Financials Unshackled Issue 3: UK Banks - Key Take-Aways from Barclays NY Conference
Discussion Note: My synopsis of the key take-aways from the Lloyds, Barclays and NatWest Group fireside chats at the Barclays Global Financial Services in NY this week
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What’s in this Discussion Note?
This note presents an overall summary of key messages from a sectoral perspective arising from the fireside chats with Lloyds (CFO - 14:00 BST, 9th Sep), Barclays (CEO & CFO - 17:45 BST, 9th Sep) and NatWest Group (CEO - 14:00 BST, 10th Sep) executives at the Barclays Global Financial Services Conference in NY this week. Below this summary is a synopsis of each individual fireside chat. Note that it is not customary for fresh guidance to be imparted at these sessions and we don’t get an enormous amount of new information relative to the interim results updates but it’s a great opportunity to ‘take stock’ some six weeks or so on from the last updates.
Overall Take-Aways
In overall terms the ‘mood music’ struck a strongly upbeat tone in terms of the macro & political backdrop and individual bank financial condition / outlook. Key observations of note were:
Macro environment improving: Unanimous view of the executives who spoke that macro conditions (e.g., GDP growth,, unemployment, house prices) have been improving over the last 8-10 months and that macro indicators are expected to strengthen further.
Political backdrop stable and Labour has a pro-growth agenda: All three discussions touched on the fact that the political backdrop is one of stability and how Labour evidently has a pro-growth agenda, which ought to be helpful in a loan growth context (for GDP+ growth businesses). Unsurprisingly, none of the executives who spoke speculated on the shape of impending bank taxation changes that could manifest in the upcoming (30th Budget) and all are in ‘wait and see’ mode. Judging by the responses that I gathered to investor polls that were run during a couple of the discussions, political risk (with tax concerns presumably to the fore) are ‘front and centre’ of investors’ minds at the moment (please consult my 8th September newsletter for a brief discussion around prospective tax changes and we may learn more this Thursday).
Strengthening macro and Government growth agenda constructive in a loan expansion and asset quality context: All three discussions briefly reflected on the modestly expansionary lending market conditions (particularly in retail banking business lines), the stabilising deposit market, and the incredibly benign asset quality experience which appears to be showing no signs of deterioration since the interim updates. Indeed, latest BoE Money and Credit statistical updates show a recent uptick in mortgage lending (and a material uplift in mortgage approvals for house purchases), strong growth in consumer credit, and continued (albeit modest) expansion in business borrowing volumes.
Confident messaging on strong returns sustainability despite expected official rate reductions: All executives spoke about medium-term expectations in a returns (and capital generation) context, with net interest income (NII) resilience conferred by (largely) mechanical sizeable structural hedging programmes - in what appeared to be a strong push to re-emphasise to investors that strong double-digit RoTEs (in the main) are sustainable into the medium-term. This message was most notable during the LLOY CFO fireside chat with Chalmers placing considerable emphasis on the expected FY26 returns profile. Notably, this morning we saw ONS wage inflation data print at 4.0% (in annualised terms) for the three months to July, below economists’ expectations for 4.1% - which is likely to give the BoE increased confidence to cut rates (over time).
But are UK banks taking enough risk?: While the above prognosis is reassuring in a returns and loan loss containment context, both the host (during the LLOY fireside chat) and an audience member (during the NWG fireside chat) raised the valid question as to whether UK banks are too risk averse and whether they should climb the risk spectrum in a bid to bolster returns. LLOY & NWG broadly indicated a preference for the ‘status quo’ in a risk appetite context while BARC executives were clear that they see opportunities for expansion in higher-risk sub-segments of the UK retail lending market (albeit were keen not to characterise these as tantamount to a material shift ‘up the risk curve’). It is a valid question - to the extent that Boards are becoming more comfortable in terms of the stability and potential growth in the UK macro then selectively adding risk (given the relative conservatism of most major lenders) should, theoretically, drive premium risk-adjusted returns delivery. Expect more focus on this topic over the coming months, especially as the market becomes clearer about what the next few years will look like under the incumbent Labour Government and as official rates reduce.
Cautious attitude towards M&A: All discussions picked up on prospective M&A and the executives were very clear that the hurdle is particularly high in a transaction appetite respect. Chalmers at Lloyds noted that inorganic acquisitions are “very unlikely”, Venkat at Barclays articulated that the bank’s expansion ambitions are “largely organic”, and Thwaite at NWG noted that, in respect of non-interest-income M&A possibilities, that vendor price expectations appear “prohibitive”. Still though, obviously no one is ruling out future acquisitions either.
Commitment to shareholder distributions: Nothing particularly newsworthy; just a reiteration of the deep commitment (and the pre-existing guidance) to continuing to distribute regular dividends and excess capital to shareholders - again, with confidence expressed in the medium-term outlook in this vein. Some chat about Basel 3.1 and a hope that the UK will broadly follow the US in terms of the shape of the ‘near-final’ package (we have learned this afternoon that the Fed is proposing to, effectively, cut increased Basel 3.1 capital requirements in half…) - indeed, we will know more later this week on this particular topic in a UK context as well. And no mention of the Australian banking regulator’s proposals for banks to phase out AT1 bonds in case you are wondering!
Lloyds (14:00 BST 9th Sep): Key Messages
Supportive macro / political backdrop: Chalmers noted that the “generally benign” macro environment is constructive in a Balance Sheet growth and an asset quality context, referencing the strong asset growth, deposit growth, OOI growth, and benign impairments (again) reported in 2Q. Noted that the political backdrop can be characterised as stable with an understanding, at a Government level, of the value of a healthy banking sector in an economic growth agenda context.
Significant emphasis on FY26 prospects: Stepping back, Chalmers in his characteristically savvy style, referenced bullish expectations for continued strong returns delivery in FY26, seeking to convince the market to fully subscribe to the strong returns sustainability story. Key points made throughout the discussion in this respect were: i) confidence in medium-term growth prospects given macro / political backdrop; ii) NIM resilience (mortgage margin and deposit churn headwinds will have dissipated, substantial structural hedge income enhancement locked in, base rate reductions will be largely done); iii) OOI growth potential from here; iv) continuing commitment to buybacks (noting that buybacks are investors’ preferred mechanism for excess capital distribution as “they see the same value in the stock as management does”) and room for more dividend growth over the coming years. He summarised on this point noting that, Lloyds essentially presents an “operating leverage story” that can spit out >15% RoTEs in the medium-term and deliver annual capital generation of >200bps. It’s a consistent message and, assuming no major wobbles, it seems to stack up.
Net interest income inflecting: Positive soundings here. Chalmers refreshed on the 2Q experience where the NIM print of 293bps was 2bps lower q/q, noting that this “gentle decline pattern” was consistent with expectations. NII is expected to pick-up in 2H - and certainly by year-end (notably, NII will strengthen before NIM does owing to AIEA growth dynamics; NIM is expected to inflect by year-end). Noted “all maybe a touch better” than what had been expected. Overall, Chalmers noted he is very comfortable with guidance on this front - though, if official rate cuts exceed existing expectations, then that’s obviously a drag. In terms of NIM constituents, it was noted that: i) mortgage headwinds continue to play out; ii) deposit churn is slowing down (Chalmers noted that there were some early signs of that happening on the 1H24 earnings call); and iii) the structural hedge is a major support factor for NII resilience over the coming years. Some more detail:
Mortgage Margins: Still seeing completion margins of c.70bps (notably, Chalmers mentioned that Lloyds is comfortable continuing to guide stable completion margins) versus c.110bps margins on the rolling back book. Margin convergence by FY26 meaning this particular headwind will have dissipated by then (though it goes without saying that the completion margins trajectory is never certain in the intensely competitive UK mortgage market).
Deposit Margins: Chalmers conveyed his disagreement with a question as to whether Lloyds would pass through a lower proportion of official rate reductions to deposit customers given that it passed on a lower proportion on the way up - noting that Lloyds was “pretty much in the pack” on passthrough in response to rising base rates, and arguing that the strong growth in customer deposits that Lloyds has achieved is “testament” to its pricing strategy. He pointed out that Lloyds will pass on official rate reductions to depositors but that it won’t be lockstep (as for on the way up). Noted that political / regulatory pressures on deposit pricing don’t significantly influence the pricing strategy as ‘great customer outcomes’ has been the philosophical view of the bank’s management for a long time. Also noted that NIM is managed in totality so deposit pricing strategies will depend on how asset pricing evolves.
Structural Hedge Contribution: Repeated that: i) Lloyds will some notional decline in FY25 (C.£8bn expected FY24 with c.£5bn done at end-1H, further c.£8bn expected FY25); and ii) significant lift in hedge contribution expected over period through FY26 (>£700m in FY24, c.£700m+ in FY25, >£700m FY26) with much of those expected benefits already locked in (largely done for FY24, four-fifths for FY25, two-thirds for FY26) and building in that respect. Swap roll will drive material benefits as maturing swaps yielding c.1.7% and have been refinancing onto a c.3.5% rate.
Other Operating Income / Operating Lease Depreciation: Expects to see a continuation of the strong capital-lite OOI growth - growth will be broad-based (across Retail and Commercial). Strategic investments supporting growth in this line and Lloyds sees opportunity to serve more customer needs - improving income diversification, thereby reducing NII reliance. From an operating lease depreciation perspective, Chalmers flagged a reversion to normality (expects c.£300m charge here in 3Q, which he indicated should be broadly representative of a ‘run rate’ level) - growing again because this “strategically important business” is growing, with used car price (especially EVs) volatility contributing to material non-recurring growth (c.£100m) in 2Q particularly. Noted that Lloyds is examining optionality (e.g., residual value risk sharing) to derisk this line.
Asset quality (and loan growth interplay): 2Q 5bps AQR print was benign (still just 23bps when model adjustments and macro assumption changes are stripped out). Lloyds’ strategic focus on prime lending has been an important support factor. Noted that the bank could take more risk (indeed, the recent decision to up minimum lending multiples to 5.5x for FTBs springs to mind) but he went on to say that, there is a confidence that, as they further explore customer relationships, Lloyds can generate decent growth at low risk so there is no necessary friction between growth and risk appetite.
Capital & Distributions: Very confident message on outlook for continued strong capital generation, which is largely a function of all of the above (no discussion of Basel 3.1 at this fireside chat), delivered by a “focused business model”. Will get to CET1 target of 13.5% by end-FY24 and 13% by end-FY26. Capital deployment will be in three directions: i) continued capitalisation of and investment in the business to enable continued transformation; ii) stable and progressive dividend - with plenty of room for dividend growth over the coming years; and iii) distributions - with buybacks being the preferred mechanism (see above).
FCA Motor Finance probe: Believes Lloyds has been in compliance with all of the regulatory requirements over time. The £450m provision taken at the stage of the FY23 results was predicated on: i) the inevitability of administrative expenses (with some already incurred); and ii) the risk of redress. While the delay of the review findings by the FCA into 2025 is not especially welcome, nothing has changed in terms of the facts or the FCA’s position since the beginning of the year.
Barclays (17:45 BST 9th Sep): Key Messages
Recap of FY26 targets: To frame the conversation, CEO Venkat kicked off with a quick refresh of the FY26 financial targets for: i) Statutory RoTE of >12%; ii) total distributions of at least £10bn over the FY24 through FY26 period; iii) a reduction in the proportion of Group RWAs represented by the Investment Bank to c.50% (note: 58% at end-1H24); and iv) a target CET1 ratio of 13-14%. He repeated that the expected reduction in Group RWAs attributable to the IB will not be achieved by shrinking the IB; rather it will be delivered by growing the UK and US retail and corporate businesses around it - re-emphasising that c.£30bn+ of RWAs will be allocated into UK-centric businesses in “a rebalancing of the bank”.
Clear commitment to consistently delivering in accordance with plan and on updating the market through the journey: Venkat noted that delivery is going according to plan in the YTD, referencing the £750m buyback programme announced at 1H24 in particular. The CFO Anna Cross made it clear that Barclays’ management is cognisant that only two quarters of what is a 12-quarter plan have been completed and that management will, very consistently, seek to update the market through the coming quarters on progress towards the FY26 targets - and she emphasised that there is a major focus on delivering stable and quality income (perhaps an attempt to distance from the ‘flip-flopping’ in a strategy context that we have seen from Barclays over many years). Venkat further noted that there is a very clear focus on execution (let there be no doubt about the strategic direction of Barclays…), that management is very focused on stability, and is hopeful that there won’t be any surprises. Positive to see the strong reinforcement of these messages.
Why management is comfortable that this is the right time to pursue a significant UK expansion effort: On the question as to what gives management comfort that this is the right time to reallocate capital to the UK, Venkat articulated some very clear reasoning: 1) The importance to a global bank of having a “strong home base” which therefore merits investing in (one could, of course, debate this point and argue that the decision to - proportionally - scale back IB is a bid to drive a more consistent stable returns profile as well as a reflection of the enormous difficulty of getting to Top 5 Global IB status from Barclays’ existing No. 6 position (which is not to suggest that it is a flawed strategy by any means)). 2) UK economic stability post-Brexit (people have made “psychological peace” with Brexit and trading relationships are normalising). 3) As a corollary to 2), given Barclays pursued a significant UK derisking strategy post-Brexit, it makes sense to go for growth again - and, in later comments, he flagged the pro-growth agenda of the Labour Government (and observed that, when concocting the 3Y strategy, management’s expectation had been that, irrespective of who were to win the General Election (presumably, Reform UK aside…), an economic growth agenda would be pursued). 4) The acquisition of the Tesco Bank retail banking business accelerates the c.£30bn+ RWAs allocation to the UK. 5) Opportunities aplenty to grow market share in UK credit cards and Wealth. The CFO reminded the audience that the UK Balance Sheet will shrink first ahead of its expansion given some large (Covid-era-related) maturities in FY25 but she married that message with a recap on the strong growth in customer accounts achieved by Barclaycard in 1H, which is conducive to Balance Sheet growth in time.
Growth, Margins & Risk Appetite:
UK Mortgages: Cross indicated that Barclays UK (BUK) is seeing strong growth in mortgage lending and that the now larger and more stable mortgage market facilitates a tilt into higher LTV mortgage lending - with (the acquired) Kensington’s risk expertise a key enabler in respect of this initiative. Cross also noted that the most significant growth opportunity for the bank as a whole is in UK mortgages - making the point that Kensington adds a real opportunity to grow through a second brand given the heavily disintermediated nature of the market (and its expertise in higher-margin higher LTV lending as noted above, an area in which Barclays was historically underrepresented in, according to Cross). For what it’s worth my own view is that, if one is comfortable with management’s prognosis for the UK economy and banking market, then it makes sense to move up the risk spectrum a bit (especially as peers seem less willing, meaning an opportunity to drive risk-adjusted returns accretion should exist). I’m not convinced on the second brand point for what is a commodity product - but I’m being somewhat one-dimensional as it does, of course, facilitate dual pricing strategies / differentiated customer propositions.
UK Cards: Cross noted that Barclays ceded significant market share in this business post-Brexit and Covid and there is now a significant opportunity for Barclaycard to rebuild share - both organically (flagging that Barclaycard has been in the Top 3 in pricing terms for the last six months, so is regaining competitiveness) and inorganically (referencing the Tesco Bank retail banking business acquisition, which included c.£4bn of card balances) without going up the risk curve (the CFO noted the broadly similar profile of the Barclaycard and the Tesco Bank card customers). From a Barclaycard standpoint, Cross said that the focus now is not just on lending (IEBs) but is also on spending so a heavy focus is being placed on the partnerships model (e.g., Amazon, Avios).
UK Business Lending: Cross pointed out that this is a very low LTV business for Barclays (LTVs c.30% territory) and, therefore, Barclays has the cash relationships as well as the Merchant Acquiring relationships in many cases -which is a growth enabler from a lending perspective. However, she noted that, given high liquidity levels in the corporate market, growth in this book will lag that of Retail (consistent with the system-wide data I would note).
UK NIM: The CFO noted that the structural hedge is the key ingredient to managing UK NIM and that the downward rate sensitivities (published at the 1H24 stage) are significantly dampened by the impact of the structural hedge roll (with maturing swaps rolling off at a yield of just c.1.5%) with substantial future income enhancement benefit capture locked in now. Cross also reminded us that the stabilisation in both the quantum and composition of customer deposits gave management the confidence to push through a UK NII guidance upgrade (excluding the impact of the Tesco Bank retail banking business acquisition) at the half-year stage.
Growth & Risk Appetite - US Cards: Venkat noted that the target for end-FY26 US cards net receivables of $40bn (from $31.2bn at end-1H24, stripping out the $1.1bn disposed of to Blackstone) will be achieved by driving some growth in the existing stock as well as some net partnership additions. Noted that management is still comfortable with this target. The SRT trade done with Blackstone was noted by Cross to have been instrumental in terms of enabling continued growth with Barclays’ partners in what is a heavily capital-consumptive business.
Investment Banking Revenue Growth: On the question around how Barclays expects to drive revenue growth and market share win in the IB on just broadly flat capital allocation over the FY24-26 period, Venkat noted: 1) Improved efficiency within the business; 2) Refreshed focus on the highest-value clients (the top 100) - noting that Barclays is Top 5 Global IB to 50 of its top 100 clients (up from 30 a few years ago and with an ambition to get this to 70); 3) Continued broadening of the business from a DCM-focused firm into Equities, ECM (I would note that it is interesting to see that Barclays has led three of the four largest global ECM transactions since March 2023), and M&A. Within these areas of growth focus, Venkat noted that Equity Derivatives and Securitised Products revenues have been growing strongly while European Rates has been “coming along”. Venkat also made the point that Barclays is equally disciplined about what it does not do (e.g., lack of EM markets presence (albeit Barclays does trade EMs from Western desks predominantly), commodities). Reiterated that 2Q Markets performance was strongly aligned to the broader market outturn (income +6% y/y in USD terms, with Equities +24% y/y within that). The CFO reminded us that a deep dive session on the IB will be held for stakeholders on 1st October (register here: https://www.netroadshow.com/events/login?show=93b024e2&confId=69558).
Operating Costs: The CFO reiterated that cost discipline is a crucial element of the 3Y strategy and is within management’s “locus of control”. Barclays is focused on efficiencies as the business scales (i.e., driving operating leverage) to enable investment and Cross noted that there is line of sight on the c.£1bn of efficiencies for FY24 (note that Barclays targets c.£2bn in cost efficiencies by end-FY26) in overall terms (collectively across all dimensions of the bank). People, Property, and Infrastructure are the key focus areas for cost reduction this year and granular analysis on customer & client journeys is expected to identify further efficiency opportunities for the following years. Notably, the CFO gave a real-life sense of the focus on the cost extraction programme, noting that she meets with the Group transformation function on a weekly basis and some adjustments have been made to remuneration structures of late.
Asset quality: The CFO reiterated that credit quality, in overall terms, is very strong. The detail on asset quality focused on the US Cards business exclusively in this discussion (sure we’re all bored about hearing about it from a UK perspective anyway!). CFO noted that, while Barclays US Cards’ business is now seeing an increase in delinquencies and write-offs (notably, delinquencies reduced in 2Q, though were broadly stable on a seasonally adjusted basis - and are expected to pick up in 3Q & 4Q, all of which is captured in guidance), early reserving (the pre-emptive actions taken in FY23) has mitigated this from an Income Statement impact perspective (reserving now falling). Cross noted that the situation “feels like it has stabilised a little” - which won’t fully put paid to concerns on this front. Less than 12% of the portfolio relates to customers with a FICO score of <660, which ought to be constructive in terms of credit performance.
M&A Appetite: Venkat noted that the growth ambition is largely organic and that the FY26 targets are predicated on organic delivery of same. However, he added that, if there were acquisitions that can add scale and/or capability at a reasonable price, then Barclays will explore them - citing the examples of: i) the Tesco Bank retail banking business bringing scale; and ii) Kensington bringing a lot of added capability.
Capital & Distributions: Committed to 13-14% CET1 target first and foremost. Second priority is delivering on the £10bn+ distributions commitment from FY24 through end-FY26 (Venkat also noted that the dividend will be flat in overall terms but the commitment to continued buybacks still, mathematically, implies continued DPS growth). Final priority is on investment (there was an acknowledgment of a need to strengthen the digital capabilities at a different point in the discussion and Venkat also filled us in on the top management-sponsored “grassroots approach” that the bank is taking in its efforts to exploit AI capability). While there may be a sense that this order of priorities tells shareholders what they want to hear (in terms of adequate capitalisation and a commitment to capital return) one could argue that the investment piece should be a priority to the distributions piece. Anyway, management believes it can deliver on all three objectives (so, my previous point is arguably redundant!). Finally, guidance for the lower end of 5-10% end-FY23 RWAs inflation owing to expected Basel 3.1 reforms implementation persists but clearly we’ll have to wait to see what we learn later this week in this context (and it will clearly take time for Barclays to analyse what comes and recalibrate guidance if necessary).
NatWest Group (14:00 BST 10th Sep): Key Messages
Macro at inflection point; political stability now: The CEO Paul Thwaite noted that he concurs with the thesis to the effect that the UK is, broadly, at an inflection point - noting that macro indicators have come in stronger than had been expected over the last 8 to 10 months or so, which is also evident in NWG customer sentiment data. Thwaite went on to say that the current operating environment is encouraging - demand has picked up and good customer engagement and loan growth are beginning to materialise. He characterised the General Election result as “a clearing event” and noted that the new Government has a pro-growth agenda, but that all eyes are now on what the 30th October Budget will bring - noting that the banking sector already pays two taxes (the levy and the CT surcharge) and that some policy certainty is now needed.
NWG sees decent growth opportunities in the UK: Thwaite referenced the growth achieved in mortgages and commercial lending particularly as evidence of growth capability and reflective of the opportunity to expand the UK book on a forward-looking basis. He noted that market share build continues to be an ‘agenda item’ - with decent share growth in Mortgages in recent years (albeit more to go for given stock share of 12.4% in May 2024, as reported at the stage of the 1H24 results (and, notably, NWG did reduce its appetite to lend for a period in late FY23)), growth in NWG’s share of unsecured personal lending volumes, and commercial (ex-Covid) loan growth in excess of system-wide growth. He further remarked that share build to date has been delivered without moving up the risk curve.
Competitive dynamics in a structurally higher rate backdrop relative to pre-Covid / Covid era: CEO noted that, irrespective of how the competitor landscape (or, indeed, how the rate backdrop evolves), NWG has proven its ability to capture returns accretion owing to disciplined lending standards, the strength of the deposit base within its Commercial franchise, and sound ALM strategies. NWG is also heavily focused on investing for the future - seeking to drive digitisation and automation from “within the existing cost envelope”. Continued progress from a simplification perspective together with a disciplined lending growth philosophy is conducive to driving strong operating leverage, according to Thwaite - which is evidenced in strong financial performance and customer metrics.
Revenue outlook: Thwaite noted that NWG has seen two successive quarters of broad-based growth across all three of its customer franchises - and, getting back to the growth point again, can see clear signs of income growth potential going forward within each of these three franchises. Loan demand is recovering (management sees net loan growth in 2H) and further margin expansion is expected in the coming quarters (NWG printed NIM of 205bps in 2Q and upped FY24 NIM guidance to 210bps) with mortgage repricing now largely done, albeit base rate reductions could be a drag in a NIM context. In a similar vein to Lloyds, Thwaite sought to reassure on FY26 returns capability - noting that recovery in loan demand, stability in a deposits context, and the structural hedging programme underpin the FY26 financial targets.
Zoning in further on the structural hedge: The CEO spoke about the income tailwind emerging from the hedge roll in FY24, with a further boost to NII accruing from hedge roll to the tune of c.£800m in FY25 (and more again in FY26). Like Lloyds and Barclays, Thwaite noted it is a very mechanistic hedging strategy and that much of the medium-term income enhancement benefits are now locked in.
Preparedness for official rate cuts: Thwaite noted that both NWG and the wider sector have had ample time to prepare the ground for a lower base rate environment. A lot of work has been done in relation to operational processes with such an eventuality in mind over the last 18 months - e.g., widening Retail and Commercial product suites and increasing tiering within them. He also spoke about rationality prevailing in the deposit market. In overall terms he delivered a confident message in terms of the bank’s readiness and capability to cope with a changed (albeit still higher for longer) rate backdrop.
Other operating income / OOI-focused M&A: To the question on NWG’s heavy reliance on interest revenues relative to peer banks, Thwaite noted the following: i) fee income growth q/q in 2Q was broadly consistent with NII growth (just a shade below NII growth); ii) the growth NWG is seeing in specific fee & commission lines is a function of the investments that have been made in those underlying businesses; and iii) perhaps, most importantly, it is very difficult to drive a step-change in the revenue mix over a short period of time (so, in short, don’t expect any radical reduction in NII reliance). On the question as to whether NWG would seek to acquire growth in this domain, the CEO made it clear that NWG will examine opportunities subject to shareholder value delivery and strategic congruence criteria. However, he went on to seek to suppress any possible change in expectations for activity on this front, noting that vendor price expectations for fee income businesses look “prohibitive”.
Asset quality: Again, the question arose as to whether management is taking sufficient risk in the context of what has been a consistently benign credit environment. Thwaite first recalled the upgrade at the stage of the 1H24 results for FY24 CoR of <15bps (3bps charge in 1H24 - depressed owing to significant PMA releases) and added that NWG is seeing “no signs of deterioration”. However, he remarked that the bank can grow in its chosen lending segments at existing risk appetite levels and that the focus on prime customers has served the Group well, stating: “Don’t expect any fundamental change in our risk posture, our risk positioning” (although he did - somewhat - caveat that by saying that where the risk/reward trade-offs are attractive, consideration will be given to such opportunities). Words of comfort, perhaps - but it does beg the question as to whether NWG should be thinking a bit more aggressively here to eke out superior risk-adjusted returns in the medium-term in my view.
Capital & Distributions: Thwaite re-emphasised the especially strong capital generation profile of NWG (nearly 140bps of capital generation pre-buybacks and dividends in 1H24). Capital allocation will go towards: i) disciplined lending growth; ii) investment for the future (tech and data); and iii) distributions to shareholders - and he noted that what is key is to strike a balance between these three objectives. In terms of distributions: i) NWG is committed to a 40% ordinary dividend payout; ii) directed buybacks are the next order of preference (with capacity for more in FY24); and iii) then it’s on-market buybacks. On the topic of M&A (apart from the OOI-related prospective M&A note above) Thwaite said during the session that any acquisitions will be focused on simple prime books.
Government shareholding: HMT’s shareholding is now down to <18% (per a RNS on 30th August). Thwaite noted that the bank being back in private hands is “absolutely the best plan” and is welcome by shareholders. However, he was clear to point out that there are no strategic consequences as a result and that the strategy has always been set by management.
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