Financials Unshackled Issue 8: UK Banks - Key Take-Aways from BoA London Conference
Synopsis of the take-aways from the Barclays, Lloyds, Standard Chartered and NatWest Group fireside chats at the BoA Financials Conference in London yesterday - with upfront summary of key messages
The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer
What’s in this Note?
This note presents a synopsis of the key messages from a sectoral perspective arising from the fireside chats with Barclays (CEO - 08:45 BST, 24th Sep), Lloyds (CFO - 09:30 BST, 24th Sep), Standard Chartered (CFO - 10:15 BST, 24th Sep) and NatWest Group (CEO - 11:00 BST, 24th Sep) executives at the BoA Financials Conference in London yesterday. Below this summary are some detailed notes (in what is hopefully a well-structured resource for you in a topic-by-topic context) from each individual fireside chat.
Overarching Take-Aways
In overall terms, consistent with the tone expressed at the Barclays Global Financial Services conference earlier this month (link below to my note on this), the disposition of the executives was positive in the terms of the macro and political climate as well as in an individual bank financial condition and outlook context.
One point of note is that, while the overall tone was upbeat, I don’t expect any material revisions to consensus expectations to spring from the updates (albeit the overall messages from both this conference and the Barclays conference will be supportive in terms of positive bias of analysts towards UK loan growth and margin recovery) - though I do sense we may see modestly more analyst conservatism set in on Barclays’ US cards impairment projections at the stage of model revisions ahead of the 3Q update.
In Summary - UK-focused Context:
Constructive political backdrop: Executives reiterated their view that Labour's pro-growth agenda is supportive in a loan book expansion context (with more optimism expressed in relation to retail loan book growth than commercial in the discussions) - although speakers were at pains to say that there is no clarity on what the outcome of the Budget will be from a bank taxes perspective.
Macro environment conducive to growth: Good chat as well on the supportive macro backdrop - an acknowledgement that the UK economy is not exactly "glittering" but improving and growing nonetheless, which should support lending book growth.
Confidence in NII / NIM outlook: Executives expressed their confidence in net interest margin / income stability and growth despite the declining rate backdrop, underpinned by structural hedge roll dynamics as well as stable deposit churn and inflecting mortgage margins (as higher-priced Covid-era lending matures and as front book margins remain stable (indeed, that's the experience thus far in 3Q with UK mortgage completion spreads still printing at c.70bps, according to Lloyds and NatWest Group)).
Asset quality not an issue right now: Credit performance remains strong with no marked shift in experience expected.
Strong double-digit RoTEs are sustainable into the medium-term: Strong reinforcement of the sustainability of strong double-digit RoTEs through a period of expected base rate reductions. This was a significant focus of the fireside chats again (like at the Barclays conference) - it makes sense for executives to push this theme (albeit NWG’s conservative guidance continues to stand out) as there is a widely held view that bank equity valuations don't reflect this (and, moreover, confidence in revenue delivery - a key input to the returns equation of course - is strongly underpinned by locked-in income augmentation attributable to mechanistic structural hedging programmes).
Excess capital to continue to find its way back to shareholders: Deep commitment to, and confidence in ability to deliver, substantial further capital return via dividends and buybacks.
Investment programmes support revenues as well as costs: Lots of emphasis on how transformation programmes / investment initiatives are revenue-enhancing measures as well as cost control levers.
M&A not a core focus: M&A appetite is there for acquisitions that can deliver added scale / capability benefits faster than the alternative organic route - but price is a key factor and, therefore, the likelihood of material incremental acquisition activity appears limited for now at least. However, I would add that there are a few interesting prospective combinations that we could see and I touch on one idea in a LLOY context below!
Individual Company Key Messages:
Barclays (BARC): All on track. Particularly confident tone in a BUK NII context. Rebalancing of business mix progressing well. RWA efficiencies deliverable - major focus on SRTs (with considerable experience of such transactions). Positive message in terms of US Cards CoR normalising at c.400bps level but it felt like Venkat wanted to move off the point fairly quickly (CFO conviction at the Barclays conference on this was not as strong as could be either in my view) so likely to drive sell-side analysts to pause for thought at the stage of next model revisions (though not imminently).
Lloyds (LLOY): All on track. Placed significant emphasis again on the accreting returns profile, reiterating confidence in the >15% FY26 RoTE target. Intelligently slotted in messages on non-interest-revenue focus / progress on a couple of occasions during the conversation (differentiating LLOY from its closest peer, NWG). Downplayed prospects for major M&A but I still wonder if TSB comes up for grabs would LLOY pounce to bring the bank ‘back home’.
Standard Chartered (STAN): Everything is on track. CFO particularly bullish on Wealth Solutions growth, cost efficiencies capture, credit quality resilience (guidance is for CoR to normalise towards the historical TTC 30-40bps range), and capital return (divis, buybacks) prospects. Keen to point out that while Standard Chartered (STAN) has many disparate businesses, it is NOT a complex business (a common investor criticism), and management has tried to simplify it as much as possible.
NatWest Group (NWG): All on track. Upbeat tone in a lending growth (including share build) and NIM expansion context (CEO acknowledged there would be upside to targets if the extent of base rate cuts NWG is assuming, which is more than what peers factor in, don’t come to pass); making strong progress on ‘micro simplification’ initiatives which should drive cost reduction (and revenue benefit). Acceptance that there is a very high reliance on interest revenues but no medium-term ‘quick fix’ from an organic perspective in that respect - and vendors of fee income businesses’ price expectations are too rich. SRTs to become more of a focus going forward.
Barclays CEO (08:45 BST 24th Sep): Take-Aways
Balance Sheet Evolution Commentary:
Venkat firstly recapped on the strategy to reduce the proportionality of risk-weighted assets (RWAs) attributable to the Investment Bank (IB), reiterating that Barclays’ (BARC) intention is to maintain IB RWAs roughly at end-FY20 levels via “a dieting exercise” (RWA efficiencies). Venkat was keen to emphasise that this capital allocation strategy should in no way hinder the IB’s competitiveness and repeated the message conveyed at the Barclays conference earlier this month that management is focused on improved top client penetration in the IB division (ambition to be Top 5 global IB to c.70 of its Top 100 IB clients, up from c.50 today).
Venkat went on to note that capital efficiencies can be garnered through continued deployment of synthetic risk transfer (SRT) trades, which have been used by BARC for several years in both a capital and a risk management context across the bank (e.g., in the IB; in Barclays UK (BUK); in the motor finance portfolio; recent US cards transaction with Blackstone) - and noted that SRT activity has been selectively ramped up in the past at appropriate times (e.g., early during the Covid-19 pandemic in anticipation of losses when BARC was in derisking mode). Venkat also made the point that BARC’s experience of executing SRTs is important in the context of counterparty appetite to transact given the targeted counterparties have strong prior experience of BARC’s underwriting standards.
Venkat gave some colour on the rationale underpinning the c.£30bn+ RWAs allocation to the UK, noting: i) BUK has been underweight in mortgages given its reduced appetite to lend post-Brexit but has seen growth in its share of specialist mortgage product flow of late (in the wake of the Kensington acquisition), albeit the net book has still been in contraction mode owing to refinancing / redemption levels; ii) seeing strong growth in UK cards (BARC notably ceded significant share in this busines post-Brexit and during Covid) and the partnerships model should be constructive (mentioned the Amazon partnership again) in this vein (as well as the acquisition of the Tesco Bank retail banking business, which included c.£4bn of card balances); and iii) more broadly, the focus of the Labour government on growth and investment in the UK, which should drive growth in consumer spending activity.
Financial Performance / Outlook - Key Points:
Improved NII outlook: BARC upgraded FY24 Group NII (excl. IB and Head Office) guidance to c.£11.0bn at the stage of the 1H24 update (from c.£10.7bn), with BUK expected to generate NII of c.£6.3bn (up from c.£6.1bn) - with Venkat reiterating that structural hedge tailwinds and more stable deposits than had been expected drove the upgrade. Venkat’s sentiment in a NII outlook context struck a confident tone.
Cost efficiencies on track; committed to continued investment in the business too: Venkat reaffirmed that BARC is on track to deliver c.£1bn of gross efficiency savings in FY24, leaving a further c.£1bn of efficiencies to be delivered over FY25 & FY26 to hit the c.£2bn savings target by end-FY26. Venkat remarked that BARC will continue to invest in the IB but at a slower pace, that Retail & Corporate RWAs will enlarge, and that more investment will be made in technology and in the Wealth proposition.
Benign credit impairment levels in UK; comfortable with provisioning sufficiency in US Cards book: Venkat noted that, while “the only way is up” from the BUK 1bp 2Q24 cost of risk (CoR) print, loan impairments remain “muted” in the UK. On US cards, Venkat made the point that it is management’s expectation that normalised impairments will be in the c.400bps territory (438bps in 2Q; 509bps for 1H24 as a whole) and that BARC has provided for a slightly higher level of impairments (also serving to rationalise the 1H24 CoR print) as its models had been predicting higher unemployment rates. He also noted that BARC is not seeing trends in default rates that would cause concern from a provisioning sufficiency perspective (despite the headlines in the US in relation to other players in that market), effectively reaffirming the comments made by CFO Anna Cross at the Barclays conference earlier this month - though, notably, he didn’t overly elaborate on the point (my gut is management is still a bit nervous on this front judging by the way in which this message was conveyed - both by the CEO yesterday and the CFO earlier this month). Venkat also noted that BARC is confident in wholesale credit impairments containment given effective use of risk management programmes as well as hedging.
Target RoTE delivery: The CEO recapped on the medium-term targets at the outset of the discussion - including the achievement of a >12% RoTE at group level in FY26. Not a huge amount of further discussion on Group RoTE but Venkat did make some points later during the chat on US Cards RoTE dynamics specifically. He remarked that US Cards is “on track” for a >12% RoTE print in FY26 (the target set out in the Strategy Update in February), reminding us that 2Q24 RoTE printed at 9.2% (note: 7.2% for 1H24 as a whole) - and he confirmed that allowances for AIRB approval (now expected in 1Q25) and late fees have been embedded in the existing RoTE target plan.
Capital-related Commentary:
Venkat noted that BARC expects to follow up the inaugural US Cards book SRT transaction with more and that further SRT transactions are on the agenda in a UK context too (historical SRT activity has been concentrated in the wholesale book and in corporate credits and the point he seemed to be making was that the net has now widened with respect to what’s eligible - so, SRT transactions in the wholesale and corporate books are likely to continue too, with Venkat making the point that consistently transacting is paramount).
On the expected impact of Basel 3.1 reforms implementation, Venkat reaffirmed existing guidance for lower end of a 5-10% range in terms of consequential Group RWAs inflation (using end-FY23 RWAs as the baseline). Noted that BARC needs to see more detail and understand timing better in a US context. I suspect we will get a firmer update on this at 3Q / 4Q.
On prospective M&A, Venkat reiterated that there are pre-conditions as follows: i) any acquisition must bring added scale (e.g. Tesco Bank retail banking business) and/or capability (e.g., Kensington); and ii) an acquisition must be of a size that is “manageable”.
Bringing it all together, Venkat repeated previous comments on the ‘capital hierarchy’, i.e., i) first priority is commitment to the 13-14% CET1 capital ratio target range; ii) second priority is capital return (i.e., delivering on the £10bn+ distributions commitment from FY24 through end-FY26); and iii) third priority is investment.
Lloyds CFO (09:30 BST 24th Sep): Take-Aways
UK macro backdrop more constructive than had been expected: Chalmers touched on the supportive macro climate in his early comments, noting that Lloyds (LLOY) pushed through positive revisions to its macro assumptions in the models supporting the 1H24 results. He highlighted the stability of the benign backdrop (flagging low unemployment and improved HPI in particular) though admitted that, while it is “relatively constructive” it isn’t “glittering”. Chalmers also noted that, in relation to the upcoming 30th October Budget, LLOY is in active dialogue with political parties and Chalmers’ view is that government recognises the important role of banks in delivering the economic growth agenda and appreciates that there is a need for stability and predictability at a sectoral level. But LLOY has “no particular insight” on what might / might not come in the form of changes to the bank taxes regime (see my note of 8th September for a discussion on the topic).
Revenue evolution a significant focus of the discussion:
Chalmers said that NIM will inflect in 2H24 (note that he remarked at the Barclays conference a couple of weeks ago that NII will inflect first, with NIM set to inflect by year-end - though I wouldn’t read into yesterday’s comment as necessarily representative of improved guidance / increased confidence versus two weeks ago, albeit messaging momentum feels favourable). Re-emphasised the structural hedge tailwind in a margin expansion context more broadly as well as dissipating mortgage headwinds and stable deposit churn - with NIM expected to gently accrete in FY25 and then lift more materially in FY26 (notably, LLOY models the base rate falling to 3.5% by FY26 to inform its guidance). Note that the acceleration in NIM enhancement projected for FY26 is a key underpin for the expected uplift in RoTE on a medium-term view (target RoTE c.13.0% for FY24 and target is >15.0% for FY26). In terms of more granular detail on NII / NIM dynamics:
Mortgage spreads averaged c.70bps in 2Q; saw some widening of spreads in early 3Q but some contraction recently and expects 3Q24 completion spreads to average c.70bps, flat q/q. Maturing spreads average c.110bps so it will be 1Q26 before we see front book / back book spreads equalisation (assuming no abrupt shift in front book completion spreads in the interim, of course). Also worth noting that Chalmers made the valid point that the disparity between front book and back book spreads is a function of LLOY management astutely grasping the opportunity to ramp up lending volumes when spreads were wide during the earlier stages of the pandemic period.
Chalmers stated that “the usual considerations will apply on passthrough” of base rate reductions in a deposit pricing context. He went on to note that LLOY passed through c.50% of the first rate cut and that others did more. Not concerned about risks to deposit spreads by virtue of TFSME maturities across the sector as: i) competition is behaving rationally - and LLOY is seeing strong deposits growth (+£5.5bn q/q in 2Q, representing a c.4.7% annualised growth rate - which is about twice the level of growth that management had expected); and ii) LLOY reported TFSME funding balances of £30.0bn at end-1H24, with the c.£21bn maturing in FY25 “absorbable” within existing funding plans - with Chalmers also remarking that, in his view, it’s the same for peers in terms of ‘absorption capability’.
CFO reaffirmed structural hedge income evolution guidance, noting that the hedge is currently yielding c.1.6% but new swaps (on rollovers) are yielding c.3.5% (given weighted average duration of hedge of c.3.5 years) with much of the future benefits now locked in - so, a material tailwind from both a NII and a NIM standpoint.
Getting into the specifics of what will drive revenue growth at a divisional / product segment level, Chalmers noted that BAU investment as well as the c.£3bn of strategic investment spend (over FY22 through FY24) have been / are constructive: i) Commitment to mass affluence strategy in Retail supportive; ii) Integrated proposition to home customers constructive, with bundled product packages - particularly co-selling mortgages and protection policies; iii) Improved Capital Markets capability within Corporate & Institutional Banking (CIB) contributory - with LLOY flagging improved rates, FX and DCM capabilities specifically (though he made it clear that LLOY is not aspiring to become a full-service wholesale bank), relevant in the context of CIB other operating income (OOI) growth of c.35% delivered since FY21; and iv) Merchant Acquiring expansion helpful. Indeed, the undertone to the answer to this question on revenue growth drivers was, rather cleverly, highlighting that LLOY has been successful at eking out non-interest revenue growth, somewhat differentiating it from its closest peer (NWG) - and I think this was well played by the CFO in terms of reassuring that there is a strong focus on diversified revenue mix, subliminally messaging how LLOY is advantageously differentiated. Indeed, Chalmers, at the end of the chat, re-emphasised that there is a clear strategy to reduce NII dependence in the long-term and that each division has an ambition to grow OOI, with OOI growing at a high single-digit clip of late (while marrying that comment up with a statement to the effect that the structurally higher rate backdrop - despite policy rates going into reverse - is clearly constructive from a NII vantage point too).
Loan growth take-aways: Chalmers noted that loan growth is expected to continue through 2H24. He articulated a positive message in a Retail lending volumes expansion context (mortgages, personal term, cards) though he highlighted that the extent of dealer restocking is impactful in a motor finance lending volumes context. On SME lending, a decline was observed in net loans in 2Q (-£0.7bn q/q to £31.5bn) owing to: i) repayment of Covid-era bouncebank loans (while repayments will slow, there are still c.£3bn of balances to be repaid); and ii) relatively muted demand on an underlying basis (he noted that it is likely that some customers are not yet ready to ramp up investment spend until rates begin to stabilise, which is a logical opinion and one that is likely informed by customer dialogue). In CIB the focus is on modest balance build to support Capital Markets-related revenues (again, that OOI point…).
Sustainability - and enhancement - of strong returns emphasised: Indeed, Chalmers kicked off at the very start of the fireside on management’s confidence in the >15% FY26 RoTE target (compared with the c.13% target for FY24). Similar to the fireside chat in which he participated at the Barclays conference on 9th September last, Chalmers sought to ‘hammer this point home’ from the outset given that the equity valuation, arguably, does not reflect these return dynamics - and he also flagged the operating leverage inherent in the business model at a later stage to reinforce the income augmentation story. Later on in the chat, Chalmers took the opportunity, in response to a question on what he thinks the “sweet spot” is from an official rates perspective (2.5-3.0% was his answer), to flag that such an official rate backdrop is consistent with LLOY’s FY26 RoTE expectations. He also remarked that, in such an official rate environment, it would be likely that LLOY might run a bit more risk in a structural hedging strategy context (though I wouldn’t interpret this as a possible blowback to the dynamic hedging strategies that LLOY was renowned for pre-Covid) and would likely see less deposit churn and higher lending activity levels.
FCA motor finance commissions review: In response to a question on the topic, Chalmers framed the conversation in a neat way - noting that, given c.80% of UK car purchases are funded with motor finance debt, that serves to underpin the FCA’s focus on a speedy and orderly resolution (which some might see as somewhat cynical / pushy given the publication of the findings of the regulatory review have been pushed out until May 2025…). He reiterated previous comments that 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 - and noted that: a) complaints and enquiries have been tracking broadly in line with LLOY’s expectation; b) the delay to the publication of the FCA’s findings is not in any way suggestive of potentially higher provisioning requirements; and c) the expectation is that LLOY’s current provision will be sufficient (but who knows at this stage…).
Capital-related comments: Chalmers reconfirmed that LLOY’s mission is to deliver stable, predictable, and growing capital returns to shareholders - reminding us that the c.175bps of guided FY24 capital generation is well on track following 87bps of capital generation in 1H. He noted that capital repatriation will come in two forms: i) the stable and progressive dividend (he flagged that there is plenty of room for dividend growth a couple of weeks ago at the Barclays conference) and ii) buybacks, which will be achieved through a combination of organic capital generation and a little bit of “capital destocking” (i.e., as LLOY moves to its 13.0% end-FY26 CET1 capital ratio target (from 14.1% at end-1H24), with Chalmers also reaffirming that LLOY will indeed get to that 13.0% target). On the buybacks, Chalmers, once again, took the opportunity to point out that buybacks are the preferred excess capital return mechanism given the stock’s “compelling value proposition” - noting that investor feedback is consistent with this assertion. Finally, on M&A, Chalmers noted there are three criteria to fulfil before something would be taken forward: i) needs to add scale and/or capability incremental to the organic alternative; ii) needs to deliver more speedily than the organic alternative would (typically not so difficult to tick this box in my view save for extremely complex integrations); and iii) needs to be within risk tolerance limitations. He finished up on this point noting that acquisitions have only been occasional historically and relatively modest in size - but that doesn’t mean anything really. However, given LLOY’s UK-centric focus and, therefore, the limited opportunity universe available to the bank from an inorganic scaling perspective (as well as market share concentration considerations in key lending segments), the comments do, of course, stand to reason - though one wonders, with a possible BBVA takeover of Sabadell in the offing and the possibility that the (surely non-core) TSB could be in the shop window again, would LLOY be tempted to buy (subject to CMA approval in a mortgage market stock share context, of course) an old business it owned that it knows reasonably well (with systems integration unlikely to be much of an obstacle given the extensive re-platforming exercise pursued by TSB a few years ago) especially now that Nationwide is likely out of the picture given it will likely be consumed by the Virgin Money UK integration project for some time. Just a parting thought…
Standard Chartered CFO (10:15 BST 24th Sep): Take-Aways
Specific Divisional Commentary:
Corporate & Investment Banking (CIB): CIB plays an important role in the overarching focus on Balance Sheet optimisation and cost control. Transaction banking key for growth. Banking pipeline healthy, albeit not at record levels. Doing very well in Markets - benefiting as it’s largely a FICC flow business (with De Giorgi referencing comments made by CEO Bill Winters on the 1H24 analyst / investor call in this respect, i.e., notably that recurring flow income has been growing strongly since FY19 with a 9% CAGR - and was +8% in 2Q). 50% of Standard Chartered (STAN) Markets activity relates to corporates, 30% relates to banks / broker dealers, and the residual 20% relates to investors.
Wealth & Retail Banking (WRB): Wealth Solutions is the area that STAN management has evolved most considerably - investing in relationship managers, technology, and platforms with a very clear target customer in mind. Notably, Wealth Solutions reported 25% y/y income growth (constant currency basis) in 1H24, with a significant focus on Affluent customers. STAN will host a seminar on Wealth Solutions in December and De Giorgi noted that it’s “a gem of a business” (low client acquisition costs; loyalty of client base) and will see meaningfully higher growth rates (relative to yesteryear) going forward. Helpful that there are less international banks nowadays but obviously STAN competes with domestics too in the various jurisdictions in which it operates. A growing middle class in its geographic focus regions, a growing propensity to save, the fast-growing Indian market (including that country’s trading opportunity with China), and STAN’s focus on servicing international clients (ex-pats, those with an international lifestyle) were called out by De Giorgi as some of the supportive growth factors.
Ventures: Digital banking businesses coming closer to break-even. CFO remarked that these are naturally high-RoTE businesses following initial significant investment. Learnings are successfully applied to the wider business. Continuing to grow (including Mox after a tough few quarters).
Financial performance / outlook commentary: Overall message was that STAN is on track in a returns delivery context.
Comfort with FY24 NII guidance: STAN is guiding FY24 NII (at constant currency) of $10-10.25bn and De Giorgi reiterated that this guidance still holds despite evolving rate expectations. He went on to note that credit demand improves as rates come down, rate changes impact quickly on the Wealth business - though corporate treasurers tend to adopt a ‘wait and see’ approach as rates start to reduce in a bid to (eventually) refinance at lower rate levels. Also noted management expects c.5% net loan growth through-the-cycle (low single-digit growth in u/l net loans guidance for FY24). De Giorgi further commented that the expanded mechanistic structural hedging programme ($51bn in size at end-1H24) will be further upsized and sees it growing to $60bn.
OOI trending positively: Given STAN’s 1H24 revenue split was 50:50 NII/OOI, De Giorgi made the point that OOI-related activities (Wealth, in Banking) are performing very well. Trends continue to be consistent with what STAN has seen over recent quarters.
Cost management a key focus: Reiterated hard costs cap of <$12bn for FY26 and expectation for widening jaws every year through FY26. Also reiterated that $1.5bn of cost savings are targeted over the next three years through the Fit for Growth programme. De Giorgi was keen to point out that this programme is a broad transformation exercise - not just a headcount reduction effort - that’s expected to drive revenue augmentation as well as cost benefits (notably, he spoke about how greater efficiency stimulates enhanced customer NPS scores, which STAN is starting to see translate into improved customer revenues). The programme is progressing in line with management’s expectations and he gave a sense that there is some ‘room in the tank’ if any issues arise in an efficiency-delivery context in specific areas.
Credit quality update: In overall terms De Giorgi noted that there are no particular areas of concern from an asset quality viewpoint (except he did mention software impairments - probably in a bid to highlight he is ‘clutching at straws’ to identify possible issues - and there has been plenty of disclosure on those already anyway with the $143m ‘other impairment charge’ booked in 1H24 reported to be mostly related to the write-off of software assets).
CIB: Difficult to see where stress will emerge from. While CRE in Hong Kong is topical (see press reports from recent days in a HSBC context, for example), De Giorgi noted that STAN has limited exposure in this respect - $2.6bn in totality, which is largely investment grade at a low LTV and (obviously) heavily secured. He also made the point that CRE exposures in HK are likely to behave very differently to Chinese CRE exposures as, in HK, the developers are typically part of large conglomerates and the CRE assets typically sit on the conglomerates’ Balance Sheets meaning there are legal protections from a lender perspective. He added that STAN’s CRE borrower client base is skewed towards large corporates and MNCs rather than local developers so the former point is particularly relevant to STAN.
WRB: Impairments running at a level that is in line with management expectations at this stage of the cycle.
Ventures: He also, later on in the fireside chat, acknowledged that Mox has had a difficult few quarters from a credit quality perspective and a lot has been learned from that.
Capital-related commentary: De Giorgi noted, seemingly in jest, that management likes to under-promise and over-deliver and wants to continue doing that. STAN’s started target is to return at least $5bn of capital to shareholders over the FY24-26 period (with $2.7bn of capital return announced already since the FY23 results). He indicated there is some decent headroom versus the stated target, which stands to reason given the quantum returned thus far and the RWA efficiencies in train (albeit lots of moving parts). De Giorgi called out three drags on capital too, namely: i) impact of official rates normalisation; ii) Basel 3.1 (albeit, the updated implementation package appears positive - STAN will provide a detailed update with the 3Q results); and iii) investment in the Fit for Growth programme. I suspect we’ll see a formal upward revision of capital return targets at the stage of the 3Q update on 30th October.
NatWest Group CEO (11:00 BST 24th Sep): Take-Aways
Supportive macro / political backdrop: Thwaite repeated previous comments (at the Barclays conference most recently) that macro data over the last 8-10 months has been better than had been expected - and is consistent with NatWest Group’s (NWG) own internal data. Also, reiterated that there is more clarity now in a political sense. Consistent with the LLOY CFO’s comments, Thwaite noted that NWG has very active engagement with political parties and that he is encouraged by: i) the government’s pro-growth agenda (also referenced the upcoming - pre-Budget - investment summit); and ii) the public and private messaging in relation to the importance of the banking sector in the context of supporting economic growth. The new government’s focus on planning, housing, digital infrastructure, and energy infrastructure are all helpful factors for NWG, according to the chief. Noted again that the 30th October Budget is a “key clearing event” so we’ll see what comes.
Lending Volume Growth: Thwaite noted the increased mortgage lending volumes evident in latest system-wide date, pointing out that NWG has taken its “appropriate share” (he later noted that NWG continues to build flow share in mortgages and unsecured personal lending (UPL) within existing risk parameters) and that more disclosure will be forthcoming in this context at the stage of the 3Q update on 25th October. He went on to note that the wider policy backdrop in terms of first time buyer supports and planning changes ought to be volume-supportive and that the 1st August base rate cut has not appeared to have driven any change in customer behaviour. Thwaite also remarked that there is evidence of “green shoots” in an unsecured personal lending (UPL) context too and that NWG has a share build opportunity here (in cards and term loans) given relatively low existing UK customer universe penetration levels. He reiterated that management is confident it can deliver growth in Retail loan volumes. Finally, on commercial lending, the CEO stated that there are “green shoots” here too with some encouraging early signs of loan demand - but he indicated that corporate lending volume recovery is slower as: i) corporates wait for rates to bottom out; and ii) some investment plans are on hold until the Budget.
NII Evolution: Thwaite noted that management is very encouraged by two consecutive quarters of NIM progression - in each of the three divisions - supported by the structural hedging programme and stability in deposit margins. He reiterated the previously communicated structural hedge income contribution guidance and reinforced that NWG adopts a very mechanistic hedging approach - and that much of the forward-looking benefits are already locked in (FY25, and FY26 to a significant extent too). Noted, in a mortgage margin context, that (consistent with LLOY) completion spreads have been running at c.70bps and that NWG expects healthy (stable I guess?…) front book margins going forward (and front book / back book margins have already inflected). The August base rate cut was passed through to mortgage customers without delay and Thwaite noted that the market remained rational in response to the base rate reduction (evidenced in stable spreads I guess) - and also remarked (again) that he thought it interesting that the digital banks passed the rate reduction on in full too. Bottom line is that NWG is confident in its short and medium-term NII guidance.
OOI an important Board focus: Thwaite acknowledged NWG’s heavy bias towards interest revenues, noting that OOI generation is an important topic at Board level. While income growth was broad-based in 1H24, NWG has not seen any mix shift towards OOI - with Thwaite, sensibly, going on to note that the prospects of achieving a material change in revenue mix organically in the medium-term is “muted”. He repeated the comments he made at the Barclays conference on 10th September last to the effect that there is a large disconnect between the price expectations of vendors of fee-focused businesses and the price that NWG is willing to pay, downplaying prospects for M&A as a solution to reduce NII dependence - and also illustrating NWG’s discipline.
Costs - emphasis is on further simplification: Thwaite noted that NWG has been in cost-cutting mode for the last 15 years and has very successfully achieved ‘macro simplification’ (e.g., exiting select regions) and the focus is now on ‘micro simplification’ (i.e., digitisation, automation, removing select operational functions). He was also keen to point out that the simplification initiatives are not entirely cost-related with these programmes delivering enhanced productivity, efficiency, and customer experience (indicating there is revenue benefit capture at play here too). The continued focus on simplification is expected to yield further operating leverage benefits and Thwaite reiterated FY24 “broadly stable” opex (ex-levy) guidance (including all restructuring costs, etc.).
Confidence in returns targets: NWG is targeting RoTE >13% for FY26 (predicated on a more aggressive pace of official rate reductions than assumed by peers and economists’ consensus), with Thwaite acknowledging that there is upside to the medium-term target in the event that we don’t see the scale of base rate cuts that management is planning for (-200bps) - notably, the latest company-compiled consensus estimates (dated 6th September) are for a 14.5% RoTE print in FY26 (with consensus gunning for an end-FY26 CET1 capital ratio of 13.5%, bang in the middle of the target 13.0-14.0% target range). But, to be clear, Thwaite wouldn’t be drawn on whether there is likely to be upside to the guidance specifically (he noted that the upgrade to FY24 expected RoTE guidance from c.12% to >14% at the stage of the interim results was underpinned by official rate reductions coming later than had been expected (the market hadn’t bought into the original exceptionally conservative guidance owing to the base rate assumptions used when it was struck), stronger growth in deposits than had been expected, and very benign CoR). On the question as to where the CEO sees the “sweet spot” for official rates, Thwaite said that an official base rate range of 2.5-3.5% is a level where management can be confident in the medium-term targeted returns profile for NWG (as that sort of range supports loan demand, benign CoR, and overall profitability).
Capital management: £5.5bn of RWAs reduction achieved in 2Q despite some net loan growth (+£1.2bn q/q) and CEO sees more scope for RWA reduction going forward but keen to point out that the substantial reduction achieved in 2Q is not representative of a run rate. Thwaite also noted that NWG has historically underutilised SRTs and is in the process of addressing this (evidenced in 1Q and 2Q transactions), with an ambition to be “a more systematic user” of SRTs going forward.
Capital returns: Reiterated that the ‘distributions hierarchy’ is: i) Ordinary dividend (he noted at the Barclays conference that NWG is committed to a 40% ordinary dividend payout); ii) directed buybacks (with capacity for more in FY24 as the change in the UKLA Listing Rules means that there is no need to wait until May 2025 for government to go again); and iii) on-market buybacks. While Thwaite welcomed the rapid reduction in the government’s shareholding (to just 16.92% per a 23rd September RNS) he reaffirmed that it doesn’t change anything. That said, he did note that, as the government’s shareholding approaches zero, that would be a time to take stock and think again about the capital distribution policy. Finally, in a capital context, Thwaite remarked that he agrees with the general sentiment of the market that the near-final Basel 3.1 reforms package is better-than-expected but that there is a lot of work to do yet before NWG can be deterministic in an impacts context.
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Thanks John, some useful insight.