NatWest Group plc (NWG) Q1 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a mixed picture: strong financial metrics with a notable increase in income and EPS, but also concerns about economic uncertainty and significant impairment charges. The Q&A reveals some optimism about lending margins and asset quality, but management's vague responses on certain issues raise concerns. The dividend increase is positive, but the integration costs and RWA growth could impact financials. Overall, the stock price is likely to remain stable, resulting in a neutral sentiment.
Key Financial Performance
Customer Lending GBP 375 billion, up 0.9% year-over-year.
Customer Deposits GBP 433 billion, up 0.5% year-over-year.
Assets Under Management GBP 48.5 billion, with net AUM inflows of GBP 0.8 billion.
Income GBP 4 billion, up 15.8% year-over-year.
Operating Profit GBP 1.8 billion.
Attributable Profit GBP 1.3 billion.
Return on Tangible Equity 18.5%.
Earnings Per Share 15.5p, up 48% year-over-year.
Tangible Net Asset Value Per Share 347p, up 15% year-over-year.
CET1 Ratio 13.8%.
Loan Impairment Charge GBP 189 million, equivalent to 19 basis points of loans.
Operating Expenses GBP 1.9 billion, down 8.5% from the previous quarter.
Risk-Weighted Assets (RWAs) GBP 187 billion, up GBP 3.8 billion.
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Operating Highlights
New Mortgage Product Launch: Launched a new mortgage enabling first-time buyers to combine incomes with a family member or friend, while retaining independent ownership.
Sainsbury's Bank Transaction: Completed acquisition of Sainsbury's Bank, adding around 1 million new customer accounts with GBP 2.5 billion of unsecured lending and GBP 2.7 billion of savings.
Business Banking Accelerator Program: Set a new ambition to support a further 10,000 small businesses in 2025, marking the 10th anniversary of the Accelerator program.
Social Housing Lending: Upgraded ambition to lend GBP 7.5 billion to the U.K. social housing sector between 2024 and 2026.
Bank-wide Simplification: First U.K. headquartered bank to collaborate with OpenAI to meet customer needs faster and increase productivity.
Cost Management: First quarter costs of GBP 1.9 billion were down 8.5% on the fourth quarter.
Risk Management: Continued optimization of risk-weighted assets (RWAs) and prudent risk management provides a competitive advantage.
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Risk or Challenges
Economic Uncertainty: The company is operating against a backdrop of heightened global economic uncertainty, which poses risks to its business activities and financial performance.
Regulatory Changes: Expectations for UK bank rates have moved down, indicating potential regulatory impacts on interest rates that could affect profitability.
Impairment Charges: The company reported a net impairment charge of GBP 189 million, reflecting potential risks in the loan portfolio due to economic conditions.
Credit Portfolio Performance: Despite current performance being stable, there is a maintained post-model adjustment of around GBP 300 million due to heightened economic uncertainty.
Integration Costs: The Sainsbury's Bank transaction will incur one-time integration costs of around GBP 100 million, which could impact short-term financials.
Risk-Weighted Assets (RWAs) Growth: RWAs increased by GBP 3.8 billion, which could affect the capital position and regulatory requirements.
Market Conditions: The company acknowledges the need to be prepared for changes in market conditions, which could impact capital generation and overall financial stability.
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Guidance & Outlook
Sainsbury's Bank Transaction: Completed transaction adds around 1 million new customer accounts with GBP 2.5 billion of unsecured lending and GBP 2.7 billion of savings.
Mortgage Initiative: Launched a new mortgage enabling first-time buyers to combine incomes with a family member or friend.
Accelerator Program: Set a new ambition to support a further 10,000 small businesses in 2025.
Social Housing Lending: Upgraded ambition to lend GBP 7.5 billion to the U.K. social housing sector between 2024 and 2026.
OpenAI Collaboration: First U.K. bank to collaborate with OpenAI to enhance customer service and productivity.
2025 Income Guidance: Expect income to be at the upper end of the GBP 15.2 billion to GBP 15.7 billion range.
Operating Expenses Guidance: Other operating expenses expected to be around GBP 8 billion, plus GBP 100 million of one-time integration costs.
Loan Impairment Rate Guidance: Expect loan impairment rate to be below 20 basis points for the full year.
RWAs Guidance: Expect RWAs to be between GBP 190 billion and GBP 195 billion.
Return on Tangible Equity Guidance: Anticipate return on tangible equity at the upper end of the 15% to 16% range.
2027 ROE Target: Target for return on tangible equity of greater than 15% by 2027.
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Shareholder Return Plan
Dividend Payout Ratio: Increased from around 40% to around 50% this year, accruing 50% of attributable profits.
Shareholder Distributions: Generated 49 basis points of capital before distributions, including 68 basis points from earnings.
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Key Q&A
Q:How much of the strength in the quarter do you think is sustainable for noninterest income?
A:We don't expect Q1 to be the run rate, particularly for noninterest income. There are positives moving forward, but also factors that may offset that.
Q:What was driving the increase in lending margins and should we expect the same pace going forward?
A:Lending margin increased due to a mix of pressures on mortgages and growth in unsecured and corporate lending. We are pleased with the performance and expect to guide to the top of the range for income.
Q:Can you share more detail on your thought process for the Q1 impairment charge and the GBP 0.3 billion PMA you currently hold?
A:Asset quality remains strong, with a charge for the quarter at 19 basis points. We are monitoring the portfolio for emerging trends but feel reassured by the current asset quality.
Q:Where do you see the most attractive area of your business currently to allocate incremental capital?
A:We haven't fundamentally changed our capital allocation. We are pleased with growth and returns in mortgages, unsecured, and corporate and institutional sides.
Q:What would you like to happen in respect of ring-fencing?
A:I think there is more scope for further progress on ring-fencing and reform. It adds cost and complexity to serving customers, which can distort decisions and limit banks' ability to support the economy.
Q:What is your strategy for the Sainsbury's business now that it has closed?
A:The closure brings 1 million customer accounts to NatWest and improves market share in unsecured prime credit card market. We see opportunities to offer a breadth of products and services to this customer base.
Q:What is the sustainability of deposit margin expansion?
A:We have seen steady improvement in deposit margin due to a strong hedge. The sustainability will depend on rate cuts and competition.
Q:What is the impact of RWA optimization on income?
A:We don't disclose the specific income impact of RWA optimization, but we ensure any trades are return accretive.
Q:What are your thoughts on mortgage approvals and growth in Q2?
A:Application volumes remain strong, and we don't see a cliff edge moment due to the stamp duty change.
Q:What is your intention regarding capital distribution?
A:We are happy to operate within the target range of 13% to 14% and will review capital distribution at the half year and full year.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer regarding the specific costs associated with ring-fencing and the exact impact of RWA optimization on income. They also did not provide a specific number on the potential duplicated costs from ring-fencing.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AUM inflow
Accelerator program
Autonomous Guy
Benjamin Caven
Bernstein Autonomous
CEO CFO
CFO Murray
Customer deposit
ET NatWest
Examples progress
Fund bank
GBP AUM
GBP Customer
GBP UK
GBP activity
GBP housing
GBP saving
Group Chief
Group Presentation
Guy Stebbings
Income GBP
India balance
Institutional Assets
Murray Group
Murray presentation
Officer
ambition
bank simplification
banking
business
customer
lending GBP
sheet risk
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