Natwest Group PLC

LSE:NWG

Q1-2025 Earnings Call

[Operator]

Good morning, and welcome to the NatWest Group Q1 Results 2025 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, executive]

Good morning, and thank you for joining us today. As usual, I'll start with a brief introduction before Katie takes you through the financial performance, and then we'll open it up for questions. Against the background of heightened global economic uncertainty, we continue to focus on advancing our strategy through 3 key priorities: disciplined growth, bank-wide simplification and active balance sheet enrichment. Examples of our recent progress include the completion of our Sainsbury's Bank transaction yesterday, which adds around 1 million new customer accounts with about GBP 2.5 billion of unsecured lending and GBP 2.7 billion of savings.

We launched a new mortgage enabling first-time buyers to combine income with a family member or friend while retaining independent ownership to help them get on the property ladder sooner. In Business Banking, we marked the tenth anniversary of our Accelerator program, which has helped to grow and scale 10,000 small businesses across the U.K. by setting a new ambition to support a further 10,000 businesses in 2025.

We also upgraded our ambition to lend GBP 7.5 billion to the U.K. social housing sector between 2024 and 2026 and announced that we're deploying GBP 500 million to retrofit social housing stock supported by a financial guarantee from the National Wealth Fund.

On bank-wide simplification, we have the first U.K. headquartered bank to collaborate with Open AI in order to meet customer needs faster and increase productivity. And as we simplify the organization, we are moving our private banking investment operations from Switzerland to the U.K. and relocating their data and technology teams to the U.K. and India.

On active balance sheet and risk management, we made further progress optimizing RWAs in the quarter. And in an uncertain environment, our prudent risk management gives us a competitive advantage. So let's turn to the financial headlines for the first quarter. We made a strong start to the year. Customer lending grew 0.9% to GBP 375 billion. Customer deposits increased 0.5% to GBP 433 billion with growth in both Retail Banking and Commercial & Institutional. Assets under management and administration of GBP 48.5 billion included net AUM inflows in the quarter of GBP 0.8 billion. We also provided GBP 8 billion of climate and sustainable funding and financing bringing the total to GBP 101 billion since July 2021, exceeding our GBP 100 billion 2025 target.

This activity clearly underpins our financial performance. Income increased 15.8% year-on-year to GBP 4 billion and costs were GBP 1.9 billion, resulting in operating profit of GBP 1.8 billion and attributable profit of GBP 1.3 billion. Our return on tangible equity was 18.5%, driving strong capital generation of 49 basis points before shareholder distributions.

Earnings per share were up 48% at 15.5p and tangible net asset value per share was 347p, up 15% year-on-year. We continue to maintain a strong balance sheet with a CET1 ratio of 13.8% and the government shareholding has reduced to less than 2%, in line with their stated intention to exit fully by 2025, '26.

Given the strength of the first quarter, we are updating our 2025 guidance, we now expect to be at the upper end of the range to both income and returns. And with that, I'll now hand over to Katie.

[Katie Murray, executive]

Thank you, Paul. I'll start with our performance for the first quarter using the fourth quarter as a comparator. Income, excluding all notable items, was up 2.1% at GBP 4 billion. Operating expenses were 12.7% lower at GBP 2 billion, and the impairment charge was GBP 189 million or 19 basis points of loans. Taking this together, we've delivered operating profit before tax of GBP 1.8 billion. Profit attributable to ordinary shareholders was GBP 1.3 billion and return on tangible equity was 18.5%.

Turning now to our income performance. Overall income, excluding notable items, grew 2.1% to GBP 4 billion. Excluding the impact of 2 fewer days in the quarter, income across our 3 businesses increased 3.7% or GBP 143 million. Volume growth was also supported by margin expansion as tailwinds from the product structural hedge more than offset the impact of the base rate cut in February.

Net interest margin was up 8 basis points at 227%, mainly reflecting deposit margin expansion. We continue to assume 3 further base rate cuts this year, with rates reaching 3.75% by the year-end. Expectations for the U.K. bank rate move down in April, closer to our base case, but we recognize that uncertainty remains and the actual outcome may differ.

Noninterest income across the 3 businesses increased 8% compared with the first quarter last year and was broadly stable when compared with a strong fourth quarter. This reflected another strong quarter of customer activity in our commercial and institutional business, in particular, in capital markets, currencies and fixed income.

We were pleased with the strength of noninterest income, but the first quarter performance should not be taken as a run rate. Given the strength of total income in the first quarter, we now expect 2025 income to be at the upper end of our GBP 15.2 billion to GBP 15.7 billion range.

Moving now to lending. We continue to be disciplined in our approach and deploying capital where returns are attractive. We were pleased to see a stronger mortgage market together with ongoing demand from larger corporates and financial institutions. Gross loans to customers across our 3 businesses increased by GBP 3.5 billion to GBP 375 billion.

Taking retail banking together with private banking, mortgage balances grew by GBP 2.1 billion with strong gross new lending reflecting some pull forward of second quarter completions ahead of the stamp duty changes for the first-time buyers on April 1. Our stock share remained stable at 12.6%. Unsecured balances increased slightly to GBP 16.9 billion, driven by higher personal loans to our retail customers.

Our unsecured portfolio will benefit in the second quarter from the completion of our transaction with Sainsbury's Bank, which I'll talk about shortly. In Commercial & Institutional, gross customer loans, excluding government schemes, increased by GBP 1.6 billion. Within this, loans to corporates and institutions grew by GBP 1.5 billion, mainly driven by infrastructure and project finance.

You will also see in the appendix that we have shown the split of our corporate lending exposure by sector as presented in our year-end Pillar 3 disclosures. I'll now turn to deposits. Fees were up GBP 2.1 billion across our 3 businesses to GBP 433 billion, continuing the quarterly growth trend of 2024.

In retail banking, an increase in current account and term balances was partly offset by a reduction in instant access savings due to annual tax payments. This also drove a reduction in private banking balances of GBP 1.2 billion. The increase in commercial and institutional of GBP 2.4 billion was mainly from larger customers in corporate and institutions.

Migration from noninterest-bearing to interest-bearing deposits was insignificant, and we have not seen any material change in customer behavior following base rate cuts nor since the onset of recent market volatility. Non-interesting bearing balances remained 31% of the total, and term accounts are still around 16%. I'd like to turn now to our Sainsbury's Bank transaction, which completed yesterday.

This transaction presents an opportunity to scale our customer base by adding 1 million new customer accounts, which deliver incremental income at low marginal costs through our digital platform, offering sustainable growth. It also accelerates our strategy to grow our share of unsecured credit in a disciplined way by increasing our credit card stock share to around 11% and improving profitability.

The transaction is self-funded, bringing GBP 2.7 billion of savings, which increases retail banking deposits by 1.4%. We expect these portfolios to add income of around GBP 100 million this year, and we will incur onetime integration costs of around GBP 100 million this year.

The unsecured portfolio attracts a day 1 charge for expected credit losses of around GBP 80 million. In terms of capital, the portfolios add around GBP 1.8 billion of risk-weighted assets with total day 1 impacts reducing the CET1 ratio by around 16 basis points.

Sainsbury's customers will move to NatWest branded products over the coming months with access to all our products through digital, in-person contact and our branches. And we're engaging with our new customers to ensure a smooth transition as they migrate.

Turning now to costs. First quarter costs of GBP 1.9 billion were down 8.5% on the fourth quarter, mainly as a result of seasonality and lower severance and property exit costs. As you know, our cost profile can be lumpy, and you should not take this as the run rate.

Our annual wage awards and higher national insurance contributions both take effect from April 1. We incurred just GBP 7 million of our guided onetime integration costs in the first quarter. So you can expect these to increase from the second quarter onwards.

We remain on track for other operating expenses to be around GBP 8 billion for the full year, plus around GBP 100 million of onetime integration costs. And we continue to focus on delivering cost savings from our investment programs to create capacity for further investment to accelerate our bank-wide simplification.

I'd like to turn now to impairments. Our diversified prime loan book continues to perform well. We're reporting a net impairment charge of GBP 189 million for the first quarter, equivalent to 19 basis points of loans on an annualized basis. In light of heightened global economic uncertainty, we have maintained our post-model adjustments at around GBP 300 million despite our book performance indicating a small release.

We have reviewed our macroeconomic assumptions. And whilst uncertainty has increased, we are comfortable with them at this stage, having embedded a combined weighting of 32% to both our downside scenarios. Our moderate downside scenario is closest to the modeled scenarios we have run and is worse than the latest economic consensus.

We have no significant concerns about the credit portfolio at this time, and it is worth remembering that customer borrowing rates have been coming down in recent months, together with inflation. Given the current performance of the book, we continue to expect a loan impairment rate below 20 basis points for the full year.

Turning now to capital. We ended the first quarter with a common equity Tier 1 ratio of 13.8%, up 20 basis points. We generated 49 basis points of capital before distributions, including 68 basis points from earnings and 10 basis points from CET1 capital improvements. This was partly offset by RWA growth, which consumed 28 basis points.

As you know, we increased our ordinary dividend payout ratio from around 40% to around 50% this year. Accruing 50% of attributable profits was equivalent to 33 basis points. RWAs increased by GBP 3.8 billion to GBP 187 billion. This includes GBP 2.2 billion from the annual update to operational risk. GBP 0.8 billion from initial CRD4 model updates and GBP 2 billion of business movements which broadly reflects our lending growth.

This was partly offset by another strong quarter of RWA management, which included 2 successful significant risk transfers and resulted in a reduction of GBP 1.2 billion. We continue to expect between GBP 190 billion and GBP 195 billion of RWAs at the year-end, with the frequent lands exactly within this range will largely depend on CRD4 model outcomes. Our target seen ratio remains 13% to 14%. Turning now to total capital issuance.

We have a robust capital position supported by strong capital generation from earnings and well-timed issuance over 2024 and 2025. Our total capital position comfortably exceeds minimum requirements for CET1, AT1 and Tier 2. You can see on the right, the consistency of our capital generation from earnings each quarter. You can also see that our 2025 AT1 and Tier 2 issuance is well progressed as we took advantage of market conditions in the first quarter.

Overall, this puts us in a very strong position to deal with any changes in market conditions. Turning now to guidance for 2025. We now expect income, excluding notable items, to be at the upper end of our previously guided range of GBP 15.2 billion to GBP 15.7 billion. Other operating expenses to be around GBP 8 billion, plus around GBP 100 million of onetime integration costs and the loan impairment rate to be below 20 basis points.

RWAs are expected to be between GBP 190 billion and GBP 195 billion. And based on the strength of income, we now anticipate return on tangible equity at the upper end of our 15% to 16% range. Looking beyond 2025, we believe the business is well positioned to continue to grow income, control costs and maintain strong capital and risk management supporting our 2027 target for return on tangible equity of greater than 15%.

And with that, I'll hand back to the operator for Q&A.

[Operator]

[Operator Instructions]

Today's call is scheduled for 1 hour, so we ask that you limit yourself to 2 questions to allow more of you a chance to ask a question. We will now take our first question from Sheel Shah from JPMorgan,

[Sheel Shah, analyst]

I've just got two questions, please, both on the income outlook. If we annualize the first quarter, we're running well above the target range you've indicated. So my question is more around the noninterest income. How much of the strength in the quarter do you think is sustainable? And if you can disaggregate between the various sort of segments within there, that would be helpful. Then secondly, on the lending margins, they've increased 2 bps in the quarter. Can I ask what was driving that and whether we should expect that same pace going forward? .

[Paul Thwaite, executive]

Thanks, Sheel. Katie, both of you.

[Katie Murray, executive]

Sure. Super. Thanks very much, Sheel. So no, look, really a good strong start to the year in terms of the quarter 1 performance. So very much expecting to land at the upper end of our guided range as we've spoken about on the call already. .

We don't expect Q1 to be the run rate, I'd say, particularly for noninterest income. There are a good few positives as we move forward from here. Obviously, we've had continued good growth in Q1. We've got 80% of our structural hedge tailwinds are already locked in for the year, and we've also got that additional benefit of GBP 100 million from the Sainsbury's portfolio coming through.

There are a few things that offset that. This -- we've got 3 Bank of England rate cuts. We expect to start on the next 1 on Thursday of next week. The overall impact of that will be subject to deposit pass-through and customer and competitive behavior. We do also recognize as you all do that there is heightened global economic uncertainty that may need to -- may lead to a little bit of customer and consumer delay in borrowing and investment decisions. And then on noninterest income, there are a number of factors there that influence the level from here, very much around kind of customer activity within there.

If I look at your NIM point. As we look at that, so NIM 8 basis points up in the first quarter, lending margin plus 2%. That was very much pointing to mix. in terms of a little bit of pressure on mortgages, but then unsecured and corporate lending growing. And also, there was a nonrepeat that we had in Q4. And deposit margins strong, 4 basis points coming through and then funding another plus 1 basis point. And that's driven by the ongoing repositioning of our liquidity portfolio and also AT1 issuance plus some non-repeat of Q4 tax charges.

I know we seem to spend a lot of time chatting around funding another with you on these calls. But I would say I don't really see it as a key driver going forward of our NIM outcome. There is some volatility in that line quarter-to-quarter. We do seek to take advantage of market conditions when they were appropriate. And overall, I think it's a good quarter for NIM. Pleased with the performance and from the start of the year, and that supports us at guiding you to the top of the range for income. And as you know, we don't give you specific NIM guidance on the different component parts. Thanks very much, Sheel.

[Operator]

Our next question comes from Benjamin Caven-Roberts from Goldman Sachs.

[Benjamin Caven-Roberts, analyst]

So first, just on the backdrop for asset quality and the read across from tariffs. Could you share a bit more detail on your thought process for the Q1 impairment charge and the GBP 0.3 billion PMA you currently hold? I recognize the U.K. is, of course, impacted differently versus other countries in respect to tariffs, but I wonder how you're thinking around the more holistic impact of the slowdown in growth from global trade tensions? And then secondly, just on capital allocation a bit more broadly, where do you see the most attractive area of your business currently to allocate incremental capital? And has this evolved at all over recent months?

[Paul Thwaite, executive]

Thanks, Ben. Katie, I'll take those 2. On the asset quality side, pleased with the quarter. Asset quality remains been strong. You'll have seen the charge for the quarter, 19 basis points, that's inside our 20 bps guidance. Higher than quarter 4 last year, but there was a release in quarter 4 and lower though than quarter 3 last year.

So we're encouraged that there's no underlying deterioration. I guess the wider observations, we're obviously monitoring them very vigilant terms of the portfolio, looking through the different asset books and ensuring we understand any emerging trends, but there's nothing material to report yet.

Customers are certainly resilient. I would say that they've proven their resilience over a number of shocks, arguably over the last decade from Brexit through COVID, energy shocks and interest rates. We've got a PMA, as you mentioned, total PMA of around GBP 330 million, about GBP 300 million of that is for economic uncertainty.

We feel that positions us well, given -- you do have to acknowledge that there is obviously more global uncertainty certainly that has emerged since the end of the quarter. If you look at our book, given the size of our corporate and commercial business, we reflect the U.K. economy. It's 70% services. We've given you some hopefully helpful disclosures in the documents today around different sector concentrations, about 2% is manufacturing, for example, low single digits from a U.S. perspective and mainly investment grade.

So we're vigilant. We're monitoring, but we feel very sure by the asset quality as it stands, and we think our clients are insulated from some of the impacts. On capital allocation, your second question, strong position at the end of the quarter, 13.8% represents around 50 basis points, 49 to be exact our capital generation before the ordinary dividend.

I think it's important to see that, that's come from both and from good RWA management. So strong position there. In terms of I think that allows us to capture demand when it's there from customers. And you'll see that we've obviously grown our asset books in retail and commercial during the first quarter. We haven't fundamentally changed our capital allocation.

We've been pleased with the growth and returns we can capture in mortgages and unsecured and the same on the corporate and institutional side, which mainly came through our kind of CIB business. So no change in our, I guess, philosophy of capital allocation. But as ever, driven by our returns. So if we see that there's better risk reward, we will deploy differently, but we haven't done that yet. Thanks, Ben.

[Operator]

Our next question comes from Chris Cant of Bernstein Autonomous.

[Christopher Cant, analyst]

I just wanted to ask about the headlines we've had in respect of ring fencing, please. And just to understand, obviously, your signatory to a letter of the press asking for a review, what would you like to happen in respect of ring fencing? And if you could explain a little bit your motivations for wanting to change this. Obviously, one of your editors has argued we shouldn't get rid of ring-fencing because it's good for customer protection. What is it that you feel this is doing that's adverse for the business? What are the restrictions? Is it about costs? And if it is about cost in part, could you give us an indication of the rough quantum of duplicated costs for the group? .

[Paul Thwaite, executive]

Thanks, Chris. I'll take the ring-fencing question. So where am I on this topic. So I've been consistent since I've been in this role around how important it is to have high-quality regulation. I do actually think it can be a source of competitive strength for the U.K. sector.

What I've also said is it's important we get the right balance between risk and protection. The regulatory architecture is very different since the time of the financial crisis. And it's also evolved a lot since the financial crisis.

So if you think of recent introductions on the conduct side of consumer duty recovery and resolution obviously followed ring-fencing. So it's in that context, I guess I've signed a letter, and I do think there is more scope for further progress on ring-fencing and to further reform. I did welcome publicly the changes that came through earlier in the year in February. Why do I think there's more chance to reform, Chris, which I guess gets to the heart of your question. A couple of reasons. One is one of the big drivers was obviously around financial stability, but the SCIO review itself concluded that the recovery and resolution regime that followed ring-fencing is arguably a more effective driver of that stability.

So that's one reason. So -- and then the consequence of that is, it's driving cost and friction into, I guess, how we serve our customers. So I wouldn't just highlight the -- that it is a cost-driven argument. Arguably, most importantly, it's a customer-driven argument. It does impact our customers. It adds to the cost and complexity of serving customers across the ring fence. That includes U.K. commercial and SMEs.

So it can distort decisions, it can distort pricing and arguably limit and stability to support the economy and the growth agenda. So that's I guess that's my rationale. I'm not going to put a cost number on it. I know you asked that, but you wouldn't expect me to not going to do that, but that's not the primary driver.

I think the other question we need to ask ourselves as well, really from a nation perspective is we are the only jurisdiction to have this particular regime. So where I am is it just feels timely and appropriate to review it. I think it is beholden on us to make sure that the prudential framework maximizes banks and the sector's ability to support U.K. business. So that's why I've called for a timely review. So hopefully, that's clear, Chris and gives you a sense of how I think about it.

And Actually, the one point I didn't cover just thinking through your various, I guess, sub questions is, obviously, deposit or protection is important. And I wouldn't be advocating for anything to jeopardize this. But I think there's a lot of existing embedded protections through the FSCS scheme, capital and liquidity we hold for MREL, et cetera. So I think there's a lot of depositor protection. So I'm not looking to weaken that.

[Operator]

Our next question comes from Andrew Coombs from Citi

[Andrew Coombs, analyst]

A couple, please. One strategic, one numbers. On the strategic one, given that Sainsbury's Bank has now closed, perhaps you can comment on the strategy for that business from here, your ability to derive synergies to tap into the Sainsbury's customer base and potentially more broadly, the Necto Rewards customer base. .

And then second on the numbers, the cash flow hedge. Thanks for the extra disclosure on Slide 9. You talk about 3p positive decay in the quarter, offset by Should we assume that quarterly day run rate going forward? Is that fair?

[Paul Thwaite, executive]

Great. Thank Andrew. Katie, I'll take Sainsbury's and you follow up on cash flow hedge. On Sainsbury's, Andrew, delighted to close that yesterday, brings 1 million customer accounts to NatWest. Also strategically, it improves our market share in unsecured prime credit card market share goes up to 11% on the back of transaction.

So I think strategically, it's compelling. It's not really a synergies led deal because we've taken the customers and the assets and the liabilities. We haven't taken in effect the infrastructure of Sainsbury's Bank. We do see opportunity there within obviously, within the 1 million customer accounts that are coming across. We get -- we have the ability to offer the breadth of our products, services, channels, mobile app functionality. We think we can deliver to that customer base a very attractive proposition. And obviously, that will be a key focus of ours as we migrate the customers over the course of the next 6 months.

We do -- we have a very good and healthy working relationship with Sainsbury's on multiple points or multiple areas. So we do have the potential to think about the proposition targeted offers using loyalty and Nectar points. But we'll be very targeted and thoughtful about that and make sure it drives customer value and utility. But you can obviously expect to see that across not just the cards portfolio across the opportunities we have. So that's where we are on Sainsbury's pleased and excited by it. Katie.

[Katie Murray, executive]

Andrew. So just in terms of the cash flow hedge, there's no change to my previous comments that I've made on this, we do expect the majority of the to unwind over the next 2 years. So that 3P that you see on Slide 19 is from that decay. It is a little bit of offset as we've seen the yield curve changes kind of move around, but so would probably guide you to quarter-to-quarter, but it certainly is over the next 2 years, we expect that to be fully kind of matured out.

[Andrew Coombs, analyst]

So just to follow up on that. A bit of a pointed question, but do you think that's reflected in consensus in the tangible NAV because you've again been in this quarter and tangible NAV per share?

[Katie Murray, executive]

Yes. So I guess when we look at consensus, I do note our average consensus is sitting around 27.8% for 2025. It's a better place than it was, but I would say it's broadly in consensus, but maybe not everybody. So maybe it's a useful reminder this morning for those that might want to look at it again.

[Operator]

Our next question comes from Aman Rakkar of Barclays.

[Aman Rakkar, analyst]

For the presentation of the questions. I guess, I've got two questions. One is around just deposit income. And you are delivering pretty impressive like deposit margin expansion despite base rate cuts? And my ultimate question is just around the sustainability of this deposit margin expansion because you've got so many moving parts here, right? You've got the structural hedge you've got base rate cuts, but then you've got pass-throughs and the various delays that come through. So is this the kind of run rate for deposit margin expansion in coming quarters? And if there's part of that, you can lift the lid on, what is the structural hedge contribution versus the other bit? Because it is impressive, and I just want to kind of get an understanding of how enduring this is.

So if you could kind of lift the lid on that. And as part of that, I think you're executing pass-through is pretty very bestly from here. I think the stuff that we're kind of monitoring I can see kind of 60% to 70%. Do you think you can continue doing that from here with the 3 rate cuts you've got coming? Should we kind of continue to factor that as a glide path? And then I mean the only other comment kind of question is, we really don't know what to do with any of your guidance this year because there is just such a clear upside risk to your guidance that we're inclined to just completely disregarded upon arrival.

So I guess it's not really a question though, it's more of a statement, right? But the net interest income is clearly compounding higher the margin is better, the volume is tailwinds to even hit the GBP 15.7 billion. I think the non-net interest income would basically have to drop off a cliff.

So you comment on that or you can just accept aeration I observation.

[Paul Thwaite, executive]

estivations hypothesis, income. Okay. We'll come back to you for deposit income. On pass-throughs, simple and quick answer, I agree with you. We've executed well in terms of the current reductions. We've given you some sensitivities. The numbers you quoted around the past interest rates are accurate.

You can see that in the data. Ultimately, it will be a function of our funding needs, competitor behavior, customer reaction. But we feel we'll feel confident from a pricing perspective. We understand the elasticity and the customer base, and we're getting the balance right. So -- that's where we are on pass-throughs. And we're very thoughtful both on the level of pass-through and the timing. Let me address the bigger question on your observation on guidance.

I guess, where are we? We've obviously had a very strong start to the year. We've said we expect to be at the upper end for both returns and income. We're pleased with the income trajectory. We've given you a pretty granular guidance on over lines in the P&L. Obviously, there are scenarios which would get you to a higher return. But my view is what is it, 6, 7 weeks since we last spoke to you. There's obviously a wider uncertainty with as ever, you'll I'll update you as we go through the year. But we feel pleased with the quarter 1 that we've had. Katie?

[Katie Murray, executive]

Thanks so much. On your kind of deposit question, I'm probably going to take you a little bit back up amount, I think it might be easier. So we don't guide on NIM, as you know, but we have seen steady improvement in the deposit margin. And that's really as a result of the strong hedge that we've got we've got in place. You understand that well. So I'm not going to take you through that in a huge amount of detail, not kind of break it down. You've definitely got all the details that you need on that hedge to enable you to model that. .

I think the kind of -- as you talk about, there are different factors coming through, and it really comes on to as we get into the rate cuts, which we expect to see kind of coming on a quarter. for the rest of the year, the level of kind of pass-through that happens there, we model it on 60%, as you know, and that's been pretty accurate in terms of our recent experiences we've gone through and then kind of what happens on competition. as well as the kind of evolving trend we see on kind of household M4, particularly as to what happens to those pods of margins.

But overall, thanks very much for the question. And I think you've got all the bits to kind of form your own conclusions.

[Operator]

Our next question comes from Amit Goel of Mediobanca.

[Amit Goel, analyst]

Hopefully, you can hear me okay.

[Paul Thwaite, executive]

Yes, we can. Good to hear you. Great. So 1 is actually on the costs on Slide 10. So I mean, maybe want me to kind of completely unpack it. But when I look at the underlying costs in the quarter, kind of annualize those and then add on the items, the integration, the NIC, 3.3 be wage growth, the levies, et cetera, I still come to a number about GBP 150 million shy of the GBP 8.1 billion market or guidance for the year. So I'm just wondering whether that's potentially some higher admin expense or the premises or depreciation? Or is there also a bit more potential upside coming through on the cost line. just and or was there any other reason why cost was particularly good in Q1 and why that wouldn't necessarily repeat in the future quarters?

And then secondly, just coming back on the ring-fencing question. I appreciate your commentary on the cost piece. So I was just wondering if you were able to deploy more capital outside of the ring-fence to what extent would that help you from a kind of a growth or volume perspective and/or kind of yield perspective, if you can deploy liquidity, I don't know, would you be able to deploy it to a slightly better yields if we were to see some softening of the regime?

Thanks, Amit. Do you want to take cost?

[Katie Murray, executive]

Thanks Amit. Look, when we look at costs, our guidance is really unchanged from that. We are on track to deliver our full year cost guidance of around that GBP 8 billion plus GBP 100 million of the onetime integration. And of that onetime integration costs, we spent GBP 7 million in the first quarter -- so you're going to see that ramp up in the next few quarters as you go through. But you understand is where the costs are lumpy. And so I wouldn't expect Q1 to kind of happily free through on the other quarters. But you've clearly got the component parts in terms of NIC comes in, in April or standard of 3.3% comes in from April as well.

So you see them kind of coming. What Paul and I are really focused on as we go towards that 8.1% number is really kind of focus on the creating capacity so that we can then reinvest that in the business. So I would really encourage you to take the 8.1 except that it's lumpy in different quarters, and I know that's frustrating for you with your models, but that's certainly the number that we're aiming for.

We have every intention of hitting. And in doing so, make sure that we can drive the business to create capacity to continue to reinvest in our development. Paul, I'll hand back to you.

[Paul Thwaite, executive]

Yes. Thanks, Katie. So on ring-fencing, relatively simple. Amit, should there be any change? And I guess, so the premise is that it is currently not as efficient as it could be from Ng from a liquidity and capital perspective. So if there were to be any changes, that does present opportunities in terms of choices around how we would deploy that capital and liquidity.

What wouldn't change is kind of, I guess, our capital discipline and the way we think about allocating capital to the best returning opportunities. But ultimately, it could lead to more supportive customers and better utilization and optimization of the capital and liquidity across the whole group.

[Operator]

Our next question comes from Ed Firth at KBW.

[Edward Hugo Firth, analyst]

Yes. I just wondered if I could just bring you back to your interest rate sensitivity. I think you put it in the appendix I think it's a couple of hundred million for 25 basis points, something like that of cuts. Because if I look over the last 12 months, your margin is up almost 30 basis points, give or take a bit. And I know you're going to want to look at the structural hedge, but the structural hedge, you give us good disclosure on that. That's 15 to 20 basis points of that utmost.

So you've probably got another 10 basis points of margin expansion in a falling interest rate environment. And so I'm just trying to understand sort of how that works? I mean I get that the 25 basis point sensitivity, like a theoretical exercise you do, but I guess what that means is you're able to adjust product pricing to basically more than offset that pressure? And so I suppose the question is it's a bit rather a man was talking. I mean, -- is there a world where -- I mean, can we safely suggest now to ignore that interest rate sensitivity and assume that you can continue to do that going forward, firstly?

And secondly, is there a level of interest rates at which that doesn't you won't be able to do that any, because, I mean, I guess, interest rate expectations are falling quite rapidly at the moment. So I mean if we get that sort of 2.5% or something, is that the level at which suddenly you can't be priced enough because you start to hit deposit floors, et cetera. So that would be -- any comments you've got around that would be very helpful.

[Paul Thwaite, executive]

Thanks, Ed. Katie, why don't I just -- I'll say a couple of quick words on pricing generally, and then you maybe talk to some of the. Yes. Ed, the comment I'd make is we -- since the second half of -- mid-2023, we've invested a lot of time and money in terms of understanding our deposit pricing, our elasticity and where much -- we've been much able -- much better able to price dynamically to understand different segments in elasticity. We've extended the product range, both the range of products but also the tiers within those products. So that probably talks to just a greater dynamic use of our pricing insights around how we price the books. It's worth bearing that in mind as well as the observations you have around the structural hedge, Katie

[Katie Murray, executive]

Yes, sure, absolutely. So I mean, clearly, we put a lot of effort into that sensitivity. So I'd really encourage you not to know it. And you can see some of the we evolve each kind of half year and year-end for you to kind of see within there. But as you look at it, there are things, obviously, you need to bear in mind about it.

It's on a static balance sheet. So as things evolve in the year, you can see changes in what we have seen in different quarters is the mix does move a little bit from where we were in terms of fixed term accounts and where we were in noninterest-bearing. And we've seen a bit more coming into instant access, which obviously that for is good for the deposit margin as that kind of comes through.

The other thing I would kind of look to sort of see is actually to consider what's happening on some of the customer pricing as well as that kind of hedge tailwind. You know that our mortgage headwind has abated in terms of the effort there. So it's kind of going to through. You heard my comments earlier in the kind of funding and other where we try to kind of eke out margin by taking advantage of different kind of positions within the in the market.

But overall, if you think of what we said about the hedge, we expect it to be kind of stable in terms of its size and then the deposit margins the percentages in terms of the different deposit costs have been quite stable as well. So that kind of helps us kind of offset some of the rate cuts as we move through. So overall, look at the different components have a look at the different component parts. But I'd really encourage you to use that sensitivity and think of how it comes through on different timings of different rate cuts. Thanks, Ed.

[Edward Hugo Firth, analyst]

Sorry, as a follow-up, is there a rate at which that dynamic pricing becomes more challenging. And I guess 1 thinking about deposit floors?

[Katie Murray, executive]

I mean I think what we need to do is look through obviously, the history we've all lived through over the last the last 5, 10 years. Obviously, as you kind of go back through a few years ago, I mean, 5, 6 years ago here we never paid anything for our deposits ever again as a receiver side, and that's kind of -- that's obviously changed. I think what's happened is both the consumer and ourselves have all got much more sophisticated, more flexibility in terms of where we want to hold our deposits. They kind of reemergence of the kind of the term account is a place to kind of get better kind of interest rates. So I think even when you -- if we were to go down to those levels, which mean it isn't a level that being proposed and say this so it's not something we certainly see in our own economics, there would still be movement in flexibility on that, an that very much motors what's kind of happened in the past as well.

[Operator]

Our next question comes from Jonathan Pierce of Jefferies.

[Jonathan Richard Pierce, analyst]

We've got -- 2 questions, please. The first, I suppose, demonstration of how far and concise much of this is AT1 costs I'm having to focus in on. The -- the AT1 stock, I think is about GBP 6 billion now, which is 3.2% of your RWAs. Just wondering where we go from here because based on what you've got at the moment, the annualized cost is about GBP 400 million, which is quite a bit above consensus, but you have got some pretty big potential calls later in the year. Your Slide 13, I think it was suggested that you probably are largely done for the year, and hence, you'll just let those those other Tier later in the year disappear without replacement. Is that the way to think about it because I'd just like to get a better handle on what we should be putting in for AT1 coupons moving forward? .

The second question is a bit bigger picture, capital intentions, 13.8% equity Tier 1. you're generating a lot every quarter. The directed buyback opportunity feels like it's receding by the day. How are you thinking about this? Are you keeping capital back for potential inorganic opportunities when we get to the interims are we -- should we be expecting in market buybacks to be announced, these kind of things? And maybe connected to that, the risk-weighted asset optimization, it'd be helpful if you could give us a sense as to what cost to the income is of that because accepting you want to hit your RWA guidance for the year, given the capital position, it doesn't necessarily feel like you need to be doing this if it's coming at an income cost. So as a rule of thumb, what's the income hit from GBP 1 billion of RWA optimization would be useful to know.

[Paul Thwaite, executive]

Right. Thanks, Jonathan. Katie, I'll take capital and then come back to you on in you take the specific on AT1.

Sure. Okay. So Jonathan, on capital, as you say, strong print, 13.8%, upper end of our range. We've been consistent. We're happy to operate anywhere within the range, 13% to 14%. It gives us obviously a material buffer on our minimum, which is 11.7. You talk there is the potential, as you say, it's -- the size of it is getting smaller, but there still is the potential for a directed buyback, should we have the chance to participate. So it's worth bearing that in mind. -- we will review other buybacks, as you'd expect with the Board and update at the half year and at the full year, that's when we tend to do that. .

Nothing's changed around my philosophy, our philosophy in terms of capital allocation. We know how important capital return is to shareholders. So that's -- yes, there's that -- I think, hopefully, that's give you a very clear view of where we are. On the RWAs and the specific -- I guess the way we think of that is about the cost of capital on the trade. So -- we don't disclose the number on the cost of that, but what we ensure any trades that we write. We have to be -- we ensure that we're very happy with the return. And then obviously, we can redeploy that capital at higher.

So in effect, we look at those trades as as through the returns lens as in return accretive at a trade level, but also redeployment of the capital rather than just thinking about the income impact. AT1 ,Katie?

[Katie Murray, executive]

Yes, sure, absolutely. Thanks for bringing it up, Jonathan. So you're right, we issued some AT1 November and March. And I would say some of the cost probably isn't completely in all of the models, so it's worth having another look we look at as well. The coupon cost is booked through profit attributable to paid in equity holders, just to remind you, that is about GBP 100 million per quarter. And then the income obviously comes in proceeds of that is included with income. We do, as you saw -- you can see on Slide 14, we're sitting a little bit higher than our regulatory requirement. On AT1, the requirement is 2.1 % versus the 3.2% that we're sitting at us now. That's really a reduction of some of the early issuance we did to take advantage of good kind of markets.

Look, Jonathan, as you know, I can't comment on future calls. -- as we go through from here. So I'm not going to comment on that specifically today, but I guess that that access gives you some kind of indicator, but comfortable with we were sitting and really pleased that we did do some of our issuance earlier in the year, but I hope that helps.

[Paul Thwaite, executive]

And more broadly, on than just to close it off, obviously remain obviously very focused on capital allocation and distribution.

[Jonathan Richard Pierce, analyst]

You're willing to give us a very rough rule of thumb, though, on the income impact of the RWA optimization because there was GBP 1.2 billion in Q1, I guess, is a bit more coming later in the year. It's obviously a bit of a headwind against income.

[Katie Murray, executive]

So we're not looking to give you a specific number on that. I mean, obviously, as you know, we guide to total income, and that would be a small number as part of that piece. It is one of the things we look to the second half of the year, the kind of the headwinds that you have where you do see as you ramp up, you'll see some kind of action come through on that. I would just remind you there are various bits of RWA action we do, whether it's res or credit insurance or obviously, asset sales as well as kind of the data management activities we go. They all come at very different costs in terms of our book, as Paul said earlier, very committed to the cost of equity on those things and also we can redeploy it. So overall, we see it as very beneficial for the for the shape of the balance sheet and the income statement. Thanks, Jonathan.

[Operator]

Our next question comes from Guy Stebbings of BNP Paribas Exane.

[Guy Stebbings, analyst]

A couple of follow-ups, I guess. So the first 1 was just coming back to the lending margin. And then firstly, -- what are you seeing on new mortgage spreads today versus prior quarters and the 70-point you saw from much of '24. I mean is it right to think that may have drifted down into sort of 60s on application spreads today? And then on asset mix, how much you're sort of seeing support on the corporate book in particular, and if that's a trend you would expect to persist?

And then the final question was back on risk run market, but really in the context of the recent PRA comments. I think seeing the concern is sent more on risk in the system from funding of banks to acquire diversities rather than the size of the market itself. But a peer of yours downplayed in exposure to starting the week. I just wondered if that was something you would sort of echo those remarks.

[Paul Thwaite, executive]

Thanks, Guy. Katie?

[Katie Murray, executive]

Sure, absolutely. So when we look at the mortgage margin, our book margin remains around 70 basis points, in line with our previous guidance. That's a good indicator of the front book margin that we aim to write up for our risk appetite. We do know, and clearly, you can see that front book margins do vary week-to-week given the dynamic pricing and hedging that we have with good returns are obviously available below that 70 basis point level, particularly when you look at the kind of lower LTVs what are we on kind of margins. Overall, you do expect us to be thoughtful on volume of new business as we continue to write and to flex our appetite at different times at some of the returns vary at different points on the pricing kind of charts. As you know, on mortgages and assets in general, our focus is very much on returns and not on the margins within there. And then if I look to your question on the asset book within the corporate book, you can see within NIM, our NIM work this time around that we actually had a little bit of a positive in there, a slight negative on mortgages, as I mentioned earlier and the positive coming through from the corporate book and a little bit unsecured as well. .

Then in terms of your second question, the DO CFO letter, it was very focused on the financing of significant risk transfers in the trading book, and that has no read across for us on the execution of our SRT transaction of our own assets. and as part of our capital optimization activities, and we do not, of course, finance any of our SRT transactions.

[Operator]

Next question comes from Robin Down of HSBC.

[Robin Down, analyst]

Can I just build a little bit on your comment there about mortgage spreads and appetite for rising business. I think you mentioned earlier that Q1 you felt was influenced by stamp duty on the mortgage side. But if we look at the banking and approval numbers, for March, but didn't really fall a great deal versus prior months. And certainly on a non-seasonally adjusted basis, they looked actually quite strong. at the end of March. So I just wonder if you could give us an indication of where your kind of approval numbers were and what you're thinking about lending into Q2? And then maybe similarly on...

[Paul Thwaite, executive]

Robin, we lost you.

[Jonathan Richard Pierce, analyst]

Yes. Unfortunately, we can't hear Robin anymore, but maybe.

[Paul Thwaite, executive]

Robin, we lost you the mid-question.

[Robin Down, analyst]

Which question, the mortgage?

[Paul Thwaite, executive]

Yes, you it got to the end of your mortgage question.

[Robin Down, analyst]

Okay. It's probably because I've got Bloomberg running in the background. It's just for a question of whether you could give us a sort of indication of where your mortgage approvals were at the end of March and what your kind of thoughts are in terms of mortgage growth in kind of 2 because it just feels to be like there's more underlying demand there rather than necessarily just being a stamp duty issue? And then the second question was around deposits. Obviously, Q1 seasonal is normally a very weak quarter. for deposits. You've seen growth coming through, including in personal current accounts -- so just wondering what your thoughts are there in terms of growth in Q2 and beyond? And whether or not we should expect feel structural hedge growing? I know you talked about stability in the past, but whether we should actually be factoring growth there?

[Paul Thwaite, executive]

Great. Thanks, Robin. So Katie, come to you on deposits. On the mortgage side, we agree with you, application levels through the quarter remained robust. There was a pull forward of some of the first-time buyer transactions because of the stamp duty change -- we can see in the data that our market share increased there from 8% a year ago to 11%, and we've kept our overall mortgage market stock share steady. So yes, so application volumes remain strong. We don't see that as a kind of cliff edge moment in terms of the stamp duty change deposits.

[Katie Murray, executive]

Yes, sure, absolutely. So if we look at the deposits, we -- if we think of our own economic data, we do expect the deposits to continue to kind of grow in line with that. We're very much moving in line with with market in that space.

And then you can also see that the savings rate has continued to improve as well, which is obviously is beneficial. Now in terms of your comments and queries on the structural hedge, we have seen a little bit of growth in this quarter on a noninterest bearing, particularly within retail banking and as we move forward from there. So Roman, think what's helpful to do is to think back how do we do our structural hedge. So we do a 12-month look -- so that small amount of growth that we've seen coming through in terms of its legal balances.

You could see we see that start to come through over the 12 months lookback. But I would say at the moment, we're kind of guiding you to pretty stable for this year around 970. so I wouldn't expect it to deliver growth immediately into the size of that structural hedge. But it's something that continued to see it growth and it became more meaningful, then it would go through, but it does come on to your kind of eligible balances. And that's certainly our noninterest-bearing are important within there. Hope that helps.

[Operator]

Next and final question comes from Alvaro at Morgan Stanley.

[Alvaro de Tejada, analyst]

Just a couple of quick follow-ups really. Just on the deposit mix term deposits come down slightly, Katie, you just referred to some of that. As rates come lower, do you think we could see more of that? Or is it just a seasonal blip, I guess people might not start not to bother to roll over some of the term deposits. Could we see that effect if we get closer to 3 or what level of rates do you think that could happen more at a bigger scale?

And second, just just to make sure that's still the intention when you talk about your 3% to 4% now the government sort of quickly going to come out do you still intend to stay within that range and distribute anything above that range on an interim basis i.e., every 6 months, the midyear and the full year .

[Paul Thwaite, executive]

Thanks, Alvaro. Last but not least, on the second -- I'll take the second question, Katie, then flip back to you on the deposit side. On the capital question, Alvaro, we're very happy to operate anywhere within the target range of 13% to 14%. We consider the bottom end to be a strong capital level. But as you probably heard me say earlier, we'll decide at the half year and the full year with the Board around capital distribution, but we know how important that is to shareholders. So no change in our philosophy at all from that perspective. Katie?

[Katie Murray, executive]

Sure. In terms of deposit mix, when I look at that term number, it was like 17%, now at 16%. It's all kind of in the roundings of where those numbers are. I think one of the things to think about as well as the kind of fixed rate ISA. So the April was ISA season, and we did see both in the sector data and in our own data, there was a strong season. So you see some nice pickup from there. So I think you see how it flows from here. What we look at a lot is in terms of the -- when people's accounts are coming up to maturity, how much do they retain and how much do they either move into an access, and then we see it coming back into fix as it goes through. And that kind of percentage has been pretty strong and is quite a high proportion of that.

So in my own mind, one of the ways to think about it, you have the ice season which brings more money in, and then you have people that are kind of managing their kind of term deposits as to where they are. Obviously, it varies in terms of different sectors, private is a little bit different. -- as well as people are looking for sometimes for alternative investment.

And then C&I, as you know, the numbers are much chunkier and it's a different kind of thing that you have in there. But overall, I think we're happy with how it's progressing. We expect it to continue to progress relatively well, but we'll move very much in line with kind of market for flow. So let's see how it plays out from here. Thanks very much, Alvaro.

[Paul Thwaite, executive]

Thanks, Alvaro. And I guess I'll wrap things up if that's the last question. So as to conclude, we're pleased with the performance in quarter 1. It's strong, and it shows the continued momentum in the business. We continue to believe the business is very well positioned to deliver strong shareholder returns. And to that end, we've updated our returns guidance to the upper end of the 15% to 16% range for '25. We will be holding a spotlight on our private banking business on June 25. So I hope most of you will have a chance to join that. And also the spotlight we held on our commercial business is available on the website. So wishing you all a good weekend. Thank you.

[Operator]

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