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The Royal Bank of Scotland Group (NYSE:RBS)

Q1 2014 Interim Management Statement Call

May 02, 2014 4:00 am ET

Executives

Ross Maxwell McEwan - Group Chief Executive Officer and Executive Director

Nathan Bostock - Former Group Finance Director and Executive Director

Richard O’Connor - Head of Investor Relations

Rajan Kapoor

Analysts

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

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Peter Toeman - HSBC, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Andrew P. Coombs - Citigroup Inc, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Rohith Chandra-Rajan - Barclays Capital, Research Division

Thomas Rayner - Exane BNP Paribas, Research Division

Jason Napier - Deutsche Bank AG, Research Division

Joseph Dickerson - Jefferies LLC, Research Division

Operator

Good morning, ladies and gentlemen. Today's conference call will be hosted by Ross McEwan, RBS Chief Executive. Please go ahead, Ross.

Ross Maxwell McEwan

Thanks so much, Kathy, and thanks for joining the call. We've -- you've seen our RBS Q1 results today. Two months ago, I set out a plan for RBS focused on building the #1 bank for trusted service in the U.K. The results we are posting today show the steady progress that we're making -- making this much -- a much simpler, smaller and superior [ph] bank. As you would know, we still have lots of work to do and plenty of issues from the past to reckon with. You will see that we've also started to cut costs out of the business so that we can invest in what matters to our customers. Again, a good start to a process that we are determined to maintain. Following the announcement of our new strategy in February, we have moved from 7 divisions to 3 customer businesses: Personal, Commercial and Corporate and put the executive teams for these new businesses in place. From the half year, we would change reporting structures so that you can see how these businesses are performing both against customer metrics and against shareholder returns.

And we started to deliver on the commitments to customers we made on the 27th of February as well. I said we'd call time on teaser rates and zero balance credit card transfers. These things erode the trust of our customers, and that is exactly what we've done. We have to ensure that the pricing across the bank is consistent for personal customers, and we are committed to ensuring this is the same for small business customers by the end of this year. We are also making good on our promise to be a much simpler bank for our customers. We have already reduced by 1/4 the number of personal and small-business products, and by the end of the year, we will have cut this by half. These steps have set out our direction for the future as a smaller, simpler and smarter bank that is easier and reliable to do business with, and I look forward to highlighting further progress towards the goals as we move forward.

Before I hand over to Nathan, I just thought one important issue I know you will be interested to hear about is the decision taken by a major shareholder regarding the remuneration and the 1 for 1 bonus cap. CRD IV clearly gives shareholders the right to direct policy in this area, and we understand the difficult position that has put our major shareholder in. We are not going to pretend that this is ideal. As our statement made clear last week, not having this flexibility involves an element of risk, but this is a risk that we will manage.

I'd like to pass over to Nathan but also to acknowledge that this is Nathan's last results session with me. Nathan, I think, has done an excellent job and been a -- played a key role as part of our strategic review, and I'd personally like to just thank him for his efforts in making this a better bank for customers and shareholders. As you know, Ewen Stevenson starts with us 19th of May. There will be a good handover between the 2 of them. But Nathan, over to you for your last set of quarterly results.

Nathan Bostock

Thanks very much, Ross. Yes, I appreciate it. Joining me today are Richard O'Connor, Head of Investor Relations; and Rajan Kapoor, our Financial Controller. I will offer some brief comments on our first quarter results before leaving plenty of time for us to answer your questions.

The key features of the quarter were: We reported a first quarter attributable profit of GBP 1.2 billion, up over GBP 800 million on a year ago. Ulster Bank returned to a small profit, the first time for 5 years. RCR reduced RWA equivalents by GBP 14 billion. We have reached agreement with the government for the future retirement of the Dividend Access Share. Independent shareholders will get to vote on this at the upcoming Annual Shareholders Meeting on the 25th of June. The first quarter has seen an improved performance across the businesses. We benefited in the quarter from several favorable one-off items, including AFS gains and the absence of negative above or below the line charges. While we see encouraging early signs of momentum, we know we still have a long way to go, and expect to face further headwinds in the coming quarters. As a consequence, we caution on a full year read-through from the first quarter's result.

Turning to our Q1 financial performance in the key lines of the P&L. Q1 total income of GBP 5.1 billion was down 2%, compared to Q1 2013, but up 28% on the fourth quarter. Versus a year ago, higher income in U.K. Retail, U.K. Corporate and AFS gains was outweighed by revenue declines in Markets and International Banking as we rightsized these businesses. Net interest margin improved 18 basis points year-on-year, and 4 basis points quarter-on-quarter to 2.12%. The year-on-year move is driven by repricing initiatives across a number of divisions.

Costs improved 6% year-over-year and 2% on the prior quarter. The year-over-year cost reduction reflects good cost control in Retail & Commercial, as well as progress on the rightsizing of Markets. Staff expenses were down 10%, driven by headcount reduction and a decline in variable compensation. Our Q1 cost performance is flattered somewhat by the absence of a number of the one-off costs seen in Q4. We are working hard to implement the new cost reduction plan and expect the benefits to begin to accrue in the second half. We reiterate our plan to reduce total costs by GBP 1 billion this year. Restructuring costs relating to these changes will be reflected over the coming quarters. The cost-to-income ratio for Q1 improved year-on-year by 2 percentage points to 66% as costs reduced faster than income.

Impairments improved further in Q1 '14, down 65% on a year ago. Ulster Bank saw a strong improvement in impairments, reflecting improving mortgage arrears and rising house prices. U.K. Corporate impairments benefited from the absence of large individual cases, while RCR saw partially offsetting recoveries of circa GBP 100 billion. Group coverage of nonperforming loans remained strong at 65%, up 13 percentage points year-over-year.

Q1 operating profit of GBP 1.5 billion is more than double the Q1 profit a year ago. As mentioned, we recorded a Q1 attributable profit of GBP 1.2 billion, reflecting improved cost and impairment performances.

Tangible net asset value per share was 376p, up 13p from the year end. The medium-term outlook for TNAV remains sensitive to timing of restructuring costs, RCR disposal costs and the extent of further legacy conduct and litigation cost.

Looking at the highlights from our businesses. Retail & Commercial's Q1 operating profit of GBP 1.4 billion was up 36% on a year ago. This increase was seen across all of the Retail & Commercial businesses, with the exception of Citizens, which was also impacted by the strengthening of sterling versus the dollar.

U.K. Retail and U.K. Corporate Q1 performance improved year-on-year, driven by stronger revenues and improved impairments. Both these businesses saw balance sheet growth in the quarter. Net mortgages grew by GBP 1.2 billion, while SMEs drew down GBP 2.4 billion of new loans in Q1, up 23% on Q1 '13. Markets operating profit of GBP 318 million increased 14% year-on-year. Q1 revenues were down 8% on Q1 '13 and includes some gains on deleveraging and derisking the business in the quarter. Costs were down 15% over the same period as the reshaping of the business continues. Markets RWAs were GBP 87 billion at the end of the quarter.

RCR got off to a strong start in its first quarter. Operating losses were held to only GBP 114 million, while funded assets declined by GBP 4.6 billion or 16% to GBP 24 billion, including GBP 2.4 billion from runoff and about GBP 1.9 billion from disposals. RWA equivalents were reduced by GBP 14 billion in the quarter to GBP 51 billion, reflecting good disposals performance.

Turning to capital. We finished the quarter with a fully loaded Basel III Core Tier 1 equity ratio of 9.4%, up 80 basis points on the last quarter. The improvement includes 30 basis points increase from retained earnings and 30 basis points gain from RCR reduction. RWAs were down GBP 15 billion quarter-on-quarter to GBP 414 billion, with RCR acting as the main driver. We reaffirm our 2016 target of a fully loaded Basel III Core Tier 1 ratio of greater than 12%. Our leverage ratio was 3.7%, an improvement of 20 basis points in the quarter, and we continue to target a medium-term leverage ratio of greater than 4%.

Before I hand back to Ross, I want to add that we are making good progress in transitioning to our new 3-segment business structure, and we will be reporting on this basis from the next quarter. We will publish, though, the restatements ahead of the Q2 results. Operator, can we have questions, please?

Ross Maxwell McEwan

Thanks, Nathan.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Chira Barua from Sanford Bernstein.

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

I just have actually one quick question on Ulster. There's been lots of speculation on corporate finance activities out there, with private equity floating that business. So why are you pressed to do anything with that business? And why wouldn't you just let it run organically now that it has turned positive? Some clarity would be appreciated.

Ross Maxwell McEwan

We did examine the running of it -- just on its own. When you've taken out RCR, when you examine the size of the tracker loan book, which gives a very, very small, if any, return out of it, and you take the Northern Ireland piece off this, the business itself is only about GBP 10 billion to GBP 15 billion of RWAs -- sorry, of assets. At that, with the cost base on top of it, it will not give shareholders a long-term return that is what we'd expect from that sort of business. So we're looking at the optionality around it, and that's what we signaled on 27th of February. It's our plan. I think by end of summer, we'll be able to come back and say what the plans for that business are, but we are looking at all options. It's just too small for the shape of that business today. Our estimation was a very low return on equity over the medium term to longer term for that business if we don't reshape it.

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

So are you planning to -- so what are the options on the table, Ross?

Ross Maxwell McEwan

I will come back to you after summer and let you know those. We'll either to do it with somebody else or we do it ourselves, but we are looking at options to make that a third bank in the republic that is a good challenger bank. And my view today is it's just too small to be that, and we do want to stay there and give the services to customers.

Operator

And your next question comes from the line of Chintan Joshi from Nomura.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

I've got 3 questions, if I can take them one by one, please. First one is on RCR. If I look at the runoff for this quarter, it's about 8.6%. I just wanted to check if we can expect the runoff rate to be that high over the next coming quarters. But also, if I look at the disposals, that's about 6.6%, so overall, a 16% reduction in total assets. Again, should I expect a fast pace of reduction that you've shown in Q1? Or Q1 is typically a little bit better in terms of disposals? That's the first one. I'll...

Nathan Bostock

Let me just pick up on that one. I think it's true that we've had a strong performance in the fourth -- first quarter. It's been a good period for us, and the markets have been favorable. I think like all these things, I would caution against reading too much into just one quarter, particularly given the nature of the type of assets that one has to deal with, the relative size of different assets and, therefore, the speed with which taking a large number off versus taking lots of smaller exposures off. So I would say that we maintain our guidance as it was for -- over the full period. We certainly are, at the moment, going faster than we had originally put on the glide path, but this type of thing has all the potential to oscillate and to have volatility in the speed. So I wouldn't draw too many conclusions. And again, we reiterate our sort of guidance for -- as well for this year, not only just for the overall period.

Richard O’Connor

Chintan, it's Richard. There were a couple of lumpy deals, one in disposals, one in run-off in sort of the mid-to-high hundreds of millions of pounds, and there's not that many of those left. So I wouldn't do the extrapolation on that basis.

Ross Maxwell McEwan

And you always get the easier assets to get off the books. So then, a great job. This is a very, very experienced team that we've got on RCR, running assets off. We're running about 280 data rooms at any one point in time. It's up full of -- running well and truly now, but I'd just be a wee bit cautionary. Easier assets always come off first.

Nathan Bostock

Yes. So I mean, the other thing to remember -- and again, it's probably relevant for the likes of impairment guidances that whilst there has been improving trend in impairments overall, RCR did have some offsets in the first quarter. So if you're looking in our overall impairments number, I would be saying, think more of GBP 100 million, GBP 150 million, probably higher than that, as a total if you're looking to sort of have a more even number of quarters, and that would give you a better feel.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

That's helpful. The second question is on capital. If -- I mean, you've had improvements in both expected losses and DTAs, but if I think about this quarter, positive underlying -- sorry, positive statutory profit, and that's helped ELs and DTAs to have a positive swing as well. So a bit of double leverage. But if your guidance is correct, then we should expect this to swing the other way in -- whenever you have these losses come through. Would that be the right way to think about it?

Nathan Bostock

So again, I think you've picked a number of the -- sort of the right components and, obviously, the connectivity of them. Yes -- I mean, yes is the short general answer. Think of it that you're moving through the year with the elements of headwinds that we talked about, but countering that, ultimately, will be the pro forma of the first tranche of Citizens. So I think you're in the right type of territory but a couple of sort of moving parts, probably, through the year, neither of them that dramatic.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Okay. And finally, U.K. R&C. If I look at the top line, it's weak sequentially. If I look at NIMs, they are flat. So the -- but the beat has really -- or rather, the improvement has really come on the cost and impairment line. When can we expect top line to see some growth in U.K. R&C? I would have thought this quarter you would already have seen something.

Nathan Bostock

Well, I think on that basis -- I mean, I'll let Ross, yes, comment on the broader business. Again, I think, clearly right on the dynamics. The reality is we are doing the things we need to do around the cost side. We are getting improvement in the impairments. We have been managing NIM, and so NIM has been improving as the assets haven't been moving up in the past quarters. But we are starting to see, I'll call it, some of those green shoots of asset growth. And particularly, again, our focus on mortgages is already starting to show good progress. So I think general comment, correct; everything is about the timing.

Richard O’Connor

Chintan, you've got to be careful, Q1 to Q4. Q1, there's 2 -- fewer number of days. That's net interest income. So really, you've got to look at it on a longer-term basis than that.

Ross Maxwell McEwan

I think you've got to look at it quarter-to-quarter. For Q1 '13, Q1 '14, we're starting to see the growth in the book, which is nice to see. You're starting to see growth in income for the first time in, I think, about 4 years. So the green shoots are there. We are going to be cautious in our growth. We're not going to explode this business. This is a business that we spent a lot of time on, with -- particularly in the mortgage market, getting our business very secure. But we have seen it start. It's gone through the GBP 100 billion of assets now in mortgage. It was up GBP 1.2 billion for the quarter, remembering, too, last year, we spent a lot of time training and developing our people. So we're starting to see the shoots.

Nathan Bostock

Yes. So I mean, again, if you look at year-on-year, which is -- I think, is a very relevant point given the number of the days differences between the quarters, then we're up roughly about 4% in income on the Retail side, or around about 2% on U.K. Corporate.

Operator

And our next question comes from the line of Peter Toeman from HSBC.

Peter Toeman - HSBC, Research Division

I was just wondering about whether any of your sort of guidance for -- from the strategy presentation on restructuring costs had changed because I had a feeling you were looking for about GBP 5 billion of restructuring costs over a sort of 3-year period. I wondered if you could sort of confirm the quantum and timing of when those will materialize.

Ross Maxwell McEwan

Yes, Peter, first off, we're not changing our guidance on that. The first quarter is a -- was much slower quarter for us in restructuring in the sense that we're building the program. You will see the heavier restructuring starting to come through and emerging in Q2 toward through into second half of this year, just with the nature of the changes around people, property, reviewing our systems processes and the like. So I'd stay with that guidance at this point in time. We don't see a change. So Nathan, timing-wise, as well, would you see that change?

Nathan Bostock

No. I think, keep -- I mean, keep with the guidance and the timing at the moment. As Ross says, we're in the early parts of this as well. We will, of course, have a real intensity of focus of looking to get the right return from our restructuring costs. So again, this is something, I think, that you need to wait for a few quarters to get to further guidance.

Peter Toeman - HSBC, Research Division

Can I also ask you about the RCR and whether -- the charges that you intimated in previous presentations, whether they might not be somewhat lower given the performance in Q1? Or should one -- is it too early to change?

Nathan Bostock

Yes, so too early. Again, for the -- we've sort of given a sort of circa GBP 1.5 billion for the year. Again, I would say take that as remaining good guidance. In fact, the general comment would be, take the year-end guidance. It has been well interpreted by people, and I think it remains very relevant. We've said the markets are better. So again, we will continue to do everything we can in those situations, but the guidance remains.

Operator

And our next question comes from the line of Michael Helsby from Bank of America.

Michael Helsby - BofA Merrill Lynch, Research Division

I've got a couple of questions, actually. Firstly, on the Markets performance, I think, clearly, that's probably surprised everyone. But I think in the text, you mentioned there are some gains in rates from derisking, which looked particularly strong versus last year. So I was wondering if you could give us some more color on that. And then in U.K. Retail, the bad debt remains extremely low in your unsecured book. It's just a check whether you're happy that, that level is sustainable. And just on the group tax charge, actually, I think it's 22% in Q1. It's the first time for a long time that I can remember it being even close -- remotely close to the U.K. tax rate. If we move over with the RCR, is that a consequence of that, that we should now think if you take your tax rate has been closer to that normal 21.5%?

Nathan Bostock

Well, I'll take 1 and 3, and Ross will take the Retail one. On the Markets side, yes, I think some interpretation of that number is clearly important for you. So firstly, I think one needs to think in terms of, quarter-on-quarter, from '14 to '13, our Q1 last year was a low number. Remember, we had a lot of the sort of the what is happening to the business, et cetera, type headwinds at that point in time. So in terms of relative to that, you're seeing it coming from a low base. You are seeing around about GBP 100 million of one-off numbers vis-à-vis sort of from the deleveraging side. If you put that into the mixer, it means that the overall sort of FICC element is pretty much in line with the sort of the circa 20% down in that, that you're seeing in the European-type banks. Personally, I think that is a very good performance given all of the other things that are going on, but I would be, again, very cautionary. Our guidance for the sort of -- for the year remains in the sort of 23% [ph] to 25% [ph] territory for income. So you can see classical first quarter, good in terms of execution given everything else that is going on but really do need to think more about the forward trajectory.

Ross Maxwell McEwan

On the Retail bad debt, particularly on the unsecured, good, clean tidy book, stopped growing substantially and holds [ph] that market, but the bad debts, I think, have been kept under very good control. That has been a concentration for the team, so a good quality book. And I'd expect the bad debt levels to stay about where they are. And I think we should see -- we'd see any -- there's nothing that we're doing in that business, that should see a much -- or decline much further than this.

Nathan Bostock

And your third question, vis-à-vis tax, again, the short answer would be no. We remain in the situation, where there's an awful lot of nuances around tax, given where profits are made, where our losses occur, given the types of expenses, which are not deductible, and all the rest of it. So again, I think typically, we have sort of guided more to the sort of circa GBP 1 billion or so in terms of the full year. Again, I would say guidance remains relevant.

Operator

And our next question comes from the line of Andrew Coombs from Citigroup.

Andrew P. Coombs - Citigroup Inc, Research Division

Just one question, please, on your impairment losses, clearly, a substantial improvement there, and you're actually running below your guidance for 2014 to '16 in terms of the annualized rate. But when I look particularly at U.K. Corporate and then at Ulster Bank, you have had some write-backs both in shipping and U.K. Corporate and in commercial real estate development in Ulster. So I'm just trying to get a feel for what's driving those write-backs. And secondly, how sustainable is this quarter's loan loss provisions?

Nathan Bostock

Again, I'll sort of pick up that. Richard might sort of add comment to it. I think what I tried to do sort of in my comment, previously, is say that I agree and I recognize a number of those things. I mean, you are getting -- as you get further and further through these cycles, of course, you do get to the stage, where -- occasionally, in that you do have some write-backs, that's a natural part of the length of the cycle. I think in overall number terms, our overall impairments are around about GBP 362 million for the quarter. I would be saying, think GBP 100 million, GBP 150 million, sort of more than that. And if you sort of took that as the average for the quarters, then I think you would be in the sort of territory that we would be considering. Impairments have improved. We do think that there are some elements to that. Not least of course, we have set up the RCR. So there is a period whereby, since you moved the higher probability of default assets into RCR, we took a one-off forward provisioning against a number of those assets. So for a period of time, there is some, shall we say, slightly more difficulty in getting that clarity, but we maintain, as well, our guidance of the sort of 40- to 60-basis-point territory for the organization. The reason we gave that was to try and help you if you see what I mean -- given that, again, we've got some noise in the short term. So if you take the 40 to 60, you take the add-back-type numbers I was talking about, you'll sort of -- you'll get the sort of right field.

Richard O’Connor

The other I'd add, Andrew, is -- are the -- we've got about GBP 100 million for our recoveries in RCR. [indiscernible] mentioned. We also didn't have any notable single names. Typically, you get to have realize [ph] a quarter We had none of those this quarter, but obviously, over 2 or 3 years, you would expect. Some quarters where you get them, and some quarters where you don't get them.

Operator

And our next question comes from the line of Christopher Wheeler from Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

Just a couple of questions on 2 areas. The first one is just looking at the U.K. deposits. I think corporate deposits fell about 3% in the loan-to-deposit ratio crept up a couple of percentage points. And then in the U.K., they were flat, I think, with savings down and current accounts up. I'm just wondering -- I mean, having seen your competitors perhaps do a little bit better in that area, what would you attribute that? Is that, do you think, part of the sort of the noise around the bank early in the year? Or is it perhaps more to do with the way that you're managing the changes in those 2 businesses? That's the first question. The second question just is to look at the RWAs in the Markets division. As Nathan said, you've went down from just short of GBP 100 million by about some GBP 12.5 billion. I just wondered where the main reduction was by business line. And related to that, we've seen 1 or 2 other banks who are in the securitization business, the asset-backed business as you are, seeing an uplift in their securitization RWA on the back of some CVA adjustments. I just wondered if you could tell us whether you'd suffered that or whether that's something you're concerned about or whether it's already dealt with.

Nathan Bostock

Well, let me go to the last ones first and come back to the deposit one. Firstly, I guess, it's -- yes, the short quick short answer on the CVA side is that we've already taken account of that. So we dealt with that historically. So that's good news. In terms of the, let's call it, GBP 99 billion, GBP 100 billion to the GBP 87 billion that you're seeing, you're absolutely spot on. That is the sort of headline. But what we've done in the IMS is we've also given a transfer schedule. I think it's Appendix 3, Rajan?

Rajan Kapoor

It is.

Nathan Bostock

In Appendix 3, you'll see some of the transfers in and out, which were, again, that noise around the likes of RCR. So the Markets numbers are closer to sort of a GBP 92 billion to an GBP 87 billion if you exclude the RCR movements. I don't have the specifics in terms of the individual numbers that are below that in terms of the reduction, but it is true that generally, we will have a lower asset-backed RWA because, again, we have been managing that book. So it's generally across-the-board in the Markets area, but it's sort of GBP 5 billion as the real reduction rather than the headline number. I guess the other thing just to be aware of is that GBP 87 billion is more a sort of a -- I'll call it a clean number in -- if you're thinking of the old sort of legacy concept, et cetera. So that -- if you think of that more now as a sort of a clean number of the RWAs being employed in that business, again, we expect it to come down further, but that gives you a better idea of what they're employing. In terms of the deposits, again, I think this is one of those things where we have been proactive in managing our repricing. It's been one of the things that we have looked to do, but it's also connected to the management of the liquidity portfolio that we talked about previously, so, again, to try and be as helpful as possible on that. As you know, we said we had excess liquidity portfolio. We said we were going to look at optimizing that and managing it better. So we have been repricing away, particularly, the more expensive institutional-type deposits in the corporate arena. So that's flowing through. You're seeing that. That's been going on for a period of time. I guess, on a forward basis, we're about a GBP 131 billion now liquidity portfolio. Again, sort of question, how much of that really is likely to be reduced further in order to do these types of things? I would say probably think of something in the order of GBP 5 billion or GBP 6 billion or something like that, not a very large number, the reason being -- although it looks like we've got the headline size for that, the reality is that we do need to start thinking ahead. And our liquidity coverage ratio, we think we ought to be circa 100% for that. And so we are going to manage across these various criteria. So that's why we would tend to be looking at managing another GBP 5 billion or GBP 6 billion, and again, we would look to manage that relative to our deposits.

Christopher Wheeler - Mediobanca Securities, Research Division

But on the Retail side, would you expect that to start to pick up again in the second quarter? Obviously, I get the corporate answer, the timing.

Ross Maxwell McEwan

No. It's -- I mean, they're fully funded. So I think [indiscernible] will be just balancing off the asset and liability side that's booked now. So I wouldn't see too much change there.

Richard O’Connor

We see a very good growth in current accounts across-the-board. We'd expect that to continue, but we'll obviously price the savings book to see how we fund the mortgage growth.

Operator

Our next question comes from the line of Rohith Chandra-Rajan from Barclays.

Rohith Chandra-Rajan - Barclays Capital, Research Division

A couple from me as well, please, if that would be okay. First, actually, just returning to kind of the margin in U.K. Retail and Corporate and sort of following up actually on Chris' question just on the deposits, given that you're repricing away or you're repricing your deposit book because you don't really need them, just -- I wondered if you could comment on the margin outlook a little bit for U.K. for those 2 businesses, given that it's been relatively stable in both in the quarter. Do those kind of moves on deposits lead you to sort of expect some margin improvement from here?

Nathan Bostock

So generally, I would say think of -- our overall margin is 2.12%. I think the best way to think of it is that we'll probably have around about 1 basis point a quarter. We might get a quarter with a couple of basis points of improvement. It's that sort of magnitude. We would generally think that we've done a lot of good margin management around our Retail and Corporate books. So those are going to be sort of in that thought process and moving sideways during the year. I think the only thing I would say is, we are expecting the Ulster NIM to drop reasonably significantly. It could be 25, 30 basis points in the next quarter as we have to deposit circa sort of GBP 3 billion or so with the Central Bank. So that will be a negative. So I'm giving you the overall numbers net of that. So there will be some element of small growth, but think of it as small.

Rohith Chandra-Rajan - Barclays Capital, Research Division

And I'm sorry, Nathan, what...

Richard O’Connor

Rohith, it's obviously grown mortgages and less so unsecured. Obviously, that has a negative mix impact on margin, but overall -- to keep it broadly flat; but risk-adjusted, improving.

Nathan Bostock

Yes. We think we can manage well that balance.

Rohith Chandra-Rajan - Barclays Capital, Research Division

Okay, all right. And I'm not sure to what degree you'll be able to give an answer to the question, but just in terms of the Markets revenues, I agree that kind of the underlying 20% down is a good outcome, and you've talked about some of the one-offs as well. Can -- do you have a view in terms of what the revenue performance of the ongoing Markets business is? I appreciate that's not a straightforward question but interested if you have any insight there.

Richard O’Connor

It's published. It's a headline, 950; ongoing, about 900. It's in the Markets.

Rohith Chandra-Rajan - Barclays Capital, Research Division

Sorry, so everything else is in R&C?

Richard O’Connor

Yes, that's right.

Operator

And our next question comes from the line of Tom Rayner from Exane BNP Paribas.

Thomas Rayner - Exane BNP Paribas, Research Division

Markets actually were positive today. I mean one thing I sense it liked was the better-than-expected TNAV progression. I mean, I think it's hard to ask this without effectively asking you for some sort of profit forecast, but the progressions through the rest of this year and into next year when you look at, obviously, your underlying earnings, but then the RCR runoff, the restructuring charges building up, I guess, as we go through the year, you are still talking about some future litigation risks, which may or may not yet have come through. Can you give me any sort of steer on maybe where you would expect TNAV by year end versus Q1? I mean, I -- there's enough variables there for you to not to have to give me an earnings forecast, I think. And I have a second question just on the stress test, please.

Nathan Bostock

Sure. Well, again, I'm not going to change our original guidance, where we said we expected sort of TNAV to move sideways for a period of time with a number of sort of moving parts. I think we used the term headwinds in our sort of script of the results. And so again, it's worth reminding people that there is, indeed, a snapshot of the strength of the core underlying franchises, but it was a clean quarter. So I've already said that the impairments number was probably lower than generally, on a forward basis. We haven't got the restructuring costs that you would see potentially in future quarters. You haven't got the RCR number running at the same run rate, as I indicated, and there, of course, remains some uncertainty around conduct and litigation. So I think you put that into the mix, and I think our previous guidance remains the right sort of guidance for the sort of -- I'll call it, for the nearer term.

Thomas Rayner - Exane BNP Paribas, Research Division

Sorry, Nathan, but just to be clear with that, is that based on the sort of year end '13 when you're seeing sideways because, obviously, you've jumped up quite a bit in Q1 already?

Nathan Bostock

Yes. I'm saying that you should take the guidance we gave at the year end as remaining as good guidance, yes.

Thomas Rayner - Exane BNP Paribas, Research Division

Okay. And I guess just on the stress test, I mean, you're still comfortable with your go-to targets. Obviously, the stress test has injected some more uncertainty, I guess, into the process. I mean, can you give us any color on what you're thinking post the methodology announcement from the PRA? Has that changed any of your thoughts for your capital targets and your capital build?

Nathan Bostock

So the short answer, it hasn't changed. The thought process, tried to do an awful lot of forward thinking when we originally went through this. That included us looking at a number different scenarios back in the October and November period in terms of the types of things that might impact. We carried out these types of the stress tests. In any case, these types of asset movements, unemployment movements, these types of things, are not out of court against the types of stress and macro conditions that you would expect. And again, the PRA are fully aware of those types of stress numbers in that, that we run internally. And again, we're fully on the table when we agreed our capital plan and our trajectory. So I say it's a short answer, which is, no, I don't think it changes, at all, what we've put out there

Operator

And our next question comes from the line of Jason Napier from Deutsche Bank.

Jason Napier - Deutsche Bank AG, Research Division

Three quick ones, please, if I might. Firstly, the sort of trust and fairness agenda is, obviously, central to the new strategic plan, and I think that's right. Could you talk perhaps a little bit about the state of product structure and the pricing on the front book? Is it in Q1 at a sort of place, where you expect it to be broadly stable? Or is this still further work to be done there? And then as you look at the total revenue tally, is there sort of any component that you'd like to call out that sort of relates to legacy product that is no longer being offered and that you'd expect to taper that won't be replaced by new revenues? So that's the first one. Secondly, perhaps some color on where you see product spreads on the asset side. And particularly, in the U.K., one of your large competitors yesterday shared the view that mortgage rates in the U.K. would continue to fall for the better part of 2014, whether you had a perspective on that. And then lastly, Ross, you spoke quite a lot at results about your readiness for MMR and the time taken last year around training. Can I just confirm, please, that your sort of underwriting standards for a long while have already been in line with MMR so that it wouldn't be your expectation that there would be any kind of tightening now versus in Q1 or Q4 of last year at least as far as obvious is concerned?

Ross Maxwell McEwan

Yes, and that's fine. Let's just start with the first one, which is about front book pricing. I think we're where we want to be on that front book pricing. I think, the big issue for the industry is around back book and that needs to be managed. Our objective, particularly across the savings-type area, is to have the back book equaling the front book over the next 2 years, so no major changes on that, but it's -- because you've got the rating all over the place from, as of you can imagine, a big portfolio of our business. So we'd look to bring back book to front look as quickly as we possibly could without destroying value, but it is around fairness for customers. I'd see on the back end of that, the revenue would stay flat because the pricing is both up and down. So I'd see it reasonably flat from that move. So I wouldn't expect any deterioration in product profitability in the retail bank, where it's -- where most of this will happen. On the product spreads, I'd see them -- particularly, our mortgages, slight down, but I'm more optimistic around the flatness of that. And if you have a look at our pricing, some of our pricing around -- particularly our SVR is -- it's not the lowest in the market, but it's pretty well below many of our major competitors on that part of the book. And our other pricing is pretty -- more matches up. So I think there may be others that probably need to come down. We're probably sitting where we think is a fair pricing for customers. And on the MMR, I don't see any changes now to the underwriting standards that we've had in place for quite some time. I think with any bank, you just need to stay within your -- the risk parameters and your risk appetite statements. I think that's where banks get into strife, that they start moving out and trying to justify themselves, moving out of those risk parameters. So I'm pretty comfortable. Our MMR, we really instigated that first half of last year, and that's why our mortgage book was down. Our growth was down fairly significantly. I don't see that we're going to have any difficulties with the implementation of MMR. There will always be some teething on the edges as you move from parts of your business, which is your telephone centers doing non-advice, and moving them to advice. But all of our people are now trained. But there's always some movement of having to pull them on and off the phones to keep their training levels and the standards up, but I don't see we need to tighten our underwriting any further than we did over the last 2 years, so pretty stable, I think, if you're looking there. The big issue for us in our retail bank is getting the growth in the volumes. We've seen the improvement in the margin. Now we need to see growth in our volumes coming through, and I've been pleased with what's going on in the mortgages.

Nathan Bostock

So I think -- yes, one thing I'll just add. I think on the underwriting one, I don't think there's any change in sort of the approach people take to the underwriting standards. I think what MMR does is it basically tries to gain, for both the underwriter and the applicant, a clearer understanding of their sort of cash flow ability. And stressing those cash flows has always been a part of the underwriting standard. It always has to remain the same. So I think it's more to do with that than it is about anything to do with changing your underwriting standards.

Jason Napier - Deutsche Bank AG, Research Division

And just, perhaps, a tiny follow-up. So on the front book pricing getting away from sort of interest rates and so on, just looking at the income by product, it's not obvious where sort of current account fee income sort of sits and relative to perhaps some of the peers, that the numbers don't look so big, is there any sort of pricing changes on late payments and so on that you might be looking to make? And then which category would those things sit with within your disclosures, please?

Ross Maxwell McEwan

Those changes have already been made. They were made last year, particularly around overdraft. There might be some tweaking at what it would want to do this year. But most of those changes were done last year. So I don't think you'll see major changes in the...

Richard O’Connor

Jason, the current account income is in the personal deposit line in the statement. Just on mortgages, we are expecting [ph] an increase in our capacity to write new mortgages. that's an important point as well.

Ross Maxwell McEwan

The numbers are right. This is up well and truly on last year. We started the year, last year at 325; phase to phase, end of the year at 425. Now we've got 440. I'd say by the end of this year, face to face we'll probably have another 50 on the road or in our branch network and growing the numbers on a telephone basis as well. But fully trained operating takes a lot longer to get the people up. That's one of the issues with MMR, which is fine. You get a better quality. You'll hold on to the business longer as well, I suspect, over the long term.

Operator

And our next question comes from the line of Thomas Mohammad [ph] from [indiscernible].

Unknown Analyst

Just a few questions. The first question is on the PPI. I noticed that both yourself and Lloyds yesterday have not made any further provisions on the PPI. I was just wondering if you could provide further comments as to whether or not you believe that it had now sort of peaked. And how much more future provisions you would sort of account for? That's the first question.

Nathan Bostock

Should we take them one -- it's probably easier just to take them one at a time, if you don't mind. So I think on that one, what I would say is, we obviously look at this very closely. We look at the methodologies that we've used in the modeling forward, and I think that there is seasonality in these numbers, which you do expect. There is still a little bit of noise from the past business review, where I think it's true that, probably, numbers remain slightly higher than people would have thought, but I would say in the general broader PPI there, perhaps, a little lower. So for us, certainly, at the moment, the numbers very much stay in line with the type of modeling that we did. And that modeling does, clearly over a period of time, come down.

Unknown Analyst

Okay. And my second question was in relation to the stress test. I was just wondering if you could sort of provide more color on that. I mean, you would expect some banks within the U.K. to actually fail the stress test. I mean, if all the banks pass the stress test, then it wouldn't really be a stress test. Would you sort of -- what is your view on RBS? Would you sort of believe that you could pass the stress test? And that ties into another kind of question that I had. If Bank of England raises interest rates next year, how would you believe that would affect RBS, given that, yes, your net interim margin may increase, but then again, your impairments may increase as well given that a number of borrowers may struggle to pay interest, given that there may be a higher interest rate. So sort of any further color on those would be appreciated.

Nathan Bostock

Okay, let me just do the -- let me just do the stress test. I mean, I'm not going to give any broader comment. I think that the stress test, you're right to think that it clearly has to be an effective one from the regulator's point of view. So it needs to move more into, I'll call it, the extreme rather than just the sort of a 1 in 7, 1 in 10-year, even 1 in 15-year type of scenario for it to do its job. And I think these are the types of things that banks have been considering now for periods of time, and it's all been part and parcel of the capital restrengthening that you've been seeing. And so I think it's good banks, generally, in the U.K., are ahead of the curve in terms of balancing both things up. I mean, from a real absolute, I mean, it's a low bar that they'll be looking to, to actually affect things. It's -- about 4.5% is the stress bar. So from that perspective, you have to burn up 1 year's earnings yet plus capital to get there. So I think they have to -- they will have to, say, tread a fine line to able to make this thing as effective because it has to be an extreme, but it also has to have the realism that goes with it. Your second question in terms of the interest rates, again, we do model this type of thing, as you would expect, Generally, raising -- rising rates is a positive for Retail & Commercial type banks. I would say think of it more in the sort of circa GBP 500 million, GBP 700 million type territory, probably, for ourselves. You may get a bit of movement in impairments. But typically, the impairments, one tends to be relatively short lived as, typically, smaller companies in that can overstretch themselves. But as you go through that, you still retain the earnings that come with the uplift from rates in general, and those impairments then normalize.

Richard O’Connor

And the majority of our new mortgage business is on fixed rate, so the earnings benefit you get from the deposit side, and you're protected somewhat on the asset side.

Operator

And our final question comes from the line of Joseph Dickerson from Jefferies.

Joseph Dickerson - Jefferies LLC, Research Division

Just a couple of quick questions, please. Firstly, on loan growth, if I look at Slide 11 in your slide deck, you've talked about the growable book within Corporate, which was -- seems to be up relative to the run rate. And then in mortgages, you're showing the 21% increase quarter-on-quarter in applications. It looks like loan growth and mortgages was plus 1% year-over-year in terms of your balances. So I'm just wondering, what's kind of the trajectory in each -- particularly, I suppose, in the mortgage piece, what's the trajectory going into the end of the year?

Ross Maxwell McEwan

Look, if the market stays in the condition it's in, I would like to see the growth stay at about those levels. We've got more people on the road, talking to customers. So we're building capacity inside the business, and we have been doing that over the last 12 months. So I think you'd see that growth continue quarter-on-quarter as the year progresses. On the Corporate side, we are starting to see more growth in the small end of the market, which you're starting to see on the growable book. We -- I have warned people that we've still got some of the non-growable book that's going to come off, particularly commercial real estate, as we realign that portfolio. So there's still a bit of stuff -- commercial was to start coming off, but I -- it's good to see some slight growth in that book, and I would see that continue. But I wouldn't get ahead of myself knowing that we've got commercial real estate coming off, and other banks will be picking that up in their growth figures. Thanks very much for your time today. I think that's all we have time for questions. I know Richard and his team are very happy to take the questions that you have. We've got a good quarter from us, but we're being realistic about the fact that we've got a big restructuring program on. We had a good quarter out of RCR, but as we said and Nathan has reiterated, the -- some of the easier, bigger assets start to go out first, and you get into a lot of more gnarly [ph] assets as time goes on, but we were delighted with that performance. And so we're looking for -- it won't be as probably as easy in the next 3 quarters given the work we've got on the restructuring of this business, but a good start to the year. And thank you for your time.

Nathan Bostock

Yes. Thank you, all, very much.

Ross Maxwell McEwan

And Nathan, again, well done.

Nathan Bostock

Thank you.

Ross Maxwell McEwan

Now it's going on the good result.

Nathan Bostock

Thanks, everyone.

Ross Maxwell McEwan

Cheers. Thank you.

Operator

Thank you, ladies and gentlemen. That will conclude today's call. Thank you for your participation. You may now disconnect.

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Source: The Royal Bank of Scotland Group Management Discusses Q1 2014 Results - Interim Management Statement Call Transcript

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