NatWest Group plc (NWG) Q2 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal strong financial performance, strategic growth initiatives, and upgraded revenue guidance, which are positive indicators. The management's confidence in maintaining strong RoTE and the positive impact of structural hedge benefits further support this sentiment. However, the lack of specific guidance on future lending growth and other areas slightly tempers the overall positive outlook. The positive sentiment is also bolstered by the strategic initiatives, like the OpenAI collaboration and the Sainsbury's acquisition, which indicate potential for future growth.
Key Financial Performance
Customer Lending Grew 3.2% to GBP 384 billion year-over-year, driven by increased customer activity.
Customer Deposits Increased 1% to GBP 436 billion year-over-year, reflecting growth in customer savings.
Assets Under Management and Administration Grew 5.9% to GBP 52 billion year-over-year, supported by net new inflows.
Income Increased 13.7% to GBP 8 billion year-over-year, driven by strong customer activity and growth across businesses.
Costs Reduced 1.4% to GBP 3.9 billion year-over-year, attributed to cost-saving measures and operational efficiencies.
Operating Profit Achieved GBP 3.6 billion, reflecting higher income and reduced costs.
Attributable Profit Reported GBP 2.5 billion, supported by strong financial performance.
Return on Tangible Equity 18.1%, reflecting improved profitability and efficient capital utilization.
Earnings Per Share Increased 28% to 31p, driven by higher profitability.
Interim Dividend Declared 9.5p, up 58%, reflecting a higher payout ratio.
Tangible Net Asset Value (TNAV) Per Share Grew 16% to 351p, supported by strong earnings and capital generation.
CET1 Ratio Stable at 13.6%, indicating strong capital and liquidity levels.
Share Buyback Announced GBP 750 million, contributing to total shareholder distributions of GBP 1.5 billion in the first half.
Retail Banking Lending Grew 3%, including mortgages and unsecured lending, driven by increased customer demand.
Retail Banking Deposits Increased 1%, reflecting growth in customer savings.
Commercial & Institutional Lending Grew 4%, driven by project finance, infrastructure, sustainable finance, and funds lending.
Commercial & Institutional Deposits Increased 2%, supported by larger customer deposits.
Private Banking Lending Grew 2%, reflecting increased customer activity.
Assets Under Management (AUM) Net Inflows GBP 1.5 billion, representing 8.1% of opening AUM, driven by strong customer acquisition.
Climate and Sustainable Funding and Financing Achieved GBP 110 billion, surpassing the GBP 100 billion target, driven by increased focus on sustainability.
Net Interest Income Grew 1.6% to GBP 3.1 billion, supported by volume growth in lending and deposits and margin expansion.
Net Interest Margin Up 1 basis point to 228, reflecting deposit margin expansion.
Gross Loans to Customers Increased by GBP 8.4 billion to GBP 384 billion, driven by balanced growth across personal and wholesale customers.
Deposits Increased by GBP 2.4 billion to GBP 436 billion, reflecting growth across retail, private, and commercial banking.
Impairment Charge GBP 193 million, equivalent to 19 basis points of loans, including a GBP 81 million onetime charge from Sainsbury's Bank acquisition.
Common Equity Tier 1 (CET1) Capital Stable at 13.6%, supported by strong earnings and capital generation.
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Operating Highlights
Family-backed mortgages: Launched to help customers get on the property ladder by enabling them to add a second person to their mortgage while retaining independent ownership.
Whole of market offer for personal loans: Extended personal loans beyond own customers following the successful extension of credit cards to the whole market.
Customer base growth: Attracted over 100,000 new customers organically and added around 1 million new customers through the Sainsbury's transaction.
Credit card market share: Increased from 9.7% to 11% due to the Sainsbury's transaction.
Climate and sustainable funding: Achieved GBP 110 billion target and announced a new target of GBP 200 billion by 2030.
Digitization of customer journeys: Digitized over 30 customer journeys, including credit card and ATM limit changes and U.S. dollar travel accounts.
AI and data modernization: Collaborated with AWS and Accenture to create a platform using AI for a single view of customer data, enabling personalization, faster onboarding, fraud protection, and stronger engagement.
Operational model simplification: Streamlined legal entities and branches in Europe, reduced U.K. branches, and relocated private bank investment operations and technology teams to the U.K. and India.
Government stake sale: Government sold its remaining stake, making NatWest privately owned for the first time in 17 years.
Shareholder returns: Announced GBP 750 million share buyback and total distributions of GBP 1.5 billion in the first half.
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Risk or Challenges
Government Stake Sale: The government has sold its remaining stake in NatWest Group, transitioning the company to private ownership. This could introduce new pressures from private investors and market expectations.
Economic Environment: The company assumes two further rate cuts this year, with rates reaching 3.75% by year-end. This could impact net interest margins and overall profitability.
Integration Costs: The company incurred GBP 27 million in integration costs during the quarter, with total costs expected to reach GBP 100 million for the year. This could strain operational budgets.
Impairment Charges: A net impairment charge of GBP 193 million was reported, including an GBP 81 million one-time charge from Sainsbury's Bank acquisition. This reflects potential credit risks.
Cost Management: Operating expenses increased by 3% in the second quarter, and further increases are expected in the second half due to business transformation and integration costs.
Regulatory and Compliance Risks: The company faces ongoing regulatory requirements, including CRD IV model inflation, which added GBP 1.4 billion to risk-weighted assets.
Supply Chain and Operational Simplification: The company is relocating private bank investment operations and technology teams from Switzerland to the U.K. and India, which could pose transitional risks.
Credit Portfolio Risks: The company retains post-model adjustments for economic uncertainty of GBP 234 million, indicating concerns about potential credit risks in the loan book.
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Guidance & Outlook
Income Guidance: The company now expects income, excluding notable items, to be greater than GBP 16 billion for 2025.
Return on Tangible Equity: The return on tangible equity is anticipated to be greater than 16.5% for 2025, with a target of greater than 15% in 2027.
Loan Impairment Rate: The loan impairment rate is expected to remain below 20 basis points for the full year 2025.
Risk-Weighted Assets (RWA): RWAs are projected to be between GBP 190 billion and GBP 195 billion for 2025.
Product Structural Hedge Income: Product hedge income is expected to increase by GBP 1 billion in 2025 compared to 2024, with further increases of more than GBP 1 billion in 2026 and additional tailwinds in 2027.
Climate and Transition Finance: The company has set a new target to deliver GBP 200 billion of climate and transition finance by 2030.
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Shareholder Return Plan
Interim Dividend: Announced an interim dividend of 9.5p per share, up 58% from the previous year, reflecting a higher payout ratio.
Share Buyback Program: Announced a new share buyback program worth GBP 750 million, contributing to a total shareholder distribution of around GBP 1.5 billion in the first half of 2025.
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Key Q&A
Q:Can you discuss the deposit flows during the quarter, particularly the impact of the ISA season and current account losses?
A:Management acknowledged the competitive ISA season driven by media and policy discussions, which normalized quickly. They maintained stable market share in ISAs and overall deposits. They were disciplined in pricing amidst swap curve volatility and expressed comfort with their deposit strategy.
Q:What is the outlook for restructuring charges and how do they compare to a normal year?
A:Management stated that GBP 34 million of the GBP 100 million restructuring charges were spent in H1, with more expected in H2. They aim to hit a base cost of GBP 8 billion plus GBP 100 million additional costs for the year, emphasizing investment in business simplification.
Q:How should we think about the lending outlook given the strong performance in the quarter?
A:Management highlighted broad-based growth in Commercial & Institutional, mortgages, and unsecured lending, with year-to-date growth of just over 3%. They do not provide specific guidance but expressed confidence in continuing to outpace market growth.
Q:Can you elaborate on the capital position and potential M&A considerations?
A:The CET1 ratio was 13.6%, well above the regulatory minimum of 11.7%. Management emphasized a balanced approach to capital allocation, including investments, customer support, and shareholder returns. They are not building a buffer for inorganic growth and remain focused on organic growth.
Q:What is the impact of the structural hedge on income and how does it interplay with other balance sheet items?
A:The structural hedge is delivering stable income, with GBP 1 billion expected this year and greater than GBP 1 billion by 2026. Management noted some cross-subsidization in product returns but emphasized rational market behavior and stable mortgage spreads.
Q:What are the drivers behind the upgraded revenue guidance for H2?
A:Drivers include continued volume growth, full run rate of the Sainsbury's acquisition, extra days in H2, higher structural hedge income, and strong non-interest income. Headwinds include expected Bank of England rate cuts and seasonality in the markets business.
Q:What are the reflections on the revenue guidance upgrade and its implications for next year?
A:Management attributed the upgrade to strong volumes, customer activity, and higher reinvestment yields. They expressed confidence in income and returns momentum but deferred specific 2026 guidance to February.
Q:What is the outlook for return on tangible equity (RoTE) beyond this year?
A:Management expects annual income growth through 2027, driven by lending growth, structural hedge tailwinds, and non-interest income. They anticipate a terminal rate of 3.5% and regulatory changes impacting TNAV but remain confident in maintaining strong RoTE.
Q:Can you explain the FX risk management derivatives and their impact on income?
A:These derivatives create negative NII and positive non-interest income, depending on market volatility. Management emphasized looking at total income rather than line splits for a clearer picture.
Q:What is the impact of recent lead reforms on the business?
A:Management supports the reforms, which have increased borrowing capacity for first-time buyers. They see opportunities to bring more people into the mortgage market but view it as one segment of a broader market.
Q:What is the expected runoff trajectory for the government-guaranteed loan book?
A:Management expects a consistent GBP 0.4 billion quarterly runoff, with little incentive for customers to accelerate payments or extend terms.
Q:What are the implications of the Prudential reviews and potential changes to capital requirements?
A:Management highlighted the importance of international competitiveness and consistency with EU and U.S. standards. They are reviewing capital risk appetite and buffers in light of regulatory changes and RWA growth.
Q:What is the through-the-cycle impairment charge outlook?
A:Current guidance is 20-30 basis points, but recent benign conditions suggest it may be at the lower end. Management is monitoring this and may update guidance if necessary.
Q:What is the rationale behind the shift in the liquidity pool from cash to gilts?
A:Management is taking advantage of gilt-swap spreads, focusing on equity hedge positions, and expects to continue this strategy.
Q:How does the structural hedge benefit increase in 2026 despite lower reinvestment yields?
A:The benefit is due to the averaging effect, stable notional amounts, deposit build, and 70% of the hedge already locked in.
Q:What is the current approach to M&A and its alignment with shareholder returns?
A:Management evaluates M&A opportunities based on scale and capabilities, maintaining a high financial and operational bar. They emphasize a balanced approach to investments and shareholder returns.
Q:What is the strategy for cost management and investment in business simplification?
A:Management focuses on BAU cost efficiency to create investment capacity for digitization, technology simplification, and operational model improvements. They aim to balance cost discipline with building a better bank for the future.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance on future lending growth, structural hedge benefits beyond 2026, and detailed impacts of Prudential reviews on capital requirements. They also did not disclose the exact contribution of FX risk management derivatives or the potential scale of benefits from lead reforms.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI
Bank
CFO
Commercial Institutional
Customer
Executive Director
GBP climate
GBP lending
GBP return
NatWest Group
Research Division
Sainsbury transaction
Switzerland
TNAV share
UK
application
bank
banking
branch
colleague
credit card
customer
deposit
government
hour
mortgage
ownership
platform
result
share buyback
technology
today GBP
transition finance
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