NatWest Group Plc Q3 FY2026 earnings call

• Strategic Priorities: The Group is focused on disciplined growth (targeting >4% CAL growth annually), increasing operating leverage through simplification, and active capital/risk management to deliver industry-leading returns (RoTE >17% over four years).
• Financial Momentum: Q3 saw income ex-notables grow 3.1% to £4.6 billion, with costs rising only 2.8%. The cost-income ratio improved to 45.1% (QoQ) and 45.7% (YTD), moving toward the 2028 target.
• Growth Drivers: Customer lending grew 7.7% YTD, supported by strong commercial/institutional demand in infrastructure and renewables. Mortgage lending increased by £8.3 billion YTD, gaining market share from 12.5% to 12.7%.
• Wealth Management Integration: Assets under management doubled to £132 billion due to the Evelyn Partners acquisition, which contributed £1 billion in new flows since completion. Integration is on track.
• Capital Generation: Generated 208 basis points of capital in Q3. The CET1 ratio stands at 13.5% post-dividend accrual. The Pillar 2A requirement will reduce by 76 bps (to 11.1% supervisory minimum) effective Jan 1, 2027.
• Operational Efficiency: Delivered £420 million in gross cost savings YoY, offsetting investment spend for Evelyn Partners and pay awards. Full-year operating expenses are guided at ~£8.5 billion.

The transcript does not provide a granular breakdown of financial performance (revenue and profit) by specific product segment (e.g., Retail, Commercial & Institutional). However, it highlights broad-based growth across the three businesses. Customer Assets and Liabilities (CAL) grew by £15.7 billion (1.6%) in the quarter. This comprised £8.1 billion in customer lending (with Commercial & Institutional growing fastest at £6.6 billion or 4%, driven by infrastructure, renewables, and housing; and Retail/Private Banking growing by £1.5 billion, primarily mortgages), £5.8 billion in customer deposits, and an £1.8 billion increase in Assets Under Management and Administration (AUMA), which reached £132.4 billion following the Evelyn Partners acquisition.

• Income: Maintained full-year 2026 guidance for income ex-notables at approximately £17.9 billion (up >9% YoY). No specific 2027 income guidance provided, but confidence remains in sustained growth driven by balance sheet expansion and structural hedge benefits (>£1 billion incremental hedge income expected in 2027).
• Costs: Maintained full-year 2026 other operating expense guidance at approximately £8.5 billion.
• Impairments: Maintained full-year guidance for impairment charges below 25 basis points of loans. YTD charge was 21 basis points.
• Capital Ratios: Target CET1 ratio of around 13%. Expected capital generation before distributions and Evelyn Partners impact to exceed 240 basis points in 2026.
• Risk-Weighted Assets (RWA): Revised upward expectation for RWA as of Jan 1, 2027, to approximately £210 billion (from previous estimates), reflecting Basel 3.1 impacts, growth, and operational risk.
• Net Interest Margin (NIM): Expects NIM to remain broadly stable/flatter in H2 2026 and into 2027, assuming Bank of England base rates hold at 4% and five-year swap rates moderate to 4% average.

• Deposit Competition: Intense competition in deposit markets may pressure funding margins, though the bank manages this via selective product launches and leveraging its high-quality deposit franchise.
• Asset Mix Shift: Growth in lower-margin, lower-risk-weighted commercial and institutional lending (vs. retail mortgages) creates mix headwinds for Net Interest Margin, partially offset by higher non-interest income from wealth management.
• Interest Rate Sensitivity: Future profitability is sensitive to changes in interest rates. While the structural hedge provides stability, shifts in swap rates and customer behavior (sentiment/lending demand) could impact outcomes.
• Regulatory Changes: Ongoing regulatory reviews (Basel 3.1, FCR) introduce uncertainty regarding capital requirements and buffer usability, though current ratios remain comfortably above minimums.
• Economic Uncertainty: Post-model adjustments and economic uncertainty provisions (£288 million) reflect potential risks from the broader economic environment, though credit quality remains strong with no significant stress areas identified.

Q: Morgan Stanley analyst asked about the sustainability of loan growth funding given deposit competition and how competitive dynamics might erode NII growth upside from the structural hedge.

A: CFO Katie Murray stated that while they don't give 2027 income guidance, they expect income ex-notables to grow >9% in 2026. They anticipate the structural hedge will add >$1 billion more income in 2027 vs 2026. Loan growth is outpacing deposit growth, but they have utilized surplus liquidity with minimal wholesale issuance, maintaining a 90% loan-to-deposit ratio. They expect NIM to remain broadly stable through 2027 as margin expansion from deposits offsets mortgage repricing and mix shifts. Regarding capital buffers, they await further clarity on MDA flexibility from the November FSR but note the P2A reduction to 11.1% was already factored into their 13% CET1 target.

Q: RBC analyst sought clarification on whether 'stable NIM' meant sequential flattening from Q4 exit rate, quantified a one-off gain from selling Mentor business, and asked about mortgage growth outlook post-'Your First Home' scheme.

A: Murray confirmed NIM is expected to be flat sequentially into H2 and 2027, driven by lending margin compression (mortgage repricing ending in Q4) offset by deposit margin expansion from the hedge. The Mentor sale gain was in the tens of millions. On mortgages, she noted 9 consecutive quarters of net growth with stable market share at 12.7%. While higher rates may shift some demand to remortgages, the government's new scheme is viewed as supportive. Mortgage spreads are expected to settle around 60 basis points for the year.

Q: Autonomous analyst questioned if NatWest would reduce its management buffer given the new Pillar 2A reduction and potential future MDA flexibility, and asked about international competitiveness issues in the UK regulatory framework beyond domestic overlaps.

A: Murray clarified that buffer usability applies mainly to systemic stress, and the new 11.1% supervisory minimum reflects strong performance in the last stress test. They are awaiting the November FCR results. Paul Thwaite outlined four areas for regulatory calibration to improve competitiveness: aligning the counter-cyclical capital buffer with peers, reducing cumulative cap limits, ensuring risk weights (like UK mortgages) reflect actual low loss experience, and reviewing output floors to prevent regulatory drift. He emphasized these changes aim to boost lending and resilience.

Q: Goldman Sachs analyst asked about the pace of income growth in 2027 versus 2026 and asset quality trends, specifically regarding higher rates and portfolio resilience.

A: Murray explained that 2026 saw loan growth (~8%) outpace interest-earning asset growth (~3%) as surplus liquidity was used. In 2027, average interest-earning assets should grow closer to loan growth rates, supporting stable NIM. Asset quality remains strong with no significant stress areas. The Q3 impairment charge (£277m) was higher than Q2 due to non-repeating releases in Q2, but the 9-month run rate of 21 basis points is well within the 20-30 bps cycle guidance. Stage 3 charges were slightly higher but not concerning.

Q: JPMorgan analyst asked about the floor for the Liquidity Coverage Ratio (LCR) and how it might impact deposit/funding margins, and whether corporate mid-market lending momentum is sustainable or subject to pricing pressure.

A: Thwaite attributed strong corporate lending growth to structural trends (digitization, decarbonization, infrastructure) and broad sector diversity, expressing confidence in pipeline sustainability. He noted no new margin pressure, with mid-market margins remaining stable despite competition. Murray stated LCR is normalizing to 137% from post-COVID highs but remains well above the 100% minimum. They have ample funding flexibility via wholesale markets and diverse deposit franchises, so LCR normalization is not a constraint on loan growth or a driver for margin compression.