Royal Bank of Scotland Group PLC (RBS) CEO Ross McEwan on Q3 2018 Results - Earnings Call Transcript

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About: The Royal Bank of Scotland Group plc (RBS)
by: SA Transcripts

The Royal Bank of Scotland Group plc (NYSE:RBS) Q3 2018 Results Earnings Conference Call October 26, 2018 4:00 AM ET

Executives

Ross McEwan - Chief Executive Officer

Katie Murray - Interim Chief Financial Officer

Analysts

Joe Dickerson - Jefferies

Claire Kane - Credit Suisse

David Lock - Deutsche Bank

Chris Manners - Barclays

Jason Napier - UBS

John Cronin - Goodbody

Guy Stebbings - BNP Paribas

Fahed Kunwar - Redburn

Chris Cant - Autonomous

Ed Firth - KBW

Andrew Coombs - Citi

Martin Leitgeb - Goldman Sachs

Robin Down - HSBC

Operator

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

Ross McEwan

Thanks Johanna. Good morning, everyone. Today, I'll give you an overview of the Group's performance on the third quarter and then Katie Murray, our Interim CFO and I'll be happy to take your questions.

In the third quarter, we made a pretax operating profit of £961 million and above in line attributable profit of £448 million, this is up 14% or £56 million on the same quarter in 2017. So far this year, we've generated a pretax profit £2.8 billion and above in line profit of £1.3 billion. It's a good performance at against a highly competitive market and in uncertain economic outlook.

Our income performance this quarter is impacted by a number of one-offs, I thought I'll take you through the large ones. With given you more and have published slides but the most significant items are and on the positive £272 million of insurance recovery that we did volume about the last half year results and a £77 million IFRS volatility gain.

On the negative, we've taken addition conduct litigation charges of £389 million, which does include a top up of £200 for PPI and we've take an additional £100 million charge in relation to a more uncertain economic outlook. And further net £16 million in payment charge in our Irish business in relation to ongoing sales from our loan book to further reduce the level of non-performing loans.

Excluding Central items and NatWest Markets income is stable quarter-on-quarter and year-to-date after accounting for one-offs and transfers.

Other expenses declined by £183 million year-to-date and by £30 compared to the same quarter in 2017 if you exclude one-off impacts.

Strategic costs were £299 million in the quarter, as we continue to invest in that digital transformation. Our bottom line profitability complied with RWA reductions driver a 60 basis points improvement and our common equally Tier 1 capital ratio taking us up to 16.7% at Q3 2018. The third quarter includes the impact of a one pay dividend accrual as we build the full year. We also expect the final merger agreement of Alawwal Bank to be completed in the first half of 2019 and estimate this will create an additional 40 basis points of CET1 capital next year.

Given this, I appreciate that you will be looking for guidance of further capital distributions and we will update you on returning excess capital at the appropriate time.

We continue to support our customers and we await further clarity on the BRICS negotiations. We have committed an additional £2 billion of funding to our growth fund to support British business. This takes the total fund to £3 billion of which £900 million has already been deployed. The fund is helping business and based in manufacturing, technology and in development.

In addition, we have received approval from the Dutch regulator for the repurposing of the existing banking license of NatWest Markets invade based in Amsterdam. This will ensure we are operationally way to serve our customers based on the - European Economic Area when the U.K. leaves the EU.

Turning to our franchise performance, the figures are impacted by transfers and I will therefore take you through, the finance was on the like- for-like basis. At personal and business banking franchise delivered operating profits of £535 million in the quarter. On lending, personal loans are up £0.5 billion or 7% on the same period last year. U.K. PBB grew new mortgage lending of £8.2 billion in the quarter that represents a 12% flow share competed to a stock share of around 10%. The future pipeline was also strong with approval shares of around 13%.

Our lower gain, again remained under pressure. Excluding conduct and litigation, the personal bank reduced its operating cost by £66 or 8% compared to Q3 2017. Our digital strategy is a key driver of this cost reduction. As we digitize the customer journeys, we are taking out cost.

Ulster Bank Republic of Ireland reported a net impairment charge of EUR68 million. This includes as I've said a provision for another non-performing loans are offset by a number of write-backs. Operating expenses increased by EUR47 or 33% compared to Q3 2017, due to high remediation, litigation and conduct cost. This pushed Ulster Bank Republic into a loss of EUR87 million in the quarter three.

Commercial Banking delivered an operating profit of 343 million and reduced RWAs for further 2 billion in Q3 2018. Looking forward, the vast majority of the RWA reduction in commercial business is now complete. We are now much better place to grow the book again within our risk credit appetite and the sectors that we do like.

NatWest market's total income increased by 509 million compared with the third quarter of 2017. This reflects disposal losses in the legacy business last year and indemnity insurance recovery of 165 million this quarter. Core income was 70 million lower than Q2 2017, due to more muted market trading conditions like client activity did remain stable. Operating cost decreased by 47 million or 9% with Q3 2017. And this attribute to an operating profit of £87 million in the third quarter.

Finally RBS International delivered operating profits of 92 million, while private banking operating profits were 84 million. Both franchises continue to deliver very good returns on equity.

Overall, our performance on customer advocacy is not where we would like it to be and that results from the CMA survey earlier this year and our own NPA striking shows this. But there are signs of encouragement and digital innovations continue to deliver improved customer experiences with their mobile app, paperless mortgage process, new Bankline and our linear platforms all generating strong customer advocacy. As these channels are used more widely and we continue to develop them, we expect to see our customer service improve.

So in summary, a good performance in the competitive market and with uncertain economic outlook, pretax operating profit of 961 million in the bottom line, 448 for the quarter, for the first nine months of pretext operating profit of 2.8 billion, and a bottom line profit of 1.3 billion, a very strong capital position with common equity Tier 1 of 16.7 and we are looking to return excess capital. And as I've said, we'll update with you at the appropriate time. We are growing lending in our target markets and we continue to focus on digital transformation innovation and improving customer service.

And with that Katie and I are very happy to take your questions. Back to you, Johanna.

Question-and-Answer Session

Operator

Thank you, Ross. [Operator Instructions] We will now take our first question from Joe Dickerson from Jefferies. Please go ahead.

Joe Dickerson

Hi. Good morning, guys, how are you?

Ross McEwan

Good.

Joe Dickerson

Thanks for taking my questions. I guess I'm getting a couple of circular references here when I consider your results in action. So I guess when I see the NIM contraction in the U.K. PBB on the back of the competition, which seems to be generating stable at best income versus a credit backdrop that you say is uncertain and you've taken 100 million provision for it. If you could help me square that circle in terms of the trade-off that you seem to be taking there?

And then secondly just on that 100 million provision that you took, I mean it seems like the backdrop is stable from what we can see in terms of corporates and consumers. So are you seeing any signs of either stress or reduced growth or delayed projects what have you that have led you to take this 100 million charge. Some color on all of that would be helpful? Thanks.

Ross McEwan

Thanks. Look, I'll lead and then hand over to Katie. Look I was keen that we were very transparent about the 100 million. We know that other banks have taken it and some have shown it, some other may not have, but my view was we should show it to you, because you take the 100 million and you take the RS provision out of the numbers would add to about a 11% - sorry 11 basis points provisioning for Q3 and a 10 basis points for the nine month 2018 which is incredibly large. So we thought we just explain - Katie, if we explained why we've taken the 100 under IFRS 9, why we've done that might be a bit helpful.

Katie Murray

You know, sure. Thanks. So Joe, you'll be familiar with IFRS 9, so when you look at the standard, it requires us to look at a range of economic scenario as you know that it's a standard, but it's forward-looking, but it uses our backward experience to kind of help and form that. And we normally look backwards that you know sitting at 16 bps before this charge for the year-to-date where we're really not seeing a lot coming through the book. What we can see is that consensus is widening and is broadening, so you can feel that there is more kind of uncertainty in the environment. So we look at scenarios are based on consensus and also other scenarios are not based on consensus, a multiple different level of scenario.

You know during the quarter, I think that you probably agree me that the risk of a disorderly back has increased, you know we're not, we wanted to be I think as a nation by this stage in the year. So as we've kind of looked at, I mean run those scenarios, we've taken through an extra 100. And what I would say we repeat what Ross as already said. In terms of that we still you know a 11 bps a year to date. And year-to-date excluding that amount, we're still a very, very low levels of guidance. You'll recall that our guidance through the cycle was 30 bps to 40 bps and we're just not getting close to touching that. I think 100 is important but it is not certainly a big number in terms of our portfolio or anything like that.

If you look at the NIM and the competition that we see within PBB, I think that you know we continue to see a competitive market across the business with a number of party still considering to push significant liquidity into the mortgage space and so that's what you can very much see coming through on our NIM.

Ross McEwan

When you have a look at our - look we're holding very, very high liquidity positions, right.

Joe Dickerson

I know, I ask you about it every quarter, Ross.

Ross McEwan

As I got to tell you, for the sake of fixing them for you guys, I am not going to change it until we've gone through BRICS and we've got some moves, we'll probably make in the next quarter, but you know we're holding on to it. And it was interesting Sam Woods at the bench and I had speech last night calling that the industry should be holding liquidity on uncertain times, we certainly got that, we don't have to build it. And it is, I think it is appearing. We know that we told you that at the last half, I am very reluctant to give it away big doses just to fix and then issue. So that's my thinking behind that and I know it's hurting fundamentally but you know we're right in good profitable business, we haven't reduced our credit standards in our mortgage book, we're still doing good flow. Les and the team who run the personal business are fixing. I think one of the big issues in there is as you come to a two or five year roll off too much what was rolling off, they are working very hard on that, have improved that over the last quarter. So I think we're in pretty good shape. And the profitability of that business is still very good even at the lower margin. So I think it's going to remain very competitive for quite some time yet.

Early signs of a couple of players moving their pricing in the last few weeks, which is good to see and was also interesting seeing some players not past all of the 25 basis points through to customers. We pass through one of that 40% of that. So this is balancing act. But I'm going to hold high liquidity levels and you can criticize us for add NIM on that basis, I don't mind. We fell over 10 years ago and this bank wants to go into whatever happens in a very strong position going forward.

Joe Dickerson

Totally understand. I'd just, if I can just dimension there, because you about the uncertainty around Brexit picking up with the recent political, could you helps us the dimension if in the first quarter of next year there is no deal, what an impairment charge might look like, is there a way to attempt to quantify that?

Katie Murray

No, I mean there isn't a way to quantify that. I mean I think as we have looked our NIM, I think we previously had guided you that we would be flat to kind of slightly up. I think what we would say as we go just into this last quarter, we probably flat to slightly down is probably where we're looking at the moment, I wouldn't take that as we cross into further disruption or what might happen as we get into 2019.

Ross McEwan

I think the economy has been incredibly robust given the uncertainty. And let's see what the –what happens with the negotiations. I was on the call with a number of CEO with the Prime Minister last week, well I am not going to comment on –it was more I think optimistic table come off, call more optimistic than probably what we gone on to. But let's see where the negotiations in and we have to do some modeling of scenarios and that's - the look forward under IFRS 9, there is absolutely up there and we should be positioning accordingly.

Joe Dickerson

Great. Thanks, guys.

Ross McEwan

Thanks, Joseph.

Operator

Thank you. We will take our next question from Claire Kane from Credit Suisse. Please go ahead.

Ross McEwan

Hi, Claire.

Katie Murray

Hi, Claire.

Claire Kane

Hi. Good morning. Two questions. Firstly, a follow-up on the margin and we see we had the PBB seminar where you said you're happy with consensus forecasts for the revenue to the top line and I know you seem bit more cautious actually on volume rather on NIM. So can just tell us given the 5 bps quarter-on-quarter decline in U.K. PBB, don't think really is a liquidity issue whether that guidance is still fair?

And then the second one is on loan interesting income. I don't think you really put any disposal of this, this quarter, can you just update us on what do you think you'll reach the 2 billion cumulative loss by year-end '18, I think you are about another £250 million loss in Q4 in slide? Thank you.

Katie Murray

Yeah. Sure. I think if we go far to your first question in terms of the PBB. And if I look to the revenue were we wouldn't be changing there that guidance that we had at that stage. We are very much still guiding you to flattish slightly up in terms of their revenue over the medium term. And so very comfortable with what we had said. If we go around to the non-interesting income, we had guided to 2 billion losses, it is hardly worth saying I think 1,744 at this stage. I wouldn't change any of that guidance at this point. I mean I think these things come through in a relatively lumpy, so I think Claire, I would probably stick with that for the time being.

Ross McEwan

Even though Claire, I think in the last quarter was only about 14 million of disposal losses depends on the assets and the positions we're taking off the books are hardly with at the 2 billion that this point in time even though we are sitting in the right position.

Claire Kane

Okay. Thank you very.

Operator

Thank you. We'll now take our next question from David Lock from Deutsche Bank. Please go ahead.

David Lock

Hi, Morning. Just following-up again on the margin. I just wanted to slightly unpack this because it feels certainly like it's got a little bit worse the guidance over the last quarter. I appreciate the comments around the liquidity loss but presumably you were intending to hold liquidity but it's pretty high through this period anyway. And so I just wondered if you could talk a little bit about the pressure in the mortgage market. I mean you've been very, very focused and tied about the pressure being there, but have things got significantly worse in the last month or so because I recall you in saying NIM flat to slightly up first half results and then Katie I think you said flat to slightly down in September, but obviously today there was a little bit worse than that.

And then the second question from that would be just would you cautious on extrapolating this the 60 odds, 60 million, 70 million NIM going forward, so do you think though some of that that will come back obviously liquidity a part of that, but would you cautious on rolling that forward? Obviously consensus has an NII rising in future years? Thank you.

Katie Murray

Sure. So I can go first and you can jump in. So David I think if we look first of all to the liquidity piece and let me kind of unpack it for you and a little bit around the whole. I mean as we look to our liquidity, we've talked about there were two points that we - two bps in terms of the impact on NIM. Now, you'll be aware obviously that we paid out of the deal, only actually that quite late in the quarter. I think you know when we do have our early guidance and then a flow of that might on leveraging basis has a fairly big impact, so that certainly has a little bit of an impact in terms of that piece.

We then repaid our pension payment which we paid in the early part of October as well. So you would see the NIM pressure kind of starting to eat off a little bit. But you know as you look into this next quarter, we still have a lot of liquidity items that we would be considering what around some of our day cause. Certainly, as you look at the margin piece, I mean that accounted for three bps in terms of overall for the competitive pressure that we're under. And I think that that really has continued and it feels very counter-intuitive after you have something like a rate rise actually what we really saw with some pricing continuing to come down and so the competitiveness that we see in the marketplace is still very much there. And then we had a couple of one-off coming through as well in terms of that margin.

So I mean the - we hold it like in September and kind of related. I think if we look at the year end, it will kind of very much a flattish number as we move forward from here. But some of the liquidity decisions that we'll make will clearly be into be impactful on that.

David Lock

So, just on that - just to be very clear, so when you say flattish at the end of the year, you talking about the full-year NIM or you talking about the fourth quarter, just so to be very clear?

Katie Murray

And, so as we look for the full-year.

David Lock

As full-year on the previous year. Thank you.

Katie Murray

Yes. And then if we go onto your next point around interest income. So as we look at income there's a couple of things going on there and I work my way through the various franchises. We gave you guidance in September that we thought that the medium term income for PBB would be so flat to slightly up, we maintain that guidance.

Within CPB, you'll be aware that we've been doing quite a lot of management of RWAs in that business. We feel that we're more substantially done that. There will be a couple of little bps that will continue to kind of come through in Q4, but the kind of the real work of resizing that portfolio is complete. And so now we're kind of well positioned for growth. And what we can see within the RWA numbers today that we're growing in the sectors that we want to grow already. So kind of comfortable on that income side.

You then look to NatWest markets, we've always guided you on 1.4 to 1.6 of income. We've never changed that weather when we were up at the kind of 1.7. So that is not something you can kind of continue with. And what we know is we still have more benefits come through on the structural hedge. We've had two rate rises, we're kind of at the end of year one of them and that so just Tier 1 and the other one. So what we know is that on the 25 bps rate rise by year three, you're getting 350 million in by year to 276 million of income coming through in terms of the structural hedge activity. So I think that for us that kind of gives us some comfort on where income is heading.

David Lock

Okay. Thank you very much.

Operator

Thank you. We'll now take our next question from Chris Manners from Barclays. Please go ahead.

Katie Murray

Good morning, Chris.

Ross McEwan

Hi, Chris.

Chris Manners

Hi Ross. Hi Katie. Yes, two questions if I may. So of the point a little bit just on the net interest margin, just trying to working with sort of getting into sort of new, we're going to be sub 200 basis points on that. And maybe I could just ask about the rate hike. I guess from the manage margin piece, you should be getting £153 million at the year, so call it roughly £38 million a quarter of with extra net interest income. Given the sort of lag before that comes in for a rate hike that we've just had, how much would be so 40 million extra revenue or extra NII would be in the Q3 numbers if that is what we might get in our Q4 run rate? That was the first piece just on that deposit piece.

And the second one maybe to just move on a little bit at the capital 16.7%, obviously way through your targets, so I mean I think you're looking to hold about 14% steady states that gives you about 5.3 billion of surplus, obviously you're recurring your dividend, you talked about the 5% of ordinary share capitally lead might do as a direct to buyback help U.K. GI get out that stake. But that still actually leaves you with a pretty substantial surplus. Could you maybe sort of run through you are thinking about how and when that surplus would come, would we have to wait till after Brexit, or is it just after the stress test and would special dividends make more sense to avoid using the free float, so maybe some thoughts around that be really appreciated? Thank you.

Ross McEwan

If I just start with the last one then Katie, you come back to that. Because look Chris we have got surplus capital and we've been very clear by last quarter and this quarter that we do want to get back to shareholders. First just start the dividend which we've done and as Katie said we're growing therefore for full year. But as you know, at 40% is just not enough to get - we about to get that level of no great. The directed buyback is really going to be getting ourselves ready for that but that's going to be in the hands of when does the government want to sell stock and I suspect not my stock to sell if there is but the pricing we're sitting at today that would probably find a major difficulty doing so.

So I think what we have to prepare ourselves for is if they - if get ourselves ready for doing a directed buyback, first priority. Second thing is if there is not going to be in a directed buyback in a reasonable period of time and I'm not going to tell you what that is, we have to be clear as to be specialize otherwise the capital built just becomes very difficult to even get a return on because we've got it, we're holding a very high level right today that just keeps building.

So we are considering all options. We've got to get through a stress test beginning of December. And I don't think you'll be hearing for us on the capital distribution position until we had a full board meeting in February with our full-year results. But be aware we have very aware of the issue of about capital that we're holding and we're having a look at all the options.

Chris Manners

Got it.

Katie Murray

Lovely, thanks Ross. I think Chris, I don't think you'd expect me to comment on whether this is a new normal or give you a forecast for your margin as you go into kind of next year. I think that I would say we share in terms of the specific points around the managed margin, you probably saw behalf of that coming through in the quarter in terms of your 40 million number. But I think as we look at the margin overall, I would kind of reiterate the reason for the fall is very much three component parts, couple of bps on one-off and two bps in terms of liquidity and then three bps we're seeing in terms of their competitive pressure. They are comfortable with our guidance for the consensus in terms of where we're going on an income as we move forward.

Chris Manners

Got you. With this two basis points of one-off that we had in Q3, should that reverse in Q4?

Katie Murray

So there was one other things I'm happy to say, there were some finding that we got in terms of the sell through and activity in the piece and I really wouldn't expect that won't reverse back if you go into the next quarter.

Chris Manners

Okay. Got you. Thanks.

Ross McEwan

Thanks, Chris.

Operator

Thank you. We'll now take our next question from Jason Napier from UBS. Please go ahead.

Jason Napier

Hi. Good morning to both. Thank you. I've got three please. The first just looking at after aside from the provisioning for NPE sales. Just conscious that costs are running ahead of where we thought they'd be and have got a pretty meaningful improvement in operating efficiency into next year in our numbers. Now just I was wondering perhaps asked for an update on the outlook for delivering a sort of a better cost income in that business, because aside from the loan loss actions that you take and it's obviously a tough market for Royal Bank and it's looking pretty tough for the incumbents too from a margin standpoint?

Secondly, just an update please on the front to back book spreads and retention rates in the mortgage business in U.K. PBB. In the past you've been able to give us that sort of delta?

And then thirdly, just the top up to reserves. I appreciate in an IFRS 9 we're sort of expecting kind of tweaking, but the sort of the roundness of the figure and so on suggests that you're looking to just sort of run more cautiously into that uncertainty rather than shifting particular indicator. So if there are indicators that have driven that perhaps you wouldn't mind sharing a sensitivity with us we're all very interested in helping investor scope, what it means if GDP expectations move unemployment and sounds, any kind of clarity on how it is you came to the 100, I think would be welcome.

And then lastly just to point of fact. Could you let us know your exposure…

Katie Murray

It's four questions.

Jason Napier

It's a supplementary for three, not having if you answered. Anyway yeah. Just lastly, can you give us a sense as to your exposure to how retail, how you choose to define it in terms of loan exposure? Thank you.

Ross McEwan

That's great. I'll take the first two and Katie can take 3 plus 3B. Just on Ireland, it is a tough market over there. We've got a lot of remediation we're doing and we're getting through that remediation, doesn't matter whether it's in the old mortgage book, we track a book, we're getting through, we've got SME remediation at one stage, I think we had about 14 remediation going on that business. So what we are getting through is so the cost of those Jason, starts to drop off mid-way through next year, but it will be I think quite a difficult year for our business next year as we get through those. And that's why you seeing the cost position staying up where normally it would be coming down. But I would still think you should anticipate that the cost of that business will stay up in 2019 before starting to come off into 2020 because of the mainly the remediation and change we're going through there.

We've got a new CEO, John Howard over the change being with the business 37 years, she is a fantastic leader and operator and she checked to the board this last week and she's got a group of those business very strongly. There is a lot of things that we need to tidy up there. The big issue for me in Ireland is definitely cost but it's also capital and we've got some things that we have to do to resolve for the regulator which we believe I fear that we should be doing before we can start getting capital out of their business, but they're just saying sitting at about 23% common equity Tier 1 by end of year with one of the books coming off, it's probably going to more like 27. So there's two issues cost at capital and we work very hard on the business.

So although that cautious about our margins getting knocked around, but still very strong, but yea, we're having to, we put a lot of effort into where Irish business and it's taken a lot more than I ever anticipated.

On the mortgage book front to back, it's still about 80 basis points. The thing the team have been working on our retention rights for mortgages delivered through the book, community was sitting at about 65% which is known when there were should be. The team have been working strongly on there and September it was up 71%. That starts making a difference to us over a year if you can hold onto another 6% of the book as it turns you know from book two year or two year or two to five. So some good work going on there but not finished at all. But yeah front to back still the bad ID. We've seen two players move there the right up a little but over the last a couple weeks which is pleasing but I think we should anticipate very strong competition in the mortgage market through into 2019. Katie?

Katie Murray

Yes, I'll go to 3A and 3B. So I think Jason as we look at the sensitivity of IFRS 9, I think this is something that we'll, all the banks will share with you far more detail at the year-end as it's one of the disclosures that we will be sharing in toward that at that time. I love to be able to say you know mortgage is this, unemployment in this and rates are this. And I think as an industry we're not there yet, we're still and again used to the behavior of it. One of the things is the finance rate when someone comes through and the answer is 100 on the no, as you get very frustrated. And I think one of the questions you go back and to say that feels a little bit too accurate, so in terms of it. But I don't think you should read anything into that. This is as we do any of our scenario work and any of the any of the calculations under IFRS 9, we look at a range and a wide range of different economic scenario, we look at and consensus, we look outside of what's in consensus and we I think we can all agree that the kind of risk is Brexit has driven, which is why we've kind of look to take the kind of 100 million at this time. I do intend, we read anything inside but it's a kind of a point number because it's not, it's only built up about way.

In terms of kind of exposure to high street retail. And as we look at - we kind of guide you there, so say our direct exposure of commercial lending is somewhere probably between the 5% to 10% range, now kind of looking to give you exact numbers in there and that's over there over the commercial exposure. I would say the most recent one they've been headlined around particularly evaluating that we're in our debt which is good but we do bank 25% of the market. So we know that it will come right into us in time but we're pleased for the last little plus to go through that we were in on that paper. But as we say it was 25%, you take your term when it comes.

Jason Napier

Thanks very much.

Katie Murray

No problem. Thanks Jason.

Operator

Thank you. Your next question comes from John Cronin from Goodbody. Please go ahead.

Q - John Cronin

Hi guys. Thanks for taking my questions. Just on the PPI, I note your comments not there has been an uptick in complaint volume this morning and is that a structural uptick or just a response to the outcome pain and what are your expectations around volume over the last ten months or so?

And secondly, just getting back to the net interest margin point on mortgages, you have expressed your ambitions to grow your share of stock. You know how do you think about that in terms of capital allocation, and maybe slow that down for a period of time given the competitive intensity in terms of your growth ambitions particularly. And so just trying to get a sense of how you think about it from a capital allocation standpoint?

And then thirdly, when do you expect that you will make an announcement in relation to the CFO position? Thank you.

Ross McEwan

Okay. I would try and offer you those actually.

Katie Murray

Go for a home run.

Ross McEwan

I'll go for a home run on all three. First off on PPI, the ad campaigning that went through in August drive the number of cases up pretty considerably. We still suspect that people saw you know the end is coming August and people didn't realize it was August 19, not August 18 which drive August, because they drop down in September but it didn't come down to the run right that we've been having. So and you've got another ad campaign running at the moment probably for the next six weeks. So that's hard for that location is coming in. And therefore we - have you was, we should take an additional provision if they standing a proposal to labels perhaps the prudence of the 200. I would say we in this campaign drops off, what it drops down to again. So with - I am not going to say never again on PPI, we said that a few time, so we thought was the final, but it's the gift that keeps on giving. So I think we're okay at the moment, but let's see what the next sort of six week campaign brings with, pushed himself in.

On NIM, we have said that we do want to grow beyond 10% stock and we have been doing that you know we've been around that 12% growth market. We'll share with the market on the growth. We're pretty comfortable with that. I am very happy to allocate the capital to it as long as it sits. I am not so worried about the volume, it's the quality I worry about not the volume. So you say value ratio has haven't moved much at all. We do monitor that very strongly. There are parts of this market that we still think we can grow in safely that we haven't been. So I am very happy to allocate the capital, it's a good return for us.

On the CFO, it's an internal external search. It's ongoing. I think we're probably halfway through the process, so I don't think you can hear anything for the next couple of months. So that they are - sitting beside me doing a fantastic job but it has to be an inside outside review and it's post on running and it's guys in governments, because it is a direct role of the bank and the board will get a view.

John Cronin

Thank you.

Operator

Thank you. And we'll take next question from Guy Stebbings from BNP Paribas. Please go ahead.

Ross McEwan

Hi Guy.

Katie Murray

Hi Guy.

Guy Stebbings

Good morning. Just one left from me. On strategic cost, it pick up a little on the H1 run rate but still running quite low related to the 2.5 billion guidance, I think it's out of the Q3 level, you feel more like 2.1 rather than 2.5. If you could update on the timing there and if revenue run is putting a little bit more tricky when you set out your investments spending plans, would you consider reducing the total spend at all?

Ross McEwan

Look, I'd stay with 2.5 and I'd encourage to stay the closer. I think you changed that as well. This year, it's looks like about a billion, next year will be higher than that. We know what we've got on that plans for next year and it's higher than that. And I think there will be a mattering of leftovers for 2020, some of the programs will take a bit longer to run through and then we take the strategic cost things around. For example we've talked about the - they will take a number of years and we have to spread those over few years as we get to 2022. But this year I'd say be around the billion next year be more like 1.2 to 1.3.

Katie Murray

I mean the 2.5 guidance Ross was certainly sticking with and these things you know they are big and lumpy if I think visibility and we're looking at here and it's 200 million charge move out of this. So there are big things and the accounting standards are quite strengthens to when you can recognize, I mean when you can take them. So I wouldn't change that number and to say the lumpiness is the reality of this kind of level of change.

Ross McEwan

And we've got I think 300 million strategic cost into 2017, it sort of gets you the 2.5.

Katie Murray

You know and I think you know I probably just repeat the comments we said on revenue earlier you know in terms of, as we look at it going forward you know not with markets 1.4 to 1.6 the structural hedge and how that rules to. We repeat the numbers again, I mean you are all familiar with them. You know PBB will come to maybe the tail ends of RWA kind of reallocation and reshaping of that business. And we talked a quite lot in September around PBB and they kind of you know hold into sort of slightly up as where we are. So at the moment, we are comfortable with having it. So no suggestion that we move away from those kind of cost in investment numbers.

Guy Stebbings

Okay, thank you.

Katie Murray

Thanks Guy.

Operator

Thank you. Our next question comes from Fahed Kunwar from Redburn. Please go ahead.

Katie Murray

Hi Fahed.

Fahed Kunwar

Hi Ross. Hi Katie. I just had one question on margins and another one just on the U.K. the loan losses. On the margins you talk about the marketing very competitive. From what I can see the broker market, you guys cut rates by for the most aggressively of all the large banks in after the rate rise, and I think your rate cuts were 40 to 50 basis points across all your core products unlike other banks is more like 10 to 15 of the larger bank. So I guess is it very much explicitly because you are still looking for volume? So it is more less to do with competition and more to do with your own aspirations around the return profile in mortgages versus your group return profile. And just a point of clarification Katie, when you said flat margins year-on-year, did you mean U.K. PBB or did you mean at a Group level, I assume U.K. PBB? So that was in the margins?

And on the loan losses, I think they seem to have come through - correct me if I am wrong - U.K. commercial rather than personal. I mean my understanding in the U.K. is that worry around BRICS intercession really is at a moment kind of focused on the indebted personal kind of sort of consumer lending point. And as you all worried about the wider range of economic consensus, is it not inconsistent at that point to also be growing share in mortgages where as you know that you know the market is getting a little riskier and harder to find kind of attractive returns with a low risk profile. So is that inconsistent if you wouldn't mind, I am just talking through, I would appreciate it. Thank you.

Ross McEwan

Look, I'll lead on the mortgage one. We have been very clear that we want to grow share in the mortgage market. We have been very clear where our price taken or the price sit. The changes you are talking about there, I don't see us being the one dragging the mortgage margins down in this business at all, we are responding to market's activity we saw when that six months ago when the first right across came through, people post the right step caught us by absolute surprise. I think your response there on us coming down was just in response to others in the marketplace. We are trying to make sure that we hold the intention rates to get them down because they were 65%, they needed to be well into the 70s and we've achieved that, but it's only around - that's only a piece around pricing to hold on to the business which as a competitive the market is. We have not dropped their credit standards, there are parts of the market, we could be and will be in, we haven't been in the past that I think are still very good pieces of business to take. But you know we're not dropping acquitted standards. Our volumes are at about 12% and stock is staying on pretty comfortable there, and it was a 11% wouldn't worry me. We do intend to grow. We've got plenty of liquid, it's really around don't take bad credits on to book is the big piece for our mortgage side.

Katie Murray

So, you know I would really add on to that. As we've guided and that we're 30 to 40 bps through the cycle. You know there is such clear daylight from what we're seeing there today in terms of our kind of guidance. So I think that we're very comfortable by the quality that we're bringing in. And I think you know we are really benefiting from the work that we have done over the last number of years to make sure that this is a clean book. And so I think that's something as we look our 16 bps here to date including you know they not like always hand scenario overlay and they mostly taken in for debt and sales in Ireland you know that's kind of coming out to it's kind of 10 bps year-to-date and we really is continuing it tremendously low levels.

Ross McEwan

I think that just shows the work that team done over last four to five years to claim the book up. And look we're very surprised at this, we've guided the 30 to 40 basis points. So it doesn't stay this good that long. Maybe I have been around but not in the sort of cycle but we all know that.

Katie Murray

And please let me just kind of - maybe just on the point. So we are sitting and I think you know on slide five we've given you, kind of gives you the breakout of that and I'm sure you've all been look already this morning. But we're kind of ending the quarter at 193 and I what we're saying at the moment a number that we look very flat or very marginally somewhere that we're going to kind of Q4. I think we try not to get into kind of forecasting them because it moves around a lot in terms of, it can be right in terms of the liquidity decisions you made which are the right decisions to make in that time.

Fahed Kunwar

Sorry, I have got a cold. I think I heard you say year-on-year Q4 2018 will be flat, but I think what you're saying is Q-on-Q it's flat to slightly down.

Katie Murray

Sorry, yeah, Q-on-Q. So thanks very much you for asking for the clarification.

Fahed Kunwar

Okay. Perfect. Thank you very much.

Operator

Thank you. And we'll now take our next question from Chris Cant from Autonomous. Please go ahead.

Ross McEwan

Hi, Chris.

Katie Murray

Hi, Chris.

Chris Cant

Good morning. Thanks for taking my question. Obviously we had a quite a lot discussion around NIM and I have to confess some and I'm getting a bit confused in terms of all the puts and takes with liquidity coming in and going out again. Have you considered reporting a banking NIM equivalent to the one that one of your large peers discloses which effectively strips out some of the liquidity impact, I know that they are able to guide quite comfortably on NIM trends on a banking NIM basis ex-things like liquidity because of how they define it. Do you consider it whether it be useful to disclose something like that people get a better sense of the actual underlying trends. And if I can just sort of round up the discussion on NIM and NII, I am consensus got 1% to 2% NII growth in 2019 versus the 3Q run rate you just printed. Are you comfortable with that? Thanks.

Katie Murray

Yeah, so I mean Ross, I kind of kickoff. I think probably there's been lots of different questions on NIM. So let us just maybe rephrase it and go kind of to slide 5. As we look at where we're sitting, there is and we had a kind of 3 bps on liquidity. As you know it's - NIM is calculated on the average and have some large pretty outflow in October and then - sorry, in September and then in early October as well. And I think the competitive pressure we've talked about as well as a couple of one-offs. As we go forward from here again 193 on Q-on-Q, why I would say that, as we expect that to be flattish to very marginally time.

And Chris, we've as a bank we really work hard not to do kind of too much adjusting over numbers and actually I was saying it wasn't for this and it would all be okay in terms of the number. I mean we will always ask the team do to kind of make sure that we have the disclosure. But we think the liquidity numbers are real - is a real cost of running the bank, it starts the whole bank not just the central treasury team. So it feels a little bit disingenuous to kind of strip out the result as of the business, but obviously will continue to look. In terms of…

Ross McEwan

I just think there was lots and lots of games of people playing on NIM, if you don't, if you do it at a group level and then allocated all out. Then we can try to be as transparent as we possibly can and allocate as much of the cost in the liquidity cost, so that you see the real values of these businesses as opposed to me holding stuff at the group level or allocating to one because we want to make it look good or just think the businesses have to stand on their own.

Katie Murray

And I think I'm just in terms of your question on income, I probably talked about a couple of times on the call, it certainly no little change consensus. So again just for any clarity we go through you know PBB, we gave you some strong guidance in September in terms of flat slightly up, the PBB we really at the end of the whole reshaping of the portfolio and we're going comfortably in areas that we want to at the moment, we also have in NatWest Markets guidance and then of course the rate sensitivity, we're as many of the banks are very sensitive and we see really strong pickup as rates continue to rise. And so Chris, hopefully that can help on partly on the NIM and income questions.

Chris Cant

Thanks. On the banking NIM point, I agree with your approach. I suppose it would be helpful for people understanding of what's going on to sort of give that are underlying view on NIM at times such as these were you know we spend an awful lot of the call discussing optical impact of liquidity on NIM and how are adjusting for those because you're managing the business. I just think it would give people a better sense but that was really the point there.

Katie Murray

Thanks for the clarification Chris. We do and we try to listen to what would be helpful as well so we will build in terms of the Q4.

Chris Cant

Thanks.

Operator

Thank you. Now we'll take on a question from Ed Firth form KBW. Please go ahead.

Katie Murray

Hi Ed.

Ed Firth

Yeah. Good morning. I just had question back on the capital, I might have just missed the answer. You mention the three stages and in terms of the - I guess extraordinary levels of capital you've got now certainly against peers and I guess any going to get worse. Just to be clear, if the governments don't sell down and you don't get involved in a directed buyback, you would do a special dividend, you specifically said special dividend you wouldn't be doing a share buyback?

Ross McEwan

Look, what I said is this is straight paths to it, I'll try to get capital back to you. One of them is obviously the dividend which was started. The other one is getting involved in the directed buyback in the third is a special. So those are the three I think tools that we have to get capital back and we have got. I mean this is amazingly good problem to have isn't it, because in 5 years ago we were struggling with capital, now we've got lots. So look we are considering all phases. The one that we talk to most investors like when we said average like back it was, please get the dividend guidance. Secondly, do a directed buyback. All of signaling if that becomes problematic we do need to actually start considering specials to get it back in hands. So that is what - this is sort of three methods.

Ed Firth

And can you give us some idea of when you - of what's the level of thinking kicks in because I mean clearly none of us have got any visibility on when the government may not be selling down, so I mean clearly you could go to 18, 20 in the new reason be soon order, I mean would you still be waiting so that always your time or I mean do you look at time or would you look at levels or what?

Ross McEwan

Look, but the levels mainly in the time we can get affected. We said we want to get through the stress test which is December and we've got a board meeting February that will give you much better clarity around there, but all realizes we don't need this level of capital in this business and move on ways of getting it back to you.

Katie Murray

And we would pull any number of the different levers in to do that.

Ross McEwan

To do that.

Ed Firth

Okay. Great. Thanks so much.

Operator

Thank you. Your next question comes from [indiscernible] from Bank of America. Please go ahead.

Unidentified Analyst

Hi. Good morning. I just have a couple of quick ones I assume probably in mortgage and then commercial. And so looking at the mortgage book stock of ten, gross landing share of 12 and then approval share of 13, is that an indication that you are willing to take market share in a market where as you indicated Ross pricing is falling and you still happy to take additional share there?

And then on the commercial book, you talked about the repositioning of that book now being pretty much complete. Wonder if you could talk a little bit about the underlying trends you are seeing if you exclude the repositioning of the book, so how much demand you are seeing, how much on line growth in commercial? Thank you?

Ross McEwan

Look, we're happy - we do want to grow the mortgage book. We do want to grow greater than 10% stock share. We haven't set lays and say many targets on that one. He doesn't have to do 12 or 13. But we have built distribution that gives us so I think a decent show at that market pricing points and those pricing points are we are followers, let me be quite clear on that. We have been having to tidy up they retention phase and that is starting to work now. So anything I would detain on comfortable work we haven't seen targets. That's what we can get out of the market at a decent return on equity and that's what we stick with. It is a good return on equity and we should continue to do it. So that is the only thing guiding us there. We are not the price leader and if you keep telling me I am, I'll go back again and again in the example is but that's something not been if the case we are not going in and have a look at the pricing points.

We're doing certainly more in the five year that we were. That 70% of the books in five years now which is fine, but I think we are certainly a price taker in that for market boost very good distribution. On the commercial book, we are quite right that we have done a lot of restructuring that book and I think Alison Rose and her team, who run the commercial business have done a very good job of really getting back to assets that we want. In that book, we've done a number of asset sales over the last couple of years. And what we're calling now is that - we've got a book that we're comfortable with we are now concentrating on where other pockets of growth we want and there's some pockets that we are quite enjoying being in, that we think will be good long-term.

So now look really no other comment on that other than to signal to you that the reduction of that book is pretty much later would end of the problem very small pieces that would claim that up and we're comfortable with it. You are saying the impairment a very low as Katie said but you know with 25% of this market some point, we will take as share impairments but I think given with cleaned up the book probably is an indicator - one of the indicators of why our impairments are so low.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. We'll take on next question from Andrew Coombs from Citi. Please go ahead.

Katie Murray

Good morning, Andrew.

Andrew Coombs

Hi. Good morning. I have couple of points to clarification please and I apologies I am going to come back for NIM firstly. If I take your commentary, you mention this 3 basis points declined huge competitive pressures Q-on-Q, I think the guidance for Q4 essentially that will continue beat take underlying Q3, 195 take up another 3, it's kind of consistent with your guidance. Now it seems to be a big increase in competitive pressures that is what you stated previously. So I think when you did the margin more could the first half 2018 stage, year-on-year you said it was 3 basis points due to competitive pressure, now we're seeing 3 bps in a single quarter and again next quarter. So specifically, what's driven up that competitive pressure more recently, is there little bit trends where looking into and particularly below deposit beat you've show which seems just the opposite? That would be my first question.

The second question is just clarification on capital which I think you listed the priorities is only dividend then directed buybacks and then special dividends. Just on the last one. Have you weighed up the options of special dividend, buybacks in your consideration? Thank you.

Ross McEwan

Look, I'll give you the last one again, I think I have been through it three times, so I'm obviously not being that clear. There are three options around it, I mean first one is on Ordinary dividend which was started and we've given you very clear indications of the sake of 40%. Directed buybacks was when we had the conversations with the investors, actually that was a good thing to be doing. So therefore we have been working very hard on how you get about doing that, there is a real process because it is reliant on a number of things; one, the government actually does want to sell; two, that was participate within and so that we get ready preapproval to do so and board approval. So we're working through that but 2020 on, I would be very, very surprise of the government was a seller of that sort of process. And therefore what I'm signaling to you is we do want to get the capital back and the other way of doing that is a rather special.

There are other forms of buyback that I would have thought special was probably the next best way of doing it. But we will examine that as a board of the next few months. Let's get through stress test and what I'm signaling to you is I don't need the capital in the business. So we hope that's clear on that one. Katie I throw back to you to have another code.

Katie Murray

Another code NIM, yes.

Ross McEwan

As we're filing on the NIM.

Katie Murray

Sorry for that Ross. But I guess as we look at in the market we have seen more competitive and pressure in this quarter and I think that's what we why we are kind of changing our guidance very slightly from what we had said in June, so we can all agree on that. I would say that you're going to the right kind of number as we look after if we ended Q3 and on an underlying basis and 195 and then put one-off that 193, so I think it kind of maintenance of flat to very slightly down on those phases is the right kind of phase to get to it. The reality is in terms of when you are debating on 1 basis point high and you a different decision that we might make on a credit here now we kind of move that. So I think you clearly got the messages in terms of what we're trying to guide.

Andrew Coombs

Rather than the Q4 number and specifically interested in where the competition is picked up because that doesn't seem to be a trend that's necessary consistent with what you're sharing, why are you specifically saying more competitive pressure and in which specific areas?

Ross McEwan

Well again somebody made a comment that our peers are allocating the way we are allocating all the cost down. So I think we are just going to be bit careful of that. This hedging policy is going on out there. That are different to us. So I look…

Katie Murray

It's our first, I mean often we have happened not really going to comment on the clear space. I think we are continuing to see as a competitive environment and that is the reality and you know we talked about our front and back margin we just can confirm that.

Andrew Coombs

Thank you.

Katie Murray

Thanks, Andy.

Operator

Thank you. We'll now take on next question from Martin Leitgeb from Goldman Sachs. Please go ahead.

Martin Leitgeb

Yes, good morning. Could I ask on competition and I think on both side, asset side and liability side. And then I think you've alluded in the call that we would expect competition in mortgages to remain tough throughout 2019. I was wondering if you could set a bit more color in terms of market itself but you see the overall market grow in mortgages potentially slow in the next year as you think, that was coming down, some of the pricing trends not being as strong as in recent years. And whether I think a number of banks are not trying to manage their attentions by similar what you indicated earlier in the call, Would you thing that as a consequent pricing would likely to fall further from here, would you obviously based on assumption pricing was made probably at current level?

And the second question is, I assume that's on the deposit side, obviously with excess liquidity being trapped in the number of banks, would you expect the competition on the liabilities somewhat less pronounced and to that extend I think just looking at some of the price related seems like that some of the pricing point in the deposit sides have narrowed some of the banks that passed on more, some of the bank that passes on less of the last base rate hike. Do you feel how sensitive all those deposits to by how much it on, so I'm just trying to understand if we have the further base rate hike next year to what extent you might be able to have a low of that time? Thank you.

Ross McEwan

Yeah, look, there's both sides. They are certainly on the asset side is very competitive in the mortgage book, slightly less than the unsecured side of the business, it's more on the pace which you can make a decision as suppose on your prices here. On the deposit side, I think different banks seem to be experiencing different things, some are certainly no need to take on new deposits in any great rush of them from existing customers. And I think this being - the larger banks well and truly well positioned for their liquidity. I suspect that some of the smaller banks as they look towards refinancing the Bank of England funding would have to start thinking about their pricing.

And you start, I think, will you starting to see that coming to the back. But look we are well positioned at this point in time with both deposit - the deposits to fund their lending and we did pass on 40% but we were quite strategic about where that went to, what products have went to, 96% of the customers actually have got some benefit out of it, but some greater than others So we were quite clear about where we put the increases as opposed to others because there are some products that it doesn't make much difference.

Martin Leitgeb

[Technical Difficulty] So I mean the mortgage charges be obviously a very high profitability to pricing at this stage, could you would you expect see that?

Ross McEwan

Less competition on the deposit side than we are on the assets side because everybody - the bigger players have got plenty of liquidity and I have the ability to get hold of the deposit. So I think there is less competition in that side of it. Deposits in the U.K. PBB are up 3% year-to-date, current accounts up 3.9% and savings were up 2.8%. So we're doing very, very well on the deposit side of this business that is better than the market growth itself. So we have the capacity to bring it on deposits but we are - we were quite careful about where we did put the pricing changes from a strategic perspective.

As I said I think there are players in the marketplace that will probably not be in the same position as ourselves. The market actually was just under the 3% so we grew pretty well across those areas. So look they will become competition overtime, but I think the main competition is in the lending side around mortgages. You know people are trying to hold on to the business. And you know the processing does get again become very competitive to hold on to the business.

Katie Murray

I think what we're always clear about Ross is you may make sure that we stick within our risk profile and that any business that we write return on capital. Well, it's a really important focus, you have to look after the back door and the front door it to make sure you always do that within your wider metrics and not to focus on them.

Martin Leitgeb

Thank you very much.

Ross McEwan

Thank you

Operator

Thank you. We'll now take our last question from Robin Down from HSBC. Please go ahead.

Katie Murray

Hi Robin.

Robin Down

Good morning. Slightly tricky one this but given you said that you were comfortable with consensus on the revenue side. I would if I could invite you to comment on the cost side as well. I'm just conscious, I think it's huge cost but you kind of give us sort of guidance now looks for this consensus. But in head I think you have been talking about the discussion in conducting elevated 2019 but that doesn't seem to be reflecting the consensus. But then going the other way, the other expenses line doesn't seem to drop away exactly as perhaps previously you have been guided. So I was wondering if you guys coming on the cost side as well of consensus.

Ross McEwan

Yeah, look and - Robin, thank you very much for a different question away from NIM, so that's good. Look I am staying very much with our 2020 guidance around the sub 50% cost of income ratio, which you know we did say at start of this year that we would spend more money this year on a number of innovative type activities inside the business and there would be less cost takeout this year, if saying we'll take another 50 at the quarter. Next year, we will stepping up the cost takeout again in the business into 2020 to position as well for that 50% cost to income ratio. We have been doing a lot of work around end-to-end processing and restructured many parts of the business there and what we call, we're all of the front to back activity is put into one area, for example being there is the hunt buying journey, the other one is around every day banking which is you covered the accounts and deposit accounts and savings accounts and the other one this area is round unsecured lending or short term lending. And this year is putting all of the people associated with those parts of the business in one area front and back including operation. So next year we do so expect to see and we planned to see little bit of cost takeout and pretty use of digital activity that we've been spending on across the bank. But you know in this industry, there needs to be relentless focus on your cost structure and that is, it's going to be a digital journey and that's what we have been spending money on and the results will start showing again in 2019 and through into 2020. So you know cost is a big focus for us. I think well has been this year but we have been spending in also in other things as well.

Katie Murray

And I think we'll see, we do kind of reconfirm what you mentioned around the litigation piece. You know we've got a long but frankly shrinking number of pages in our accounts. We continue to kind of pick them off. We expect some of that to continue into 2019 as well.

Ross McEwan

There will be some activities that will try and clean up again next year. We still got a few places there.

Katie Murray

Continuation of the journey, yes.

Robin Down

Okay, thank you.

Ross McEwan

Thanks Robin.

Operator

Thank you.

Ross McEwan

I think that's the last call. Can I just thank everyone for joining us. I was pleased with the caller's performance given the current economic outlook and the competition that we are seeing and we've discussed on this call. We're also aware that there is you know a lot more for us to do and we're full excited on improving this business particularly around that customer service delivery. And as we've discussed in the last call, just around the cost takeout in this business, we haven't taken our eye off that at all. But the business is a pretty good shape, we've got great capital levels, which we do want to distribute back. We'd be excited again and again and we'll find ways of getting it to you and we will continue to make this a very good bank. Thanks for joining us on the call and thanks to join us for running it for us.

Operator

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