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Edited Transcript of RBS.L earnings conference call or presentation 14-Feb-20 1:00pm GMT

Full Year 2019 Royal Bank of Scotland Group PLC Earnings and Investor Update Call (Fixed Income Investors)

Edinburgh Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Royal Bank of Scotland Group PLC earnings conference call or presentation Friday, February 14, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donal Quaid

The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets

* Katie Murray

The Royal Bank of Scotland Group plc - CFO & Executive Director

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Conference Call Participants

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* Alexander Latter

PGIM Fixed Income, Research Division - Research Analyst

* Corinne Beverley Cunningham

Autonomous Research LLP - Partner, Banks and Insurance Credit Research

* Guillaume Desqueyroux

* Lee Street

Citigroup Inc, Research Division - Head of IG CSS

* Paul Jon Fenner-Leitao

Societe Generale Cross Asset Research - Head of Financials

* Robert Louis Smalley

UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. This afternoon's conference call will be hosted by Katie Murray, Chief Financial Officer; Donal Quaid, Group Treasurer; and Rupert Mingay, NatWest Markets Treasurer. Please go ahead.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [2]

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Thanks, Laura, and thank you for joining the call. On the line, you have myself, Katie Murray, Group CFO of NatWest Group. And I'm joined by Donal Quaid, our Treasurer; Rupert Mingay, NatWest Markets Treasurer; Paul Pybus, the Head of Debt IR; and also Amanda Hausler from NatWest Markets IR.

We have put some fixed income slides onto our IR website, which Donal and I will now talk you through. We'll give you a brief overview of our financial performance in 2019 before taking you through the key elements of our strategy and our 2020 and medium to long-term outlook, and then we'll open up the call for Q&A at the end.

Let me start by running through the bank's solid performance in 2019. We delivered operating -- an operating profit before tax of GBP 4.2 billion, up 26% on 2018 in an uncertain economic and low interest rate environment. Our attributable profit was GBP 3.1 billion, up 93% on 2018.

Importantly, we grew lending in attractive segments of the market with net loan growth across retail and commercial of 3.7%, exceeding our 2019 lending growth target without changing our risk appetite. At the same time, we reduced cost by GBP 310 million, meaning we have reduced cost by over GBP 4.5 billion in aggregate since 2014. And RWAs reduced by GBP 9.5 billion, reflecting continued capital optimization. And we continue to return excess capital, today announcing 3p of ordinary dividend and 5p of special dividend equating to a return of GBP 2.7 billion to shareholders, taking us to an end CET1 position of 16.2%.

Going to the next slide, focusing on Q4 results. As we look at the bank, we feel it was a good result in a tough operating environment. All of our targets were met that we laid down at the start of the year.

If I look down through the P&L, starting on income, excluding FX recycling gains of GBP 1.2 billion and other notable items, Q4 income was 10% lower than Q4 '18 and GBP 56 million or 2% higher than Q3 '19. Q4 bank NIM of 193 basis points was 4 basis points lower than Q3 2019, primarily reflecting competitive pressures in the mortgage business, as front book margins remain lower than back book.

On costs, excluding conduct and strategic costs, other operating expenses reduced by GBP 117 million in Q4. We had GBP 537 million of strategic costs and GBP 85 million of litigation and conduct costs in Q4 with no changes being made to the PPI charge we took in Q3.

Within impairments, our Q4 charge of GBP 160 million represents 19 basis points of gross loans in the quarter. And while we have experienced more single name charges in commercial banking, we have not seen any material signs of deterioration in the trend in our core loan books.

Headline Q4 attributable profit was GBP 1.4 billion, excluding FX recycling gains. Q4 attributable profit was GBP 176 million. On returns, full year headline ROTE was 9.4% or 4.7% once you exclude the FX recycling gains.

And with that, let me hand over to Donal.

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [3]

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Thanks, Katie. Good afternoon, all, and thank you for joining today's call. I'm pleased to be joining you as treasurer today. I met many of you over the course of last year, and I look forward to continuous engagement throughout 2020.

Let me start with my thoughts for 2019. We've ended the year with a solid set of balance sheet metrics against our capital funding and liquidity requirements. Once again, we achieved a strong pass on the Bank of England stress test, reflecting confidence that the group can continue to support customers and the U.K. economy through very tough economic scenarios and demonstrating the progress we have made in becoming a much stronger bank for our customers and investors.

The economic and political uncertainty, particularly in the U.K. as Brexit deadlines approached and passed, contributed to the risk-on and risk-off environment for fixed income markets last year. So I'm pleased that in those market conditions, we achieved our funding targets for the year and completed a number of milestone transactions for the bank.

I would like to thank all investors who participated in our primary deals and provided support for our paper in the secondary markets. We continue to take opportunities to optimize the capital stack across the group, calling EUR 1 billion of holding company Tier 2 securities in March, and our Ulster Bank Ireland's entity returning EUR 500 million of equity to NatWest Holdings, its first dividend since 2018.

On ratings, we were pleased with S&P's 1 notch upgrade across all entities in May of last year, and we retained a positive outlook across all of our legal entities with Moody's, despite most U.K. banks' outlooks changing in November.

RBS International is assigned the first time rating by Moody's in July, and Ulster Bank Ireland made further progress in December with a 1 notch upgrade by Moody's. Finally, all our Fitch ratings are now on stable outlook from Rating Watch Negative following a U.K. sector-wide review in December.

Turning to the balance sheet. Starting with capital. Our core equity Tier 1 ratio at full year was 16.2%. Excluding the impact of the Alawwal merger and PPI, the core equity Tier 1 ratio reflects 110 basis points of capital generation from profits in 2019 and 60 basis points from reduction in RWAs and other capital movements.

Our total capital ratio was 21.2% with a total loss-absorbing capacity ratio, including senior MREL, of 33.3%, comfortably above our minimum regulatory requirements. Although the U.K. has now formally left European Union, we are still left with a degree of uncertainty until we have final clarity on the future trading relationship at the end of the transition period on December 31 of this year.

So with that in mind, we continue to manage a comfortable level of surplus liquidity while recognizing it did result in a NIM drag. Our liquidity coverage ratio for the year was 152% with a total primary liquidity of GBP 125 billion. This is a decrease of around GBP 3 billion as deposit growth and the proceeds of net issuance were offset by the Tier 2 redemption, dividend payments and a further GBP 4 billion TFS repayment. Our remaining TFS drawings are now GBP 10 billion from a peak of GBP 19 billion, a significant reduction well ahead of contractual maturities.

Our loan-to-deposit ratio is 89%, and we are seeing customer deposit growth of GBP 8 billion during the year. Our funding base continues to reflect a diverse mix of retail, commercial and wholesale liabilities supporting our customer lending.

Looking back at 2019, we issued GBP 4 billion of MREL compliant senior unsecured from our holding company and 4 very well received transactions across a range of tenors. Our outstanding stock of MREL-eligible securities is GBP 19 billion at the end of 2019 against our end 2021 requirement of around GBP 23 billion.

We were especially proud to bring the U.K.'s first social bond issued on the International Capital Market Association's Social Bond Principles, further demonstrating our commitment to addressing regional inequality and promoting economic growth by supporting businesses to create and retain jobs in some of the U.K.'s most deprived areas.

We also completed a USD 750 million Tier 2 transaction, taking advantage of favorable market conditions to access the dollar markets in a rare callable format. In addition to senior MREL, we also issued GBP 5 billion of senior unsecured debt out of our NatWest Markets entity, including an inaugural U.S. dollar issuance from their newly established 144A program.

And finally, we raised GBP 750 million from our first SONIA-linked covered bond for NatWest Bank.

I will now hand back over to Katie for an update on strategy, after which I'll discuss the 2020 funding and liquidity outlook.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [4]

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Lovely. Thank you, Donal. And for those of you looking at the slides, we should be on Slide 10, I believe. We spoke to our shareholders this morning about becoming a purpose-led bank, responding to the changing needs of all of our stakeholders. We believe our purpose is to champion potential, helping people, families and businesses to thrive. We have a very strong foundation in place from which to deliver our plans. We see opportunities to deliver much more than this. Today, we have strong customer franchises, market-leading positions in many product categories. We will evolve our propositions to serve more of our customers' needs at every life stage.

This will both maximize our customers' potential and deliver returns for the bank. We have a strong track record of consistent cost reduction, which we will build upon. We see further opportunities for simplification of our core customer journeys to improve customer experiences and reduce costs in key segments.

We have rapidly launched a broad range of innovative -- innovation assets to defend our core franchises and enter new spaces. We will continue to test and learn with the customers while scaling these assets as well as leverage partnerships to accelerate our efforts.

We will take a much sharper approach to capital allocation. The actions that we will set out for NatWest Markets is a good example of this. And finally, climate change is the defining issue of our generation. We have a bold new ambition to be a leading bank helping to address the climate change by making our own operations climate positive by 2025 and driving a material shift in our financing activity over the next 10 years as we support the transition to a low-carbon economy.

Getting all this right, we will ensure we are well positioned strategically, operationally and financially.

Turning to NatWest Markets. We have taken the decision to refocus this business on activities which are directly supporting our core customers, significantly reducing capital allocated to our Rates business.

Importantly, the areas that we are reducing are where we have experienced higher volatility as proven by the 2019 performance. So at the end of this, we will have a customer-focused business with a more stable and consistent income stream.

The business will be going from 21% to around 10% of the group's RWAs. We have previously guided you to NatWest Markets being of around GBP 39 billion RWAs. Our current plan assumes that NatWest Markets in the medium term will be GBP 20 billion of RWAs, utilizing half of the GBP 6 billion capital with us today. We expect this capital reduction to be CET1 capital ratio accretive in year 1 and over the course of the transition period.

And finally, NatWest Markets' legal entity has a CET1 ratio of 17.3% at year-end 2019, which is above its 15% target, so it is well capitalized as we start the process of change.

I am conscious that throughout today, we shared a lot of numbers with yourselves and the wider market. So I thought it would be helpful to put all of our financial targets and outlook on 1 page, and I'll highlight a few of them for you just now.

Starting with costs, we're targeting to take out another GBP 250 million or 3.6% in 2020 and we'll aim to continue to reduce costs in the medium to long term. We will do this while continuing to invest GBP 1 billion in the business per annum. We expect to incur GBP 0.8 billion to GBP 1 billion of strategic costs during full year 2020, resulting from the refocusing of NatWest Markets and the continued resizing of the group's cost base.

On lending, we are targeting growth of over 3% across our retail and commercial businesses in 2020. On impairments, we maintain our guidance of a normalized long-term loss rate of 30 to 40 basis points. And on capital, we are today updating our medium- to long-term CET1 ratio target to 13% to 14% as key uncertainties have reduced and reflecting a more normal retail and commercially focused bank with a smaller and less volatile NatWest Markets. That's a medium to long-term target, and we'll get there by getting capital down to 14% by the end of 2021.

As you are aware, there are a number of capital headwinds over the next couple of years. These include things like the RWA inflation, our pension contributions linked to dividends with payments starting from 2020, which are capped at GBP 500 million per annum, up to a total of GBP 1.5 billion, noting we have reflected year 1 in our 2019 CET1 with an impact of 20 basis points.

Basel III amendments, which we anticipate to be at the lower end of the 5% to 10% range and phased across 2021 to 2023. And we expect to end 2020 with RWAs in the range of GBP 185 billion to GBP 190 billion.

Looking at returns. In the current economic and lower rate environments, we believe that in the medium to long term, the NatWest Group will be generating a return on tangible equity in the range of 9% to 11%.

And with that, let me hand back to Donal.

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [5]

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Thanks, Katie. So turning to issuance plans. Looking ahead to 2020, as the holding company, our guidance for senior MREL is in the range of GBP 2 billion to GBP 4 billion. This morning, Alison has announced a new purpose-led strategy for the bank and Treasury will play a key role as we look to issue up to GBP 1 billion of our senior MREL requirements in green, social and sustainable format next year, building on the strong investor support, our social bond received last November.

We will continue to develop our internal framework to facilitate higher volumes of green, social and sustainable linked issuance going forward.

On capital, we will consider up to GBP 2.5 billion of Tier 2 and up to GBP 1.5 billion of additional Tier 1. As many of you will be aware, we have a call in our dollar additional Tier 1 in August. And over the coming months, we will consider our options in light of prevailing market conditions. The guidance of up to GBP 1.5 billion of additional Tier 1 issuance this year gives the option of refinancing, if required.

Turning to our operation companies. NatWest Markets will have senior unsecured funding requirements of GBP 3 billion to GBP 5 billion in 2020, primarily refinancing matured legacy debt. We will also consider secured issuance from NatWest Bank subject to funding requirements as we look to support the continued development of the SONIA bond market for these products.

On capital optimization opportunities, it's an area we keep under constant review, and we maintain our prudent approach to legacy security management, which is based on both economic and RegC considerations. We have been consistent in our guidance that our post 2021 capital stack supporting the bank's go-forward balance sheet will be as clean as possible. We have not changed our assumptions on the future compliance of our legacy securities.

I thought it would be helpful to spend a few minutes on the recent changes to our capital requirements. A significant change for the bank has been the removal of the G-SIB classification as of the first of January. This results in a notional reduction of 100 basis points in the bank's minimum CRR or core equity tier 1 buffer requirement and MDA. However, minimum ratio requirements remain broadly unchanged for the group due to the inclusion of the systemic risk buffer applied to NatWest Holdings in the group's PRA buffer.

The Bank of England recently announced their intention to increase the countercyclical buffer to the region of 2% from the current level of 1% in December of this year. At the same time, they announced a potential offsetting reduction in Pillar 2A. We will provide further guidance on the impact for us after the outcome of the PRA consultation is known.

Additionally, in November last year, we announced a reduction in the group's Pillar 2A capital as agreed with the PRA. The total Pillar 2A requirement for the group was reduced by 20 basis points to 3.4%, of which 1.9% is held in the form of common equity Tier 1 capital.

Given our underlying capital strength, after application of these changes to minimum requirements, the group will continue to operate with comfortable headroom above our medium- to long-term management target of 13% to 14% announced today.

Finally, Katie has just outlined the changes to NatWest Markets. While we refocus that business, the NatWest Markets' legal entity, from which we issue senior unsecured debts, is targeting to maintain a core equity Tier 1 ratio of above 15%, an MREL ratio of at least 30% and to reduce risk-weighted assets by GBP 14 million to GBP 18 million in the medium term.

With that, I'll hand back over to Katie for final comments.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [6]

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So just let me finish with the key points behind our investment case. Our purpose will lead to a long-term sustainable business. We have solid customer businesses with an ability to grow. We will become simpler to deal with. Our business model is powered by innovation and partnerships. And we have a robust balance sheet with strong capital generation and returns to our shareholders.

And with that, I will now open the call to Q&A.

Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [2]

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Thanks, Laura. It's always a tense moment as you are waiting for questions to come through.

Laura, do we have any questions on the telephone?

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Operator [3]

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We will take our first question from Alexander Latter from PGIM.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [4]

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Alexander?

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Alexander Latter, PGIM Fixed Income, Research Division - Research Analyst [5]

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Sorry about that. Sorry, can you hear me?

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [6]

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Absolutely.

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Alexander Latter, PGIM Fixed Income, Research Division - Research Analyst [7]

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So a couple of questions. Firstly, watching the equity call this morning, you clearly look at NatWest Markets in conjunction with the corporate business within the ring-fenced bank. You talk about sort of GBP 80 billion of risk-weighted assets within that group. Now obviously, you can't treat that as a single division because of the ring-fencing rules, but given that this kind of strategic rationale for NatWest Markets is pretty fundamentally based around that kind of being a bit of a division, and you've been sort of presenting this customer view which is kind of along those lines. Has the regulator kind of passed a view on this sort of way of managing the 2 entities kind of across the ring fence? That's the first question.

And then secondly, with what you said about cutting NatWest Markets in half in terms of RWAs and also that you probably run it as a legal entity at roughly breakeven. Have you had any indications from the rating agencies in terms of how they might consider that for ratings and whether or not they'll recognize that it's still core to the group even though it will be a sort of zero profitability entity? And what the implications might be for the ratings?

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [8]

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Okay. Thanks so much, Alexander. I'll take the first one on ring-fencing and then I'm going to pass to Donal on the rating agency point. So in terms of the ring-fencing piece, so it's -- we've certainly gone through with a regulator in terms of how we're planning to run these 2 entities, but -- Robert Begbie is today the Interim CEO of the legal entity and he will remain so tomorrow. So there's no intention to kind of merge the leadership of those entities together. I think it is important that we run and make sure we meet our ring-fencing obligations. But what's really important is the fact that we meet the needs of our customers and that we're able to make sure for those corporate customers whose -- a significant number of who utilize their product, and it's really important to them for their business delivery that they're able, from their perspective, to feel that actually they're dealing with 1 entity, and in reality, the booking model that's in the background is of interest to us and to the regulator, but probably less important to those individual customers. Donal, do you want to do the ratings thing?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [9]

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Yes, on ratings. So I'd say our focus is on continued delivery of our strategy. We're sustainably profitable, have a high capital base, strong asset quality, solid liquidity and funding ratio as compared to some highly rated peers internationally. At the end of refocusing NatWest Markets, it will be circa 10% to the group's RWAs, so it will be a smaller and less volatile entity. On balance, we'd see that as positive for ratings, given some of the concerns the agencies have previously cited in their reports, but we can't second-guess the rating agency's decisions.

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Operator [10]

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Our next question comes from the line of Robert Smalley of UBS.

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [11]

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It's Robert Smalley from UBS. Couple of questions around strategy and then on ESG. In the other call, you had -- it was mentioned that 6 out of 10 new mortgages are outside of London in the South East. This is -- these are areas that you're cutting back on branches. So you're leaning much more on digital. Could you talk a bit about the challenges with that? Number one. Are you continuing to just cut price and compete on price? And when do you start competing on credit? And what are the challenges around accumulating that much mortgage exposure and that much data digitally? And what are the challenges looking at that from an asset quality point of view? That's my first question. And then I want to -- I have a question about ESG after that.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [12]

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Okay. Well, let me deal with that one and then you can come to the ESG. So as we recapture, yes, I think, this time it was actually 6 out of every 10 [pounds,] but it will come to more or less the same thing though interest in the opposite mortgages outside of London are generally, but not specifically, lower value. I mean the way that we deliver our mortgage proposition today is through a mixture of branches. A lot of it is also done digitally. And also what we're also starting to branch out into is the -- via video so that you can have your appointment. And previously, you might have done telephonically or gone into a branch. So we will do it via a secured video into our kind of customer bases which, for us, works very well because then we're able to have maximized the use of our various facilities.

In terms of the competition, there is definitely some competition going on, on pricing. That's not probably surprising given I think some of the excess liquidity we and some of our peers also hold. But I think what's really important is that we still -- as we price, we make sure we also look to ROE and also to the risk metrics so that we're not having -- creating issues in terms of our credit quality or the kind of future profitability. And we're very comfortable with that.

In terms of the digital piece, I'm not sure exactly where you're getting at, but I would say that we've done a lot in terms of data. You will have heard us talk, Robert, in the past around things like our paperless journeys. And actually, what that's been able with us to do is access more data far more efficiently in lots of different formats so that the whole process becomes a much slicker process. And definitely, what we find is that you can compete on price, but you have to also compete on service and be able to be flexible in terms of how you're structuring mortgages as you go forward. So we still view it as a tremendously good quality asset with good high returns. Do you want to commit to your ESG question?

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [13]

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Sure. So you had mentioned ESG issuance in the past. As we go forward, are you looking at ESG issuance as something that you'll be able to issue at tighter spreads than your regular benchmark issuance? And as a result, will you be able to pass on some of that funding advantage with the use of proceeds to the people that you're lending that money to? Or do you see doing the ESG bonds as, for lack of a better term, table stakes as we all go into this together?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [14]

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Robert, I'll take that one. I would probably view this a bit more in the latter, so we will recognize, obviously, the emergence of ESG focused mandates. You present also new opportunity to welcome new investors to group credit and also to help existing and new investors with their ESG focus. So I think competitive pricing is not the main goal of GSS issuance for us. I think the bond will be priced as a function of the book building process and in line with other transactions and standard market considerations, but it is something as we build out our own framework internally. It's something we'd look to increase volumes with over time, both from our capital and MREL issuance.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [15]

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Laura, are there questions from the phone line?

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Operator [16]

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We will now take our next question from the line of Lee Street from Citigroup.

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Lee Street, Citigroup Inc, Research Division - Head of IG CSS [17]

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I have a couple of questions on returns and then 1 on LIBOR, please. So just, obviously, there's a lot of questions about your return this morning, which is at 9% to 11%. So is there any pressure? (inaudible) you're just going to get forced down the credit curve or is there a temptation to look back into some of your unsecured lending or card lending and sort of expand there? And then, I guess, the flip side of that is like, obviously, we like the level of capital that you run up from a credit perspective. Is that -- is it not a temptation to sort of lower those sort of longer term targets of sort of 13% to 14% CET1, and you have to try and -- can you still give the return or the return on equity story a boost as a consequence? I'm intrigued to hear your thoughts there. And then on LIBOR. What's the plan for bonds that don't have fallback language? I'm thinking sort of unsecured and small deck bonds that don't have any fallback language. It feels like the Bank of England is trying to put a bit of pressure on. So (inaudible). Is that how one should be thinking about it? And are you feeling the pressure from the Bank of England? I have no more questions.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [18]

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Thanks very much. In terms of returns, we were very, very focused on making sure in terms of the 9% to 11% that we deliver that sustainably, and not without going up and down the credit quality. You will notice that we have gone a little bit more into things like credit cards. I think I said 80% growth we had in this last year, but when you listen to that number, you think, "Oh! that's quite chucky," but the reality is that credit has gone from GBP 4 billion to GBP 4.3 billion. So it's -- in itself, such a small level of that, and we're happy to be returning into what we see as big business with good returns. We're very keen that we stay within our credit appetite. And that's something the Board is also very, very focused on. We can -- obviously, and thanks for recognizing. I know that a few guys there capital wise are more comfortable. It tells me what I would say there's absolutely no temptation to try to build on capital and quicker or head towards the 13%, 14% to get that kind of return number up quite faster. And I think from your perspective, while I'm not sure your equity colleagues particularly liked this morning the fact that we kind of started the year at 16% and ended the year at 16.2%. Really does show that we will do capital return, but we will do it cautiously and slowly, and we have -- certainly have preferences in the manner which we would like to do it. So that's not something I think that you should be concerned about? Donal, do you want to talk it's LIBOR for a moment?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [19]

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Yes, certainly. So I think on LIBOR, we updated the fallback language in our issuance programs back in 2017. So we're actually in good position there. We've already moved our corporate bond issuance, reference SONIA, last year. We do have a small number of securities outstanding beyond the end of 2021, referencing LIBOR. Many of them do have regulatory call options. And I think for the ones that don't, we will just continue to work with the industry to find the most viable solution.

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Lee Street, Citigroup Inc, Research Division - Head of IG CSS [20]

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Okay. Sorry, just -- you obviously referenced the regulatory call options. That's the sort of the way you'd be thinking [for this relevant guidance for some form of] consent as a sort of alternative because [there is no] capital. Is that fair way to think about it?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [21]

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Well, I think we wouldn't rule out (inaudible). We have done a due diligent exercise on what we have outstanding. So we have a covered bond that, obviously, matures ahead of 2022. So for us, it's not really a major issue. It's only a small number of securities that we think will be remaining referencing LIBOR.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [22]

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We are just going to take 1 question from the web, and then we'll come back to telephone, from Mark Kehoe and from the States.

Hi, would you think about a green Tier 2 or Tier 1 bond rather than just a senior green bond? Donal, I feel that's one for you.

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [23]

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Yes, very happy to take that. Mark, yes, we'd look at all formats. As I said, we're still developing our internal framework to support. So MREL capital, but I think also as well we'd look at secured and potential future secured issuance out of NatWest Bank as well.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [24]

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Laura, should we go back to the phone line?

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Operator [25]

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We'll take our next question the line of Paul Fenner of Societe Generale.

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Paul Jon Fenner-Leitao, Societe Generale Cross Asset Research - Head of Financials [26]

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A couple of my questions have already been answered, but I've got 1 on your legacy bonds. You've obviously got the $2 long core step-ups, which you recognize aren't going to be Tier 2 from 2021 onwards. And I think everyone is expecting some form of liability management. I just wanted to know if those bonds are up something like 20% over the last year. Likes of them getting any cheaper for you to take those out, it doesn't feel like any time soon. What are your realistic options? Are you thinking maybe an exchange into your next AT1? Or are you hoping for something for an event that makes these bonds cheaper to take out? That's my first question. So I'm specifically talking about the 6.425s and the 7.648s.

And the second question actually is -- forgive me, I didn't quite catch what your response was for the question around ratings at NatWest Markets. I mean I look at these ratings, and I'm constantly surprised by the fact that S&P rates them better than RBS Holdco. Are you not surprised that Holdco isn't better rated against NatWest Markets? And what do you think is going to happen to that?

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [27]

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Donal, do you want to take lead on these?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [28]

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Yes, I'll try and take those two, Paul. So I think on the first one, on legacy, I'm not going to comment on specific securities. We've had a consistent view regarding all our legacy capital instruments as offering no capital value beyond 2021. We're going to continue that prudent approach to the management of our capital to ensure no surprises and find a clear and consistent message to our bondholders. That's probably all I'll say on that piece. And in terms of the ratings, again, I think, as I said previously, we've -- we're not going to second-guess what the rating agencies are going to do. We view the changes that we've announced within NatWest Markets as being positive from a credit perspective in terms of derisking that business and being a smaller amount of our RWAs. But we will, I suppose, wait and see what the rating agencies decide on that.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [29]

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Brilliant. Thanks very much. Laura?

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Operator [30]

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We will now take our next question from the line of Corinne Cunningham of Autonomous.

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Corinne Beverley Cunningham, Autonomous Research LLP - Partner, Banks and Insurance Credit Research [31]

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Just a quick one, really. Just now that your G-SIB buffer has disappeared and the D-SIB only applies to the ring-fenced entity. The ring-fenced entity is obviously quite a big chunk of your business. So how should we think about that when we're looking at Slide 14, for example? Is that just something that gets taken into account in the management buffer? I'm just wondering how we should actually think about that at the group level?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [32]

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Yes, I'm happy to take that one. The PRA framework incorporates the supervisory risk offer for the group into the PRA buffer. So as I said, it's not part of the CRR buffer for the purposes of group MDA. We don't disclose the PRA buffer or its components, as you know, but the PRA has given some guidance as to how that SRV is incorporated, which you can look into.

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Operator [33]

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(Operator Instructions) We will take our next question from the line of Guillaume Desqueyroux of Tideway.

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Guillaume Desqueyroux, [34]

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In simple terms, you explained that your need for Tier 2 and especially AT1 over the next year because you haven't been that active on the -- specifically the H1 market. Can you explain your intention, like maybe to issue more like a standard AT1 in your main currency? What kind of structure do you -- basically do you have in mind, do you consider to fit the specific needs?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [35]

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Yes, I'd say just on additional Tier 1, obviously, we'll make a decision over coming months, so nothing else to add on that. In terms of different currency options, we'll look at the different options available given the market conditions prevailing at the time and key considerations of both relevant pricing and volume requirements. And I'd say as a U.K. bank, we'd like to do more in sterling, but fully aware that there's a greater depth in other markets. But it'd be fair to say that sterling has been attractive for a number of issues this year. So we'll definitely keep a close eye on that. I'd also add that we received our first rating from the Japan rating agency last year. So yen issue is also something that we could consider.

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Operator [36]

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(Operator Instructions) We will take our question from the line of (inaudible).

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Unidentified Analyst, [37]

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It's actually about the Pillar 3 appendix that has been updated. I just wanted to understand better the -- I would say, the different fields. So for example, when we look at the regulatory treatment, there is traditional CRR rules and if we take the example of rules that are additional Tier 1, then post transition, there would be either additional Tier 1 or ineligible. And I can't find, in your disclosure, any additional Tier 1 instruments that are Tier 2 post transition. So how should we read this field post-transitional CRR rules? When it says ineligible, does it mean ineligible as additional Tier 1 or ineligible as additional Tier 1 and ineligible as Tier 2? That's my first question.

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [38]

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Yes, I'm very, very happy to -- I'd probably just say -- we've a very, very consistent review regarding all of our legacy capital instruments as having no capital value beyond the end of 2021. So I suppose that should probably make it easy.

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Unidentified Analyst, [39]

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So ineligible would mean no cap value as AT1 or Tier 2?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [40]

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Correct.

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Unidentified Analyst, [41]

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Okay. And my second question is on the noncompliant feature of -- so where you indicate some features for those that lose eligibility. I have to say, it's not necessarily consistent across the industry. So those features deemed noncompliant, are they the result of your own interpretation of the regulation? Or is -- has it been proposed or checked by the regulator, and it's actually the regulator's view on those instruments?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [42]

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Yes, no problem. So probably, again, we've taken a very, very conservative view on the interpretation of that. And so to ensure that there are no surprises and find that clear and consistent message to our bondholders. So full details are in the Pillar 3 appendix. I can get Paul to follow-up after the call for further details.

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Unidentified Analyst, [43]

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Yes, absolutely. No, I am familiar with the disclaimer on the Pillar 3, but -- so if I understand well, what you're saying is that those disclosures are actually your interpretation. What I'm just asking is, to which extent has it been validated with maybe your regulator? Is it just a reflection of a legal opinion that you have? Or is it something that has been the result of an exchange and a validation by the regulator?

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [44]

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Yes. No, so the PRA do not provide the policy guidance. So that's our internal interpretation that we'd work through with our legal counsel.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [45]

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But I think given, Donal, the fact that we take quite a conservative view in terms of the noncompliant features, it becomes a little bit of a no point.

Laura, are there any other questions on the line?

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Operator [46]

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We have no further questions at this time, Katie. I'll now hand the call back to you for closing comments.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [47]

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Lovely, Laura, thank you very much, indeed. Thank you, everybody, for joining the call today. we really do appreciate you taking the time. If you do have any follow-up questions, please don't hesitate to contact Paul in our Debt IR team. Thanks very much, and enjoy the rest of your day.

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Donal Quaid, The Royal Bank of Scotland Group plc - Interim Treasurer & Head of Treasury Markets [48]

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Thank you.

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Operator [49]

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