NatWest Group Q2 2026 Earnings Call Transcript

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Provided by Quartr
July 31, 2026

Key Takeaways

  • Positive Sentiment: 2026 guidance was upgraded: NatWest now expects income of around £17.9 billion, a return on tangible equity above 19%, and capital generation before distributions above 240 basis points.
  • Positive Sentiment: H1 performance showed strong operating leverage, with income up 8.9% versus 4.5% cost growth; the cost-income ratio improved to 46%, while Q2 operating profit rose 12.4% to £2.3 billion.
  • Positive Sentiment: Customer assets and liabilities excluding Evelyn Partners grew 5.2%, supported by broad-based lending growth and strong wealth inflows; the Evelyn acquisition added £71.7 billion of assets under management and administration.
  • Positive Sentiment: The company said credit quality remains strong, with a Q2 loan impairment rate of 13 basis points and expectations for the full-year rate to remain below 25 basis points.
  • Neutral Sentiment: NatWest expects a flatter net interest margin trajectory in the second half as lending mix and mortgage pricing weigh on margins, although balance growth and structural-hedge income are expected to support higher net interest income.
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Earnings Conference Call
NatWest Group Q2 2026
00:00 / 00:00

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Operator

Good morning, and welcome to NatWest Group's H1 2026 Results Management Presentation. Today's presentation will be hosted by CEO Paul Thwaite and CFO Katie Murray. After the presentation, we will take questions.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Good morning, everyone, and thank you for joining us. Our results today show how we've created a bank with increasing momentum through our focus on sustainable growth and returns. By delivering growth across all three businesses, improving operating leverage, and managing our capital and risk, we've created the most efficient large U.K. bank with the lowest cost of risk, delivering the strongest capital generation and highest returns. Our ambition for the future is founded on the strengths we've created and the opportunities we see ahead. The U.K.'s next phase of growth will be shaped by a handful of defining trends, we have built leadership positions in areas that will drive the next decade, such as wealth, AI, and infrastructure. Our performance makes clear we have the capability and capacity to grow at scale.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We're seizing the opportunity to maximize our position as a trusted partner for customers and to help stimulate growth across the U.K. In February, we set out how we plan to deliver our 2028 targets by pursuing disciplined growth, leveraging simplification, and actively managing our capital and risk. Our aim is to grow customer assets and liabilities at an annual rate of more than 4%, to reduce our cost-income ratio to below 45%, and to generate over 200 basis points of capital before distributions, with a return on tangible equity of more than 18%. Our strategy is delivering excellent results as we make good progress against these ambitions. Let me give you the financial headlines. We have deliberately built a scaled business that benefits from structural U.K. growth drivers to deliver strong returns on a sustainable basis. Our return on tangible equity was industry leading at 19.7%.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Our acquisition of Evelyn Partners has now completed and boosts our exposure to the fast-growing U.K. wealth market. Customer assets and liabilities grew 13.4%, including Evelyn Partners. Assets under management and administration increased more than 150% to GBP 131 billion. Excluding Evelyn Partners, CAL grew 5.2%, well above our target of more than 4%. We continue to drive operating leverage. Income growth of 8.9% is significantly ahead of cost growth of 4.5%. Our cost-income ratio reduced 2.8 percentage points to 46%, getting close to our 2028 target. Strong operating leverage, together with a low cost of risk, has driven 23% growth in earnings per share to GBP 0.38, with a 26% increase in our interim dividend to GBP 0.12 and a 13% uplift in TNAV per share, excluding Evelyn Partners.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We also generated high levels of capital at 137 basis points, and our balance sheet remains strong with a CET1 ratio of 13.2% after the acquisition of Evelyn Partners. Given the strength of our performance and our confidence in the outlook, we are upgrading our 2026 returns guidance to more than 19%. Our strong capital generation has allowed us to invest in growth and acquire Evelyn Partners while still having surplus capital. We are bringing forward the point at which we consider buybacks by six months to the year-end results. You can see from the distribution of CAL on this slide that with the addition of Evelyn Partners, we now have three scale businesses. Growth is broad based and diversified across them. Each one shows increasing operating leverage, and each one delivers industry leading returns of 20% or more.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

All three businesses are well-positioned to benefit from attractive structural growth opportunities, and we are allocating capital dynamically to optimize risk-adjusted returns. Our retail bank has a strong track record of gaining share at attractive returns with a clear opportunity for further growth in key target areas. We now have the U.K.'s leading private banking and wealth management business in a high growth market where regulatory change is accelerating customer demand. Commercial and institutional is capturing structural growth opportunities by building on its leading position in mid-market banking and in sectors such as infrastructure and social housing. Let me update you on our strategic progress. Our retail bank serves 19 million customers or one in three U.K. families, with an opportunity to continue growing in savings, investments, and lending to align with our share of current accounts of over 16%.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

One way we are capturing this is by targeting growth in key customer segments such as youth, families, and affluent. By strengthening our leading position in the youth market, we are creating the next generation of primary banking relationships and boosting our long-term funding base. We are building here on the success of our NatWest Rooster Money app. Its customer base has grown 18 times since 2021, and it has a leading net promoter score of 72. We increased the number of Rooster customers by 15% over the last year. We opened around 50% more junior ISAs, and we enhanced our offer for teenagers with a new card and new features on the app. We also grew our share in savings and investments, mainly with affluent customers, as we opened 20% more ISA accounts and attracted 32% more customers to invest with us.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

There was also strong momentum in our private banking and wealth management business. Prior to the acquisition of Evelyn Partners, it attracted GBP 2 billion of net inflows to assets under management. This is a record performance representing a 33% uplift on last year and more than 9% of opening balances. These inflows were supported by over 45,000 customers across the group investing with us for the first time, a 60% uplift on last year. As well as 11% growth in the number of high net worth clients we serve with more than GBP 3 million of assets and liabilities. This progress will be accelerated by the acquisition of Evelyn Partners, which I'll talk about on the next slide. Commercial and Institutional is the U.K.'s biggest bank for business.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

It serves 1.5 million customers across the U.K., ranging from startups, where we have a leading 20% share, through the mid-market, to large corporates and financial institutions. We gain a clear competitive advantage here from our longstanding presence across the nations and regions, as well as our highly experienced network of more than 1,000 relationship managers. They are rooted in their local communities, offering businesses both local knowledge and deep sector expertise. This enables us to play an important role in regional economies, giving us a distinctive platform to support investment and capture growth. We are capitalizing on our market-leading positions in areas such as infrastructure, social housing, and transition finance to take advantage of structural growth, and building on our leading position in debt capital markets to support corporates, not just with lending, but with broader funding needs.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We delivered GBP 23 billion of climate and transition finance in the first half, making good progress towards our GBP 200 billion 2030 target. All three businesses continue to leverage simplification to improve customer and colleague experience and drive efficiency. The use of AI is changing how our customers live and work, as well as their expectations of us. It is also reshaping financial services. While the pace is faster and the tools have evolved, the fundamentals remain the same. Success in our sector has long been built on relationships and on trust, the real value of AI comes when it builds stronger customer relationships, strengthens trust, and delivers growth through better insight, experience, and outcomes. That's why we continue to invest in leading capabilities. Last year, we created a new AI research office to enable faster innovation and to accelerate our responsible deployment of AI.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

The benefits for both customers and colleagues are clear. A smoother customer experience, quicker, more informed decisions, and more time for colleagues to focus on what matters most, building trusted relationships and delivering better customer outcomes. For example, we are using AI to deliver new customer propositions faster, in hours rather than weeks, to help customers understand their spending habits better, to help them resolve cases of fraud through natural language conversations with our digital assistant, Cora, and to provide relationship managers with greater client insight and more capacity for productive engagement. The operational momentum in each of our businesses is demonstrated by operating profit growth of more than 15%. I'd like to turn now to the acquisition of Evelyn Partners. Evelyn Partners allows us to deliver an exciting step change in our private banking and wealth management business, generating sustainable growth and returns.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We now have a highly differentiated, scalable, end-to-end wealth proposition comprising advice, planning, and investments with the largest employed network of financial advisors across the U.K. and a highly regarded direct-to-consumer investment platform. The combination of planning and investment capabilities with banking, savings, and wealth management services gives us a unique position in the market and a distinctive offering for our 20 million customers. One month in, Evelyn Partners is performing in line with expectations, the integration is going well. We were able to hit the ground running, having planned since February, we're executing at pace with a focus on the most valuable revenue opportunities. We have a single leadership team under Emma Crystal. We have created an integrated financial planning team to take advantage of opportunities like targeted support, we are already seeing business referrals in both directions.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We are excited about the opportunity ahead and the value that Evelyn Partners brings both for the group and for shareholders. We look forward to updating you further at an in-depth spotlight in the fourth quarter. Our strategy is focused on driving sustainable growth and returns, which in turn generates higher levels of capital, giving us both resilience and flexibility. Let me remind you of our approach to capital allocation. We have a robust balance sheet and aim to operate with a CET1 ratio of around 13%, giving us appropriate headroom above minimum requirements. Our strong capital generation enables us to invest in our business, to grow and to deepen customer relationships. We are both disciplined and dynamic in our deployment of capital, and our diversification across three businesses gives us optionality through the cycle to optimize risk-adjusted returns.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We also apply a high bar as we consider acquisitions that accelerate our progress through additional scale or capabilities. Our strategy is delivering attractive and growing shareholder returns, and we remain committed to a dividend payout ratio of around 50% and to returning surplus capital to shareholders via share buybacks. This translates into compounding growth in earnings, dividends, and TNAV per share. Given the strength of our performance and the inclusion of Evelyn Partners, we are upgrading our 2026 guidance. We now expect a return on tangible equity of more than 19%, and we are bringing forward the date when we consider share buybacks to our full-year 2026 results. The momentum we are seeing in customer growth, efficiency, and returns gives us great confidence for the future.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

By driving disciplined growth, increasing our operating leverage, and managing our balance sheet and risk, we have created a business capable of delivering strong, compounding, sustainable returns through the cycle. With that, I will hand over to Katie to take you through the results.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Thank you, Paul. I will cover the second quarter using the first quarter as a comparator. Our strong performance in the first quarter continued in the second, with broad-based growth, income momentum, and improved operating leverage. Income, excluding notable items, increased 5.4% to GBP 4.4 billion, and total operating costs grew 1.8% to GBP 2.1 billion, driving 1 percentage point improvement in the cost-income ratio to 45.5%. The impairment charge was GBP 140 million, equivalent to 13 basis points of loans. This resulted in 12.4% growth in operating profit to GBP 2.3 billion. Profit attributable to ordinary shareholders was GBP 1.6 billion, and we delivered a return on tangible equity of 21%.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to income. Income, excluding notable items, was up 5.4% at GBP 4.4 billion. Income across our three businesses continued to grow, supported by an increase in CAL, margin expansion, and higher non-interest income. Net interest margin was 249 basis points, up 2 basis points, with deposit margin expansion partly offset by the mix of lending. Non-interest income grew 15%, or GBP 124 million, supported by strong customer activity in Commercial and Institutional, together with higher insurance fee income following our decision to partner with a new insurance provider. Looking forward to the second half, we expect an income contribution of around GBP 275 million from Evelyn Partners. Given the strength of our performance and the inclusion of Evelyn Partners, we now expect full-year income, excluding notable items, of around GBP 17.9 billion.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to customer assets and liabilities, or CAL. We are pleased with our continued track record of growth and the addition of Evelyn Partners. CAL increased by GBP 86.8 billion in the quarter, or 9.6%, to GBP 986.9 billion. This comprises GBP 9.7 billion of broad-based customer lending growth, GBP 2.8 billion of customer deposit growth, and a GBP 73.9 billion increase in assets under management and administration, including Evelyn Partners. I'll touch on each of these elements in turn.

Katie Murray
Katie Murray
Group CFO at NatWest Group

We're reporting another quarter of strong broad-based loan growth across the group, with gross loans to customers up GBP 9.7 billion. Retail Banking and Private Banking & Wealth Management balances grew GBP 4 billion or 1.7%. This comprises GBP 3.9 billion in mortgages and GBP 0.1 billion in unsecured lending. Our mortgage stock share increased slightly in the quarter to 12.7%, with record applications in March. Commercial and Institutional continues to be the fastest-growing segment, with lending up GBP 5.7 billion or 3.6%. Within this, growth is strongest for larger corporate and institutions, where we see continued strong demand driven by structural trends, including digitization and decarbonization. Our mid-market customers are showing healthy demand driven by manufacturing and social housing. Our smaller Business Banking customer balances are stable with potential for growth once government schemes are fully repaid.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to deposits. Customer deposits grew by GBP 2.8 billion in the quarter. This was driven by Commercial and Institutional, where deposits increased by GBP 2.5 billion, with broad-based growth across Business Banking, Commercial Mid-Market, and our large corporates. Private Banking & Wealth Management deposits were up GBP 0.3 billion, mainly as a result of growth in savings balances. Retail Banking deposits were stable, with further migration to fixed and variable rate ISAs as customers prioritized tax-efficient savings options. Overall, deposit mix continues to be stable.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to assets under management. Assets under management and administration closed the quarter at GBP 130.6 billion. This includes the addition of GBP 71.7 billion from Evelyn Partners and a GBP 4 billion reduction in assets under administration following the sale of Cushon in May. Excluding both Evelyn and Cushon, AUMAs were GBP 6.2 billion higher in the quarter, comprising positive market performance of GBP 5.1 billion and net inflows of GBP 1.4 billion. Net inflows to assets under management of GBP 1.1 billion were a record high at 10.2% of opening AUM on an annualized basis, demonstrating accelerating client confidence and strong momentum.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to costs. We are pleased that once again, we have driven operating leverage as income growth has outpaced cost growth. Other operating expenses were GBP 2 billion in the second quarter, taking the total to GBP 4.1 billion for the first half. Our persistent focus on simplification delivered a further GBP 250 million of gross cost savings in the first half, which gives us the capacity to continue investing in the business. We front-loaded investment spend in the first half to speed up our transformation.

Katie Murray
Katie Murray
Group CFO at NatWest Group

We also increased pay for staff by 4.1%, which took effect in April. The impact of this has been largely offset by a reduction in the number of employees. Our cost-income ratio reduced by 2.8 percentage points to 46%, and we now expect other operating expenses of around GBP 8.5 billion for the full-year, including around GBP 300 million for Evelyn Partners. We have given you a more detailed breakdown on the slide.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to impairments. Credit performance remains strong, and we benefit from a structurally low loan impairment rate and strong asset quality. The impairment charge for the quarter was GBP 140 million, equivalent to 13 basis points of loans. We saw no new signs of stress across our three businesses, and we continue to expect a loan impairment rate below 25 basis points for 2026. The change in our economic scenarios and weights this quarter was immaterial for expected credit loss. We carry economic uncertainty post-model adjustments of GBP 284 million, with total PMAs of GBP 360 million.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to capital. Paul explained our capital allocation policy earlier, and our capital bridge here is aligned with that. As you know, our business is highly capital generative. We ended the first half with a common equity tier one ratio of 14% before distributions, in line with the year-end. 142 basis points was invested in our acquisition of Evelyn Partners. Our earnings power is reflected in 197 basis points of CET1 capital generation, which was boosted by 31 basis points of capital generation from RWA management. Our ongoing investment spend consumed 19 basis points, and organic lending growth consumed 61 basis points.

Katie Murray
Katie Murray
Group CFO at NatWest Group

This means that in effect, all our investment in growth was funded with just six months of capital generation. We are reporting a CET1 ratio of 13.2% after accruing 50% of attributable profit for ordinary dividend payments. We expect to continue generating strong capital from earnings and RWA management. For 2026, we now anticipate capital generation before distributions and the impact of Evelyn Partners of more than 240 basis points. This is also before the impact of Basel 3.1 on January 1st, 2027, where we continue to assume around GBP 10 billion of RWA uplift.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Turning now to guidance. Given our strong first-half performance and the inclusion of Evelyn Partners, we are strengthening our 2026 guidance. We now expect income, excluding notable items, of around GBP 17.9 billion, other operating expenses of around GBP 8.5 billion, capital generation before distributions and the impact of Evelyn Partners greater than 240 basis points, and a return on tangible equity of more than 19%. Finally, we now expect to announce our next buyback with our full-year results in February. With that, I will hand back to the operator for Q&A. Thank you.

Operator

We will now take your questions. If you'd like to ask a question today, you may do so by using the raise hand function on the Zoom app. If you're dialing in by phone, you can press star nine to raise your hand and star six to unmute once prompted. We ask that questions are limited to two per person to allow an opportunity for more people to ask questions. We'll pause for a moment to give everyone an opportunity to signal for questions. We'll take our first question from Sheel Shah of JPMorgan. Sheel Shah, please unmute and go ahead.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hi, Sheel.

Sheel Shah
Sheel Shah
Analyst at JPMorgan

Hi, guys. Hopefully you can hear me.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah, we got you, Sheel.

Sheel Shah
Sheel Shah
Analyst at JPMorgan

Yeah, great.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Good morning.

Sheel Shah
Sheel Shah
Analyst at JPMorgan

Good morning. I've got two, please. First, we've seen some changes to the leverage ratio come through, and your leverage ratio requirement has fallen, as have some peers as well. You clearly have improved the mortgage stock market share, and this is a market that continues to grow. I'd like to hear your thoughts on the changes to the leverage ratio and its application to the mortgage market. We had a peer yesterday talk about long-term asset margins declining in the mortgage market, so I'd be keen to get your thoughts there.

Sheel Shah
Sheel Shah
Analyst at JPMorgan

Then secondly, can I ask, with regards to the private banking wealth inflows of GBP 2 billion that you saw in the first half, you made a point that 45,000 customers across the group have contributed to these inflows. I'm wondering, when it comes to customer segmentation of your overall retail and corporate base, what is the target market we should be thinking of that are maybe applicable for wealth products within the existing customer base? How are you doing in terms of penetration of this customer base, please? Thanks.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

That's great, Sheel. Okay, Katie, why don't you talk a little about the leverage ratio, maybe then go on to talk about the mortgage market and I'll cover wealth as well.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Super. Yeah, thanks very much. Morning, Sheel. Look, the leverage framework announcements are very much as we had expected. We were expected to see a kind of 42 basis point reduction in our leverage requirements. However, I think, Sheel, it's really important to note that we are not leverage constrained, so it doesn't release day one balance sheet capacity, but instead ensures that leverage does remain a backstop measure for us, but all very much in line with expectations. Paul, do you want to?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Sheel, on, I guess the link to mortgages and kind of asset margins, Sheel. If you look at H1 for ourselves on mortgages, as you say, we've grown slightly our mortgage market share, which is great. Our approach really has been very thoughtful in terms of trying to ensure that we're driving quality, decent growth. We've been very mindful around making sure that we're right in deploying capital in the mortgage market, acceptable returns, but also driving low cost of risk. We've played the market really to take growth at the right times in what at, as you alluded to, at specific points was a very competitive market. We've grown our balances by GBP 4 billion, and yes, we've increased share.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

If you look at the areas we've focused on, we've been broadening our addressable market, first-time buyers, family-based mortgages, buy-to-let. We've also signed a number of partnerships with digital platforms where we're, I guess, putting ourselves earlier in the customer journey to secure volume. Rightmove, ChatGPT would be two examples of that. We're being very thoughtful there. The strategy on mortgages is to grow, to absolutely ensure that we're growing at the right returns. I think it's a little bit too early to draw any wider conclusions about, I guess, the long-term prognosis for mortgage asset margins. I think the reality of some of the building societies is, you may see on what I call vanilla mortgages, more competitive pricing. I think it's very early to draw conclusions.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

On the second question, different topic, on private banking and wealth management, yet very pleasing kind of organic AUM flows in the private bank. GBP 2 billion net new money, it's a record, 30% up on the same time last year. That's great. Part of that is from the broader distribution or I guess, new customers investing with us, but that's a proportion of it. We've got a target to treble the number of customers who are investing with us. We're making good progress on that. I'd also remember that it's not just the retail base, it's the Commercial & Institutional base is a great source of referrals.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

In terms of our customer segmentation and the opportunity, how we're going to execute across that opportunity, the spotlight I announced in the presentation will be a great opportunity to dig into that further. We're going to talk about the different customer segments, how the proposition plays, and how excited we are about the opportunities. Delighted with two things just to close off, the underlying momentum in the kind of the wealth management business, the organic momentum, and then obviously completing Evelyn, which adds a whole host of expertise and capabilities, which opens up much wider opportunities. Thanks, Sheel.

Operator

Our next question comes from Alvaro Serrano of Morgan Stanley. Alvaro, please unmute and go ahead.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Hey, Alvaro, are you here?

Alvaro Serrano
Alvaro Serrano
Analyst at Morgan Stanley

Yes, I'm sort of struggling to unmute. Good morning.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Morning.

Alvaro Serrano
Alvaro Serrano
Analyst at Morgan Stanley

Good morning, Katie. Kind of two questions on a similar theme around NII. It's sort of your growth in loans in CIB and corporate institutions continue to be very strong, if anything, accelerating. Can you sort of, again, talk us through what you're seeing latest in demand? It's accelerating more than sort of normalizing. Looking at your pipeline conversations, should we continue to expect an acceleration, this kind of level of pace for the foreseeable future is sustainable in your view? Just a bit of color on that as we think about the next few quarters and next year without explicit guidance, I presume, some color.

Alvaro Serrano
Alvaro Serrano
Analyst at Morgan Stanley

On deposits competition, again, your competitor yesterday was making pretty cautious comments and assumptions around limited deposit growth in the system with strong loan growth that doesn't bode well for competition. Obviously, in this quarter we saw the ISA season, again, any color of how you're thinking about your best guess of how deposit competition may evolve over the next few quarters, given the loan growth pictures. It sounds like it could continue to be pretty competitive. Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Alvaro. I'll probably take both of them.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Yeah, carry on.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks for acknowledging the strong lending in C&I. We continue to be pleased with that. As you alluded to, it's not just one quarter, it's a strong track record of growth. I think really it talks to both the scale of the franchise, but also the quality of the franchise. We have, in our view, distinct competitive advantages that our positioning against some of the key structural trends that we've had for at least a decade, I would say, be that infrastructure, social housing, etc, is positioned as well. Yeah, over GBP 5 billion growth in the quarter, GBP 9 billion for the half year. I've touched on the areas it's coming through. You'll see in the disclosures, infrastructure, social housing, aspects of tech, funds lending. There was also growth though in the mid-market and in business banking as well.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

It's not exclusively the large end. Looking at the pipeline, there's a lot of demand. There is a strong pipeline, Alvaro, so to that direct question. We feel that demand is resilient. Plus, if you look at the system level data, which I know you do, the Bank of England data, the PNFC growth is around 8% or 9% from memory. There's resilient demand. The good news is we're not needing to change any sort of risk appetite. We're able to grow with the same risk appetite. That business we're writing at high risk adjusted returns, which obviously is a great support. Very encouraged there, and we think the strength of our franchise positions us very, very well. On the other side of the balance sheet deposits, so some growth in the quarter, just under GBP 3 billion.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

You can see that's come through the private bank and also through the commercial franchise. Retail, give or take, is flat, although there are some ups and downs, current account balance is up, for example. I think we should think quite broadly about this. We don't just see it as funding, we see it as a key part of the customer relationship and how we grow with customers. Aspects of retail are competitive where we've chosen to focus, and you'll have seen this during the first six months, is where we see real relationship value. We haven't chased hot money. For example, the ISA season, yes, we've competed there, we've taken share, but that's because we see great relationship value. Affluent would be another segment where we see that opportunity, likewise youth. That's how we think about it. Looking out, we take quite a holistic approach.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We work very closely. The treasury teams and the strategy teams do a great job to make sure that we're optimizing in terms of both the customer proposition, but also the cost of funding. I think strategically what we've done over the last couple of years is really try and ensure that we're owning the customer relationship early. Whether that's startups, whether that's innovation economy, whether it's youth through Rooster, and that means we build the primary relationship early and that comes with the high value deposit. Strategically, that's how we're thinking about it. I think there will be net-net, that's our strategic positioning, but there will be some kind of competition, I'd say, in the retail hot money space. We're going to remain disciplined, we want to be thoughtful about where we invest, and that needs to be where we can see wider customer value. Thanks, Alvaro.

Alvaro Serrano
Alvaro Serrano
Analyst at Morgan Stanley

Thank you.

Operator

Our next question comes from Benjamin Caven-Roberts of Goldman Sachs. Benjamin, please unmute and go ahead.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hey, Ben.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Hey, Ben.

Benjamin Caven-Roberts
Benjamin Caven-Roberts
Analyst at Goldman Sachs

Morning. Thank you very much for the presentation and taking the questions. Two from me, please. First, a lot of focus today on capital generation, it's of course positive to see the share buyback expectations being pulled forward six months. If we look further ahead, how are you thinking about uses of capital generated as we move into 2027 and 2028, particularly in terms of how much RWA growth is consistent with that strong lending activity you're seeing, then how much capital that leaves to be returned to shareholders? Secondly, just on income, of course, strong as well this quarter, could you talk through your expectations into the second half? If you're seeing much of a different backdrop on income between the different segments of the business and the balance of tailwinds versus headwinds in NII and non-NII. Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Ben. Katie, why don't I take capital and you take income, if that's okay.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Sure.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

On capital, Ben. Very strong capital generation in the first half, 137 basis points. Obviously, we've raised the guidance there in terms of year-end expectations greater than 240 ex-Evelyn. I guess testament to the high growth, high returns business model that we've built. In terms of how you should think about it in terms of allocation, in terms of organic, we still see growth opportunities across all three businesses. You can see with the momentum we've got, we're executing well. We've now got a multi-year CAL record. We've got CAL targets out there, and we've demonstrated in the first half that we see opportunity. We will deploy across the three businesses, but in a disciplined way per the answer earlier, to make sure we get the right risk-adjusted returns.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

On the inorganic side, obviously we've made our choices over the last few years, whether that's purchase of retail mortgages, unsecured purchase of unsecured, and more recently, wealth. The near-term focus is very much on the successful integration of Evelyn. Pleased to say that that's on track and performing well. That links to, I guess, the latter part of your first question, which is distributions. Committed to the 50% of attributable profit for ordinary, on surplus capital. We've got a very strong track record of returning our excess capital. We'll assess it, as you would expect us to, with the board at the half year and the full-year, but we certainly see good value in buying back our shares where they currently are.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We're absolutely committed to returning at the earliest opportunity, the signal we've given today, we expect to return at the year-end, is good evidence of that. I think all of that really is, to me, is, I guess, evidence of the model that we've built. We've got a highly capital generative model that gives us great choices to deploy into the business to grow, but also to drive good returns and drive the distributions, for shareholders. Katie?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Sure. Income. Thanks very much. Morning, Ben. Obviously we're really pleased with the strategic progress we've made in the first half of the year and the strengthening of that guidance. I mean, that reflects in a large part the completion of the Evelyn Partners transaction, which we're delighted about, also our increased confidence following that strong H1 performance we've had, and our line of sight that we have for the rest of the year. I think a couple of things that I would bear in mind. In terms of economics, we obviously, as you know, early in the year, removed the two bank rates from our plan. We still expect bank rates to remain at 3.75% this year, no change in that rate assumption as we go from here.

Katie Murray
Katie Murray
Group CFO at NatWest Group

If I think of where we'll kind of see the growth coming through to get to GBP 17.9 billion, GBP 275 million of it is Evelyn, in terms of where we are. Other things I would think about across the business is the strong balance growth that we've had and pipeline that we can see in corporate lending. That will come through and will continue to drive NII growth. We have the reinvestment, obviously, in the structural hedge that will come through. If I look to the kind of non-interest income kind of area, you know that we're continuing to deliver a lot of product propositions for our customers. We were really pleased with the performance in C&I at the beginning of the year, expect that to kind of continue. Obviously the AUM, AUMA fees, which I've already talked about.

Katie Murray
Katie Murray
Group CFO at NatWest Group

As we look at it, they're kind of a solid performance. One thing I would think about is that we did have, in the first half of the year, we had higher insurance income in that non-interest income space. That was GBP 45 million that came in. That won't be a repeat, overall, a good trajectory for income in the second half. Continued growth across all of the businesses and importantly, supported by ongoing balance sheet growth.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Katie.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Thanks very much, Ben.

Benjamin Caven-Roberts
Benjamin Caven-Roberts
Analyst at Goldman Sachs

Brilliant. Thank you.

Operator

Our next question comes from Guy Stebbings of BNP Paribas. Guy, please unmute and go ahead.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hey, Guy.

Guy Stebbings
Guy Stebbings
Analyst at BNP Paribas

Hi. Morning. Thank you-

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Morning.

Guy Stebbings
Guy Stebbings
Analyst at BNP Paribas

For taking questions. First question was just on net interest income. Thanks for the sort of refinements in the hedge guidance. Are you able to confirm what swap assumptions you're using to sort of underpin that guidance this year, future years, etc? That'd be very helpful. On the lending spreads, they went backwards a little bit more than the sort of pure mortgage back to front book spread compression. I think that was just partly a function of good lending growth, but maybe you could elaborate on the dynamics there and how we should think about that in future periods.

Guy Stebbings
Guy Stebbings
Analyst at BNP Paribas

A question just on sort of buybacks and capital. Very pleasing to see that commitment come forward. Just interested, is that purely a reflection of the better capital generation that you're seeing this year, or does it reflect in any way in terms of comfort around where Basel III lands precisely or how the capital framework might evolve later this year? Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Okay. Thanks, Guy. Why don't I take the third one very quickly and then you, Katie.

Katie Murray
Katie Murray
Group CFO at NatWest Group

I'll take on the-

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

The buyback is very much driven by the performance in the first half of the year, Guy. It doesn't make any assumptions in terms of around future regulatory. We've got Evelyn, we've got the performance the first half, and we obviously have got good line of sight on the half two performance. That's a simple answer. Katie?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Sure, thanks very much. If we deal with the hedge reinvestment rates, first of all, Guy. We assume a blended hedge reinvestment rate of around 4% for the full-year 2026, and that's 3.9% on the product hedge and 4.7% on the equity hedge. That's well ahead of the expectations we had at the start of the year, where at that time our assumption was that we would have two rate cuts coming down to a terminal rate of 3.25%. Clearly we're benefiting from that reinvestment rate. It's also supporting our out-year hedge income. I would just remind you that we did say in February that we expect growth in our hedge income every year out to 2030. There is further upside if the current market rates are sustained. If I then go on to NIM. You're absolutely right.

Katie Murray
Katie Murray
Group CFO at NatWest Group

You can see within NIM, while there's a 2 basis point increase that we've had in the second quarter. That's built on 4 basis points in the deposit margin, clearly coming from the hedge, 2 basis points from funding another, and then that's partly offset by the 4 basis point decrease in the lending margin. Couple of things happening within there. We've talked a lot this year already around the roll-off of the higher five-year fixed mortgages that's coming through. That will be completed as we get to the end of this year, so that's good to see a little bit more stability that will come through in later years on that. Also, we've had strong growth in lower risk, high return, but of course, lower margin areas like mortgages, but also in our corporate and institutional business.

Katie Murray
Katie Murray
Group CFO at NatWest Group

While we look forward, the structural hedge continues to be a positive tailwind for the rest of the year, those trends that we're seeing in the lending margins as we add on high returning business, it will continue as we go forward from here. I would expect, Ben, that the NIM trajectory is likely to be a little flatter for the second half of the year. Obviously NII is going to be driven by the volume growth that we're seeing. This, for us, is really disciplined choices in our capital allocation and the loan origination that we do. You should expect this growth to drive higher returns, as we've seen in H1 2026, and that's what's been reflected in our increased ROTE guidance. Thanks very much.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Good. Thanks, Guy. Thanks, Katie.

Operator

Our next question comes from Benjamin Toms of RBC. Benjamin, please unmute and go ahead.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hey, Ben.

Benjamin Toms
Benjamin Toms
Analyst at RBC

Hi, mate. Thanks for taking my question. Firstly, a clarification on that buyback and the quantum of the buyback at year-end. Is the right way to think about it that we assume that you distribute down to 13% on a post-Basel basis? Secondly, a question on buy-to-let. We're seeing continued structural shift from amateur to professional landlords. Do you think you have the current capabilities to deal with that shift, or do you need some further build-out here? A personal point, on your Rooster card, can you stop charging for the jammy front covers on the card? It's costing me a fortune with them. Thanks.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

I won't comment on your pence there. Katie, buyback and pay down to 13%.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Absolutely. Look, Ben, we were really clear and deliberate when we set our target of around 13% so that we can be flexible with that number for our capital allocation decisions. We're not paying down to a specific number, but as we've said before, we wouldn't have a problem printing a 12% handle for CET1, given that this is a point-in-time metric. We're really confident in our strong ongoing capital generation, as we've just demonstrated again these last six months. Obviously, we haven't hit that 12% yet, despite even the absorption of the Evelyn Partners acquisition at Q2, given how strong our capital generation has been.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

On buy-to-let, good observation, Ben. You're right that the market has evolved in terms of, I guess, the amateur to professional landlords. That's the reason why we put the strategic partnership in place with Landbay, and that's working really well for us. A really successful partnership. Obviously, the combination of them and ourselves, we have the necessary capability. We have also been building out in parallel our internal capability. We feel very comfortable in terms of both from an underwriting perspective, from a face to market perspective. That's why we took those steps last year, actually. Well placed on that upfront. There we are. Thanks, Ben, and I'm pleased your family is a Rooster customer. Thank you.

Operator

Our next question comes from Perlie Mong of Bank of America. Perlie, please unmute and go ahead.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hi, Perlie.

Perlie Mong
Perlie Mong
Analyst at Bank of America

Hello, and good morning.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Morning.

Perlie Mong
Perlie Mong
Analyst at Bank of America

Two questions. Just one on the hedge and the reinvestment rate. I think the footnote says it is the macroeconomic assumptions, not for this year, but outer years. If I look at IMS, I think it's 3.8%. Can I just clarify that that is what you're assuming for outer year hedge roll-off assumption? Second question on non-NII. Can you help us understand a little bit more about the sort of sustainable organic growth rate in that business? Because it's been a bit lumpy, and this quarter obviously is very, very good, but it's just one of those lines that I think we all find a little bit difficult to forecast.

Perlie Mong
Perlie Mong
Analyst at Bank of America

Maybe more specifically, maybe talk too about the wealth growth prospects other than the Evelyn advisory side of things, but the D2C side of things as well, because obviously some of your peers have been quite aggressive in pricing there and not charging any platform fees. Just how do you make money and how do you monetize that D2C platform, and how does that link to the non-NII growth?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Perlie. Good questions. Katie, do you want to go with hedge and then I'll cover off wealth?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Perfect. Yeah, super. Thanks very much. Perlie, sorry, apologies if I wasn't clear. Forgive me. If I look at the rate that we're assuming for 2026, it's the product hedge reinvesting at 3.9% and 4.7% on the equity hedge. We haven't marked our outer year targets to market in terms of where they are, so that's still sticking with the kind of original assumption of the five-year swap rates of 3.5% through to 2028. Clearly, if this higher rate sustains as we go forward, you would see some additional benefit coming through from that as well. Paul?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

On D2C, Perlie, you can see we've shared today we've now got 45,000 people in the first half who invested for the first time. We're pleased with that. Obviously, as part of the Evelyn acquisition, we acquired a digital investing platform. We already have NatWest Invest as well. We'll lay out in more detail at the spotlight where we see the opportunities and how we plan to execute against those opportunities. The mindset we have around that is we see ourselves very much as the challenger, not the incumbent.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

In most of the markets we operate in, we are the incumbent, but the reality is in that space, we are the challenger. We believe there are levers that we can pull given we have the customer relationships and we have the product set to be very competitive and very attractive. We've got the full end-to-end proposition in place now. Very excited about the opportunity and growth that can come from it, but more to come in the quarter four spotlight. Thanks, Perlie.

Operator

Our next question comes from Andrew Coombs of Citi. Andrew, please unmute and go ahead.

Andrew Coombs
Andrew Coombs
Analyst at Citi

Morning.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Morning, Andrew.

Andrew Coombs
Andrew Coombs
Analyst at Citi

I think the majority of mine have been answered, perhaps I can just dig a bit further into C&I. On slide 34, you helpfully give the lending and deposit margins by division. If I look at C&I think the lending margin or asset yield, gross yield, I should say, is dipped from six to 5.5. Interested in any comments you have on the margin on the flow versus the stock, because obviously you're seeing strong growth there, but I assume it's into lower margin segments.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah.

Andrew Coombs
Andrew Coombs
Analyst at Citi

Secondly, staying on the same slide, deposit yield in C&I has actually trended up slightly in the quarter, 4 basis points. Anything you can say on deposit competition in that space as well, please. Thanks.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah. Thanks, Andrew. Okay, I'll take them, Katie, if that's okay. On the C&I story, it's very much the mixed story. We're deploying capital in areas which are low risk weights, high risk-adjusted returns, infrastructure, social housing, etc. Obviously they're at lower margin. We're very comfortable that's a great deployment of capital. It's driving growth, but it's also driving returns. You should think of it as a conscious mixed choices. On the other side, on the deposit side, it's primarily a function of where the deposit growth has come from. There's very different ranges of pricing within the commercial and institutional base. Some of the growth this quarter has come from the large corporate institutional end. Obviously, the pricing on that is finer. These are the, for example, aspects of SME operational balances. It just reflects that. That's how I'd think about it.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Andrew.

Operator

Our next question comes from Rob Noble of Deutsche Bank. Rob, please unmute and go ahead.

Rob Noble
Rob Noble
Analyst at Deutsche Bank

Morning, thanks for taking my questions. It's just one question, really. The loans are growing very quickly and the deposits not as quickly at the moment. Your loan-to-deposit ratio has jumped to 92%, I think. How far are you willing to let that go, and what are the margin implications for just solely that aspect of loans growing faster than deposits going forward? Thanks.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Okay, LDR and, sorry, what was the Rob, can you just repeat the second one? We couldn't quite, for some reason.

Rob Noble
Rob Noble
Analyst at Deutsche Bank

Just the margin implications from purely the loan-to-deposit ratio going up. Does that cause margin lower given where the spreads are on both loans and deposits?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Yeah. No, absolutely. Let me talk to that, Rob. As we look at it, we obviously manage our funding very holistically. We don't traditionally manage on an LDR basis within the bank. Clearly, it's something we look at, but it's not one of our key metrics. As we're looking at things, we really manage on the LCR, where we've still got capacity to move lower than the current 140 average LCR that we have. You've also seen us this year be a little bit more active in covered bonds. We may do a little bit more of that in the second half of the year.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Basically, as we see the growth of the assets on the balance sheet, we're very mindful of actually where is the right place to fund them from, whether that's to go to the market or whether that's to do a little bit more on deposits. Paul talked a lot about the importance of deposits from a customer relationship as well. We look to manage that. Clearly there is a little bit of an impact on that within the NIM, as lending margins, as you can see, are a bit tighter still at the moment. We just look to manage all of those things, which is also why we're really focused on ROTE to make sure that we're getting the right returns for the capital that we're deploying. We're obviously balancing and fully loading in the costs of where that funding is coming from. Thanks very much.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Katie.

Rob Noble
Rob Noble
Analyst at Deutsche Bank

Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thanks, Rob.

Operator

Thank you. Our next question comes from Chris Cant of Autonomous. Chris, please go ahead and ask your question.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hey, Chris.

Chris Cant
Chris Cant
Analyst at Autonomous

Good morning.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah, we got you.

Chris Cant
Chris Cant
Analyst at Autonomous

Thanks for taking the questions. Appreciate it. I wanted to ask on capital and data centers, please. On the 13% and flexing around that 13% target, I think the more interesting thing to come out of the Bank of England FPC review process was actually this flexibility they expect to introduce around the O-SII buffer under stress. Effectively, if that happens, you're going to have one of the more hyper-flexible MDAs in the sector. Just curious how that feeds into your thinking about headroom to MDA over time, particularly with your Pillar 2 likely coming down next year. It seems to me there's room to actually nudge that target lower potentially over time.

Chris Cant
Chris Cant
Analyst at Autonomous

Understand you're not announcing that today, I was interested in your thinking, noting that one of your domestic peers indicated there may be room to review that, in their case, next year, and they already run with a tighter headroom to MDA than you do. On data centers, there's obviously a relatively high number being built in the U.K. As you say, you're the largest commercial bank. I'm just interested in whether you can comment on your exposure there, how you think about that area. In particular, if you are taking exposures, how those get structured from a lending perspective, whether you have any sort of direct linkage into delivery of data center revenues down the line? Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Okay. Katie, do you want to take the first?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Sure, absolutely. That's great. I think, Chris, good morning. When we look at the target, I just repeat again that we set our target very deliberately around 13%, so we're not pinning down to a specific number in mind. We wouldn't have a problem pinning down to a 12% handle in terms of CET1. What I would say as I look at the risk weight framework that's going on, I know that you and Donald from our side are very involved in a lot of these conversations as well. We're pleased that they're looking at the overlap between different parts of the framework, whether it's Pillar 2A or O-SII or the CCYB numbers. I think one of the things that you can see that's helpful is with the committee reaffirming its judgment that the appropriate benchmark for us is the Tier 1 capitals.

Katie Murray
Katie Murray
Group CFO at NatWest Group

That's around that 13% of risk-weighted assets. Interestingly, that's equivalent to about a CET1 ratio of about 11%, so we may see some changes come through from that. We've obviously got Basel 3.1 coming in, which we confirming today that's still around GBP 10 billion that we're estimating for that. As you can imagine, we don't manage our capital today on what may or may not happen in terms of future buffers. We do like the approach of making it easier to access those buffers, and I think we'll just very much watch to see how things develop. Again, we welcome the move that they are more releasable in stress. At the moment, it's no change in terms of what we're doing or what we're talking with you externally. Paul, can I come back to you?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah, on the Chris, on your second question on data centers, we could probably spend a very long time talking about that. I'm sure the team are also happy to pick up bilaterally, but maybe try some broader thoughts, which should help you. It won't surprise you, given the, I guess, acceleration of data center and the associated infrastructure build-out, that we're very thoughtful in terms of where to deploy credit and capital towards data centers. When you think about your point on how these things are structured, you can very much think about, it can be the physical security or it can be the long-term cash flows. Where you're dependent on long-term cash flows, we're very focused on, I guess, high-quality occupants, highly rated, highly graded, almost exclusively the hyperscalers. That would be how you should think about how these things are structured.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

As I've said, we've got a multi-decade history in project finance, structured finance, so I feel we've got very strong expertise, and we only participate where we are very confident around the security that sits behind. There's a lot of talk, and there's a lot of noise. I think it's key that you remain disciplined in this part of the market, and that's our approach. Hopefully, that gives you a sense of it. The key really is if it's cash flows, then it's all about the creditworthiness of the occupant or the offtake as it is, in fairness, in other energy and utility deals. Thanks, Chris.

Operator

Our next question comes from Amit Goel of Mediobanca. Amit, please unmute and go ahead.

Amit Goel
Analyst at Mediobanca

Hi. Thank you. Hopefully you can hear me.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We can.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hi, Amit.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Hi, Amit. Good morning.

Amit Goel
Analyst at Mediobanca

Okay. Brilliant. Thanks. Sorry. Yeah, no, it just still shows the mute button. No, it's Yeah, actually, just one follow-up just on the capital. Apologies for asking again, but I guess I'm just still trying to size how much buyback you could contemplate at year-end. Appreciate the comments that you'd be happy or you'd be comfortable running with a 12% handle. Still just trying to get a sense of pro forma for the Basel 3.1 effect. Would you be happy running down to a 12.5% type ratio, or is that too far out of the bounds of circa 13%? My second question was just on the non-interest income in retail, just the comment about There were some effects relating to the accelerated recognition of back book insurance income.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah.

Amit Goel
Analyst at Mediobanca

Just kind of curious, how big was that? Does that mean that we're not getting that income in the second half of the year? Just how much of a delta to expect going into Q3, Q4 on that? Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah. Thanks, Amit. Katie?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Yeah, sure. Let me try to help you a little bit. I'm not going to get into the niceties of what around 13% might mean. You guys are the masters of that kind of debate. When we look at it, obviously we consider the pro forma for Basel 3.1 when we're doing any capital decisions, as we would always be looking a good few years out as we make these kind of decisions. I think probably a way that could be helpful to you is to think around on the RWA kind of trajectory that we'll see in the second half. We've been growing well this first half in lower risk-weighted lending areas, such as mortgages and C&I, and we're confident that that's going to continue in H2. Partially offsetting that, you've seen our successful ongoing program of RWA management.

Katie Murray
Katie Murray
Group CFO at NatWest Group

We'll continue to exercise transactions where economics make sense. We do have good line of sight of those RWA management actions for the rest of the year, following the GBP 3.9 billion we did in the first half. Also, you should just bear in mind that we have got the annual op risk uplift in Q4 as well. You can see historically what that number generally is. If I bring all of those things together, I would think from an RWA perspective, we would expect to see a little bit of growth coming through in the second half of the year on an RWA basis. If I go to the retail side, what this was very much the recognition of a transaction we did with our existing home insurance provider as we move to a new provider.

Katie Murray
Katie Murray
Group CFO at NatWest Group

It's simply recognizing the income that would've been flowing through over the next number of years into just now. The reality is, Amit, it was GBP 45 million, that will be a non-repeat in future quarters, you won't see a particular impact on it on the different quarters because the way that we'd have amortized through. Obviously, with the new provider, although it will have to build up a little bit, you'll see that coming back in. For your model, I would think of the GBP 45 million for this quarter and not worry too much about how it flows in and out over the next number of quarters. Hopefully that's helpful.

Amit Goel
Analyst at Mediobanca

Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Thank you, Katie.

Operator

Our next question comes from Nicolas Payen of Kepler Cheuvreux. Nicolas, please unmute and go ahead.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hi, Nick.

Nicolas Payen
Nicolas Payen
Analyst at Kepler Cheuvreux

Hi. Morning.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Morning.

Nicolas Payen
Nicolas Payen
Analyst at Kepler Cheuvreux

Thanks for the presentation. I have two questions, please. The first one would be on the retail banking and on the cost income ratio. I can see a very strong improvement in the cost income ratio. We are getting closer to the 40% mark. Just wanted to know what is the frontier, actually, because I can see that talking about AI quite a lot, I think the AI usage has tripled in the quarters. You are deploying Cora. You also mentioned that your head count, I think, decreased by 400 ex-Evelyn Partners. Yeah, anything structural going there, and if we could expect the cost income ratio to actually go below the 40% mark. That the first question.

Nicolas Payen
Nicolas Payen
Analyst at Kepler Cheuvreux

The second question is coming back on your comment, Katie, regarding RWA management. Just wanted to know what your SRT benefit is currently included in your CET1 ratio. You mentioned it was part of your toolkit, so I just wanted to know whether or not it's going to accelerate or if we have hit a run rate on that front. Thank you.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Do you want to take that, or?

Katie Murray
Katie Murray
Group CFO at NatWest Group

I can do that. Yes, absolutely.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

I thought you had posed that.

Katie Murray
Katie Murray
Group CFO at NatWest Group

No. Sorry, forgive me. If we look at where we are, this is year three of our SRT program. I would say at the moment that we're not quite at our run rate, but by the end of this year, you'd sort of see that while there would still be more actions you'd be filling in a lot of the historic deals. We would expect to do more transactions as we go through. You can see a bit more detail in the Pillar 3 in terms of where we are, but we do think we still have a little bit more capacity building on the GBP 3.9 billion total RWA actions that we did earlier in the year. Paul, do you want to talk about cost income ratio?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah. On the cost income ratio, overall, Nick, great progress. You can see cost income ratio has improved again. We're driving the cost income ratio through improvement through all of the businesses, I would say. The retail team have done a great job, as you alluded to get to the circa 40% number. They pulled a lot of levers to do that, and they continue to drive productivity and efficiency. When we laid out our group target of less than 45% for 2028, obviously, we had some assumptions about what the different businesses would contribute. We've also said our ambitions go beyond 45% at a group level. When we see the opportunities in front of us, some of them driven by AI, but not exclusively by AI. You may have heard me say before, I don't see AI as the Hail Mary here.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

We've still got a lot of good productivity and efficiency levers that we're pulling across the group that is improving the underlying efficiency of the business. I'm not going to give you, in your words, a frontier number for retail, but we are absolutely confident that as well as growing, we can continue to drive operating leverage via an improved cost income ratio, and that will be the case across all the businesses, including retail. Thanks.

Nicolas Payen
Nicolas Payen
Analyst at Kepler Cheuvreux

Thank you.

Operator

Our final question comes from Edward Firth of KBW. Ed, please go ahead and ask your question.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Hey, Ed, are you there?

Edward Firth
Edward Firth
Analyst at KBW

Sorry. Yes, I am. Can you hear me okay?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah, we got you now.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Hi, Ed.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Sorry, couldn't hear you initially.

Edward Firth
Edward Firth
Analyst at KBW

Thanks very much. Morning, everybody. I just had two quick questions. The first one was just picking up on a comment you made, I think, Katie, tell me if I'm wrong, that you thought the NIM trajectory would be flatter in the second half. Given that it was up only 4 basis points in the first half, that sounds like we're getting pretty close to flat. Firstly, I just wanted to check that is correct understanding. I guess in that context, we've got another big year for the hedge next year, but after that, it grows, but grows quite modestly. I'm just trying to think, is there some correlation between the sort of hedge benefits and pricing in the market, do you think? As that starts to disappear, some of these competitive pressures will disappear?

Edward Firth
Edward Firth
Analyst at KBW

I think you said a lot of the pressure came from mix. That's not going to change. Now once these hedge benefits go, which will be 2028, 2029, are we actually saying the underlying margin will start declining? I guess that's my first question. The second one was, there's an awful lot of talk on this call and all the other calls about capital and the Bank of England potentially reducing capital requirements, etc, and Pillar 2 cover, etc. You're making a 20% return.

Edward Firth
Edward Firth
Analyst at KBW

You're growing well above nominal GDP. What are we looking for in terms of this benefit from reducing capital requirements? Are you saying that actually 20% is not enough, we should be making 25%? Have you got unutilized capacity for growth that you can put to work? I don't really understand. It seems to me that if you reduce capital requirements, all that's going to happen is margins will come down and your return will return. I mean, 20% return is plenty, isn't it? Thanks very much.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Okay, do you want to take the first one?

Katie Murray
Katie Murray
Group CFO at NatWest Group

Shall I start off on that? No. Ed, as ever, you're absolutely right. I did reference a flatter NIM. My comment was directional. As you know, we don't guide on NIM. I think the important thing is that it really is around the deliberate choices that we've made to grow in lower risk but high return areas like CIB and mortgages, which is driving that lower kind of lending margin. You know that at the end of this year, we've got the drag from the roll-off of the higher margin five-year mortgage business is kind of coming to an end, which will be helpful, so that will give us a little bit more stability as we go on from here.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Then there's the offset in our margin with the improvements on the structural hedge, which continues to deliver into 2027, 2028 and beyond. Obviously, I've talked about the better rates that we've had just now that will strengthen not just 2027, but it will also strengthen the later years as well as we move forward from that. I don't generally comment on consensus, we have given you good guidance on what our expectation is for the full-year income as we go forward from here. Overall, while I do expect flatter NIM based on the pipeline, we do expect the volume to drive higher NII in the second half in line with our guidance and then further income growth each year out to 2028 and beyond from there.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Good.

Katie Murray
Katie Murray
Group CFO at NatWest Group

Shall I hand back to you?

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Yeah. Okay. Thank you. Ed, on the second question, I guess simply on the kind of capital reg side, I think our message is we just kind of want the various consultations to conclude so everybody knows exactly where they stand. We're at the very tail end of IRB, the tail end of Basel III. I just think conclusion and certainty would be helpful for all stakeholders. Our message is, in a way, no more complicated on that. In terms of what we would do with any hypothetical additional capital, we manage the business for returns. We'll deploy it where we see demand. At the moment, we can see that demand is there, and that growth obviously will support returns into the medium term.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

I don't want to oversimplify it, that's how we're thinking about the regs, that's how we're thinking about how we deploy capital organically, that's a virtuous cycle, as you know. We deploy it into growth at high returns. That drives capital generation, drives distributions. It's no more complicated than that. Hopefully that just gives you a little bit of color and a little bit of flavor. Thanks, Ed.

Edward Firth
Edward Firth
Analyst at KBW

Great, thanks so much.

Operator

There are no more questions. I'd now like to hand back to Paul Thwaite for closing comments.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

Okay. Thanks, Matt, and thank you, everybody, for your questions. We appreciate it. I hope you've seen today in the presentation, and hopefully in the Q&A, the momentum we've got in terms of driving both sustainable growth and returns. We're very pleased with that. We've delivered growth across all three businesses. As we've touched on several times, we've improved and increased our operating leverage. We're now the most efficient large U.K. bank. We have the lowest cost of risk, and we're delivering the strongest capital generation and highest returns.

Paul Thwaite
Paul Thwaite
CEO at NatWest Group

The mindset of management is this is very much the start, not the end. We're very ambitious for the future of the business. We're determined to capitalize on some of those leading positions that we've created and also our exposure to some of the structural drivers within the U.K. Hopefully, that will lead us to accelerate the momentum you've already seen today. Our strategy is all about driving strong compounding growth and sustainable returns. We look forward to updating you that both in the spotlight in quarter four and then in our quarter three results. Wish you a good Friday and a good weekend. Thank you.

Operator

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

Executives
    • Paul Thwaite
      Paul Thwaite
      CEO
    • Katie Murray
      Katie Murray
      Group CFO
Analysts
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