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Good morning, ladies and gentlemen. Today's conference call will be hosted by Ross McEwan, Chief Executive. Please go ahead, Ross.
Thanks, Joanna, and good morning, everyone. Today, I'll give you an overview of the group's performance in the third quarter, and then Katie Murray, our Interim CFO, and I will be happy to take your questions.In the third quarter, we made a pretax operating profit of GBP 961 million and a bottom line attributable profit of GBP 448 million. This is up 14% or GBP 56 million on the same quarter in 2017. So far this year, we've generated a pretax profit, GBP 2.8 billion and a bottom line profit of GBP 1.3 billion.I think this is a good performance set against a highly competitive market and an uncertain economic outlook. Our income performance this quarter is impacted by a number of one-offs, so I'd thought I'd just take you through the large ones. We've given you more detail in our published slides, but the most significant items are -- and on the positive side, GBP 272 million of insurance recovery that we did warn you about in the last half-year results and a GBP 77 million IFRS volatility gain.On the negative, we've taken additional conduct and litigation charges of GBP 389 million, which does include a top-up of GBP 200 million for PPI. And we've taken an additional GBP 100 million charge in relation to a more uncertain economic outlook and a further net GBP 60 million impairment charge in our Irish business in relation to ongoing sales from our loan book to further reduce the level of nonperforming loans. Excluding central items in NatWest Markets, income was stable quarter-on-quarter and year-to-date after accounting for one-offs and transfers.Other expenses declined by GBP 183 million year-to-date and by GBP 50 million compared to the same quarter in 2017, if you exclude out one-off impacts. Strategic costs were GBP 299 million in the quarter as we continue to invest in our digital transformation. Our bottom line profitability, combined with RWA reduction, drove a 60 basis points improvement and a common equity Tier 1 capital ratio, taking us up to 16.7% at Q3 2018. The third quarter includes the impact of a 1p dividend accrual as we build to the full year.We also expect the final merger agreement of the Alawwal Bank to be completed in the first half of 2019 and estimate this will create an additional 40 basis points of CET1 capital next year.Given this, I appreciate that you will be looking for guidance on further capital distributions, and we will update you on returning excess capital at the appropriate time.We continue to support our customers, and we await further clarity on the Brexit negotiations. We had committed an additional GBP 2 billion of funding to our growth fund to support our British business. This takes the total fund to GBP 3 billion, of which GBP 900 million has already been deployed. The fund is helping businesses invest in manufacturing, technology and in development.In addition, we have received approval from the Dutch regulator for the repurchasing of the existing banking license of NatWest Markets N.V. based in Amsterdam. This will ensure we are operationally ready to serve our customers based on the economic -- European economic area when the U.K. leaves the EU.Turning to our franchise performance. The figures are impacted by transfers, and I will therefore take you through the financials on a like-for-like basis.Our personal and business banking franchise delivered operating profits of GBP 535 million in the quarter. On lending, personal loans are up GBP 0.5 billion or 7% on the same period last year. U.K. PBB grew new mortgage lending of GBP 8.2 billion in the quarter. That represents a 12% flow share compared to a stock share of around 10%. The future pipeline was also strong with approval shares of around 13%.Although again, margins remained under pressure. Excluding conduct and litigation, the personal bank reduced its operating cost by GBP 66 million or 8% compared to Q3 2017. Our digital strategy is a key driver of this cost reduction. As we digitize the customer journeys, we are taking out cost.Ulster Bank Republic of Ireland reported a net impairment charge of EUR 68 million. This includes, as I've said, a provision for another nonperforming loan sale, offset by a number of write-backs. Operating expenses increased by EUR 47 million or 33% compared to Q3 '17 due to higher remediation, litigation and conduct costs. This pushed Ulster Bank Republic into a loss of EUR 87 million in quarter 3.Commercial Banking delivered an operating profit of GBP 243 million and reduced RWAs by a further GBP 2 billion in Q3 '18. Looking forward, the vast majority of the planned RWA reduction in our commercial business is now complete. We are now much better placed to grow the book again within our risk credit appetite in the sectors that we do like.NatWest Markets' total income increased by GBP 509 million compared with the third quarter of 2017. This reflects disposal losses in the legacy business last year and an indemnity insurance recovery of GBP 165 million this quarter. Core income was GBP 70 million lower than Q3 '17 due to more muted market trading conditions, although client activity did remain stable. Operating costs decreased by GBP 47 million or 9% compared with Q3 '17, and this contributed to an operating profit of GBP 87 million in the third quarter.Finally, RBS International delivered operating profits of GBP 92 million, while Private Banking operating profits were GBP 84 million. Both franchises continue to deliver very good returns on equity. Overall, our performance on customer advocacy is not where we would like it to be, and our results from the CMA survey earlier this year and our own NPS tracking shows this. But there are signs of encouragement. Our digital innovations continue to deliver improved customer experiences with our mobile app, paperless mortgage process, new Bankline and Esme lending platforms, all generating strong customer advocacy. As these channels are used more widely and we continue to develop them, we expect to see our customer service improve.So in summary, a good performance in a competitive market and with uncertain economic outlook. Pretax operating profit of GBP 961 million in the bottom line, GBP 448 million for the quarter. For the first 9 months, a pretax operating profit of GBP 2.8 billion and a bottom line profit of GBP 1.3 billion, a very strong capital position with common equity Tier 1 at 16.7%. And we are looking to return excess capital. And as I've said, we'll update you at the appropriate time. We are growing lending in our target markets, and we continue to focus on digital transformation, innovation and improving customer service.And with that, Katie and I are very happy to take your questions. Thank you, Joanna.
[Operator Instructions] Do you want to take our first question?
Yes, please.
It's from Joseph Dickerson from Jefferies.
I guess I'm getting a couple of circular references here when I consider your results and actions. So I guess, when I see the NIM contraction in the U.K. PBB on the back of the competition, which seems to be generating stable at best income versus the credit backdrop that you say is uncertain, and you've taken GBP 100 million provision for it, if you could help me square that circle in terms of the trade-off that you seem to be taking there. And then secondly, just on that GBP 100 million provision that you talk, I mean, it seems like the backdrop is stable from what we can see in terms of corporates and consumer. So are you seeing any signs of either stress or reduced growth or delayed projects, what have you, that have led you to take this GBP 100 million charge? But some color on all of that would be helpful.
Yes. No, thanks. Look, I'll lead in and then hand over to Katie. Because, look, I was keen that we were very transparent about the GBP 100 million. We know that other banks have taken it and some have shown it; some others may not have. But my view was we should show it to you because if you take the GBP 100 million and you take the Irish provision out of the numbers, we're down to about an 11% -- I'm sorry, 11 basis point provisioning for Q3 and about a 10 basis points for the 9 months to '18, which is incredibly low. So we thought we'd just explain -- Katie, if we explain why we've taken the GBP 100 million under IFRS 9, why we've done that, it may be a bit helpful?
No, sure. Thanks. So Joseph, you'll be familiar with IFRS 9. So when you look at the standard, it requires us to look a range of economic scenarios. You know that it's a standard that is forward-looking, but it uses our backward experience in kind of help and form that. And when we know and we look backwards, sitting a 16 bps before this charge for the year-to-date, we're really not seeing a lot coming through the book. What we can see is that consensus is widening and it is broadening, so you can feel that there is more kind of uncertainty in the environment. So we will look at scenarios that are based on consensus and also other scenarios that are not based on consensus and multiple different level of scenarios. During the quarter, I think that you would probably agree with me that the risks of a disorderly Brexit has increased. We're not where we had wanted to be, I think, as a nation by this stage in the year. So as we've kind of looked at it and we've run those scenarios, we've taken through an extra GBP 100 million. What I would say and repeat what Ross has already said, in terms of that, we still -- 11 bps year-to-date -- so 10 bps year-to-date, excluding that amount, we're still at very, very low levels of guidance. You'll recall that our guidance through the cycle was 30 to 40 bps, and then we're just not getting close to touching that. So I think the GBP 100 million is important but it's not certainly a big number in terms of our portfolio or anything like that. If you look to the NIM and the competition that we see within -- in PBB, I think that we continue to see a competitive market across the business with a number of parties still considering to push significant liquidity into the mortgage space, and so that's what you can very much see coming through on our NIM.
And then when you have a look at it, Joseph, we are holding very, very high liquidity positions.
I know. I ask you about it every quarter, Ross.
I know. And I've got to tell you, for the sake of fixing NIM for you guys, I am not going to change it until we've gone through Brexit. We've got some moves we'll probably make in the next quarter. But we're holding onto it. And it was interesting, Sam Woods at the Mansion House speech last night, calling that the industry should be holding liquidity at uncertain times, well we certainly got that. We don't have to build it. And it is, I think, it is impairing our NIM. We know that. We told you that at the last half. I'm very reluctant to give it away in big doses just fix a NIM issue. So that's my thinking behind it and I know it's hurting on the NIM, but we're writing good profitable business. We haven't reduced our credit standards in our mortgage book. We're still doing good flow. Les and the team, who run the personal business, are fixing what it -- I think one of the big issues in there is, as you come to a 2- or 5-year roll-off, too much of it was rolling off. They're working very hard on that. They've improved that over the last quarter. So I think we're in pretty good shape and the profitability of that business is still very good, even at the lower margin. So I think it's going to remain very competitive for quite some time yet. Early signs of a couple of players moving their pricing in the last few weeks, which is good to see, and that was also interesting seeing some payers not pass all of the 25 basis points through to customers. We pass through, what, about 40% of them.
Yes.
So it is a balancing act, but I am going to hold high liquidity levels and you can criticize us for our NIM on that basis. I don't mind. But we fell over 10 years ago and this bank wants to go into whatever happens in a very strong position going forward.
Totally understand. Just if I can just dimension there because you mentioned about the uncertainty around Brexit picking up over the recent political shenanigans. Could you help us dimension, if in the first quarter and next year there's no deal, what the -- what an impairment charge might look like? Is there a way to attempt to quantify that?
No.
I don't think there is, Katie. Not in that period.
No. I mean, there isn't a way to quantify that. I mean, I think as we have looked at our NIM, I think we previously had guided you that we would be flat to kind of slightly up. I think what we would say as we go just into this last quarter, we're probably flat to slightly down, is probably where we're looking at the moment. But I wouldn't take that as we read-across into further disruption or what might happen as we get into 2019.
I think the economy has been incredibly robust given the uncertainty. And let's see what happens with the negotiations. I was on a call with a number of CEOs with the Prime Minister last week. Well, I'm not going to comment -- comment here, it was more, I think, optimistic people came off that call more optimistic than probably what we'd gone on to. But let's see where the negotiations end. And we have to do some modeling of scenarios and thus the look forward under IFRS 9, see if it -- there is uncertainty out there and we should be positioning accordingly.
We will take our next question from Claire Kane from Crédit Suisse.
Two questions. Firstly, a follow-up on the margin. Obviously, we had the U.K. PBB seminar where you said you were happy with consensus forecasts for revenue to top line. And I know you seemed a bit more cautious actually on volume rather than NIM. So can you just tell us, given the 5 bps quarter-on-quarter decline in U.K. PBB, which I don't think really is a liquidity issue, whether that guidance is still fair? And then the second one is on noninterest income. I don't think you really booked any disposal of this, this quarter. Can you just update us on whether you think you'll reach the GBP 2 billion cumulative loss by year-end '18, which I think is about another GBP 250 million loss in Q4 implied?
Yes, sure. So I think if we go first to your first question in terms of the PBB. And if I look to the revenue, where we wouldn't be changing there -- that guidance that we had at that stage. We've been very much still guiding you to flat to slightly up in terms of their revenue over the medium term. And so still very comfortable with what we had said. If we go around to the noninterest income, we had guided to GBP 2 billion losses. It's certainly worth saying I think at GBP 1,744 million at this stage. I wouldn't change any of that guidance at this point. I mean, I think these things come through and they're relatively lumpy. So I think, Claire, I would probably stick with it for the time being.
Yes. Even though, Claire, I think in the last quarter it was only about GBP 14 million of disposal losses, it depends on the assets and the positions we're taking off the books. So I believe it's at the GBP 2 billion at this point in time, even though we're sitting to at the GBP 1.75 billion.
We will now take our next question from David Lock from Deutsche Bank.
Just following up again on the margin. I just wanted to slightly unpack this because it feels certainly like it's gone a little bit worse, the guidance, over the last quarter. I appreciate the comments around liquidity, Ross, but did you know that you were intending to hold liquidity buffers pretty high through this period anyway? So I just wondered if you could talk a little bit about the pressure in the mortgage markets. I mean, you've been very, very cool for some time about the pressure being there. But has -- have things got significantly worse in the last month or so because I recall Ewen saying NIM flat to slightly up at first half results. And then Katie, I think you said flat to slightly down in September. But obviously, today, it feels a little bit worse than that. And then a second question from that would be just, would you caution us on extrapolating the sort of 60-odd -- GBP 60 million, GBP 70 million in IMS going forward? Or do you think there is some of that, that will come back, obviously liquidity part of that? But would you caution us on rolling that forward? Obviously, consensus has NII rising in future years.
Yes, sure. So I kick off, Ross, and you can jump in. So David, I think if we look, first of all, to the liquidity piece and let me kind of unpack it for you a little bit around the whole. So I mean, as we look to our liquidity, we've talked about there were 2 points that we -- 2 bps in terms of the impact on NIM. Now you will be aware obviously that we paid out the DOJ. We only actually did that quite late in the quarter, I think, when we were doing some of our early guidance. And then a flow of that amount on an averaging basis has a fairly big impact, so that certainly has a little bit of an impact in terms of that piece. We then paid -- repaid our pension payment, which we paid at the early part of October as well. So you would see the NIM pressure kind of starting to ease off a little bit. But you know, as you look into this next quarter, we still have a lot of liquidity items that we'd be considering around some of our debt calls. Certainly, as you look at the margin piece, that accounted for 3 bps in terms of overall for the competitive pressure that we're under. And I think that, that really has continued and it feels very counterintuitive that after you have something like a rate rise, actually, what we really saw was some pricing continuing to come down. And so the competitiveness that we see in the marketplace is still very much there. And then we had a couple of one-offs coming through as well in terms of that margin. So I mean, the -- I kind of -- we hold with what I said in September and kind of reiterate it now. I think if we look to the year-end, it will be kind of very much a flattish number as we move forward from here. But some of the liquidity decisions that we'll make will clearly be -- could be impactful on that.
Sorry, just on that, just to be very clear. So when you say flattish at the end of the year, you're talking about the full year NIM or you're talking about the fourth quarter? Just so we're very clear.
So as we look to the -- for the full year.
Okay, so full year on the previous year.
Yes. And then if we go on to your next point around income. So as we look at income, there's a couple of things going on there and I'll work my way through the various franchises. We gave you guidance in September, that we thought that the medium-term income for PBB would be sort of flat to slightly up. We maintain that guidance. Within CPB, you'll be aware that we've been doing quite a lot management of our RWAs. In that business, we feel that we're more or less substantially down on that. There'll be a couple of little bits that will continue to kind of come through in Q4. But the kind of the real work of resizing that portfolio is complete. And so now we're kind of well positioned for growth. And what we can see within the RWA numbers today is that we're growing in the sectors that we want to grow already. So kind of comfortable on that income side. You then look to NatWest Markets. We've always guided you on 1.4 to 1.6 of income. We've never changed that, whether we -- when we were up at the kind 1.7, so I think that's something you can kind of continue with. And what we know is we still have more benefits to come through on the structural hedge. We've had 2 rate rises. We're kind of at the end of year 1 of one of them and so - just into year 1 on the other one. So what we know is on a 25 bps rate rise by year 3, you're getting sort of GBP 350 million, and then by year 2, GBP 276 million of income coming through in terms of the structural hedge activity. So I think that for us, that kind of gives us some comfort on where income is heading.
We will now take our next question from Chris Manners from Barclays.
Yes. So 2 questions, if I may. Sorry to sort of belabor the point a little bit just on the net interest margin. Just trying to work out if we're sort of getting into sort of new normal here that we're going to be sub-200 basis points on that. And maybe I could just ask about the rate hike. I guess, from the managed margin piece, you should be getting the GBP 153 million a year, so call it roughly GBP 38 million a quarter of extra net interest income. Given the sort of lag before that comes in from the rate hike that we've just had, how much would be that sort of GBP 40 million extra revenue or extra NII would be in the Q3 numbers versus what we might get in our Q4 run rate? That was the first piece, just on that deposit piece there. And the second one, maybe to smooth it on a little bit. The capital position, 16.7%, is obviously way through your targets. I mean, I think you're looking to hold about 14% steady state. It gives you about GBP 5.3 billion of surplus. Obviously, you're recurring your dividends. You talked about the 5% of ordinary share capital that you might do as a directed buyback to help UKGI get out their stake. But that still actually leaves you with a pretty substantial surplus. So could you maybe sort of run through your thinking about how and when that surplus would come back? Would we have to wait until after Brexit or was it just after the stress test? Would special dividends make most sense to avoid reducing the free float? So maybe just some thoughts around that will be really appreciated.
Maybe if I just start with the last one, then Katie, you can come back to the...
On the -- more on the NIM, sure.
On the NIM. Look, Chris, we have got surplus capital and we've been very clear by the last quarter and this quarter, that we do want to get it back to shareholders. Our first thought was just start the dividend, which we've done. And as Katie said, we're accruing now for a full year. But as you know, at 40% it's just not enough to get -- we're building at that level, if not greater. The directed buyback is really going to be getting ourselves ready for that. But that's going to be in the hands of when does the government want to sell stock? And I suspect and it's not my stock to sell, it's theirs, but at the pricing we're sitting at today, they will probably find a major difficulty doing so. So I think what we have to prepare ourselves for is if they -- is get ourselves ready for a doing a directed buyback, first priority. Second thing is, if there is not going to be a directed buyback in a reasonable period of time, and I'm not going to tell you what that is, we have to clear ourselves to pay a special, I suspect, otherwise this capital build just becomes very difficult even get a return on because we're holding very high levels of rate today and it just keeps building. So we are considering all options. We've got to get through a stress test first beginning of December, and I don't think you'll be hearing from us on the capital distribution position until we have had our full board meeting in February with our full year results. But be aware, we are very aware of the issue of far too much capital that we're holding and we're having a look at all the options.
Thanks, Ross. And I think, Chris, I don't think you'd expect me to comment on whether this is a new normal or give you a forecast for your margin as you go into kind of next year. I think that what I would say -- would share in terms of the specific points around the managed margin, you probably saw about half of that coming through in this quarter in terms of your GBP 40 million number. But I think as we look at the margin overall, I would kind of reiterate that the reason for the fall is very much 3 component parts: a couple of bps on one-offs, 2 bps in terms of liquidity, and then the 3 bps that we're seeing in terms of the competitive pressure. But comfortable with our -- your guidance -- our guidance for the consensus in terms of where we're going on, on income as we move forward.
Got you. And with this -- that 2 basis points of one-off that we've had in Q3, should that reverse in Q4?
No. So there was one -- one of the things I'm happy to share with you, there was some funding that we got in terms of the telco activity in Ulster, Chris. And so you wouldn't expect that won't reverse back as we go into the next quarter.
We will now take our next question from Jason Napier from UBS.
I've got 3, please. The first, just looking at Ulster, aside from the provisioning for NPE sales, just conscious that costs are running ahead of where we thought they'd be and I've got a pretty meaningful improvement in operating efficiency into next year in our numbers. And I just wanted to perhaps ask for an update on the outlook for delivering a sort of a better cost income in that business because aside from the loan loss actions that you've taken, it's obviously a tough market for Royal Bank and it's looking pretty tough for the incumbents too from a margin standpoint. Secondly, just an update please on the front to back book spread and retention rates in the mortgage business in U.K. PBB, in the past you've been able to give us the sort of delta? And then thirdly, just the top-up to reserves. I appreciate, in an IFRS 9 world where we're sort of expecting kind of tweaking with the sort of roundness of the figure and so on suggests that you're looking to sort of run more cautiously into that uncertainty rather than shifting a particular indicator. So if there are indicators that have driven that, perhaps you wouldn't mind sharing a sensitivity with us. We're all very interested in helping investor scope, what it means if GDP expectations move unemployment and so on. So any kind of clarity on how it is you came to the GBP 100 million, I think, would be welcome. And then lastly, just a point of fact. Can you let us know your...
That's 4 questions, Jason.
It's a part of -- it's a supplementary to 3, not having you answer any of it yet. Just lastly, can you give us a sense as to your exposure to high street retail, however you choose to define it in terms of loan exposure?
That's great. Look, I'll take the first 2 and Katie can take 3 plus 3b. Just on Ireland, it is a tough market over there. We've got a lot of remediation we're doing and we're getting through that remediation. It doesn't matter whether it's in the old mortgage book or tracker book. We're getting through. We've got SME remediation. At one stage, I think we had about 14 remediations going on in that business. So we are getting through. So the cost of those, Jason, starts to drop off midway through next year, but it will be, I think, quite a difficult year for our Irish business next year as we get through those. And that's why you're seeing the cost position staying up where normally it would come -- be coming down. But I would think you should anticipate that the cost of that business will stay up in 2019 before starting to come off in 2020 because of the -- mainly the remediation and change we're going through there. We've got a new CEO, Jane Howard, over there. Jane's been with the business 37 years. She is a fantastic leader and operator. And she's kind of chatted to the board this last week and she's got a grip of this business very strongly, there's a lot of things that we need to tidy up there. The big issue for me in Ireland is definitely costs, but it's also capital. And we've got some things that we have to do to resolve for the regulator, which we believe are fair that we should be doing before we can start getting capital out of that business. But as you've seen, it's sitting at about 23% common equity Tier 1. By end of year, with one of the books coming off, it's probably going to be more like 27%. So there's 2 issues, cost and capital. And we work very hard on that business, so I'm a bit cautious about our margins getting knocked around a wee bit, still very strong. But yes, we're having to put a lot of effort into our Irish business and it's taking a lot longer than I ever anticipated. On the mortgage book, front to back, it's still about 80 basis points. The thing the team have been working on, our retention rates from mortgages delivered through the broker community, was sitting at about 65% which is nowhere near where it should be. The team have been working strongly on that. In September, it was up to 71%. That starts making a difference to us over a year. If you can hold onto another 6% of the book as it turns from book 2 year to 2 year or 2 to 5, so there's some good work going on there, but not finished at all. But yes, front to back's still at about 80. We're seeing 2 players move their rates up a little bit over the last couple of weeks, which is pleasing, but I think you should anticipate very strong competition in the mortgage market through into 2019. Katie?
Yes, sure. I'll go to 3a and 3b. So I think, Jason, as we look at the sensitivity of IFRS 9, look, I think this is something that we'll -- all the banks will share with you in far more detail at the year-end, it's one of the disclosures that we will be sharing and are prepping towards that at that time. I'd love to be able to say to you now, mortgage is this, unemployment is this, and rates are these and we're just -- I think, as an industry, we're not there yet. We're still in kind of getting used to the behavior of it. One of the things is, the Finance Director, when someone comes through and says the answer is 100 on the nose, you get very frustrated, given I think, one of the questions. You go back in to say, that feels a little bit too accurate so -- in terms of it. But I don't think you should read anything into that. This is -- as we do any of our scenario work and any of the calculations under IFRS 9, we look at a range and a wide range of different economic scenarios. We look at what's in consensus, we look outside of what's in consensus. When we -- I think we can all agree that the kind of risk of a disorderly Brexit has risen, which is why we've kind of looked to take the kind of GBP 100 million at this time. But I don't -- I wouldn't read anything into that, but it's a kind of a point number because it's not certainly built up that way. In terms of kind of exposure to high street retail, as we look at it, we kind of guide you there to sort of say our direct exposure of commercial lending is somewhere probably between the 5% to 10% range, not kind of looking to give you exact numbers within there. And that's of the their -- of the commercial exposure. What I would say of the 3 most recent ones that have been headlined around Patisserie Valerie and Maplin, [ how it's a pity ] they weren't our debt, which was good. But we do bank 25% of the market, so we know that it -- we'll come -- it will come round to us in time, but we were pleased with the last little blush to go through the -- that we weren't on that paper. But as we say, with these things at 25%, you take your -- you'll take your turn when it comes.
Your next question comes from John Cronin from Goodbody.
Just on the PPI, I note your comment that there has been an uptick in complaint volumes this morning. Has -- is that a structural uptake or just a response to the ad campaign? And what are your expectations around volumes over the last 10 months or so? And secondly, just getting back to the net interest margin point. On mortgages, you have expressed your ambitions to grow your share of stock. How do you think about that in terms of capital allocation? May you slow that down for a period of time given the competitive intensity in terms of your growth ambitions particularly? So just trying to get a sense of how you think about it from a capital allocation standpoint. And then thirdly, when do you expect that you will make an announcement in relation to the CFO position?
Okay. Well, I might try on all 3 of those, actually.
Go for a home run.
I'll go for a home run on all 3. Firstly, from PPI, the ad campaigning that went through in August drove the number of cases up pretty considerably. We still suspect that people saw -- the end is coming, August, and people didn't realize it was August 19, not August 18 which drove August, because they dropped down a wee bit in September but it didn't come down to the run rate that we've been having. So -- and you've got another ad campaign running at the moment probably for the next 6 weeks. So that's heightened applications coming in, and therefore we -- our view was that we should take an additional provision if they're staying up at those sorts of levels. Thus, the prudency of the GBP 200 million. We'll wait and see when this campaign drops off, what it drops down to again. So with -- look, I'm not going to say never again on PPI, we've said that a few times that we thought it was the final, but it's the gift that keeps on giving. So I think we're okay at the moment but we'll look to see what this next sort of 6-week campaign brings with Arnie pushing himself out there. On NIM, we have said that we do want to grow beyond our 10% stock, and we have been doing that, we've been around that 12% growth mark what we shared with the market on the growth, we're pretty comfortable with that. I'm very happy to allocate the capital to it as long as it's -- I'm not so worried about the volume, I'm more worried -- it's the quality I worry about, not the volume. So you'll see loan-to-value ratios haven't moved much at all. We did monitor that very strongly. There are parts of this market that we still think we can grow in safely that we haven't been in. So I'm very happy to allocate the capital. It's a good return for us. On the CFO, it's an internal, external search, it's ongoing. I think we're probably halfway through the process. So I don't think you're going hear anything for the next couple of months. So that be it. And we've got young Katie sitting beside me doing a fantastic job, but it has to be an inside outside review, and it's -- whilst I'm running it, it's -- goes through our noms in governance because it is a director role of the bank and the board will get a view.
We'll take our next question from Guy Stebbings from BNP Paribas.
Just one left from me then. On strategic costs, I picked up a little on the H1 run rate, but it's still running quite low relative to the GBP 2.5 billion guidance. I think if it sort of held at the Q3 level, you'd be at more like GBP 2.1 billion rather than GBP 2.5 billion. So if you could update us on the timing there? And if revenue run is proving a little bit more tricky than when you set out investment spending plans, would you consider reducing the total spend at all?
Look, I'd stay with the GBP 2.5 billion, and I'd encourage you to stay there. Katie, I don't think you'd change that as well. This year looks like about GBP 1 billion. Next year will be higher than that. We know what we've got on our plans for next year and it's higher than that, and I think there will be a smattering of leftovers for 2020. Some of the programs of work will take a bit longer to run through and then we can take the strategic cost things around, for example, the -- we've talked about the data centers, they will take a number of years and we'll have to spread those over a few years as we get to the [ 222 ]. But no, this year I'd say it would be around the GBP 1 billion, next year be more like GBP 1.1 billion -- GBP 1.2 billion to GBP 1.3 billion, I suspect.
Yes, and I mean the GBP 2.5 billion guidance, Ross, we're certainly sticking with and these things you know they're big and lumpy. If I think of the building we're talking -- we're looking at in here, it's like a GBP 200 million charge when we move out of this. So there are big things, and the accounting standards are quite strict as to when you can recognize them and when you can take them. So I wouldn't change that number, I'd just say the lumpiness is a reality of this kind of level of change.
And we guided I think GBP 300 million strategic costs in 2020, so that sort of gets you the GBP 2.5 billion.
Yes, I think -- I'll probably just repeat the comments we said on revenue earlier, in terms of as we look at it going forward. NatWest Markets, 1.4 to 1.6, the structural hedge and how that rolls through, I won't repeat the numbers again, but they're -- you're all familiar with them. CPB, we've come to really the tail ends of our RWA kind of reallocation and reshaping of that business, and we thought quite a lot in September around PBB in the kind of holding to sort of slightly up is where we are. So at the moment, we're comfortable with how income is looking, so no suggestion that we move away from those kind of costs and investment numbers.
Our next question comes from Fahed Kunwar from Redburn.
I just had one question. Unfortunately, again on margins and another one just on the U.K. and the loan losses. On the margins, you talk about the market being very competitive. From what I can see in the broker market, you guys cut rates by far the most aggressively of all the large banks in -- after the rate rise. I think your rate cuts were 40 to 50 basis points across all your core products. I look at other banks, it was more like 10 to 15 at the larger banks. So I guess, is it very much explicitly because you're still looking for volume? So is it more -- or less to do with competition, and more to do with your own aspirations around the return profile in mortgages versus your group return profile? And just a point of clarification, Katie, when you said flat margins year-on-year, did you mean U.K. PBB or did you mean at a group level? I assume U.K. PBB. So that was on the margins. And on the loan losses, I think there seem to have come through, correct me if I'm wrong, U.K. commercial rather than personal. I mean my understanding in the U.K. is the worry around Brexit and recession really is at the moment kind of focused on the indebted personal kind of -- or the consumer lending point. And if you are worried about the wider range of economic consensus, is it not inconsistent at that point to also be growing share in mortgages where, as you know, the market is getting a little riskier and harder to find attractive returns with the lower risk profile. So that inconsistency, if you wouldn't mind just talking through, I would appreciate it.
I'll lead in on the mortgage one. We have been very clear that we want to grow our share in the mortgage market. We have been very clear we are a price taker, not a price setter. The changes you're talking about there, I don't see us being the one dragging the mortgage margins down in this business at all. We're responding to markets' activity, we saw when -- about 6 months ago when the first rate rise came through, people pulled the rates down, caught us by absolute surprise, so I think in response there on us coming down was just in response to others in the marketplace. We are trying to make sure that we hold the retention rates, to get them down because they were at 65%, they needed to be well into the 70s, and we've achieved that. But it's only around -- and it's certainly a piece around pricing, to hold onto the business, which shows how competitive the market is. We have not dropped our credit standards. There are parts of the market we could be in and will be in that we haven't been in the past that I think are still very good pieces of business to take. But we're not dropping our credit standards. Our volumes are at about 12% and our stock is 10%. I'm pretty comfortable with that. To be quite honest if it was 11% it wouldn't worry me because we do intend to grow. We've got plenty of liquidity. It's really around don't take bad credits onto the book, is the big piece for our mortgage side.
And Ross, the thing that I would add really add onto that is that we've guided that -- you all to that we're 30 to 40 bps through the cycle, and we're -- where there's such clear daylight from what we're experiencing there today in terms of our kind of guidance. So I think that we're very comfortable about the quality that we're bringing in. And I think we're really benefiting from the work that we have done over the last number of years to make sure that this is a clean book. And so I think that's something, as we look at our 16 bps year-to-date, including the model economic scenario really and the amounts that we've taken in for debt sales within Ireland. That's kind of coming kind of out to a kind of 10 bps year-to-date, it really is continuing at tremendously low levels.
I think that just shows the work that the team has done over the last 4 to 5 years to clean the book up. And look, we were -- we are very surprised it is that low. We've guided to 30 and -- 30 to 40 basis points. So it doesn't stay this good for that long, maybe I've been around a bit long in these sort of cycles, but we all know that.
And please let me just kind of maybe just -- on the point. So we're sitting -- and I think in Slide 5 that we've given you kind of gives you the breakout of the NIM. I'm sure you've all been looking at it already this morning. But we're kind of ending the quarter at 193 and I think what we're seeing at the moment, a number that really looks very flat or very marginally down in some way that we're going to kind of Q4. I think we try not to get into kind of forecasting NIM because it moves around a lot in terms of -- you know, it can move around in terms of the liquidity decisions you make, which are the right decisions to make in that time.
Sorry, no, it's probably me, I've got a bit of a cold. I think I heard you say year-on-year Q4 '18 would be flat, but I think what you're saying Q-on-Q it's flat to slightly down.
Sorry, yes, it's Q-on-Q, yes, so thanks very much, Fahed, for asking the clarification.
We will now take our next question from Chris Cant from Autonomous.
Obviously, we've had quite a lot discussion around NIM, and I have to confess I'm getting a bit confused in terms of all the puts and takes of liquidity coming in and going out again. Have you considered reporting a banking NIM equivalent to the one that one your large peers discloses which effectively strips out some of the liquidity impact? I note that they are able to guide quite comfortably on NIM trends on a banking NIM bases, ex things like liquidity, because of how they define it. Have you considered whether it'd useful to disclose something like that so people get a better sense of the actual underlying trend? But if I can just sort of round out the discussion on NIM and NII, consensus got 1% to 2% NII growth in 2019 versus the 3Q run rate you've just printed. Are you comfortable with that?
Yes, so I mean, Ross shall I -- I kind of kick off? I think probably, there's been lots of different questions on NIM, so let's just maybe rephrase it and go kind of to Slide 5. As we look at where we're sitting, there is -- we had a kind of 2 bps down on liquidity. As you know, it's our -- it's a -- NIM is calculated on the average and we had some large [ approved ] outflows in October and then -- in September and then in early October as well. But I think the competitive pressure we've talked about, as well as a couple of one-offs. As we look to -- as we go forward from here, again it's the 193 on the Q-on-Q, what I would say there is we expect that to be flattish to very marginally down. Chris, we as a bank, have really work hard not to do too much adjusting of our numbers and actually sort of saying if it wasn't for this then it would all be okay. In terms of number, we're always looking, as the team do, to kind of make sure that we have the disclosure. But we think the liquidity number is a real cost of running the bank and it serves the whole bank, not just the central treasury team. So it feels a little bit disingenuous to kind of strip it out of the results of the business. But obviously we'll continue to look. In terms of...
Just on that one, I just think you end up with lots and lots of games of people playing on NIM if you don't actually do it at a group level and then allocate it all out. I just -- I find that it -- then we can -- we're trying to be as transparent as we possibly can and allocate as much of the cost, particularly in the liquidity cost out, so that you see the real values of these businesses as opposed to me holding stuff at the group level or allocating to one because we want to make it look good. I just think we -- the businesses have to stand on their own.
And I think, just in terms of your question on income, I probably talked about it a couple times on the call, so certainly not looking to change consensus. So again, just for any clarity as we go through, PBB, we gave you some strong guidance in September in terms of flat to slightly up. The CPB, we're really at the end of the whole reshaping of the portfolio, and we're growing comfortably in the areas that we want to at the moment. We also have a NatWest Markets' guidance and then of course, the rate sensitivity, we or many of the banks are very sensitive to rate, and we see really strong pickups as rates continue to rise. So Chris, hopefully, that kind of helps on clarity on the NIM and the income questions.
On the banking endpoint, I agree with your approach. I suppose, it would be helpful for people's understanding of what's going on to sort of give that underlying view on NIM at times such as these where we spend an awful lot of the call discussing optical impact of liquidity on NIM, and how you're not adjusting for those because you're managing the business. I just think it would give people a better sense. But that was really the point there.
No, no, no, thanks for the clarification, Chris. We do look and we try to listen to what would be helpful as well, so I mean we will look at it in terms of the Q4.
We now take our next question from Ed Firth from KBW.
I just had a question back on the capital actually and I might have just misheard the answer. You mentioned the 3 stages in terms of the, I guess, extraordinary levels of capital you've got now, certainly against peers, and I guess it's only going to get worse. Just to be clear, if the governments don't sell down and you don't get involved in any directed buyback, was I right that you would do a special dividend? You specifically said special dividend, you wouldn't be doing a share buyback?
Look, what I said is there's 3 parts to it of trying to get capital back to you. One of them is obviously the dividend which we've started, the other one is getting involved in the directed buyback, and the third is a special. So those are the 3, I think, tools that we have to get capital back and we have got it. This is an amazingly good problem to have, isn't it? Because 5 years ago, we were struggling with capital. Now we've got lots of it. So look, we are considering all phases. The one that we talked to most -- that most investors liked when we said how would you like it back, was just get the dividend going. But, secondly, do a directed buyback. All I'm signaling if that becomes problematic, we do need to actually start considering specials to get it back in your hands. So that is why there is sort of 3 methods.
And can you give us some idea of when you -- of what sort of level that thinking kicks in? Because I mean clearly none of us have got any visibility on when the government may or may not be selling down. So I mean clearly, you could go to [ '18, '20 ] in a reasonably soon order, I mean, would you still be waiting for that? Or is there a time? I mean, how -- do you look at time, or do you look at levels or what?
Look both time -- levels mainly and then the time we can get it back to you. We've said we want to get through the stress test which is December and we've got a board meeting February. I think we'll give you much better clarity around there. But all I want you to realize is we don't need this level of capital in this business and we'll find ways of getting it back to you.
And we would feel free to pull any number of the different levers in -- to do that.
To do that.
Your next question comes from Rohith Chandra-Rajan from Bank of America.
I just had a couple of quick ones actually on volume in mortgages and then commercial. And so looking at the mortgage book, stock of 10, gross running share of 12 and then approval of share at 13. Is that an indication that you're willing to take market share in a market where, as you indicated, Ross, pricing is falling? Are you still happy to take additional share there? And then on the commercial book, you talked about the repositioning of that book now being pretty much complete. I wonder if you could talk a little bit about the underlying trends that you're seeing if you exclude the repositioning of the book? So how much demand are you seeing? How much underlying growth in commercial?
Yes. Look, we're happy to take -- we do want to grow the mortgage book. We do want to grow it greater than the 10% stock share. We haven't set Les and the team any targets on that one. He doesn't have to do 12 or 13. But we have the distribution that gives us, I think, a decent share of that market at pricing points, and those pricing points are -- we are followers, let me be quite clear on that. We have been having to tidy up the retention piece, and that's starting to work now. So anything over the 10, I'm comfortable with. We haven't set Les targets. That's what we can get out of the market at a decent return on equity, and that's what we stick with. It is a good return on equity and we should continue to do it. So that's the only thing guiding us there. We are not the price leader. And if you keep telling me I am, I'll go back again and again and examine with Les, but that's certainly not been the case when I've gone out and had a look at our pricing points. We're doing certainly more on the 5 year than we were. About 70% of the book is at 5-year now, which is fine. But I think we are certainly a price taker in that market, but with very good distribution. On the commercial book, you're quite right that we have done a lot of restructuring on that book, and I think Alison Rose and her team who run the commercial business have done a very good job of really getting back to the assets that we want in that book, we've done a number of asset sales over the last couple of years and what we're calling now is, that's a -- we're -- we've got a book that we're comfortable with. We are now concentrating on where are the pockets of growth we want and there are some pockets that we are quite enjoying being in that we think will be good long term. So no -- look, really no other comment on that other than to signal to you that the reduction in that book is pretty much near to an end other than a couple very small pieces. It's -- we've cleaned it up and we're comfortable with it. You've seen the impairments are very low, as Katie said, but you know we're 25% of this market. At some point, we will take our share of the impairments, but I think given we've cleaned up the book, probably is an indicator, or one of the indicators, of why our impairments are so low.
We will now take our next question from Andrew Coombs with Citi.
A couple of points for clarification, please, and I apologize, I'm going to come back to the NIM, firstly. If I take your commentary, you've mentioned there's 3 basis points decline due to competitive pressures Q-on-Q. I think the guidance for Q4 is essentially that will continue, because if you take the underlying Q3 195, take off another 3, it's kind of consistent with your guidance. That seems to be a big increase in competitive pressures versus what you'd stated previously. So I think when you did the margin walk at the first half '18 stage, year-on-year, you said it was 3 basis points due to competitive pressure. Now we're seeing 3 bps in a single quarter, and again, next quarter. So specifically, what's driven up that competitive pressure more recently because a lot of trends we're looking at, and particularly below deposit beta that you've shown, which seems to suggest the opposite. So that would be my first question. The second question, just clarification and capital return. I think you list the priorities as ordinary dividend, then directed buyback and then special dividend. Just on the last one, how have weighed up the options of special dividends versus general buybacks in your consideration?
Look, I'll give you the last one again and I think we've been through it 3 times so I'm obviously not being that clear. There are 3 options around it. The first one is an ordinary dividend, which we've started and we've given you very clear indications of the circa 40%. Directed buybacks was when we had the conversations with our investors, they said that was a good thing to be doing, so therefore we have been working very hard on how do you get about doing that, there's a real process, because it is reliant on a number of things: one, the government actually does want to sell; 2, that we participate with them; and 3, that we get regulatory approval to do so and board approval. So we're working through that, but at 220-odd, I would be very, very surprised if the government was a seller at that sort of pricing therefore what I'm signaling to you is we do want to get the capital back. And the other way of doing that is around a special or another form -- there are other forms of buyback but I would have thought special was probably the next best way of doing it. But we will examine that as a board over the next few months. Let's get through the stress test. And all I'm signaling to you is I don't need the capital in the business. So Andy, I hope that's -- Andrew, I hope that's clear on that one. Katie, I'll throw it back to you to have another go at NIM, because we're failing on the NIM question this morning.
We're failing. Sorry for that, Ross. But I guess as we look at it in the market we have seen more competitive pressure in this quarter, I think that's what we -- why we're kind of changing our guidance very slightly from what we had said at June, so I think we can all agree on that. I would say that you're getting to the right kind of number as we look at it. If I look, we ended Q3 on an underlying basis at 195 and then post one-off at 193. So I think a kind of maintenance of flat to very slightly down on those rates is the right kind of place to get to. But the reality is, in terms of when you're debating on 1 basis point up or 1 basis point down, a different decision that we might make on liquidity or not will kind of move that. So -- but I think you've clearly got the message in terms of what we're -- where we're trying to guide you to.
But rather than the Q4 number, I'm specifically interested in where the competition's picked up because that doesn't seem to be a trend that's necessarily consistent with what your peers are showing. Why are you specifically seeing more competitive pressure and in which specific areas?
Well, again, somebody made a comment that our peers aren't allocating the way we're allocating all of the costs down. So I think we've just got to be a wee bit careful of that. You know there's hedging policies going on out there that are different to ours. So I -- I'm not...
It's hard for us -- I mean, Ross, and we have a habit of not really getting into commenting...
I'm not going to. I'm not going to comment on others.
On the peers basis. I think you know we are continuing to see it is a competitive environment and that is the reality and we've talked about our front book and back book margin which just confirms that.
We will now take our next question from Martin Leitgeb from Goldman Sachs.
Could I ask on competition, and I think on both sides, asset side and liabilities side. And then I think you've alluded in the call that you would expect competition in mortgages to remain tough throughout 2019. I was wondering if you could shed a bit more color in terms of market itself, where do you see the overall market growing mortgage shares, potentially slowing in the next year as you see some of the transactions that was coming down, some of the pricing trends not being as strong as in recent years? And whether I think a number of banks are now trying to manage the retentions that are similar to what you indicated earlier on the call. Would you think then as a consequence, pricing was likely to fall further from here would you -- or basically make an assumption that pricing would stay probably at current levels? And the second question is similar just on the deposit side. Obviously, with excess liquidity being trapped in a number of banks would you expect that competition on the liability is somewhat less pronounced? And to that extent, I think just looking at some of the pricing data, it seems like that some of the pricing points on the deposit side has narrowed, so some of the banks have passed on more, some of the banks have passed on less over the last base rate hikes. Do you think -- how sensitive are those deposits to -- by how much you pass on. So I'm just trying to understand if we have a further base rate hike next year to what extent you might be able to have a lower beta into it?
Look, there's a -- on both sides, there -- certainly on the asset side is very competitive in the mortgage book, slightly less in the unsecured side of the business. It's more around the pace with which you can make a decision as opposed -- as long as your pricing is fair. On the deposit side, I think different banks seem to be experiencing different things. Some are certainly no need to take on new deposits in any great rush other than from existing customers, and I think this is being -- the larger banks are well and truly well positioned for their liquidity. I suspect that some of the smaller banks, as they look towards refinancing the Bank of England funding, will have to start thinking about their pricing. And you start -- I think -- well you are starting to see that coming to the marketplace, a wee bit. But look we are well-positioned at this point in time with both deposit -- the deposits to fund our lending, and we did pass on 40%. But we were quite strategic about where that went to, what products it went to, 96% of the customers actually got some benefit out of it, but some greater than others. So we were quite clear about where we put the increases as opposed to others because there are some products that it doesn't make much difference. Sorry, question?
Yes, I just wanted to -- just to follow-up on that [ section ]. If you would have passed on less than the 40% of the balances or where you're sensitive to that. So on the mortgage side you'd be obviously a very high sensitivity to pricing in this space, would you expect similar sort of things on the deposit side or is it more resilient there?
Probably we're seeing less competition on the deposit side than we are on the asset side because everybody -- the bigger players have got plenty of liquidity and the ability to get hold of the deposits. So I think there's less competition in that side of it. Deposits in the U.K. PBB are up 3% year-to-date. Current accounts is up 3.9%. And savings are up 2.8%. So we're doing very, very well on the deposit side of this business. That is -- my understanding is that it's better than the market growth itself. So we have the capacity to bring on deposits, but we are -- we were quite careful about where we did put the pricing changes both -- from a strategic perspective. But as I said, I think there are players in the marketplace that will probably not be in the same position as ourselves. The market actually was just under the 3%, so we grew pretty well across those areas. So -- but look, there will be competition over time, but I think the main competition is in the lending side around mortgages. And yes, you're right, retention rates, people are trying to hold onto the business, and the pricing does get -- again, become very competitive to hold on to the business.
I think what we're always clear about, Ross, is that we make sure that we stick within our risk profile and that any business that we write returns a good cost -- return on capital. So while it is a really important focus, you have to look out -- look after the back door and the front door to make sure you always do that within your wider metrics and not just focus on NIM.
We will now take our last question from Robin Down from HSBC.
Slightly cheeky one this, but given you've said that you are comfortable with consensus on the revenue side, I wonder if I could invite you to comment on the cost side as well. I'm just conscious -- I think strategic costs, I think you've kind of given us the sort of guidance and that looks pretty similar to where consensus is, but in my head, I think you have been talking about litigation and conduct being elevated in 2019, and that doesn't seem to be reflected in consensus. But then going the other way, the other expenses line doesn't seem to drop away exactly as perhaps previously have been guided. So I just wonder if you could just comment on the cost side as well as consensus?
Yes, look -- and, Robin, thank you very much for a different question away from NIM, so that's good. But, of course, I'm staying very much with our 2020 guidance, around a sub 50% cost to income ratio, which we did say at the start of this year that we would spend more money this year on a number of innovative-type activities inside the business, and there would be less cost takeout this year. You've seen we've taken another 50 out in the quarter. Next year, we will be stepping up the cost takeout again in the business and certainly into 2020 to position us well for that 50% cost to income ratio. We have been doing a lot of work around our end-to-end processing, and restructured many parts of the businesses around what we call domains where all of the front to back activity is put into one area, example being that is the home buying journey, the other one is around our everyday banking which is your current accounts and deposit accounts and savings accounts. And the other one in these [ metrics ] area is around unsecured lending or short-term lending. Now -- and then what we've been doing this year is putting all of the people associated with those parts of the businesses in one area, front to back, including parts of our Indian operation. So next year, we do expect to see, and we're planning to see, better cost takeout and better use of digital activity that we've been spending money on across the bank. But the -- in this industry, there needs to be relentless focus on your cost structure and what that is, it's going to be a digital journey, and that's what we have been spending money on, and the results will start showing again in 2019 and through into the 2020. So costs is a big focus for us, again -- well it has been this year, but we have been spending it on some other things as well.
And I think we'll see reserve -- kind of reconfirm what you had mentioned around the litigation piece. You know we've got a long but thankfully shrinking number of pages in our accounts, we continue to kind of pick them off. We expect some of that to continue into 2019 as well.
Yes. There will be some activities that we'll try and clean up again next year and we've still got a few places...
Continuation of a journey, yes.
Thank you.
I think that's the last call. Can I just thank everyone for joining us? Look, actually I was pleased with the quarter's performance given the current economic outlook and the competition that we are seeing and we've discussed on this call. We're also aware that there's a lot more for us to do, and we're fully focused on improving this business, particularly around our customer service delivery. And as we've discussed in the last call, just around the cost takeout in this business, we haven't taken our eye off that at all. But the business is in pretty good shape. We've got great capital levels, which we do want to distribute back. I'll say that again and again. And we'll find ways of getting it to you, and we will continue to make this a very good bank. Thanks for joining us on the call. And thanks, Joanna, for running it for us.
Ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may now disconnect.