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ROYAL BANK OF SCOTLAND GROUP (NYSE:RBS)
Q4 2019 Earnings Call
Feb 14, 2020, 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Howard Davies -- Chairman

Well, good morning, ladies and gentlemen. Thank you for joining us. I was going to wish you a happy Valentine's Day, but then I recall that emotion plays no part in the lives of banking analysts, so I'll leave that out. What I will, however, say is that yesterday morning, Katie Murray was our CFO and she is still our CFO this morning, just to underline that continuity.

Today, we have a slightly different running order from our usual results presentations as we set out our plans for the future under Alison's leadership. I'll make some brief opening remarks about the current economic environment and our performance in that context. Then Alison and Katie will cover 2019. And they'll then set out our plans and strategic direction for the coming years, and I'll return and open it up for questions.

First of all, you will have noticed that today, we've announced that we are renaming the parent company, NatWest Group plc, later this year. As we outline our plans for the future and with our legacy issues behind us, the Board have agreed that it's the right time to align the parent company name with the brand under which the large majority of our business is delivered. It's important to note that customers will not see a change in their products or services and will continue to be served through the brands they recognize today, including The Royal Bank of Scotland. Similarly, our employees will see no change to the way they work.

Now, looking back to last year, 2019 was another year of positive progress, set against ongoing political and economic uncertainty. Further cost reduction, increased lending to our personal and business customers, and more dividends for shareholders are all good outcomes. On capital distributions, we're proposing to pay a final ordinary dividend of GBP0.03 a share and a special dividend of GBP0.05 a share. Taken together with our interim payments, that means GBP2.7 billion of returns to shareholders in 2019.

The Bank's capital ratio remains well above target, with scope for further capital distributions through dividends or buybacks from the UK government at the appropriate time. Our private shareholders, whom we've consulted extensively, agree that share buybacks from the government are the best use of surplus capital at this stage.

Turning to the economy, the consensus forecast suggests that UK GDP will remain below trend and there are signs of a wider global slowdown. The continued low interest rate environment also poses a challenge to income growth for all UK and European banks. On the more positive side, the UK labor market remains fairly robust with record low unemployment helping to keep impairments at low levels. With our strong market positions, we still see good opportunities for volume growth that is within our risk appetite to offset some of the income pressure.

The future terms of trade between the UK and EU remain to be determined. Clarity for our customers is crucial, and we continue to plan for a range of potential outcomes from negotiations on the future relationship. We remain well placed with strong capital and liquidity positions to support our customers as we make the transition.

Looking to the future then, today marks an exciting and important moment for the Bank as we explain how our strategy will evolve over the coming years. Alison and Katie will give us more detail in a moment, but the plan we are describing represents an important shift for this bank with a new focus on the economic and social purpose of our work. It will mean seeking to balance the interests of all our stakeholders and implies building longer-lasting relationships with our customers rather than taking a transaction-based approach. It also means recognizing the need to lend sustainably in an environment of global warming. All of that will require a shift in how we conduct our business, and it will take many years to implement fully. But we're setting out some clear targets today that will steer us.

By building on solid foundations, putting our focus on purpose at the center of our decision making and refreshing our approach to delivering a better service for customers, we will create a more sustainable bank, and in return -- in turn, more sustainable returns for our shareholders. The Board is fully behind this approach and excited by the dynamism and enthusiasm that Alison and her evolving team have already brought to the revised strategy. And with that, I'll hand over to her and then subsequently to Katie. Alison?

Alison Rose -- Chief Executive

Thank you, Howard. I'm delighted to be here as Chief Executive and privileged to take on the role. Today, I'm going to start by running through our solid performance in 2019 and then return to set out my long-term vision for the Bank.

In 2019, we delivered an operating profit before tax of GBP4.2 billion, up 26% on 2018, in an uncertain economic and low interest rate environment. Our attributable profit, including a number of one-offs, was GBP3.1 billion, up 93% on 2018. Most importantly, however, we grew lending in attractive segments of the market with net loan growth across our retail and commercial businesses of 3.7%, exceeding our 2019 growth target without changing our risk appetite. We remain the biggest supporter if UK businesses with GBP19.5 billion in gross new lending to our commercial banking customers and GBP33.3 billion gross new mortgage lending in our UK personal bank, as we continue to support our customers in a challenging environment.

At the same time, we reduced costs by GBP310 million, meaning we have reduced costs by GBP4.5 billion in aggregate since 2014. This will be the foundation on which we continue to deliver further efficiency improvements. And as Howard mentioned, we remain committed to returning capital to shareholders. And if our dividend proposals are approved, total dividends will be GBP2.7 billion this year.

We have significantly strengthened the Bank's culture in recent years, and this will be a key strength for the future. We have moved from bottom quartile to top quartile on the independent Banking Standards Board survey. And we are the first bank to be awarded Corporate Chartered status by the Chartered Banker Institute, recognizing our investment in the professional skills of our colleagues.

On customer advocacy, our momentum is encouraging. We performed well in our commercial bank, and NatWest was voted best mortgage provider at the British Bank Awards in 2019. However, we do recognize that there is room to improve across our personal and business banking franchises.

We have also continued to up the pace on innovation to the benefit of our customers. We launched our digital banks, Bo for retail, Mettle for business, and reentered the merchant acquiring space with Tyl. Our rollout of Bankline Mobile continues at pace, and we completed over GBP10 billion of transactions through the channel last year. And we are continually testing and learning inside and outside the Bank and taking a disciplined approach to decision making across our innovation agenda.

In summary, we start from a position of strength but see significant opportunities to deliver more. Today, we have strong customer franchises and market-leading positions in many product categories. We will evolve our propositions to serve more of our customer needs and every life stage, and this will both maximize our customers' potential and deliver returns for the Bank.

We have a track record of consistent cost reduction, which we will build upon. We still remain too complex and see further opportunities for reengineering and simplification of our core customer journeys, and this will improve customer experience and reduce costs in key segments. And we have rapidly launched a broad range of innovation assets to defend our core franchises and enter new spaces. And we will continue to test and learn with customers, while scaling these assets, as well as leveraging partnerships to accelerate our efforts. And finally, we have a strong balance sheet.

With that, I'll hand over to Katie to discuss the financial results, and I'll return to talk about the vision for the Bank and expand on the opportunities I've highlighted here.

Katie Murray -- Chief Financial Officer

Thank you, Alison. Good morning, everybody. I'm going to give you a brief overview of our financial performance in Q4 and the full year. As we look at the Bank, we feel it was a good result in a tough operating environment. All our targets were met that we laid down at the start of the year. We have been very capital generative, allowing us to recognize GBP2.7 billion of distributions to shareholders.

So, let me talk you through the P&L, and I'm going to focus mainly on Q4 results this morning. On income, as we have discussed throughout H2, income was going to be noisy with an FX recycling gain of GBP1.2 billion in the last quarter, along with other notable items of GBP74 million. After excluding these items and OCA, Q4 income was GBP10 million lower than Q4 '18 and GBP56 million or 2% higher than Q3 '19. This reduction compared to prior year's represents two main areas: the first, within UK PB, being driven down GBP51 million, primarily driven by mortgage margin pressure, the representation of our interest and suspense recoveries and lower debt sale gains; and secondly, across the Bank, the impact of lower deposit income.

On costs, 2019 was another good performance. Excluding conduct and strategic costs, other operating costs reduced by GBP170 million in Q4, taking the full-year cost reduction to GBP310 million, ahead of the GBP300 million target. We had GBP537 million of strategic costs, GBP85 million of litigation and conduct costs in Q4, with no changes being made to PPI charge that we took in Q3.

Within impairments, our Q4 charge of GBP160 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 a deterioration in trend of our loan books. We maintain our guidance of a through-the-cycle impairment loss rate of 30 basis points to 40 basis points. But note that based on core economic forecasts, we do expect to be slightly below that level in the medium term.

Our tax charge includes an GBP86 million charge relating to reducing the carrying value of the deferred tax assets within NatWest Markets in respect of losses in the UK, coupled with the tax credit relating to the FX recycling adjustments. Headline Q4 attributable profit was GBP1.4 billion. Excluding the FX recycling gains, Q4 attributable profit was GBP176 million.

On returns, the full year headline ROTE was 9.4%, which included significant litigation and conduct charges, as well as strategic costs. Excluding these recycling gains, the ROTE was 4.7% for the year and 2.2% percent for the quarter. In the appendix, there is a slide that shows you the full year results excluding the FX recycling gains. These are a more sensible base from which you should forecast from.

Q4 NIM was 193 basis points. This was 4 basis points lower than Q3 2019, primarily reflecting competitive pressures in the mortgage business, as front

Book margins naturally remain lower than back book. UK PB NIM decreased 12 basis points in Q4 with a very strong mortgage front book volumes of 10.4 billion [Phonetic] in the quarter. This clearly has had an impact. The positive revenue impact of this additional volume, offsetting margin pressures that we saw in Q3, has continued into Q4.

As we've talked about previously, our front book new to bank mortgage margins have been in the range of 80 basis points to 100 basis points this year. In both Q3 and Q4, we were slightly above that, and we would expect to continue to operate within that range into 2020.

Within one-offs, we have two compensating items that you should understand at business level, a 4 basis points negative in relation to the customer [Indecipherable] adjustment in Personal Banking that we spoke about in Q3, and coincidentally, a 4 basis points positive in Commercial in relation to customer repayment charges. So while the impact is zero at Group, the numbers are of course important at a business level.

Leaving the P&L and moving on to balance sheet growth. Our lending across UK PB, Ulster, Commercial and Private was 3.7% in 2019. This is comfortably ahead of our 2% to 3% target. Ulster had a strong performance, reflecting good lending in both retail and commercial sectors, partially offset by concluding the sale of a portfolio of nonperforming loans and the continued reduction of the tracker book mortgage of EUR0.7 billion in the year. Private net lending increased by GBP1.2 billion, or an impressive 8.4%, mainly due to growth in mortgage lending. And finally, on RBSI, net lending increased by GBP0.8 billion or 6%. This includes the business transfer of GBP0.5 billion from NatWest Markets, along with higher volumes in institutional and local banking.

Looking at UK Personal and Commercial Banking loan growth in more detail, mortgage new business market share increased approximately 12.5% in 2019, supporting a stock share of 10.2%, up from 9.8% in 2018. Q4 represented the strongest mortgage lending in 2019 and the best growth in a quarter in many years. Gross new mortgage lending was GBP10.4 billion in Q4, representing approximately 15% new business market share. While we saw a slight movement in new mortgage front book loan to values, which were 70% in Q4 2019 versus 69% in 2018, we are very comfortable with the level of risk that we are taking as we grow this book. Momentum also continued in personal advances and credit cards, increasing by 11.8% and 7.5% respectively. We are attracting new customers to the bank. In 2019, we added 60,000 personal current accounts in net terms.

Commercial lending remained broadly stable, as planned reductions were offset by growth across the business. Within business banking, SME, mid-corporate and specialized business lending increased by GBP1.1 billion during 2019 or 2.1%. And we have done that without compromising on risk appetite or lending margins and with commercial RWA intensity down from 76% at the full year to 71% currently.

Looking forward, we continue to target net lending growth across our retail and commercial businesses at attractive returns. Crucially, we are writing new business within our risk appetite and focusing on intelligent risk taking. Overall, we believe that this is a good performance in lending growth as we continue to deal with a range of uncertainties in the economic and regulatory environment, and it is a testament to the strength of our customer businesses.

Let me spend some time on capital. We have ended the year with a robust 16.2% CET1 capital ratio. This was partially driven by our lower RWAs of GBP179.2 billion, below the guided range of GBP185 billion to GBP190 billion, which is a result of continued strong capital management and modeling improvements in our commercial business and a reduction of market and counterparty risk in our NatWest Market positions during the quarter.

Excluding the impact of the Alawwal merger and PPI, we generated 110 basis points of capital from profits in 2019 and 60 basis points from a reduction in RWAs and other capital movements. Our diluted year-end TNAV was GBP2.67, down GBP0.19 on 2018, which is largely as a result of the capital distributions we have made during the year.

So to summarize the full year 2019 results, we continue to execute against the key pillars of our plan. This year, we have grown our lending by 3.7%, exceeding our 2% to 3% target. We have reduced costs by a further GBP310 million versus a GBP300 million targets. We generated 110 basis points of capital from profits excluding Alawwal and PPI. And we have reduced RWAs by GBP9.5 billion, reflecting continued capital optimization. And finally, as you know, we are well placed to participate in any future government sell down in 2020, and we would hope that this is the start of a multi-year buyback program.

And with that, let me hand over to Alison to talk more about the future.

Alison Rose -- Chief Executive

Thank you, Katie. Today marks the start of a new era for our bank. As Howard mentioned, we have announced our intention to change our parent company name to NatWest Group plc, and we're also announcing our new purpose to champion potential, helping people, families and businesses to thrive. This means recognizing that the way people live their lives has changed and that people now task business with a broader set of expectations, looking to companies not only to deliver financial performance but also benefiting customers, communities and shareholders. At the same time, and to ensure the Bank is well placed for the future, we are taking action to improve our customer proposition, taking out costs, injecting greater discipline in our approach to capital allocation and refocusing NatWest Markets to reduce RWAs by almost half. Taken together, this will result in a safe, simple and smart bank that will generate sustainable returns for our shareholders. And let me take you through some of the details behind our plan.

Firstly, we have a very strong foundation in place from which to deliver our plans. We are a leading UK and Irish bank with 19 million customers, supporting people, families and businesses to achieve their ambitions, to grow and to keep their asset safe and secure. In the personal bank, we're proud to have supported over 40,000 first-time home buyers, and indeed, our 2019 mortgage performance was the best in many years. Our commercial bank supports one in four UK businesses, and we supported over 65,000 new businesses last year. We have a robust balance sheet and a capital-accretive business. This broad customer base, good market positions, strong culture and a strong balance sheet provide us clear springboard for our strategy, a bank that is safe, simple and smart.

In every area of the country, our professionally qualified staff in branches, call centers and delivering specialist support are working hard to meet the needs of customers and regional economies. Indeed, GBP6 in every GBP10 we lent to UK mortgage and SME customers was to regions outside of London and the South East. We are the biggest supporter of manufacturing, with 29,000 customers in the sector. And we provide support to all businesses, from start-ups to the largest corporates to help them thrive, contributing to economic growth across the country.

Our 12 accelerator hubs deliver market-leading advice and support to entrepreneurs. And our regional board network ensures we are well connected to the local markets, listening, learning and reacting to the key customer needs and issues in the local economy. Put together, our deep relevance across the UK and Republic of Ireland provides a powerful local platform for serving customers and meeting that changing needs.

And there is no doubt that the coming years will bring sweeping changes to the way our customers live their lives and radically reshape their communities. We are actively getting ahead of these structural long-term shifts to ensure we stay relevant to our customers and position the Bank for the future. For example, demographic trends show an aging population with over half of potential future retirement income locked in properties. The number of private renters under 45 years of age are expected to overtake mortgage holders by 2029, which will have a knock-on effect on the mortgage market.

The nature of work is being reshaped. With up to 16% of UK adults expected to be self-employed by 2025 and almost three in 10 jobs at risk from automation, up-skilling and reskilling will be critical. And climate change is a profound threat with 85% of Britons concerned by it. Communities and families expect organizations like ours to react and take a leading role in addressing these changes and the impact it will have on their lives and communities. Against this backdrop, we see clear commercial opportunities for us as a bank if we stay close to our customers' changing needs and are at the forefront of helping them navigate these complex issues that face us all.

Our success in the long-term requires us to embrace these challenges, which will be good for our business, good for our customers and good for our shareholders. We do not exist simply to deliver financial products. Our actions have an impact on all our stakeholders, and our ongoing license to operate requires us to take a broad view. We will support our customers more effectively through their lives. We will use our insights about customers at each life stage to adapt our propositions and pre-empt their needs. And we believe this will unlock significant growth opportunities. We will reengineer our systems and processes to become a simpler bank to deal with. This will result in improved customer and colleague experience, as well as boosting efficiency. And we will use our innovation assets and leverage partnerships to power our strategy.

We recognize we can accelerate our execution and create better solutions if we look beyond our own boundaries. And we will take a much sharper approach to capital allocation, focusing our franchises more tightly against our customer priorities. The actions we lay out for NatWest Markets are a good example of this. Getting this right will ensure we are well positioned strategically, operationally and financially, enabling us to deliver on our ROTE targets of 9% to 11% and CET1 ratio of 13% to 14% in the medium to long term.

Our purpose will create longer-term deeper relationships with our customers. And when our customers succeed, our economy thrives, and we will succeed as a result. We've looked externally and worked closely with a blueprint for better business as we shaped our purpose, directly connecting our purpose with our core values. And this will sit at the heart of our core decision making, and we will aspire to live by it every day. We've built on a rich heritage of embedding these values in our day-to-day actions, and we're amplifying them and holding ourselves to a higher standards today and into the future.

We've also embedded purpose into remuneration, starting from myself, for my leadership team and for our broader organization, and we will be held accountable for delivering it. As Howard mentioned, this is the start of a longer journey, and we commit to moving the whole organization forward in this way.

In line with our purpose, we are focusing on three core areas where we believe we can make a unique contribution to the broader issues that are impacting the lives of our customers and communities. These are: addressing barriers to enterprise and business creation, skill building, particularly around financial confidence, and climate change and supporting the necessary transition to a low-carbon economy.

On enterprise, we're already the largest supporter of UK business and offer a wide range of services to those who either want to start a new business or scale up. Indeed, almost 19,000 entrepreneurs have benefited from our various programs, and we have launched a GBP1 billion fund, focused on female entrepreneurs. We are now setting targets to support more aspiring entrepreneurs, helping to create an additional 50,000 new businesses across the UK by 2023, and supporting over 0.5 million people to consider entrepreneurship as a career opportunity with a particular focus outside of London and the South East.

On lending, we will continue to take a leading role in helping people improve their financial confidence and well-being. We have set targets to reach 2.5 million people each year to build capability and are committed to helping our customers increase their savings. And we will also continue to build skills in our front line and ensure young people have better access to opportunities. And to do so, we are extending our digital apprenticeship program across the country.

And finally, on climate change, this is the defining issue of our generation. We have a responsibility to play an active role in helping find solutions. We know this is increasingly important for our colleagues and our shareholders. And as a bank, that also means helping our customers make the necessary transitions. Today, I'm setting a bold new ambition to be a leading bank helping to address the climate challenge 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. I want to be absolutely clear, I'm setting this bank up to take the 10-year view and matching our ambitions accordingly. We are setting ourselves the challenge to at least half the climate impact of our financing activity by 2030.

We are also determined to lead on the industrywide collaboration that will be so critical to influencing and financing the transition to a low-carbon economy. We know that there will be significant investment required to support this transition. The International Energy Agency estimates a doubling of the annual global energy sector investment, and we want to be at the forefront of making that happen. There is a clear market appetite to shift to more energy-efficient buildings, as well as for greater use of renewables and electric vehicles. However, demand is not being met with supply. Our strong market positions and expertise in these sectors, requiring transitional investments, be it agriculture or transport, means we are well placed to play a leading role in this transformation and the financing requirements.

As we set bold ambition in the short term, we have put in place the following targets, which we will evolve as solutions develop. In order to help accelerate the speed of transition, we will contribute by moving away from co-financing activity, engaging with our customers as we do so to help them. We will also support 50% of our mortgage customers to achieve an EPC band C rating for their properties by 2030. To champion climate solutions by 2022, we will double our funding and financing support to sustainable energy to GBP20 billion. And we will transform the impact of our own operations with a commitment to be climate-positive by 2025.

In the context of the structural shifts I discussed earlier, we must do better for our customers at every life stage. By acting purposefully and taking a life cycle view, we will better pre-empt our customers' needs. For instance, it is notable that 85% of businesses in the UK are family businesses. These are customers who interact with both our personal and commercial businesses, and we need to be able to serve them seamlessly. We also recognize the growing number of self-employed and gig economy workers and the different ways they want to access short-term borrowing, and we are working to reflect that in our propositions.

In addition, people are living longer, requiring more income in retirement, creating opportunities for decumulation propositions to help unlock wealth tied in property. And we also see growing demand for investment products from our mass affluent customers, and we are enhancing our digital wealth propositions and evolving our premium [Phonetic] proposition to meet these needs. Our scaled customer franchises in personal, private and commercial enable us to capture the value of these customer insights. We see a number of areas of opportunity, for instance, across short-term borrowing and investments for our personal customers, and in fee-based products and adjacent services for our business customers. We believe these opportunities allow us over time to protect and diversify our income in the face of ongoing economic uncertainties and disruption.

Consumers also want their bank to be simple to deal with, and this is reflected by the growth in digital, which is now the predominant channel for our customers. However, helping our customers means being there when they need us, both in the digital world, but also to evolve our physical interactions. In 2019, more than 70% of our personal customers were digitally active. And in the commercial bank, this was more like 90%. For many customers, speaking to an advisor will always be required in certain situations. We have over 16,000 physical points of service, be it branches, post offices, community bankers or our mobile vans. And we will continue to evolve our physical footprint and how we use it. We're also improving our support to vulnerable customers through better use of data, centers of expertise and human support networks, and our strategic partnerships, for example, SafeLives, to help tackle financial abuse, financial hardship and later life learning.

We do however remain too complex, and this negatively impacts the experience of our customers and our colleagues and it is highly inefficient. We are going to focus on simplifying and reengineering our processes, which will make us a simpler bank to deal with for our customers, reduce costs, and over time, support income growth. We are driving greater adoption of our digital tools and equipping our colleagues to support customers in successfully changing how they interact with us. We are continuing to invest in our systems and using predictive analytics to reduce handoffs and eliminate stalling points that drive complexity and cost that can also result in lost income. These actions will help ongoing operating cost reductions in our business and contribute to our GBP250 million cost reduction targets in 2020.

We will also continue to innovate and look to partner with third parties to develop solutions for our customers in this period of uncertainty and disruption. We're starting to build a good track record in innovation delivery. Over the past two years, we have launched to market a digital lender, Esme; a business bank, Mettle; a personal bank, Bo; and a digital HR advisor, Path, among many others. We're also very proud of our reentry into the merchant acquiring via our new proposition Tyl, which is an innovation that is already making a difference to our customers. Working with partners, we identified a customer need and designed Tyl to make it easier for customers to run their business; straightforward on-boarding, simple pricing, smart data insights and next working day settlement recently launched. There is positive customer advocacy, over 1 million transactions processed and over 1,000 merchants on-boarded, and this is a really positive start. At the same time, however, we will remain highly disciplined in how we approach both innovation and partnering. It must be matched by the financial discipline to call time on ventures that aren't delivering sufficient impact for our customers and our shareholders.

Turning to NatWest Markets, we have taken the decision to refocus this business. We will provide solutions for our core customers, which will result in Markets having a sustainable future within the Group. We assessed various options and arrived at this decision to reflect our customers' needs and the challenging returns in this business. As a result, we plan to half the size of the business by RWAs to circa GBP20 billion over the medium term. Once the restructuring is complete, the business is expected to comprise of around 10% of the Group's RWAs from its current level of 21%. Our current plan assumes CET1 capital allocated to NatWest Markets will reduce by circa GBP3 billion, and we also assume this reduction to capital will be capital ratio accretive in year-one and through the transition plan. And we will continue to refine the plan over the transition period. Sharpening our capital discipline and focus means we need to be much smarter in how we run our businesses across the Group, and this is broader than NatWest Markets and includes parts of our commercial bank and how we get the best out of Ulster Bank.

The restructuring of NatWest Markets has been centered around the needs of our corporate and institutional customers. We want to remove complexity and be a simpler bank to deal with. A slimmer product suite will serve a focused set of core customers across financing and risk management, an operating model that is better integrated with our core banking infrastructure and better aligned with the Group, less duplication and better service. This is a multi-year restructuring plan, but we have a strong track record of execution and a robust balance sheet that puts us in a position to make these decisions. We expect illustrative returns from our corporate and institutional customers to be around 8% in the medium to long term.

In summary, we are putting purpose at the core of everything we do, and doing so will create a sustainable and resilient long-term future, with medium-to-long term ROTE of 9% to 11% on a CET1 capital ratio of 13% to 14%. We will support our customers at every stage of their lives, thereby building deeper, longer-lasting relationships and greater revenue opportunities to counteract a low rate environment and continuing disruption. In 2020, will target greater than 3% lending across our retail and commercial businesses.

We commit to being a simpler bank, resulting in a cost reduction target of GBP250 million in 2020, and we will continue to invest to create future revenue opportunities through innovation and partnership to open up the Bank and bring the best solutions to our customers. And we are refocusing our NatWest Markets business to meet the needs of our customers and to optimize Group capital and returns. We will be a safe, simple, smart bank that will help all of our stakeholders succeed.

And I'll now hand over to Katie to talk through some of the key financials to support our strategy.

Katie Murray -- Chief Financial Officer

Thank you, Alison. Alison has reminded you of the solid foundations of our customer businesses and where we start the next chapter of our journey from. Over the next couple of slides, I will cover the financial aspects of our future plans.

We have a sound balance sheet. We continue to invest in transforming the Bank. We have a proven track record of cost reduction. We will refocus NatWest Markets on serving our corporate customer need. And finally, we will continue to generate and distribute capital from a financially and operationally resilient bank, targeting a medium-to-long term ROTE of 9% to 11%, supported by a capital ratio of 13% to 14%, again, in the medium-to-long term.

We started the year with a solid set of balance sheet metrics. Our CET1 ratio was 16.2%, comfortably above our end-2021 target of 14%, supported by our strong organic capital build. Our LCR for the year was 152% on a total liquidity pool of GBP199 billion. Our LDR remains a healthy 89% with our customer lending supported by solid core deposit base. And we will continue to manage our liquidity position in response to market conditions. This is a strong balance sheet by any measure, which has also been well demonstrated in the recent Bank of England stress test.

Looking at our customer businesses, they have performed well in a challenging environment, and we enter this new strategic phase from a position of strength. UK PB delivered a solid ROE of 21% excluding PPI, driven by strong lending growth offsetting margin pressures, particularly in the latter part of the year. Ulster's operating performance is improving. We are seeing good lending growth and front book margins. Legacy trackers continue to reduce and costs are coming down. NPLs continue to decline, and we are on track to be at the around 5% level, in line with the EBA guidance -- guidelines by the end of this year. We will build returns from here. However, as we have said, Ulster's repositioning will take time. But we are pleased with the progress that Jane and her team are making, including the return of a further EUR500 million dividend that was delivered in December to the Group.

We are the leading commercial business in the UK, banking one in four of all UK businesses. Our lending remained stable this year against the backdrop of increased uncertainty. We are growing in the areas we like. Business banking, SME, mid-corp and specialized lending were together up GBP1.1 billion or 2.1% this year. Private continues to be a very successful business; 15% ROE in 2019. Income is up. Other expenses are down. And both lending and assets under management are growing, and present further opportunities for growth.

Turning to RBSI, this is a small part of the Group, but it is a business with excellent returns; 26% ROE in 2019. We have made strong progress in the funds business over the last year, and we see more opportunities to continue to grow. I will cover NatWest Markets in more detail on the following slides, but together, we have a strong set of connected businesses from which to build and grow.

Turning to investments, we have consistently invested over GBP1 billion in our business. What has changed is the mix of the spend. Over the last few years, our spend has been dominated by mandatory and regulatory programs, including things like ring-fencing. We are now investing more in new technology and to really change our focus through innovation in our core businesses.

If you look at something like mortgages, back in 2014, it was all about the mortgage margin -- mortgage market review and getting ready to fix our GMS system. What we are now spending resources on in mortgages is new capability and improving our customer experiences. We've talked a lot about the paperless mortgage journey before. We have now also automated the way that more of our customers get their property valuations, making it quicker and easier for them to get their mortgage offers.

Looking at how this business is changing, back in 2014, only 26% of UK PB sales were digital. Today, it's 53%. 63% of personal unsecured loan sales, 66% of credit card accounts and 56% of current accounts were opened by the digital channel. Going forward, our investment will be directed toward our strategic priorities where they can have the most impact, focusing on growth to future proof the business and on reducing costs to offer shareholders and customers better value.

We've built a very strong track record on costs, GBP4.5 billion out since 2014. That's over a third of our starting cost base. We're very focused on taking costs out as quickly as we can without damaging either our customer businesses or our control environment. When we talk about cost takeout going forward, we will be looking at other operating expenses, excluding operating lease depreciation. So this year, we will take out a further GBP250 million or 3.6% of our cost base, reducing our other operating expenses to GBP6.7 billion, excluding the operating lease depreciation. If we were to look at our 2019 reduction on a comparable basis, the 2019 cost takeout would have been GBP327 million.

Going forward, cost takeout will mostly be about process reengineering. That's a much better quality cost reduction. It reduces the run rate much more immediately versus the large-scale property reductions, which take time to pay back. But of course, it is also a kind of cost reduction that's more difficult to achieve. We will focus on transforming our top customer journeys. We will deliver this by building on our successes to date and enhancing the way we work to accelerate delivery. Importantly, this process reengineering will allow us to take costs out and result in better and simpler customer experiences and improve satisfaction.

We're also today updating our guidance on strategic costs. These will be GBP0.8 billion to GBP1 billion for the Group, including NatWest Markets in, 2020. And we expect these to trend to around GBP300 million over time. Our focus is on and will continue to be on reducing the cost base of this business.

So let me walk you through the detail around the NatWest Markets' refocusing Alison has talked about. This business will be going from 21% to around 10% of the Group's RWAs. It will be refocused on activities which are directly supporting our core customers, significantly reducing the 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, which supports our position as the leading supporter of British businesses.

So to give you the numbers, we have previously guided you to NatWest Markets' RWAs to be up to GBP39 billion. Our current plan assumes that NatWest Markets in the medium term will be around GBP20 billion of RWAs, utilizing half of the GBP6 billion of capital it does today. We expect this capital reduction to be CET1 capital ratio accretive in year-one and over the course of the transition period. And we will, of course, continue to refine our plan over this period. NatWest Markets' restructuring and disposal costs will be GBP0.6 billion in 2020. We estimate GBP0.4 billion of these costs will come through as disposal losses in the income line and GBP0.2 billion as strategic costs within the cost line.

As some of you may have seen this morning already, NatWest Markets' legal entity has a CET1 ratio of 17.3% at year-end 2019, or GBP6.1 billion of capital, which is above it's 15% target. So it is well capitalized as we start this process of change.

You also heard Alison talk to our view of customer via corporate and institutional customer lens. This view takes our large and mid-corporate customers combined with the NatWest Markets' product suite that they use. We target an illustrative ROE of this customer view in the medium-to-long term of around 8% excluding strategic and conduct costs. It is important to understand the results we get from servicing our customers across the Bank and not just by individual businesses. And so, I will share this view with you periodically. We will, however, continue to report the businesses of commercial and NatWest Markets to you as the business view [Phonetic].

Turning to capital generation and distributions, we have ended the year with a robust 16.2% CET1 ratio post an ordinary dividend of GBP0.03 and a special dividend of GBP0.05. 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 commercial focused bank with a smaller and less volatile NatWest Markets. That's a medium-to-long term target. And we will get there first by getting our capital down to 14% at the end of 2021. To achieve this, we will use a combination of distributions as the Board, Alison and myself feel appropriate at the time. All using at their base the continuation of an ordinary dividend payout ratio of around 40% of attributable profits.

As you are aware, there are a number of capital headwinds in the next couple of years. These include things like RWA inflation. We said we expect the Bank of England mortgage floors to increase RWA base by GBP10.5 billion at the end of 2020. Pension contributions linked to dividends with payment starting from 2020 which are capped at GBP100 million per year up to a total of GBP1.5 billion, noting that we have reflected year one in our 2019 CET1 ending position with the capital impact of 20 basis points.

Basel 3 amendments which we anticipate to be at the lower end of the 5% to 10% range. We have talked about and phased across '21 to '23 with the timings and details still subject to regulatory uncertainty. And as we have discussed, we aim to take around GBP18 billion of RWAs out NatWest Markets after consideration of the Basel 3 amendments. I am conscious, we've given you a lot of numbers today. So I thought it might be helpful to put all of our financial targets and outlook on one page, based on the economic outlook as we see it today.

Starting with costs, we are targeting to take another GBP250 million or 3.6% out in 2020 excluding the operating lease depreciation and we would expect ongoing cost take-outs in the medium to long term. We will do this while continuing to invest around GBP1 billion in the business per annum which as we go forward becomes more and more allocated to long-term value investment spend versus mandatory remediation and regulatory spend. On lending, we are targeting over 3% across our retail and commercial businesses in 2020.

On capital, we are targeting to get to 14% by end 2021 on our way to our updated medium to long-term target of 13% to 14%. Looking at returns, in the current economic and low rate environment, we believe in the medium to long term, NatWest Markets Group -- NatWest Group forgive me, we'll be generating a return of tangible equity in the range of 9% to 11%. There are also a few items in our outlook statement, I want to ensure that I have landed as well. Throughout last year, we talked much about the regulatory changes in personal banking and their expected impact on income in 2020. You should think of this number as around GBP300 million in 2020 and growing to a full-year run rate of GBP300 million in 2021 depending on customer volumes and behaviors in responses to the change.

We expect to incur GBP0.8 billion to GBP1 billion of strategic cost during the full year 2020, resulting from the refocusing of NatWest Markets and the continued resizing of the Group's cost base. On impairments, we maintain our guidance of a normalized long term loss rates of 30 basis points to 40 basis points. However, the potential impact on the real economy and browser uncertainty could of course affect our loss -- our credit loss outcome and this rate from single name and sector driven events always remains.

Turning to capital, we expect to end 2020 with RWAs in the range of GBP185 billion to GBP190 billion and in the medium term within NatWest Markets, we anticipate the RWA will reduced by around GBP18 billion. Finally, the key points of our investment case. Our purpose will lead to a long-term sustainable business. We have solid customer businesses for an ability to grow, we will become simpler to deal with our business model is powered by innovation and partnerships. We have a robust balance sheet with strong capital generation and returns to our shareholders. And with that, I will now hand back to Howard to host some Q&A.

Questions and Answers:

Howard Davies -- Chairman

Thank you very much, Katie. You've been very patient through rather long sort of presentations. But we can now move straight to questions. And if you can give your name and institution that will be helpful. Thank you.

Jennifer Cook -- Exane BNP Paribas -- Analyst

Thank you. It's Jenny Cook, Exane. Could I ask for a little bit more color on the ongoing operating cost takeout because if I take your GBP12 billion revenue base and I pro forma for a significant loss of the rates income, the regulatory impacts both 2020 and 2021 and the fact that you're factoring in rate cards. It gets me closer to around an GBP11 billion revenue base. So in order to kind of reached your certainly the low end of your rate targets, you're looking at operating cost takeout of around 3 times what you have outlined for 2020. So if we could get a little bit more color in terms, kind of our ongoing operating cost takeout up quite useful. [Speech Overlap]

Secondly, just on the phasing, if you give a little bit more color around the phasing of when you would expect to lose those revenues and NatWest Markets take out sorry NatWest Markets. That would be quite useful, just kind of size up the run rate PBT drive that we are going to have coming through over the next few years. Thank you.

Howard Davies -- Chairman

Thank you, Katie.

Katie Murray -- Chief Financial Officer

Yeah, sure. Thanks very much, Howard. So if we look at them, our cost takeout. What we have done in the last couple of years is a number that's been around 4%. The GBP250 million number is 3.6%. We would expect to kind of continue at those kind of levels as we move forward. We certainly don't see this is the end of the cost journey. So I would continue to penetrate them forward within your model.

In terms of the phasing within NatWest Markets. What we've said today is that will take GBP6 billion to GBP8 billion of the revenues out in 2020 with our an intention to get down to GBP20 billion and over the medium to longer term. When you look at the revenues within your financial supplement and then all which gave you about 100 bits of paper this morning but Page 31 is a we need good place to go in the financial supplement when you get back to the office. What it does is it shows you the revenues split out by currency financing in rates and what you can see is the currency and financing business is relatively stable over time. We wouldn't expect that to change.

When I look at the rates business, it's going so from GBP650 million to GBP450 million over the last couple of years, that's the business that we said that we're going to shrink substantially. So I think from there you kind of with the takeout this year in the plan, but you can kind of estimate what that might mean for revenue in terms of phasing of that business. And I think that was it.

Howard Davies -- Chairman

Thank you. Next. Yeah, third row, first one. Thank you.

Joseph Dickerson -- Jefferies -- Analyst

Hi, it's Joe Dickerson from Jefferies. You referenced at the -- I believe it was the half year results from recycling of legacy instruments from NatWest coming through and being a benefit to income and you referenced also on that commentary that I think Q1 2020 there was a sizable chunk. How can we expect that to impact the NIM in the near term. I guess secondly, a question for Alison, which is we heard a little bit about repositioning of Ulster but what's really the strategic future of Ulster.

Alison Rose -- Chief Executive

Okay. Why don't I take Ulster and then Katie can answer your first question. I mean Ulster Bank, Jane and her team are doing a very good job there, you can see the progress that we're making. And I think the plan to continue to restructure that business is ongoing. We've seen our tracker books coming down, we've now started to get capital out of that business with the dividend at the end of last year and our non-performing loans are coming down. We will see getting some growth in the mortgage business. So I think what I would assume on that business is a continuing steady restructuring of that business and Jane and as her team continue to refocus that business. Katie?

Katie Murray -- Chief Financial Officer

Yeah sure. Thanks, Alison. In terms of the recycling of some of the legacy debt. So you recall that we have about GBP1.9 billion of that came off the books at Q3, which was the main portion. At the end of Q1 there is another GBP1 billion and then over Q2 and Q3 it is actually another GBP1.1 billion. And in terms of coupons, we pay on that, it's about 5.5%. So we expect to replace that numbers are kind of half that level within that, within NatWest Markets. The bad news is Joe, it doesn't have any benefit on NIM because you will recall that last year I moved the NIM to exclude NatWest Markets because of the fact that it gets its -- its expense and everything comes through NII but its income comes through in non-interest income. So it won't it would know itself a direct pick up on the NIM number. Thanks, Joe.

Howard Davies -- Chairman

And next, immediately next to Joe, I think.

Raul Sinha -- JPMorgan -- Analyst

Hi, good morning. It's Raul Sinha from JPMorgan. Thanks for taking my questions. Maybe a couple of -- first, a strategic one I'm really struggling to understand the NatWest Markets stand-alone division as a strategy, which is half its size currently and I wonder if you can talk about the option of kind of merging that with commercial. It was the only reason that it stands outside the ring-fence and that if that is why you have to sort of maintain this division, because obviously it is going to distort the profitability of the Group significantly. So that's a strategic question. And I guess related to that.

What should we think about, I don't know if Katie you've got a hazard in P&L as Ross used to give us GBP1.3 billion of topline, GBP1 billion of costs, you know. What is the sort of future outlook for NatWest Markets because I think that is something, the market will really like to understand to get a sense of your long-term royalty? And then I've got a second one just very quickly on. Sorry, maybe a third one. We are supposed to be able to count on capital. A lot of your excess capital is trapped in Ulster. If I look at -- if I assume that GBP10.5 billion of RWAs. It's going to eat up most of your surplus capital outside of also then essentially getting down to 14% CET1, requires you to get capital out of Ulster. What are the risks to that strategy in the next --

Howard Davies -- Chairman

I think in a way you wanted your first question yourself on the ring-fence. I mean, there are certain products and certain customers with whom we cannot -- in which we can transact or with whom we can transact within the ring-fence. So that requires you to have some of it. But I think as we've said, we are increasingly trying to look at it from a corporate and institutional banking perspective, while respecting the ring-fence but nonetheless looking at the totality of the business we do with those customers and bringing those teams more closely together than they have been in the past. So that was part of the first question. Alison?

Alison Rose -- Chief Executive

Yeah, what I'd just answer to that is obviously NatWest Markets, when I took over was one of the key strategic areas of focus, which is why we launched a strategic review in that business and we looked at all of the options. So as Howard said the ring-fencing is key here. But we think the shape and size of that business is really then going to provide the products and services to support our core businesses and we think that is the right shape and size going forward. And obviously that was one of the first things I addressed. Katie, do you want to pick up the --

Katie Murray -- Chief Financial Officer

Yeah I'll try and give you a -- look like our P&L but they actually giving you want because clearly I would have given it to you if I was going to. But let me help you. Let me help you a little bit, AA is complicated, I do accept that. So if we look at there today. They are at GBP1.1 billion in terms of core income. As you look at the currency numbers and the financing numbers in the revenue share, I would look at them going forward modeling what you think economics might do to them and kind of take them take them forward digital go through. You then expect the rates business to substantially decline.

When we look at this business in the sort of medium to long term. I guess we view is basically a breakeven type business. Your income will reduce accepting kind of the RWA change and your costs are more or less going to kind of match it. So if you can kind of crack the income code, you get to you'll get some kind of a cost picture. And you know then it's important to say actually, and this is why the corporate and institutional customer view is really important. The reason we have this business is absolutely as Alison says it's so important for the way that our corporate customers interact.

In the ring fence, we're not looking to change it but it makes the view of it a little bit unrealistic. When we talked about that being at 8% returning business and after we do they kind of the resizing. The way I would think about that is, the GBP20 billion of RWAs that sit within NatWest Markets and there is about GBP40 billion of the RWAs that are allocated to corporate which people to actively use that and that combined kind of returns an 8% return in these economic kind of conditions. So I'll probably let you kind of build build something up.

You also asked to asked about Ireland in the capital. We got EUR500 million from Ireland in December and so that something we're very, very pleased to receive coming back. If I look back to 2018, we also received a significant dividend in 2018. I think the reality in terms of the Irish story, it's slow but it's delivering. And so we are getting the capital out. I would expect to get more out later this year and I probably expect to get more again into next year. So I think it's a kind of a question of patience rather than deep concern

Howard Davies -- Chairman

Thanks. I'm going to take one from in the Ether because it was very much adjacent to what we had been talking about, from Gary Greenwood of Shore Capital is, if you only expect to achieve an ROE of 8% for the C&I business over the medium term to long-term, why don't you just close it down.

Alison Rose -- Chief Executive

Thanks for the question. So as I said NatWest Markets is, it was the most important thing on my desk when I took CEO and having run the strategic review. I think this is a business that provides key products and services to a very strong commercial, corporate and institutional set of customers. We think that the products and services reshaped delivered in a different way, meaning that this is the right shape and size for the business. We're obviously moving more of our capital into our retail and commercial franchise, which is a higher rated, more stable income business, I think 8% based on the current economic outlook and assumptions is a realistic scenario and therefore I'm comfortable that this is the right shape and size to support our core business.

Howard Davies -- Chairman

Thank you. I think we should go over here, Second row, thanks.

Martin Leitgeb -- Goldman Sachs Group -- Analyst

Yes, good morning. It's Martin Leitgeb from Goldman Sachs. First on capital distribution just looking back a year ago the core Tier 1 ratio was 16%, the target for '21, 14% and I think the implicit assumption was a kind of a guideline step down over the years. Today, the core Tier 1 ratio is up, the dividend is slightly less than consensus, but obviously there is to focus on the buyback, during the year and I was just wondering, is there anything which in according to your plan has slowed down somewhat, the kind of distribution of excess capital whether that's a whole, whether that's something else in terms of headwind or is just we should we just think it is of being bulky and the trajectory to the 14% 2021 is still pretty much unchanged. And -- [Speech Overlap]

Katie Murray -- Chief Financial Officer

Sorry, no other questions.

Martin Leitgeb -- Goldman Sachs Group -- Analyst

The second question is just on the exit cost in NatWest Markets. And again, thinking back when you went from, I think GBP100 billion or GBP107 billion, NatWest Markets down to around 30 kind of implied exit cost around 5% of risk-weighted assets all in what you show now and I think it's slide 40. We said, at least the exit cost in year one are meaningfully higher, and I was just wondering, is that just a kind of a front-loading of some of the actual cost of earlier and we should broadly similar exit costs overall. What I'm trying to get is essentially what is the kind of the net capital freed up from the exercise at NatWest Markets. Thank you.

Howard Davies -- Chairman

On the first of your questions and I'll hand over to Alison for the second. I think that the environment, political economic environment has changed somewhat and that since December with the election of majority government and it stated aim to return the bank to the private sector. We do now see greater potential to take part in share buybacks in the short term. And we also think that that should become a recurring feature of our distributions over a number of years. I think that is part of the background.

Alison Rose -- Chief Executive

I mean, and just more broadly on the capital distribution. No, there is nothing that we're struggling with, or holding us back. We always said our capital distributions will be non-linear and as Katie mentioned we have a number of positives we're generating capital which is good from our businesses, which are doing that but we have some headwinds, the mortgage floors that are coming in, the pensions, the Basel 3. So we always said it would be non-linear and lumpy and as Howard mentioned, we want to participate in any government sell down, so that's the answer for that.

Katie Murray -- Chief Financial Officer

In terms of the -- I reduced the guidance we've given you for year one as a good indication of what it might it might take to get kind of down to the GBP20 billion of assets, but we not, we're not giving you anything more specific. We're not kind of planning to, but that would be, that would be I think a fair proxy, we will obviously, we will update you obviously as we go through -- we go through that process.

Howard Davies -- Chairman

Yes, that one. Thank you and then immediately behind you.

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Hi. Alvaro Serrano from Morgan Stanley, I just wanted to follow up on the cost question. Katie, I think you said during the presentation that reengineering your processes was -- has a faster payback. And when I look at the strategic costs, you said GBP800 million to GBP1 billion, GBP200 million of that presumably is NatWest Markets, but you're only expecting kind of a GBP250 million run rate of take out -- cost takeout. Can you maybe just give us a bit of color of what you're spending the money or investing the money in terms of those GBP800 million and a GBP1 billion, which areas and could we expect more or why should we expect more. Thank you.

Katie Murray -- Chief Financial Officer

So, I mean as we look at it, GBP250 million is the target that we've given you. I think in our past, I said that we really do try to give you honest targets, in terms of, we said GBP300 million, we did GBP310 million. So that is certainly is the number. So I wouldn't go back and take my GBP250 million and double that or anything like that. That would be foolish. So I mean I think in terms of the guidance we have. When you look at the cost, you know what we've done this year, we spent of this strategic cost, the GBP1.4 billion, about GBP500 million of that was on big property access. We've exited about 13 big buildings around the country this year, and those are really important things to do. They are important not just because you're exiting the building, but you're also -- you are naturally reducing headcount to enable you to exit those buildings.

But they take a long time to payback. I mean it's over GBP70 million to GBP80 million run rate we've got into this year from that GBP500 million of spend that you do get. So there still be some, as I look at the kind of the GBP800 million to GBP1 billion, you are right GBP200 million is NatWest Markets. So all of that piece, there is still some portions in relation to properties, less significant than it has been in the past. Obviously, when you're doing cost reduction, you've got three levers. There is properties and the technology and processes within there that you've -- and people that you can, that you can deal with in terms of the, what you believe is that you can pull. We've also in our strategic cost still a little bit if I'm left over of some of the regulatory, I think we're all surprised that the ongoing kind of payments regulation that continues to change we had felt that we did finish that last year. So it's probably between that and the kind of cost of LIBOR, it's probably about GBP100 million in there that kind of is really focused at some of the regulatory kind of type engagement that we continue to have to so kind of kind of deal with as we move forward.

Howard Davies -- Chairman

Thank you. Directly behind. Thank you.

Claire Kane -- Credit Suisse -- Analyst

Hello it's Claire Kane from Credit Suisse.

Katie Murray -- Chief Financial Officer

Hi, Claire.

Claire Kane -- Credit Suisse -- Analyst

I have three questions please. The first is on NatWest Markets and the P&L development there, you give out a target to get up to 8% return on C&I on a GBP60 billion base. I think that implies broadly speaking about GBP450 million net profit improvement. And so if we consider the breakeven target for NatWest Markets, can we assume the majority really is borne within Natwest Markets in the sense that you will take out a lot of cost there given you probably lose half of the GBP450 million rates income and you've already got GBP200 million of surplus costs relative to the existing revenue base. That's my first question.

Alison Rose -- Chief Executive

That was three questions in one Claire.

Claire Kane -- Credit Suisse -- Analyst

Sorry. My second is just broadly speaking on the 9% to 11% group targets. Can you just maybe talk us through why you have a range in the, given you had previously hoped to be above 11% and if we look at your kind of longer term GBP200 billion RWA target for the group that would suggest a range of net profits of about GBP2.8 billion to GBP3.5 billion, up 14%. So just wondered if that's kind of where you're thinking the group could end up in terms of earnings power. And my final one is just a really small follow-up on Ulster Bank capital distribution. Good to hear your expected to further dividend at the end of the year, is that really just dependent on delivering the 5% NPL. And then going forward, do you think there's any risk to the distribution out of that entity, given the change in political party perhaps in Ireland. Thanks.

Alison Rose -- Chief Executive

Okay, thank you. So I'll start and then Katie can pick up a few of the others. So look on NatWest Markets as we restructure and refocus that business, we are going to significantly be streamlining the cost base in that business as you would expect, as we made key sort of leveraging some of the capabilities that we have in the core bank as well in terms of our platforms and our technology as we reduce our product suite and make it much more focused on our core corporate and institutional customers and as we make use of some of the technology improvements from electronic trading and such like, you will see a much smaller simpler business in terms of supporting the corporate and institutional customers.

So we will be taking quite a lot of cost out of that business as you would expect and we will come back and update you later in the year on those developments of those actually plans and Robert and Paul can talk you through how they're doing on that is the business collaborate more closely together. Katie, do you want to take the next one?

Katie Murray -- Chief Financial Officer

I'm going to try to go around as circle. And then if I miss something else, please, please do jump in. So I guess NatWest Markets in terms of the numbers. Certainly, there's going to be significant cost takeout that we do talk about as a breakeven business going forward. Just to kind of try to help you on the 8% in the numbers, if I look at that business today it absorbs with the appropriate portion of the mid-and large corp together, they're about GBP75 billion of RWAEs they earn about 2% return, but the time you reduce the NatWest Market piece expect probably a little bit of growth in the mid to large Corps as well. You kind of get as of GBP60 billion time number on the 8% piece, I mean here as you work through the kind of income guidance we have given you and what that means for the cost base. I think that will kind of help you hopefully get to at some sort of the appropriate kind of answer.

In terms of the range of the, the 9% to 11%. We believe that that's the right range we should be aiming for. There is a lot of things we will do in the short term and we felt it was more appropriate to give you a range that we were very comfortable, but then there I think you know I'm sure we have more conversations around what you might think of income in the medium to long term. We've also tried to give you some guidance on where capital will be going in that space. We've talked about continuing cost reduction and beyond this year. So we're kind of comfortable that within that range is where you should, you should think of us.

And then in terms of capital distribution. There is not linked to a specific kind of transactions you've heard us as a group, a number of years ago talking about before we could deliver capital distributions. We have to, we had these three or four things that we'd agreed with the PRI. We don't have that same situation in Ulster. But I think we just need to do is continue improvement continued commitment on our plans and we will get there in terms of risk from the politics. I'll leave that to the politicians and then we'll see where we go.

Howard Davies -- Chairman

Let me just pick up that because it -- I mean, one is a considerable uncertainty about what the government will be. We have no idea at this point. But secondly, just as a factual point. This is a bank regulated by the ECB. And it is not regulated for prudential purposes by the Central Bank of Ireland. And so the capital distribution is in the hands of Frankfurt not of Dublin. Thanks. Yeah. Let's go. I think we should go right to the back. Actually to be geographically even-handed. We are doing some leveling up here. Yeah.

Andrew Coombs -- Citigroup -- Analyst

Thank you. It's Andrew Coombs from Citi. I actually wanted to touch on the net interest margin. It wouldn't be complete without a question on NIMs. If I look at the decline quarter-on-quarter, you've had a 4 basis points actually slightly better run rate than the prior quarter. My question is really comes down to three elements in this. The first is, can you just provide the usual guidance you gave them front versus back book spreads our analysis. The second is about Q3. You said there might be a one-off ERR adjustment and I can't see any reference to that. So is that still to come? I guess the third part on the NIM is should we read anything into the fact you've increased your loan growth numbers. What does that mean in terms of your pricing? And then the final question. So I know if you can, but done on the 200 number you gave the 300 exit run rate for PBB. Can you just remind us the split of that the main elements and how that's deviated up between NII and SVR --

Katie Murray -- Chief Financial Officer

My favorite topic. Yes, absolutely, and I'm delighted that it took 22 minutes past time to get there. And so we look at, look at the NIM number, obviously down 4 basis points in the quarter 3 basis points in terms of the competitive pressure, and 1 basis point because of the one-off that we had in Q3. When we talked in Q3, we talked much more about the fact that actually that competitive pressure was a real blend of mortgages and also the pressure on deposits. What we didn't see in the fourth quarter was that pressure from deposits. So, it really was a mortgage -- a mortgage story, which was both the filing of the rate, but also the add-on of the greater volume that we had in that quarter.

We say that we're kind of comfortable to operate in this kind of 80 basis points to 100 basis points corridor and if I look at, I think it's a full year number, it was a -- we roll over the whole year at about 99 basis points, a little bit higher in the last couple of quarters. When you look at the back book to the front book, our ending or exiting at Q4 back book is about 145 basis points so obviously, we've got to remember that you don't take the whole book all the way down to the 80 basis points to 100 basis points because there is SVR, there's [indecipherable] there's switchers, I always say to people think of a number of kind of in between the middle of those two, and you'll probably get a fairly comfortable bace, but not going to give you the specific the specific detail.

In terms of the one-off an adjustment that was in relation to the negative 4 basis points that we got within the retail space. So there is not something else to come that has come through and loan growth, look I think Les is doing a tremendous job with his team on loan growth, what's really pleasing is the volume that they have been able to do 15% in the last quarter. We talked earlier last year and previously that actually went 15%. Are we in the right place from our system and processes could as a bank could we actually push that much and the business down the pipe. And it's been really pleasing to see NPS scores in that space, and that's really what we're able to push down without compromising not saying that we're targeting 15% going forward further, what we've said is our stock share now at 10% and our kind of natural share. We're very kind of happy to take the volume, we're happy with the margins that we're earning on it and the fact that we can get the volume to kind of offset that margin loss. So very pleased to see what that business is delivering.

And then in terms of the 200 for this year, but they are kind of the basket of differences, whether it be the overdraft the high cost of credit review, the interchange fees on European payments. We're not really going to split that number down for you what I would say is that, think of the 200 and for the year. It comes more into impact after April and then the beginning of the year and then by the time you get into 2021, you should think of it as a full year numbers. So closer to 300 public get you into the right, the right basis undoubtedly we will call out as we go through the quarters of what we actually see kind of happening in that business.

Howard Davies -- Chairman

Very helpful, thanks. I'm going to just take one another from the Internet, Jonathan Pierce of Numis. Does the guidance just given of GBP850 million reduction in group cost per year going forward include the impact of lower costs in the NatWest Markets businesses being run off.

Alison Rose -- Chief Executive

Yes.

Howard Davies -- Chairman

Thank you. Yeah, third row here in the middle.

Aman Rakkar -- Barclays -- Analyst

Thank you very much. Good morning. It's Aman Rakkar from Barclays. Just had two questions actually. Just one point of clarification on NatWest Markets, you typically historically talked about the proportion of NatWest Markets' revenues that come from the commercial business. I was wondering on the new kind of target GBP20 billion of RWAs, is it still kind of third of revenues coming from commercial the sense of get is that number is presumably a lot higher now and so if you could clarify that will be good. And I guess the second was just on on Bo, just in terms of what your intention is for that business and whether you think there is any repositioning that's required from there.

Alison Rose -- Chief Executive

All right, thank you. So NatWest Markets obviously as we refocus that business and have it more focused on our corporate and institutional clients, you would expect that to be more strategically aligned and the whole point of the refocus is we want to make it much more connected to the group and our core customer. So you would expect that to increase. On Bo, Bo is one of suites of innovations that we have our strategies always on our innovations to buy built and partner and to test and learn with our customers that is out in the market now relatively recently we're testing with our customers. We have a minimum viable product out there and that will continue to evolve as we get feedback from our customers. So, we will apply the same discipline and approach as we did to all of our innovations.

Aman Rakkar -- Barclays -- Analyst

Okay just can I just follow up on the NatWest Markets revenue then, so 30% of it. Currently comes from commercial we're talking about that being kind of broadly even split now in terms of what's --

Katie Murray -- Chief Financial Officer

I think I would take you to my favorite page of page 31 in the financial supplement. So, there you can kind of see just in terms of currencies had 432 of income in the year and financing 403 and the revenue share was about 208 most of that revenue share comes from those businesses which of the businesses going forward. And the reason for that is because, naturally, the business is so much more capital intensive that it doesn't fluctuate the revenue share and particularly. So I think those are good kind of a good base from which you could is probably going to model forward.

Howard Davies -- Chairman

Yeah. Next on the same, right. Just. Thanks.

Christopher Cant -- Autonomous Research -- Analyst

Good morning. It's Chris Cant from Autonomous. Thank you for taking my questions. I wanted to ask about slide 41 and your capital and RWA guidance you've given us GBP200 billion medium to long term RWA number and you mentioned and discussing that slide is, your RWA guidance at least in relation to markets is taken into account, the Basel 3 amendments. Is that GBP200 billion number, your post Basel 4 or Basel 3.1 however you are referring to at these days. Is that post that impact because you previously guided for that to be 5% to 10% inflation basically, at least as an initial hit. So, is that included in there? And if so is the 13% to 14%, you are now targeting over time your post Basel 4 capital targets because the regulator would indicate that Pillar 2A for instance should come down in response to the RWA inflation.

And if I think about your 13% to 14% range that wouldn't seem to take any of that into consideration. And if I could also ask on NatWest Markets please, back in the annals of history and I'm talking about the CEO who preceded your predecessor and probably a Markets restructuring to one before last, we were told to expect something like $0.30 to $0.50 back on the dollar in terms of net capital release from a restructuring of the Markets business. So you've given us the GBP2.7 billion gross capital release figure. I just wondered if you'd like to comment on that historical pointed reference. Thank you.

Alison Rose -- Chief Executive

So shall I answer the third question first. So I'm probably not going to comment on the CEO before the CEO before the CEO. I think the structure that we've given you in terms of resizing and reshaping that business and the transition plan to bring that down, is what we think is a realistic plan and one that will allow us to protect the revenues and the core franchise that we want to support as well as an orderly reduction of the RWAs that are not there for the future. So you wouldn't expect me to comment on previous assumptions. Katie, do you want to pick up the capital?

Katie Murray -- Chief Financial Officer

The capital number look the GBP200 billion is a guide, it's not target, clearly there is a lot of different things that kind of happened within there. But what we're trying to say if you look at what we know is coming. That's a fair place for you to kind of end up. So you should assume that that does in Basel 3 amendments or the risk department tell me it's Basel 3, not for amendments. So if that helps and then 13%, 14% should also be after those considerations. We've tried to build all of those, all of those in. We accept that the timing may move and in terms of from where whether it comes in from '21 to '23 or a little bit later that would have a bit of an impact on their. So I think you can kind of take us from where we are now building you're NatWest Markets in the mortgage floors and are kind of Basel 3 guidance you'll get in a bit of growth, you'll get to the right kind of place.

Howard Davies -- Chairman

Thank you, yeah. Second right here.

Fahad Changazi -- Mediobanca -- Analyst

Hello, good morning. It's Fahad Changazi from Mediobanca. Could I just ask on your 3% or greater than 3% lending growth. Is that primarily related just to mortgages or are we now are looking for a bit more happening on commercial lending. And just following on from that last year, commercial non-interest income collapsed or went down significantly. I was just wondering, given the election, have you seen some signs of where that might be going or any anecdotal evidence there. Thank you.

Katie Murray -- Chief Financial Officer

So in terms of our lending growth obviously as you can see, we exceeded our lending growth target for 2019 at 3.6%. We had very strong growth, obviously, in our mortgage business and growing gross lending by GBP33.3 billion. Our commercial business also grew in the sectors that we wanted to grow and we've always said that we will be very targeted in the sectors. We want to grow in the areas we want to grow but also apply a very strong capital distribution lens to that business. So we took out a lot of capital from that business as well. So overall we expect retail and commercial to grow as part of our 3% loan growth target that we set this year.

We will continue to grow within our risk appetite and I think that is a very strong message when you look at the growth we contributed last year. The quality of the assets that we're putting on our book or within risk appetite and have a good credit quality. So we are very cognizant of that. So growth across both sides and from that perspective. In terms of pipeline, and how the business is performing since the election. We had a very good finish to the year and we are seeing good volume growth continuing. I think any improvements in business confidence and reduction of uncertainty helps. And so we certainly had good growth and good pipeline at the start of the year.

There is still quite a lot of uncertainty out there. So while there is a degree of improvements in our pipeline is too early to say whether you're seeing a significant bounce. Our job is to keep really close to our customers as that looking at the opportunities and we're certainly doing that and seeing good momentum but business confidence will be affected by uncertainty and so we'll continue to take a closer look.

Howard Davies -- Chairman

Thanks. I'm going to take another one from the Internet from Robin Down of HSBC. He says the quarterly rate of reduction in the retail margin even allowing for the mortgage accounting changes in Q4 of '19 has been relatively rapid. How do you see this shaping up in 2020 and can you give some color on the dynamics. Katie.

Katie Murray -- Chief Financial Officer

Sure. Thanks very much. I am conscious obviously with the questions on the way we often asked them when we've answered much of them as we go through. So I think they are the key things to remember are around the 80 basis points to 100 basis points corridor that we're writing at this kind of top end of of that and kind of exit rate of the whole kind of book at the 145 basis points. Just one thing I would add to that is that you know in our plans. We do assume that there is a rate fall. I'm not sure if that's something that you won't necessarily picked up on. We are assuming in line with consensus as it was as we struck it and that it happens in Q2 of this year that will have a little bit of an impact naturally on NIM if and when it happens. We'll see what kind of an comes forward from there.

So that's kind of important thing to remember, and one of the ways I kind of work around NIM quite sort of simply as if you take a GBP10 million change in your NII, it's 1 basis point of NIM that you lose in terms of that piece or GBP2 billion movement if your average interesting earning assets also has the same piece. As you try to model NIM bear that in mind, and also the rate cuts and we've given you in the in the accounts, and in the analysis of what that kind of does in terms of, in terms of the various product margins and things as well, which will help you model that piece of NIM going forward.

Howard Davies -- Chairman

Yeah. Just behind you, please. Maybe take the mic.

Ben Toms -- RBC -- Analyst

Good morning, thanks for taking my questions. It's Ben Toms from RBC. You've given a range for the potential strategic costs in the year of GBP0.8 billion to GBP1 billion. Is there a range then on the amount of cost cutting you can do or is there upside to the GBP250 million cost you can take out this year?

Katie Murray -- Chief Financial Officer

So I think you should take the GBP250 million as a GBP250 million. We always try to out deliver, but you've got a track record with us of being very transparent, so GBP250 million is the target we're expecting to deliver this year.

Howard Davies -- Chairman

There, yeah, just over there. Thank you.

John Cronin -- Goodbody Stockbrokers -- Analyst

Thank you. It's John Cronin from Goodbody. Two questions from me. One is on the mortgages, I'm not going to ask again about your share development going forward but if I can ask about the ROEs printing when you superimpose the mortgage floors on flow and how you think about how far you'd be willing to go in terms of price compression from here and perhaps to maintain share at current flow share. And then secondly, just more broadly in terms of funding conditions and in the year today what are you experiencing and how do you think about that in the context of NIM evolution in Q1? Thank you.

Katie Murray -- Chief Financial Officer

Sure. Shall I empty that Alison. Okay. So as we look at it in terms of ROEs and that's exactly the way that we should really look at this business given the repricing in terms of the NIMs. So today we'd say the book is comfortably earning above 20% ROE. When you bring in the extra GBP10.5 billion, we're comfortably above 15% and then you kind of saying to yourself, well, if you are writing closer to the 100% you are a bit higher if you're writing and close it down to the 80% in terms of the corridor, you'll be a bit closer to that 15% in that corridor that we kind of seek to operate within we're comfortable that they do write, they would write our business above that kind of level of ROE. And at that kind of level, and so we're not looking for any particular price compression, but we kind of internally think of the 80 basis points to 100 basis points.

You will recall that in the early part of last year we were much closer to the 80 basis points until the kind of swap curve moved. And in terms of funding for NIM evolution of probably said as much as I say about NIM evolution as we go into next year and we'll talk more about that when we get together in few short weeks time for Q1 results.

Howard Davies -- Chairman

I've got one more on the screen from Edward Firth of KBW. Looking at your presentation from this time last year, you were targeting a 12% ROTE for 2020 I think by you, it means the other [Speech Overlap] We're now looking at mid-single digits, and I guess the big changes that restructuring, never seems to come down as you hope so. I guess my question is what gives you the confidence that this program is the final one 2022 will be a promise land.

Alison Rose -- Chief Executive

So I think -- well I'll take that. So we have set our targets based on the current economic conditions and outlook. There is a degree of uncertainty in terms of the outlook, we are in a lower for longer rate environments. We've all seen what's happened with the yield curve. So we think that the targets that we've given you are a realistic set of assumptions based on the current economic scenarios and as Katie mentioned the consensus on which we base our plan. So I'm comfortable that that is a realistic scenario that we've given you with that condition. In terms of the restructuring costs, obviously what I'm focused on is building a bank that can withstand the changes in trends, and I talked a little bit about them at the beginning. In terms of how customer behavior is disrupting and also the opportunities that exist within our customer base.

So we are not only restructuring our business. We're investing significantly in it, so that we can identify and continue to grow the potential that we see within our business. So obviously there are restructuring charges related to NatWest Markets. And I think that was the burning issue in my entry, when I took over and therefore I think it is appropriate we restructure that business to make it a sustainable part of the Group going forward with more of a focus on retail and commercial, which are more stable returns, less volatile and obviously as we reengineer our processes, as we invest in technology as we invest in new propositions. They're all going to be restructuring charges that come with that. So that is about building the bank that is able to deal with the future trends and the future opportunities that we're looking at.

Howard Davies -- Chairman

Thank you. Yes, just over there.

Claire Kane -- Credit Suisse -- Analyst

Hi. It's Claire Kane again from Credit Suisse. Just a follow-up on restructuring charges or strategic costs, you say they should trend down to about GBP300 million over time, which is about the level of underlying cost takeout. So I just wondered, is there a point in time where we should expect that total costs, including those restructuring costs actually come down, and that's not just a perpetual restructuring below the line. And just on the phasing of NatWest Markets restructuring given a large portion of that is through income losses what's your expectation on those developments? I mean, do you get rid of most of the assets at the beginning or I know the RWA take a bit slower in your plan but really those losses is that quite an area of uncertainty we think forward. Thanks.

Alison Rose -- Chief Executive

So let me take that second question. As we've looked at the plan for NatWest Markets Robin and his team are obviously focused on building that business, so it can focus on our core customers, we are very mindful about the phasing of that and obviously we got quite a lot of experience of restructuring businesses of this nature. And so the challenge is always managing the revenue line and the cost line so that one doesn't run ahead of the other. So in our phasing and transition plan, we're very mindful of how we manage that what we've said to you is, it will be capital ratio accretive in year one, and you can expect us to bring you updates is that transition plan goes see but we are very mindful of the phasing.

Katie Murray -- Chief Financial Officer

Thanks Alison. Just on the cost piece, we do expect it to trend down over time. I think we have taken the cost down and we try very hard not to talk about cost on an adjusted basis, we do kind of like to keep into other operating strategic costs. Many of you so said I told last year are quite like to get rid of that number, but I'm conscious of the year. I do that will create great successes on cost takeout and actually we have done nothing except a few lines together. But the intention is to continue cost takeout what you hope is that in one year the cost, if you get that year. You have a great run rate in to the following year. And it is kind of continues to deliver, but that's certainly the mantra that we have in the organization and one that I think, Alison, and I am very strong on the -- it has to be a continued cost reduction journey.

Howard Davies -- Chairman

I have another one on screen from Fahed Kunwar from Redburn. I appreciate you don't run the business relative to consensus, but the dividend was lower than expectations, considering the size of capital surplus. Why do you not pay out more today also given you surplus capital, why now I think it mean. I think that's probably should be net, not, why not set the ordinary dividend on statutory rate rather than underlying profits?

Alison Rose -- Chief Executive

So we've talked about our capital distribution story, a little bit in terms of our capital work, obviously we're starting from a very strong base of the 16.2%. I think we're very pleased to be able to pay a dividend today, bearing in mind, we only started relatively recently. I think we're starting to distribute that capital back to and with our plans for getting to 14% and then 13% to 14% you have a look in terms of what we intend to do. Our intention is to distribute capital. We also know that actually being well prepared to take part in a government sale of RBS shares is a good use of our distribution and plan and I would certainly hope that we see greater potential to take part in share buybacks, not just in the short term, but we also hope that will become a recurring feature of our distributions over a multi-year period. So I think we've declared the dividend that's GBP2.7 billion back. There is a capital works that we've given you it won't be linear, but our intention is to continue to focus on using the means that we're comfortable delivering to you between the Board and myself and Katie.

Howard Davies -- Chairman

Thank you.

Katie Murray -- Chief Financial Officer

So I just pick up that last point, because it is, it is important in terms of our dividend, we really do look to do on a typical profits available to equity and shareholder. So it really is on that statutory profit kind of level. What we had this year was really old thing where there was GBP1.5 billion of FX recycling gains that we basically to go of one line in the reserves and brought into the income statement. So we did adjust for that, we made no other adjustments we didn't try to back out any other costs. So the idea is that we do kind of 40% of that bottom line number because it didn't feel appropriate to do on what was actually a bit of accounting and maneuvering of our balance sheet rather than actual generated profits.

Howard Davies -- Chairman

Yeah. Any body else and I am not seeing any more hands and I'm not seeing anything else on the screen. So thank you very much for coming in, quite a long session, but quite a lot to get through. And we hope that you take all those 16,000 pages we've given you and digest them over the weekend. Have fun.

Duration: minutes

Call participants:

Howard Davies -- Chairman

Alison Rose -- Chief Executive

Katie Murray -- Chief Financial Officer

Jennifer Cook -- Exane BNP Paribas -- Analyst

Joseph Dickerson -- Jefferies -- Analyst

Raul Sinha -- JPMorgan -- Analyst

Martin Leitgeb -- Goldman Sachs Group -- Analyst

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Claire Kane -- Credit Suisse -- Analyst

Andrew Coombs -- Citigroup -- Analyst

Aman Rakkar -- Barclays -- Analyst

Christopher Cant -- Autonomous Research -- Analyst

Fahad Changazi -- Mediobanca -- Analyst

Ben Toms -- RBC -- Analyst

John Cronin -- Goodbody Stockbrokers -- Analyst

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