The Royal Bank of Scotland Group's (RBS) CEO Ross McEwan on Q4 2016 Results - Earnings Call Transcript

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The Royal Bank of Scotland Group PLC (BS) Q4 2016 Earnings Conference Call February 24, 2017 4:30 AM ET


Howard Davies - Chairman

Ross McEwan - CEO

Ewen Stevenson - CFO


Robert Noble - RBC Capital Markets

Rohith Chandra-Rajan - Barclays

Fahed Kunwar - Redburn

Andrew Coombs - Citi

John Cronin - Goodbody Stockbrokers

David Lock - Deutsche Bank

Chris Cant - Autonomous

Howard Davies

Good morning and thank you for joining us today. And can I ask you all to turn your phones to silent for the benefit of your neighbors, thanks. We know that you need to get to Singapore by 11, so we’re going to talk fast.

The bottom line loss that we’re announcing today is stark seen in isolation and is difficult for our shareholders. But the results do reflect progress in two areas, firstly the significant strides we’ve made this year in clearing our outstanding legacy issues and the continued run down of non-strategic assets.

But secondly it shows the continuing strong underlying performance of the core bank, particularly in mortgages and business lending that is very evident, and the business is now growing healthily.

On the first point, related to the past, 2016 saw the bank concluded a number of outstanding legacy issues. You will see in our announcements and the related one from the treasury about a potential way forward on the project formally known as Williams & Glyn.

The European Commission will now be consulting on a revised plan which we and the treasury think will achieve earlier benefits for competition, particularly in small business banking and would remove a continuing burden on the bank. We now wait the conclusion of that consultation and a formal decision by the commission which we hope will be positive.

It has however been frustratingly difficult to make progress on the issue surrounding the bank’s participation in residential mortgage backed securities in the US before the financial crisis. We remain under investigation and as we’ve said face potential criminal and civil action. At this point we cannot say when those issues will be resolved as the timing is out of our hands and we will not be providing any further updates on that today.

Looking at the broader macro environment within which we operate, the votes to leave the EU was widely expected to have a negative impact on the economy. So far though we’ve seen a significant fall in sterling, consumer spending has remained fairly robust and growth has continued. Of course the UK has not yet left the EU and we don’t know the terms of our departure. So the long term impact remains impossible to predict.

But the short term effect on banks was felt primarily through the reduction in interest rate last summer. Our prime focus through this uncertain period has been and will continue to be to provide high quality banking services to our customers and help them to understand the implications of change for their businesses and their families.

Putted against a background of some uncertainty the Board and I remain confident in our strategy as we set it out in 2014 and confident that we have the right management team to deliver it. On one other governance point we announce this morning that Mark Seligman is joining the Board as a non-executive director. Mark is former senior investment banker with broad financial services knowledge and experience on a number of other 4100 Boards, who will bring a range of skills and expertise to our Board and I’m looking forward to working with him.

I’ll now hand you over to Ross and Ewen for more detail and will return to open the Q&A. Remembering as Ross tells me not to take his script with me.

Ross McEwan

Always a fear that the person before you walks off with your script and you’re left standing here wondering what to say. But thanks very much Howard and welcome to everyone this morning for our full year results presentation.

Look, you’ve all have seen the results statement this morning and when we last spoke we said it would be much tougher quarter, and we have delivered that by concluding as many of our legacy conduct and litigation issues as we possibly can. These costs are a stark reminder of what happens to a bank when things go wrong and you lose focus on the customer as this bank did before the financial crisis.

This is also been another tough year for our colleagues at this bank, and I’m grateful for the determination and serving millions of customers day in and day out despite the many headline negatives that we have taken. We can now increasingly shift our focus from the legacy of the past to the future of this core bank.

Despite an eventful 2016 from a macro perspective, and some uncertainty around the future, the fundamentals of our strategy remain unchanged. I’d like to talk you through the progress that we’ve made since we set our strategy in 2014 and I’ll then outline the bank we’re becoming as we invest in our service model to meet our customers’ ever evolving needs. The Ewen will provide you with the details on the banks financial performance in ’16 and more importantly he will give you an over view of how we’re going to meet our revised financial targets.

Finally I’ll look ahead to the bank we will be in 2020, a simpler, safe, customer focused bank that delivers for its shareholders. And then we will finish by taking your questions.

We’ve made progress across all of our financial targets in 2016. The £7 billion bottom line losses of course are faced fairly very difficult for shareholders. However, given the provisions we announced recently for RMBS and the proposal to addressing our remaining state aid commitments, the desk payment of 1.2 billion in Q1 and our restructuring cost incurred over the first three quarters of 2016, I don’t think any of this will have come as a surprise to you.

Our core business has continued to deliver strong results, generated £4.2 billion on adjusted pre-tax operating profit for the year, an average of 1 billion per quarter for the last eight quarters and is up 4% on our 2015 results. This translated to a return on equity of 11%, a solid result from the tough economic environment that we now find ourselves.

We are growing strongly in the markets we like. Net lending growth and PBB and CPB franchise was up 10%, that’s well ahead of the target we set. And importantly it’s within our risk appetite. We achieved particularly strong growth in certain segments, mortgages are up 12%, personal unsecured loans are up 7, and lending to small business is up 6%.

Against our cost reduction target of 800 million, we took another 985 million out of the business in 2016. That’s a third year running. We’ve exceeded the cost target we set for ourselves and between this and income growth, this has been driven positive jaws in our core bank.

Finally, following the vote to leave the EU last year, we promised an update for our targets and I’d like to give some certainty on that today. We are targeting an unadjusted 12% or greater return on tangible equity and a below 50% cost to income ratio by the time we get in to 2020. That’s one year later than originally planned.

Subject to providing for remaining legacy issues, we expect that 2017 will be our final year of substantive legacy cleanup with significant one-off cost. And as a result we anticipate the bank will make a bottom line profit in 2018. This will be big milestone for us all at the bank.

Our service levels are improving, driving lending growth in our core business and giving us belief that we can meet our tough 2020 customer aspirational target, which remains to become the number one bank for customer service trust and advocacy.

I joined RBS because I could see that underneath all the problems with this bank, there was a very strong bank that had great brands and that had great colleagues doing an outstanding job for our customers each and every day.

That underlying strength is even more evident to me today, and good news is that we have working through the majority of the material legacy issues that have masked this bank. In 2014, I set out a plan to make this is a simpler, safer, customer focused bank. I knew that it would be tough. But even in the face of more challenging economic conditions the plan is working.

This bank has changed for the better. We’ve taken a number of actions that on their own would represent significant change in any other organization. Our common equity tier one ratio has now materially improved from8.6% in 2013 to 13.4% today. Our ownership structure has normalized with a repayment of the dividend ex this year and a single class of shares.

We have thoroughly reshaped our investment banking franchise and just recently rebranded to NatWest Markets. We sold citizens in the US and completed the largest IPO of a bank in the US history. We’ve sold our International Private Bank business; we’ve ceased operations in 26 countries. We’ve decommissioned 30% of our IT systems and applications. We’ve closed down over half of our legal entities. We’ve also reduced legacy and non-core assets by more than 75%.

Successful strategies, focused businesses on where you can win. Our strategy has focused on our core strengths as a retail and commercial bank here in the UK and in the Republic of Ireland. We’ve made progress in relation to resolving outstanding legacy conduct matters. \

The announcement last Friday on HMT’s proposal on a return of way to allow us to meet our remaining state-aid commitment if accepted, would deliver an outcome more quickly with more certainty than undertaking a complex sale. However a number of other legacy issues remain including in particular RNDS.

The core bank has continued to deliver. Our UK PBB, private banking, commercial banking and RBS International businesses have achieved significant net lending growth of £24 billion in the past year. We’ve grown more than any other large UK bank. This has not been at the expense of income. We’ve also achieved income growth in five of our six customer facing businesses, and Ewen will provide the detailed financial shortly. But wanted to highlight how we have been growing the core as well as delivering on the past.

This is our strategy on a page. I know most of you will have seen it before; the decision last summer by the UK electorate to leave the EU has wide reaching consequences. And in the light of this, we reviewed our strategy to ensure that our plans remain valid in the changing macro and political environment.

Today, I want to reiterate that strategy. We firmly believe that aspiring to be the number for customers will deliver the best value for our shareholders. Building our capital strength remains a cornerstone of our plan, and while we hope that the conduct risk has diminished our focus while our capital strength does remain.

In 2017, we will continue to reduce legacy RWAs, we’ll use capital more efficiently and we will continue to target common equity tier one position of at least 13%. We are no longer a bank with global aspirations. We’ve reduced our RWAs by over £150 billion and taken out 3.1 billion of cost since the start of 2014. But we need to go further.

We expect to take out £750 million in operating cost in 2017, and large part by removing complexity in our core bank and simplifying processes for our customers and for our colleagues. And we are confident that with the right customer focus and offering, we can continue to grow in the markets that are attractive to us.

The health of our core business is clear. It is supported by our strong market positions across all customer segments and our distinctive brands. We believe that investing in these brands will help us to build high quality enduring relationships for their customers. Our customers continue to tell us that we are serving them better, while our net promoter scores for Q4 were down from the level seen recently. Our net promoter scores for commercial and NatWest Personal which are our big customer groupings were in 2016 the highest that they have ever been.

Our efforts are being recognized externally as well, but they’ve known the best banks for mortgages and best first time mortgage by a lender last year. Customers are also benefiting from the enhanced functionality on our leading mobile banking app, with net promoter score for uses of our app at its highest ever as well. And we recently won the best mobile app at the British Bank Awards.

We are determined to serve customers the way they want. Our innovation agenda is about giving customers more control. For the majority that means more self-service for our digital channels and great customer service when they need to have a conversation with our highly qualified colleagues. We believe that our continued investment in how we serve customers will deliver long term value in each of the franchises.

UK PBB has achieved its highest adjusted operating profits since the crisis and our mortgage growth outpaced the market again in 2016, despite not overly competing on price or on risk. Our new business loan-to-value has remained constant over the last year to around 69% and customers are telling us that our service-led strategy is working.

Our mortgage broker team has a net promoter score of plus 79, which is outstanding. We’re delivering a reliable service that means brokers and our customers can trust us to deliver and key moments of truth for them.

We ended 2016 with over 1.1 million reward account holders. That’s up from 202,000 a year ago, that’s almost 3,000 new reward accounts a day. This is a prime example of when you get the product and the service right, customers want to bank with us. These customers have a net promoter score of 24 points higher on the average than those without the account. We are wining business that will create future value for our shareholders and continuing to grow our market share.

Our support to SMEs continues to increase. We have a £1 billion NatWest lending fund supporting our SME customers, a five star rated business current accounts in the UK and our processes are improving as well. The introduction of digidocs, a cloud document solution has sped up business current account applications and dramatically reduced the time taken to complete a business loan application from 11 days to now less than a day on average.

Digital innovation is improving productivity in our postal business as well, and mortgage processing times has reduced by 40 minutes through increased automation and 42% of existing customers remortgaged online in 2016. It takes about two minutes. And in addition the introduction of the telephonic signature has reduced the mortgage switching process from seven days to less than two. It is no wonder we are wining business.

We’re also investing in a mobile sales and service proposition which will connect customers no matter where they are to the right specialist. This provides the trust of being able to see somebody combined with the convenience of being able to do it from your own home, office or in our branches.

Last week we launched a new automated investment service for personal customers called NatWest and West. It is a fully digital service accessible through customers’ normal internet banking accounts. These innovations are responding to how customer’s preferences are changing. We interact with our customers over 20 times more through digital channels than physical ones.

In PBB, 35% of all product sales are now digitally delivered and rising. We now have 4.2 million mobile users in PBB that’s up 19% on last year. We are the largest commercial bank in the UK and our ranking is joint number one on net promoter school. While low rates in some of our legacy back-book loans are temporary depressing returns in this business, our ability to generate value here is shown by delivering almost 9 billion of net new commercial lending which when you compare it to the wider market is exceptional.

Our commitment to UK business goes beyond purely financial. Our entrepreneurial spark program has achieved seven industry awards in recognition of the outstanding support that this bank has provided to entrepreneurs. The entrepreneurial spark program provides premises, far reaching networking and mentoring for ambitious entrepreneurs to take their business to the next level.

We aim to serve 95% of our commercial customers’ needs through their mobile and online, and that will be up from 80% today. This year we are introducing a new online banking service for commercial customers that will greatly improve this experience for them. The emergence of direct and peer-to-peer lending platforms which now takes up 12% of the SME market also reflects through changing customers preferences. Although we are confident that banks still have a key part to play in this space.

In response to this, last week we launched a fully automated lending platform called Esme to originate unsecured SME lending and we’ll introduce more alternative lending products in due course. Our private banking business was voted the best private bank in the UK in 2016 and generated an adjusted return on equity of 8%, that’s up from 5% the year before, and we are aiming to grow the portion of our customers borrowing and investment needs that we provide for, by improving service levels and at the same time lowering the cost through simplification.

Through this we foresee sustainable opportunity to grow above the market and continue this positive trend in improving the return on equity to double digits in 2017 in the private bank.

We have a strong market’s business and it’s focused around our core strengths of rates currencies and financing. NatWest Markets is the number one market maker for UK good and the market leader in facilitating FX transactions. Currently NatWest markets delivers returns below our cost of equity, but our future expectations are for considerable improved returns.

It is a crucial offering for our business customers and we are confident that NatWest markets can deliver value on both a standalone basis and through its support for the rest of the bank. We are forefront of the market in automating our fixed income trading. This has benefits both for us and our customers with a consistent, clear and round the clock pricing and shows us that we can manage the increasingly complex requirements by providing better controls over risk.

It’s simpler, quicker and cheaper for the bank which lets us pass on these savings to our customers and to our shareholders. We’re also replacing hundreds of separate product (inaudible) platform called Data Fabric, which will help reduce cost significantly and dramatically increase the speed at which we can deploy new capabilities for our customers.

We’re managing risk data with a single global risk agent that by the end of next year will cover all of our NatWest market products. Finally, we have introduced a single dealer platform that edge our markets, an electronic front door through which we can provide FX and right solutions to our clients, while reducing (inaudible). These changes will both lower cost and protect revenue while delivering even better customers service at the same time.

I know it’s a schedule, if you have some opportunity have a look on the screens outside that some of these innovations, check them out, I think you will be impressed with what’s going on in the innovation sphere in this bank.

(inaudible) bank that has been on a remarkable journey and we still have further to go. Next three years will not be the same as the past three years. Despite the political and economic uncertainties, our customers, our cost base and our plans for returning to headline profits will be our core priorities.

In 2016, we met all our financial targets for the third year running and grew both in. We are now in a position to go further on cost and faster on our digital transformation and to help us deliver increased productivity for colleagues, better service for our customers and ultimately sustainable profits.

Back in 2014, I set out a vision to make us the number one bank. The results announced today feature a tough headline loss, but that figure match the sheer strides forward we’ve made, the long list of legacy issues we’ve dealt with and most importantly that we are now a more simple, safe and customer focused bank than we once were.

I’ll now hand it Ewen, who will provide the details around the financial performance of the bank and the financial building blocks for our 2020 target.

Ewen Stevenson

Thanks Ross. The magnitude of our full year loss today clearly reflects a further £10 billion of one-off costs we took in 2016, the final debt payment to HM Treasury, further conduct and restructuring costs and additional capital resolution disposal costs. But underlying the poor headline results was a lot of progress last year both with the core bank and with resolving our legacy issues.

We’re targeting 2017 to be our final year of substantive clean-up and subject to this being achieved. We are thinking to return in a 2018. As part of this turnaround, Ross and I are very keen to stop our practice of what I would describe as a just [artist]. In recent years in order to show you a true and fairer view, we’ve been showing you adjusted numbers of shares. From Q1 2018 we plan to only report unadjusted numbers and unadjusted ratio.

For our core businesses, 2016 was another year of good progress, combined adjusted operating profits of £4.2 billion, that’s up bent on 2015 and that’s despite a tougher interest rate environment. Adjusted ROE of 11.1% against all of our financial targets we delivered again adjusted for business transfers, personal and business banking, commercial and private banking at combined income growth of 2%, and together with NatWest markets, our three core businesses had positive operating jewels of 4%.

We had our third year of over delivering on cost a further £985 million taken out last year. That’s a combined £3.1 billion of cost take-out over the last three years in context the 26% nominal reduction.

With capital resolution, our RWAs declined by a further £14.5 billion down 30% during 2016 and down 64% since we established capital resolution at the start of 2015.

Turning to Q4 in more detail, the substantive loss we recorded in Q4 primarily reflects a combination of £4.1 billion of additional conduct costs and last week £750 million Williams & Glyn provision.

Across the three core businesses we had a much better quarter, relative to a weaker Q4 of 2015. Adjusted operating profits were up over 60% to 848 million. That includes the cost of the annual bank levy. Our adjusted ROE including the levy was 8.5%.

You should note that in Q4 £161 million operating loss from central items included 308 million of IFRS volatility gains, a 140 million of net FX gains and the recent volumes in Glyn provisions.

Turning to the balance sheet, I’d highlight three key trends from last year; first, the strength of growth across our customer lending and deposit franchises, with overall 5% net lending growth and 3% deposit growth. Secondly the continuing significant shift in our capital allocation that’s going on in aggregate RWA is reduced by a further £14 billion or 6% during the year. And this continues the trend that we’ve seen in recent years away from legacy and towards our core businesses.

In context two years ago about 50% of our capital was tied up in legacy asset force. At the end of 2016, we have four times the capital invested in core as opposed to our legacy. And thirdly, given weak stress test results last year, continued prioritization, those balance sheet resilience, three de-risking of higher strays portfolios.

We talked in December at our investor seminar about ouster bank for public violence, private banking and RBS International. So I was going to talk today about the other three franchises. On the UK personal and business banking, we do view 2016 as its best operating performance since the start of the financial crisis. What we believe you’re seeing in these results is validation of our business model, superior customer service driving higher customer needs met, driving a combination of both higher volumes and attractive returns.

UK PBB achieved 10% lending growth relative to Q4 2015, had adjusted operating profits in the quarter of 546 million that’s up 35% on Q4 2015 and it’s adjusted ROE was 27.8% in the quarter.

With commercial ranking, we’ve decisively reenergized the business from a relatively stagnated franchise position just three years ago. Customer loans and advances at [NT4] were 10% higher than a year ago. Adjusted operating profits in Q4 were 228 million, that’s up 23% on Q4 2015. The adjusted ROE in the quarter of 5.3% I think reflects a combination of obviously the annual bank levy, but also the continuing impact of the rate environment.

Given that rate environment, we do expect overall return in 2017 in commercial banking to continue to be weaker than target, but through a combination of improved capital allocation and improved jobs, we would expect and improve in returns from 2018 onwards.

For NatWest Markets, after a weak start to the year, we saw much stronger income close for the remainder of the year. Q4 adjusted income was £314 million that’s up 25% on Q4, 2015. For the full year, like-for-like adjusted income was up 16%.

Cost for the full year were impacted and continue to be impacted by the upfront expensing of significant investment spends. At the start of this year for 2017, year-to-date income flows have been much stronger than what we saw for the equivalent period last year.

Coupled with the income benefits of weaker sterling post the EU referendum, and while its early in to the year and all of the caveats that would go with that, we are planning for NatWest Markets 2017 income to be above the previously indicated annual target of £1.3 billion to £1.4 billion.

On Williams & Glyn given the proposed outline on last Friday’s announcement, we are restricted on the detail we can go in to at this point. But to give you some more color the proposal is very much focused on enhancing competition and the SME market place. As such, we would expect under this proposal to absorb the retail franchise of Williams & Glyn and partially reabsorb the commercial franchise.

To help your modeling on this annual results and Pillar 3 document do provide some additional disclosures on retail and commercial split in Williams & Glyn some of which is summarized on this table. On the £750 million provision we’ve taken, it’s our best estimate today of making the cost of that proposal. You should expect some additional provisioning to be required if we reintegrate and rationalize Williams & Glyn in due course.

On timing from here, if the proposal is expected by the European Commission, HM Treasury will need to renegotiate and sign a new State Aid agreement. Realistically this is likely to be no earlier than Q4 of this year.

As you can read in our appellate statement in more detail, we provided you guidance on a few areas for 2017. On lending growth, we plan to grow our combined lend book across personal and business banking and commercial and private banking by a net 3%. The planning assumption underlying this is continuing strong growth in personal and business banking and lower net growth in commercial and private banking.

On operating costs, we are committed to reducing these by a further £750 million in 2017. We expect much more of these cost savings to benefit the core businesses relative to 2016 and as such we’re targeting higher core draws than what we saw last year.

With capital resolution at the end of 2016, and excluding the stake that we own in our Saudi Arabian bank, we had remaining RWAs of just under 27 billion. By the end of 2017, we plan to reduce these to between 15 billion to 20 billion.

On other one-offs, the headline is that while you should expect to see elevated one-off costs in 2017, these should then materially fall away in the coming years. We’ve also confirmed today that while recognizing the macro and [regetry] uncertainty that exist was second to our medium term targets at 12% plus return on equity at sub-50% cost income ratio, we are targeting achieving these in the 2020 financial year.

You should assume that they were on an unadjusted basis consistent with what I’ve said earlier and that’s a year later than previously signaled. Please note that all of these targets are based on contentious interest rates and macro assumptions.

Our confidence in achieving 2020 targets is really based around four building blocks, firstly that we will address our remaining legacy issues. We aim to make substantial progress on these and 2017. Secondly in the segments that we’re targeting that we can grow lending volumes faster than market. We are not seeking to protect any legacy back-book pools of profitability and therefore we can focus our business on providing superior delivery to customers on the front book.

Thirdly, further significant cost take-up despite the high cost take-up we’ve achieved over the last three years, we remain the least efficient of our UK peers, And fourthly, at least £20 billion of gross RWA reduction by the end of 2018 across our three core businesses.

On restructuring costs, we expect to incur a further £2 billion over the next three years of which around £1 billion of those should be expected to be incurred this year.

The majority of our restructuring spend has relatively short paybacks through improved processes, better technology, but around 40% of the spend is in relation to owned real estate. We have a relatively poor payback, it’s a combination of expensive leases that we have on certain of our office buildings, together with the cost of reshaping our distribution network over the coming years.

On capital resolution, we expect this to be the final year of peak disposable cost. Of the £2 billion of expected disposal costs that we previously discussed we’ve incurred 1.2 billion through the end of 2016 and you should expect the great bulk of the remainder to be expensed during 2017.

Our intention continues to be to wind up capital resolution at the end of this year, at which point as I suppose will be spread across various parts of the banks depending on room fencing considerations. On conduct costs, we’ve consistently talked to you about five significant legacy issues that need to be resolved US, RMBS , the 2008 rights issue shareholder litigation, the FCA review in to our treatment of distress as a lead customers PPI and FX.

As you can see on the substantial conduct cost, we took in to our financial results last year we made good progress against these in 2016.

In 2016, we committed to achieving income stabilization. We delivered this across personal and business banking and commercial and private banking, income was up 2%, and the NatWest Market suggested income on a like for like basis was up 16%.

As we look out, we are increasingly confident in the delivery of our business model, with many of the income headwinds now having played out, a decline in percentage of SVI mortgages, that’s now stabilizing over the last two quarters, a sharp reduction in interchange fees that’s now been fully absorbed in to our non-interest income. We do expect a higher volume growth to be more visibly reflected in income.

This is further underpinned over the last few months by a more favorable interest rate outlook underpinning a more favorable structural hedge income outlook than would have been the case six months ago.

Over the last three years and excluding Williams & Glyn, we’ve reduced operating costs on our adjusted basis by just over £3 billion. Over the next four years, we’ve got increasingly robust plans to reduce it by a further £2 billion including reducing cost by £750 million this year.

Breaking down the 2016 cost structure, I think helps explain why we have this confidence. £764 million pounds of our 2016 costs related to capital resolution, that’s just over £190 million per quarter. This quarterly run rate is already down to under £100 million and by 2019, we’ve got plans to reduce it to less than £25 million per quarter. In aggregate, that’s annual cost saving of more than £650 million.

£1.3 billion of our 2016 adjusted cost related NatWest Markets. We are confident that we can reduce this to around £800 million by 2020. That’s a £500 million annual run rate reduction. We are currently fully expensing significant investment spend in NatWest Markets and will continue to do so in 2017 and 2018. This will equip as both new regulatory requirement, but also provide the opportunity to materially reduce back-office support costs, which will provide us with platform for NatWest Markets to meet its cost reduction targets.

For the remainder of the bank, the 6.1 billion of cost sitting across personal and business banking and commercial and private banking were well in to a significant bottom-up review of our cost structure. Around half of the cost structure related to clearly identified customer journeys like taking out a mortgage with us, opening up a new account, and just 10 of those journeys represent around £1.5 billion of cost.

So we strip back each of those processes end-to-end and we’ve identified significant cost savings with each. The great thing about this cost simplification is that it also typically delivers a much better customer service and a better controlled outcome. And once we finish with those customer journeys we’ll start on the next 10. So the remainder of our cost structure around a further $3 billion last year, we’ve gone back to basics and we’re targeting any costs that are unnecessary to support our future bank.

By the end of 2018, we’ve committed to reducing gross RWAs across our three core businesses by at least £20 billion or 11% of the combined RWAs at the end of 2016. So with some offsetting RWA growth from volume growth potentially reabsorbing the majority of Williams & Glyn’s RWAs and expected regulatory driven mortgage RWA inflation from Q1 to 2019, we now expect core bank RWAs to be well below £200 billion of that (inaudible).

We expect gross income loss from those gross RWA reductions to be relatively modest in the order of £250 million to £300 million per annum, and this reflects that within the planned gross RWA reduction, much of those reduction has limited or no impact on income. \

So before I hand back to Ross to quickly sum up ahead of Q&A, just a few key messages from me, if you can’t see them on the slide. Focus is on 2020, three building blocks, firstly on income, we are confident that our customer servicing model can deliver superior and volume growth. Secondly on cost, we’re targeting £2 billion of nominal cost reduction over the next four years. And thirdly on capital efficiency over the next two years we’re targeting to take at least £20 billion of improved gross RWA efficiency out of the core bank. Thanks.

Ross McEwan

Thanks very much Ewen. And as Ewen described despite a significant bottom line, a loss, we continue to make progress against the medium term goals we set ourselves, and today we are intentionally not dwelling on the past years performance but instead we sort to explain the progress of the three years positions us well today to go forward and being able to achieve our vision for 2020.

Look, we’ve published a lot of information today, so I just thought I’d leave you with five key takeaways. The first of those is, we have the right strategy and it is starting to deliver the results. Secondly, we have made progress on dealing with the many material legacy issues that have been holding this bank back and we have some issues still to resolve in particularly, RMBS at the final W&G resolution, but I don’t expect legacy issues to dominate our story in the same way that they have in the past. Thirdly, we have delivered our financial targets for the third year in a row. Fourthly, our customer’s behavior is changing at an ever greater pace and we will change with them.

Going further on reducing cost to serve, going faster on digital transformation and giving them more control over how they bank with us. And my final point, we’re targeting a profitability in2018, and we’ve set clear targets for an unadjusted 12% return on tangible equity and below 50% cost to income ratio by 2020.

Ewen’s laid out the financial roadmap of how we expect to get there. This bank has great potential and we believe that they are going faster on the cost reduction and faster on digital transformation we will deliver a simpler, safer and even more customer focused bank with a compelling shareholder investment case.

And with that I’ll hand it back to Howard to host the Q&A.

Question-and-Answer Session

Howard Davies

Thank you Ross and Ewen. We will have, I expect some questions from the ether and I’ve got a little screen that tells me. But lets’ begin in the room. First over there.

Robert Noble

It’s Robert Noble from RBC. The RWA guidance that you’ve given in the core, is the non-core on top of that? So should we expect 15 billion to 20 billion to fold back in to the core business on top of the 163 you gave? And then in Saudi Hollandi on top of that as well, and given all of the RWA and movements and all of the restructuring cost heads, do you think pre-dividend you’re going to have any excess capital by 2020 to a 13% target?

And then on a core question, I guess you’ve said the structural hedge will have less of a drag. Is it still a drag and do core NIM still run backwards, and so I have one more on the non-core. Actually the funding cost, I’ve got about 24 others if the funding cost related to non-core to what funding cost of your side is non-core at the moment?

Ewen Stevenson

So on capital resolution, 15 billion to 20 billion. I don’t think we would describe it as core at the end of next year. We’ll still be non-core, but yes it will be folded back and not all of it necessarily will be folded back in to - I mean it predominantly sits across asset classes that would be in NatWest markets and commercial banking today. But some of it may well sit in a further vehicle outside of those two businesses as well. So you should add that number on top. The only reason for excluding the Alawwal Bank stake was - look the timing on that is again we’re committed to exiting that stake, but the timing on that is uncertain. So you should assume that our aspiration is to also exit the 8 billion or so of RWAs that’s sitting in that bank safe today. So your second question was --.

Robert Noble

On NIMs you said there’s going to be lower structural hedge drag.

Ewen Stevenson

So look in terms of NIM overall I think Q4 was 219 basis points at the bank level. You know that we don’t guide on NIM, but if you think about sort of what’s going on in our various - we’ll get less of a benefit this year I think from the reduction in non-core. We still got a significant benefit from that last year. We’ve repriced a whole bunch of deposits in Q4, not all of that benefit is reflected in to Q4.

The SVI book which has been a big drag for us in terms of the conversion, the SVI percentage declining that has now stabilized over the last couple of quarters. So we think that will be less of a drag in terms of our changing mix on our NIM. And in terms of what we’ve said, in terms of commercial we’ve said that we expect to keep income stable, quarterly stable this year. So you should assume that there is a mix change going on from lower ROE, lower margin commercial business in to higher margin commercial business.

So you take all of that together with some pluses and minuses, we do think there will be very modest NIM pressure this year overall.

Howard Davies

Next one over here, I think.

Unidentified Analyst

It’s Jonathan Pierce from (inaudible). Can I focus on the 2020 RAT target lease, given there’s lots of pieces at the jigsaw and thank you for that. But can I just ask three questions to help us get to the bottom line. Firstly, impairment charges, I assume you’re using it through the cycle there. Give us an idea of what you think through the cycle impairments?

Second question, the [CET 1] ratio you’re assuming, I guess it’s still 13% in 2020, but what’s that apply to sounds like it is RWAs on the current regulatory basis only adding in the mortgage uplift due to the PRA proposals, but if you could confirm there that would be helpful.

And the third one is, some color on IFRS 9, I think if you look at a section in the report accounts, but there’s no numbers as of yet. Maybe you can help us a little that today, but if not could you at least tell us whether equity tier one ratio you expect to run in 2020 will be 13% after any IFRS 9 impact or do you think you can run lower than 13 if you include that. Thanks.

Ewen Stevenson

We talk impairments trends this year being below normalized trends. We find it quite hard to think about what normalize does in this interest rate environment. But somewhere between 30 and 40 basis points over the cycle, I would have thought. The core tier one target we are targeting is 13%. That includes the mortgage RWA uplift, it includes some modest impact of some parts of the BASAL 4 initiatives, but doesn’t assume the imposition of significant apple flows on us and their contract.

And on IFRS 9, you’re right there is quite a bit of detail for those of you who got that far on the annual report. But it’s all qualitative at this point. We expect to provide quantitative feedback as part of Q2 reporting. But you should assume for the time being that we’re modeling on the basis of a 13% core tier one target.

Unidentified Analyst

And just to clarify, supposed to any IFRS 9 impact, I’m sorry just follow-up on the BASAL 4 comment because that’s interesting that you are assuming some inflation in there, but still targeting 13%. Can I push a little bit more on the areas of inflation that you are assuming within the RWA phase, doesn’t sound like output flows from what you say that you’ve seen in some operational risk increase.

Ewen Stevenson

Yeah, we’re assuming bits and pieces of the BASAL 4 package to get announced on a time table that’s consistent with implementation in 2020. As we said today, I think that looks to be a relatively conservative assumption.

Howard Davies

I’m going to take one webcast question from Rohith Chandra-Rajan from Barclays.

Rohith Chandra-Rajan

Please could you discuss where the additional cost savings are planned to come from, and if you expect any associated revenue impact? Similarly with the 20 million RWA reduction could you provide some details on how much of this comes from each business, what types of assets these area and what type of returns they deliver?

Ross McEwan

You have done a pretty good job of just outlining where the cost savings are going to come across the business over the next three to four years, because they’ll be different from what they were in the past, and the past has been as we’ve pulled down 26 countries and taken assets off the book, reduced our markets business.

But going forward other than the cap raise cost that Ewen did outline and the cost of running that operation, which will be coming down, certainly we’ll be seeing some cost come out of that NatWest Market business from its current 1.3 down to the 800 million. So there’s 500 million over the next four years on an annual basis will come down.

And the (inaudible) will come throughout the business itself as we use a lot more technology and simplify this business on an end-to-end basis. We believe that there is significant cost to come out, but more importantly those significant will make it easy for our staff to deal with customers, and our customers do business with us so it’s a win-win.

I don’t see a lot of revenue impact other than what we’ve already signaled with cap raise coming off from assets associated with that. If anything making this business a simpler business has shown in the past that we actually get revenue increases and we certainly seeing that as we make it a simpler business to deal with we’re doing more business. So we’ll continue on with that.

On the 20 billion RWA reduction, most of this will come out of our commercial business. But I’ll leave you and just take, if there’s any other detail feel free --.

Ewen Stevenson

A decent part of its out of commercial consistent with what I said earlier. But it is tough across all three franchises. In terms of the income the current returns they deliver, we said that was 250 million to 300 million pre-tax of income reduction as a result of that £20 billion reduction. So you should assume from that, it has a relatively modest impact on income.

Unidentified Analyst

Andrew (inaudible) from Honda Advisors. Just coming back to the return on tangible target that the gentleman before me asked, just a couple of things really, one, could you just give the interest rate assumption for that. I think you talked about consensus right, but (inaudible) just reduced their targets because they have to move their interest rate ups and downs. If you could talk to that that would be very useful.

And the second thing is, I hugely welcome the idea of moving to only reported numbers in the future in 2018. But that being the case, on the ongoing restructuring of [combat] issues, maybe something that power normal life than a bank going forward. Are they assumed in your targets as well?

Ewen Stevenson

On the second one, yes we are assuming consensus interest rate assumptions. So if those consensus assumptions were to change then it would have some impact on our forecast. But on the conduct and restructuring charges I think not probably just similar to one of the banks earlier this week, we are assuming on a run rate basis there will be some ongoing modest impact of conduct in our numbers and that’s included within the effectively £6.4 billion cost guidance.

Unidentified Analyst

But just on restructuring, I mean surely it feels like restructuring is a part of banks life not just today and tomorrow --.

Ewen Stevenson

No, got to be clear. As long as restructuring everything is within the £6.4 billion guidance.

Ross McEwan

Yes, so I think this is why we are keen to get to an unadjusted basis rather than the adjusted and everything else on it. And as I’ve said, we see those numbers included in our 6.4 billion guidance.

Unidentified Analyst

Just a last observation, during the period of time that you’ve had that target, the consensus view on interest rate has moved quite a lot, both up and down. So your target stays the same, so how should we interpret that or is that just more bit of aspirational guidance sort of reading through those ruins of market forecast.

Ewen Stevenson

Look since you wouldn’t assume its aspirational guidance, we have to take you through a lot of governance to be able to put targets out in the market and we do take them very seriously. I think you should interpret that when Ross first got the math it was probably a decent amount of freight in terms of getting through the 12% plus return on equity and since then the interest rate environment has changed certainly relative to the way we were in Q3, the interest rate environment has improved and therefore we’ve got more confidence in the delivery.

But as you would recall that was previously 2019 target and that’s very much why we shifted back a year on the back the changed outlook for interest rates post Brexit.

Fahed Kunwar

Hi, its Fahed Kunwar coming off from Redburn. Just had a question on the deposit side of things. You said there’s more to come in ’17. I think one of your peers is going to break down off your book in to the saving rates and what the move was from Q3 to Q4, so can have a think about how much benefit there is to come through.

And then also going forward from that new rate in Q4 ’17, how much can you cut? And I asked that question because you talk about sharp increase in swap rates benefiting your NIM by reducing the drag in the structural hedge. If that was to reverse which is possible I guess, would that then change your balance sheet targets besides, you and your NIM will aggregate greater or have you got more flex on the deposit side to offset that.

Ross McEwan

May be if I take the last one and then you can go and make the first. I don’t think we have a lot of flexibility left in the deposit pricing in the books. They are as you’ve probably seen down, it is at very low levels at the moment. So any further reductions I think would be hurting for us and the customers exactly from a banking revenue perspective. So I don’t think there’s a lot of flexibility left, only just the benefit left to fly through. Do you have any idea of what’s left?

Ewen Stevenson

It’s relatively modest, because the deposit change came through mid-way through the quarter. So we gave you the interest spreads in our disclosures, so you can assume relatively modest improvement. But as I said overall, if you think about UK, PBB and where a lot of that free pricing came through, obviously the SVR which has been a big drag has now stabilized at around 12% in the last two quarters.

The mixed change that we’ve had over recent years of a very rapidly declining unsecured book is also now stabilized. So as I said, I think more of the - and we said today that we do expect income and UK PBB to go up this year.

Howard Davies

Someone over there, thanks.

Andrew Coombs

It’s Andrew Coombs from Citi. If I could ask one on 2017 statutory profits, and the second question just coming back to the new HMT proposals and the state aid obligations, and on the 2017 statutory profits. If I look at your 2016 accounts to start with you printed 3.7 billion of adjusted operating profit, do you expect some cost to be 750 million lower of which any part should be offset by higher loan losses. And I think your CR disposal costs are not too dissimilar in 2017 versus ’16. So if we take that in to account and then adjust for the one being in restructuring that you’ve taken and your commentary that you only expect that bank to potentially return to profits in 2018, it would seem to suggest conduct and other charges of 2.5 billion or more. Is that fair assumption? So that would be the first question.

Second question on at the HMT proposals; the original proposal had a dividend lock up based on an exit showed Williams & Glyn. Now I know your limit and what you can say here, but would it be fair assume that there would be some kind of SME switch assured i.e. a certain amount would need to shift before you were allowed to resume dividends or is that way off the mark?

Ross McEwan

I will start with the last one and then Ewen can get back to the first. But you’re right that there will be differences made up around conduct litigation, restructuring charges that will make up the difference. On the Williams & Glyn there’s still a lot of detail to be put around the place of the options that’s been put forward. But there would be a number of SME customers that would move across, and I suspect if they didn’t move across, it would be some sort of number that they’d have to pay up accordingly. But there’s a detail of history going through.

The advantage of this arrangement, it gives much greater certainty to customers which is I think very important, much greater certainty to our staff, much greater certainty to the bank that we can actually fill in at a very short period of time as oppose to the current arrangement which we’ve said will take probably through to 2019 or 2020. And we still don’t have, we get in to the details about what does that mean for dividend.

We’ve always said that satisfying Williams & Glyn are in the ace stress test and getting ourselves profitable were the four criteria for getting back in to dividend. So we’ll see that’s why we came to get those numbers off as well.

Howard Davies

I’ve got one from the webcast from [Claire Kane] of Credit Suisse. Just three questions and I’ll get them very quickly. 12% return on tangible target seems to be based on the ability to achieve 6.5 million pre-provision profits. You confirm guidance of 6.4 for 2019 so why push the target out by year. Secondly, is the leverage different higher risk density, what impairment assumptions more below the line charges? Third one, on cost guidance does the 2 billion cost reduction plan include cost take out for Williams & Glyn i.e. Williams & Glyn is included in the 6.4 billion 2019 cost target, if so are we just waiting to hear what the additional restructuring charges will be to get there or could be expect with that update to hear that the cost reduction is above 2 billion.

Ewen Stevenson

Firstly just a point of clarification that the 6.4 billion is not a 2019 target, it’s a 2020 target. The £2 billion cost reduction does include an assumption around Williams & Glyn. It’s obviously sort of premature at the moment for us to be able to do a detailed modeling on us until we know what the final proposal package is and therefore what any time table and therefore what the integration plan is around, reintegration plan would be for Williams & Glyn. So as and when we’re able to confirm that we will. And as I said earlier that may include needing to modestly adjust what our restructuring charges are - assumptions are at that point.

Is the leverage different, however the density. Look I don’t think you should assume as we model out there’ going to be significant change RWA density in the bank overall. I mean we’re growing mortgage book well. It’s not based on a significant change in leverage assumption during the planning there.

Howard Davies

There was somebody else over here I think.

Unidentified Analyst

It’s James (inaudible) from [Soft Gen]. I had a couple of questions please, the first one is on your markets business. I guess what you’ve been saying today is yes that you will finally shrink the 30 billion risk rated asset, but it’s been pretty sticky where it is. So I guess the question is what’s the hold up and will this be happening this year for the markets business? And I’m thinking about that in relation to the income guidance that you’ve given.

And then the second question is on the DOJ provision until recently. What does that number actually represent i.e. is that your estimate of a best case outcome or there’s just nothing we can read in to that numbers it’s just a stinking post, nothing else.

Ross McEwan

I’ll take the last one on the DOJ provision, it was after obviously a very serious discussion at the Board on what we should take - one of the issues that we looked at was what settlements had happened in the months prior to us which gave us a slightly bit effect. And also your last point about would the Board be comfortable sitting with it.

We’re not in negotiations, the situation from a month ago hasn’t changed and I think it’s got a little way to play through before we do get the final resolution. And as we see it, the number could be much higher than what it is in the plain. So until we get to that position there’s really no change from that last conversation.

On the markets business, Ewen do you want to pick that up.

Ewen Stevenson

Look we’re not changing our guidance, but we expect the market franchise to be at around 30 billion of RWAs. You should assume that it’s sort of within that gross 20 billion that I talked about earlier. And in 2016 there was obviously some adverse FX movements which meant that there were some FX translation which kept RWAs higher than otherwise it would have been. But we’re not changing the guidance on the 30.

Unidentified Analyst

How much is the 35 sterling at the moment?

Ewen Stevenson

We’ll get you that number.

Howard Davies

I have a question online from Goldman Sachs. Two questions, one your target seems to imply that you have significant excess capital further out. How should we think about return both in terms of timing i.e. earliest first half ’18 now and form for example, buybacks versus dividends. Second question, could you comment on the competitive trends you currently see in UK mortgages. Shall we expect RBS to maintain its current strategy focusing on volumes and continued market share gains?

Ross McEwan

May be do the latter one first, I mean the market is competitive that we have as I’ve said many quarters in a row been building distribution very strongly in this market place which we did lack. I think we still got some very good growth to go through here. Just in one of the branches this morning and the mortgage volumes are very, very strong because the proposition of service delivery is fantastic and that’s what people are enjoying. It’s not so much around the (inaudible).

But I do see more compression of the nature and the NIM, but I think our current strategy will remain. We are focusing on getting volumes but not at all cost thank you very much. It has to be within risk appetite and we are not the price leader here. We sit middle market and the volumes are going very well. So I’d stay with that strategy.

Ewen Stevenson

Yeah on the first question on returning capital was, as Ross said, clearly are not on the four hurdle that we see is obviously resolution of Williams & Glyn, RMBS passing a stress test and being profitable. So we can clearly see a very visible past achieving all of those. We talked previously about returning capital both in the form of dividends and buybacks.

If we were to do directed buybacks, we would need to get shareholder approval to do that which we don’t currently have, and we are not proposing to put that in front of the shareholders at this AGM. But certainly for this year, it’s not a topic that we spend a lot of time debating internally and we’re very focused on ticking off the four things we need to tick off.

John Cronin

John Cronin from Goodbody. Just coming back to the Williams & Glyn question, you’ve indicated that there would be further cost ahead of the £750 million to the extent that that business is reintegrated. And can you give any guidance in terms of how we should think about that? I mean substantially less than £750 or another £750 million again perhaps.

And then secondly, on the specific approval of the timing for a potential product proposal. And you mentioned that it would be no earlier than Q4 ’18 before you’re renegotiating the state aid agreement. But in terms of the actual approval of the proposal, when could we expect to see some progress on that if you can give any guidance on that that would help.

And then just thirdly to come back to the £20 billion reduction in core RWAs and I suppose just that given you what the Q4 2018 timing on that, does that indicate any progress recently with regulators in terms of discussions around risk densities and this was specifically within that you’ve alluded to scope to reduce the RWAs of the Ultra Bank business that you are currently still very high. Any update you can give on the discussion of the Irish regulator in that respect would be helpful.

And finally, within that if there’s anything you can point to in terms of the actual operative associate us with. Why you have assumed from a BASAL 4 perspective that would be helpful too. Thank you.

Ross McEwan

We have got some costs set aside for the WMG reintegration. But at this stage we don’t know how big that will be. So they may well be. I personally don’t anticipate being another 750 million on top of the 750 of getting through the solution. But we will keep you updated as we go through that and make determinations.

Timing wise, it’s quite a complex process because both at the European Commission we want to do some testing on the solution. I suspect there’ll be negotiations around the actual solution itself. Treasury have put forward proposal and that would have to tested in the market place and I think that will take at least three to six months to get the complete approval through on that. So I think we’ve going to have to be patient.

As I’ve said I think it is a very good solution for everybody, customers. Speed of getting it done in the market place, creating more competition in the market place, but then this is the best way of doing it. And obviously certainly for us, but I think this will probably take us at least three if not six months. And Howard you have worked through these process before. But I think it’s going to timing.

Howard Davies

We understand that there’s a short an initial consultation by the treasury on the safety of that scheme, and then the EC has to consult for a period of three months or maybe slightly longer than that and then it goes back to the Commission for a final decision.

David Lock

And before you answer on the risk rated assets, there’s a related question, very similar question from David Lock of Deutsche. Saying that the Ulster Bank presentation in December Gerry Mallon mentioned high RWA sensitivity versus Irish peers and also was due to the point in time model you used and that you have new models in time which should be deployed in 2018 reducing that disparity. What proportion of the 20 billion core bank RWA reduction expected is related to these model changes, and is there further potential optimization for Ulster risk rated assets to come during 2019 to 2020. It’s a linked question.

Ewen Stevenson

So around Ulster Bank RWA as Gerry mentioned back in December, last year we’ve reduced RWAs in Ireland by 20% in euro terms, The track of book RWA gets it either you can see it in the Pillar 3 document came down a lot already. Their track of book RWAs came down by 30% last year. As bigger issue is model changes, there’s still we’ve got about 55% of the Irish lend book either in the form of track of book or an MPL portfolio.

So we do think there is material further, RWA reduction coming out or if Ireland which will go beyond ’18. So there’s some, but its within that 20 billion, it’s as we said earlier by far and away the bigger piece is commercial a bit in NatWest Market is getting down to the 30 billion, then you’ve got bits and pieces across RBS, UK PBB and Ulster.

Howard Davies

Another one there.

Chris Cant

It’s Chris Cant from Autonomous. I just want to follow-up your comments on group margin being down a little bit overall. It feels like we’ll see more growth in retail or PBB this year than commercial, and I’m just wondering to what there’s a mix benefit supporting that, because some of the other comment you’ve given about limited room for maneuver on deposit rates and the fact that whilst the SVR book isn’t presenting a headwind anymore, the back book of fixed mortgages I would guess still has better spreads than the front book mortgages you’re going to be adding today.

It feels like the retail margin the PBB margin will continue to decline potentially reasonably quickly and the reason for stability at the group level is just because you’re growing retail more quickly than commercial. So I think the first question, if you could speak to that. And secondly, if I could push you a little bit further on Williams & Glyn. I know it’s a difficult topic, but its feels like this is an important and there are assumptions being made within your 2020 targets about the restructuring potential. So how much of the revenue base of Williams & Glyn should we assume is going to stay, will you assume something like 50%, two-thirds.

And on the cost side, I understand you’re optimistic that you can take out a lot of that cost base. So should we be looking for a number beginning with a 100 million to 200 million there? That would be really useful if you could put some figures around it.

Ewen Stevenson

Well look on William & Glyn I think we’ve given you as much guidance that we feel like we are able to. At this point the overall cost guidance is within the £6.4 billion that we’ve given. We’ve told you that we expect to keep almost all of the retail franchise at Williams & Glyn under that proposal, and some of the commercial franchise. But that’s going to be part of an ongoing discussion, as part of finalization of that proposal.

But on the UK PBB margin I don’t think that we said that we expected margins to go down in the way that your described them. We said that given the SVR book is now stabilized, a lot of that margin pressure that you’ve been seeing over the last couple of years, that’s been because of a change in mix within the retail book together with a run-off of the consumable going because of us down on some credit cards.

Those two trends have stabilized substantially now. So we don’t think that we’ll see another type of spread conversion. And we’ve talked about an increase in income in PBB this year. So you should assume that within that there is some margin compression and good volume growth.

Howard Davies

I think we need to wrap up now, because we said we would try to wrap up at about quarter to 2, because we know some people have got somewhere else to go. Thank you very much for coming. Thank you for some interesting questions. Thanks to you in particular for answering most of them. And we’ll see you next year.

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