The Royal Bank of Scotland Group plc (NYSE:RBS)
Q1 2016 Earnings Conference Call
April 29, 2016, 04:00 AM ET
Ross M. McEwan - Chief Executive Officer
Ewen Stevenson - Chief Financial Officer
Raul Sinha - JPMorgan
Michael Helsby - BofA Merrill Lynch
Andrew Coombs - Citigroup
Chira Barua - Bernstein
Jonathan Pierce - Exane BNP Paribas
Martin Leitgeb - Goldman Sachs & Co
Rohith Chandra-Rajan - Barclays
Manus Costello - Autonomous Research
Jason Napier - UBS
Tom Rayner - Exane BNP Paribas
Ross M. McEwan
Good morning and thanks for joining Ewen and I for our Q1 results call. It’s only been a month or so since we’ve presented our full-year results with that in mind we’ll keep our remarks brief and focus on the progress we’ve made so far this year. I’ll then hand over to you and then be back for questions.
At the end of the year, we set out five clear goals for 2016 and I think we’ve made good progress against them in Q1. The improvements to our core business delivering much better customer service cost and reflecting into credit volume growth, across the majority of our branch.
In the quarter we made an operating profit for GBP421 million and the six franchises that form our core businesses generate a return on equity of 10.9, a good return on equity in a competitive environment. Loss attributable to shareholders was 968 million driven by the final payment of 1.2 billion to H&T that let us to retire the dividend this year and as you know this is an important milestone for us as we continue to clear the path to ultimately return access capital. Putting this one-off payment beside the bank made a bottom-line profit of 225 million on the quarter.
Yesterday we updated you on our mandatory disposal of Williams and Glenn as I’ve cautioned before this is a very complex process that involves standing up full service retail and commercial bank that works seamlessly for around two million customers on the day we turn it on. And the closer we get to delivering this the more clarity we have on the risks and we now see a significant risk that the separation and divestment will not be achieved by the end of 2017.
That said, we remain committed to our state-aid obligation and we’re exploring alternative means to achieve this. At our year-end results, I said I would continue to build capital, reduce costs, improve service and grow our core businesses whole of this in an effort to become the number of bank for customer service trust and efficacy.
And let me just give you a sense of where we stand against these targets. Let’s firstly start with capital build common equity Tier-1 ratio dropped to 14.6 from 15.5 at the end of 2015. This was driven primarily by the desk payments and the previously announced action on our pension liabilities. Even with this decrease, our common equity Tier-1 remains strong and rush to our peers and above a 13% target.
Secondly, our reducing cost. We continue to take steps towards becoming a simpler, lower cost UK focused bank by completing the sales of our international private banking business and exiting our Russian business. With Titan out over two billion of cost base in the last two years and we’re committed to taking out a further 800 million this year. Many of you will have seen cost reductions in branch closures reported in the media. However, this is as much about reshaping our business to provide better service as it is about taking costs out.
We also continue to accelerate our exit of expensive properties and we’ve announced that we will leave the 135 Bishopsgate this year to one of our main London offices. A simpler bank with greater automation is key to having a goal of less than a 50% cost to income ratio by 2015. Improving service, so we do more business with our customers is a logic behind sustainable growth and high return into our core business and we have continued to make good progress this quarter.
Personal net promoter score is the highest that its ever been and we’ve seen improvements across most of our franchises and new reward account is a great product with a 3% cash back on selected households build tied by direct event. We are building positive momentum and we’ve more than doubled the number of reward account holders this quarter with over 0.5 million now paying GBP3 for the current accounts in months.
I mentioned stronger service from automation and digitization. Active users of our mobile app are up 20% over last year and with or 200,000 new users in Q1. We’re one of the leading banking apps in the market. We’ve also improved our mobile banking functionality that with customers are now able to apply for loans and credit cards from their phones and our online mortgage renewals more than doubled to three billion in Q1 2016.
We also continue to grow our business in the markets that we like and at a completive price. We grow our line book and personal and business banking and commercial and private banking by 15% on an annualized basis. We expect this to moderate throughout the year, but are confident of achieving our 4% loan growth target. Our performance in the mortgage market continue to be strong and we’re still taking market share in addition we made increasing our invoices and improving our relationship within this is paying off.
Our share of new business was 11% compared to our stock share of 8%. We are the biggest supporter of British business Tier-1 are lending for the smallest business that of course will finish in two million in turnover grew by 15% on an annualized basis and we’re opening six more entrepreneurial hubs this year to strengthen our relationship with this community.
Our commercial net lending performance outperformed the market. This is now the fifth consecutive quarter of net lending growth in the commercial business and looks like demand is holding up well. This performance shows the benefits of investing in relationship manager capability and simplify our lending processes.
We know that there are some franchises that need to do better at the once we repositioning for greater returns and you can see across the [indiscernible] investment banks had a tough quarter and whilst our CIB business underperformed during the quarter. It's important to note that the impact of such income volatility was much more because of the restructuring and repositioning we announced last year.
The RWAs in this business have fallen by 18% of last 12-months and cost to down 16% that’s volatile for this business making up less than 15% of our overall business mix. Three years ago performance like we have had this quarter would have had a much bigger impact on overall results.
We have a new leadership coming into Northstar and private banking. Jerry Nolan would start Northstar in June and Peter was already in place of CEO of course. A priority for both of these new CEOs will be identifying opportunities to grow the businesses, while at the same time reducing cost. So we are delivering suddenly on everything but then add gift, but as there are range of things we need to get pass that are not directly in our control.
We head no material updates to give today on our legacy R&D settlements from the day I joined in the U.S. and what we've already said at the year end. So one quarter end capital remains strong, cost continue to fall, customers scores are improving and we are seeing in the business and the markets that we like.
I'll now pass over to Ewen, who will take you through the results in a bit more detail.
Thanks, Ross. From our perspective an encouraging quarter, we are delivering on what we said we would this year, our retail and commercial banking franchises are doing well and that's despite a competitive operating environment. On the income statement our operating profit in Q1 was GBP421 million we made an attributable loss of GBP968 million, but that included the GBP1.2 billion final cash dividend to treasury. The return on equity across our six core franchises was 10.9%.
After many years of declining income, we are beginning to address this, while income was 13% lower than Q1 2015. Adjusted for transfers and CIB and certain one-offs income across PBB and CPB was broadly flat. Very good volume growth is offsetting a combination of margin pressure, asset mix changes towards secured lending and an ongoing decline in the certain non-interest income streams.
Stable income across the combined PBB and CPB franchises will remain at a target for the year. CRD had a tough start to the year, adjusted income was down 37% on Q1 2015, but most of this impact was seen in the first six weeks of the quarter and for the remainder of the quarter CIBs income has been in line with expectations. You should note there is a number of one-off in the quarter that includes a negative GBP356 million for IFRS volatility a positive on credit adjustment of GBP256 million net disposal losses of GBP206 million including a EUR28 million gain in Ulster Bank ROI.
Adjusted operating cost were down 7% on Q1 2015, we are managing the volume growth across PBB and CPB while we remaining disciplined on their operating costs and we’re now seeing meaningful reductions in both CIB cost down 16% Q1-on-Q1 and capital resolution where cost were down 43% Q1-on-Q1. We are on track to deliver our cost target of GBP800 million this year, but I would caution against assuming linear reduction trends across the year.
Restructuring cost were GBP238 million on the quarter that includes GBP158 million for the ongoing separation of Williams & Glyn. On Williams & Glyn and further to get that announcement this quarter separation cost run rate of GBP158 million, I think is a useful quarterly guide for future separation costs. In our full year 2015 results, we gave the standalone equity for Williams & Glyn about GBP1.8 billion you know we’re equivalent challenger banks trade and to support that Lloyds had to provide to DSP, so you can factor in your end use on potential excess values.
On litigation on conduct in addition to our existing provisions charges for this quarter were GBP31 million. together with the ongoing complexity of the Williams & Glyn separations and a tougher set of bank in the England [indiscernible] criteria for this year, I would continue to caution on the on the timing for return capital distributions, we will get there as quickly as we can address the issues we need to address, but we remain committed to returning quarter one above our 13% target.
Net impairment charges were GBP223 million this includes a GBP226 million charge for additional shipping provisions as this charge for shipping should be considered part of the overall GBP1.5 billion disposal loss guidance for capital resolution implying around GBP900 million of disposal loss to go. Away from shipping, imperilment levels continue to be low, but we do remain cautious in this environment given the increased potential for defaults.
Turning to the balance sheet, you’re now seeing the benefit of the continuing shift in our asset backed liability mix towards PBB and CPB and away from capital resolution in excess liquidity holdings. While addressing our legacy total funding and capital securities, this is driving a higher NIM without needing to take undue risk and all the consumer credit or higher risk commercial segment.
In PBB and CPB our low loan to deposit ratio provides us with the funding to grow market share, we grew the combined loan book of 15% annualized growth in Q1, mortgage activity continues to strengthen, applications were at 61% from Q1 2015 to GBP10.3 billion and this provides a strong forward pipeline going into the second quarter.
Price to new lending all much doubled to GBP7 billion partially driven strong buy-to-let mortgage completions, totaling some GBP1.5 billion in the quarter. Float market share was 11.4%, this is a stock share of 5.3%, on commercial lending this was up 4.3% year-on-year, primarily due to growth in the large corporate segment
Across the combined line portfolio as of PBB and CPB we do expect this growths to moderate this quarter, that would call for unless delivering our great segment this year and that’s a net gross target that includes the impact of continuing to showing by parts of the commercial book and selected PBB exposures, such as Ulster Banks track of mortgage and MPL portfolios.
And with our lower returning assets and more expense of funding, we’re continuing to actively manage these down. Interest on the assets and capital resolution are down 63% over the last year and on the liability side, we think actively in handling our HU wholesale debt. Provide transition to more as in riel complaints and reduce our overall funding costs.
Over the last six months within the April we reduced funding by GBP11.7 billion through a combination of both maturing debt and repurchases and we’ve also issued GBP2.2 billion of new MREL complaints senior debt. As a result of the shift in our asset liability mix, our net interest margin is up five basis points this quarter our line to deposit ratio increased to 90% and our liquidity covered ratio is down to a 121%.
Our quarter one ratio so 90 basis points during Q1 to 14.6% or an 50 basis points of those received to the final debt dividend and a fall of 30 basis points was it resulted for previously announced accelerated contribution in our main pension scheme that we made in March. Our quarter one ratio was also impacted by growth and developing new ways, these increased by GBP6.9 billion this quarter. GBP3.3 billion of this was due to sterling weakness and the residual increase was primarily due to loan growth and modern recalibration in UK PBB and markets volatility with strong beneficial offset from annual operational risk recalibration.
Despite only models declined in capital resolution RWSs in Q1, we remain committed in delivering our 2016 target of a GBP19 billion reduction by year end. [indiscernible] per share fell by one pie to 351 pie per share as that despite of 14 pie reduction from the combined impact of the debt and accelerated pension payments, with proposal of offset paying eight pie from cash flow hedging reserve gains was separates fell in the quarter and five pie from FX reserve gains.
In terms of outlook for the reminder of the year, we remained committed to delivering the guidance we get it two months ago and we’re comfortable with the operating trends in our core businesses. For Q2 you should note that we’ll book in approximately GBP50 million charge for the FACS levy this compares to only GBP11 million in Q2 2015 and will recognize a charge of GBP66 million relating our most recent debt repurchase.
But as always we do caution lumpy quarter-on-quarter on as a result of expected further come back restructuring and disposable losses and come back cost in particular subject are our broad range of possible outcomes. So overall, a good quarter for PBB and CPB, CIB has recovered from a very weak start to the year and we’re convicted to meeting all of that 2016 financial targets.
With that I’ll turn back over to Ross to host some Q&A
Ross M. McEwan
Thanks Ewen. Will if you can open up the lines for calls now please.
Off-course thank you Ross. So our first question comes from the line of Raul Sinha from JPMorgan. Please go ahead.
Good morning gentlemen. Can I have three please eventually quick ones,. The first one is on the US RMBS. In the past you've talked about starting negotiations or sitting down for discussions as a pre-cursor to having some visibility on the timeline. So I just wanted to check factually if you have actually started discussions on this topic.
Ross M. McEwan
Ross here Raul. No.
The only brief update that you’ll see in the litigation note that we have entered into a discussion with one of the State Attorney Generals, Connecticut, but that’s the only substantive update.
The second one is on mortgages and obviously some very strong growth there; your gross has almost doubled to GBP7 billion this quarter. Can you explain maybe how much of that is coming from buy-to-let and is that one of the reasons why you expect a little bit of tail-off in the second quarter?
Ross M. McEwan
Yes. It’s about just over 20% I think 21% of the growth is due to buy-to-let, about 1.5 out of the seven. Partly the growth, I mean if you recall Q1 of last year was weaker. But I mean, again I think Raul as you think about our market share, we grew mortgages at are 11.4% flow share, we’ve got 16% share of current accounts and a loan-to-deposit ratio of 19%. So we do have structurally a different asset liability mix and loan-to-deposit ratio, relevant to some of our peers, which I think allows us to grow mortgages in a way that others are not at the moment.
And I think the other thing is we have for the last three years been building mortgage distribution. We’ve got nearly 1,000 mortgage advisers supporting customers, that’s up over 20% since 2015 and prior to that, I think we started 375 mortgage advisers. So it’s been a big uplift. Our online renewals, as you’ve seen well and truly up. They’ve doubled in the last year, so just to share automation of the renewals is helping on the retention.
So I think an overall story both with advisers with the broker community and our retention is pretty strong. And also there was a little bit of a pull forward in the first, or the last part of the first quarter with stamp duty changes, so I don’t see that will continue all. Because you did bring forward some activity than the marketplace.
Okay, and then lastly just on Williams & Glyn, I appreciate obviously you might be limited in what you can share with us, but just what is the linkage to capital return? Do you have to make progress? For example, if you did choose the IPO approach for Williams & Glyn, if you were able to list, let's say, one tranche, would that constitute enough for you to then have discussions about capital distributions or do you have to get it totally off the books?
The words that were put to us by the PRA was exit is assured. So we have-to-have idea look was assured not necessarily off our books as we interpret it, but a deal that was assured. And that’s what we’re working towards. I have chatted on Williams & Glyn before, it is, we are taking what would be seen as the hardest route of getting the business out and actually taking it out without service level agreements.
So we, when we started this we knew it was the toughest route, but it is the best route to get a bank out otherwise you end up supporting it inside your organization. But as we’ve said, we will look at other alternatives where we have to make sure that we get to that timeframe end of 2017.
Okay, thanks. That’s very helpful Thanks.
And your next question comes from Michael Helsby from Merrill Lynch. Please go ahead.
Good morning, everyone. I have got three as well. Thanks for those comments on Williams & Glyn, Ross. It does look like, on the basis of what you've said, a trade sale may well be more likely than the IPO that you were aiming for. If I think about the potential buyers and if we just exclude Santander, who obviously you've talked to in the past, but even for the bigger UK challenger banks who are an obvious potential buyer, it's a very big acquisition. So can I just ask two things in relation to that; first, would you be prepared to accept other UK bank paper as any part of any sale consideration? And can you also remind us about the agreement with Corsair and how that might complicate any disposal. That's question one..
Ross M. McEwan
Michael, there’s very little we can say and we’re obviously not going to discuss parties that can or cannot. All I’d say is we have a look at the results, interesting enough, Williams & Glyn is starting to grow quite nicely, it’s a very good bank and it’s a diverse bank, so that’s an attractive assets. And as we’ve said in the past, there are people who like this asset.
The Corsair/Centerbridge investors in it have actually been really good partners in this business and taken a good share in just helping us get this into reasonably good shape. The arrangement with them is they will take this position at an IPO or other options if it suits them, but they don’t have to.
Alright, okay. Secondly, just turning to the corporate loan growth, which was extremely impressive. Of the 5.5 billion quarter-on-quarter, can you tell us how much of that was in the UK and what the typical yield might be on that new business? And also just drilling down a little bit within that growth, commercial real estate grew 5% quarter-on-quarter, GBP700 million. In the context of what's going on in the market, that's a very meaningful increase. It's the equivalent of putting on the total Shawbrook/Aldermore commercial real estate book in a single quarter. So can you just give us a little bit more color on what type of CRE lending is going on in Q1 and again, what the blended yield might be on that type of new business? Thank you.
Ross M. McEwan
On the question on - if you look at the sort of the quarter to one on Q4, I think the overall growth is about 3.9 billion that 3 billion of that was in large corporate segment and there are numbers of lumpy one-offs in there. I wouldn’t - I have seen that we are going to continue to grow at that price at the remaining of the year. On commercial real estate, I wouldn’t try and draw any Showbrook and Aldemore comparisons into our long growth in Q1.
It's all comfortably within risk appetite as we have talked about in the past, we are very conscious of our history in the commercial real estate sector as very, very tight risk appetite. I think frankly, we are just doing the better job of servicing our customers than we have done in the past. If you look on an overall margin level you can see we have provided pretty detail margin disclosure and overall CPB margins stable in the quarter.
Okay. Thank you. And then, just finally from me, and you've already touched on this already, but clearly, buy-to-let was a big incremental business for you in the first quarter. It's not historically been something that Royal Bank has traditionally been bigging. It's 21% of your [gross] (ph). Can you tell us how much it was of your net lending growth? I'm conscious that you've not got a big back book there, so it might have been a more meaningful part of the net lending. And just whether you're happy - there's a lot of regulatory scrutiny on buy-to-let, you're happy with all the underwriting and the regulatory risk that you're potentially taking on.
Yes, let's start with the bigging, just recently the regulators have come out with the views and how we should - all organization should be looking at the under riding of this business. We were within those requirements we have been recently gone back into the buy-to-let market, you are right, our book is only 14%, buy-to-let of our total lending books. So we know the biggest drive in this market. We have quite strong and stringent lending criteria, particularly around income and loan-to-value ratio, so we our flow is 21, stocks about 14%.
So and I think this is a bit of bring forward again in this quarter, but we have been building our capability in this market place as we have another parts of the mortgage market which would traditionally being quite weak in. I am still curious to be comfortable, you do have to be careful in buy-to-let, particularly as the rules around taxation and the like change. But I think we stay within our risk parameters.
Ross M. McEwan
And again, Mike, I think given some of the changes coming, again you should expect growth in the buy-to-let segment, I think for us and others to moderate for the remainder of the year.
Okay. Thank you. Thanks, gents.
And your next question comes from Joseph Dickerson from Jefferies. Please go ahead.
I've got a question on two subjects. The first on Williams & Glyn. Over the past several months, there's been a two standard deviation move in investor expectations for returning capital around this one asset. And certainly, since shares were placed at 330p, I'd call it a three standard deviation move in expectations. The process has been going on for years. What exactly is the complication? And when you've looked at it in your own assessment, where have you got it wrong, if you will, from the standpoint of estimating when this thing was going to be lifted out?
And then, secondly, on that issue. Is a de-merger to, say, existing minority shareholders, something that could be on the table? So that's - those are my questions around Williams & Glyn. And then, the second question is around the UK PBB NIM. It looks like it was only down 1 basis point, quarter-on-quarter. And I'm sure there's some - you've got some flexibility still, given the high proportion of savings deposits in that business. Do you think that the NIM is stabilizing there? Thanks
Ross M. McEwan
Just on the second question first quickly. It was down 1 basis point in the quarter. I have wouldn’t called out but we think at this point, it is stabilizing and I think it will continue to moderate during the course of the remainder of the year. I think on an overall growth basis, I think we have actually confident that our NIM will continue to increase during the remainder of the year, it will be a probably it is our price and what we saw in Q1.
So I mean what we have got going on UK PBB is all of the trends that we have talked previously where you have progressive rolling off of cash price hedges that we got in place. So on current accounts, you have got the mix change - two mix changes going on, one from unsecure to secure and a continued although a moderating trend for shift from standard variable rates to fixed rates.
Standard variable rates declined by about a percentage point in the quarter from 17% to 16% but overall if you look at the margins that we’re putting on the lead book and mortgages we think it’s very, very good ROE business and certainly much better returning profitability for us in the run-off that where it will be where its coming from which is the run-off of capital resolution and access liquidity.
Just on the Williams & Glyn side just as you said before is a very, very complex piece of work taking a bank from a bank and we are actually having some successes in doing it and we did have to put to the market very significant risk. We’re not going to give a deadline and that’s the reality as you get into these programs. We are moving out or standing up 700 systems here. This is not one mortgage platform that most organizations would take two-years to take the business from one mortgage platform to another.
We are actually standing up 700 systems, we will have to work on the day, we definitely, you don’t really know no matter how much planning you do, you don’t really know how it’s going to go until you get through this. So we’ve done a lot of heavy lifting on testing of systems. We’re now moving forward in to what we call the production zone which will be in the light summer and that means putting the systems into a production zone and then putting the customer grouping into them and each part of those changes you learned a lot more about yourselves and your organization and how these things well. So these are our systems but they are going into a new environment and they will have to work and talk to each other.
So, unfortunately it s just high complexity and as you go through and further closer and closer to the end you do find some difficulties with time but progress is being made just for example stood up the payroll system which again for most organizations probably taken a year to do one of those things where we just had to do 700. That’s up and running, we got 5,500 people standalone being paid by Williams & Glyn and now outside of RBS and we’ve got other things definitely going on but we did have to signal to the market.
We will have a look at other options of making sure we dig it out but are just reinforces is highly complex work and I’m not too sure. I’ve ever seen a bank do this and remember we went down this route rather than a full TSA because it’s the TSA lease that’s struck inside your organization and after it was stated to be a standalone bank away from us so we keep growing on our resources. Our capability in this area is strong. We have taken but quite differently a separate insurance business direct line group, we’ve taken our will pay again quite a separate business but this is taking our own systems out and standing them up. So we’ll keep you updated next time we’ve got our quarterly results.
Ross M. McEwan
The complexities is in separation, the complexity is not in disposal. So once we had got it separated we’re pretty confident that we can come up with a manner of disposal that protect shareholder value and your point on quite do the math on two or three standard deviations on capital distributions but the overarching message that continues that worth is as and when we clear the remaining hurdles to bring out a return to capital distributions we will normalize to a 13% core Tier-1 ratio. So if you’re taking a more conservative view as a timing difference or other than an difference in absolute capital distributions. So those three hurdles just as a reminder Williams & Glyn here as RBS and Bank of England treasury.
And we got rid of the fourth one in the fiscal which was paying out the debt.
And the next question comes from the line of Andrew Coombs from Citi.
Good morning. Three questions. The first, I'm afraid, is another follow-up on Williams & Glyn. You mentioned earlier that, in your discussions with the PRA, there need to be a deal assured on Williams & Glyn before returning capital. I guess the point we're struggling to understand is, even if restructuring charges were to double, it's difficult to - how that would mean for the impact on your capital, once you adjust for the GBP10 billion of RWAs dropping out. So could you just elaborate on why the PRA has this stance, why they have attached the Williams & Glyn disposal to any capital return? That's the first question. Then I've got a couple of more technical questions.
Well maybe if I answer that one first Andrew. This is all to do with state aid. I mean we have an obligation to take this business out. So once it doesn’t have the immediate impact on capital this is a state ag requirement and its agreement between the UK and European commissions and we’re a party to that.
So that’s why it’s one of the requirements. So what’s not a big capital until its tidied up. It’s pretty clear that, that’s one of the things holding its back from becoming absolute normal bank we aspire to be. It’s not the biggest capital issue for us, it is one of the requirements to become a plain bank again.
Okay. That's clear. I could ask what the consequences of Brexit might be on that agreement...
Probably we should state not much at all, because it is agreement that sits in place.
Great. And then the couple of technical questions. The first would just be on the shipping portfolio, the write-downs there. Can you just remind us of the size of that portfolio? And also the mix of that portfolio between container, tanker, bulker, and where you've seen the charges? And then the final question would just be on this IFRS volatility through the corporate centers. The second time in three quarters we've seen a large charge there. Can you just remind of what's driving that charge, what the key inputs are into that impact?
The shipping details are actually report.
Ross M. McEwan
I think page 17 of the report Andrew. We’ve got some details on the shipment portfolios. About just under 40% of it is dry bulk, but we set out in there what the credit exposure is what the non-performing pool is et cetera. So, and the last question Andrew was?
It was on the IFRS volatility.
Ross M. McEwan
Yes. And the question around IFRS vol.
It was on the IFRS volatility. It's just what the key drivers of that are, because it's the second time in three quarters we've seen a large charge relating to it. So it'd be great to give us an idea of how we can better assess that in the context of the wider Group.
Ross M. McEwan
I think the way ultimately to assess it is that, yes, long-term it should have zero impact on the bank over time. And I think when we get into IFRS 9 in a couple of years time. We shouldn’t have this issue, it relates to some hedges that we put all on some very decade lines that we put on a number of years ago. And quarter-on-quarter, we think just right volatility unfortunately, you’re just going to see that volatility come through the other income line. We have broken it out separately and obviously had a bigger impact given the significant movement and long rights, but it shouldn’t impact your valuation models.
Okay, thank you.
The next question comes from Chira Barua from Bernstein. Please go ahead.
Hi. Good morning, guys. Three questions. One, again on topics which you've already commented, but very quick ones. Williams & Glyn, is there a - what's the penalty from Brussels if you miss the deadline? Have you had a chat with them as yet, and - because you've gone public right now, saying that you'll not meet the deadline, most probably not meet the deadline. So what is the feedback coming from Brussels? Should I give you all three?
I’ll give you that one now, that we haven’t had those conversations. We keep in touch with them obviously through the monitoring trustee that sits through the sessions regarding Williams & Glyn. They know the work that’s going on in the sector, but they see 6,000 people working at it, they see the entire organization focused on at. So at this stage, I think it’s far too early to be talking about what are the penalties. And also depends upon what do we miss on if we’re minorly out. We’d hope to see nothing. If we’re well out, it may be different. But no discussions at this point.
Ross M. McEwan
And just to repeat some guidance around numbers. Obviously if you look at 2013, we had GBP630 million of restructuring costs for the separation of Williams & Glyn, we’ve just incurred another 158. So we think that sales like a pretty good quarterly run rate. Obviously offsetting that is the fact that every quarter with Williams & Glyn making good operating profits, GBP80 million of operating profits. You should offset at against those numbers and we provided I think enough disclosure for you to form of you is just walk the exit values might be Williams & Glyn and given you’ve got a very active challenger bank sector now trading in the market.
That's the first. The second one is on, again, the UK mortgage book. Just a quick question on that. What percentage of the front book is actually fresh lending as opposed to buy-outs of loans from other banks?
Let’s take a look at that. I don’t know what the actual.
Ross M. McEwan
I think we’ll have to get back to you on that Chira, I don’t have those numbers on hand.
Okay. And the third one, Ewen, to your disclosures on US RMBS, I always thought that your strategy was to try and settle with all agencies together, because you've got a big bunch of them, and work through the DoJ around that. But I've seen that you started one-on-one talks. So has the strategy changed? Is there something fundamentally changed from the DoJ side?
No. Our strategy hasn’t changed, but it does, we can’t stop those other individual parties wanting to have those conversations with us alone if they feel that their timing is different to the DoJ or any other state attorney. And that’s what’s happening.
Ross M. McEwan
Yes. I guess, remember we’ve got Department of Justice we’ve got a handful of states and on top of that we’ve got about 20 different pieces of litigation. So there’s always going to be, yes we continue to want to work with the Department of Justice to get, settle as much as we can by way of an umbrella settlement, to the extent of that continues to push out. I think we will choose to negotiate individually with some of the states and some of the come to us.
The next question comes from Jonathan Pierce from Exane. Please go ahead.
Three quick ones in risk-weighted assets, please. Firstly, can you reconfirm that the Capital Resolution RWAs are intended to get down to GBP10 billion mark by the end of 2018, which I think is guidance you've given before? Secondly, some model changes in the first quarter. I think that was only a couple of billion of additional RWAs. Is there any more of those to come? Anything you see in the pipeline now?
And thirdly, on the commercial Bank, the loans and the risk-weighted assets went up by fairly similar amount in the quarter. Previously I think you've talked about a GBP9 billion RWA opportunity around efficiency in the commercial Bank. When might we start to see that come through? So if we continue to see solid loan growth, could we expect the RWA growth to slow as some of that GBP9 billion efficiency improvement comes through? Thanks.
Ross M. McEwan
So our capital resolution I don't think I've ever mentioned 10 billion at the end of 2018, but what we have regarded to this 30 billion at the end of this year which is the sort of the commitment of in terms of reduction in RWA out of cap rate. I think we will - yes, we remained committed to achieving that with down relatively modest 1.4 billion this quarter. So the currently about 40 just over 47 billion so that implies we've got just over 17 billion to go for the remainder of the year.
And then that lease was about 30 billion, so it could get to 10 billion at end of 18. The growth that reduction will begin to moderate, but it's plausible that we'll have bachelor level by the end of 18. In terms of the model recalibration, some of that will reverse I think on the coming quarter as there more to come. I think that really depends on some of the discussions that are going on in Basel, et cetera where they land over the next years, but much longer data.
On the commercial bank, we have got to about a pull of that GBP5 million one of the reasons you've showed that high growth in commercial Q1 relative throughout the quarter was because there wasn't the corresponding offset coming through from that portfolio of 9 billion. We do think you will see some of that stuff come out again in the coming quarters.
The next question comes from Martin Leitgeb from Goldman Sachs. Please go ahead.
A few follow-ups from my side, please. And one again, I think, on Williams & Glyn. I was just wondering what kind of alternatives you are exploring? And then the question is, obviously, looking at some of the previously European Commission mandated restructurings in Europe, so we have seen some banks completely changing from a disposal to a rundown or similarly. Is that part of your consideration?
Or would that be part of your discussion? I think if I remember back at the disclosure back in 2009, one of the key concerns of the Commission, with regards to state aid, was your market-share position within SMEs in the UK. Could then an alternative solution be to this dispose loans and just close the branches? Or do you think the going - or at least the base-case assumption remains carving out a completely standalone functioning banking entity going forward?
And that obviously as well in light of the substantial restructuring costs you have incurred already in that process. The second question is just a quick follow-up on your funding position and you obviously mentioned your structural advantage you're having. From your disclosures, together you had around GBP8.1 billion of legacy AT1s, which no longer count as part of your capital stack, at least from an endpoint perspective.
Could you update us there what your plans are with regards to that? I think you're past the potential call date. Should we be expecting any further liability exercises here going forward? And the last is really just a quick clarification with regards to costs in Capital Resolution, which obviously have declined meaningfully over the last couple of quarters.
And I get your comment we shouldn't look at a linear basis on that sharp decline we had versus last quarter. But I was just wondering in terms of indirect expenses, which is down sharply, is that a new run rate going forward? Or could we imagine that to come down even further in the short term? Thank you.
I'll just pick the first one which is alternatives, so we won't go into any detail on what we're looking at that. You need - you're quite right, when you look at what was acquired from the state aid, was the disposal, but the creation of competition in the marketplace, so I doubt that a complete rundown on the business or big chunk of that would be acceptable, because it wouldn't create a competition.
And the European commission and agency would want to see increased competition into marketplace either through new vehicle or strengthen vehicle. So I can't see it a position where the book would be run off is my view, but I just like to give you acceptable when you look at the terms of our requirements.
Ross M. McEwan
On the other two question, Martin, on the legacy capital securities we still have, you’re right. It is important, I think to recognize that some of them still have regulatory capital value for us for the time being. But, I mean as you’ve seen over the last couple of quarters, we are actively managing down legacy capital and way to see household funding when it makes sense to do so, some about through natural maturities, some about through repurchases to speculate on what our strategy is, but we’re going to manage it for value on your behalf.
On Capital Resolution, look our target is to take the current quarterly run rate of just over GBP250 million down to as close to zero as we can over the coming years. And we will manage that expense based down as rapidly and as prudently as we can. The one thing I’d caution about though it’s obviously much easier to take out front office cost than it is back and middle office costs because as you close down the business, you’ve got years of legacy clean up to do around accounting, tax, litigation, et cetera that just takes time to work through. So there will be a stub of costs that I think runs for a while.
And can I just add to that, we’ve still got it bring down the global transaction service business, which is a heavy back-ended business, as Ewen said. So the stub of that will take some time, but we’re planning to have all customers off by the end of the year. And then the systems and administrative staff down out of that pretty soon after. But those sort of things do take time and that next where the cost is. So front end’s pretty well out. Now we’re working on the bank end and all the service and technology pieces behind it. It’ll take a couple of years.
Thank you very much. Very clear.
The next question comes from Rohith Chandra-Rajan from Barclays. Please go ahead.
Hi. Good morning. Thanks very much. Just a quick one from me actually, just on the net interest margin. Obviously the positive progression in the quarter, and Ewen, I think you mentioned earlier you'd expect progression for the year as a whole. Looking at the businesses that drove that, Ulster Bank was up 30 basis points and commercial up 6 basis points. Is that really due to the liability repositioning that you were talking about earlier? Or is there anything else going on there? And how should we think about that progression going forward? Is Q1 particularly lumpy? Thank you.
Yes, I wouldn’t read the Ulster trend as, there was some liability, well, both in commercial and Ulster, the main benefit was on the liability. And Ulster that was also some changes in the way that we accounted for the interest cost and NPLs I think, which also drove it up. So I wouldn’t read the Ulster trend or movement in that quarter as going to continue for the rest of the year.
I think the biggest drivers, frankly, and what’s driving NIM up at the group level is really driven by the continued run down and Capital Resolution and with the continued run down in our excess liquidity. So if you look at the shift in interest earning assets in the table that we provided on Capital Resolution over the last year we’ve taken interest earning assets down from GBP83 billion to GBP31 billion and the margin on that in Capital Resolution is about 1%. So that has a very meaningful impact on overall Group NIM.
Okay. So primarily a mix change. I hadn't assumed that Ulster would continue improving at 30 basis points a quarter, but thanks for the clarification.
Ross M. McEwan
It would be nice but don’t…
The next question comes from Manus Costello from Autonomous Research. Please go ahead.
Hi guys. I had a couple of questions, please. Just back on Williams & Glyn, to follow up on what happens if you aren't able to get it done. In your annual report you disclosed that the Commission can appoint a trustee to sell it with no minimum price and that they can impose additional remedies. I wanted to check that that is still the case if it's not done by 2017? what's the nature of the agreement between you and Treasury around this because I think the state aid commitment is not just for you it's also for Treasury as well, is that correct?
There is back-to-back deal between us and Treasury and Treasury in the European commission is the way it’s structured. So it just the same agreement so we’re all working in unison here.
Ross M. McEwan
In terms of the monitoring trustee, Manus, they actively participate, they’re involved in all of our meetings, they’re fully briefed. As I said earlier actually the challenge is not the disposal, the challenge is the separation. So as and when we have confidence in separation, I think we’re very confident in our ability to do suppose. And the monitoring trustee is not going to be able to, I think add significant value to the ease of which we can separate.
Okay. And then on operating performance. Just on costs. Your GBP800 million of reduction this year, that comes off the GBP9.4 billion base from last year, right?
Ross M. McEwan
Because if I look at the Q1 rate overall, it's running somewhat ahead of that. You talked about it not being linear, Ewen, I wondered if you could give us an indication of where those costs will come out. Because in your commentary, it looks as if there's more investment going into areas like PBB, in particular you talk about a pick-up in technology spend. So I wondered how that's going to progress through the year. Thanks.
Yes, look I think at the full year we talked about the fact that of the 800 we expected the majority of it to come of the rundown of capital resolution. And we also expected to have positive jaws across the six core franchises. So I think from that you can sort of do the math and figure out that there will be some element under that 800 offsetting the income erosion that we expect to see in CIB this year. In terms of when I talk about non-linear I mean I discussed, I mean you all have seen in the numbers today that headcount numbers have actually increased some of that is because of an increase in Williams & Glyn as we continue to invest in without Williams & Glyn.
Some of it's due to ongoing remediation. We have large numbers of people helping out on various remediation issues. Some of it's to do with GBP1 billion odd of investment spend we're putting into the core bank and the people we've got helping on that. I think you'll see through the progressive quarters the headcount beginning to come down across the bank which will drive cost down. But I think we got a pretty detailed plan at this point on where the 800 coming from, we're pretty confident as we sit today in terms our ability to deliver that number.
Ross M. McEwan
Instead it will be lumpy. I mean second quarter we've got the FSCS maybe a 50 million, we've got the bank maybe on fourth quarter, so you have to come with big bumps in the year and which I am confident we will get the 800 million and a big chunk of the change will come out CIB, you've seen at 16% down the year quarter-on-quarter. We need to get the cost in that business down.
It'll happen over a three to four-year period with a good start. You are seeing the investment, as we've said there three businesses we want to invest grow. One of those is personal bank, the other on is the commercial bank and RBS International. We are investing in these businesses so that's way some of the spend is going but the cost reduction is coming across the board but will be much bigger in CIB and Cap Res this year and slightly less reduction over the others.
The next question comes from Jason Napier from UBS. Please go ahead.
Three quick ones, please, and I'm afraid we're going to be ploughing much the same field as we've been in all morning. Williams & Glyn. Just to be clear, I appreciate that the challenge is on separation rather than disposal, but given all the work and the investment that's gone in, the various options that are under examination, presumably none of them are about customer transfers.
You're going to stand up the bank and then it's really about how the transfer takes place would be my guess, given the experience with Project Rainbow earlier on. Second question was I appreciate the reiteration of the cost target for 2016. I guess I'm wondering, you're having to throw the kitchen sink at getting Williams & Glyn done. Surely that's putting the business under business-as-usual strain.
Your ability perhaps to hit next year's cost targets and so on must be under some pressure, given the talent that you must be diverting to getting that single project done. And then thirdly, and I appreciate that this may be a question that is very difficult to address in April 2016. But I'm just wondering if you miss the 2017 deadline whether there's any color that you could add around the capacity of the Board to pay a meaningful interim dividend in 2018.
What are the sort of hurdles, perhaps from a regulatory standpoint before a meaningful payout can be made? Because there are those on the market that will point to Lloyds's first interim dividend, but it was really small and relative to perhaps the excess capital that some would hope you would have, that's really not going to do it. So I guess the question is are we looking at potentially a year's delay in a real payout from Royal Bank of Scotland?
I'll pick up on the first two just on the separation, we're - of course with action and a number quarter action is to complete systems out from the bank, so it stands on its own. We're going to look at all alternatives though to make sure that we do on their commitments and as you know we have to come and say, it's just risk significant risk there.
But our course of action and number one course of action is to separate out and we are throwing lot of that very-very good people at this with good on it, but we're stepping up because it's needed anyway because you're getting it quite big technical pieces of separation. But I won't go into any detail, but we will you inform next time probably there quarter next quarter results or six monthly results.
On the cost target given that a lot of activity is going into Williams & Glyn. You know that this way made a separation of one of that senior role because it does actually separate out the go forward on technology with the challenger Williams & Glyn under Simon McNamara, and also brings that Mark Bailie into the mix with more the business as usual operational tax of the bank.
And just to spread the light of that cost to executive team, some of those that they were working together on the number of features anyway, particularly about bringing the international portfolio, global transaction services that are working together on that on that because a lot of that is service - operational service parts of the of the business. But that will bring not into play a lot more in DIU in making sure we stay very focused on sort of the process type activity in this business, so that we stay on cost target and spread the light.
Ross M. McEwan
On capital distributions, I mean we have said what the three things are that we are focused on the. And you right that for us to pay a modest dividend I mean obviously 3p is less than GBP250 of capital items of bank. So it's not really a question of our capacity to make initial modest dividend payment.
So we will get there as quickly as we can get there and we would just reiterate, I mean Lloyds does that a good precedent for us that they have been have to normalize their capital structure in a way that we would like to be at a normalized at in the coming years. So appreciate, it's a bit frustrating but we will get there as quickly as we can.
So just as a follow-up, the annual stress test really isn't a binding factor in - as far as hurdles go, you can pass the stress test but not have sold Williams & Glyn, and then move on from there. I guess that's another way of looking at the same question?
Ross M. McEwan
Yes, look this is obviously - and quite some volatility around U.S. on RMBS outcomes too which obviously does color people's views from a regulatory perspective. And Williams and Glyn as Ross said earlier, assured exit, I think once we know that we have got confidence in separation, I think we can have confidence in exit sales as well.
We have time for one further question. I have informed IR team will come back for your any remaining questions. This final question comes from Tom Rayner from Exane. Please go ahead.
I was just looking, Ewen, Ross, at slide five where you split your core franchises from your exit businesses and comparing that to the same slide at the full year. One thing from this call, the balance of questions would suggest that people are still worrying much more about the right-hand side of the slide, and the - Capital Resolution, obviously, Williams & Glyn, etc. I just wondered what's your feeling as a management team about the movements on the core businesses compared to the year-end position.
Because it looks, just by following your slides, that your profitability in your core retail commercial businesses has improved, but at Group level it's actually come down with a bigger drag from CIB. I just wondered if you could comment on how you're feeling. Do you feel you've made any steps forward in terms of that core business, or do you think it's still very much steady state? I just wondered if you could add some color to that because as I say, it seems to be the main focus is on the exit businesses still.
Ross M. McEwan
Yes, I mean our focus is now on the go forward business across the run-off businesses. Ewen given you the comments on the run-off businesses which assure that we will get this down to our target level this year and again year after. So our focus is there on too. Look to seeing strong results out of UK PBB, we said the NIM would stabilize later on in this year and we are still confident that will very good growth coming soon in that business.
And also it's an underlying growth starting to appear in the unsecured personal for the first time in a long time. So we've got that book into the shape, and it's now starting to quietly grow, but the mortgage growth is very good. Commercial you have seen good growth in there and good cost control in that businesses Alison and the team have restructured it, and got it - I think coming nicely.
You've seen personal business - sorry the private banking, I think is just quietly this year going to restructure itself so start focusing on good growth here and get the cost down. You have seen like - look I was extremely quite pleased with the result out of CIB. I know the revenue line was disappointing but that was fluctuates in everybody else got hammered with it, and if they didn’t, to be honest you would have to wonder about how they were accounting for, it did take a knock. And the issue pointed to you is we able to get the cost out there 16% down year on year.
That’s why we need to concentrate on Chris answer the team, they are doing a really good job on that side that reshaped us. The front end's pretty well in the shape it want be know that it get the bigging cost out of it. Our net promoter scores, which I think are an indicator of how our people and our customers feeling. We are up at the highest level on the big brand in that list and you going to be pleased about that because that was lacking, we are sitting in the pack it's.
And only other are coming up as well. Digital is top on the market place, growth is good, costs are down. With this reviews we starting to focus on the core franchises, Mark Bailie and you want to concentrating on the get-rid-of businesses; we know Williams & Glyn was a disappointment, the but crikey, we're working very hard on that, we wanted out. but we had to tell that the significant risk portion and I have roll out from my perspective, it's pretty good quarter from the team. lots of works still to do.
Some other advantages just I like Ross said I mean I think when you look at all of the things that we’ve been doing, yes, we felt a lot of that starts to sort of come through in this quarter, which is shifting the business mix towards retail and commercial. Yes, we’ve been investing heavily and improving customer service, which is now translating to the growth, we’ve been making big investments into digital and you can see the improvements coming through there. We’re continuing to strip cost out.
The only thing that we couldn’t control with some pretty difficult markets in the first six weeks of the year for CIB even some of our more maligned businesses, like Ulster Bank, you can see the cost beginning to come out of that now, if you strip out the excess bank levies we had to pay, yes, private banking with Peter in place is now beginning to show some momentum.
So we think there is a pretty good quarter for PBB and CPB and within the context of the markets in CIB, they recovered well in the second half of the quarter. So we would love to spend more of our conference calls talking about the core business, but we’ve recognize we’ve got a few quarters to go to talk about the right hand side of the slide.
Alright, thanks very much.
Thanks for your time.
Ross M. McEwan
Well, thank you for running the session. Thanks for joining us income the call and where Richard and the team are if you’ve got any questions coming through fuller. And appreciate your time this morning. All the best.
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