye. Thank you.
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No.
Bye.
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