NatWest Group Q2 2025 Earnings Report

NatWest Group EPS Results

• Actual EPS: $0.41
• Consensus EPS: $0.37
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: N/A

NatWest Group Revenue Results

• Actual Revenue: $5.42 billion
• Expected Revenue: $4.06 billion
• Beat/Miss: Beat by +$1.37 billion
• YoY Revenue Growth: N/A

NatWest Group Announcement Details

• Quarter: Q2 2025
• Date: 7/25/2025
• Time: Before Market Opens
• Conference Call Date: Friday, July 25, 2025
• Conference Call Time: 4:00AM ET

NatWest Group (NYSE:NWG), together with its subsidiaries, provides banking and financial products and services to personal, commercial, corporate, and institutional customers in the United Kingdom and internationally. It operates through Retail Banking, Private Banking, and Commercial & Institutional segments. The Retail Banking segment offers a range of banking products and related financial services, such as current accounts, mortgages, personal unsecured lending, and personal deposits, as well as mobile and online banking services. The Private Banking segment provides private banking and wealth management products for high-net-worth individuals and their business interests. The Commercial & Institutional segment offers banking and financial solutions to large corporate organisations, multi-nationals, and financial institutions. The company was formerly known as The Royal Bank of Scotland Group plc and changed its name to NatWest Group plc in July 2020. NatWest Group plc was founded in 1727 and is headquartered in Edinburgh, the United Kingdom.

NatWest Group Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: NatWest is fully private for the first time in 17 years after the government sold its remaining stake, enhancing investor appeal and strategic flexibility.
• Positive Sentiment: Customer lending grew 3.2% to £384 bn and deposits rose 1% to £436 bn in H1, helping drive a 13.7% increase in income to £8 bn while cutting costs by 1.4%.
• Positive Sentiment: Operating profit reached £3.6 bn with return on tangible equity at 18.1% and EPS up 28% to 31 p, underpinning a 58% uplift in the interim dividend to 9.5 p.
• Positive Sentiment: The bank announced a £750 m share buyback, bringing total H1 distributions to around £1.5 bn and signaling confidence in future earnings and capital strength.
• Positive Sentiment: NatWest upgraded its 2025 guidance to income above £16 bn and RoTE over 16.5%, backed by a stable CET1 ratio of 13.6% and an expanded climate finance target of £200 bn.

Presentation

[Operator]

Good morning, and welcome to NatWest Group's h one twenty twenty five results management presentation. Today's presentation will be hosted by CEO, Paul Thwaite and CFO, Katie Murray. After presentations, we will take questions.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Good morning, and thank you for joining us. I'll start with a brief business update. Katie will take you through the numbers, and we'll then open it up for questions. You will all be aware that since our first quarter results, the government has sold its remaining stake in NatWest Group. So we are now privately owned for the first time in seventeen years.

[Paul Thwaite, Group CEO & Director at NatWest Group]

This is clearly an important milestone. With government ownership and a significant restructuring of the bank behind us, we are attracting new investors and driving growth. Customer activity has helped to deliver a strong first half, so let's turn to the financial headlines. Customer lending grew 3.2% to GBP $384,000,000,000. Customer deposits were up 1% to GBP $436,000,000,000.

[Paul Thwaite, Group CEO & Director at NatWest Group]

And assets under management and administration grew 5.9% to GBP 52,000,000,000. This has driven strong financial performance. Income grew 13.7% to 8,000,000,000, while costs reduced 1.4% to 3,900,000,000.0. This resulted in operating profit of $3,600,000,000 and attributable profit of $2,500,000,000 Our return on tangible equity was 18.1%. Earnings per share were up 28% at 31p.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We have announced an interim dividend of 9.5p, up 58%, reflecting our higher payout ratio. And TNAV per share grew 16% to 351p. Our CET1 ratio is stable at 13.6% with strong levels of capital and liquidity. Successful execution of our strategy is driving strong capital generation, which allows us to invest in the business, support customer growth and deliver attractive returns for shareholders. We are pleased to announce a new share buyback today of $750,000,000 Together with the interim dividend, this brings total distributions declared to shareholders in the first half to around 1,500,000,000.0 The chart on the right shows how the dividend and TNAV per share have grown year on year.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Our new buyback program will deliver further share count reduction in the future. I'm also pleased with the progress we are making on our strategic priorities. So let me update you, starting with disciplined growth. We continue to grow our customer base across the bank. We attracted over 100,000 new customers as a result of organic growth during the first half.

[Paul Thwaite, Group CEO & Director at NatWest Group]

In addition, the Sainsbury's transaction completed in May, adding around 1,000,000 new customers with about $2,400,000,000 of savings and $2,200,000,000 of unsecured lending. We have grown across all three of our businesses. In Retail Banking, we grew lending 3%, including both mortgages and unsecured lending, and deposits increased 1%. We continue to build out our mortgage proposition, including for first time buyers, which has driven a 4% increase in our application share of this market since early last year. During the first half, we helped 24,000 people buy their first home.

[Paul Thwaite, Group CEO & Director at NatWest Group]

And we recently launched family backed mortgages to help customers get on the property ladder by enabling them to add a second person to their mortgage while retaining independent ownership. Our share in credit cards increased from 9.7% to 11% as a result of the Sainsbury's transaction, And we launched a whole of markets offer for personal loans at the end of last year, extending them beyond our own customers following our successful extension of credit cards to the whole market. In Commercial and Institutional, we grew lending 4% and deposits 2%. In Corporate and Institutional, growth was driven by project finance, infrastructure, sustainable finance and funds lending. In Commercial Midmarket, we grew in a number of areas, including social housing, where we delivered another $2,700,000,000 of lending.

[Paul Thwaite, Group CEO & Director at NatWest Group]

In Private Banking and Wealth Management, we grew lending 2% as well as attracting new assets under management where net new inflows of $1,500,000,000 represented 8.1% of opening AUM. You will remember from our first quarter results that we have over delivered on our $100,000,000,000 target for climate and sustainable funding and financing and have now reached $110,000,000,000 We are announcing a new target today to deliver $200,000,000,000 of climate and transition finance by 02/1930. We have extended the scope to include Transition Finance in line with the government's Transition Finance strategy. Our second priority is bank wide simplification, where we continue to enhance customer and colleague experience and increase productivity. Let me talk you through some examples.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We have digitized over 30 customer journeys during the first half. In Retail, this includes being able to change credit card and ATM limits as well as accessing our new U. S. Dollar travel accounts. In Commercial and Institutional, we made it possible last year for Business Banking customers to access up to 100,000 of unsecured lending within twenty four hours.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We have now extended this to our commercial mid market customers, making life easier for them as well as our colleagues who save on average around two point five hours on each application. And in our Private Bank, this includes the automatic renewal of fixed term deposits. We continue to streamline our systems and modernize our technology estate. In Commercial and Institutional, we have moved our commercial customers onto a new modern bank line platform, which has allowed us to start decommissioning the old one. And our Private Bank is rehosting their core banking platform from a third party provider in Switzerland to the group data center in The UK.

[Paul Thwaite, Group CEO & Director at NatWest Group]

This both reduces spend and increases capacity. We are accelerating the use of data and AI. For example, we have just announced a strategic collaboration with AWS and Accenture to modernize our data capabilities. This includes the creation of a platform that uses AI to give us a single view of customer data across the bank. This will enable greater personalization, faster onboarding, better protection against fraud and stronger customer engagement.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We also continue to simplify our operational model as we streamline our legal entities and branches in Europe, reduce the number of branches we operate in The UK and relocate our Private Bank investment operations and technology teams from Switzerland to The UK and India. And as a result of growing income and lowering costs, we have reduced the first half costincome ratio from around 56% last year to around 49% this year. Finally, as we actively manage our balance sheet, we have generated 101 basis points of capital in the first half, including 139 basis points from earnings. And we have taken action to reduce risk weighted assets by $2,900,000,000 through a range of measures, including three significant risk transfers. As a result of our strong performance, we are upgrading our 2025 guidance for both income and returns.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We now expect income greater than $16,000,000,000 and a return on tangible equity above 16.5%. We continue to target returns greater than 15% in 2027. And with that, I'll hand over to Katie to take you through the results.

[Katie Murray, Group CFO & Director at NatWest Group]

Thank you, Paul. I'll cover our second quarter performance using the first quarter as a comparator. Income excluding all notable items was up 1.5% at 4,000,000,000 Operating expenses were 3% higher at $2,000,000,000 And the impairment charge was $193,000,000 or 19 basis points of loans. Taking this together, we delivered operating profit before tax of 1,800,000,000.0 Profit attributable to ordinary shareholders was $1,200,000,000 and the return on tangible equity was 17.7%. Turning now excluding notable items grew 1.5% to $4,000,000,000 Excluding the impact of one additional day in the quarter, income across our three businesses increased 1.1% or 43,000,000 Net interest income grew 1.6% or $50,000,000 to $3,100,000,000 This was driven by volume growth across lending and deposits, including portfolios added from Sainsbury's.

[Katie Murray, Group CFO & Director at NatWest Group]

It was also supported by margin expansion, as tailwinds from the product structural hedge more than offset the impact of the base rate cuts in May and lending growth. Net interest margin was up one basis point at 02/28, mainly reflecting deposit margin expansion. We continue to assume two further rate cuts this year, with rates reaching 3.75% by the year end. Non interest income across the three businesses was down 0.8% compared with a strong quarter and up 2% compared to the prior year. Retail Banking and Private Banking and Wealth Management benefited from higher debit and credit card fees.

[Katie Murray, Group CFO & Director at NatWest Group]

And in C and I, our currencies business continued to perform well given the heightened volatility. Given the strength of the first half total income, we now expect full year total income, excluding notable items, to be greater than 16,000,000,000 And as a result, we now expect return on tangible equity to be greater than 16.5 percent. Moving now to lending. We continue to be disciplined in our approach, deploying capital where returns are attractive. Gross loans to customers across our three businesses increased by $8,400,000,000 to $384,000,000,000 evenly balanced across our Personal and Wholesale customers.

[Katie Murray, Group CFO & Director at NatWest Group]

Taking Retail Banking together with Private Banking, mortgage balances grew by £1,300,000,000 with growth improving throughout the quarter following the stamp duty deadline at the March. Our stock share remained stable at 12.6%. Unsecured balances increased by £2,700,000,000 mainly reflecting the addition of the credit card and personal loan portfolios from Sainsbury's Bank. In Commercial and Institutional, gross customer loans, excluding government schemes, increased by $4,600,000,000 Within this, loans to corporates and institutions grew by 2,100,000,000.0 mainly driven by project finance, sustainable financing and funds lending. And loans in our Commercial Mid Market business grew by $2,100,000,000 reflecting increased lending across social housing and residential commercial real estate.

[Katie Murray, Group CFO & Director at NatWest Group]

I'll now turn to deposits. These were up $2,400,000,000 across our three businesses to $436,000,000,000 continuing the quarterly growth trend. Retail Banking increased deposit balances by $900,000,000 to $197,000,000,000 The addition of $2,400,000,000 of deposits acquired from Sainsbury's Bank was partly offset by a reduction in current accounts. Private Banking balances increased by £100,000,000 and the increase in Commercial and Institutional of £1,400,000,000 was mainly from larger customers in Corporate and Institutions. Deposit mix was broadly stable as the proportion of noninterest bearing balances remained at 31, and term accounts increased slightly from 16% to 17%.

[Katie Murray, Group CFO & Director at NatWest Group]

Turning now to our Product Structural Hedge. The strength of our deposit franchise combined with our mechanistic approach to managing the structural hedge is an important driver of income. The Product Hedge notional was stable in the first half at $172,000,000,000 and we continue to expect it to be broadly stable in 2025, which means a reinvestment each year of around 35,000,000,000 As we show in the chart for 2025, more than 90% of the hedges are already written and we have £4,000,000,000 locked in. We expect 2025 product hedge income to be £1,000,000,000 higher than 2024, given reinvestment rates. And in 2026, we expect product hedge income to increase by more than £1,000,000,000 when compared with 2025.

[Katie Murray, Group CFO & Director at NatWest Group]

We continue to expect the hedge to be a further tailwind in 2027. Turning now to costs. These increased 1.6% to $2,000,000,000 in the second quarter. Our annual wage awards and higher National Insurance contributions both took effect in early April. We also incurred $27,000,000 of our guided onetime integration costs during the quarter, bringing the total to $34,000,000 for the first half.

[Katie Murray, Group CFO & Director at NatWest Group]

We remain on track for other operating expenses to be around $8,000,000,000 for the full year, plus around $100,000,000 of onetime integration costs. This means expenses will be higher in the second half, driven by further business transformation, the remaining onetime integration costs and the bank levy. Our focus remains driving cost savings to create capacity for further investment to accelerate our bank wide simplification. I'd like to turn now to impairments. Our diversified prime loan book continues to perform well.

[Katie Murray, Group CFO & Director at NatWest Group]

We are reporting a net impairment charge of £193,000,000 for the second quarter, equivalent to 19 basis points of loans on an annualized basis. This includes an $81,000,000 onetime charge on acquisition of balances from Sainsbury's Bank, equivalent to eight basis points. Excluding this, the charge was $112,000,000 or 11 basis points, benefiting from post model adjustment releases of $64,000,000 We retained post model adjustments for economic uncertainty of $234,000,000 We have reviewed and updated our macroeconomic assumptions with minor changes that drove £10,000,000 of additional expected credit losses. Overall, we have no significant concerns about the credit portfolio at this point. And given the current performance of the book, we continue to expect a loan impairment rate below 20 basis points for the full year.

[Katie Murray, Group CFO & Director at NatWest Group]

Turning now to capital. We ended the second quarter with a common equity Tier one ratio of 13.6%, down 20 basis points on the first. We generated 53 basis points of capital before distributions, net of the 15 basis points impact from Sainsbury's. Strong earnings added 69 basis points and other CET1 capital changes added 11 basis points. Risk weighted assets increased by $3,100,000,000 to $190,000,000,000 including 4,600,000,000 of business movements, which broadly reflects our lending growth, including Sainsbury's Bank and $1,400,000,000 from CRD IV model inflation, partly offset by a $1,700,000,000 reduction as a result of RWA management and a 1,200,000,000.0 reduction in other RWA movements, including FX.

[Katie Murray, Group CFO & Director at NatWest Group]

RWA growth, excluding Sainsbury's, consumed 12 basis points of capital. This brings our CET1 ratio pre distributions to 14.3%. As you know, we increased our ordinary dividend payout ratio from around 40% to around 50% and have announced an interim ordinary dividend of 9.5p per share, up 58% on last year. We've also announced a share buyback of $750,000,000 Together, these accruals consumed 72 basis points of capital. Post accruals, our CET1 capital increased in the quarter and is up $900,000,000 since year end to $25,800,000,000 Our CET1 ratio, however, is stable since year end at 13.6%, in line with our target range of 13% to 14%.

[Katie Murray, Group CFO & Director at NatWest Group]

Turning now to guidance for 2025. We now expect income, excluding notable items, to be greater than $16,000,000,000 And based on the strength of income, we anticipate return on tangible equity to be greater than 16.5%. Our cost, impairment and RWA guidance remains unchanged. We expect other operating expenses to be around $8,100,000,000 including around $100,000,000 of onetime integration costs the loan impairment rate to be below 20 basis points and RWAs to be between 190,000,000,000 and $195,000,000,000 Where the figure lands within this range still depends on the CRD IV model outcomes. With that, I'll hand back to the operator for Q and A. Thank

[Operator]

If you are dialing in by phone, you can press 9 to raise your hand and 6 to unmute once prompted. We ask that you limit yourself to two questions to allow more of you a chance to ask your question. Now pause for a moment to give everyone an opportunity to signal for questions. Our first question comes from Alvaro Serrano of Morgan Stanley. Alvaro, if you'd like to unmute and ask your question.

[Katie Murray, Group CFO & Director at NatWest Group]

Yeah. Alvaro.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Hi, Alvaro.

[Alvaro Serrano Saenz de Tejada, Managing Director at Morgan Stanley]

Hi, Paul. Hi, Katie. Hopefully, you can hear me okay.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Crystal clear. Go for it.

[Alvaro Serrano Saenz de Tejada, Managing Director at Morgan Stanley]

Perfect. Just on the deposit sort of flows, obviously, we have the season, which has made a lot of noise. But I obviously, you've lost some current accounts. Just if you can talk to that, it was a conscious sort of management of yields? And what do you see what did you see during the quarter?

[Alvaro Serrano Saenz de Tejada, Managing Director at Morgan Stanley]

And I'm also thinking as we look forward around presumably this won't affect the hedge notional further down the line. So maybe to speak to that sort of market share movement there. And second, on cost. You've now second quarter doing much better. I know that, Katie, you've called out the restructuring sort of charge in the second half.

[Alvaro Serrano Saenz de Tejada, Managing Director at Morgan Stanley]

But still, it looks it looks like you're doing underlying a lot better. So can you help us sort of understand what the magnitude of restructuring charges are and how that compares to a normal year?

[Paul Thwaite, Group CEO & Director at NatWest Group]

Okay. Thank you, Alvaro. That's great. So I'll share a bit on deposits, then may maybe, Katie, you you come in on deposits around the the hedge notional.

[Katie Murray, Group CFO & Director at NatWest Group]

Yeah. Sure. Absolutely.

[Paul Thwaite, Group CEO & Director at NatWest Group]

And then and then we'll come to cost of our so on on deposits overall, Alvaro, I think your your your read is pretty accurate. You know, we did grow the base, but, obviously, some of that was supported by the the Sainsbury's acquisition. We've talked before about the kind of competitive ISA season primarily driven by, I guess, the the kind of the the wider media and kind of policy kind of discussions around what may or may not happen to ISA. So that so there was a competitive ICE season. From our perspective, it normalized relatively quickly.

[Paul Thwaite, Group CEO & Director at NatWest Group]

If you look at our market share of we saw our ISA balances go up. Our market share was was was consistent and stable. Likewise, our overall deposit share is stable as well. You'll also see from Katie's slide, our our mix has remained has remained pretty much consistent, so we haven't seen any massive shift there. As you rightly alluded to, we were we were very thoughtful and disciplined around our pricing, especially as there's quite a bit of volatility in the swap curves around the kind of tariff states.

[Paul Thwaite, Group CEO & Director at NatWest Group]

So we're very thoughtful about that where we priced our products, and we're comfortable in terms of the the the deposit strategy and the deposit base. Katie, on hedge and notional?

[Katie Murray, Group CFO & Director at NatWest Group]

Yeah, absolutely. So in terms of the hedge notional, the reality is moves relatively small. I mean, Alboros, I'm not expecting that to have any guidance on that, know. In reality, overall NIB's, down a billion, so very stable in H1 where the hedge is £172,000,000,000 We kind of guided you to think of that by the end of the year. We see no reason to change that.

[Katie Murray, Group CFO & Director at NatWest Group]

And then what's great of course though on the hedges is because of this higher average kind of rates you can see that we've raised our reinvestment rate and for the year to kind of 3.7%. So we know that we're going to be a billion this year in terms of income and then greater than a billion as we move into 2026 on the hedge. It's good to see that stability coming through in terms of real kind of push towards the income line. And then if we go on costs as well, overall, you know, our guidance for operating costs, it's unchanged. I did mention some of our transformation costs that we've had coming in with integration, sorry, with Sainsbury's coming in.

[Katie Murray, Group CFO & Director at NatWest Group]

We spent 34,000,000 of the £100,000,000 in the first half. We'll spend more in the second half. Our cost narrative, Alvaro, is kind of boringly similar each time we talk. We've given you the number that we'll hit this year, 8,000,000,000 as the base and £100,000,000 of those additional costs. What Paul and I work really hard to do is to create capacity so that in the second half of the year, can kind of go to our investment kind of shopping list and go back to we want to we want to invest in these things to help accelerate the simplification of of the business.

[Katie Murray, Group CFO & Director at NatWest Group]

So I would just sort of see that lumpiness will come through. You know, we're very clear on the number we're aiming for at the end of the year, making sure we're delivering real benefit for the for the simplification of the business. Thanks, Alvaro. Thanks, Alvaro.

[Operator]

Thank you. Our next question comes from Sheel Shah of JPMorgan. Sheel, if you'd like to unmute and ask your question.

[Sheel Shah, Executive Director at J.P. Morgan]

Great. Thank you. Two questions, please. First, on the lending outlook. I mean, the performance was quite strong in the quarter at just under 2% underlying, excluding Sainsbury's.

[Sheel Shah, Executive Director at J.P. Morgan]

How should we think about the outlook? Is this something we should be annualizing, especially in the context of The UK economic backdrop, which looks a little bit more challenging compared to the start of the year? Secondly, on capital, could you talk through some of the moving parts we should be thinking about? I'm particularly interested as to how you're thinking about potential m and a and maybe holding a bit of a buffer against that and how that plays into operating within the range and when we come towards the year end, how you're thinking about the definition of a surplus capital position. Thanks.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Excellent, Shiel. Thank you very much. I think I'll Katie, I'll take both of them. Okay. On on lending overall, yeah, I'm pleased to recognize the strong quarter, Shiel.

[Paul Thwaite, Group CEO & Director at NatWest Group]

It's it's been good to see the the the growth continue in quarter two after quarter one. I'd say it's encouraging because it's very broad based. You you can see growth in our commercial institutional business. You can see continued growth in mortgages and unsecured. And obviously, we've had the helping hand of of Sainsbury's as well.

[Paul Thwaite, Group CEO & Director at NatWest Group]

So year to date, from memory, it's just over it's just over 3%. So that that feels good. We don't have to we don't we don't guide on the kind of future lending, but what I would point to is our track record there of being able to deliver being able to deliver lending broad based lending growth in excess of kind of market growth. So to your point on kind of UK outlook, I think if you look at our track record over the last couple of years, you can quickly work out our lending performance versus the wider market performance, both on the business side and on the consumer side. So I'd say we feel confident in around our ability to continue to drive growth on lending.

[Paul Thwaite, Group CEO & Director at NatWest Group]

On capital, more broadly, so we finished the half year at 13.6%. It's good print. You'll know it's well above our regulatory minimum, 11.7. That also includes the accrual for the the the the ordinary dividend and for the buyback that we announced today. So very strong cap capital generation in the half year, 101 basis points, which is great, 53 basis points in the second quarter, combination of earnings and good kind of RWA capital management.

[Paul Thwaite, Group CEO & Director at NatWest Group]

That's allowed us to increase the interim dividend but also announced the buyback. We're very mindful in terms of the investment case and how important kind of returns to shareholders is, and we hope that's a strong signal. I guess context, the second part of your question is really around, I guess, the broader allocation. And I'd reiterate note very clearly, change there. We're happy to move between the 1314%.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We think that gives us good balance in terms of being able to invest in the business, support customers, but also return to shareholders. So very much a a balanced approach is what is what I'd say. What you should expect from us with the board, we'll review at the half year, and we'll review at the full year in terms of surplus capital and and distribution. We obviously have a model that's generating a lot of capital, which is great. As I alluded to earlier, we we under we understand the kind of investment case and the thesis the thesis and the importance of distributions and to be explicit, not building any buffer or war chest in respect to inorganic.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Our approach hasn't hasn't changed. They're very happy with the organic growth in the plan and the growth that we're delivering. Thanks, John.

[Operator]

Our next question, it comes from Guy Stebbings at PMB Parabar Exane. Guy, if you'd like to go ahead and ask your question.

[Guy Stebbings, Executive Director - European Banks Research at BNP Paribas Exane]

Hi. Good morning.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Hey, Guy. Good morning, man.

[Guy Stebbings, Executive Director - European Banks Research at BNP Paribas Exane]

So I was gonna ask around the sort of structural hedge, but also how it sort of interplays other parts of the balance sheet. So, yes, it's clearly working through very nicely, and and thanks for some of the updates disclosure, which only reinforces conviction of support into '26 and and twenty seven two. I guess a a debate out there is is how much this flows straight through the p and l or whether we see any give back on other line items given plenty of other banks also seeing similar support. We have seen mortgage spreads tighten slightly this year. You put a couple of basis points decline in lending margin in the q two bridge.

[Guy Stebbings, Executive Director - European Banks Research at BNP Paribas Exane]

So one could argue it's, you know, it's starting to happen already a little bit. So just interested to get your view there as as we work through that hedge benefit, whether you see any give back elsewhere, whether that slight tightening in mortgage spreads will hold around these levels, or if you see a risk of it drifting lower, offsetting some of hedge support, or if you think the market should retain enough discipline to keep the sort of floor on spreads. And then just a follow on to that question is just around what you're seeing on current application spreads in the mortgage book or whether you could give us maybe what the the back book spread is now on mortgages? Thank you.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Thanks, Guy. So at at mortgage margins and app spread, Katie, and then can probably lead out with the hedges.

[Katie Murray, Group CFO & Director at NatWest Group]

Yeah. Sure. Absolutely. So, I mean, thanks, guys. Definitely doing what it's kind of we we plan to do.

[Katie Murray, Group CFO & Director at NatWest Group]

We run a very mechanistic process, and it's great to see that kind of increase coming through on the yield, and we know that that that will continue to kind of increase as we as we go forward from here. You know, and you can see even as you look into 2025 and 2026, you know, we've got the billion being delivered here, greater than a billion in 2026. And you know, we do expect that further tailwind to come through into 2027. I'm not going to give you guidance on that, but you can see from our slides, you know, 50% of the hedges have already written, we've got £3,800,000,000 of that income already kind of locked in as you move forward. So in terms of then how do we think about it in terms of it kind of flowing through?

[Katie Murray, Group CFO & Director at NatWest Group]

So we're very clear on our view here that returns are the metrics that we work towards and we work towards the returns within the individual kind of product class. There's obviously some level at the total of kind of cross subsidisation when you see that the lending margins are obviously a bit lower because you know in terms of our NIM we're sitting there with two twenty eight basis points of NIM, so mathematically the mortgages are going to depress that a little bit given where they are. So we don't look at it as over I'll subsidize this product with that product. We make sure the products kind of stand alone in terms of their returns. But naturally as you flow all the way down through the P and L, there is a little bit of that kind of subsidy that kind of happens.

[Katie Murray, Group CFO & Director at NatWest Group]

In terms of mortgage spreads, what I would say if I look at the name walk at the moment, you can see minus two on the lending side. That's mix, obviously in terms of the depressing the pool of the current that comes in there. But as you look at it, I'm not seeing a big back book, front book differential when I look at the totality of the mortgage book. It's definitely you know mortgages are always competitive and it's definitely been a competitive period, but I would say also the market seems to be quite rational. We've kind of gone to a bit where we are writing below the 70 basis points that we talk about a lot, but it seems to be stabilizing at that kind of level and we'll it strengthen as other things kind of move around.

[Katie Murray, Group CFO & Director at NatWest Group]

So that's good to see that kind of stabilization, but good to see overall on the book that we're happy with where the book is and obviously happy with the returns that we're writing mortgages at at the moment, which I think is is critical. Right.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Good. Thanks, Katie. The one thing I I'd add which I think comes across in our slides is in mortgages, we're also broadening the proposition.

[Katie Murray, Group CFO & Director at NatWest Group]

Yeah.

[Paul Thwaite, Group CEO & Director at NatWest Group]

You can see that the breadth we've added to the first time buyer proposition, but also aspects of the buy to let proposition and our market share improvements there for 4% up on in both areas on this time last year. And obviously, there's a larger margin there versus, I guess, what you call a traditional low LTV vanilla mortgages. So as Katie said, there's some general dynamics. But we also think given where we are around 12.6% stock share, we see opportunity in the mortgage market and broadening the proposition opens up that opportunity to us. That's what we've been taking That's what we have been and will continue to take advantage of. Thanks, Guy.

[Guy Stebbings, Executive Director - European Banks Research at BNP Paribas Exane]

Very clear. Thank you.

[Operator]

Our next questions come from Amar Raqar from Barclays. Amar, if you'd like to go ahead and ask your question.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Hi, Amar. Hey, man.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

Good morning, Paul. Good morning, Casey. Thanks very much for taking the questions. Yeah. There's two.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

There's two that I'll ask. So first one is I'm just taking your revenue kind of upgrade the revenue guidance to face value. It implies a decent step up in the revenue cadence in h two versus h one and probably in excessive consensus. I'm just trying to work out the drivers of that if it's net interest income. I I suspect there is a better run rate for net interest income in h two that's underpinning this upgraded guidance, but also versus consensus.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

So could you lift the lid on that at all? Confirm, deny, or otherwise, if you share that view? And the second question yeah. I'm not I'm interested in your in in your reflections actually. So I think where we are right now is at h one.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

The assumptions that sit behind your revenue guidance in terms of interest rates haven't really changed that much since February. I think when I scan back to when you gave us the original guidance, looking for a similar rate curve here, maybe swap rates were a touch better. Yeah. But but we're but we're about to potentially beat your revenue guidance by about a billion pounds versus the kind of level that you were you were pointing us to at the beginning of the year. So what's coming in better than what you expected, please?

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

Is it volumes? Is it, you know, presumably markets is a bit better, but and just just full disclosure. The the reason I'm asking is because I think it's a conservative guide. I think it you know, it was a conservative guide at the beginning of the year, continues to look conservative to me, and I wanna be able to kind of calibrate that. So any color there is really appreciated. Thank you.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Very fair and very clear. Katie, I'll take the reflections. Got a question, the second one. But do wanna talk a little bit around the specifics around the revenue guidance?

[Katie Murray, Group CFO & Director at NatWest Group]

Yeah.

[Katie Murray, Group CFO & Director at NatWest Group]

Back on that. Perfect. So thanks. Good morning, Aman. It's ever so good to hear from you.

[Katie Murray, Group CFO & Director at NatWest Group]

So definitely, as you look at it, so guiding you to greater than £16,000,000,000 so that of course implies at least £8,000,000,000 in H2, know, which would be equivalent to this, but obviously we're guiding you to greater. There's always a number of variables that we need to think about as we look at it, some of them NII and some non interest income. But so continued volume growth in H2. Know, we've also obviously got the full run rate of Sainsbury's as well given the completion was on the May 1. We've got some extra days that I always frustrate me to talk about extra days as it feels so unscientific, but the reality is it does make a difference.

[Katie Murray, Group CFO & Director at NatWest Group]

You know, that adds about a 100,000,000 of income into the second half. The structural hedge repricing, you know, we've got we've locked we've done 90% of of the hedges are are locked in now for next year, which means we'll have that higher hedge income coming through for about a billion. And I would say you're right on our economics, they've been very consistent in the main, but the swap curve I think was particularly a bit more generous to us in the first quarter and you can see that we've raised our kind of average repricing coming through. So that's definitely helped a bit of the guidance and where we are. There's also a few headwinds.

[Katie Murray, Group CFO & Director at NatWest Group]

It's obviously two more Bank of England cuts that we're expecting this year to get us to 3.75% coming through very consistently. You'll have six month impact of the two rate cuts we had in H1. Our non interest income, it was up overall across the group 15.4% on H1 twenty twenty four, 5% if I look just at that central kind of business area. We do expect some seasonality in C and I in the markets business in H2. We know that traditionally April and August are that bit quieter.

[Katie Murray, Group CFO & Director at NatWest Group]

We've been very pleased with how that business has reacted to the volatility, really working with customers to make sure that they are able to kind of maximize the outcomes for them, but obviously being beneficial to our income statement as well. The other thing just to think about in terms of what could be in our minds for the second half of the year, we do have some contra revenues that come through from capital actions. We've got some of those planned in the second half as well as you would expect, which would go across retail and C and I and that would have a little bit of a drag on income as well. We do think it's a strong start, 13.7% up on last year. We're more confident about the outturn for the full year and we are now expecting that income as you know to be greater than £16,000,000,000 Paul, do want to do some reflections?

[Paul Thwaite, Group CEO & Director at NatWest Group]

Yeah, I feel like you've done quite a lot of reflections. You've done quite a lot of them, but that's fine. But no, But, Amanda, I I guess the the kind of big picture I'd say is you're right around, you know, there haven't been any fundamental changes to our interest rate assumptions, but kind of what's the what what's what's been different as we've traveled through the '1 and into quarter two? Obviously, volumes have remained very strong. We've been pleased with the volumes both in the retail bank on mortgages and on unsecured.

[Paul Thwaite, Group CEO & Director at NatWest Group]

If you look at non net interest income, we've had two strong quarters. So that's been very encouraging. And as Katie alluded to, really underpinned by strong levels of customer activity. So we now have two quarters of that. The other thing is the reinvestment yield has been slightly higher or the hedge has been slightly higher.

[Paul Thwaite, Group CEO & Director at NatWest Group]

So there are things that really, I guess, as we've gone through quarter two, have given us confidence to around the income picture, but also the returns picture. And as as you'll have seen, you know, we've been very clear. What we've said is greater than 16,000,000,000 and greater than 16.5%. The other the one thing I would add to what Katie said is in obviously, as you will have in your calcs, obviously, our tangible equity will build during the second half of the year as well. So that does play into the the returns the the returns outlook.

[Paul Thwaite, Group CEO & Director at NatWest Group]

But overall, yeah, I think quarter quarter do has given us not only given us strong performance, but given us increased confidence in terms of the in terms of the outturn for the year. Thanks, Amit.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

Thanks. Is it is it possible to ask a follow-up? If so,

[Paul Thwaite, Group CEO & Director at NatWest Group]

is the mic, so go for it.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

Thanks. Thanks. I mean, you know, you you you kind of you've lifted the RoTE guide this year and, you know, just me being me, I'll I'll, you know, I'll emphasize the greater than 16.5% return on tangible equity. But I'm just trying to think into next year. Is there any is there any reason to think of a meaningful step off of that level of return on tangible equity?

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

I mean, you did print 17 this year, I can I can sit I I know that we've got rate cuts and what have you, but there's so much momentum in terms of the hedge, in terms of volume growth? I can't actually see why we would be expecting any any meaningful step off in the return on tangible equity. That gets us anywhere near the kind of grace than 15% RoTE aspiration.

[Katie Murray, Group CFO & Director at NatWest Group]

Yes. So I think let's chat a little bit about 2026 kind of income outlook because that's obviously the numerator in there and I'll come on to the denominator as well. We do expect annual growth as we go into go through all the way to 2027. We remain confident about the growth trajectory beyond 2025. The key drivers of 2026 as I look at it, first of all, there's growth.

[Katie Murray, Group CFO & Director at NatWest Group]

We've got a strong track record of growth across our three businesses outpacing wider sector growth. Our breadth of businesses means we're well placed to capture demand where it's there. Remain very disciplined on our royalty and guidance. So we only deploy capital when returns are attractive. Second, the hedge, we've talked about it quite a bit on the call already.

[Katie Murray, Group CFO & Director at NatWest Group]

We do expect a stronger structural hedge tailwind into 2026 versus 2025. Expecting over GBP 1,000,000,000 there higher than the 2025 print. Third, of course, rate cuts. One further rate cut in 2026, so a terminal rate of 3.5% at the moment. And whilst this would be less than what we had for four rates in this year, we will see a bit of an averaging effect of that coming through into 2026.

[Katie Murray, Group CFO & Director at NatWest Group]

Non interest income, we are pleased with delivery from the business this year, really strong overall demonstrating the strength of our customer franchise, but also the strength of our kind of central activities in terms of that treasury activity. And our strategic efforts I think of bringing more of the bank to more of our customers is really paying benefit in that non interest income line. So overall, we've got good confidence on that income coming through as we move into H2 and then beyond. Then when you think a little bit about the numerator, we've obviously got nice growth coming through on TNAV. You know, we do have some regulatory changes coming through as we get towards into 2026 in terms of that Basel number unchanged from the 8,000,000,000 we've we've spoken about historically.

[Katie Murray, Group CFO & Director at NatWest Group]

So they kind of come through. But overall, I'd say we are we're feeling we're feeling pretty comfortable as we move forward from here. Paul, anything you'd add?

[Paul Thwaite, Group CEO & Director at NatWest Group]

No. I mean, obviously, we're not gonna get drawn into February will be the time for '26 guidance, Aman, but you you can sense from Katie's comments there that we we feel pleased with the momentum and and and the outlook as we start to look ahead to to '26 and '27. Thanks.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

Thank you.

[Operator]

Our next question comes from Amit Goel of Mediobanca. Amit, if you'd like to go ahead and ask your question.

[Katie Murray, Group CFO & Director at NatWest Group]

Hey, Amit.

[Amit Goel, Managing Director at Mediobanca]

Hi. Thank you. Yes, so one question. Just I mean, minutia, but just in the central items, there's the kind of negative NII and positive other operating income. It seems like that relates to these kind of FX risk management derivatives.

[Amit Goel, Managing Director at Mediobanca]

So I just wanted to check exactly what those are and, and what the contribution is and and and then what to kind of expect on that going forwards. And then, second question, just on the back of, I guess, the the leads reforms. Just curious if there's anything there that you think could change your outlook a bit and or if there's any incremental, for example, incremental volume that you could see from the loan to income cap and things like that? Thank you.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Do you want to take the essentials?

[Katie Murray, Group CFO & Director at NatWest Group]

Sure, absolutely. So we've talked about the FX kind of ARBs as we call them a few times before, and it's interesting we talk about them as we see greater volatility in the FX markets because what we basically do is that with treasury we identify opportunities on our surplus FX cash positions to take advantage of that volatility. So it's negative to NII and you have this offset on non interest income. So it's a little bit annoying on the lines because it kind of makes a little bit of noise. Overall, it's positive in terms of income.

[Katie Murray, Group CFO & Director at NatWest Group]

I've not kind of given you guidance in terms of how much that would be. It's also given that it depends on market volatility, it's not something we see is definitely coming all the time, but we do look to take advantage on it. So when you look at the centre, it's always good to look at the centre on a total income and not think so much about the the line kind of split. But when you just I meant to give you a little bit more kind of detail on it. When I look at NIM at this period, it's the funding and other is kind of flat, but there are two things that are going on within that line.

[Katie Murray, Group CFO & Director at NatWest Group]

Just to help you a little bit, there's the positive from some repositioning we've been doing of the liquidity portfolio into gilts and then that's actually offset by the NII drag on the treasury FX activity. So it's like that was a minus two basis points in there and two positive on the other side. So it does have an impact. It's hard, and I'm not gonna guide you on it. Would be this and this quarter because it clearly is dependent upon upon activity within there.

[Katie Murray, Group CFO & Director at NatWest Group]

But it is it's a meaningful little kind of nudge in terms of our our numbers and very, very happy to take that. Paul, can I give you piece?

[Paul Thwaite, Group CEO & Director at NatWest Group]

So on lead lead reform, I mean, I guess the headline from from our perspective is we're we're supportive of the direction of travel. We think that they're they're positive for the sector and ultimately for The UK. In terms of the mortgage specific you mentioned, we we've already implemented chain changes on the back of the FCAs earlier kind of affordability changes. So that that's increased the amount of borrowing that we can provide to some of our first time buyers.

[Paul Thwaite, Group CEO & Director at NatWest Group]

So we see that we see that as a positive. And similarly, yeah, as has been as has been referenced in numerous places, the the the current consultations, we think, will also be helpful and and nudge things along a little bit. I just put that in context, though. Yeah. The mortgage market is already relatively big.

[Paul Thwaite, Group CEO & Director at NatWest Group]

I think this will this will create opportunities to bring more people into the mortgage market, but it's in one segment of that of that wider market. But more broadly, I think some of the prudential reviews that are happening around capital and also ring fencing have the potential to be helpful in terms of the level of support we can provide to customers in the economy. And as you've heard me say before, and you'll have seen at our wealth investor spotlight, the the advice the advice guidance and boundary review and the review into savings and investments, we see as really an opportunity to bring more financial advice to more of our customers at lower cost and help them with their savings and investments. So we see that as a positive as well. And we're doing a lot of work on that ahead of, obviously, a lot of those reforms are still in consultation phase. Thanks, Amit.

[Operator]

Our next question comes from Chris Kent of Autonomous. Chris, if you'd like to unmute and ask your question.

[Katie Murray, Group CFO & Director at NatWest Group]

Hey, Chris.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Are you there, Chris?

[Operator]

Chris, you're currently muted if you'd like to unmute.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

Try that again. I was pressing the button on my headset and I had to click it on the screen.

[Paul Thwaite, Group CEO & Director at NatWest Group]

I'll get the hang of the day.

[Katie Murray, Group CFO & Director at NatWest Group]

Lovely. Thanks, Chris.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

Questions. Two sort of follow-up questions, really. First, just on growth. I know it's relatively small now, but the Bibbles book is looking quite small in the context of the overall commercial book. And I guess we're starting to see the underlying growth come through a bit more strongly with that runoff tapering.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

It seems to be a pretty consistent $400,000,000 a quarter of runoff on the government guaranteed loan book. Is that what we should expect continuing for sort of the next six quarters and then it's gone? Or do we get down to a sort of ramp of the book where the remaining customers are going to take the full term? And I think some of them could take ten years. I think it was extended to, wasn't it?

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

So that was the first question just in terms of understanding the growth dynamics we might see coming through. And then I just wanted to follow-up, Paul, on your comment there about the prudential reviews and particularly around capital. I mean, I read the FTC minutes earlier this month and didn't really make much of it, given that they said they think that the level of capital is broadly correct. But the fact that the Chancellor in her speech talked about the treasury working with the Bank of England to assess the right level of capital for the system suggested maybe there's going to be a bit of downwards pressure there. So I'm just curious to know whether you have a view on what form that might take.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

Do you think we might have a revisiting of the through the cycle 2% countercyclical buffer calibration, for instance, which is quite high relative to many other countries. And if we did get something like that, how would you think about this as a management team in the context of your own capital target calibration? So I think you're already targeting a higher level of buffer to MDA than one of your nearest domestic competitors. How much would you actually want to take into how you think about the capital target? Or is really that 13% minimum just your management view of this is where the bank should run and it sort of doesn't matter if the underlying MDA changes? Thank you.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Thanks, Chris. So on it's a while since I've talked about Beebles, so thank you for that. I have to test myself, bounce back lens. Yeah. I think you're I mean, simply, your assumption is I think your assumption is right.

[Paul Thwaite, Group CEO & Director at NatWest Group]

You know, a pretty consistent level of roll off quarter on quarter. There's very little incentive for customers to accelerate payments given the low cost of that borrowing. And absent some sort of big economic event, I don't I don't think there'd be any driver for customers to extend their terms. You are right in the the the the was and is was the potential to ex for some for borrowers to extend to ten years, but I think your assumption is the right one. On the much bigger topic of of of Prudential review and and capital, I think the angle that you alight on around ensuring international competitiveness is is the right one, and I think that's the in terms of the discussions and inputs that, yeah, we'd like we'd like to provide.

[Paul Thwaite, Group CEO & Director at NatWest Group]

I think that's where we'll where we'll be highlighting, you know, where it's important to have consistency, you know, both with from an EU and The US perspective. Then you drop down into specific elements that are different. You you you mentioned the the countercyclical buffer. That will be that will be one topic, I am sure, of but there are others as well. So that's your logic, and I guess your thought process is how we're thinking about it in terms of what the the areas for for review are.

[Paul Thwaite, Group CEO & Director at NatWest Group]

It is early days. You know? Literally, obviously, the the announcements were relatively recent, so it's hard to give you any more insight into that. What that would then lead to if there were changes or thoughts, obviously, we'd then, from a management perspective, look at that in the context of the absolute level of capital we hold, the percentage of CET1, our regulatory minimum. But to me, they're kind of downstream events from the wider review of the the capital. Do want add anything to

[Katie Murray, Group CFO & Director at NatWest Group]

that, And and and it's great. So we we do look at capital risk appetite and buffers versus the supervisory minimum. Clearly, if that changes, then we would look to review that. I think the other thing Chris is, you know, as we look at the RWAs increasing over the next eighteen months, that will increase our nominal capital requirement without a change in the risk of the balance sheet. As these things change, I think we might start to look and think about actually how what kind of level of capital targets and buffers you might need given that that target is now based on a much higher level of nominal capital. So we'll have a a think about thing about things as it evolves.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

Yeah.

[Katie Murray, Group CFO & Director at NatWest Group]

Thanks, Chris.

[Paul Thwaite, Group CEO & Director at NatWest Group]

You're on the right track, Chris. Thank you.

[Operator]

Our next question comes from Jonathan Pierce of Jefferies. Jonathan, if you'd like to go ahead and ask your questions.

[Katie Murray, Group CFO & Director at NatWest Group]

Hey, Jonathan.

[Jonathan Pierce, Equity Analyst at Jefferies]

Hello. Hello. Good morning, both. I've got I've got two actually. One is sort of a follow-up to to the last question, but coming at it from the impairment angle.

[Jonathan Pierce, Equity Analyst at Jefferies]

The metrics on every front are still extraordinary really. ECL in the downside extreme downside scenario is now only £2,000,000,000 that's with GDP down 4% and unemployment up at 8%. I mean, if all that came in one year, that's only 45 basis points of loans or a quarter of your current pre provision profits. See that the commercial book you had more loans flowing back to stage one than you had flowing into stage two in the first half. I'm just really looking for a comment around how you're thinking on the through the cycle impairment charge today after a number of quarters now of very benign, very low levels of impairment coming through.

[Jonathan Pierce, Equity Analyst at Jefferies]

Is really 15 to 20 basis points, not sort of 25 to 30 we might have talked about in the past? And linking it into the capital question, presumably, if your ECL calculations are right and that feeds into this year's stress test, your pillar 2b buffer is going to be very small. So again, is that putting downward pressure on your equity Tier one target the way that you think about it? Second question, just quickly, the liquidity pool in the second quarter saw about a £9,000,000,000 drop in cash and £15,000,000,000 increase in gilts. Is that you taking advantage of the gilt swap spread and is there more of that to do because you've still got nearly 60% of the pool in cash at the moment? Thanks a lot.

[Katie Murray, Group CFO & Director at NatWest Group]

Shall I jump in? So I'll take your second question first and sort of simply put yes, it us taking advantage of that. We'll probably do a little bit more into it as move forward but it's something that's been a nice kind of additional kind of improvement to income as well, focused a lot on our equity hedge positions as well within there which we don't talk about quite as much. So yes, very pleased to see that. In terms of the impairment angle and through the cycle impairment change, know, so our guidance at the moment is 20 to 30 basis points but I mean, Jonathan, I'd absolutely agree with you.

[Katie Murray, Group CFO & Director at NatWest Group]

As you look at what we've experienced over the number of years, our guidance again this year is below end. So I'm not kind of updating the guidance on that particularly today. I think what we've been trying to give you more recently is kind of just annual looks as we move forward on that and it definitely seems to be at the lower level. I mean even the print this quarter at 19 basis points, you know, eight of that is the Sainsbury's good book recognition. So really it's a kind of 11 number compared to the nine of last year.

[Katie Murray, Group CFO & Director at NatWest Group]

So you know we'll I think continue to monitor that and if it's something people are more interested in we could we could look about refreshing that. But I think the annual look forward is quite kind of helpful. You know in pillar 2b we don't disclose that as you know, but you know I think what you see is our nominal CET1 capital in absolute terms is rising significantly. We added £900,000,000 to that in H1 and we know that there's going to be more rises coming through with RWAs and that doesn't reflect more risk on the balance sheet. So it's something I think we look at it overall on the round and we'll continue to do that as we move forward. Thanks, Jonathan.

[Jonathan Pierce, Equity Analyst at Jefferies]

Thanks. So sorry, can I it does sound like you are not even indirectly, pretty directly suggesting the 13% to 14% equity Tier one ratio target is under very firm review? Is that right?

[Katie Murray, Group CFO & Director at NatWest Group]

Think it's something we've talked about quite a few times. If we think Basel was meant to be coming in at the end of this year and it's now obviously been delayed a year and what I said there once we got clarity on CRD four, the Basel kind of changes that were coming through, what was happening in pillar two a, it's something that we would would we would have a look at and see how things are coming through. We need to still get some of pillar 2a and things like that and finalised, but we're always alive to how these things look and what's kind of happening in the market and we're pleased to see how our nominal capital is evolving and developing as these different changes are coming through.

[Paul Thwaite, Group CEO & Director at NatWest Group]

I think it's the response responsible for management to do that, give given all the changes that have come through. And as Katie says, once you're through the back end of that, you have to decide where you think the right level of absolute absolute capital is. Thanks, Jonathan.

[Jonathan Pierce, Equity Analyst at Jefferies]

Very good. Thank you.

[Operator]

Our next question comes from Ed Firth of KBW. Ed, if you'd like to unmute and ask your question.

[Katie Murray, Group CFO & Director at NatWest Group]

Good morning, Ed.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hello, Ed. Good morning, everybody. Hi. Can you hear me okay?

[Paul Thwaite, Group CEO & Director at NatWest Group]

We can hear you clear.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

Perfect. Yeah. I just have two questions. One was, could I just take you to the the structural hedge slide on slide 12?

[Katie Murray, Group CFO & Director at NatWest Group]

Absolutely.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

And it's possibly I I I just really I don't I don't I hate talking about the structural hedge because you have your eyes well. But just to check my understanding, because what I don't understand is that in 2026, you're telling us there's a higher redemption yield and a lower reinvestment yield, but the benefit is bigger, even though the roll off is the same amount. Yep. And I'm just trying to work out how that how that works. So that that would be my first question because it's, of an understanding one.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

And then the second one is in terms of m and a, I think in the past when you've been asked about this, you said that you look at things that would add a skill to what you have was one of the criteria. But I guess if one looks at what's happened in the first half, clearly, you've been looking at stuff that would be tough to argue that some of that stuff added any skills to you at all. So I'm just trying to get a sense as to how do you look at acquisitions now? Has that shifted a little bit? Or should we take the buyback as a sort of indication that they're pretty much off the table for the foreseeable future?

[Paul Thwaite, Group CEO & Director at NatWest Group]

Thanks Ed, very Thanks. Clear. Can you nail the first one?

[Katie Murray, Group CFO & Director at NatWest Group]

Yes, sure. 2026, Ed, it's quite simple. You've got the averaging effect there and also importantly the lack of the offset from reducing the notional that we had through 2024. So you've got a stable notional and the and deposit build is is important over there as well. And also we've done 70% of the hedge already, so that's it's it's already that portion that's already locked in.

[Katie Murray, Group CFO & Director at NatWest Group]

So your your redemption and reinvestment yield is only in relation to that last 30%. Paul?

[Paul Thwaite, Group CEO & Director at NatWest Group]

Yeah. And on on the m and a piece, Ed, I I wouldn't characterize our previous position as exactly as you did. What what I've said consistently is we'll where we when we do look at things, we look at them whether they can add scale or whether they can add capabilities, which I guess is your your skill point. So that lens hasn't changed, and you'll probably be bored bored of me saying it. But when we look at things, we look at it through those two lenses.

[Paul Thwaite, Group CEO & Director at NatWest Group]

If you look at the returns we're generating in the organic plan, it's a very high financial bar as well as operational bar to justify it vis a vis the organic plan or or the the buyback. So we will continue to look at things, but we'll look at it, you know, in a very disciplined manner. And it's very much a balanced approach there, making sure we're invested in the business, returning capital to giving good returns and distributions to shareholders, but also thinking about the opportunities that might come from either capabilities or scale. So no change in philosophy. And I guess just a reframing a little bit ahead of it was always about scale or capabilities, not just capabilities. Thanks. Thanks, Andrew.

[Operator]

Our next questions come from Jason Napier. Jason, if you'd like to unmute and ask your question.

[Katie Murray, Group CFO & Director at NatWest Group]

Hey, Jason.

[Jason Napier, Head - European Banks Research at UBS Group]

Hey. Good morning. Good morning, both. Yeah. Just one for me really, and goes to the continued outperformance relative to market expectations on costs.

[Jason Napier, Head - European Banks Research at UBS Group]

I can easily see how things like bank levies and claims based day one costs can get you to the seven or 8% half on half growth in OpEx that you're guiding to. I guess, philosophically, though, the other thing that sort of tends to happen is when you're beating, we're presented with the notion that you've got a long list of ways that you'd like to, in particular, simplify the bank. And and I guess inherent in that thinking is is a sense that there's a there's an appropriate level of cost growth that, you know, you ought to embark on, whether that's to run the bank or or to change it. And I just wonder whether you might talk a little bit about, you know, how long the list is, how big the opportunities are, and indeed, you think that, you know, the cost base ought to continue expanding a sort of two ish percent underlying on an ongoing basis. The you know, there's an appetite amongst investors for, you know, sharing in the benefits of outperformance that they see on OpEx, and and it looks like we're we're getting a better bank rather than one that, know, you know, might be more profitable in the immediate near term. You know what I mean?

[Paul Thwaite, Group CEO & Director at NatWest Group]

We thanks, Jason. We do. It was a it was a bit your quest or the the, the reception was a bit scratchy, but I think we got the, we got the the gist of it around costs. Couple of things I'd point out. First of all, I've been very consistent in in the two years updates I've been giving that we very much look at it as an all in number.

[Paul Thwaite, Group CEO & Director at NatWest Group]

You know, everything is above the line. There's nothing below the line. It includes, you know, our cost number our cost guide includes wage inflation, national insurance inflation, tech contract inflation. It includes our significant investments in the business, and it includes our restructuring So I think that's a very clear and transparent way to do it. As Katie alluded to earlier, you know, we work very hard on what I'd call BAU costs and and efficiency.

[Paul Thwaite, Group CEO & Director at NatWest Group]

And what that creates is capacity to invest in the business, and that's the bit building the better bank for the future, whether it's simplifying the tech architecture, whether it's digitizing the customer journeys, another 30 customer journeys we digitized in the the first quarter of this year. So it's that kind of hard yards and discipline around BAU cost management that creates the pools of investment, which are within our overall cost guide to invest in the business and create the better bank of the future. So that's how we think of it. And if you look at, I guess, what's happening, I think we have a we have a really nice combination, Jason, where we are driving underlying efficiency out, and we're investing in the business. If you look at the the cost income ratio reduction, you can see, you know, year on year, we've come down by seven seven points, you know, 49% at the end of half half one.

[Paul Thwaite, Group CEO & Director at NatWest Group]

You know, the jaws are quite considerable if you look at absolute income growth and you and you look at cost reduction. So strong very strong jaws. And if you take the guide that we've we've given today around income, depending on where where you guys settle on income, the reality is, you know, what we're saying from a jaws persect perspective is, you know, we're gonna have high single digits. So what you can see there is not only good cost discipline, but also significant investments in in the business. And we're seeing that.

[Paul Thwaite, Group CEO & Director at NatWest Group]

And I was gonna say there's a number of levers when when we talk internally about it as a management team. One is digitization. We still see big opportunities to do more digitization across the bank and not only improve the cost base, but actually improve the customer experience, and we've got lots of evidence of that. The second is the much broader technology simplification. You'll have heard us talk about how we're simplifying the technology estate, you know, how we're moving, for example, some of our technology estate from Switzerland to The UK, how we're reducing the number of our applications.

[Paul Thwaite, Group CEO & Director at NatWest Group]

You heard me at at the in the first quarter talk about some of the promising use cases from an AI perspective where we're driving a lot of efficiencies and customer experience improvement. And we continue to simplify the operational model. Sometimes I think it's easy to think about NatWest that the kind of the simplification of the operational model has been done. That simply isn't the case. We're reducing number of licenses and branches in Germany from four to two.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We're just about complete on our exit of of Poland, which is great. We're moving a lot of our investment operations from Switzerland. We're we're rightsizing our branch network. So to me, we feel like we've got a number of levers we can pull that are building a better bank, but we're doing that within a cost envelope that that is still, you know, I'd say, aggressive and, you know, and and disciplined in terms of how we manage things. So, hopefully, that gives you a sense of both how we're doing it, but also why we feel optimistic that it's creating the investment we need to create that bank of the future.

[Jason Napier, Head - European Banks Research at UBS Group]

Thank you. That's perfect.

[Operator]

Thank you for all your questions. I would now like to hand over to Paul for closing comments.

[Paul Thwaite, Group CEO & Director at NatWest Group]

Okay. Thanks, everybody. We appreciate your your time on the call. So to wrap things up, I hope you've got a sense that we're pleased with the the strong performance and the very obvious continuing momentum we have in all three of our customer businesses. But in addition to that, we see opportunities across all three businesses continue to continue to to take market share and grow.

[Paul Thwaite, Group CEO & Director at NatWest Group]

We've updated income and returns guidance today. If we don't see you, I wish you a very good summit, and I'm sure we'll speak to you shortly. Thank you.

[Operator]

That concludes today's presentation. Thank you for your participation. You may now disconnect.

Participants

Executives

• Paul Thwaite, Group CEO & Director
• Katie Murray, Group CFO & Director

Analysts

• Alvaro Serrano Saenz de Tejada, Managing Director at Morgan Stanley
• Sheel Shah, Executive Director at J.P. Morgan
• Guy Stebbings, Executive Director - European Banks Research at BNP Paribas Exane
• Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank
• Amit Goel, Managing Director at Mediobanca
• Christopher Cant, Head of Banks Strategy at Autonomous Research
• Jonathan Pierce, Equity Analyst at Jefferies
• Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)
• Jason Napier, Head - European Banks Research at UBS Group