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Royal Bank of Scotland (NYSE:RBS)
Q2 2020 Earnings Call
Jul 31, 2020, 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Alison Rose-Slade

Good morning, everyone. Thank you for joining us today for our first half results presentation. Our agenda for the call is follows. I will start with the first half headlines and update you on how we have been managing the business through the COVID-19 pandemic, the progress we have made on our strategic priorities during the first half and then Katie will take you through the numbers in more detail before I wrap up and we open it up for questions.

So let me start with the headlines. As you know, we had a strong start to the year before the impact of COVID-19 and our preimpairment operating profit for the first half was GBP 2.1 billion. Since we spoke in May, however, the economic outlook has worsened. And as a result, we are announcing a first half net impairment charge of GBP 2.9 billion.

This is based on extensive modeling carried out during the second quarter, which I'll talk about on the next slide. Costs were slightly lower year on year. And taking into account impairments, we made an operating loss of GBP 770 million and an attributable loss of GBP 705 million. Given the ongoing economic uncertainty, we are pleased to be operating from a position of strength in terms of liquidity, funding and capital, even after absorbing prudent provisions through impairments.

This is a sign of the strength of our franchise. Our common equity Tier 1 ratio for the first half was 17.2%, and our liquidity coverage ratio was 166%. I'll talk about impairments and capital on Slide 5. Given the current level of economic uncertainty, we are managing impairments carefully.

Our impairment charge for the second quarter was GBP 2.1 billion, an increase from GBP 802 million in the first quarter. This charge is based on modeling that takes into account a wide range of macroeconomic factors as well as expert views on risk and reflects the deterioration in economic indicators. We have provided you with a lot of detailed information on our approach, which Katie will take you through later. As a result of this modeling, the majority of provisions have been taken in the first half, providing coverage of 1.72%.

We anticipate a significantly lower charge in the second half with full year charge in the range of GBP 3.5 billion to GBP 4.5 billion based on current economic assumptions. Despite this increase in provisions, we have a CET1 ratio of 17.2%, one of the strongest capital ratios in Europe. Now of course, this ratio partly reflects the cancellation of dividends earlier in the year in consultation with the regulator. And we plan to return to paying dividends as soon as this is possible.

We continue to believe with the current shape and mix of our business that we should be operating with a CET1 ratio of 13% to 14% over the medium to long term, which means we have clear headroom of somewhere between GBP 6 billion to GBP 8 billion above our target capital ratio, and GBP 15 billion above the maximum distributable amount. This gives us the flexibility to return capital to shareholders as soon as that is possible, to manage an uncertain outlook and to consider other options that offer compelling shareholder value. So having given you the headlines, let me move on to talk about how we have been running the business during the pandemic. We set out a new purpose in February to champion potential by helping people, families and businesses to thrive.

What you will hear today is how we are taking advantage of our strong customer franchise and market positions to advance that purpose. We have supported our customers in difficult circumstances, and we have done so safely with a prudent approach to risk and impairments and with careful deployment of our balance sheet. We have taken swift action to address COVID-19, but we have also focused on the key strategic priorities I set out in February. For example, we have made real progress refocusing NatWest Markets on to the needs of our core customers and expect to complete the majority of our targeted RWA reduction by the end of 2021.

We are also on track to deliver our GBP 250 million cost reduction target despite the disruption of COVID-19. Finally, we remain focused on maintaining a strong balance sheet, which, as I said, gives us significant advantage in this environment and will allow us to assume dividend payments to shareholders when it is appropriate to do so. Putting purpose into action has entailed making a very significant change to the way we work in order to support our customers during the pandemic, as you will see on Slide 7. We have kept 95% of our branch network open for customers who need help, and we have over 50,000 people working from home, including more than three-fourths of our call center colleagues.

The swift action we have taken to help customers has contributed to increased net promoter scores, which are up 18 points in our branches and 20 points in business banking since March. We are proud of the strength of our customer franchise and our response during this period of disruption is an important part of deepening relationships with customers and positioning us well for growth as the economy recovers. We have leveraged our investment in technology, not just to support working from home, but also to accelerate new digital services in order to meet customer needs. Our customers are increasingly engaging with us via digital channels.

We now have 7.2 million active mobile users, while three quarters of our current account customers in Personal Banking and almost all Commercial Banking customers regularly use digital banking. Sales via digital channels have also grown rapidly. 80% of personal banking sales were digital in the second quarter compared to 55% in the first. In addition, there were over 0.5 million new downloads of our app during the first half, and we added more than 485,000 new online banking customers.

A good example of our focus on innovation and partnership is our reentry into merchant acquiring via our new digital payment solution for small businesses called Tyl. Tyl has become even more important for these customers with a move to contactless payments during the pandemic, and it's progressing well. It has now processed over 4.5 million transactions, up from one million in February. These examples are an illustration of how our investment is enabling us to scale up and increase speed of delivery, both effectively and efficiently.

I'll talk on Slide 8 about how we have also been supporting customers through lending. Across the retail and commercial businesses, net lending increased by GBP 16 billion in total during the first half. Approximately half of which relates to government scheme drawdowns. You can see here the impact of the pandemic on customer behavior in the second quarter.

In Personal Banking, there was a falloff in demand in April, but we are now seeing signs of recovery as lockdown eases. New mortgage applications in July are nearing pre-COVID-19 levels, and are 30% higher than June, spurred on partly by a reduction in stamp duty. Debit and credit card spending is also growing and is 10% higher than the levels we saw in June. With debit card spending back to the same level as January.

Of course, it is still early days, and we are watching this closely, given the uncertain outlook. In Commercial Banking, there was a steep increase in the use of revolving credit facilities in March, but customers are now making significant repayments as government lending schemes have kicked in. The current RCF usage is about 30%, down from the COVID-19 peak of 40%. Weekly commercial card and cash transactions have more than doubled by volume from a low point in April.

And we have also seen record issuance in debt capital markets. Turning now to government support scheme lending on Slide 9. As you would expect, we have done all we can to support our customers during this period of uncertainty, including providing them with access to all the government support schemes, but we have only supported existing customers. Customers we know and use risk profile we understand.

We have also maintained a consistent approach to risk, due diligence and underwriting standards, with the exceptions of bounce back loans, which are 100% guaranteed by the government. In order to help people and families in the U.K., we have extended 240,000 initial mortgage repayment holidays, which represents 20% of our book and 72,000 payment holidays on personal loans. With an easing of lockdown, our focus has shifted to helping customers as they start to resume normal repayments. What is clear is that many people who ask for repayment holidays did so through prudence rather than constraints.

At this stage, about 70% of U.K. customers who have come to the end of a repayment holiday have recommenced payments. So this could clearly change when the furlough system starts to roll off and all mortgage holidays run to their full three months. We have also played our full part in government-backed loan schemes for large and small businesses.

At the end of June, we had received applications under these schemes, amounting to GBP 13 billion for which we have approved lending of GBP 10 billion to existing customers, which is broadly in line with our market share. Of that GBP 10 billion, GBP 8.3 billion has been drawn down. Demand for these schemes is now tapering off from initial peaks. For example, in July, we have received up to 2,000 applications a day for bounce back loans compared to an average of 20,000 a day in the week they were launched and about 48,000 on the first day.

We also remain comfortable with the level of risk and diversification of our books, which I will talk about on Slide 10. Lending in U.K. Personal Banking represents just over half our total loans and advances. Within Personal Banking, it's important to remember that just 7% of our book is unsecured.

And looking at our U.K. mortgage book, our average loan to value is 57%, just 12% of the book has an LTV above 80%. I'll talk about commercial lending on Slide 11. Wholesale lending is well diversified across large corporates small and midsized businesses, real estate and others.

There are, of course, some sectors that we monitor closely, which represent 8% of total loans and advances. We have significantly derisked our lending in these sectors in recent years by using synthetic trades and capital reduction to manage our exposure. We have also skewed our lending to lower risk better performing subsectors. For example, in retail, the majority of our exposure is to food and convenience retailers who continue to perform well in the current market.

In leisure, we have reduced our exposure to high-risk subsectors, and our lending is typically secured against property assets. While oil and gas represents just 1% of our wholesale book. Since the start of COVID-19, we have continued to proactively manage our risk in these sectors by reducing limits, increasing oversight of new business and making a series of controlled exits and structured risk mitigation trades. Just 3.6% or GBP 1 billion of these loans are Stage 3, and we are comfortable with our coverage ratios.

You'll see on Slide 12 that our lending growth has been more than outweighed by deposit growth as customers continue to see NatWest Group as a safe place to keep their money. Total customer deposits grew by GBP 39 billion during the first half. Just under one-third of that growth was in retail banking, mostly in current accounts as consumers spent less during lockdown. About two-thirds was in commercial banking as customers built up liquidity and retained a significant amount of borrowings from government lending schemes.

This inflow of deposits has helped to maintain a healthy loan-to-deposit ratio of 86%. Whilst we were quick to respond to the pandemic, we have also continued to focus on executing our four key strategic priorities, and Slide 13 is a reminder of them. In addition to these priorities, we set out some ambitious targets for supporting U.K. enterprise by helping to create new businesses, promoting financial capability and well-being and helping to address climate change.

Today, I want to focus on the second and fourth priorities shown here, starting with NatWest Markets on Slide 14. Refocusing NatWest Markets is one of my key strategic initiatives, and we have continued to adapt the business to better suit the needs of our corporate and institutional customers. Our aim is to create a business that is both simpler and more strategically aligned with the product suite focused on financing, currencies and risk management. I'm pleased with the progress we have made executing our plan.

We set a target to reduce risk-weighted assets in NatWest Markets to GBP 32 billion in 2020 and to almost halve them to GBP 20 billion over time. To date, we have reduced RWAs by GBP 2.8 billion, making good progress toward our 2020 targets, and we expect to achieve the majority of our GBP 20 billion target by the end of 2021. We are managing the associated disposal losses to about GBP 600 million over the two years. Since February, we have appointed a new management team in NatWest Markets confirming Robert Begbie in his post as CEO and bringing in David King as CFO.

Direct costs in the second quarter were 13% lower than the first. We are refocusing the business in the U.S. and Asia Pacific by reducing our footprint, and we have started aligning the business through a 1-bank model by centralizing technology within the group. We have also formed a new partnership with BNP Paribas for both the execution and clearing of listed derivatives.

We expect strategic costs to be in the region of GBP 200 million in NatWest Markets for 2020. Moving on now to simplification and cost reduction. We have made good progress on simplification in other areas, and we are on track to deliver a cost reduction of GBP 250 million in 2020. As a result of COVID-19, the shape and timing of these cost reductions has been rephased, and we have also incurred additional COVID-19-related costs of GBP 25 million.

This has led to a cost reduction of GBP 41 million compared to the first half last year, and we expect to see most of the execution impact falling in the second half. We remain firmly focused on execution, and I have accelerated a planned exit from one of our London properties into 2020. Our strategic costs, however, will still be in the range of GBP 800 million to GBP 1 billion. Before I hand over to Katie, I want to talk on Slide 16 about our progress on enterprise, learning and climate change.

Our initiatives here are more important than ever as we start to rebuild the economy, which is why we have accelerated our digital offering during the pandemic. On enterprise, we are supporting people who want to become entrepreneurs through our 12 U.K. accelerator hubs around the country, and we have migrated these hubs to digital delivery. As a result, we welcomed 1,200 new entrepreneurs to virtual accelerator programs in April.

And we extended our Dream bigger program, which encourages young women aged 16 to 18 to become entrepreneurs by offering it online. On learning, the need for financial education and capability has also become ever more important as people look to manage their own personal balance sheet. We have now completed financial health checks for over 0.5 million customers, and we reached two million people in the first half through MoneySense, our free financial education program for 5- to 18-year olds, which we made available online when schools closed down. We also launched the first ever financial education console game, Island Saver, which has had over one million downloads.

We continue to invest in the next generation, and we have committed to growing talent by creating 1,000 intern, graduates and apprenticeships over the next 15 months. On climate change, we remain focused on making our own operations climate positive over the next five years and halving the climate impact of our financing activity by 2030. During the first half, we issued a $600 million green bond with all proceeds allocated to renewable energy assets across the U.K. NatWest Markets was ranked No.

1 book runner for U.K. corporate green and sustainable bonds by Dealogic, and we helped raise about GBP 4 billion of new sustainable financing and funding. Since 2019, the business has helped 33 clients issue green, social and sustainable bonds, totaling about GBP 29 billion. So in summary, our first half results demonstrate that we have a strong business franchise and have supported our customers well at a time of uncertainty.

We are managing risk carefully and providing for impairments thoughtfully. We continue to execute on our strategic priorities and even after absorbing increased provisions, we have a robust capital position and resilient capital generative business. This gives us the flexibility to return capital to shareholders as soon as that is possible, to manage an uncertain outlook and to consider other options that offer a compelling shareholder value. With that, I'll hand over to Katie to take you through the numbers.

Katie Murray -- Director of Finance

Thank you, Alison, and good morning, everyone. There are three main areas I will spend time on this morning. Naturally, I'll start with the group income statement, and I'll be using the first half last year as a comparator. For the businesses, I'll also show the income progression from the first to second quarter this year.

And as Alison mentioned, I'll give you a detailed breakdown of the impairment charge and the scenarios we have used to predict our model expected credit losses under IFRS 9. And finally, I will cover our capital and liquidity position in a little more detail. So starting with the group income statement. We reported total income of GBP 5.8 billion for the first half, a decrease of 5% year on year, excluding the impact of last year's disposal of Alawwal.

Within this, net interest income decreased 4% to GBP 3.8 billion. And noninterest income reduced by 6% to just under GBP 2 billion. These reductions were driven by a fall in rates. The impact of regulatory changes discussed in the last two quarters and the effect of COVID-19 trading.

We reduced overall operating costs by 9% to GBP 3.75 billion. Within this, other expenses, excluding operating lease depreciation, decreased by 1%, while strategic costs were 26% lower at GBP 464 million. Litigation and conduct costs for the first half were an GBP 89 million release, reflecting a PPI release of GBP 250 million, offset by some other historical litigation matters. We are reporting operating profit before impairments of GBP 2.1 billion, up 3% from last year, mainly as a result of lower strategic and conduct costs.

The impairment charge for the first half was GBP 2.9 billion, which represents 159 basis points of gross customer loans. I'll talk about this in more detail later. Taking all of this together, we reported an operating loss before tax of GBP 770 million and an attributable loss of GBP 705 million. On tax, the credit of 27% is higher than the standard rate of 19% due to the rate impact of FX recycling, the tax surcharge and other tax adjusting items.

I'll move on now to take you through the income by business line. Total income for the second quarter was GBP 486 million lower than the first, reflecting the contraction of the yield curve, reduced business activity and lower customer spending resulting from government measures in response to COVID-19. In U.K. Personal Banking, total income decreased by GBP 115 million, due to lower overdraft fees and significantly reduced card spend, which resulted in reduced fee income and lower unsecured balances.

Total Commercial Banking income was down slightly as a result of lower deposit funding benefits and reduced business activity. This was partially offset by strong balance sheet growth as government lending initiatives helped to increase net interest income, albeit at a lower margin given the agreed government rates. Finally, NatWest Markets income was up GBP 270 million. But excluding own credit adjustments and asset disposals, revenue grew by GBP 50 million.

Income from financing increased as credit markets stabilized with support from central banks, while rates and currencies decreased as market volatility toward the end of the first quarter eased. Moving on now to look at net interest margin. Bank net interest margin decreased 22 basis points in the second quarter to 167 basis points. This is the result of three factors.

You will recall we talked about interest rates and margin pressure in May. Lower interest rates accounted for 10 basis points, while five basis points was the result of the impact of a change in mix of lending. I would note, of course, that the level of lending has been beneficial to income, particularly in the commercial area. The high level of liquidity we are holding accounted for a further seven basis point reduction as average interest-earning assets grew by over GBP 35 billion.

This of course had a negative impact on net interest margin, though it had no impact on income or ROE. Looking to the second half, there are two main factors to consider. One, the impact of holding excess liquidity, and of course, the ongoing pressure from the fall and hedge income. Moving on now to look at costs.

Other expenses for the second quarter were GBP 50 million lower than the first, excluding operating lease depreciation. As Alison mentioned, the shape and timing of our cost reduction program has changed as a result of COVID-19. Fixed costs will be higher as we have delayed some of our restructuring plans. Our change spend will be lower as we prioritize a smaller number of key programs to focus on maintaining critical services for customers.

Some run-the-bank costs will also be lower, such as travel and the cost of running buildings. So we have, of course, encountered additional costs in our response to COVID-19. Alison and I both believe it's absolutely critical we remain very disciplined so that we continue making sustainable strategic change where we can. Strategic costs in Q2 were GBP 333 million.

This includes GBP 86 million as a result of restructuring NatWest Markets, GBP 44 million on technology spend and GBP 148 million related to a London property charges, which includes an additional property exit. This building was already part of our longer-term property rationalization plan, so it did not make economic sense to make it COVID-19 compliance. This will be beneficial for us in the long run, but it means strategic costs will now be within our projected range of GBP 800 million to GBP 1 billion, rather than at the lower end of that range as guided in May. Litigation and conduct costs were GBP 85 million released for the second quarter.

We have made an additional PPI release of GBP 150 million in the quarter. As we have now substantially completed the complaints process and settlement of claims. Looking forward, as you heard from Alison, we remain committed to our cost reduction target of GBP 250 million for 2020. Moving on now to look at impairments.

Over the next couple of slides, I want to give you a more detailed explanation of how we've arrived at the impairment charge, the treatment of COVID-19 support measures under IFRS 9 and our approach to stage migration. I'll start with the impairment movement on the balance sheet shown at the top. We reported an impairment charge of GBP 2.9 billion for H1 or 159 basis points of gross customer loans. This charge includes total Stage 3 charges of commercial of GBP 236 million, including a small number of single-name charges.

This compares to ECL increases of GBP 6 million to GBP 8 million of mortgages and GBP 0.4 billion in personal unsecured over the same period in H1. The economic outlook has deteriorated during the second quarter. And under current economic assumptions, impairment charge for the full year is likely to be in the range of GBP 3.5 billion to GBP 4.5 billion. This increase is expected to be made up of migrations to Stage 3 as customers move into default, and of course, any further economic movements.

The Q1 overlay of GBP 798 million has been absorbed into our provisioning. So we're no longer holding an economic uncertainty overlay in our numbers. So let me take you through our approach on the next slide. In order to arrive at the impairment large, we have broadly taken a 3-step approach.

First, we developed four different economic scenarios based on a wide range of future economic indicators and made an assessment of their respective probabilities. After applying probability weightings to these scenarios and given the continued uncertainty, we are using two central scenarios to reflect NatWest Group's expected outlook. They both have a 35% weighting apply, while the upside scenario has a 20% weighting and the downside has 10%. Over the four scenarios, our assumptions for 2020 included a drop in GDP growth ranging from 8.9% to 16.9%, U.K.

unemployment rates between 7.4% and 14.4%, and a fall in-house prices of 0.1% to 11.5%. They all assume a return to GDP growth and lower levels of unemployment from 2021 onwards as you can see from the table on this slide. As a second step, we've made model adjustments to reflect the effect of government support aimed at delaying impairment and reducing the likelihood of default. We also applied expert judgment on specific sectors.

The third step was supply further judgments, specifically for high-risk customers and other uncaptured risks. I also want to cover our approach to stage migration. As a starting point, our approach to payment holidays and government lending schemes has continued in the second quarter. New or extended payment holidays will not on their own trigger a stage migration.

The key trigger for Stage 2 migration in H1 is a deterioration in probability of defaults, driven by the adoption of the four new macroeconomic scenarios. In wholesale, we used a conservative threshold for a significant increase in credit risk or SICR of just 10 basis points increase in PD. This has led to a large migration of high-quality, up-to-date balances from Stage 1 to Stage 2. These will have a lower ECL coverage than past due Stage 2 balances.

Where our SICR thresholds to be 75 basis points rather than 10 basis points, this would reduce our Stage 2 exposure by GBP 16 billion. However, ECL would reduce by just GBP 60 million. For a Stage 2 loan to migrate back to Stage 1, it must revert back to the PD threshold for a three-month period. Asset is only moved to Stage 3 in the event of default, typically, once the account is 90 days past due.

On the next slide, I will cover stage migration and expected credit loss coverage in more detail. Before going into the detail, I want to reiterate the fact that the vast majority of the movements I will be discussing in the following two slides are anticipatory and not in response to observed default. Our starting point is that we've continued to use an appropriately conservative approach to stage migration and ECL and personal. Our trigger criteria includes persistence, where we keep balances in Stage 3, typically for at least 12 months.

For mortgages, 13.5% of mortgage loans now sit in Stage 2, which are not past due against 5.6% in December. The majority of these are up to date as of the balance sheet date. In fact, of our total mortgage book, only 0.9% is past due and 1.6%in Stage 3. Similarly, 30% of total loans in credit cards and personal advances now sit in Stage 2 not past due, against 24% at December.

And you see a similar pattern repeating in credit cards and personal advances in terms of payments being up to date. Looking at our defaulted balances across personnel, we have 1.9% in Stage 3 at June against 2.1% in December. However, given our guidance, we expect this to change over Q3 and Q4 as we see defaults start to come through. Turning now to wholesale migration on the next slide.

As you would expect, there's clearly been a larger migration here, with 38% of total loans at Stage 2 driven by forward-looking PDs. Across wholesale, 36% of loans now sit in Stage 2 not past due. While 1.7% is Stage 2 past due and 1.9% Stage 3. Our overall coverage for wholesale increases from 1.13% to 2.16%, reflecting the mix of PD migration across the group book, and staging with a slight offset from a small reduction in our Stage 3 coverage.

From what we can see today, it may not be until Q4 that we start seeing event-based stage migration as furlough ends on 31st of October and the various government lending schemes close. These movements will combine to deliver our expected GBP 3.5 billion to GBP 4.5 billion of 2020 impairment charge expectations. Subject, of course, to the economics being as we see them today. Moving on now to look at risk-weighted assets.

Risk-weighted assets decreased GBP 3.7 billion in Q2 as counterparty and market risks were both down GBP 1.5 billion, while credit risk was down GBP 700 million. Counterparty and market risk reductions were driven by NatWest Markets where RWAs decreased by GBP 3.8 billion as the business works toward its full year reduction target. Counterparty risk in NatWest Markets decreased by GBP 1.5 billion, reflecting the exit of specific positions. And market risk also decreased by GBP 1.5 billion as markets normalize during the second quarter.

Credit risk reduction was mainly driven by personal banking, where lower spending by credit card customers resulted in reduced undrawn RWAs. Withdraw on balances, new lending under government schemes offset general credit risk migration. Looking forward, RWAs at end 2020 are expected to be in the range of GBP 185 billion to GBP 195 billion. We have seen little procyclicality in RWAs in the quarter, in line with the low level of overdue payments we are seeing.

Moving on to capital, liquidity and funding. We ended the quarter with common equity Tier 1 ratio of 17.2% on a transitional basis under IFRS 9. This is 60 basis points higher than Q1. We are benefiting from 70 basis points of transitional relief in Q2 as well as a reduction in RWAs of 30 basis points.

Following a change in the rules, the banks are now required to take 100% IFRS 9 transitional relief on expected credit loss movements in Stage 1 and Stage 2 provisions from the 1st of January 2020. The movement in ECL from 2020 is subject to a full add back in 2020 and 2021 and then unwinds over the following three years to 2024. This change aims to reduce the procyclicality impact caused by increasing ECL. And on a fully loaded IFRS 9 basis, our CET1 ratio was 16.3%.

This gives us a strong position, both in transitional and fully loaded basis terms. Moving on now to capital and leverage on the next slide. In terms of capital headroom, our CET1 ratio was 830 basis points above the maximum distributable amount of 8.9%. Our total loss-absorbing capital was 36.8%, well above the minimum requirements.

This headroom reflects our progress issuing senior debt that's eligible for MREL purposes. Our U.K. leverage was 6%, which is 275 basis points above the Bank of England and minimum requirements. We believe that this excess capital position means that we can manage through the economic downturn and also gives us options in the long term.

As Alison said earlier, given the shape and mix of our business, we believe that we should be operating with a CET1 ratio of 13% to 14% over the medium to longer term. We have also maintained strong liquidity levels for the high-quality liquid asset pool and a stable diverse funding base, as you will see on the next slide. Our liquidity coverage ratio for the first half was 166%, reflecting about GBP 6 billion to GBP 8 billion of surplus primary liquidity above minimum requirements. Elevated liquidity levels were mainly driven by deposit inflows as customer deposits increased by GBP 39 billion.

Our U.K. personal banking deposits grew GBP 11 billion to GBP 161 billion, with most of the growth in current accounts as a result of lower consumer spending in the face of both lockdown and increased economic uncertainty. Commercial banking deposits grew GBP 25 billion to GBP 160 billion as customers built up liquidity and retained drawdowns from the government lending schemes. This significant growth in deposits is driving the seven basis point decline in net interest margin that I spoke about earlier.

Our deposit base is well balanced across commercial and retail. And our wholesale funding mix reflects a range of sources and maturities. Our short-term wholesale funding is GBP 22 billion. During H1, we took a decision to repay GBP 5 billion to the term-funding scheme and draw GBP 5 billion from the new term-funding SME scheme.

This leaves us with GBP 5 billion of TFS and additional GBP 5 billion of TFSME. Moving on to my final slide, an update on targets and guidance. We continue to expect that regulatory change will have an adverse impact of around GBP 200 million on Personal Banking income in 2020. We maintained our cost reduction target of GBP 250 million for the year.

As we decided on additional property exit this year, strategic costs are expected to be in our original guidance range of GBP 0.8 billion to GBP 1 billion rather than the bottom end as we guided at Q1. On impairments, subject to economic conditions as we see them today, our full year charge is likely to be in the range of GBP 3.5 billion to GBP 4.5 billion. And RWAs at end 2020 are expected to be in the range of GBP 185 billion to GBP 195 billion. As you have heard, we are making good progress in restructuring NatWest Markets.

And we are now intending to achieve the majority of the expected medium-term reduction in NatWest Markets RWAs by the end of 2021, while managing the associated income disposals to around GBP 200 million this year. And a further GBP 400 million in 2021, subject, of course, to market conditions. And with that, I'll hand back to Alison.

Alison Rose-Slade

Thank you, Katie. So in conclusion, as the impact of the pandemic on the economic outlook remains uncertain, our focus is on continuing to support our customers while protecting the performance of our business. The strength of our franchise is clear. During the first half, we have supported customers and accelerated our digital offering to deepen relationships, while also taking a prudent approach to risk and deploying our balance sheet carefully.

We have taken swift action to address COVID-19, but also maintain focus on our key strategic priorities. We have made good progress refocusing NatWest Markets and expect to achieve the majority of our RWA reduction by the end of 2021. And we remain on track to deliver our cost reduction target of GBP 250 million for this year. Most importantly, we have a capital-generative business with a strong CET1 ratio, giving us headroom that is somewhere between GBP 6 billion to GBP 8 billion above our target ratio of 13% to 14% over the medium to long term.

This capital strength gives us flexibility to navigate the uncertain outlook to resume dividend payments to shareholders as soon as it is appropriate to do so, and to consider options that deliver compelling shareholder value. Thank you very much, and we're very happy to open it up to questions now.

Questions & Answers:


Operator

[Operator instructions] And your first question comes from the line of Rohith Chandra-Rajan, Bank of America.

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

So only if I could ask on a couple of areas, please, income and capital. And firstly, on income, be really helpful, actually, to get some color on your revenue expectations for the second half of the year. I guess, I'm thinking in terms of volume growth and then the margin drivers sort of hedged loan and deposit pricing, but also mix as well. And then the second question on capital.

You've given us a risk-weighted asset range, which is very helpful. But I was wondering if you could help us with the drivers of the numerator of the CET1 ratio. There's obviously earnings, but also in terms of what your expectations are for the — beginnings to the reversal of the IFRS 9 impacts, anything you're expecting on software intangibles, if that comes through? And anything else that we should bear in mind for the CET1 progression?

Alison Rose-Slade

Thank you. Katie, do you want to take that?

Katie Murray -- Director of Finance

Yes. Rohith, I think that might have been six questions in one you try to get through there. Let me have a look. So if we go with our revenue impact earlier for the rest of the year, I think at the beginning of the year, we gave some quite fulsome guidance.

So we've obviously confirmed the GBP 200 million in relation to the HCCR. I'm sure we'll talk more about our kind of NIM outlook as we're moving forward. But certainly, as we look at where kind of consensus is sitting at the end of the year at the moment, we are very comfortable with that in the round, I would say, in terms of that. In terms of the kind of revenue opportunities just to kind of look at that piece of the question.

If I stick with Personal first, what we'll see as the economy begins to recover, we will see an element of increased retail sales, which will drive our customer fee income, our NII, which relates to our unsecured balances. Credit cards, that's obviously fallen off quite a bit in Q2, and we'll also see new demand for lending. Our H1 mortgage lending was GBP 16 billion, but it was very much split GBP 10 million and GBP 6 million. And so it's good to see that activity — that activity seems to be increasing again, which we're very pleased about as well.

In commercial, while the business — all of the government lending and the business bank-backed loans, they themselves are lower margin, given the volume we've done, that also helps income, which will help us in the tail end of this year as well. So overall, relatively comfortable on income, excepting, of course, it is in the face of what's been a big rate drop. On capital, if I take this of software intangibles piece, and there's also a small bit to come through on SME regulation as well. We would estimate that would be a 20 to 30 basis points of impact positive in the next quarter.

And so you should see that coming through. When we look at how IFRS 9 might unwind. So we've got 90 basis points for the first half. We've given you guidance today around RWAs, as to how they might look for the end of the year, GBP 185 million to GBP 195 million.

We've also given you GBP 3.5 billion of — GBP 3.5 billion to GBP 4.5 billion of impairment guidance. If I was to look at those in the round, and if you were to say, let's assume you hit the middle of the RWAs and you hit the middle of the impairment range, about 20 basis points would come off on IFRS 9 and then you'd obviously lose on capital about the next drop 70 basis points in terms of that RWA kind of uplift. And then you want to decide what your thoughts are around that. But I would say heading to that middle of that range probably gives you a fair enough kind of guidance.

So clearly, it will have an impact as it unwinds.

Operator

Our next question comes from the line of Martin Leitgeb at Goldman Sachs.

Martin Leitgeb -- Goldman Sachs -- Analyst

I just wanted to follow-up on the kind of the question tied to revenue and revenue outlook and just in terms of the growth opportunity. So very strong growth in mortgages during the half year despite, obviously, the impact of the lockdown. And I was just thinking, how should we think about mortgage growth in particular going forward? Could you just update us on where you see pricing at the moment, how that compares to your pricing target and if you potentially see scope here for increased growth opportunity or where else you could see more opportunities for the group as the year progressed as in maybe into next year, just considering, obviously, your strong capital and funding position at this moment in time? And secondly, I just wanted to ask with regards to rate outlook and structural hedge. Has anything changed in terms of how you approach the structural hedge at these levels, just given where swap rates have moved? And if you could update us on your thoughts about the potential introduction of negative rates from here.

Alison Rose-Slade

Well, let me start a little bit on the mortgage side. And you obviously saw pre-COVID our strong preprovision profit performance and a good performance in mortgages. We expect to continue to grow market share in mortgages, consistent with prior years, with new business share sort of ahead of our stock share that has now grown to 10.5%. Our retention levels continue to improve and that is key to supporting improving mortgage margin and overall profitability going forward.

Clearly, we've shared with you the impact of COVID as obviously, the market went into lockdown, and we're now seeing a strong recovery with mortgages coming back. But our retention levels are running around 55%.

Katie Murray -- Director of Finance

No. I'll just help with that last number it's 79%.

Alison Rose-Slade

Yes. 79%.

Katie Murray -- Director of Finance

79% on retention level. Sorry Alison. That's no problem. So about 75% on retention and our flow share is about 15%.

So it's sitting nicely. Martin, we always talk about how long it takes to move your kind of share of group. So it's nice to see the growth from 10.2% up to 10.5% in this first half of the year. So we're pleased with that.

If I just pick up your comments around pricing in there. The back book is rolling off 138 basis points. Our blended rate is 124 basis points. What you would see given that mix of that GBP 6 billion, it was much more remortgage business rather than new mortgage.

So therefore, that kind of helps lift your blended rate up a little bit. I would expect and hope as we move into the year, probably more into Q4, I would say that you'll see the new mortgage kind of grow a bit more significantly as the activity of today kind of feeds through into the system, which, of course, is great for income, pools down your margin a little bit, would be great for income. So we're very happy with that. In terms of rate outlook and the structural hedge.

So at the moment, in terms of the structural hedge, it's rolling off about 115 basis points at the moment. And it's coming on at around 13 basis points. So clearly, that's a big disparity. What I would say people often say, "Oh, why do you still do the hedge?" If we look at the average of what we added on and where spot rates were averagely for the first six months, 48 basis points compared to where it is today.

So it certainly helps us at this stage. Negative rates, look, it's a great question. In our own economic scenarios, we've only got a 10% likelihood of negative rates coming in. So we don't see that as something that's particularly impactful.

What we've given you the — our usual kind of disclosure, and it's on Page 74, 75 of the accounts, Martin, you can see what the earnings would be if we're at a 25 basis point fall. That 25 basis point fall is structured with actually kind of rates flooring out at 0, in line with a lot of what our contracts would actually have at this moment, and that would be minus GBP 162 million in year 1. Hopefully, I think I got them all there.

Operator

Your next question comes from the line of Jonathan Pierce at Numis.

Jonathan Pierce -- Numis Securities Limited -- Analyst

I've got two questions. The first, actually, just clarifying what you were just saying, Katie, on consensus for this year. Can I just confirm? Were you talking about net interest income forecast for full year 2020 look in the right place? Or was it more broadly on income or the second half? Just clarify that for us.

Katie Murray -- Director of Finance

Total income consensus, we are very comfortable within the range.

Jonathan Pierce -- Numis Securities Limited -- Analyst

OK. The second question is on risk-weighted assets. I've got to confess, I'm slightly confused as to what's going on generally with RWAs at the moment. I think in the second quarter for you in the credit book, so there's actually about a GBP 1 billion procyclical benefit to the risk-weighted assets.

And I guess just slightly — at odds with what's happening on the provision side of things, the IFRS 9 forward-looking provisions are clearly building very substantially. But the RWA movements, which I thought were also supposed to be forward-looking, particularly in the point in time books are going the other way. I mean if I look at your excellent disclosure on IFRS 9, I think the IFRS 9 PDs, obviously, say, the other retail book were up about 65% in the first half, but the Basel PD only moved by 10%. So I guess the question really is, these models actually need to see genuine defaults going up before the procyclicality and the risk-weighted assets comes through.

And does that mean that we're likely to see a further build in RWAs for procyclical purposes into next year as well?

Katie Murray -- Director of Finance

So I mean, the simple answer to that, Jonathan, is yes. I mean changes in RWAs in H2 will be driven — obviously, we've got RWA reduction in NatWest Markets, but you have accounted for that already. The level of procyclical is driven by the economy. What we need to do see is the downgrades in the credit quality and the ratings in the commercial book, and also the move through into kind of default coming through as well on the mortgage book.

So I do think that there is a risk, and we haven't seemed to quantify it yet into next year because it really is very dependent upon how the next half happens in the speed at which we see the deterioration that you could continue to see some RWA inflation into 2021. You're absolutely right.

Jonathan Pierce -- Numis Securities Limited -- Analyst

OK. And the point on the forward look, so just to come back on that. Again, in the other retail book, the IFRS 9 default assumption is 4.9%, and it's 4.1% in the Basel model, even though that's supposed to be 12-month forward looking on the same basis as IFRS 9. Why is there such a big gap? Why is the RWAs taking time to come through versus the IFRS 9 builds?

Katie Murray -- Director of Finance

Well, I think part of the clue for that is also, I think, as we move things into Stage 2, where you see our Stage 2s build up quite quickly. I mean in our — across our group, for the movement, we've got Stage 2 more than 90% of it is still performing, it's still being serviced in terms of — so I think that's — you're seeing that kind of gap and have magnified, given our relatively early move into Stage 2 and that you see coming through, I think that will explain your gap between the two elements.

Operator

Our next question comes from the line of Jenny Cook of Exane.

Jenny Cook -- Exane BNP Paribas -- Analyst

A couple of questions on, clearly, the kind of two themes from this reporting season. Firstly, I'm trying to get a sense of the underlying revenue expectations. So if I adjust to the disposal losses and loan credit, it gives me about GBP 5.9 billion of underlying income for H1. You've told us that you're broadly happy with consensus this year.

If I then plug in the revised disposal losses, you get that. It points to just over GBP 5.1 billion of underlying income for H2. Clearly, an annualization of H2 would give me in FY '21 income from distance below consensus. So I just wanted to ask kind of which of those half yearly revenue run rates you are more comfortable with? And then second, just on RWAs.

On kind of bridge between where you printed today and your full year guidance? Because given that a large component of your lending in H2 will be government guaranteed, NatWest Markets RWA should reduce a further GBP 3 billion by year-end. And you'd assume some of that commercial, say, RCF utilization will unwind as well. Are you trying to tell us that you could potentially have GBP 17 billion of RWA procyclicality just in H2? That's about GBP 0.10 inflation in six months?

Katie Murray -- Director of Finance

Quickly, let me take those in turn. So you're absolutely right. We're comfortable with consensus in the round. I think we're I — if I was to look at the kind of '21 consensus, I would say there's quite a lot of moving parts that have to happen.

We've got to see actually how much of these impairments flow through because obviously, you're familiar that when they move to default, we stopped recognizing interest on the [Inaudible] to the income statement. So that will have a little bit of an impact on it. So at the moment, I would say, look, we're kind of broadly comfortable as it stands. I think there's lots of pressure.

There's lots of headwinds. There's uncertainty. But it doesn't feel like that it's in a ridiculous kind of place at this stage and we'll inevitably talk much more about it in Q3 and Q4 as we kind of get into that. But in terms of the RWA guidance, it's going to be a build of a couple of different things.

You've hit most of the highlights, your NatWest Markets coming off, the government lending growth. And that — if I look at the government lending on the CBIL side, it's got about 50% RWA intensity. So it's sometimes more, I think, than people realize in that space. We'll obviously have some more — one which is going on, obviously, much lower intensity.

But in essence, then the balance will be made up with some level of procyclicality that will come through, but we're comfortable with the obvious GBP 185 billion to GBP 195 billion range that we've given you.

Jenny Cook -- Exane BNP Paribas -- Analyst

Half year 2020 at this point, and then we'll have more in 2021 in kind of the Q3 and Q4 results?

Katie Murray -- Director of Finance

Yes. So I mean, the 2021, there's lots of things going on, obviously, what will happen in the next six months, I think none of us could have predicted the last six months. So I won't attempt to predict the next six months. But as we look at where it's sitting on 2021, I'm not broadly comfortable, not trying to move you around dramatically at this stage.

Alison Rose-Slade

I think we now have a question on the webcast.

Unknown speaker

We do indeed. We have two questions from Raul Sinha of JPMorgan via the web. The first question, could you discuss the outlook for loan growth for the rest of 2020, in particular, unsecured balances, which fell significantly in H1? And the second, can you discuss how the franchise within NatWest Markets is performing in the context of the strong industrywide trends? Would you consider making refinements to the plan for NatWest Markets if demand for hedging activities improves relative to your expectations?

Alison Rose-Slade

Thank you. Well, let me talk about NatWest Markets. Let me remind you with why we are refocusing NatWest Markets. So we're clearly very pleased with the performance of the business, a strong performance as it's responded to volatility in the market and activity around financing and balance sheet restructure.

But that business was needed to be refocused. And so we're very comfortable with the plans. And as you can see, we're accelerating those plans. Clearly, the performance has been better in response to market needs.

And as we have refocused that business around our core clients, which are strategically aligned, we would expect the products and services that we would provide with benefit from the activity of our customers in those segments. So — but the plans for restructuring and refocusing that business remain appropriate. In terms of the unsecured question, I mean, largely, I think that will partly depend on the recovery of the economy. And just to remind you, we're lending to our own customers, but it will depend on the economy.

But what we're seeing in July is improving trends as we're seeing some growth come back in the economy and some of the details we covered there.

Katie Murray -- Director of Finance

Yes. And the only thing I would probably remind you on, Raul, is obviously, we've got a very small unsecured group. It's GBP 3.7 billion. It's strong by GBP 0.6 billion over the last kind of six months.

So it's not a big driver of either our income or our impairments obviously, which is important at this time.

Unknown speaker

I hand back across to the operator, Nicole.

Operator

Your next question on the phone comes from the line of Andrew Coombs at Citi.Andrew Philip CoombsI think my questions have pretty much just been asked actually, but perhaps just a further clarification on NatWest Markets. I mean the outlook was always for it to be a breakeven business as you alluded to the first half and particularly strong. The restructuring is actually going ahead of plan. Is the expectation that this will still be a breakeven business in the medium term and predominantly used to support other areas of the bank like the commercial bank?

Alison Rose-Slade

Yes, absolutely.

Katie Murray -- Director of Finance

No change in that strategy.

Operator

And our next question comes from the line of Fahed Kunwar at Redburn.Fahed Irshad KunwarJust a couple. The first one I want to ask on impairment. If I look at your particular Stage 3 coverage and your GDP assumptions, they're a lot stronger and a lot more conservative than your peers. If I'm thinking out to kind of 2021 loan losses, what's kind of natural run rate you're seeing at the provisions? So we think about that 2021 number.

And also, when you set those provisions for this half, how much of the fact that you've got a very, very strong capital position, make you be a bit more prudent in your forecast? Because your unemployment forecast is even more prudent in Bank of England's desktop stress test. So that's my first question. And my second question is on margins as well. Obviously, thanks for your answers on negative rates earlier, but we saw in Europe, a lot of the European banks are willing to charge corporate core deposits.

If we got into negative rate territory, I appreciate the sensitivity you called out, but is any headroom to actually cut corporate deposits as they get charged for having deposits with a bank, so that's something that you wouldn't do?

Alison Rose-Slade

Well, let me start on the impairments. My philosophy is very much to take a prudent and considered approach to provisions. And you've seen the scenarios that Katie walked you through in terms of our assumptions. Now clearly, what I would also point you to, even after absorbing those provisions, we have a very strong balance sheet and very strong capital strength.

So we think we've taken an appropriate view of the outcome. In terms of what we're actually seeing in impairments and in our underlying book, the government schemes and the support that has been put into the economy has actually done its job in terms of supporting businesses, navigating bridge through this period. We do have some small impairments in our commercial book but very limited flight risk. But my approach is to be prudent and considered and thoughtful on our impairments, but I would — I'd point you to even notwithstanding that the strength of our capital.

Katie, do you want to pick up the margin question?

Katie Murray -- Director of Finance

Yes. And just to finish off that impairments one, I think I wouldn't like the suggestion that we've gone big because we had plenty of capital. So I mean, I think it's done consistently in terms of the approach that we take there. In terms of — on the conversation you had around — the questions around margin, look, I think what we see, obviously, we've got a couple of jurisdictions in terms of also in our base [Inaudible] already charge in terms of negative rates.

We do see them making charges in terms of — to corporates. I can imagine, as you see in Europe, if you got there, that's where you would end up on that journey in time. And it has taken time for them to get there as well. But it's not something that we're actively planning for at this stage, given we don't see it as a big likelihood as we move forward.Fahed Irshad KunwarPerfect.

Actually, can I just ask one follow-up, if I may, sorry. Just when you think of that capital position that you mentioned, when you speak to the PRA on dividends, is there any acknowledgment for just how well capitalized you are versus your peers? And if that influences when you can pay or what size you can pay on dividends once the regulator allows them at the end of 2020?Howard DaviesYes. It's Howard Davies here. Let me just try to pick that up.

The PRA came out with the statement earlier this week to the effect that they would be reconsidering their policy on dividends in the fourth quarter. And that means that for the moment this is all or rather theoretical question. But they are fully aware that we are very strongly capitalized, that we have service capital. And of course, before we came into this highly unusual period, they were very comfortable with us making a buyback and paying a special dividend.

So the moment, the position is present as it was at the end of March. There won't be any movement in the fourth quarter. But I'm sure that when they do reconsider, they will take account of us from a capital position.

Operator

Your next question comes from the line of Ed Firth of KBW.Edward Hugo Anson FirthYes. Sorry, I've got a number of questions, but really quick ones. So on the margin, you highlighted a 10 basis point headwind from the yield curve. Should — is that a sort of quarterly run rate that we should expect for the rest of the year? So I guess that's question No.

1. Question #2, in the UK PB, you obviously had a big falloff in fees, which I guess you'd expect from the shutdown, etc. Can you give us some idea of what the run rate is now? What sort of recovery we've seen in that in terms of payments and how that might progress? And then the third one was just on financing income. You've got this huge swing in financing income in NatWest Markets, almost GBP 200 million.

And that's always been a very stable line in the past. I'm just trying to get a sense as to how we should be thinking of that into the second half. And then very final question. Could you give us some sort of sensitivity to your impairment charge to GDP assumptions? I mean, I heard the previous question, but if I got it right, your weighted forecast for next year is a 12% growth in GDP in the U.K., which feels quite punchy relative to what other people are — well, certainly relative to consensus, but I'm just — how does that change if it was 10% or 8%? Can you just give us some idea of how that number moves around?

Katie Murray -- Director of Finance

Well I'll start, and then you pick up, Alison, what I have missed there. In terms of the margin, I wouldn't — the 10% rate cut, that's obviously, you reflect it onetime in your margin numbers. So you wouldn't expect to see that fall next quarter and coming through again. And obviously, you see a little bit coming through from the hedge.

As that kind of moves through, I'd call that kind of a couple of basis points. So in that space. PD recovery, I think Alison talked about earlier in her speech. So we're beginning to see the recovery coming through.

I think July numbers are kind of positive in that space. And Alison will add a bit more on that at the end. Financing income. So in the financing income, you're absolutely right, it is generally a relatively stable set of results.

But bear in mind what happened in Q1, you had this massive movement in the credit markets. And so therefore, what you were seeing in that space is a revaluation of a lot of the positions that you've got, which then started to unwind. So I would almost encourage you that absent another kind of massive market volatility piece, that's not something we would see. And I would take the kind of previous relatively stable income coming from that business as a huge guide to the future rather than that volatility that we've got.

And sensitivity to GDP, we haven't given you single metrics in terms of what it would mean by moving one metric or another. But you'll have seen — and Ed, I'm sure, on Page 34, we give you a blend. And what you can see if we were to move all of our metrics down to either say the upside, you would see our impairment charge would have reduced by GBP 1.4 billion in this half. If you had to move 100% to the downside, you would see that increasing by GBP 1.9 billion.

But I haven't given you any guidance on single mix. That gives you something to play with it. And Alison, do you want to touch on recovery?

Alison Rose-Slade

Yes. I think in terms of the recovery, I mean, obviously, during the lockdown, we saw a really significant drop off in spending. And actually, consumers behaviorally doing the right thing, paying down their more expensive debt, so paying down their credit cards and activity dropped. We've seen debit and credit cards spending now up 10% on June levels and coming back quite quickly.

Actually, cash transactions are still remained very low, but debit and credit cards are going up. We've seen mortgage volumes obviously increasing, which I mentioned, and commercial card and cash transactions have more than doubled by the low point in volume. So I think a lot of it is behavioral, and we'll see what happens as the economy recovers, but we are seeing those volumes and fees coming back.

Operator

Your next question comes from the line of Ben Toms at RBC.Benjamin TomsTwo for me, please. Firstly, on PPI, there was released today in the numbers. Can you remind us what the stock provisions left is for this? And how much more you have to work through on this topic? Could we see potentially more releases in coming quarters? And secondly, on mortgage prisoners, there was a consultation out this week from the FCA. Can you just confirm that you don't have any of this type of customer? And linked to this topic, there's been discussions from activists or an SVR cap, which was discussed in the report.

And while it wasn't ruled in, it also wasn't ruled out. And the FCA said that they need think about potential impacts and have dialogue with the banks. Have you had any discussions about the topic of the cap with the regulator? And do you have any sensitivity on what the impact would be on the financials if a 2% SVR cap was implemented?

Katie Murray -- Director of Finance

Sure. PPI, there is GBP 506 million that's left on the balance sheet. On that, we are substantially down on PPI. We've dealt with our claims.

They — we're rolling people off the projects. We've just got the kind of the last kind of drip through of things going through. So I think for us, never say never, but it's a topic that is really behind us where we are kind of at the level of completion we're very happy with. In terms of the mortgage prisoners, this is not a big topic for us.

We've done things in the past to kind of help and have tried to deal with that. And I think at this stage, we haven't had any substantive — that conversations with the regulator in terms of that item. That's fair, Alison?

Alison Rose-Slade

Yes, that's right.

Operator

Your next question comes from the line of Chris Cant at Autonomous.Christopher CantJust a quick follow-up and then one on mortgages, please. Katie, you mentioned the SME support factor and software and you mentioned 20 to 30 bps of benefit. Was that a combined benefit? Or was that for each of them?

Katie Murray -- Director of Finance

Combined [Inaudible].Christopher CantThat was combined? OK. Just wanted to confirm. And then on mortgages, you mentioned some numbers in terms of 138 bps rolling off on the back book. And you gave 124, I think it was as a blended, I guess, first half average.

If I think about what some of your peers have been saying, they've been talking about much, much higher front book margins, 160 to 170 bps. Is that just a 1H average versus sort of July issue. And related to that, in the past, you've talked about 80 to 100 bps being a circa 15% ROE, even allowing for pending mortgage risk weight changes. If we look at where front book spreads are to the industry, but we see substantially above that.

Could you just give us an update on where you think front book mortgage ROEs are at the moment, I guess, they're up significantly? And how does that play into your thinking about whether you want to actually start leading the market on pricing there and take more volume, given that you are so well capitalized?

Sure. So I'll leave other peers to comment on what they are doing. It could well be — it's an average over the closing in July. Our July would certainly have been a bit stronger.

But I do think that 124 blended is the right way to think about it. And bear in mind that in Q2, most of us would be doing any — we'd be doing remortgages, which would be a slightly higher basis point level. So that could be pushing some of their numbers up as well. Then in terms of the ROEs, we probably not changed our guidance on that, particularly, obviously, pricing is more or less held, which is good, while rates have come down.

So you'd expect to see those ROEs have continued to improve. We're not keen at this point, are going to do a race through to kind of get, take a lot of market share. We've done some slight variations on pricing. You may have noticed last week, Chris, that we started to now just slowly move back into the 85% LTV sort of space and where we have pulled out through the last kind of three months.

But I think it's something that — what's the best way to manage the mortgage group to make sure that we do the right thing for customers. We're able to deliver the right kind of service levels as well, which we've been pleased about with the volume that we've been doing. I'm very comfortable in the ROEs we continue to earn on this business.Christopher CantIf I maybe ask the question slightly differently. In the event that the market does present you with an opportunity for something like 160 to 170 bps front book spreads, would that be enough to get you to compete more aggressively given how far above your previous expectation of 80 to 100.

That would be — I'm just trying to understand how the competitive dynamics might play out into the second half...

Yes. I think that — so bear in mind that 80 to 100 is purely new mortgage business. So I would compare the 124 basis points to that 160. I think we view ourselves as quite competitive in this market.

We're not looking to become more competitive because ultimately, you end up putting the margins down. But we do expect to continue to be competitive in that space. So I think if we were looking at something in still to earn 160 basis points, we certainly continue to pursue it, but not at the point of then dragging that margin all the way back down again, which versus what you would actually do. Kind of happy to continue to be as competitive as we have been.

Operator

Your next question comes from the line of Aman Rakkar, Barclays.

Aman Rakkar -- Barclays -- Analyst

Yes. Just two questions, please. I'm going to ask another theoretical question on distributions. Consensus had you loss making prior to today's results for full year '20.

I think given the impairment guidance, that's probably still going to be the case. On that basis, being loss making, stat loss making, does that preclude from paying the ordinary dividend this year given your policies based on the [Inaudible] profit? And then in the instance that you're not going to pay an ordinary, would you look to pursue, in theory, if you're allowed to paying a special dividend in that scenario? And I guess what would be really helpful to understand is, is there in any way that you'd need to seek approval from the regulator around paying a special dividend in a way that perhaps you don't have to, if it's the ordinary? That would be really helpful. And then the second is just on Ulster. Obviously, quite heavily loss making in the quarter.

But even if I look through the impairment charge, loss making on a preprovision profit basis. I mean, how long do you expect that business to be loss-making on a preprov basis? And is it reasonable to expect that, that could be part of some broader restructuring perhaps next year? I guess, has coronavirus accelerated your thoughts in that regard?Howard DaviesLet me pick up on distributions again. I'm not sure that's — we're going to be able to be enormously helpful to you on this because there are a lot of sort of hypotheticals built into your question. Let me just say a couple of things.

One is that in the normal way, you don't ask the regulator for approval to pay a dividend, ordinary or special. You will ensure that you are meeting all of the capital requirements and that the regulator is comfortable with your overall financial position. And that would be — that's the normal case. And as you know, for last year, we plan to pay an ordinary and indeed a special, and you may take it that the regulators were content with that.

As for where we go from here, however, they have essentially put a block on capital distributions, which includes ordinary specials and buybacks at this point, and they said they will reconsider in the fourth quarter. And frankly, I think it's not particularly helpful to anybody to speculate on what the situation might be in the fourth quarter and what we might be able to distribute at that point.

Alison Rose-Slade

Let me pick up the Ulster question. So as you know, our strategy was and is to grow that business organically and safely. And we have been successful in growing both the personal mortgage and some of the commercial share in 2019. That strategy hasn't changed.

Clearly, COVID-19 presents different challenges to the economy, and we will continue to consider all strategic options in relation to that business. Thank you for the question. And I think we have another question on the webcast.

Unknown speaker

Indeed, this next question is a three-part question and comes from Gary Greenwood of Shore Capital. The first part, can you expand on your comment around using surplus capital to explore other options that offer compelling shareholder value? Are you considering acquisitions? And if so, what areas of the business do you think need [Inaudible] doing? For the second question, can you explain again the mechanical changes to IFRS 9 transitional relief and how these unwind? And the final part, do you need to see greater economic clarity to assume dividend payments/buybacks? Or is your capital position so strong that you don't need to wait?

Alison Rose-Slade

Thank you. Well, I think we've probably answered three, and I'll get Katie to answer the IFRS 9 transitional release. But let me start with the first question. Clearly, we are very pleased to operate with the sector-leading capital strength that we have.

And as I mentioned, and let me reiterate, we see our medium- to long-term CET1 ratio of 13% to 14% as being appropriate for the nature of our business. It is our clear intention to return to our dividend possible — dividend policy as soon as possible and when it is appropriate and returning capital to our shareholders is our clear preference. Acquisitions have not changed in our priority list. We have very strong client franchises, as you can see in our Personal and Commercial bank.

And we see significant opportunities to increase our share closer to our prevailing market share, so opportunity to grow. You have seen that we have made small acquisitions like free agents or looked at mortgage books in the past if we think that they add shareholder value, but let me come back to the point that it's our clear intention and our clear preference to return capital to our shareholders when it is appropriate to do so. Katie, can I give you the IFRS 9 transitional?

Katie Murray -- Director of Finance

Absolutely. Absolutely. Look — and Gary, I'm trying to say is that it is a complicated adjustment. So I think if you kind of wind back, you're basically getting relief on I think at Stage 1 and Stage 2.

Once things move into Stage 3, you take the hit on them. So we are sitting at the moment with GBP 1.6 billion of relief, which equates to about 90 basis points of CET1. If I was to take you to a kind of a midpoint of our range, what you would have seen happening as we got to the midpoint, you could see a natural migration of things into Stage 3, quite on a specific level. So I would've expected at that point, your transitional relief rather than being GBP 1.6 billion kind of falls to about GBP 1.2 billion.

You can — the math is relatively complicated behind how much you do that. But let's assume you see quite a lot of migration into Stage 3, that's why you lose such a portion of that. And then that would have a benefit of about 20 basis points in terms of your — sorry, that would have a cost of 20 basis points in terms of your CET1 if you got to that kind of midpoint on your impairment summary. Hope that, that helps.

And I think we're going to go back to Nicole.

Operator

And your next question comes from the line of [Inaudible] with Deutsche Bank.

Unknown speaker

If I could just explore the range on impairments here that you've given, what's the underlying impairment at the moment? And if I look at guidance now, there's maybe GBP 321 million per quarter. Is that an elevated level? And at the top end of your guidance, is that just assuming more Stage 3 migration? Or is there macro assumption changes assumed at the top end of your impairment level? And then secondly, on the structural hedge, I think we talked mostly about this, but you're seeing quite a lot of deposit growth, but no growth [Inaudible] particular reason for that?

Katie Murray -- Director of Finance

So if you look at your ECL charge for the half, it was split GBP 308 million in terms of Stage 1, GBP 2.1 billion in terms of Stage 2 and GBP 400 million in terms of Stage 3. When you look at what's in Stage 2, about 90-plus percent of that — debts that are continuing to be serviced. And which is why — I mean so that's kind of where you are on that number. When I take it up to the range.

I would sort of say that Stage 3 migration of GBP 400 million for a half, it's not a bad number. It's not particularly elevated for us. It's actually slightly lower than we've seen occasionally. So it really is just the modeled kind of output.

The GBP 3.5 billion to the GBP 4.5 billion number is very much guided on stage migration. If we see a significant move on macroeconomic assumptions, that's where that number would come under threat. Obviously, both positively and negatively in terms of what happens within there. And we talked on one of the earlier answers around some of the sensitivities which we've given you for H1.

Structural hedge and deposit growth. No, you're absolutely right. We haven't converted all of that at this stage into our structural hedge. I think we're — given the speed at which the deposits have grown, we're happy to kind of just wait a little bit and look at the behavioral life of that, but that's something that we will look through the next couple of quarters.

Operator

Those are all the questions we have time for today. I would now like to hand the call back to Alison for any closing comments.

Alison Rose-Slade

Thank you very much, and thank you, everyone, for joining and for all of your questions. So just to conclude our call this morning, you hopefully have seen the strength of our franchise is very clear. We've supported our customers well during the first half, while also taking a prudent approach to risk and impairments and deploying our balance sheet carefully. We've taken swift action to address COVID-19, but also maintain focus on our key strategic priorities.

We expect to achieve the majority of our RWA reduction in NatWest markets by the end of 2021, and we are on track to deliver our cost reduction target of GBP 250 million for this year. More importantly, we have a capital-generative business with a strong CET1 ratio, giving us headroom of GBP 6 billion to GBP 8 billion above our medium- to long-term target ratio of 13% to 14%. I'll reiterate this capital strength gives us flexibility to navigate the uncertain outlook to resume dividend payments to shareholders when it is appropriate to do so and to consider options that deliver compelling shareholder value. Thank you, again, for joining us today.

Duration: 86 minutes

Call participants:

Alison Rose-Slade

Katie Murray -- Director of Finance

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Jonathan Pierce -- Numis Securities Limited -- Analyst

Jenny Cook -- Exane BNP Paribas -- Analyst

Unknown speaker

Aman Rakkar -- Barclays -- Analyst

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