Royal Bank of Scotland Group PLC (RBS) CEO Alison Rose on Q1 2020 Results - Earnings Call Transcript

Royal Bank of Scotland Group PLC (RBS) Q1 2020 Earnings Conference Call May 1, 2020 4:00 AM ET

Company Participants

Alison Rose - Chief Executive Officer

Katie Murray - Chief Financial Officer

Conference Call Participants

Martin Leitgeb - Goldman Sachs

Andrew Coombs - Citi

Ben Toms - RBC

Jonathan Pierce - Numis

Edward Firth - KBW

Chris Cant - Autonomous

Fahed Kunwar - Redburn

Aman Rakkar - Barclays

Robin Down - HSBC

Jenny Cook - Exane

Operator

Good morning, ladies and gentlemen. We will now play a pre-recorded video of the results announcement. This will be followed by a live Q&A with Alison Rose and Katie Murray.

Alison Rose

Good morning and thank you for joining Katie and me on the call today. We’re here to cover Q1 results, but clearly, we need to address the context we’re into. Every person, family and business has been affected by the current situation, and normal business activity has been severely affected. And everyone including governments, central banks, regulators and businesses had been responding at pace. I would address how the Group has been responding and focus on the important things for NatWest Group, our customers and employees.

On Slide 3, before I cover our response to Covid-19, I will briefly touch on our headline Q1 results which Katie will expand upon. Despite a strong start, our Q1 financial results is impacted by net impairment charge of GBP 802 million, as a result of our response to the economic uncertainty. This compares to GBP 86 million in the same quarter last year. It included a GBP 628 million management overlay, as we build provisions under IFRS 9 against the uncertain economic outlook, which has substantially worsened.

The detail here is important, and Katie will take time to walk you through the assumptions behind this in the moment. Our overall approach here is to provide thoughtfully in the face of uncertainty. Taking that charge into account, our operating profits were GBP 519 million, and an attributable profit was GBP 288 million. It is key here that we come into this crisis with strong fundamentals in terms of liquidity, funding and capital. And on capital, our CET1 ratio of 16.6% increased, in part from the cancellation of our full year dividend following consultation with the PRA.

Turning to Slide 4, my key messages for you today are the following. Firstly, we’re putting our purpose into action as we respond to the pandemic. Secondly, we retain a balanced and consistent approach to risk, and are focused on careful and disciplined deployments of our balance sheet. Thirdly, we come at this from a position of absolute and relative strength, with strong liquidity, diversified funding and sector leading capital strength. And lastly, as we address the immediate challenges, we are maintaining focus on our key strategic priorities. This is both my agenda today and my agenda for running the bank in the crisis.

On Slide 5, as you know, our purpose is to championing potential, helping people, families and businesses to thrive. The work that we did on this last year gives us a solid basis for everything that we’re doing now. Putting purpose into action has meant reacting quickly to Covid-19. I’m going to cover what we’re doing operationally, what we are doing for our customers and then and the financial implications.

In terms of supporting our customers and colleagues, we have reacted quickly and made significant operational adjustments. We now have over 60,000 people working from home, around three times previous levels and nearly 70% of our telephony staff can operate from home. And here I would just like to tribute to my colleagues for their amazing commitment and resilience.

We’ve also guaranteed full pay for six months for any colleagues who cannot work due to coronavirus, as well as providing a range of additional well-being measures. We’ve kept over 90% of the branch network open for those who needed and we have also redeployed and retrained staff to address operational hotspots rapidly. At the same time, we’ve seen new mobile banking customers are up by 20% and new online banking customers are up by 30%.

For people and families, we’ve also set up dedicated phone lines for vulnerable customers and for key workers, proactively calling nearly 250,000 vulnerable customers to offer support. We’ve also extended over 190,000 mortgage repayment holidays and nearly 16,000 in short-term interest free overdrafts. And we’ve matched customer donations to the National Emergencies Trust, raising GBP 3 million pounds for the cause, as well as funding charities in the community supporting our customers, such as Tonic Health, a community hub in the East Midlands and Don’t Lose Hope, a mental health support charity.

To help businesses, we’ve added GBP 5 billion to our growth funding package to support SMEs with almost GBP 4 billion of that approved and accessible to customers. We’ve received requests for over 42,000 capital repayment holidays to help businesses manage their cash flow whilst waiving fees on overdrafts up to GBP 5,000 pounds. And we’ve worked alongside the Princess Trust to create a GBP 5 million fund to help young entrepreneurs struggling in the crisis. It’s taken a massive effort across the bank, and I would like to reiterate my thanks to my colleagues for their commitment to supporting customers at this very challenging time.

On the next Slide, as well as the proactive measures outlined, we’ve also playing a full part in the recently introduced government schemes. For our SME business customers using the COVID Business Interruption Loan Schemes, where we offer loans starting from GBP 5,000, the lowest of our UK peers. As of last Thursday, we had approved GBP 1.4 billion of lending which is around 40% of the market.

And at the end of the last week, we launched the CBILS scheme for larger businesses. This is a new scheme and we’ve already received GBP 29 million worth of requests in the first few days. To be clear, we use these schemes to support our existing customers, with no change to our approach to risk and consistent diligence and underwriting standards. And we’re comfortable with the volumes that we’re writing.

At the same time, we helped our bigger clients raise GBP 3.1 billion with a strong pipeline and demand [technical difficulty] in the Covid corporate finance facility, making us almost a third of the market. Demand for these schemes has been very strong across all sectors. And looking ahead, we will use all facilities to support our clients, including the just announced small business CBILS scheme, helping our customers get the funds they need as quickly as possible, but with no change to our risk processes we start.

On Slide 7, translating this into the balance sheet, on lending prior to the crisis taking hold, January and February were very strong months for us. And our strategic focus on growing lending in UK retail and commercial with a particularly strong performance on mortgages in this period. At the Q1 as a whole for retail and commercial, we saw net lending increase by GBP 13.1 billion or 4%. With GBP 4.8 billion to the personal bank, primarily mortgage growth and GBP 8 billion in commercial.

The commercial lending growth was driven by drawings on revolving credit facilities by our clients, particularly from large corporates and institutions in the face of disruption at the end of the quarter. Part of this growth and need for liquidity translated into deposit growth in the quarter, up by GBP 15.6 billion or 4.2%, with GBP 8.9 billion in commercial.

In April, we’ve seen commercial lending continuing to grow, underpinned largely by the government schemes. The slide shows gross new the lending to the 23rd of April, where the CBIL approved lending I’ve touched on accounted for GBP 1.4 billion and commercial overall was GBP 2 billion. Also, revolving credit facility utilization stabilized at around 40% of committed facilities, gross new lending in this period has been GBP 1.3 billion, largely coming from remortgaging, as there have been very few house purchases in the UK.

On Slide 8, our prudent approach to risk is supported as well for many years now, and the cost of risk last year was 21 basis points. Coming into the crisis, our book is well diversified, of good quality and well balanced between retail and commercial lending. We’re comfortable with the level of risk on our books, including the new lending and the government schemes.

The features of our retail book that gives me that comfort, of that, an 8% of our book is unsecured and in our UK mortgage portfolio, our average loan to value was 57%. Of course, it isn’t average mortgages that lose money. However, at the higher risk levels, only 13% of the book had LTVs above 80% and we had no particular geographical concentration.

In commercial lending, our book is diverse with a good spread across sectors. To give you a sense of that, and where we stand in our corporate loan book, and applying accounting standards to our expected credit losses. As at the end of March, only GBP 1.2 billion or 1.5% of the book is stage 2 or 3. Of course, we will suffer losses on our books as the crisis plays out. And as Katie will explain further, we do think that it’s too early to estimate the shape and scale of the economic impacts of Covid-19.

With no consensus amongst forecasters on the impact of lockdown or the effectiveness of the government response. As you should expect, what we have done at this stage is make a considered judgment on our books through the impairment line. And we will do so again through Q2 and beyond.

Turning to Slide 9, and whilst we do not know the future, we do know that our risk terms and capital base means that we come into the crisis from a position of absolute and relative strength. One lens on this is the system-wide stress tests that have been applied since the financial crisis. Looking at the most recent Bank of England’s stress test on an absolute basis, we achieved a clear pass through the stress. We were well above our hurdle requirements and peak stress point, and no AT1 capital conversion was required.

And as we show on this Slide, a relative stress performance was strong, with five-year impairment losses around 1.8% lower than the peer average and our final stress CET1 ratio nearly 1.5% better. As I say, this is only one theoretical lens, but it points to progress made in recent years, I get some background to my view that we start from a position of strength.

And onto Slide 10, facing into the crisis, increases my confidence that the strategic steps I set out in February are the right ones for the bank. Starting with costs, where our track record is compelling. We have capped more than GBP 4 billion from our cost base in five years, including 4% in each of the last two years. And our target is to further 4% this year or GBP 250 million, and I reiterate that target today.

Of course, the facts have changed, so whilst we retain the same target, the makeup of the savings will be different to what was in our plan to most of it. And we have delayed some planned cost reduction measures. We have made our strategic cost guidance for 2020, down to the low end of our previous range of GBP 0.8 million to GBP 1 billion.

In line with this, and after careful consideration, we have decided to merge our personal digital account, Bo with our digital bank for SMEs, Mettle. As a result, we will be winding down Bo to customer-facing brand and technology used in Bo will be integrated as we develop Mettle. We retain the longer-term commitment to reshaping the bank to be fit for the future and driving sustainable success.

Turning to Slide 11, when I became CEO, I made refocusing NatWest Markets a priority. It is worth recalling why the business was not sustainable. It consumed too much capital and costs were too high. And it was far too removed from the needs of our core customer base. Here, our refocusing work is well underway. You will however see that RWAs are actually up in Q1. This was because of market volatility and increased counterparty risk, but the level of fluctuation was lower than we would have seen in past stresses. This year, we still expect to reduce RWAs to around GBP 32 billion, assuming no regulatory changes.

And we now expect disposal cost to be below GBP 400 million for 2020. In the medium-term, we’re still targeting a reduction in RWAs to around GBP 20 billion. More generally, whilst we’re willing kind of cost to execute our strategy, we’re targeting a lower cost base over the transition period as the business develops a leaner operating model.

Moving to the final slide and in closing, clearly, we all understand that the pandemic has obvious implications for our outlook. With downward pressure on the yield curve, and significant uncertainty for the economy, and for how or when it will begin to normalize. The outlook remains extremely uncertain. We will however, maintain a strong focus on risk and the management of our capital and liquidity. But we approach the crisis with confidence in our balance sheet strength and focus on our strategic priorities. I’m confident that these are the right ones and we’ll create a better future for the bank.

The importance of being purpose led has only increased in the crisis and I’m proud of how we have responded. The impetus to reduce cost is now greater and our target remains to an even further GBP 250 million from our cost base this year. And to keep up that downward pressure, we are carefully deploying our balance sheet, maintaining strong capital levels and a balanced and consistent approach to risk, whilst ensuring, most importantly, that we continue to support our customers. And in NatWest Markets, we have already begun refocusing the business as we target of having of RWAs is in the medium-term.

I look forward to taking your questions, surely, but first I’ll hand over to Katie.

Katie Murray

Thank you, Alison. Good morning, everyone. In the current market environment, safety and soundness is key. I will go through the details of our key balance sheet and liquidity metrics in more detail than usual. But first, I will give you a brief overview of our Q1 2020 income statement.

Slide 14. Our attributable profit for the period was GBP 288 million, significantly impacted by the multiple economic scenario overlay of GBP 628 million we have taken in the quarter. On income, total income was up GBP 125 million on Q1 last year. Income across the retail and commercial businesses decreased by 6.5% versus Q1 2019. This reflected loan growth across retail and commercial businesses of GBP 13 billion. And of course, the ongoing margin pressure we’re familiar with.

NatWest Markets’ core income of GBP 412 million was GBP 35 million or 9% higher than Q1 2019, as the impact of the credit market write-downs was more than offset by increased customer activity as the market reacted to the spread of the Covid-19 virus. In terms of other income items, the OCA gain of GBP 155 million was driven by the significant widening of credit spreads across the markets.

On costs, our cost reduction of GBP 26 million was achieved in the quarter, excluding operating lease depreciation. Strategic costs in Q1 were GBP 131 million, and included amongst other charges, GBP 39 million relating to technology spend and GBP 34 million in NatWest Markets in respect of restructuring activity.

We have also benefited from GBP 100 million of PPI release, where we have continued to make good progress in dealing with claims and remain on track to complete the compliant process by the end of Q2, ensuring our customers get the refunds they’re entitled to.

Looking at impairments, our Q1 charge of GBP 802 million represents 90 basis points of gross customer loans. I’m going to talk to this in more detail in a moment. All of this combined together, produce an attributable profit of GBP 288 million an RoTE of 3.6%.

Slide 15, moving on to NIM. Q1 2020 bank NIM of 1.89% was down 4 basis points compared with Q4 2019. In personal, we continue to see structural pressures in mortgages as blended front book margins of 110 basis points, which includes the [structures] [ph] remain below the bank book of 140 basis points.

In the past, we’ve talked about the new to bank business having a margin within an 80 basis point to 100 basis point corridor. In Q1, as in the last few quarters, we remain to the top of that range. And in reality, I would today think of this range is 90 basis points to 110 basis points. In the latter part of March, the blended front book application margins were around 125 basis points.

Commercial NIM decreased 11 basis points compared with Q4 2019. If you remember, at Q4, we called out the 4 basis point positive one-offs as a result of review of customer repayment behavior change. So of the underlying 7 basis points quarter-on-quarter decline. The main drivers were lower deposit income and higher liquidity portfolio costs.

Clearly there are potential headwinds of NIM coming due to the BoE rate cuts and lower – excuse me, lower swap curves, and the fact that our deposit margins are already low, which of course reduces the ability of us to pass through the recent reductions. Other factors to consider when thinking about the future NIM trajectory, includes the volume of TFS funding and the volume of lower margin CBILS that we’re currently writing.

Slide 16, as you are well aware, we find ourselves in an unprecedented shutdown in the global economy. There’s a lot of uncertainty both around the scale and duration of the impact of Covid-19 on the economy, including when and how lockdown eases, and also on the nature, shape, timing and endurance of the eventual recovery.

There is naturally a huge market commentary currently on what Covid-19 will mean from an economic impact perspective. And with many wildly differing views, which we have seen deteriorating during April. It actually means it’s very difficult and likely too early to provide a medium-term view of what the impact is on our KPIs at this time.

What I want to focus on, is how we have approached this uncertainty in terms of our Q1 impairment charge. Slide 17, Q1 2020 impairment charge of GBP 802 million pounds, included GBP 628 million related to the multiple economic scenario overlay. This builds our stock of ECL from GBP 3.7 billion to GBP 4.2 billion. By the end of March, we were only beginning to see the initial signs of credit deterioration.

In retail, our Q1 trends were stable, but heading into April, we’re beginning to know some of the years build up in our unsecured portfolios. In commercial, we had no new [indiscernible] cases in Q1. We’re beginning to see signs of stress in certain sectors and while there is a broad read across the sectors that typically for long and traditional recession, the effect was more acute in a number of these sectors.

I’m going to spend some time explaining how we approach the multiple economic scenario overlay or MES as we refer to it. The MES approach is designed to capture the historic variability and distributions of economic risks. The approach to capturing any incremental or skewed forward looking risks is to apply an overlay to the ECL. After reviewing relevant readily available sources of information, we concluded that leveraging established internal stress testing analysis was the most reliable and supportable source of information on which to base is overlay alongside significant management judgment.

The stress analysis included, unemployment rising to 7.6% and start-to-trough GDP of 4.3% and the UK HPI of 19.7%. Our considerations on top of this scenario included, firstly government support actions, the potential recovery trajectory, and the differential impacts on portfolio and sector classes, including the application of IFRS 9 in the context of Covid-19.

The overlay at Q4 2019 of a GBP 170 million was primarily predicated on Brexit related economic uncertainty. However, uncertainty related to Covid-19 as those significantly eclipse this, we decided that the value of the economic uncertainty overlay should be increased to GBP 798 million. This broadly equates to an increase in stage 2 exposures of 32% and 65% in the personal and wholesale businesses prospectively.

Over the course of the year, we anticipate observable credit deterioration of a portion of assets resulting in a systemic uplift in our ACL requirements, mitigated by the economic uncertainty overlay. As we see how the economy emerges from this stage of pandemic, and we start to understand the real impacts on the economy after the impacts of the government interventions which are slowing the immediate effect on the economy.

Slide 17, I’ll now spend some time focusing on the impact of the various customer support measures and the IFRS 9 implications. Starting with retail payment holidays, customers do not automatically trigger a significant increase in credit risk when a payment holiday is granted. And there is no automatic move to stage 2. Accrual of arrears is being suspended during the payment holiday periods and accounts will not progress to stage 3. However, interest is still charged. A similar approach is taken on unsecured payment holidays.

Turning to commercial, customers seeking Covid-19 related support including payment holidays, who were not subject to any wider SICR triggers, and who are assessed as having the ability in the medium-term post crisis to be viable and meet credit appetite metrics, are not considered forborne.

On CBILS, the granting of a CBIL does not represent a significant increase in credit risk criteria and therefore loans are not automatically moved into stage 2 and stage 3. CBIL loans are only made to companies who are considered viable prior to Covid-19. The government guarantee of up to 80% per loan reduces the loss expectations on CBILS impairments and RWAs are reduced pro rata with the guarantee i.e. the LGD is effectively reduced by 80%.

The treatment for CLBILS, which is targeted at larger companies is aligned to this treatment. On Monday, the government announced Bounce Back loans. This is a new scheme focused at micro businesses, seeking a loan of up to GBP 50,000 pounds or less. Unlike CLBILS or CBILS, this will be 100% guaranteed by the government. Again, the use of this scheme will not change credit risk criteria and the 100% guarantee will reduce loss expectations and credit RWAs on this lending to zero.

And finally, on the COVID corporate financing facility. There is no discrete or distinct IFRS 9 treatment required, as these facilities are provided by the Bank of England and we are a facilitator of the issuance of these facilities to the Bank of England. These are not on our balance sheet, and we are not bearing any credit risk of these loans as a result.

Slide 20, RWAs increased by GBP 6 billion over Q1, primarily driven by credit RWA increases of GBP 5.4 billion. Looking at credit RWAs increased income and drawdowns accounted for the majority of the increase. This was largely driven by commercial banking.

In NatWest Markets, RWAs increased by GBP 1 billion in Q1 as the impact of market volatility, increased counterparty and market risk that was partially offset by the PRA’s temporary approach to the Value at Risk back-testing exceptions.

We anticipate further PD migration in Q2, and six regulatory measures are through the cycle, this effect will be more muted than we see on the ECL. Most of the regulatory interventions and release we’re seeing we’ll go directly to capital and will not affect the RWA calculations.

Slide 21, turning to the balance sheet. The starting point capital ratios reflect a track record of strong underlying capital generation, active de-risking and RWA management and conservative approach to capital distributions.

Our CET1 ratio at Q1 was 16.6% and although the outlook is uncertain, we operate with significant CET1 headroom of 760 basis points or GBP 14 billion above our MDA of 9%. We welcome the Bank of England’s recent reduction in the countercyclical buffer, which together with the removal of the G-SIB buffer from 1, January 2020, and the action taken on our 2020 dividends has increased our CET1 headroom over MDA.

The total capital ratio was 21.4% and the total loss absorbing capital is 34.1%, well above the BoE’s 2020 interim minimum requirements, and reflects our progress on MREL issuance. Our UK leverage ratio was 5.8% at Q1, leaving us with 255 basis points of headroom above the UK’s minimum requirements.

Slide 22, on liquidity and funding, we have a high quality liquid asset pool and a stable and diverse funding base. Our total liquidity portfolio is GBP 201 billion, of which, GBP 134 billion is primary liquidity comprising a mix of cash and central bank balances and high quality government issued securities.

As we have talked about previously, we have been prudent in our approach to liquidity, consistently managing buffers in excess of regulatory requirements and our LCR for Q1 is 152%. We will continue to assess all options available to us to maintain significant headroom above our regulatory requirements.

Our funding base continues to reflect a diverse mix of retail and commercial deposits, with lower reliance on wholesale debt. With an LDR of 91%, we have significant headroom to deploy to support additional lending. And we have seen customer deposit growth of GBP 15.6 billion during the quarter, particularly in March.

Slide 23, I thought it would be helpful just to put all of our 2020 financial targets and the outlook onto one page. We continue to expect that regulatory changes will adversely impact income in our personal business by around GBP 200 million as we discussed at the year end, in relation to the overdraft fees and high cost of credit reviews.

On costs, as Alison already highlighted, we remain committed to our GBP 250 million cost target reduction. On strategic costs, we now expect this to be at the lower end of our previous guidance of GBP 8 million to GBP 1 billion for the year. On impairments, our Q1 2020 impairment loss rate was 90 basis points of customer loans.

We expect that for the full year 2020 loss rate will be meaningfully higher than our guidance or below 30 basis points to 40 basis points. The impacts of Covid-19 and the mitigating benefits of government schemes are uncertain and challenging to forecast accurately. At this time, it would be inappropriate to provide full year loss rate guidance. On lending, we expect to achieve lending growth of greater than 3% across our retail and commercial businesses, given the significant increase in lending during 2020 to-date.

And finally on capital, given the unprecedented levels of uncertainty as we discussed earlier, and even taking into account the lack of mortgage floors, we’re very likely to exceed the GBP 185 billion to GBP 190 billion range for RWAs that we previously guided you to. Given the uncertainties which we are well understood by you all, we are not planning on providing an update on medium-term outlook at this time, as we continue to monitor the evolving situation.

And with that, let me hand back over to Alison for our live Q&A.

Operator

Thank you. We will now hand over live to Alison Rose and Katie Murray for Q&A. Alison, over to you.

Alison Rose

Thank you very much. Thank you everyone and Katie and I are delighted to take any of your questions. Thank you.

Question-and-Answer Session

Operator

Thank you, Alison. [Operator Instructions] And your first question comes from the line of Martin Leitgeb from Goldman Sachs.

Alison Rose

Good morning, Martin.

Martin Leitgeb

Yes, good morning. The first question I have is, just in terms of yearly guidance from here and just bear in mind, two of your peers guided for significant net interest margin declines in the UK, and particularly starting in the second quarter this year. And I was just wondering if you could give us a similar hearing in terms of how meaningful an impact to expect here?

And then the second question is more broader just on payment holidays and the latest industry statistics show that that 15%, 16%, 17% of mortgages in the UK are currently on a payment holiday. And I was just wondering if you could shed a bit of light how you see this playing in holidays, both for mortgages and for unsecured debt. What are the expectations in terms of some of this payment holidays converting into some form of payment issuance, to what extent were those payment holidays we’ll just see here that made a rebalance some of the debt mix out there? Thank you.

Alison Rose

Well, let me touch on the payment holidays and then I’ll hand over to Katie on NIM. On the payment holidays on our mortgage book, we have around – 190,000 mortgage repayment holidays that we have agreed that’s about 18% by value of our book. At this point, it’s too early to call what the issues are and what that will move into and lot of cases what we’ve seen from customer behavior is, they’re asking for holidays from a prudent perspective rather than from a stress perspective.

But obviously, we’re spending a lot of time talking to our customers about that, but that is broadly the behavior we’re seeing. And in terms of our deposits, you can see consumers and businesses are conserving cash and we’ve seen an increase in our deposits there. So I think it’s very early to call what that is. With that, I’ll hand over to Katie on NIM. Katie?

Katie Murray

Yeah, and thanks very much, Alison. So, if we look at bank NIMs obviously, Q1 to Q4 down 4 basis points. And then when you start to separate that into commercial and personal that was about 7 basis points and 8 basis points. But when you look our NIM guidance, as you know, we’re not big fans of giving NIM guidance, but we have given you enough for you to be able to work it through. I think the way that I think about it, Martin, and I know you’re very familiar with the disclosure we give you on how our structured heads and we deal with our managed margins.

So we’ve had a 65 basis point cut, we’d always talked about there being a 25 basis point cut and at some point, during this year. If you look at that managed margin, you know, for a 25 basis point cut, that’s about GBP 160 million in payroll disclosures. So I would say, if you just brought that up and for the fact that a 65 basis point, you’ll get broadly the right answer, you know, and that will give you, you know, GBP 400 million over the impact on NII within a year.

We’ve talked a lot and previously that every GBP 10 million impact on NII would equal 1 basis point in any quarter. So you take your GBP 400 million a quarter, and then you can kind of apply that math, that would probably be my first base point. So you’ll see a natural deterioration because of the rate change. And I think you’ve probably already got that in your model already.

The next thing is to think about what’s our kind of normal, just the pressure on the mortgage group that we’ve seen coming through, and again, you know, I think it probably give you enough guidance as to kind of get there. So I wouldn’t expect it to be an unexpected fall, but it will certainly be a slightly bigger fall than we’ve seen in this quarter really, because of that rate cuts.

Alison Rose

Thank you.

Martin Leitgeb

Perfect. And just a follow-up on the payment holidays. It says that the trends in how you approach them in terms of mortgages and unsecured. So you’re more worried about payment holidays and the unsecured side that goes to mortgages and if mortgages mainly credit?

Katie Murray

The difference is probably one that’s moved from the consumer side, so we continue to charge interest. Clearly if you’re a mortgage individual and you’ve got, you know 18 months left to run on your fixed rate period and potentially 20 years life, that interest will be spread over that time. So what you’ll see is your monthly payment will increase very slightly. And but if you’re naturally if you’re a credit card holder we’ll continue to charge interest and when you start to pay down that balance is immediately there and sort of things that that’s the kind of difference.

From our perspective, it doesn’t have – I don’t predict a difference. And I think that’s why you’re seeing the view difference in terms of the number of people who are taking mortgage holidays, because actually it feels much more manageable on managing your personal cash flow versus so much lower levels in terms of the credit card space.

Alison Rose

And Martin, I’ll just remind you the mix of our book which is 92% secured and only 8% of that is unsecured.

Martin Leitgeb

Perfect, thank you. Thank you very much.

Alison Rose

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Coombs from Citi. Please go ahead, your line is now open.

Katie Murray

Hi, Andrew.

Andrew Coombs

Good morning. Two questions, please. That firstly just on the way that overlay is applied on the existing ECL. Can you just explain what’s the difference between applying the overlay with the economic assumptions you have, that is simplistically changing your IFRS 9 base case scenario to have those economic assumptions and put a 100% rating on it? If you could just explain the technicality between those two different approaches?

And then my second question would just be on the prior core tier 1 target of 14% in 2021. Does that remain the target? I know that the mortgage floor has been slightly just bend but and you’re still aiming for a 14% core tier 1 ratio at the end of ’21?

Alison Rose

Okay, thank you. Katie, do you want to walk through the –

Katie Murray

The first piece, you know absolutely. So just in terms of your – your first question in terms of the economic assumption piece. So when we compare that to what we had previously and that there’s a nice table in page 14 of the IMS, we had our economic assumption that was mainly based on what the likely impact of Brexit would be and what we were seeing in the economics there. I mean, interestingly, if we go back to year end, I think, you know, some of us we were under pressure as to why you know even release that yet as things were looking more positive.

So what we then did at the end of this quarter is to kind of say, have a look at the economics, apply all the different end parameters as I told that in my narrative, to kind of come up with this number of GBP 798 million which I’d realize is so furious accuracy in terms of the impact on that. And basically both of those amounts come together. So what we did that in terms of the amount that we took through the accounts this quarter of the GBP 628 million, it was really just to talk about the whole MES overlay.

Look, in terms of the difference and why don’t you put into the base models, the reality is, because the base models rely and are fed by the experience that you’re seeing in your book. What you do with the MES overlay is to say that you understand and you accept that the models cannot possibly at the end of March we’ll be seeing the experience that we’re seeing. We weren’t actually experiencing any particular signs of stress and we certainly didn’t have a view at that point of where we’ll be sitting there today.

So you use your models based on the data and experiences coming out of your business. And then what you do is, with your overlays to say, well actually, I understand what that’s doing, the reality is, that probably doesn’t affect and we do believe things are developing and so we have this additional model, and that we that we use on top, you know, and I talked in my narrative that the reality is, you know, this model is obviously complicated, because it’s a situation that isn’t a simple economic situation as you would normally have seen in the past. I hope that that’s helpful. Alison?

Alison Rose

Yeah. Thank you. And look in terms of looking at our capital, what I would bring you back to clearly, we’re starting from a very strong position at CET1 of 16.6% we’ve given you an indication of our view on impairment. But given the economic uncertainty and outlook in the variables there I think we are comfortable with our capital position, you would expect it to perform, but and I think we remain entirely comfortable with the robustness of that and our ability to manage through that period and not uncomfortable with where we’re starting from.

I think we’ve also said, it would be inappropriate at this time to give you an update on medium-term outlook at this stage that we have obviously, not paid dividends this year and we’ve given you the – [indiscernible] pre-Covid performance in terms of our corporate position.

Andrew Coombs

If I could just come back on the point on IFRS 9, obviously your closest peers have changed their economic assumptions under their IFRS 9 models, regardless of the experience that they’re currently seeing. So I’m just trying to get a feel for in the overlay approach versus changing your economic assumptions, I’d assume that those are just reflecting a change in what is essentially LGD, because in either cases or you’re assuming stage migration. So are there essentially equivalent in approaching LGD?

Katie Murray

And I think – we get to a point of equivalents of results certainly, so I think we are quite affluent. I think what’s important there, Andrew is, we haven’t changed the LGD. What we’ve done is changed the PDs, but the underlying models will have been updated as well. Remember that overlay is trying to do a forward loop on things that you don’t and completely understand as to how they’re going to play out in the economic that commence there. But in terms of all the standard updates that you would see and some of the underlying models.

But it is really important to stress in our underlying models we weren’t seeing signs of stress. We had no single names in the quarter, which I think is really important. And you know, there are some quarters that will happen to you in the next quarter, you might – even I get two or three and we saw that certainly in – Q4 2019, where we had a few single names. I think that that’s also an important part of those core models as they build.

But basically what –

Andrew Coombs

Then define around this one, then I will drop. You’re saying it’s PD changes rather than an LGD changes. So even though you talk about a 19.7% house price index decline, that’s not fitting through into your LGD assumptions when you’re putting a provisioning on your secured portfolio.

Katie Murray

Not at this stage, and the way that you can see clearly that that’s clearly not is that, as you look at the – on that page 14, where we show you the allocation by segments, where in terms of mortgages, we’re only holding at it at 28. You know, and bear in mind, our average loan to value is 57% at this stage. So well that’s important. I think it’s probably more important for the future business that you write on your book. We have no at this stage change the LGDs. I think we start to see that coming through in [technical difficulty].

Andrew Coombs

Okay, thank you.

Katie Murray

Andrew.

Alison Rose

Thank you.

Operator

Thank you. Our next question comes from the line of Ben Toms of RBC. Please go ahead. Your line is now open.

Katie Murray

Good morning, Ben

Ben Toms

Hi, good morning. [indiscernible]. In relations to the new loans announced government scheme for micro businesses and I think acronym is CSBILS I’m confused with the acronyms. That you start next week do you expect to set your own pricing for these loans? Would you expect the government to announce the cap over the week? And if there was a cap, do you choose not to lend that money if the price is the wrong level for you? Thank you.

Alison Rose

Thank you. So the scheme that is being announced next week is called the Bounce Back Loan. So that is for loans under GBP 50,000. You then have the CBILS loan and then the large CBILS loan. So that is Bounce Back Loans which is for the small loans. We are currently working on the details of that with the government in terms of the terms and conditions. And that is not yet finalized. So I do expect at this time not really able to comment on that at this stage.

Ben Toms

Thank you.

Alison Rose

Thanks, Ben. Thank you. We now have a question, I believe on the webcast.

Operator

Our first two questions come from Raul Sinha of JPMorgan.

Raul Sinha

Question one. Could you please discuss the outlook and drivers of NII and NIM post the BoE rate cuts and the UK lockdown, especially into Q2? And question two. Could you also provide some additional thoughts on how sensitive your MES overlay as to changes in UK GDP in ‘20 and 21 – 2021?

Alison Rose

Thank you. So just looking at question two, and I think it’s not a sensible approach to think about one specific economic metric as we look at that GDP knocks on into corporate activity and then into unemployment and into consumer spending and so on. So having said that GDP is clearly the key driver. What you would expect, as we have approached this is, we are making a judgment call as we see things today and we’re positioning the bank to manage for all of the outcomes will be it, there are huge uncertainties and no consensus on these things at the moment.

Katie, is there anything further on NII and NIM post the BoE rate cuts that we haven’t covered.

Katie Murray

No I mean that I think on NIM, I think I probably answered that already with Martin’s questions. There’s really nothing further I would add on that. you know and that obviously just kind of leads through naturally from the NII. So we’ve seen the comment around the base rate cuts, you know, we’re likely in terms of any TFS, it’d be a little bit dilutive as well, but no, nothing really further to add I guess what we’ve – you know, we talked about already.

Alison Rose

Thank you. Back to audio. Now, join, please.

Operator

Thank you. Your next question comes from the line of Jonathan Pierce from Numis. Please go ahead. Your line is now open.

Alison Rose

Good morning, Jonathan.

Katie Murray

Good morning, Jonathan.

Jonathan Pierce

Hello, both. I got two questions. I’m sorry to come back on the margin again, but it’s been kind of awesome focus through the course of this week elsewhere that I just want to make sure I’m entirely clear what the guidance here that you’re giving is. Lloyds was talking about a 30 basis points to 40 basis points drop in the margin in the second quarter, Barclays similar to all in the magnitude top end of that. Sounds from everything you’re saying that even once been cleared some of the costs of the customers support program the issue of mix shift CBILS so on and so forth. But you think you’re going to be somewhat less than that? Can I just confirm that that’s what you are telling us this morning?

Katie Murray

Yes, that’s what I’m telling. I mean would really, I mean here is the guidance that we’ve given you so consistently on the structural heads to kind of work out the margin, that will give you the bulk of the drop. And then what we know in any one quarter is that, you know, we see us I mean it’s 6% this quarter, it was a little bit less last quarter in terms of the move, and then that will kind of be your sort of balancing figure.

I think the thing about CBILS, although they are important, they’re still you know, given the size of our Group, they’re still a very small portion of the Group. So they will have a natural dilutive impact. I would go with the guidance that we’ve given you, and we’ll – you’ll get there I think in the run. So we’re not expecting the larger impacts others have spoken about.

Jonathan Pierce

Okay, all right. That’s helpful. Thank you. The second question and again, sorry to come back on this point on the overlay. I understand that this is all horribly complex and deeply uncertain at the moment. But if I, again look at what you have done in the quarter versus what we’ve seen at Barclays and Lloyds, you’re stage 1, 2 ECL has been built by almost 60%. Those are two banks increased the stage 1, 2 provisions by about 35%. And I guess there was a bit of true up needed from you, because your economic scenarios at December particularly the downside scenarios were not particularly harsh. When you looked at where you are now, do you think that you have now largely trued up to an equivalent level of the other banks and hence overlays moving forwards will not necessarily be disproportionately sized versus what we’ll see elsewhere?

Katie Murray

Yeah, so look. Let me kind of run through the impairments so again and see if I can help you. So, what we did was, in total we charged GBP 802 million or 90 basis points of loans of advances. So, obviously, well in excess through the cycle and charge of 30 basis points to 40 basis points. Most of this was the GBP 628 million overlay.

So as I said in my speech that was based on our internal stress scenario, and because we didn’t actually feel that we had the data, and we were not seen the data yet, coming through our books. So the overlay that on assumptions on government support dilutive recovery, individual kind of sectoral stresses, and then that got us to a result in charge which equates to an increase in stage 2 exposure sort of 32% and 65% in personal and wholesale, and increased the provision stock to GBP 4.2 billion at the end of March, of which, GBP 798 million of that GBP 4.2 billion is in relation to the MES.

There is therefore a significant uncertainty and judgment involved in our Q1 charge. There is much more uncertainty in thinking about how that will play out in 2020. This you know, we know about the wide range of views around medical issues and lockdown and economic impact on that and the shape, timing and scale and the duration of the recovery.

What we’ve not done today is to forecast the 2020 impairment charge and how it might come through I think the difficulty in forecasting is reflected not only in all of your own forecasts that we’ve you know, in terms of the consensus we’ve published, we’ve got ranges of GBP 1 billion to GBP 4.6 billion. So there’s no real consensus coming through in that, and I think we’ve seen similar ranges coming out from some of our peer group as well.

But given the analysts need to focus and we need to forecast, I guess, what can you do? I would say an absence of guidance from us and the significant caveats of uncertainties that we’ve just gone through, I would say a rational approach would be to extend something like our Q1 charge of 90 basis points through the rest of the year.

And let me now just, I don’t know if I can tell you but the uncertainties again, I’m happy to do so, that what we know definitely is that will not be an evenly spread 90 basis points, will not be the answer you know and I would say I don’t kind of offer this as a forecast but just as a rationale way to kind of approach the problem as we go through with the MES.

Jonathan Pierce

Okay. That’s answer really helpful. So again accepting the uncertainty, what you’re essentially saying is, it’s good to get to any at the moment, if I take Q1 and multiply by 4 get to the little bit of above right consensus is at the moment, but that’s a good shot in the dark is any at the moment?

Katie Murray

No, I would – we’d go with that and you know, that mix of us compared to others is also something that’s important. You know and then –

Jonathan Pierce

Right. thank you very much.

Katie Murray

Jonathan, if I can just make sure that, because we’re clear that we’re in terms of the kind of the NIM and where we are, I think we’re sort of saying is that we’re kind of happy enough with where consensus is sitting. And that, you know, that kind of 10 basis point kind of impact as a result of the GBP 400 million is how we should read it, and don’t read it as 40 basis points. I think I may have confused you with that answer really, if that's helpful.

Jonathan Pierce

Yeah, that’s really helpful. Thank you, Katie.

Katie Murray

Thanks a lot, Jonathan.

Operator

Thank you. Your next question comes in the line of Edward Firth of KBW. Please go ahead. Your line is now open.

Katie Murray

Good morning, Ed.

Edward Firth

Yeah, good morning, everybody. I think you’ve actually answered all my questions. Just a very small one. I mean you said the runoff costs will be less than GBP 400 million. I guess that’s a huge range. Can you help us a little bit more than just less than GBP 400 million?

Katie Murray

Ed, I’d love to.

Edward Firth

And what will be the losses for example?

Katie Murray

What we had said at year end was you know GBP 400 million in terms of those disposal losses that will obviously go against the income line. You know, at the moment, what we’re saying is we’re working towards the GBP 32 billion at the end of the year, we’d expect those losses to be slightly less than – as we get them, we’ll will share them with you.

Edward Firth

Okay, but there will still be losses?

Alison Rose

No, that they will be less, Ed. One thing I’ll point out is, when we announced the NatWest Markets, refocusing strategy in February since then we have a dedicated team who are managing our RWAs and but we’ve obviously made some announcements around some changes in that business. We would expect to continue to reduce our RWAs without crystallizing the full amount of that GBP 400 billion. So there will be some losses, but they will be less.

Edward Firth

Okay, thanks so much.

Alison Rose

Thank you.

Operator

Thank you. Your next question comes from a line of Chris Cant from Autonomous. Please go ahead. Your line is now open.

Chris Cant

Good morning. Thank you for taking my questions, both.

Katie Murray

Good morning, Chris.

Alison Rose

Good morning, Chris.

Chris Cant

If I could just come back on the revenue on NIM piece again. And I appreciate you’ve covered this on a couple of questions. But I’m just cognizant that we’ve seen consensus revenues need to move pretty consistently lower for four or five quarters now. Can I just come back on the previous answer? Are you saying you’re happy with where consensus is sitting for revenues for the full year, because I’m not sure you give us a NIM number for consensus of about 10.7 obviously that includes some disposal losses, which you’re now saying are going to be less than the GBP 400 million? I’m just trying to understand what it is you’re telling us there?

Katie Murray

No, absolutely. Chris, let me give you a kind of a clean revenue answer rather than kind of mixing up with NIM as well. So look we know the consensus where it’s sitting at 10.7, you’re absolutely right. We gave you really very fulsome guidance at the year end, the GBP 200 million. So which I think is quite well reflected in that 10.7 and I think that 10.7 has probably also reflected well in some of our structural hedge kind of guidance. So that – I overdraft at high cost of credit, the GBP 200 million guidance, we’re still in and around that number.

We talked about the 25 basis point cuts, we got 65 basis points. You know, in that note, it gives you good views as to higher to kind of roll it forward, impact of lower margins and obviously from CBILS and CLBILS we’ll have a bit of an impact. You know, we do continue to accrue income for mortgages and other retail payment holidays. And although we do expect the disposal losses in line in NatWest Markets in the round, we kind of we know where consensus is sitting and we don’t feel the need to talk more about it.

Chris Cant

Okay, that’s helpful. Thank you. And if I could just follow-up on the questions around the IFRS 9 in the provisioning approach, just trying to understand you – scenario a little bit more, you’ve given us some slightly qualitative commentary relative to some of your peers where we’ve got some clearer tables outlining the scenarios. So did you just give us the GDP moves you’re assuming for 2020 and 2021 sequentially and the equivalent numbers for what you’re assuming for the unemployment rate in the UK in 2020 and 2021 just to help us cross compare between the banks I appreciate the approach is a little different. But I’m more interested in the scenarios that are underpinning the numbers? Thank you.

Katie Murray

And so Chris, at this stage we haven’t shared those later dates. I’m sorry, I’m going to disappoint you on the call this morning in terms of what our assumptions are. And I think the reality is and what has become increasingly clear to us, I think during April is just actually how difficult it is to give you those forward-looking dates. So I think we – our guidance is really has been quite focused on the 2020 here and we’ll see how those go overnight.

I would say that qualitative is as important as the quantitative in terms of how you actually get to a kind of number that you feel relatively comfortable with. And our view is very much, we’re so early in the crisis of how it unfolds. I think that we’ll a far more substantive conversation when we get to Q2. So, apologies I think that our guidance for ‘20s probably as far as we’ll go this morning.

Chris Cant

Okay, thank you.

Katie Murray

Thanks a lot, Chris.

Operator

Thank you. Our next question comes from the line of Fahed Kunwar from Redburn. Please go ahead. Your line is now open.

Katie Murray

Hi, Fahed.

Fahed Kunwar

Good morning. Good morning, Alison and good morning, Katie. And I have a couple of questions. Yeah and just one on the dividend. I know you’re of course getting medium-term outlook. When you have a 760 basis point buffer over your MDA, obviously dividend is cancelled in ’19 because of the PRA. But going forward, the buybacks have some changes, of course, but why would your ordinary dividend strategy change at all considering the size of the buffer unless you’re expecting you know extremely significant losses that that’s kind of capital buffer? Especially the CBILS are quite low risk weighted intensity? That was my first question.

My second question just on NWM revenue guidance. I know we talked about the rates income, I think harping from the kind of arbitrary reductions that you’re trying to see in that business. Is that still a relevant guidance or does that change or slow down based on the kind of changes you’re having to some of the disposal losses? Thanks.

Alison Rose

Thanks very much. On dividends clearly our strategy is to receive dividends at the appropriate points. We recognize it was disappointing for shareholders that we cancelled the dividend following discussions with the regulators which the banks went through, we would look to receive dividends at the appropriate moment, and we’ll review that at the end this year, and we see no need to change our dividend policy. And I remain committed to distributing back to investors and shareholders, I think that’s our position on that.

In terms of NatWest Markets, Katie?

Katie Murray

You know, I would say Alison that in terms of that response, because that guidance was obviously for as we get further through the process in terms of where we are now. I would say that the – what we’ve said to you that you would expect ultimately that the rates business route, and we’d be significantly lower and that this year was probably quite a step down year.

I do sort of note so on page 30 of the pack that the rates income for last year was 328 and we’ve done 276 in the first quarter. So I would say that they performed well with the volatility that was in the market, which is good, because it gives us a bit of a runway into the year as we continue to transition over that business. So our strategy is unchanged so I would continue that when we get to ultimately that guidance would still be valid, but obviously, we’re repeating the performance that they’ve had in the first quarter.

Fahed Kunwar

Okay. And can I just follow-up on one more question, sorry, it’s a slightly unfair question, but on the CBILS scheme as you’re a big partner to CBILS scheme and to the shape that the loans are getting out at the moment. Do you feel any kind of extra responsibility are there any kind of implicit pressure on your as a kind of state-owned bank to be the bigger part of that CBILS scheme? Is your log in market share are more because you have a larger market share in the UK corporates space? Thank you.

Alison Rose

Thank you. So it’s not an unfair question, very happy to take it. We are not under any undue pressure, nor do I feel any, I act in the best interest of all of my shareholders and we mad those decisions as an Executive and a Board as you would expect.

In terms of CBILS, we are participating in that scheme, supporting our customers, one of the things that we were very aware of when the crisis unfolded. It was the need to move very quickly. I reorganized the organization very fast and we operationalized that program very quickly. And that was why we were able to move so fast and getting GBP 1.4 billion of lending out under that scheme, that is to our existing customers within our existing risk appetite taking into account very disciplined viability analysis in the normal course of business.

So, as you can see as other banks operationalize more and step up, they will take more of a share of that program we are lending to our existing customers, but no unique pressure for us at all, nor do I feel any, and I will act in the best interest of all of my shareholders.

Fahed Kunwar

Thank you very much for the answer.

Katie Murray

Thanks, Fahed.

Alison Rose

Thank you.

Operator

Thank you. Your next question comes from the line of Aman Rakkar from Barclays. Please go ahead. Your line is now open.

Katie Murray

Good morning.

Aman Rakkar

Good morning, Katie. Good morning, Alison. Yeah, I just want to come back to the ECL comment you made earlier. I appreciate the uncertainty in predicting the ECL portfolio. And I do really appreciate you giving us that kind of guidance about the times in Q1 by 4. I guess just based on that view of the world that is obviously a big part of the Q1 charge was the macro overlay.

So I mean, you know for that 90 basis points show us the return in the remaining four quarters with three quarters, are we saying that there is a decent chance actually given the macro situation in flux and fast moving target that we potentially will see, you know, a mixture of additional macro overlays as your assumptions around the macro that you put into your models are kind of a bit become a bit more conservative.

And I guess following on from that, you know, benefiting from our first line transitional relief in Q1 you know, simplistically, as we saw the same 90 basis points charge materialized in Q2 composed in the macro overlay and the actual underlying charge, could we see a similar level of transitional relief in coming quarters?

And then final one was just interested in obviously printing a really, really strong capital ratio, the headwind to the MDA is massive basically. Just wondering how you guys were kind of weighing up the temptation that kind of gold plate your provision reserves kind of in front-loading potentially a higher charge in Q1, you can still print a really, really healthy CET1 ratio and potentially get ahead of this issue, you know, particularly relative to other banks. So we’re interested in to hear your thoughts on that? Thank you.

Alison Rose

Let me start and then I’ll hand over to Katie. I think Katie’s given you hopefully a very detailed and helpful view on our approach to the overlay and impairments and the look forward. What I would say is, as you would expect, we are looking at a period of very significant uncertainty and I think there are a number of variables in there, both the duration of the lockdown and the speed with which the economy can and will recover as we come out of this situation, which in fact that what you would expect me and the team to be doing at this point is making a balanced judgment you remotely see running the various different scenarios and positioning the bank well to deal with that, I think what we’ve given you is a sense of our approach and also hopefully a view of how we look at that. So I think probably that’s you know, I would say on that.

In terms of the strong capital ratio. You know, we are starting from a position of strength. We do have a strong CET1 ratio. We have a balanced portfolio and mix across our books, which I am not unhappy with and a resilient performance coming out of Q4 into Q1 pre the Covid. So I think that gives us a strong starting point facing into a challenging operating environment. We try to give you a balanced view and not gold plating anything, I think that is a balance sheet certainly not saying that our provisions and impairments in Q1 the end of it’s and that’s the guidance Katie has given you there. So hopefully that helps.

Katie, do you want to pick up the transitional –

Katie Murray

Absolutely look I mean, transitional relief, as you know is a kind of hideously complicated calculation. You know, it basically tracks the changes in stage 2 in the movement they’re in. So in the quarter, you can see that we got GBP 296 million of transitional relief, you can see that in our in our capital or capital kind of deductions are scheduled. What I would say is, I would absolutely say, given that we expect to incur more impairments, that we would expect to see more of that relief coming through and we’ll continue to kind of update you on the exact number as it kind of flows through.

And then I think you also asked did we see going forward that we’d end up with a mix of overlay and our base you know, the desire is always not to have overlays. I could imagine as we go through this year, you’ll still end up with a bit of a plan, because the reality is it’s going to be uncertain for the next few quarters. So we think you have a bit of a glide. I wouldn’t like to comment in any way what those numbers would be.

Aman Rakkar

All right. Thank you so much.

Alison Rose

Thank you.

Katie Murray

Alison, I think there’s a question from the web after this one. Shall we take this?

Alison Rose

Yes. Let’s take this. Thank you.

Operator

Our next web question comes from Robin Down of HSBC.

Robin Down

On page 15 of the accounts, you called out various corporate exposures where you see heightened risks for your airlines, leisure et cetera. And yet the stage 1 and stage 2 ECLs looked very modest, for example, just GBP 31 million on a GBP 2.4 billion oil exposure. How do we square that circle of elevated risks with low ECLs? Is the exposures to oil all majors for example. Why has the economic overlay not had a material impact here? Thank you.

Alison Rose

Thank you, Robin. Look, when I look at our oil exposure, I think as a percentage of our overlay is relatively low and our oil exposure is you know major companies and this is lending. So we’ve applied stress PDs but if the specific counterparty is very strong, then the overlay is not a key, so it’s really about risk appetite but as an overall percentage of our book, oil exposure to that being set against [technical difficulty].

Thank you. Shall we go back to the phones lines where any further questions.

Operator

Thank you. [Operator Instructions] The next question comes from the line of Jenny Cook from Exane. Please go ahead. Your line is now open.

Katie Murray

Hi, Jenny.

Jenny Cook

Thank you. Good morning, both.

Alison Rose

Good morning.

Jenny Cook

Can I just ask that in [indiscernible] in the next few years clearly in a tighter regardless in terms of what you’re expecting that consensus seems to be in the order of magnitude more optimistic than that? Secondly kind of following-up on Robin’s question, just thinking of the airlines in aerospace, leisure well I can see that your exposure increased around in the quarter, appreciate numbers are quite big relative move and your coverage kind of just decreased by 2 percentage points to just 1.5%. What are the nature of that exposures? And are you factoring a significant amount of government support to this sector?

And then the final question is just given that nearly 20% of your mortgage book is on a payment holiday, we’ve got this incredible disconnect between cash and accounting environment. And intuitively your assessment of risk must be going up in this environment. And in normal circumstances this would lead to higher mortgage spreads. You could see total underwriting moves just based on expected impairment losses around 25% to 40% above the loss rate. Are you going to look to maintain that profit in your underwriting? So could I therefore your perspective on the trend for mortgage spreads for the next few years from here? Thank you.

Alison Rose

Thank you. Sorry, Jennie I didn’t quite catch the first question.

Katie Murray

The first question was cost expectations –

Alison Rose

Thank you, sorry –

Katie Murray

Both here and into the future.

Alison Rose

Thank you. Sorry, apologies, my hearing not as good as Katie. So we reiterated our guidance on costs for this year of GBP 250 million as you know, we have a strong track record on costs and over the last few years, we’ve taken around 4% out of our cost base GBP 250 million this year.

I’m reiterating that, we will continue to take cost out of the business. The next that you’d expect as changed and little as a result of as adapting to the crisis that may remain committed to that GBP 250 million and continuing downward pressure on our cost base and looking forward, we would expect that to continue. So I think that becomes and continues to be an imperative.

We’ve obviously also reprioritized as you would expect some of our spending and where we will look to invest and where we will look to take cost out. So we remain committed to the GBP 250 million this year and continuing cost coming out.

On the airline and aerospace exposure, what I would reflect back is, we have relatively low exposure to multinationals, given the nature and shape of our business, our airline exposure is included in lending to airline services as well not just airlines, so our exposure is relatively limited in terms of the big multinational players that you, I think are thinking about when you talk about airlines and we’ve obviously looked as we’ve assessed our impairments, both from a sector perspective and also government support and overlays, but I would go back to our exposure to airlines is relatively limited from that perspective.

Katie, do you want to pick up the mortgage?

Katie Murray

Absolutely, there's naturally a disconnect between the cash and accounting floor that we’re seeing at the moment. You know, and certainly, you know, given the volume of requests that we’ve had around mortgage holidays, you know, 80%, what will happen is, they will all have been granted out three months and holiday.

And then there’ll be a process where we’ll go back and talk to every single one of those customers about and then we can make their mortgage payments and how they would like to do that and that’s where we’ll actually get through that process which will be in its very early stages now as we run into – through me and the payments are due to kind of start again, so we’re beginning in June. That’s and we’ll start to get some of the kind of the real insight within there.

In terms of pricing on mortgages, look I think, obviously the way this swap curve has gone, it’s probably is beneficial. And at the moment, what we think is really interesting on future demand, 50% of our new business has to do with new mortgages. You know, you can see even in those numbers that we’ve shared with you up until the beginning of April, GBP 10 billion of – GBP 10.4 billion of new gross mortgage loans in Q1 we’ve done I think it’s got 1.4. it’s more or less in April. So you can see there’s just a massive kind of fall off in that volume.

Well, we have done with all of the mortgage offers that we have out there. We’ve extended them all so they’re all valid for six months. And I think we’ll just start to see as and when and how we emerge that some of those will still come back on the books. Some of them will move away and then I think, you know, in a year or two years’ time, it’s incredibly hard to call at the stage journey as to how we might you might kind of see that kind of evolving. Thanks, Jenny.

Jenny Cook

Thank you.

Operator

Our final question is another question from the line of Fahed Kunwar from Redburn. Please go ahead. Your line is now open.

Katie Murray

Good morning, Fahed.

Fahed Kunwar

Hi. Sorry. Just one more question. Just on credit migration, I know you don’t want to give guidance, but just how to think about. It looks like a lot of the increase in risk weights over the course of this quarter were from RCF usage and you kind of flagged that the RCF usage has stabilized, and also that the mortgage risk rates have been postponed. So should we infer you’re expecting kind of reasonable significant credit migration in the corporate and regional book, but or should we say that the RCFs don’t actually get any worse from here than the risk weighted asset allocation could actually moderate it? Thank you.

Katie Murray

Yes. So we think of RCFs there are about a 57% risk weighting. So they’re not – I mean, there’s – in the round within our corporate group, we have seen that stabilized that’s really as a large part I think it was out of the CCFF scheme that’s come on with the with the government. So we’re not expecting that to particularly migrate. But I think in terms of how the kind of the Group migrates in general, I think we’ll obviously we’re watching it very closely, we’ll continue to continue to do so. But I wouldn’t see them as a particular flag within that migration.

Alison Rose

And I would add them that the RCF drawdown was very early on as the crisis happened, you’ve seen a lot of that come back in terms of deposits on our book. And as the capital markets have reopened, the credit markets have reopened a lot of the corporate are now accessing those markets, which were a period were very volatile. So I think we’re much more normalized.

Fahed Kunwar

Thank you very much.

Alison Rose

Thank you.

Operator

Thank you, Alison. I would now hand the call back to you for closing comments.

Alison Rose

Thank you very much. Thank you everyone for joining and for your questions. Much appreciated. I think we have addressed most of your concerns. I would just end by reiterating what we’ve seen is a resilient performance coming into Q1 we’re clearly facing in today period of significant economic uncertainty and we are taking a measured and prudent approach in how we position the bank go forward mindful of supporting and preserving our financial liquidity strength and shareholder value as well as playing us parts and supporting the economy as we go through this difficult period. Thank you very much for your time.

Operator

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