The Royal Bank of Scotland Group's Management Hosts Investor Seminar on UK Retail (Transcript)

| About: The Royal (RBS)

The Royal Bank of Scotland Group plc (NYSE:RBS)

March 18, 2013 9:30 am ET

Executives

Ross Maxwell McEwan - Chief Executive of UK Retail and Member of Group Sustainability Committee

Satyendra Chelvendra

Les Matheson - Former Managing Director of Retail Products and Member of Group Sustainability Committee

Fiona Davis - Finance Director for Retail and Wealth Division

Stuart Haire

Analysts

Thomas Rayner - Exane BNP Paribas, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Ian Gordon - Investec Securities (NASDAQ:UK), Research Division

Andrew P. Coombs - Citigroup Inc, Research Division

Rohith Chandra-Rajan - Barclays Capital, Research Division

Chris Manners - Morgan Stanley, Research Division

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

John-Paul Crutchley - UBS Investment Bank, Research Division

Manus Costello - Autonomous Research LLP

Gary Greenwood - Shore Capital Group Ltd., Research Division

Ross Maxwell McEwan

Good afternoon, everybody. Thanks very much for joining us this afternoon. This is my first Retail Investor roundtable, so looking forward to this. The structure for this afternoon is we're going to do a presentation. I'll do a quick intro of my team who are here today. It will take about 45 minutes and then we're going to head into, I think, probably the most important part of the afternoon, is where you get to ask all the questions, which we have allocated about 1.5 hours. And for those of you, I'm sure you're now routing ballots here. Those who are frighten to ask questions, we're going to have a cup of tea and coffee afterwards and you can ask all the questions you didn't want to ask publicly. So that's the structure for this afternoon.

First off, Les Matheson. Les looks after all our products and marketing. Les, do you want to quickly stand up so they can see from there. Great to have Les with us today. Fiona, Fiona is our Chief Financial Officer. You've probably seen a fair bit of Fiona in many, many presentations. Been around a great time, which is great for me. We'll come back to that later. Chelvi, Chelvi, who you would've seen in the distribution role, just recently I pulled him out of running distribution and running what we'll call Future Bank and I'll talk to you a little more about what that looks like going forward and delighted to have him in that role. I think it's a role he started, he came over here for and all of a sudden found himself divided into a whole raft of other things, including distribution. And we've got in the front row, Stuart Haire, who is the Chief Risk Officer for the Retail bank. Stuart's not going to do a presentation but is here to answer any of those tricky questions that I'm sure you'll have.

Now the most important slide of the day, we'll take the next 1.5 hours, you can read that. We'll just move on from that one, now that we've done it. What we're going to cover off today is basically, I'm going to give you a background of our new strategy. We're going to cover off some of the key initiatives from that strategy, look at the service proposition and also products, financial performance and outlook and then we're going to do a quick summary. I will do up to the strategy itself and including the strategy, then we're going to run on to service and Chelvi will pick it up from -- for our section there. Les Matheson will run the product piece and then Fiona will come up and do financial performance and I'll come back and just do a quick summary at the end and then we're going to open it up for questions. Okay?

So that's the sort of structure today. I thought I'd make -- just make some initial observations about the business that I've picked up. I've been here now 6 months. It feels a lot longer, actually, but it's about 6 months. And I thought I'd just make some comments on the business itself. I think, it actually made really good progress for the 3 years under Brian Hartzer and team. And many of the team or all the team here, were actually here under Brian. And I think the fundamental building blocks of this business have been put in place and the results that you've seen -- and we'll show you again today, have been very good. Without those building blocks, I don't think we'd be in a position to actually move off the platform that has been developed. And when I talk about that, it's around loan of payment being well down, really good credit skills inside the business. People that are really engaged in this organization despite what's been happening, particularly to the RBS brand, and also a very good platform around our customer database that's been put in place over the 3 years that we'll use going forward.

So there's a great opportunity here for our business to build off what has been built. We've got great people assets and interesting enough, after all of the pounding that this team and the team at the frontline have taken, they're up to the challenge and that's something, I think, has been so very pleasing for me. We're very focused on serving our customers and serving our customers well. In Asia you'll see -- throughout this presentation, you'll see a very strong focus on efficiency, through simplification. And if you don't get that message as we go through, we've failed in our job today. I believe our strategy will show continued sustainable returns for shareholders. And I'm going to take you through the past and then I think you can extrapolate out what you think as you will do on whether we can hold onto the terms we're getting out of this business. I believe we can.

Let's just quickly recap on the scale and reach of this business. Employees close on, including all the back-office, operational, IT staff, are pretty close to 40,000 people. We've got a total customer base of 15.4 million. Big opportunity within that customer base because only about 1/3, just over 1/3, to 40% are actually what we call main bank customers and I think they're probably typical traditional banking, Retail banking business in the U.K. We have over 5 million customers who are active online, and as part of our strategy of self-serving, that becomes really important for us. In the mobile space, the team moved in toward the last 15 months has had a very, very quick update of 2 -- uptake of over 2 million customers now, regularly using the mobile app, which I think has been great.

Loans to deposit ratio. At the height of this business, it was loan to deposit of 122%. It's now ripped down in Retail to 103%. And to be quite honest, for me, somewhere between 103% and 110%, I think, sort of signifies a very safe business and today it's running at 103%. The area that I think we've got the biggest improvement on is working with our customers. If you look at the net promoter score, which is what I'm pushing throughout our business, for our people to focus on, and I think the key feature for me is -- for us to focus on is around net promoter score, both by channel and byproduct and by overall. And you see the difference between the RBS net promoter score, which is well and truly negative about 15%. The market average though, interestingly, in Scotland is also negative because we dragged most of it down. NatWest is positive and slightly ahead in the market but interestingly, the market leader is actually well and truly above. So there's a space between what I'd call the 5 big banks and those smaller banks that our customers are being attracted to and have been dealing with, which creates the opportunity but also a threat for us.

Just moving through then into progress that the team have made over the last 3 years and I would just pick out a couple here. If you look at operating profit back in 2009, you can say, well that was sort of the depths of despair of the industry was GBP 200 million. The highest, I think, this business got to was close to GBP 1 billion. If you extract that out to 2012, without all the one-offs, close to an underlying business about GBP 1.9 billion. So it's a good underlying profitable business. Net margin has stayed pretty flat but pretty good at 3.6%. Our cost to income ratio has come down from the height of 61% down to 51%, and I think plenty of room to move on that. Return on equity is sitting at around 24%. If you look at the long run average of this business, it would be sub-20%, probably, 16%, 19%. [ph] But today, without the one-offs, it's sitting at around 24%. Loan impairment, which I talked about from the height of the time was at 1.6% now down to 0.5%. It's a very, very good result and shows a lot of hard work has gone into this business in the back end of it over the last 3 years. And again, if I take you right down to the bottom, net promoter score, it's not good for RBS and it is improving under the NatWest, which just shows 2 different brands doing -- having different things going on in people’s minds, and I know a question from one of you later, I will be disappointed if you don't ask if we keep RBS as a brand. About 80% of our business is done under the NatWest brand. It's Scotland that has the Royal Bank of Scotland number -- name.

Over the last few years, the team have done a very good job of simplifying the product range, reducing products on sale by 45% down to 56%. I still think a lot of work to be done there but also a lot of work to be done around the bank book coming to the front book to simplify even further. A lot of technology has gone out to the network in particular and that will certainly continue and Chelvi will take us through that. And also the charter which become a big part of the team, putting themselves out for public scrutiny, 92% of all the promises made under the charter have been met and we're looking at revising that charter now. I think, overall, a pretty good result for the last 3 years, giving the hammering this brand has taken and a very good business.

Looking forward, the market, we don't expect and have factored into our figures a lot of market growth. We think it's going to be somewhat quiet, I could say anemic, but I would say a quiet growth from this marketplace. So our figures, what we've been working on is going to be slow to come out of -- to see growth again from an economic perspective and the market will remain competitive.

We do not believe our investor -- sorry, our competition is sitting on their hands. They will also be looking to change their businesses dramatically and also focus on customer. So at the end of the day, I think it's going to be around the ability to execute in this marketplace as much as what you do -- or what you say you're going to do.

Our strategy is very much having the customer at the heart of everything we do. And we talk about delivering fair and transparent outcomes, so our alignment with the regulator is actually completely aligned, because I have a view that their thinking is exactly the same. And we'll be looking at focusing on customers’ needs and efficiency will be a key driver for us in doing so. We aim to make our processes, products and our interaction simple and easy. Today our business is incredibly complex in the way we deal with things, the way we use our systems and processes and our technology and our job is to simplify it on behalf of customers. And it's something I've been somewhat shocked about, having come out of the New Zealand and Australian marketplace, to see how little use of technology and how complex the processes are that our customers and our staff have to use. So I have a slightly different lens on that than probably many others do.

The team, you would've met Chelvi, who's -- as I said, has recently come out to look after what we call Future Bank and strategy for our business and we'll take you through the 7 major initiatives that Chelve's going to drive on behalf of our business. Les Matheson, been with us now 3 years and been spearheading the simplification of our product range and our marketing. Jane Howard about to join us in what we call a customer experience role. We'll make sure that what we do right across the business focuses on the customer. You'll see some other changes here. I've flattened out the distribution of our organization so that we get a lot closer to our customer and hear the voice of the customer a lot more. So we're putting in place a head of direct distribution, which will look after online, mobile and our contact centers. Fiona Davis, who you've met, great to have such an experienced finance person in our team. Fiona knows this business and the wealth business back to front, which is great for us as we look to change this business. Stuart Haire, you've met in the Chief Risk Officer role, that doesn't change. Same as Louise Haggerty, has been with us for quite some time in the HR role. Two dotted boxes there. John Ellington, Director of Operations for the Retail Bank; and Mike Errington, the Chief Information Officer, did not use to sit on that Retail ASCO [ph] . They both do now and to be quite honest, the conversations have changed quite dramatically since those 2 have been sitting at the table, and we make this business, I think, move a lot faster having them there and hearing their conversations and understanding their needs.

Mike Bamber, who looks after our Branch and Private at the moment. He's going to look after England and Wales. I've got to put somebody in to look after as indie of London and also somebody to look after indie of Scotland. The reason behind this, London is the growth engine. Let's focused on it. England and Wales have the biggest number of branches, I suspect, limited growth, so we need to manage that quite differently to London. And Scotland is the -- basically, going to be, after we've sold the Rainbow branch, is going to be the Royal Bank of Scotland and that brand needs lifting and so do the customer base up there to do better things with us. Ian McLaughlin, looking after Specialty Banking, which is investments, mortgage and our protection business; very clearly, the focus is on advice. And Ian will sit at our table and make sure that, that voice is getting a good hearing. So quite a large executive team but very focused on the conversations we would have about our customer.

I just want to cover off what our key parts of strategy will be. And it is my view that we can build the U.K.'s best retail bank under both the NatWest and the RBS brands. Having come into this market 6 months ago, I've been quite surprised of how bad this industry is from a retail banking perspective. And that upsets many, many of my people when I say that, but you just need to have to look at the stats, both for ourselves and for the industry, around industry complaints and you realize that there's not a great retail bank up here in the U.K. I would even go to say that there's not a good retail bank in the U.K. and our job is to create that. You have to look at the things that have happened in the past around PPI and I'm sure there will be some others that come out of the woods from past. One has to say, there is a real opportunity in this marketplace to create U.K.'s best retail bank and that will be a very, very good bank and I just see the opportunity is for us to take.

So our strategy is pretty clear. It's as much about what we're not going to do as it's much about what we are going to do. First off, this will be a mass-market retail bank. I am not going to allow this business to segment off and do all sorts of exciting segments. There's only one segment we're going to be after and that's in private. We haven't had about 700,000 private clients sit outside the Coutts brand. We're going to focus on that and get it right. And right now I don't think it is right in its proposition and we can do some pretty good things there. That's the only segment we will go after other than being really good at mass-market retail. We will support Chris Sullivan in his efforts in the small to medium size, because those people are in and out of our branches all day. And we have a very good relationship with Chris and his team on how do we support his SME customers so that they don't see the difference between my business and his and over time, we'll make sure that, that happens. We've talked about coverages just across all of the U.K., excluding Ireland, which is run separately but we will invest in London. I mean, London is where the growth is. We probably haven't put enough resources into this particular marketplace and focused on enough and we plan to do so. And we'll have a full product range but a simplified product range and we want to expand our shares in the mortgages and current account markets and in savings. And over the last 3 years, both mortgages and savings have been growing for us and we plan to continue that. One of the areas that shows the determination, particularly in the mortgage market to be really good at this market, we've had a fair number of our distribution force off the road for the months of December and January as we retrained and retrained them, again, to be great at what they do. And the feedback from those, from customers now, from a net promoter score alone has gone from 0 to 46% being prepared to promote to us as a great place to do mortgage. We used to be 0. So that's the sort of things we're going to have to invest heavily in this business and spend a lot more time with our people.

We will differentiate through service. The key pieces, though, will be availability and accessibility. We're good on ATMs, we're good on branches by number, and we're good at where they are and what they do. We've got a lot of work to do. We want to be the industry leader in self-service. We're good in mobile. We're not as good in online and getting people just to do it for themselves and allowing them to do it when they want to. And Chelvi will take you some -- through some of that. We do not plan to be -- this is where we don't plan to be the world leader in product design and development. We will be "me too", but we actually specialize in being greater at our distribution and allowing customers to do it for themselves. We'll have fair pricing. We're not going to lead the market, we're not going to lag up, we'll be there in fair pricing both as you take the product out and as you hold onto that product and we're going to have a smaller cost base in doing all of that.

We need to get closer to our customers. You've seen our organization structure. In some cases, we've already taken out 2 layers and we've got more work to do. And we need to have our staff following very consistent service standards, which started under the charter but will continue on under new charter going forward. The final one, I just want to cover off on is the simplified processes. We need to reduce the number of processes. An example would be 600 processes that run through our branch network, 600 processes that our people need to know about. It's just far too many. We're going to go straight through it and we're going to go through paperless. I'm just being amazed at this industry and its ability to love paper process. Fax machines that disappeared at other parts of the world about 10 years ago, they're all still here in abundance. I don't know what it is about the English, Welsh and the Scots that you love paper so much, but our view is, we can do without it, let's go straight through and let's eliminate all this waste that goes on and we'll simplify this business quite dramatically.

When it comes to the customer, these are the 3 things in the dark blue that the customers need: expert and trusted advice. They want it easy to deal with and you can't say that about the banking industry up here, and they want great customer service. So it's not that hard if you boil it down to one of the fundamental things you need to develop to deliver for customers. Then take you through to the next level, which is sort of one of the things that permeates down to amend the key service components. And I'm only going to pick out on a couple here. First, high levels of training and coaching. Differentiate between the training and the coaching. We do lots of very good training but we then don't take up on the job and coach people and to make sure that their behaviors are correct. So we've started doing a lot of work around that already. If you have a look at the next one on easy to deal with, accessible where and how customers want. Chelvi would take you through some of that. But far too often, we make customers ring us because our processes and systems aren't simple enough for them to do or we've complicated them so much, we don't trust them to deal with their own money. Or we don't have enough -- I think, we've got enough security at the back of the place to actually save them from losing it. We can change that. We need to simplify the processes. They're just too hard to deal with. And we need to build a culture of service inside this organization so that every point of contact, no matter where it is our how or who it's with, is a great piece of contact.

There are 7 major initiatives that we're going to drive in this business. In the joint, we have 142 projects running in the retail bank. That's a big bank but it's not that big. So we're starting to whittle those down and I suspect by the end of this year, we'll have about 40 and by the end of next year, we'll have about 20 projects running. But they will all flow under 7 initiatives, unless they're mandatory and dictated by the regulator or the government. And the first one of those is a single view of the customer. I'm used to having, when you go into a branch, or online, you can see all of the interactions with a customer, what they have with you as a bank, right across the spectrum. That's not the case with us. We turn up and do a review, a very good person would do a review but they'll hand you over to somebody else and that person today will have to put the data in again. If they then hand you over to somebody else, that data goes in again. That's what I talk about a single view of the customer. Put it in once, use it once and everybody inside the bank can use it in the interactions. Again, I'm not used to seeing this in a bank of this size, not having that single view and it's also the reason why we getting caught with PPI claims because we can't extract easily the old file that shows we had a conversation. So it fits very strongly to that single view of the customer. One and done.

One anecdote, when you actually take out a current account and you move it through and you go through the process, it will touch 3, possibly 4 pairs of hands, if not more whether it's right or wrong, whether it's corrected or not. Our world in the future will be the person at the front actually touches it and nobody else touches it. That's what I call one and done, one person touches it, nobody else. That, I think, will be very new for this industry.

Self-service. Giving the customers the ability to do it when they want it, where they want it, how they want it. It's interesting to note on the mobile space, people are already starting to do that. Our biggest use of the mobile is between 7 and quarter past 8 in the morning, people are on a train, they're on a tram, they're on a bus and they're doing stuff themselves when they want to. We need to do that right across our services and make more services available for them to do it.

Points of presence. We constantly think about points of presence as ATMs and branches. We need to stop thinking about that. We need to start thinking about where is the point of presence that a customer actually has an interaction with us, do it themselves or come into our branch, the things like kiosks and the like where they can just do it for themselves in a public space where they want to do it, or they can have access 24/7 online or through mobile. But the old days of points of presence being at branch, I think are well and truly over and done with. Sales and service heartbeat is how do you create an organization that thinks customer first every time and that's not just the front lines, that's about our support functions as well. So everything we do thinks about the customer and thinks about their needs, not our needs. And that's a big program of cultural change we'll run through this organization. If you pull that together with a single view of the customer, I think that answers all the regulatory issues of conduct that are floating around the marketplace that puts it in terms of really good things for customers. Simplifying frontline life. Really, we started this one and it's going gangbusters. The front of our branches and the front of our contact centers, our people spend a lot of time doing stuff that would push that from over the last 20 years that is no longer relevant and we're starting to strip those out well and truly and giving them time, and that time is going back into coaching them on how to do better things with customers. That will give us a lot of time and at the first phases, we have not stripped any of that time out taken it to savings, that's what this business has done every time, and left our frontline staff, without the skills to face customers. We've already created a lot of time for our people to have better coaching. And finally, this is one that I didn't want to put in here, which is around our private banking. Would've been nice to have left this one out and had 6 initiatives. But as Chelvi and our team went through, the areas of concern, we had 12 open forums with 3,000 of our leaders and our private bank came up time and time again. It wasn't working the way customers wanted it. It wasn't working the way our staff wanted it. So we've put it on the list to review the strategy and how that operates going forward. I think, there's a good place for a really good private banking operation. And I think we can create that here. I wouldn't say we had one today.

So those are the 7 priorities, Chelve's going to take you through a number of those in detail. That's the program that we'll drive, you'll notice it is initiative-lead. We need to build momentum in this business to create the U.K.'s best retail bank.

Investment in this business over the last 3 years has been pretty strong and the returns out of that also, as you've seen from the numbers, have been very strong. We're also now going to take the next level of investment, focused around those 7 initiatives and push this business even harder over the next 3 years to focus on the customer. I think those return -- will deliver again, great returns for this business. We're stress-testing them ourselves, we pushed them through our board, we're pushing every one of them a very, very hard in our business. But we need to do some pretty basic things. Our branch network, other than about 450 out of the 2,100 have been refurbished. The others don't look that good at all. We are slow with doing basic things like account opening, our mortgage processing is slow and archaic and we need to do a lot more at the front of our business with allowing customers, as I've said, to do their own thing and self-serve themselves. I think, there will be a good payback out of this investment. And I think you'll see it quietly emerge over the next 3 years, the change in this business. I'd now like to hand over to Chelvi just to run through the service components of some of the areas that we're going -- I've been talking about and just take you into a little bit more detail on some of these initiatives. Are you ready, sir?

Satyendra Chelvendra

Good afternoon. What I'll do is just run through a few examples and I'm sure we can pick this up at question time as well if we needed more detail. The priorities that Ross was talking about earlier, the 7 priorities, what I'm going to do is to take you through 3 or 4 examples. There are basically, walk on to 2 principles. The first one is around for the customer, something that is simple, easy and convenient. We are trying to keep it quite narrowed down because of the fact that -- then make sure that the initiatives deliver what we set out to do. And the second one is focused on people. Is really about people feeling confident and competent. So people are coached, trained, so on and so forth. Now let me tell you a couple of examples and the first one is, Ross spoke about this, of simplifying frontline life. What we have done is we have commenced this program, we have gone through all of the channels, so fundamentally the call center, starting with the branch, then call center, into complaints into the private bank and looked at what are the -- what we call our silly processes that we are running that we can actually remove for our staff, creating the time for them to serve customers. So that's sort of the first one, which is really about what can we actually remove for our staff. The second thing that we have done is we've gone in and said, "Look, what is it that we can actually automate?" So the account opening process was one of the things that we've looked at and said, "Look, an account opening process takes several days for us in terms of delivery." And we've looked at that and said, "Look, can we actually open an account in much, much shorter time with much -- with actually no paper, except what was stored on the computer?" Now at the moment, we have so far, saved something like an 1.5 hour for branch managers and about 40 minutes for our customer service officers, which we haven't taken out of the network. We have given that back to our staff, given that back to our management team so that they could train the staff in terms of delivery of service to our customers. Now this is something that has caused a fair amount of energy in the branch network, energy in the call centers because of the fact that they can now actually focus on the customer or on their staff.

I'm learning how to use this mouse actually, this mouse is -- okay, so second one is on digital. In digital, we have basically 2 things that I would like to talk about. One side is online and the other one is mobile. And on the online front, where we have really focused a lot of our energy on online banking and as Ross pointed out, this is not -- we did not hit the NPS number that we've been looking for. What we've also grown at the same time in the last 3 years is online sales, so for example, we grew online sales by 25% from year to year. We do a lot of the simple sales through the online space, for example, credit cards and loans. We do a large share of our credit cards and loans through the online platform. Now a third thing that we not have done much of, which is in our plans in terms of online, is to now do non-financial customer maintenance on online and directly, which we now do in a manual sense. So that's part of the work that we're actually working through. Now from a mobile point of view, the shift is slightly different. What we've done is we did simple mobile banking, which you saw and as a market-leading proposition for the last 1.5 years, but now, we have moved to a slightly different space, which is changing the paradigm on payments. So really looking at our payments and saying, "Look, how can we make it easy and convenient for our customers to make their payments?" And there are 2 things we've done there. We combined our emergency cash idea and mobile, and allowed customers to actually get cash from ATMs without having to use their cards. So that is one idea that we pushed through, which has been a big hit with our customers. And the second one that is in pilot at the moment is paying anyone through the mobile by having the contact number. So you don't need the account number. You can actually pay through the actual phone number. So the big, big push in here has been how can we change the way that customers can deal with their payments in an efficient and convenient way, and that's showing in our number of transactions. That's showing in the volume that we are driving in terms of registrations that we see.

Now we've always had the strategy to keep mobile independent of platform. So we have developed it on several platforms, the recent one being Windows 8, and we will continue to do that because our objective is not to be linking just to one platform, but with all those platforms that customers actually use. Now what we're doing now is in terms of mobile and online is to see whether we could actually converge the 2 and make sure that the look and feel and what we provide on both channels start to now become common, which is what is what we are investing in and spending a lot of time on.

Now slightly different from sort of the digital space is really looking at where we are investing in terms of markets. Now there are few things that we're doing here. First is really looking at our network and asking the question, where should be -- what should be the optimal points it presents across our organization, across both brands. Then once we've looked at that, the second question that we ask ourselves is what format should we have and how should our customers be served in these formats so we have come up with formats that our flagship branches maybe [ph] for the top 50 to 75 branches right down to branches that don't have any staff, they're self-service branches. Then we've -- the third thing we've looked at is what sort of people should we have in these branches because once we start to change the dynamics of the branch, where the conversation is more around self-service and people can actually deal with transactions directly and they're being far more advice-based conversations taking place, the questions that we've asked ourselves is, okay, what sort of people should be in this branches and what sort of population should be in the these branches for the various formats?

Now lastly in this space, has been really around the private bank. So we want to have private bank working as part of this business, then what should be the private bank proposition, what should we be focused on there, what should the relationship manager should be doing and to again, to provide a differentiated service that is cost-effective. So there is a combination of both the physical side of the network, as well as the people side of the business. So fundamentally, if I were to summarize, the entire focus in all the work that we're doing is around becoming #1 for service across the U.K., so which is really focused again on the point we are making and Ross was making earlier, which is around being really good at the point at which we have a conversation with the customer.

So if we had a distribution point, we will actually be good at that point in which we have that conversation, whether it'd be whether customer contacts us on the phone, deal self-service on the mobile, ATMs, online, deals with an advisor, really doesn't matter. Second is they have the choice. So we give the customer the choice to deal with us where they want to deal with us.

Now this point that I did not actually touch on a lot and quite happy to take it on questions is that every single transaction that we do, every single automation piece that we're doing in this, as part of this program, a principle that will govern everything is one and done. So what that actually means is that you could actually complete a transaction without having several handoffs and several pieces of paper moving up and down. We have spent of a fair amount of time and energy to actually think about how we do that, by keeping it simple for our customers. Now this applies to everything. So this applies to mortgage application. This applies to current account opening. This applies to the way that we make payments and so on and so forth. And the objective is from a technology architecture point of view and a business architecture point of view, to have a consistent architecture that allows us to then provide this service consistently, consistent look and feel across all points of interface, whether they are self-service or not, which basically means our design of an application that we've done for mobile over something else, we could use it and reuse it without having to then produce -- have another system or another project to drive that through. So that's basically the points I got to make just now, and I'm sure we'll come back and have some questions. The simplicity of this is there are only 7 initiatives. It sometimes looks a bit scary in a bank of this size that you have 7 initiatives, but the 7 initiatives are focused on the customer, on the front line that serves the customer. There is nothing else in there. There's no more magic in there than that. So I'll hand over to my colleague, Les.

Les Matheson

Thank you very much indeed.

Satyendra Chelvendra

Yes, thanks.

Les Matheson

Thank you. Okay, good afternoon. What I'm going to do is just talk a bit about products, the products set, what we have been focused on. Let me page down, see if I can do that any better, there we go, talk about what we've had, how that has performed and the product set that we see going forward. I mean, overall, our strategy is to simplify both the range of products, as well as simplifying the products themselves. Largely, we've got through the first job, which is simplifying the front book. We have also simplified a certain amount of the back book, but we still have a ways to go to get it quite as simple and easy as we would like. We want to have a range of simple, easy-to-open and easy-to-use products so it's not massively exciting, but from a customer perspective, it's easy; easy to use, easy to open. They don't need to spend a hell of a lot of time in it. They can just get on, get the basic facility and function working well.

If we look by type of product or customer need, the areas that we're going to be focusing on are current accounts, the basic transactional account on mortgages, a large loan, and we're going to be focused on savings accounts. So those are the 3 product categories and within those, we'll be looking at largely for mortgages and for savings products, developing and building those amongst our existing customers. So we have a much larger share of current accounts than we do of mortgages and savings, and our intent is to build out both of those second 2 product ranges amongst our existing current account base.

So I'll take you to each of those in turn. First of all, mortgages and you'll see the same arrangement now for the next 3 charts, which is talking a little on the left about what we've done, and a little bit on the right about what we expect to do in the future. So if you look at mortgages, in 2012, our market share of new mortgages has been 11%, which is significantly ahead of our stock share, which is 7.9% around 8% or so. I mean, you'll see that that's grown quite a lot since 2008 from 6.1% to 7.9% so almost 2 percentage points, and I think this is just a reflection of where we're coming from. If you think about it, NatWest and RBS, was largely a mainstream, high-street bank. What many of our competitors did was they bought up building societies that had a large mortgage book. That isn't something that we did. So we have a significant opportunity to build mortgages amongst our existing current account base. That's been working pretty well. We've had the capability of doing that. Some of our competitors don't. Some of our large competitors have a mortgage book that means their assets are significantly greater than their liabilities, and so they're having to be very careful about what assets they actually bring on with an LDR, loan to deposit ratio of 103. We're in a place now where we can grow in balance, our mortgages and our savings accounts so we can focused on the customer rather than worrying too much about the balance sheet.

Over the past couple of years, we've focused particularly on redemptions, minimizing redemptions by making sure that we make it easy for customers to switch accounts. So about 9 months ago, we actually made it possible for you just go online if you had a mortgage to be able when you came to the end of, let's say, your 2-year deal, you could switch straight into a new deal. You didn't have to come into the branch. You didn't need to talk to anybody. So we made that process a lot easier, and I think that's a good example of what you should expect to continue to see from us across the product range. So if we take the future, we'll be using a lot of the functionality and facilities that Chelvi's been talking about to make sure that the customer has a better experience so that means faster mortgage approvals. That means slicker online applications and decision-making, and it means a certain amount of self-service. It means things like when you're actually begin the process of applying for mortgage that we'll send you text alerts, let's say, along the way just to let you know where that process has got to or you can log on online, and you can actually see where you're up to in the process so that's helpful for the customer. It's also good for us, and that we get a lot less people calling into our operational centers or into the branch.

We've been doing a lot of training with our mortgage teams, our mortgage sales force towards the end of last year and through the first quarter of this year. That is going to have an impact on our mortgage volume, probably less so in the first quarter, maybe a bit more in the second quarter, when completions come through, but that's really helping us to get ahead of what we expect in terms of MMR. In other words, beginning of 2014 when the mortgage market review actually comes into place with new regulations, we expect a lot of the training that we've done now is preparing our salespeople for that new regulation. We are also increasing significantly the number of mortgage advisors we have at a branch level to take account of that volume forecast.

Let me dive into the next product, which is current accounts. So on current accounts, here, we've held market share, if anything, on our front book, we've lost some in certain areas. Some of them, we are happy about. Where we lost a bit of share, for example, in basic accounts, we are also redefining our student proposition at the moment, to try and make sure that it's sustainable for the longer term. On the positive side, our balances have grown, 8% in 2012 on current accounts, which is pretty good and would be better if interest rates were a little higher, but that will come one day. What else have we done? We've done things like increasing functionality and capability, things like emergency cash, which none of our competitors have because we have a patent. We've introduced text alerts more broadly. We have been developing contact-less, and we are about to begin the national rollout of that. We've actually rolled it out last year into the London area. We'll begin the national rollout, which will just be a replacement rollout, starting towards the end of next month. On packaged accounts, we have relaunched all of our 3 main packaged accounts over the last 12 months, making them simpler, making them easier to use, making it easier for customers to use so you don't have to sign up for various facilities, mobile insurance, in particular. We've literally just last week changed our provider there, and that we're now using Carphone Warehouse, which we think will make the capability of getting a replacement phone much easier. So for the future, again, it will be building on some of the things that Chelvi was talking about. We will also be looking at a number of rewards-type programs, make sure that it's easy to use, the functionality of the current account.

Opening process and usage process, making it easy to transact any time anywhere. As Ross was saying at the beginning, what we want to make sure is that if you look on your phone or if you look on your PC or if you look in a branch, what you see in terms of the screen is going to be the same, and that's going to be helpful both for our customers, but also for our staff. So they won't be looking at green screens, they'll be looking at whatever it is that our customers can see. And by the way, if any of you haven't used our mobile phone or somebody else's mobile phone, I would strongly suggest you do if you want to know where the retail banking industry is heading. I have to confess, I hadn't used it myself, in anger, up until about 9 months ago when Chelvi persuaded me and actually loaded it on the phone for me, but now I wonder what I'm going to do without it. So I would highly commend that to you if you haven't already done it.

We also continue to make sure that current accounts are simple, easy to use and make sure that the fees and charges are also simple and obvious and fair. So again, over the last couple of years, one of the reasons that you've seen our fee income come off is that we have been simplifying the fees that we have, making them simpler, but also making them less, frankly, and making it easier for people to manage their way around the current account. So that will continue to be a focus.

The last one is savings. Here, we, over the last 3 years of being at the front of the pack, I think the same last year, we grew our savings 6%, which, I think, was the best of our peers. So you'll see, we've managed to grow our, and this is just savings, balances, it doesn't include our current accounts. If you take savings and current accounts, you get to the 108 billion or so, but that focus has enabled us to now better balance, obviously, our assets and liabilities. But over the 3 years, we have been able to grow ahead of the market. Again, we simplified the product range down from 21 to 10 on the front book in the last 2 years. Again, we'll continue to simplify that going forward. The other things we have been doing over the last couple of years is, again, just making it easy to use, so things like an online EIs [ph], making it easy to get an instant access account online. For the future, you're going to see the same sort of things: fewer products, easy to use, very well linked in with online, very well linked in with mobile, a lot of functionality for customers. Again, if you go onto our savings website, let's say, and just look at some of the functionality there in terms of being able to put in a goal, let's say, track yourself against the goal, we can actually go in and see what our customers are saving for, and I can tell you, there are some interesting things, but again, that's one for afterwards. But it's something more seriously that people get engaged with, and this functionality enables them to get engaged with the product and therefore, to use it more. So that's it for me. The focus is current account, mortgages and savings, simplify the range, make sure that the product's easy to open and then easy and simple to use. And with that, I will hand over to Fiona to talk you through the financials. She's trapped at the back.

Fiona Davis

Thank you.

Les Matheson

Thank you very much.

Fiona Davis

Thank you. Good afternoon to you all. Before I get into the financial performance of the business, I just thought it was worthwhile if you'll indulge me for one slide of pictures before I get to some numbers. Quick reminder as the economic backdrop that we've been battling against in this business, not to tell you anything that I think you don't already know, but actually, to illustrate the fundamental resilience of this retail business. So top left-hand side, you can see that customers have, as you know, been significantly deleveraging over the last few years, leading to pretty much flat in terms of the mortgage market and an unsecured market that's actually been shrinking by about 7% per annum since 2009. So clearly in that kind of environment, growing the balance sheet is pretty challenging. And then top-right, you've got the household savings ratio. Again, the rise in this ratio reflecting reduced household consumption. So that, once more, creates some challenges for us as a business this time on our fee line, as it clearly drives a significant element of the transaction volumes that go through the economy and hence, our fees. So that follows with the absence of any GDP growth, and the deleveraging that we saw at the beginning there, leading to pretty flat balances in terms of the deposit side as well, again, challenging when we're all competing to close our funding gaps so -- and I guess, my point is had I been sitting in retail in 2007, and I think there's a fair chance that I actually was as, and someone have given me this as a stress scenario and said, "Plug it into your model, Fiona." And possibly, I said, so do you plug it into your models as well, I doubt that I would have come up with a 5-year forecast, which is actually an increase in profit 5 years hence. And as Ross alluded to earlier, it's actually a doubling of profit over those 5 years so my point being it is a resilient, strong business.

So here's some numbers that you've already seen for 2012 as part of our published results. The first point I would make is that this business has remained in profit throughout the cycle. Our lowest point was actually in 2009, as Ross referred to, when we made a profit of GBP 230 million and since then, obviously, those profits have recovered strongly. Our returns rose about 18% in 2010, and then in '11 and '12 have been an excess of 20%. If you look through the cycle and assume something like a 10% RWA rating, then after the cycle, returns were probably something in excess of 13%. The increase in profitability has been achieved through a number of factors. I'll go through 4. Number one, costs have been sustainably reduced from GBP 3 billion, down to GBP 2.5 billion over the period since 2009. That alone adds about 10% to our return on equity. Secondly, franchise growth, as you've seen, has been very strong. We've taken share in mortgages, and we've taken share in savings in each of the last 3, 4 years, as Les has already referred to. Thirdly, we've kept our net interest margin pretty stable over that period. Even with the margin effect that reducing our unsecured book has and even with the length of a low interest rate environment that we are now into, our net interest margin is actually where it was in 2009 at 3.6%.

And fourth, but not least, in improving our profitability, we have also been reducing our impairments. Part of that is economic, and part of that is management action through our tightening of our risk appetite and also improving our collections performance. So at the same time as growing the profitability of the business, we have obviously been tightening up on our risk profile, firstly in terms of culture, which I'll come onto a bit later. Secondly, in terms of credit, and you'll see that's in the mix of the books, so we've actually shrunk our unsecured book from about [ph] GBP 22 billion at its peak to GBP 14.5 billion at the end of 2012. Thirdly, in terms of liquidity, which you've also heard about already in this presentation, improving from over 120% loan-to-deposit ratio to 103%. And the fourth area that I would point to is actually one where we have also improved the quality of our earnings. So if I looked at the composition of our income back in 2009, you would see it was about 60% net interest and 40% fees. And if you look at that now, it's about 80% net interest and 20% fees. Our net interest income has grown nicely, stable margins. It's grown nicely, in line with the growth in the franchise, but we have actually taken our fee income down and probably taken about GBP 400 million, GBP 500 million of lower-quality fee income out of the P&L as we've gone through the last 3 years.

So outlook, you'll be interested to hear about. Just before I cover 2013, I guess in terms of our income in 2010 and 2011, we had pretty strong income growth off the back of a combination of the growth that we had in the franchise and some widening spreads over that period. And in 2012, you saw our income decline. It fell by 10%, which is about 7% on net interest and 19% on fees. Net interest income reduction was a reflection of margin pressure on our current account book on the hedges there, coupled with some impacts on other hedging and also some one-off kind of transfer pricing issues as well. So I think those latter 2 components were fully embedded in the 2012 number so don't expect it to cause a similar delta in 2013. The drop in fees was a result of 3 things. There is some transactional fee pressure. Some of that is economic, as I referred to, lack of growth. It does have an impact on the level of transactions going through. Some of it was also effectively induced by us and some of the helpful things we've been doing for customers through, for example, text rollouts, reducing our overdraft fee income. Quarter 4 was impacted by our preparations for RDR. Also I guess, there's some smallish one-offs in our fee income last year as well. So what does that leave us for 2013? Well, I would say broadly stable in terms of income and also in terms of ROE. If I start with the negatives because that's what I'm famed for in my team, I think. Market rates would imply that current account hedges will continue to decline over 2013 and into '14. As we've already said, we don't, at the moment, see interest rates rising in 2013 or the economy growing, and I think the other thing is whilst we will seek to increase the amount of front-book, unsecured sales, I would still expect the unsecured book to continue shrinking slightly in 2013. So the offsetting things in my mind are: one, I think we will continue to achieve balance sheet growth that is in excess of the market, particularly on assets, although I would remind you of Stephen's comments at the year-end-results presentation where he did say, don't expect too much from our asset growth early on this year due to retraining of our sales force. As Les referred to, we are now in a sort of equilibrium as far as the funding act is concerned and if anything, we might be happy to take it slightly higher, so we've got much more flexibility in where we choose to grow. I would expect asset margins to be pretty stable in 2013. There is obviously, as you know, some front-book pressure on mortgages at the moment, but I don't think that will feed through to have a significant impact on the book in 2013. Our unsecured book is slowly repricing upwards as well, and I see no reason why our SVR book would not continue to grow as well. So I think on balance, asset margin's pretty stable. On liabilities, as I say, we have current account hedges have a downward pressure. But again I would say, in aggregate, we would hope to keep our deposit margins stable. Clearly on the front book, our savings pricing and the market savings pricing has come down over the last few months and there may be potentially opportunities for us to look at repricing some of the back book as well, which will mitigate against that current account hedge.

Fees, I would say, stabilizing but I guess, none of us know at this stage where RDR is actually going to play out. So that's my one question mark in there.

Costs. Costs, we guess we're part way through that journey. We have a strong track record over the last few years in reducing cost. And as Ross has said, we already have plans to do more. Our costs are down from GBP 3 billion in 2009 to GBP 2.5 billion last year, net of absorbing the investment in the retail transformation program. Huge number of areas that we see opportunity and most of them have been talked about already.

To recap: Automation; transaction migration to online, to digital, which will save time; Ross' beloved paper, and maybe even the postage you're sending the paper out as well; efficiency savings through moving to much more of a one-touch approach; less handoffs; simplification, whether that's in our head office or whether that's in our product range; and also complaints that Ross also referred to, clearly have a cost to them to the extent we can eliminate those and fix the root cause, again, that should drive the cost-saving for us.

So I would say the underlying trajectory will continue to be downwards in 2013. One mitigant against that, which I can do not a lot about is the fact that our FSCS levies will go up in 2013, so the net effect may be, while still underlying, will definitely be going down but maybe some mitigant that makes it more flat than downward in terms of the headline number.

On the impairment front, we've seen as you know, a material reduction since the peak in 2009. As you can see from this slide, the lion's share of our charge stems from the unsecured book and its decline reflects the fact that historically, we tightened our risk appetite in 2007, 2008, 2009 increasingly. We have seen, as you can see in 2009, a flush-through of some of the weaker cohorts. The overall book has been shrinking. We continue to invest in our collections and recoveries guys and I suppose equally, whilst economic conditions are not stunning, they're at least relatively stable.

On the right-hand side, you can see that graph that shows impairment as a percentage of the balance sheet, consistent drop in the unsecured charge. Our coverage there is about 90%. The mortgage graph shows an increase in '10 and '11 and then dropping back down in '12, which reflects the increase that we made to our coverage on the mortgage book, which is now in excess of 20%.

Before I start some comments on where we are in the risk space, there are 3 points I'd like to make here. One, we have strengthened the culture. We now have a much clearer articulation of our risk appetite and much better monitoring thereof. And secondly, our investment in Future Bank will serve to enhance our risk management much further, particularly in the conduct space. This will be driven by a consistent review of customer needs and outcomes simplification of the process and the consistent application of that process, and as Chelvi alluded to, invest in our people and training. And the third point is just to say that our aim is to be proactive in identifying and fixing operational and conduct risk issues and being proactive in our dealings with the regulators on those issues.

So if I sum up with a medium-term outlook, the economy doesn't look likely, as far as we can see, to show a significant improvement in the medium-term. So we are preparing, at least on the basis that whilst there will be income growth, it will probably be fairly subdued. If I'm wrong, great. We'll continue to target franchise growth in excess of the market, but I think we can, as I said before, be more flexible about where we target that growth, given that our loan-to-deposit ratio, doesn't need to improve further.

I think margins should be reasonably stable as the current account pressure starts to moderate. We will continue to target cost reductions. But if the economic circumstances do improve and we can see opportunities that we can use that freed-up capacity to generate further top line growth, then my logic is that we'll be in a good position to actually capitalize on those opportunities.

On impairments, I would say there's probably not a huge amount of road left to go. It can only go so low. So I would probably see them stabilizing around about 50 bps that you saw in 2012. On that basis, I would expect that the return on equity should continue to be attractive in the medium term.

Risks, conduct risk is obviously at the forefront of my mind practically when I try and estimate the PPI number. There are a number of regulatory question marks out there in terms of future capital requirements, liquidity requirements under Basel III and deposit insurance schemes, et cetera. And clearly, there is economic risk there.

Upside, rising rates, economic growth wouldn't do us any harm. I think if we can really get the culture of simplification part of everyone's DNA in the organization, there will be more to go for than we have currently allowed for in our estimates. As I said, the Future Bank investment case has been largely predicated upon cost savings. And I think if we can truly differentiate ourselves on customer service and satisfaction, then clearly, there would be gearing factor on the top line.

So that was what I was going to cover on the numbers. I will hand back to Ross to sum up. Thank you.

Ross Maxwell McEwan

Thanks very much, Fiona. I just thought I'd give a quick summary now on our aspiration of creating the U.K.'s best retail bank. First off, I think there's a big space there for it. I don't think there's anybody I've met that sort of says that there's great retail banking in the U.K. And I think we can achieve that, but it is going to become through superior execution of a strategy as opposed to the strategy. Because I'm pretty sure, you would've been speaking to all the other retail banks and they would have all been talking about customer and technology and a whole raft of things as well. So it's going to come down to execution.

The things that we'll be focusing on will be our customer. We will measure ourselves strongly against the aspiration of getting to #1 net promoter score, at which point we'll start right at the bottom in many, many classes. So it is a big aspiration but one that I found our own teams are very keen to get to grips with and work out how -- what we need to do to move that score. Also quite hard when you've got a brand that's getting trashed, particularly, the RBS that gets knocked around on a daily basis. But I said, 80% of our business is done under NatWest.

I'm going to differentiate through our distribution. Our points of presence and our capability and capacity out in the network, we're going to have to rebuild some of that capacity, particularly around mortgages, that's why we've spent over 2 months retraining a lot of our mortgage writers and starting the process of bringing new people into the industry to actually do mortgage business. We're going to go simple and easy and one and done. Everyone of my team is now focusing on what of the processes and procedures we have that are really difficult for our people and their customers and how can we eliminate them. You can imagine an organization with over 30,000 people all focusing on how to make this easier for customers is a winning strategy for us. We need to build our people capability and that's why we're giving them time.

This will be the first time in this organization's history for a long period of time where we've created capacity at the front of our business and not stripped it out. I know you find that difficult to work through why you wouldn't do that. But I think a lot of our issues is that we haven't given our people time to train and develop and coach on the job. If we can do that, a lot of the other costs of our business start to dwindle away as well as we handle things 2 times or 3 times when we don't -- just don't get it right on the front.

We need to build momentum, as Fiona said, across a number of financial metrics. Some of those metrics have been incredibly good, random blinded payment and I do agree with her, there's probably becoming limited room to move on there at the moment but there are other measures that we should be looking at around, particularly around that cost base at this organization. As we get it simpler, it should be a lot lighter.

We look at the risk profile, and the controls we had over our business now I think are pretty good. They may not have been that way some time ago but I think the business has a good risk profile and a good control environment where the front line of our business own the risks of the business more and more every day. We have a strong investment program that we've given you some detail of today. We have it under, I think, exceptional leadership with Chelvi, who's driving 7 initiatives, not 142 but 7 initiatives in our business, so that we can focus on the things that make an absolute difference.

I think it will be tough given the economic environment we're trading in, limited growth of any growth, in this marketplace. And as I said, it will come down to the team we've put together and the execution basically on a day-to-day basis dealing with every customer we interact with and that's what I think we'll be -- that's what we'll be focused on dealing with the culture of the organization. Enough for us. I think it's a good opportunity now, having heard from myself and some of my retail team, to open it up for questions. And I'm very happy to take those or to pass those around to each of the team. First hand up here.

Question-and-Answer Session

Thomas Rayner - Exane BNP Paribas, Research Division

Tom Rayner from Exane BNP Paribas. Could I have a couple, please? First just on the normalized 50 basis points charge. Does that suggest we've now seen a normalization in the mix as well because, clearly, mortgages is a core product and unsecured is not. I would have thought maybe the mix shift would've continued to argue for a lower normalized impairment charge. And I have a second question on ring fencing, please.

Ross Maxwell McEwan

You want to take up the first one?

Fiona Davis

Yes, and I guess what's in my head is it's a combination of things. One mix, you would argue, yes, I'll also start to see or continue to see improvement. Equally, we're benefiting at the moment from quite a high level of recoveries. And that also, in due course, will peter out. So I'm balancing the 2 things off and staying at around probably where we are as the charge feels sensible.

Thomas Rayner - Exane BNP Paribas, Research Division

Just on ring fencing, one of your competitors clearly thinks a narrow ring fence is the way to go, which, for you guys are pretty much for your entire business and nothing else, I think. And if I'm right, RBS doesn't share that view. It thinks avoid a ring fence. So I'm just wondering from your point of view as sort of U.K. retail, where do you think you're going to end up and how is it going to affect the business?

Ross Maxwell McEwan

I'm not too sure where it's going to end up, to be quite honest. I think store [ph] favored the water to go under that bridge. From our perspective, the way we're structured, if it does end up now narrow, we are a narrow, retail-focused business. So what you see is what you're getting today. If it's broader than that, we've got a -- building very, very strong relationships across the business between Chris Sullivan and myself, which sort of captures the rest of the business if it was a broader ring fencing. So I don't know whether the impact from a day-to-day operation of this business would that dramatic from our perspective if you ended up with those two together and the others out. Other than that, [indiscernible] to which I think we're just going to have to wait see what it looks like when the government the regulators have had their play. I think we had a question over here and then we'll come back.

Unknown Analyst

I think this one is for Fiona. I mean just firstly, detail question, Slide 29, the margins, they're calculated with reference to what? Is that relative to LIBOR or swaps are going to...

Fiona Davis

It's against swaps.

Unknown Analyst

It's against swaps. Okay. You talked about front-book NIM pressure and mortgages. But you said in 2013, you don't expect it to impact the back book. What are the moving parts there, why not and what do you think about 2014?

Fiona Davis

So I think we are seeing at the moment some pressure on front book on mortgages and that probably hardly gets to about 10% of total impact on the book margin versus what I'm saying. I think that would remain pretty stable. So I see a gradual decline in the book number on mortgages and I think offsetting that, you've got -- what we're trying is manage obviously the spread between mortgages and savings. Savings are moving down similarly on the front book. But I think savings, there are opportunities in the back book as well.

Unknown Analyst

Okay. And looking into 2014, would you expect more...

Fiona Davis

I think you're just assuming -- potentially more of the same.

Unknown Analyst

If I just -- on the same topic, if I look at the difference between -- to your fixed rates and the various [indiscernible] in the sector, it's called almost a historical gap. Does that mean we should have some kind of pressure on SVRs coming down maybe this end of this year or next year?

Fiona Davis

I think the other interesting thing in SVR is to bear in mind that if you looked at the individual customers' iSVR, over half of them would actually be paying more if they were paying for a deal rather than SVR. So that's one of the mitigants when you start to think about where SVR might go and just thinking about it as well. So would there be a market pressure to bring SVR down? It actually helps the customers on SVR are arguably doing better than they would be on a front book deal.

Les Matheson

As you probably know, the trend has been the reverse. So for the last 3 years probably, SVR for different businesses and different competitors has actually increasing. If you look at where we are, we're almost sort of dead bang in the middle. So some people have SVR up at 499, 479. So we're dead on 4. But all of the movement has been upwards. To your point, when do we see a turn? I don't -- we've seen no impetus to that. And as Fiona was saying, there isn't -- in terms of the structure of the book, in terms of other part -- aspects of pricing, again, it's more -- and certainty right now, it's more consideration around increasing rather than decreasing.

Unknown Analyst

I mean the reason I asked is because the last 3 years, as you mentioned, front book rates have been quite high. It's only in last 6 months that changed. And even for the industry, stuff, mortgages on SVR actually fell, but I would say variable fell in the last few months. So it's renewed trend and I'm just inquiring your thoughts there.

Ross Maxwell McEwan

We've seen no -- I think there's no indication that we would see it coming down.

Unknown Analyst

And just finally on...

Ross Maxwell McEwan

I think the pressure has been up as opposed to down on SVRs. It's what we've seen over the last [indiscernible] which has been surprising.

Unknown Analyst

And just finally on asset quality, there has been a bit of a disconnect between kind of economic growth and where cost of risk is. But that's clearly because, I mean, we're in a low interest rate environment. How do you see the picture in your clientele in terms of how much they are saving, how much can they bear this inflation before it starts become a problem?

Ross Maxwell McEwan

I'll give that to Stuart here. I think...

Stuart Haire

[indiscernible].

Ross Maxwell McEwan

We'll give it there.

Stuart Haire

Actually, it's a lot to do with changing your underwriting position. We actually do -- when we underwrite, we stress customers to what would be a more normalized level, in our case, upwards of a 7% rate, if you like, base rate is 7% and make sure the affordability sits there. So the asset quality and the unsecured book is a very strong. What can kill you, would be extremely high spikes of employed people becoming unemployed as opposed to less people getting on the employment ladder and a massive deterioration in house price. So if you're factoring either of those 2 things in, that will have an impact in credit quality. Outside of that, this will be a long run of a better credit position through the underwriting and through the investment and collections and recoveries.

Michael Helsby - BofA Merrill Lynch, Research Division

It's Michael Helsby from Merrill Lynch. Just 3 quick questions, actually. Firstly on the savings, I think you mentioned an opportunity on the back book. I'm a NatWest customer and I know you've been cutting your rates already on the back book. So I was wondering if you could quantify what the impact on what you've already done as, you say, has been quite a lot for 2013. And if you could just tell us what the contribution to the hedge is in the retail bank for 2013. Second question's on the unsecured, because I think Tom mentioned about the mix. But your share of unsecured, if I blend it about 7% to 8%, the bad debt charges are very, very low. So it's just a question why you don't see more of an opportunity in unsecured to get your share up. And last question, I think, again, you alluded to it. But is there anything that you think you're doing different than what all the other major banks are doing? Is there anything that's different?

Ross Maxwell McEwan

Let's start with the Fiona on the first one. Then might flip to either Stuart or Les on the second. And I'll give you the third.

Fiona Davis

Should have written down. That was impact on savings reprice? If I would say, in the low tens of millions, in terms of what we have done and what we are planning to do at the moment. But we'll see what further opportunities present themselves. If you want to give us a hint with any other accounts that you've got that we might be able to...

Michael Helsby - BofA Merrill Lynch, Research Division

No I'll just say -- but how big is the ISA balances that you've got? I'd have thought that would have been one of your biggest savings accounts.

Fiona Davis

It's certainly one area that we're looking at.

Ross Maxwell McEwan

My guess is there'd be other banks. So Stuart, do you want to...

Stuart Haire

The unsecured opportunity, actually we're not trying to manage to number of shrinkage. What we've done is we've set an appetite with regard to what would be a reasonable probability of default for a customer to take on. And actually, it really just comes down to responsible lending. So we're looking for business and we'll push on and do as much good quality businesses comes our way. So it's going to be a lot more to do with the productivity. What we're not going to do is dive into daft probabilities of default, things like 1 in 4 customers who are, in our view, is likely to go bad -- one is bad conduct but it's just daft economics as well. I do, though, see opportunity in the unsecured book because, at some point, it'll start to -- it's already started to rate itself and customers do need loans, they need to buy cars, et cetera, et cetera. But I don't want to be taking all the consolidation that no one else is going to touch. I don't think our strategy has been -- our strategy, our risk appetite strategy isn't credit risk-led. It's the guys who run those product lines basically deciding what they want to look back on as good decisions and they've set themselves these sorts of targets for a probability of default. They don't want to go beyond...

Les Matheson

But you can say in general that our -- we certainly still have a market share and growth opportunity in terms of cards, particularly amongst our own customers. So it's not that we're ignoring that. It's just it's not one of the top 3 things that we're doing.

Ross Maxwell McEwan

Just on your final question, I think if you have a look at this bank compared with a number of the other larger retail banks, this team has been incredibly distracted with what's been going on to create a safe bank over the last 3 to 4 years. And when you look at the steps you're showing through here in the retail bank and across the rest of the group to the cost, that focus has been absolute worthwhile. We're now starting to unleash not just this group but other people in the organization to get their eyes and focus on customers, which is finding absolute resonance throughout the organization. As Stephen Hester, people like myself, Chris Sullivan, actually say, right, it's safe. It's okay. Now let's start focusing. And what I've found is a very, very willing group of people who have now been unleashed our customers to do good things, and we're focusing very heavily on it. So I think if it comes to execution, we've got a pent-up desire to get back to doing good business rather than just saving the bank and they've done a great job on it. And I said, I pulled together some of my team, 3,000 senior leaders and talked to them -- of them to talk to me about what the issues that they saw that we needed to grapple with this business. It was fascinating what came out of it. And our entire 7 initiatives were not just built on those, but all their feedback comes through there. So when we played it back to them and said these are the things that we're going after, we've got a lot of people behind us wanting to push it really hard. So I think execution will be big. The organization, we've got a lot to prove because we have been knocked -- it's been knocked around. The franchise of the Royal Bank of Scotland has been knocked around pretty badly but we've got a lot of people wanting to pick it up off the ground and get going with it again as well. So I think the execution's going to be crucial and having all of our staff focused on them, I think we've got a [indiscernible] . Come over this side here.

Ian Gordon - Investec Securities (UK), Research Division

It's Ian Gordon of Investec. Can I have 2, please? Firstly, on the London opportunity, are you talking primarily about better penetration, profitability per customer, or is it more of a share growth aspiration? And then secondly, on cost x London, I guess you've given us fairly subdued/realistic assessment of the revenue opportunity. Looking out into the medium-term, just how far might you go in terms of reducing your footprint and/or headcount?

Ross Maxwell McEwan

First, on the London opportunity, I think it's both our footprint, where we are and what we do with them. We've got a very good customer base that is poorly penetrated with a lot across the whole business, but think about London in particular. We had a growth store here and the incomes are pretty good. So I see it as both using customer base that we have to actually do better things with, it's primary right across. And then see if we can pick up a little bit more market share without being absolutely aggressive in the marketplace. Give you a quick example using mortgages. We had -- we're completely underscored on mortgage advisors in the London marketplace, the biggest growth place. I think if the bottom named that Chelvi we have about 63 people that were qualified to do a mortgage. I mean we should hit twice that number in this marketplace. So it's those sort of opportunities because the opportunities are there for us, we just haven't been working hard enough on them, and focusing on the growth opportunities in London. You've got in the right people in the right place, skilled to do the job stop here. Our customer base, when you look at the number of products for the customer, if you go for main bank, it's about 2.4 products per customer. If you look right across the range, it's 1.4. Now that's not an opportunity in a retail bank, of just doing better things with existing customers have an account with us and getting more business with them if we do the right thing. I think that says there's a real opportunity of existing customers. Forget about new ones across the business, we just did over the next 3 to 5 years, one more product, per customer over the customer base in the next 5 years. Forget about even the next 2, we would have done okay. That would've been a good result. There was a second part to the question?

Ian Gordon - Investec Securities (UK), Research Division

And is on the cost side, mainly x London, if the revenue outlook is anemic.

Ross Maxwell McEwan

Yes, we've made it quite clear that we have to keep going at that cost base given we don't believe there'll be great growth in the marketplace. And each of the moves here will be around reducing that cost base. But it has to come back to focus on the customer, get it really simple and easy, debt reduces cost. And we started that journey and so we know we can do it, the team have done a great job in the last 3 years. I mean when I look at the stats of where that come from, where they're to, the great results show that the business can do it. But we just need to take next step in the next 3 years. You can't run a retail bank. Well, you can run a retail bank with any cost to income ratio. Some run over 75% and think, fantastic. But if you're really going to be a competitive, focused bank, even at 51% is too high. Now we better grab this one. Just behind here. We'll pass it there.

Andrew P. Coombs - Citigroup Inc, Research Division

It's Andrew Coombs from Citi. I have a couple of questions on strategy and then a follow-up on margins base as well. Of the 2 strategy questions first, one of these things conducts issues, I know you happen to sit on a radio panel with Mr. Willie [ph] just prior to Christmas. I'm interested to know what your thoughts are on if there's an opportunity to drop what the next product might be and anything in terms of the SCA coming on board and changes there. So perhaps, managed accounts via interest-earning mortgages and so forth. Second strategy question would be particularly with regards to the IT points that you've made, I think you've said the average customer logs on 25 times a month from their mobile. What proportion of those is simply to check their balance? And the reason I ask is how much -- is this just a cost-save opportunity now and at what point could this become a revenue opportunity?

Ross Maxwell McEwan

First off from, what's the next piece around the conduct risk? It is big, big out there. I mean, you just need to read the note -- article come out of Martin Weekly's [ph] conversation with who was at the -- yes, the wealth management institutes, some very clear signals there that have come out around under conduct risk and just doing good things with customers. And having customers understand what they're getting as opposed to try to sell them something they don't know anything about. And that is absolutely the path we're on, both with what we call, sales and service heartbeat, which is focusing on the customer, and giving our people the tools to actually do that. And secondly, the focus on one view of the customer, because most of the reasons we have not done well is because we haven't had that one view of the customer and we haven't clearly articulated what we're doing with customers and then recorded it. And even worse, been able to actually bring back that file easily and, say, this was the conversation we had. So even if we had a fantastic conversation, our difficulty has been with PPI, for example, to actually pull that file up and say, this was the conversation and that's where we need to be better. A, have better conversations, record those conversations and retrieve them are the key drivers. There's nothing in what Martin Weekly [ph] or ourselves are talking about that actually clashes with each other, nothing there. How we go about it might be quite differently, because to be quite honest, I can't do anything about the past. I can't do anything about the last 20 years. We have to flip forward, say, how do we build a business going forward? And the other thing that we've had conversations with the regulator on is around how can you keep looking back? This industry needs to start looking forward to do good things. Because every minute of the day, we're looking back, we are not building a business of the future, we're just trying to fix up what happened in the past. But they're aligned. But I think we got pretty clear alignment. Martin [ph] and I said on that panel, didn't disagree with each. Maybe in the implementation of it, we disagree, and the thrust that pushing back so hard on the past, we've sort of had some different views on. But the intent on going forward with customers, I think, we're pretty well aligned. The next one is just around IT...

Andrew P. Coombs - Citigroup Inc, Research Division

Is on the mobile payments and the cost-save opportunity versus revenue opportunity long-term.

Ross Maxwell McEwan

Les might have some stats on that. But a fair bit of what goes on in mobile is around balance. So that's what people are doing in the morning. That's what they need to do. But remember, what they used to do is ring us. So now they're doing it themselves. So that level of phone call isn't coming in, which is a cost-saving to us but also a benefit to them. They can do it anytime they like. And if you've got our mobile app, it's pretty simple. It pops up the balance first thing. So that's quite interesting, is how do you change people's behavior, because often they'll find that balance and they'll now ring to see if it's okay, which is still right. And all they get told is exactly the same number they see as what we see. We will get there with that. So there is a behavioral change that's coming. But as Chelvi said, there's a lot of things we want to do on the mobile and online and at ATMs. You can just do it for yourself. And in a lot of cases, we've made it too difficult for you to do it, but you're actually very happy to do it. Change your own address. Why do you need to come in and get us to do that for you? Ring it up. Ring in, you talk to us. Go on and change it all yourselves, those sorts of things. Make payments that are above a certain limit. We've got good security, which is -- now security is pretty good. Why don't you guys just make those payments yourself? We'll put you into a safe environment. Do it yourself. So we're going to create that environment for customers to do it themselves, which means they don't ring us.

I mean, one of the outstanding -- those sort or things I found when I first came here, we had a private banking structure. Lots of customers were ringing up to make payments. Well, why would I want them to ring me to make payments they should be making themselves, if we made it that easy for them, in a safe environment? So once you get that sort of mindset -- the customers are quite happy to do it for themselves if you give them the ability to do it in a safe environment. That's what we're creating for them. And then a lot of that admin [ph] just disappears.

Andrew P. Coombs - Citigroup Inc, Research Division

Okay. And final question is help us on the margins, taking the deposit margins. Ecol [ph] asked earlier, it's -- clearly, a lot of your peers are going through improving margins there. So I want to try -- if you can potentially quantify the impact of the rate hedge that's rolling off, how much is left, what the average yield is, the duration and so forth.

Fiona Davis

It's hedged on a 5-year rolling tractor. So we're rolling up quite the absolute number. But certainly, the impact in 2013 will be less of a, kind of, hit to us than kind of the impact was in 2012, albeit it'd be still negative, I know carry on being negative into 2014, I would say, and then might start to turn the corner depending on what happens to interest rates.

Ross Maxwell McEwan

Just pass the mic there and then we'll come out the other side of the room.

Rohith Chandra-Rajan - Barclays Capital, Research Division

It's Rohith Chandra-Rajan from Barclays. A couple of costs -- on costs bucket, please. I guess a lot of what you talked about this afternoon is about simplification and making the bank run better and more efficiently. In terms of the sort of GBP 0.7 billion additional investment that you've highlighted and the 142 projects that were previously running, I was wondering if you could give us some sort of an idea of the scale of the potential cost saving that you expect to come through. And then related to that, you sort of indicated quite clearly that we shouldn't look at the U.K. for decent benchmarks for U.K. banks. Just wondering where in the world you would suggest we look at in terms of cost benchmark in terms of efficiency.

Ross Maxwell McEwan

Fiona, do you want to cover off from the first one with just sort of without giving away the exact numbers on the -- of indicators about what's for costs versus what's for revenue?

Fiona Davis

So the way we're trying to fund the program is similar to the way we've tried to fund the Retail transformation program. So not to have a divot [ph] at the beginning in terms of profits. And so I would kind of try and structure it to be self-funding for the couple of years, and then we would anticipate by year 3, net of writing off the investment, you'd be in the low hundreds of upside.

Rohith Chandra-Rajan - Barclays Capital, Research Division

And in terms of the roll-through of the investments spend that's happened to date, the 142 projects that are running, is there anything additional on top of that or is that included in what you just suggested?

Fiona Davis

Yes. That's in that number.

Ross Maxwell McEwan

Just on the other one, as far as on the wave of [indiscernible] coming out of the Australia and New Zealand marketplace, I mean, you pull the stats for you pull the stats for yourself and have a look at what's happened to those businesses. They've been blessed with revenue uplift, which makes it far easier than when you're in a revenue going backwards or revenue standing still. But our aspiration is to have a cost-to-income certainly larger than 51% in this marketplace. And knowing we're going to have an anemic growth in this world makes it more difficult, but I think you have to -- when you consider for every pound you're giving -- taking half to run yourself, I think you need to be doing better than that on behalf of customers and shareholders to run a really good bank. And if you look at the Canadian marketplace, the Australian marketplace, some of the Asian banks, I think you'll start to get an indication of good banks that use really good technology and focus on customers are certainly not a 50%, 51% cost-to-income ratio as an indicator. And they used it as one indicator. So we'll be targeting below that.

We'll just come over there and then come back in here.

Chris Manners - Morgan Stanley, Research Division

It's Chris Manners from Morgan Stanley. Two questions for me. So the first one was just on Slide 23. You say you're targeting significant growth in the mortgage market, yet you don't expect that much asset margin compression. We saw Lloyds this morning. They seem to really want to start taking share in mortgages starting from right about sort of September time. If you got a sort of "me too" product offering and you're not going to compete on price, how do you capture that significant share opportunity that you see? And second question was Funding for Lending Scheme, obviously reports that may be sort of beefed up. What would you like to see to actually spur credit growth in the U.K. economy from that scheme if it is to be changed?

Ross Maxwell McEwan

I'll take the first one on Lending and then hand off to Les on the Funding for Lending. First off, we need to build capability inside this business. We don't have enough. We are just completely underserved with the numbers of people and their skills to do a great job in the mortgage bank. My view, and I think it's been proven through Chelvi's work in the distribution area is that we can generate more business if we just had more people who were trained properly to do the job and do it well. We can build it. And so I think for us, it's not around have we got enough customers. We got a lot of customers that we can deal with. Do we have enough people that can deal with them? We had never really specialized in mortgages. And that's why we've had the team off the road for 6 to 8 weeks. Because if you want to build a good mortgage business without blowing yourself up, you need to have really well-trained people to do it, and you've got to have great credit skills, which we actually have. And you've got to have great product teams. And if you meet Mori [ph] , who runs the mortgage business, he's a very, very good mortgage product. We don't have capability and capacity up front who know the bank up front. And then we'll do some pretty good stuff on how do we manage it and put it through the system because that's funky as well. And we're working through that right now on how do we make it smoother for customers, and that's part of one and done that Chelvi's working on. So the sort of bits, that try and develop people, get, well, very good people. We need more of them. We need them really well trained in this environment. We don't have enough. And then we need a really good process to put them through -- to testament [ph] in through. And we'll have good product in the marketplace, but I just don't see you have to be the leading edge on all of these products. Les, why not go there? Sort of talk about the...

Les Matheson

I mean, just picking up on the first point that Ross was talking about, and the other aspect to it, of course, is just that if -- as and when we further build the relationship that we have with customers in our current accounts, they are our existing customers. And if we're doing a great job there and they're really happy with that, they're far more likely then to take a mortgage with us. So that intrinsic relationship that we already have gives us more opportunity than somebody who, for the sake of argument, has a higher mortgage market share than they do with current accounts. In terms of FLS, I think that we -- I think we would always be a little wary of any external intervention in the normal running of Markets. But I think we certainly have been supportive of the FLS in particular around first-time buyers and in buy-to-let. So it is something that -- a facility that we have been using and we intend to continue to use it help the general direction that travel that the government has been trying to pursue, alright?

Stuart Haire

Just let me just add one thing on the FLS and again about intervention. What we're trying to do, though, is you got to create a careful balance between -- the good thing that FLS has done is it sort of filled the void whereby, if you like, securitization markets and wholesale funding perhaps in the past and the pricing discontinuity. So that's sort of good. But it shouldn't then lead you to challenge your credit quality and your credit standards if it is a means to get people who can ill afford to pay a mortgage, to pay mortgages. And so it's not a good, long-term strategy. So that -- anything that's sort of "in that direction," we would speak strongly out against because that's not long term.

Ross Maxwell McEwan

Yes, just from the back [indiscernible].

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

This is Chira here from Bernstein. Just a very quick question. Loan-to-deposit target ratio of 105 to 110, so where does that come from? How do you want to fund that? What's your reliance on covered bonds? And how does it all play out inside the ring-fence of the rate [ph] ?

Ross Maxwell McEwan

Are you going to cover it, Fiona?

Fiona Davis

Well, obviously, at the moment, as it stands, we get effectively charged for a basket of funds from the group pot in terms of how strong it's priced. We have significant element on our balance sheet, which is either securitized income bonds or available through a discount window already. So from that perspective, we'll be able to maintain that going through into an ICB-type arrangement.

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

And this 105, does it include private banking deposits as well?

Fiona Davis

Yes it does. Not wealth but just the top end that we have. Our top end.

Ross Maxwell McEwan

Yes, so that 103 is related to our private banking not to do with Coutts. Otherwise, it'd be considerably lower again. Okay? Question?

John-Paul Crutchley - UBS Investment Bank, Research Division

John-Paul Crutchley from UBS. Two. One, back on the conduct issue and a broader question after that. As an outsider coming into the U.K. market, how much do you perceive the pricing structure of the U.K. banks or the economic model of the U.K. banks as being a contributing factor to the legacy costs they're faced today, i.e. having the free, I think [ph] , credit and trying to extract profit from other products to compensate for that? And do you think it's possible to move away from that kind of legacy cost risk while you've got a business model that is actually built on something where it doesn't look to be economic in the long term? That's the first question. The second question is post-Rainbow, I just wondered if you could comment on whether the branch network in terms of its density peak in London is where you'd want it to be or whether you could actually foresee these branch openings.

Ross Maxwell McEwan

First off, on the conduct piece, I think we just, as an organization, need to adapt our cost structures and our pricing to match into the new environment which is with us today. We can -- if we try and extract out profits that shouldn't be there on behalf of customers, you really get [indiscernible] those. So, I mean, see one of the points Les raised was how do you bring your back book to the front book? And how do you bring that as quickly as you possibly can without straining your business? And that's the task that we have. And we've got, I think, some good opportunities. Les and the team have done a pretty good job on it. Each fortnight or actually each week now, we're sitting down as an executive team with a section of Les' product team and working through getting them to tell us how -- what the product will look like going forward in the next 12 to 24 months and what the back book will look going forward in 12 to 24 months. So pushing the teams to say, how do you get from front to back without killing yourself. Now it does put, if you're not careful, some strain on your business -- and I don't think the regulators are wanting us to strain our business. They just want to make sure we're looking after customers. So we're forcing ourselves into that position, which I think is the right thing to do. I think we've got some really good opportunities on behalf of customers to get them into that position as well without really hurting our position. But we do have to extract costs out of this business at the same time, and I think we're capable of doing it. So if you can make that -- what you lose in revenue equal up in cost or thereabouts, you got a cleaner and tidier business because I -- the complexity we've built into this business over the last 20 years is horrendous. You just need to go into the back end of our operational shops and the back end of even our collection shop, as I did on Friday, and just have a look at the complexity we've built into this business over 20 years. But if we extract it, how clean and tidy this business would be, which would be a lot simpler and cheaper to run. But it will be -- you cannot do it overnight. And the conversations I've had with the regulator are we cannot do it overnight, but we do need to do it over the next 3, 4, 5 years, and we will do so. So, for example, the piece we're looking at, at the moment, we've got a new investment offer for customers that's a pretty tidy offer. So my view, and we've said this to our -- to the regulator, that over the next 2 years, we'll go back out to the old back book and have a look to see how much is the end customers' interest to bring on to the front book. Yes, but you're left with a lot more simple operation, which is a lot cheaper to run, and a much safer book going forward, because I think the problem we've had is we've seen this as losing revenue. Boy, you're going to get smashed if -- when [indiscernible] if it's a bad offer for customers that you've -- you used to hold on to. So it just comes back at you at one way or other. A second one was just around post-Rainbow and the branch network. Look, we've probably got about the right number of branches in London, England and Wales today without Rainbow. What is the right number when you're coming down from what, 2,150? Take out 300, you're down to about 1,800. The number is smaller than that. What number is, we're working through, Chelvi's working through, is part points presence. But I don't see massive number drop-off in the numbers. I mean, you've got to be very careful with customers. You need to be there for them and with them as you make that transition. And organizations that go through and slash out 500 or 1,000 branches and say wow, we've done a great thing for costs, you have to bring customers with you through that.

So we're planning to do that. And we're planning to go through what we call points of presence. So maybe, in a railway station that you have a lot more point of presence there. There are people who are coming through, and they can do things quickly either assisted and save time today or for themselves through other times. Those are the same sorts of things we're looking at. And so where else could we be for customers that they go that we could be there for them as well? And I don't think we've really stretched the brands enough on those sort of issues.

Manus Costello - Autonomous Research LLP

It's Manus Costello from Autonomous. How much do you think the state-owned organization impacts your relationship with your customers and your staff? And how much of a risk do you think you run the longer you go on being state owned? Do you think agree with the Chief Executive that you risk the butcher's [indiscernible] of the institution?

Ross Maxwell McEwan

I should give this to one of the others who have been around a bit longer than me. I don't wake up in the morning and see myself as personally being state owned and nor do the 40,000 staff simply get up in the morning and see themselves with RBS and NatWest over the top of them and try and be good staff. So from a personal perspective, I don't think it's really made a massive impact on our people. They still actually see themselves as being NatWest or RBS. So I think that [indiscernible] . From a customer perspective, you do get some comment from customers about "Well, we own you," type attitude. But I think that'll go as quickly as it came if and when the government chooses to divest out. I think we'll probably have some flurry from customers and then they'll move on as well.

Manus Costello - Autonomous Research LLP

Unless they had all the shares to your customers.

Ross Maxwell McEwan

Yes, and that's right because they may change, though, as they become shareholders. So they become shareholders. So I'm less worried about that. But that's in the governments hands, not on ours, to have a sort of want to get themselves out of being owners of this bank, should they wish to. So I don't see a lot of difficulties or downside from that perspective. We treat it as though as we are a -- as we are a publicly listed business that should be doing good things with customers and giving a decent return to shareholders. Will that change? When the government [indiscernible] , I don't think it will. But I think there'd be some customers. I mean, I'll head it myself. We are a new-type attitude. That's okay. I think our people have become pretty resilient as well, which is an amazing thing.

Come here and then we'll...

Gary Greenwood - Shore Capital Group Ltd., Research Division

It's Gary Greenword of Shore Capital. I just wanted to come on to the ROE guidance on Slide 33, where you talk about -- talked to the continued attractive ROE. But for REIT, the various targets sort of would probably imply an improvement in ROE from what's a currently quite high level of 24%. So I was just wondering what you think is an acceptable balance for returns between your customers', the regulators' view and shareholders. That was my first question. And then I had a second question, which is just in terms of coming back to this issue of differentiation, I mean, in terms of the strategy, because a lot of what you talk about seems to be very much internally focused to what you can do better and, obviously, what you need to do better not only needs to be done better, needs to be done even better than what the competitors are doing. And so I was just wondering what sorts of external benchmarking you've done that gives you the confidence that you can achieve that.

Ross Maxwell McEwan

I'll start at the back and go forward. Our research shows it's a really tough task for us. When you have to look at, for example, net promoter score or any customer satisfaction, it shows us not to be in the best position particularly on net promoter score. So it shows, particularly on the RBS brand, a really big road to home, which in a sense, one could get depressed about or see that as the exciting challenge that all our people will take onboard and get on with them. Interesting, as you put that to them, lest we don't shy off them [ph] , it has been interesting. Now we want to have a go at getting ourselves to being #1 on net promoter score, which is interesting psychology. They will say, we've been down, now we want to pick this thing up. The NatWest brand has less issues around that because it actually tracks, okay [ph] , against the big 5. But our view has been, let's not concentrate on the 5 banks because if you really want to be a winner, there's others winning out there with the market at a moment. There are some small banks starting to have a goal that customers are quite enjoying. So let's be where customers want to be and not be with a traditional bank. Let's get out and have a go with the smaller, more nimble people who are playing very strongly in the customer space. So I think challenging? Absolutely challenging? It's aspirational, and I think we will find it really difficult in the first couple of years. And I think if you don't start tackling the real issues for customers, you will never create a really good retail bank here. And don't forget there's a lot of smaller players come in and having a good go with it. So we should be there. Otherwise, long term, we'll lose it anyway. On the ROE, I think we've got -- our aspiration is to try and hold that ROE up. There are some things running really strongly against us in this marketplace, and that's why we have to deliver very strongly. Slight to no growth, I mean, it doesn't help us at all. As we get hit with more and more, I think, continuation of regulatory-type issues from the past, there is a cost of that running through your business. The number of mandatory projects that Les and Shelby are running at the moment is up to about 20. And these are -- some of these are not small projects that you're constantly running through your business and the expenses going through it, IML, FEDCAR [ph] . All of these things are huge projects with very nice businesses. If you had to put GBP 40 million to GBP 60 million within a year, these are big, big things that we have to absorb on a daily basis or a yearly basis. So there are some pressures against that. But again, it's -- our aspiration is to hold that up around the high teens to low 20s because I think that's going to be a signal of a really good retail bank, a balanced retail bank. We don't think it's going to be easy. Yes. Sorry, Christian, yes.

Unknown Analyst

Joe D'Christian [ph] from Jefferies. I just have a quick question on impairments. Impairments have been improving. The leading indicators of impairments have been improving, and the mix shift has moved from unsecured to secured. Yet your balance sheet provisions remain at about GBP 2.6 billion. I believe you had a smaller release in the fourth quarter. Is there any scope to liberate some of those balance sheet reserves to fund investment initiatives?

Fiona Davis

So I guess we have seen some reasonable releases probably last year and the year before. I would expect, in my guidance to the previous question, that is to start to kind of mitigate somewhat as we go forward, which is why I was coming to the 50-basis-point blended number. So I would say we have seen some reasonable releases over the last couple of years. And whilst there will be some in the year to come, for example, I think it will be less than you've seen in 2012.

Ross Maxwell McEwan

We might...

Les Matheson

[Indiscernible] with you, [indiscernible], is -- the cover ratios of unsecured and secured and linked into the provisions, -- so -- and they're very much -- yes, they are prudent, but I think they're pretty much aligned to where the other banks would be. And so we don't see it as either a massive opportunity or a massive threat to us.

Ross Maxwell McEwan

Going to take one more question and then we'll wrap it up and you can have a cup of tea. We'll answer some of the questions you...

Unknown Analyst

[indiscernible] from [indiscernible] Bank. A couple of questions. First one on private banking. You want to avoid that, I think. You've made it very clear mass market is where you want to be. What do you -- you talked about developing a strategy. What do think that might be in terms of a pledge with Coutts? What are you going to call it? I mean, private banking is what Coutts apparently do. How are you going to lead those out? That's the first question. The second one is I think like most of the banks we've seen in the last few months, cost is I think the battleground, as Mr. Jenkins told us. And a lot of that is down to IT, better use of IT operations. You perhaps had a bit of a reputation for having a large number of IT-enabled workers on your IT floor. Can you talk a little bit about that? Because it's something that bothers me. I mean, Deutsche Bank told me they got 30,000 IT consultants and 100,000 staff. Can you talk about the sort of percentage of your senior guys in IT within the retail bank who actually are employees of Royal Bank? Because I just see that as a list which is growing in terms of if I look at some of these projects of yours, fairly important projects, immediately could be an issue. And by the way, what was it like in Australia? Was it the same?

Ross Maxwell McEwan

I'm going make a couple of comments and probably hand to Chelvi, who's running on the initiative on private. The way -- well, it started with us not wanting to do private from an initiative perspective. I'm happy to be there from a customer-focused piece. But the issue to me is there's a winner on the countryside. I got more concerns about our offer from the private bankers and their management and the way we supported them and customers. Let's shore it up as we need to have a good review of what we're doing on private. So I was okay [ph] with it as a statement. But really, it's one of my 7 initiatives. I've tried to avoid it. We couldn't avoid it because the feedback was so strong, both customer-wise and from our staff. That's why it appeared on the [indiscernible] . And Chelvi will give you a timeline on what we're doing, what we're up to or where that's at.

Satyendra Chelvendra

So on the private bank, what we're doing is we're really looking at what the proposition is and narrowing it down also in terms of the customer groups that we're going to deal with it. So that is work in progress at the moment. We will have a proposition worked through in the next, say, 6 to 8 weeks, which will also determine what the relationship managers will be doing and how they will be dealing with customers and what our call center proposition for the private bank as well. It's seriously work in progress at the moment because we have just put -- brought it back to the drawing table and really looking at this proposition and saying what's the best way we can fit this in between the core banking and Coutts. So I'm sorry I don't have a more specific answer to give you here, but that's where we are at this stage.

Ross Maxwell McEwan

It does fit. Interesting because some of our clients in there could quite easily be in Coutts. Many of them choose not to be in Coutts. Many of them aspire to be in Coutts. It's interesting dynamics. What we've got is a group. Actually we've got a more premier banking that sits underneath the Coutts and about the mass market. But I'd say some could well and truly be in Coutts. We'll work with Coutts on is that the right place if the customer wants to be there and what's the offer we'll make. But it was very clear that the service delivery we were delivering to those private clients wasn't good enough. And the proposition wasn't clear enough, and the support to both our clients and to our private client advisors was actually not strong enough either. So that's sort of where we ended up. On the IT front, divisions, I've got no idea. [indiscernible] we could have itinerant workers operate there in our shops. Most of them, I thought, were -- I mean, obviously, we've got a big operation down in India, both IT and operations are -- I don't know the numbers there that we could be working on purely on the retail bank. But then most of those, I mean, we run an in-house shop as opposed to an out-house arrangement with our IT operations. So they sit inside the business. [Indiscernible].

Satyendra Chelvendra

So can I just make one point on that? The -- all the leadership team that drives these key initiatives, that those teams are only in the U.K. So the team are -- so leadership teams, the designers, the guys who think through that, that -- and they are all permanent IT workers.

Ross Maxwell McEwan

That's a good comment on that. Look, just closing off, thanks very much for your time this afternoon. This is the first retail bank session we've had. Happy to have them in the future in smaller groupings or large groupings, whatever works for you. This is an exciting business. It's an exciting time to be in this business. You -- there aren't too many people who leave the Australian marketplace where you get bashed by the newspapers but not the regulator on a daily basis. You get -- you don't get beaten up on your bonus structure on a daily basis. They might criticize you for being high. So it's an interesting place to be. To me, we can create, I think I know, U.K.'s best retail bank here. And I think we've got the people who'll do it. Certainly, you've seen the people and the determination to get this brand -- both brands back up and running with the RBS one even more so given the hit it's taken. And I think we've got the people to do it, and we've got support from both board and the executive team to have a good go at it as well. So it will come down to execution. Thanks for your time. Happy to take questions afterwards. It could be another quarter of an hour, we can have over another a cup of tea. Cheers.

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