Royal Bank of Scotland (RBS) Q4 2020 Earnings Call Transcript

Royal Bank of Scotland (NWG 0.87%)
Q4 2020 Earnings Call
Feb 19, 2021, 4:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Howard Davies

Good morning, everyone, and thank you for joining Alison, Katie, and me for our full-year 2020 results presentation. It's fair to say that 2020 was a year like no other. Politicians, regulators and industry leaders have to come together and find urgent solutions to a series of rapidly evolving challenges caused by the pandemic, and the United Kingdom left the European Union after nearly 50 years of membership. At the last minute, the trade agreement with the EU avoided a disorderly exit, but there's still a lot of work to do and significant uncertainty persists, particularly in financial services.

The direct impact of Brexit is not as significant for our NatWest group as it is for banks with larger EU or markets operations. And we are as prepared as we can be through well-capitalized operational entities in the EU. Any wider economic impacts on the U.K. will, however, clearly have implications for the bank's performance in the medium term.

Against that extraordinary backdrop, we provided exceptional levels of much needed support to our customers and the communities in which we work throughout 2020. And although the persistent low interest rate environment and ongoing COVID-19 restrictions will continue to challenge financial performance among all U.K. banks for this foreseeable future, our bank is well-positioned to navigate the ongoing uncertainty and is making good progress against its purpose-led strategy. By embedding our purpose at the core of our business, we have signaled our intention to deliver not only a sustainable financial performance for shareholders, but to make a positive contribution to society.

In December, the PRA made the welcome announcement that it was lifting restrictions on capital returns for U.K. banks subject to some certain sensible guardrails. Following that decision, we have announced a final dividend of 3p per share and subject to permission from the regulators, we plan to distribute at least GBP 800 million each year to 2023 through a combination of ordinary and special dividends, maintaining our 40% payout ratio for ordinary dividends. The board are grateful to Alison and her senior team for our leadership and energy they've displayed in remarkably challenging circumstances.

We firmly believe that we have a well-balanced leadership team in place with the necessary experience and expertise to deliver our objectives. And with that, I will hand over to Alison and Katie, who will take you through our results and our strategic priorities in more detail. Alison?

Alison Rose -- Group Chief Executive Officer

Thank you, Howard, and good morning. I'll start with an update on our strategic priorities before handing over to Katie to take you through the full year results. We'll then open it up for questions. So starting with the headlines.

Against a backdrop of economic uncertainty, we have delivered a resilient performance while supporting customers throughout the pandemic and then accelerating the digital transformation. Today, we're reporting an operating profit before impairment of GBP 2.9 billion for the full year, with impairments of GBP 3.2 billion, below our guided range. Our well-diversified loan book remains resilient, and there has been little change in stage migration. Taking impairments into account, this resulted in an operating loss before tax of GBP 350 million and an attributable loss of GBP 750 million.

Despite the challenges of the pandemic, we have continued with disciplined execution of our strategic priorities, strengthened our executive team, and delivered on our targets. During the year, we grew retail and commercial lending by 7% versus our target of 3%. We reduced costs by GBP 277 million, above our target of GBP 250 million. As we continue to reshape NatWest markets, reducing RWAs to GBP 27 billion, well below our GBP 32 billion target.

This resulted in an initial dividend of GBP 500 million from NatWest markets to the group this month. As a capital-generative business, we operate with one of the strongest capital ratios of our European peer group at 18.5%. And as I have said before, this gives us the flexibility to navigate continuing uncertainty to consider options for creating shareholder value, such as our recent acquisition from Metro Bank and to return capital to shareholders. Following the Bank of England's announcement in December, I'm very pleased to announce that we are reporting a proposed final dividend of 3p per share today, which is the maximum allowed within their guardrails.

Subject to regulatory permission, our intention remains to return capital to shareholders with a payout ratio of 40% for ordinary dividends and with distributions of at least GBP 800 million per annum in '21, '22 and '23, giving us the capacity to participate in directed buybacks from the government. You will have seen that we also announced this morning the conclusion of our strategic review on Ulster Bank. Despite the progress that has been made in recent years, it is clear that Ulster Bank's business in the Republic of Ireland will not be able to generate sustainable long-term returns. So we have decided to make a phased withdrawal over the coming years, and I'll cover all this in more detail later.

So those are the headlines, and I'll move on now to talk about our strategic priorities on Slide 5. This time a year ago, we set out a purpose-led strategy just before COVID-19. And it's an understatement to say it was not quite the year I had anticipated when I stood up in front of you last February. Yet the experience of 2020 has shown that it has never been more important to put purpose at the heart of our business.

Helping people, families and businesses to thrive. Throughout this year, we have done everything we can to put this into practice. Our purpose is underpinned by four strategic priorities with a plan to drive sustainable returns. By serving customers across their lifetime to generate value, powering the organization through innovation and partnerships, simplifying and digitizing our business to improve customer experience, increase efficiency and reduce costs, and by deploying our capital effectively to maximize returns.

Our purpose is also exemplified by three focus areas: we're moving barriers to enterprise, building financial capability and leading on climate change, which delivered benefits for all the stakeholders and deepen our ability to drive long-term sustainable returns. So let me give you a flavor of what putting purpose into practice as entailed in 2020 on Slide 6. Over the last year, our people have done everything they can to support our customers in the face of exceptional challenges. I'd like to thank my colleagues for their incredible dedication and commitment.

At the start of the pandemic, we set up remote working for over 50,000 colleagues and kept 95% of our branch network open for customers who need us, while also accelerating our digital offering. We provided mortgage holidays, capital repayment holidays, help for vulnerable customers and approved over GBP 14 billion of loans under government lending schemes. Demand for support has been tapering since the second quarter. And despite the ongoing pandemic and extension of government lending schemes, current trends show no increase in demand, no increase in impairments and continued growth in mortgage lending.

Nevertheless, we recognize that there are tough times ahead for some of our customers as this pandemic ensues. And we continue to work closely with them to understand their needs. During the year, we also responded to customer needs through our three focus areas, which I'll cover on Slide 7. We are committed to removing barriers to enterprise as a vital means of supporting economic growth and job creation, while also generating income for NatWest.

We recognize that pandemic has presented particular challenges for entrepreneurs and we have pivoted to digital channels to continue to support them. We migrated our 12 accelerator hubs around the country to digital delivery and welcomed over 1,200 new entrepreneurs to the virtual accelerator programs. We helped more than 14,000 entrepreneurs through business builder, which offers advice and networking opportunities online. And we hosted over 1,000 virtual events for more than 45,000 business owners across the country.

We also supported female entrepreneurs in 2020 by creating a GBP 1 billion fund to which we added a further GBP 1 billion this year. On learning, there has never been a greater need for financial capability. And the pandemic has left many people struggling with their finances. And our banking app, which offers customers dedicated support and advice has helped them manage debt, understand personal credit schools and stay in control of their money.

We reached 2.9 million people in the 2020 through our activities such as free financial health checks, our financial education program, MoneySense and training on fraud awareness. And we also helped over 0.5 million people start saving with us for the first time. Our commitments on climate change recognize that this is a risk of ever-increasing importance for investors and customers. We are helping the transition to a low-carbon economy by aiming to halve the climate impact of our financing activity by 2030.

During 2020, we reduced our exposure to the oil and gas sector by about 16%. It's also worth noting that oil and gas represents less than 1% of our loan book. We also help business customers raise GBP 12 billion of new sustainable financing and funding, enabling us to bring forward our GBP 20 billion target from 2022 to this year, which we now expect to exceed. We launched our first green mortgage in the autumn and having achieved net zero on our own operations in 2020, we remain focused on making them climate positive by 2025.

So looking at our activity across the year, our purpose has also served as well. I'd like to talk now about progress on our strategic priorities on Slide 8. Our strategy remains focused on delivering sustainable returns over time. And our clear priorities are: first, to build sustainable growth with a continued strong risk discipline.

We have lent above the market rate in 2020 and expect to continue to do so over the next three years. Secondly, we are simplifying the business and delivering cost efficiencies. We expect to reduce costs by about 4% a year through to 2023, leveraging our investment in technology. And third, we are actively managing capital in order to maximize returns and aim to operate with CET1 ratio of 13% to 14% by 2023.

So let me move on now to talk about generating income growth on Slide 9. We will benefit from having strong customer franchises across the business that provide multiple growth opportunities, and we are building on our strengths to serve customers across key moments in their lives. In retail banking, we have a 16% share of current accounts, but a lower stock share in mortgage lending. We see mortgages as an attractive growth area, and we continue to grow organically in 2020.

Our stock share increased to 10.9%, up from 10.2% in 2019, with net new lending of GBP 12.5 billion. In addition, we acquired a GBP 3 billion mortgage portfolio from Metro Bank, which supplements our organic growth plans and represents a positive contribution to income. We plan to build on this position and grow further while also maintaining strong pricing discipline. In Private Banking, we brought our wealth businesses together last summer, so that we can make better use of our asset management expertise to support saving and investment needs for customers across the group.

For example, our online platform, NatWest Invest, gives customers a simple way to invest in a range of funds managed by the investment team in private banking. Over 1,600 new customers were now onboarded by private banking in 2020, and assets under management or administration grew about 6% or GBP 1.7 billion, almost half of which was net to new inflows. By working across the group to help more customers meet their investment needs, we plan to grow assets under management significantly over the next three years. Turning here to Commercial banking on Slide 10, we are the largest supporter of businesses in the U.K.

with a leading Net Promoter Score and nearly 70% of our sales in our commercial bank were digital in 2020. We are providing more services for our commercial customers by investing in technology-led innovation and products, such as our merchant acquiring platform, Tyl, which continues to gain traction, and our new payment platform PayIt. PayIt was launched last June using the U.K.'s open banking infrastructure to enable online payments direct from the consumer bank accounts in close to real time. We're also investing in digital capabilities that will enable us to deliver a relationship management experience to 16,000 more customers but at a lower cost.

We have enhanced our proposition for small business customers with our digital-only business bank Mettle as well as online offerings such as Rapid Cash, which enables businesses to borrow against some unpaid invoices and Path, a one-stop shop for HR compliance that has been a lifeline for businesses during COVID. Finally in Natwest Markets, the team are executing well and reshaping the business to serve corporate and institutional customers with leading products and capabilities in areas such as foreign exchange, interest rate risk management and capital markets. With a simplified and less capital-intensive business that is better integrated into the bank, we are extending our expertise in foreign exchange across the group, deepening our coverage of product offering for commercial customers and leveraging our leading position on sustainable financing, where we brought forward our GBP 20 billion target from next year to this year, as I mentioned earlier, and we expect to exceed it. You can see that on Slide 11, how the pandemic has accelerated the rate of digital adoption over the past year.

58% of our retail customers now use digital-only to interact with us, up from 46% a year ago while transaction volumes through branches continue to decline as a result of changing customer behavior. We are investing in digital transformation to create a relationship bank for a digital world. In other words, a bank where customers can interact with us in person or online at any time of the day and from any place they choose. Video banking is a good example of this, with meetings up from under 100 a week in January of last year to around 15,000 a week in January this year.

Use of our artificial intelligence chatbot Cora grew 67% in 2020 to 9 million interactions, of which 40% were completed without any human intervention. Our ongoing digital transformation, together with the initiatives I've spoken about in each of the businesses will help us acquire new customers, drive additional revenue generation and support our lending growth target. It will also help us to increase efficiency and then reduce costs, which I will cover on Slide 12. Customer journeys currently account for 30% of our cost base, so transforming them through greater automation will have a significant impact on our operating costs.

We were able to extend over GBP 8 billion of bounce back loans last year by creating an end-to-end digital application process within the space of a week. We also used automation to improve account opening in Commercial Banking last year, resulting in a Net Promoter score of 60, up from 16, and we are building on this experience to continue to transform other customer journeys. For example, since last September, our customers have been able to renew their mortgage online in a simple straight-through process that takes as little as 10 minutes compared with anywhere up to 23 days when the process was manual. Our mortgage retention levels improved to about 80% in 2020 compared to about 70% in 2019.

We're now planning to extend digital decision making across all our channels, creating greater speed and certainty for our customers. With further automation like this, we are targeting gross savings in the region of GBP 300 million by 2023 as part of our cost reduction targets of around 4% per annum. So let me turn now to investment on Slide 13. We intend to invest GBP 3 billion over the next three years, of which more than half will support our income growth and cost reduction initiatives.

Our aim is to build a technology and data-driven business supported by greater automation, artificial intelligence, and robotics in order to improve customer experience, increase efficiency and reduce costs. We're also expecting to reduce strategic costs to around GBP 800 million in 2021, with a continued reduction through to 2023. Turning to Slide 14. I'd like to update you on our decision on Ulster Bank.

After an extensive review, it has become clear that Ulster Bank's business in the Republic of Ireland will not be able to really generate an acceptable level of sustainable returns. As a result, we have decided to make a phased withdrawal from the Republic of Ireland over the coming years in an orderly manner. We will do everything we can to ensure that customers and colleagues are well supported and that service is maintained. In the near term, there will be minimal change for customers and colleagues.

And we have also made a commitment that there will be no job losses or branch closures in the Republic of Ireland this year. So, as part of this phased withdrawal, the group has entered into a memorandum of understanding with AIB to sell Ulster Bank's performing commercial loan book and to transfer some Ulster Bank colleagues supporting this loan book. Naturally, any transaction is subject to some usual due diligence as well as regulatory approval. We are also in early stage discussions with other strategic partners about other retail and SME assets and liabilities.

We expect the withdrawal from the Republic of Ireland to be capital accretive over the duration of the process. This decision has no impact on Ulster Bank in Northern Ireland. We are continuing to actively manage capital across the group in other ways, as you can see on Slide 15. In NatWest markets, we're ahead of plan as we reduced risk-weighted assets and expect to have largely completed our RWA restructuring by the end of this year.

We're also managing portfolios and using synthetic trades across the business to reduce capital consumption, manage risk and improve returns. For example, we took actions to offset our RWA growth in Commercial Banking last year, which reduced them by GBP 800 million, and we will make further reductions this year. We expect combined exit and disposal losses from NatWest markets and Commercial Banking of around GBP 300 million in 2021. In Retail Banking, we have sold about GBP 3 billion of nonperforming debt over the past four years, and we also continually optimize our regulatory capital with liability management exercises.

We're focused on maximizing our capital efficiency in order to improve returns to shareholders, which I will cover on Slide 16. As you know, NatWest is a capital-generative business, and our strong capital position has been a great advantage over the past year when it has given us both security and flexibility in an uncertain environment. Yet with a CET1 ratio of 18.5%, we are operating well above our target ratio of 13% to 14%. As I said earlier, we are reporting a final dividend of 3p today and subject to permission from the regulators, we plan to distribute at least GBP 800 million per annum in 2021, '22 and '23 through a combination of ordinary and our special dividends, maintaining our 40% payout ratio for ordinary dividends.

This gives us the capacity to participate in directed buybacks from the government for up to 4.99% of issued share capital a year. Our intention remains to return capital to shareholders or pursue other options that create value, and we have now set out a clear glide path to reach our 2023 target CET1 ratio of about 13% to 14%. And so let me conclude on Slide 17. The economic outlook remains uncertain in an ongoing pandemic and while we welcome the vaccination program, the duration of the current lockdown remains unclear.

In this environment, we continue to do everything we can to support our customers while advancing our strategy and accelerating our digital transformation. Our focus is on driving improved shareholder returns by growing income, reducing costs and maximizing capital efficiency. With our disciplined execution in each of these areas, we expect to deliver a return on tangible equity of 9% to 10% by the end of our three-year plan. With that, I'll hand over to Katie to take you through the financial performance in more detail.

Katie Murray -- Group Chief Financial Officer

Thank you, Alison, and good morning, everyone. I will start with the group income statement, and I'm going to focus performance on the fourth quarter. Total income of GBP 2.5 billion was up 4.6% on the third quarter. Within this, net interest income grew 2% to GBP 2 billion, and noninterest income was up 13% to GBP 564 million.

This increase reflects strong lending volumes, increased margins on mortgages, and a nonrecurring loss of GBP 324 million on the liability management exercise in the third quarter. Total income, excluding all notable items, was down 4% on the third quarter, as a result of lower levels of customer activity and our tight risk management in NatWest markets, partially offset by income growth of 2% across our other businesses. Operating expenses grew 29% to GBP 2.3 billion, driven by the annual U.K. bank levy, higher strategic costs, which were up around GBP 100 million and increased litigation and conduct costs.

This means we're reporting an operating profit before impairments of GBP 194 million, 68% lower than the third quarter. The impairment charge for the fourth quarter decreased to GBP 130 million. This represents 14 basis points of gross customer loans, and I'll also talk more about this later. Taking all of this together, we reported an operating profit before tax of GBP 64 million.

The attributable loss to ordinary shareholders of GBP 109 million reflects deferred tax movements in Ulster Bank and Royal Bank of Scotland, along with coupons on 81 bonds and preference shares. I'll move on now to net interest income on Slide '20. Group net interest income for the fourth quarter was GBP 45 million higher than the third. If you look at the columns for the third quarter on the left and the fourth quarter on the right, you can see that banking net interest income have grown GBP 26 million or 1.3%.

This reflects strong mortgage growth, improved mortgage margins and lower issuance costs following the repurchase of legacy instruments in Q3. The strong position in the center is in part the result of this repurchase. Turning to bank net interest margin, this increased one basis point in the fourth quarter to 166 basis points. This is also the result of three factors: the lower yield curve accounted for a fall of two basis points due to the structural hedge.

This was offset by a one basis point increase for liquidity and two-basis-point increase from mix and pricing. The change in our mix and pricing reflects that the full-quarter benefit of higher overdraft fees as well as the liability management exercise. Moving on now to look at the drivers of net interest margin. On Slide 21, we show customer loan and deposit rate for Retail and Commercial Banking, which together account for over 80% of group net interest income.

We also show the overall group gross yield and cost of interest-earning banking assets, which covers the rest of the balance sheet, notably the lower-yielding liquidity portfolio and higher cost wholesale funding. On the asset or lending side, yields across the group continued to fall, reflecting the pass-through of the lower interest rates, but the pace of reduction slowed further in the fourth quarter. Gross yield for the group declined by 9 basis points to 185 basis points compared to a 13-basis-point decline in Q3. This was driven by Commercial Banking, where our front book rates remain below the back book due to the rate cut earlier in the year.

On the liability or deposit side, costs reduced by a further 17 basis points to 50 basis points in the fourth quarter, largely driven by the repurchase of legacy instruments in Q3. Overall, deposit costs have stabilized. Looking at net interest margin in the first quarter of 2021, there are three main factors to consider. First, ongoing pressure from the structural hedge, we expect this to be greater in 2021 at a little over three basis points per quarter.

This will not be completely linear and to be absolutely clear, over the year it equates to a reduction in income of a little over GBP 300 million from our hedge portfolio and compared to 2020. Second, a change in liquidity. In January, we repaid GBP 5 million of TFSME loans. However, our deposit base has continued to grow during our third lockdown.

And liquidity levels will depend on customer behavior in the coming months. The third factor is mix and pricing. Mortgage margins on the front book increased in the fourth quarter to 161 basis points, above an improved back book of around 147 basis points. Application margins grew to 180 basis points.

However, we expect them to reduce during the year as demand tapers. Mix will also be affected by demand for higher margin unsecured and corporate lending, which will then ultimately depend on lockdowns and the shape of economic recovery. Moving on now to look at volumes on Slide 22. Gross banking loans have increased by GBP 9 billion in the fourth quarter, driven by mortgages, which grew GBP 6 billion or 3%, reflecting strong demand ahead of the stamp duty deadline and of course, the GBP 3 billion portfolio acquired from Metro Bank.

Our Retail Banking flow share in the fourth quarter was 13% above our stock share of 10.9%. Mortgages now make up 51% of total customer loans across the bank. Unsecured balances declined slightly in the fourth quarter, both across personal advances and credit cards. Demand for these government schemes also slowed further, but this still accounted for GBP 1.6 billion of additional lending.

However, this was more than offset by GBP 2.4 billion of RCF repayments in commercial banking. With utilization in Q4 of 22%, lower than the usual pre-COVID levels of 27%. Average interest-earning banking assets grew by GBP 4 billion or 1% and as Metro Bank competed late in the quarter. Looking now at the charges year on year.

Gross banking loans increased by GBP 36 billion or 11%, driven by mortgage growth of GBP 16.5 billion and government lending schemes of GBP 12.9 billion. Average interest-earning banking assets were GBP 53 billion higher than the fourth quarter of 2019, reflecting this increased liquidity. Customer deposits grew by GBP 62 billion, which reduced our loan-to-deposit ratio by 5 percentage points to 84%. Moving on now to look at noninterest income on Slide 23.

Fourth quarter noninterest income, excluding notable items, was GBP 645 million, 34% lower than the same period last year and 19% down on the third quarter this year. Within this, income from trading activities decreased 59% from the third quarter to GBP 122 million. This reflects a weaker performance on the fixed income business with lower levels of customer activity, tight risk management and some further reduction of RWAs. Looking ahead, we expect NatWest Markets income, excluding disposal losses, to be in the range of GBP 800 million to GBP 1 billion for 2021, as a result of more normalized market conditions as well as the ongoing reduction in RWAs toward our medium-term target of around GBP 20 billion.

Moving now to fees and commissions for the Retail and Commercial Bank, which increased 6% from the third quarter to about GBP 491 million. This was driven by lending and payment services in the Commercial Bank. Despite this recovery, fees and commissions remained below the fourth quarter of last year, in part due to regulatory changes in retail banking. The impact on group income for 2020 was around GBP 200 million, and you will see the full annualized effect this year.

Our outlook for fees and commissions is uncertain given the current national lockdown, but we would expect them to grow as the economy recovers. So to round off my comments on income. We are targeting lending growth above the market rate in 2021, which we expect to be more than offset by two main headwinds: the impact of the structural hedge, and the income reduction in NatWest Markets, as I just mentioned. As a result, we expect income, excluding some notable items, to be slightly lower in 2021 than 2020.

I covered cost in my opening slide. So I'll move now on to look at ECL on Slide 24. You'll remember from the half year that our modeling is based on four different economic scenarios to which we attach a probability weighting. We used the two simple scenarios to reflect our expected outlook, each with the same probability weighting of 35%.

Given the stabilization of economics, we have now increased probability weighting to 40% for our base case. This scenario anticipates GDP growth of around 4.5% in 2021. The unemployment rate averages 6.3% with an improvement expected from Q4. A decline in-house prices in low single digits is forecast for this year before steadily reversing from 2022 onwards.

And interest rates are expected to remain low with an unanticipated reduction in the central bank rate to 0 in the second quarter this year. This 10-basis-point decline feels a little conservative today, but as we were discussing negative rates only two weeks ago, this is clearly very volatile. It would represent around GBP 60 million of income for 2021. We have included GBP 878 million of post model adjustments for economic uncertainty in our ECL provisions until further credit performance data becomes available as the government support protection unwinds.

These assumptions are reflected in our expected credit loss provisions of GBP 6.2 billion for the full year. You will see our updated sensitivities on the slide. If we were to wait 100% to the extreme downside scenario, this would increase ECL by GBP 2.2 billion. And if we weighted 100% to the upside, it would reduce our ECL by GBP 840 million.

So let me now cover how this impacts the impairment charge on Slide 25. We reported an impairment charge in this fourth quarter of GBP 130 million or 14 basis points of gross customer loans. This was down from 28 basis points in Q3, largely driven by a reduced charge of GBP 10 million in the commercial bank compared to GBP 127 million in Q3. This reduction reflects a number of the leases, the impact of refreshing our economic assumptions and the post model adjustments that I talked about earlier.

Our active capital management in the commercial bank has contributed to this low impairment charge, and we've had no tall tree exposures in 2020 or indeed this year. In Retail Banking, the GBP 65 million charge is a slight reduction, mainly reflecting Stage 3 default charges and updated economic scenarios. Any potential flow of new defaults is still being delayed by government support. Our impairment charge for the full year of GBP 3.2 billion is equivalent to 88 basis points of loans.

We expect impairments for 2021 to be at or below our through-the-cycle guidance of 30 to 40 basis points. I would now like to talk about our risk profile on Slide 26. There has been little change during the quarter as government support measures are all ongoing and customers have built up healthy cash balances over the year. 97% of our loan book is in Stage 1 and Stage 2 not past due where customers remain up to date on payments.

Stage 2 past due is 0.8% of the book, down from 0.9% at Q3. And Stage 3 is 1.7% and down from 1.9% at Q3, reflecting write-offs of legacy mortgages in Ulster. Our ECL coverage ratio is 1.7% and with Stage 3 coverage of 41%, in line with Q3. As we know, some of our wholesale loans are in sectors that we monitor closely.

These amounted to GBP 27 billion in Q4, which also represents 7% of gross loans. In these sectors, similar to the trend at group level, Stage 3 gross loans were broadly stable at around GBP 800 million, and we remain comfortable with coverage at 52%. Turning now to look at risk-weighted assets and capital on Slide 27. RWAs decreased GBP 3.6 billion in Q4, driven by credit risk and counter-party credit risk.

This reduction was mainly in NatWest Markets, where we reduced RWAs by GBP 3.1 billion to GBP 27 billion, ahead of our GBP 32 billion target. We expect NatWest Markets RWAs to increase slightly in the first quarter of this year due to normal seasonality, but our year-end target remains appropriate. This year, we expect to achieve the majority of our targeted reduction down to around GBP 20 billion. There was no impact overall from procyclicality for the full year.

This reflects positive trends in Retail Banking, which offset the negative trends in Commercial Banking. We ended the year with a Common Equity Tier 1 ratio of 18.5% on a transitional basis under IFRS 9. This is 30 basis points higher than Q3, driven by lower RWAs and software intangible benefits, partially offset by the proposed dividend of 3p and the linked pension contributions of GBP 266 million post tax. Together, these accounted for an impact of 36 basis points.

Moving now on to the drivers of our CET1 ratio on Slide 28. We have shaped the business to operate at a CET1 ratio of 13% to 14%. And we plan to reach this level by 2023. As you can see, there are a number of factors to consider when modeling this evolution.

First, we expect to generate capital as we move toward our 9% to 10% return target in 2023. Second, distributions to ordinary shareholders are a priority. And we intend to distribute a minimum of GBP 800 million per annum through dividends, while retaining capacity to participate in directed buybacks, for which we have a regulatory provision in place today. These are also linked to pension payments, where we have committed to pay up to a further GBP 1.1 billion pre-tax into the pension funds over the coming years.

IFRS 9 transitional benefit, which accounts for around 100 basis points of our ratio will taper down through to 2024 and will also be affected by stage migration, which remains uncertain. On the denominator, we also expect RWAs to increase relative to full-year '20, driven by three factors: first, lending growth. We intend to grow above market rate in the U.K. and RBSI, excluding government schemes and the mix of lending, what impact RWAs.

Second, procyclicality, which to date has been incredibly low and the timing of which remains uncertain. Third, regulation. We expect changes made by the PRA to increase our mortgage RWAs by around GBP 12 billion. This reflects growth in the book and assumes risk weights of around 15%, as we have previously guided.

And while this is effective from January 1, 2022, we would expect to see some of this inflation brought forward to 2021 as a result of procyclicality. On Basel 3, we anticipate inflation of less than 5% in 2023, given the changes that will come into effect on January 1, 2022. These impacts will be partially offset by the ongoing refocus of NatWest Markets. Taking all of these facts together, we expect RWAs in the range of GBP 185 billion to GBP 195 billion at the end of 2021, including all regulatory impacts on January 1, 2022.

Turning to our capital position on Slide 29. Our CET1 ratio is now 450 to 550 basis points above our 13% to 14% target range and more than double our maximum distributable amount. Our U.K. leverage ratio of 6.4% is 315 basis points above our Bank of England's minimum requirements.

We have also maintained strong liquidity levels with high-quality liquid asset pool and a stable, diverse funding base. Our liquidity coverage ratio increased in the quarter to 165% due to higher deposits and headroom above our minimum requirement is now GBP 72 billion. Turning to the outlook for returns on Slide 30. As Alison said, we expect NatWest Group to generate a return of tangible equity of between 9% and 10% by 2023.

The key drivers behind this are: first, growth while we expect income to be about slightly down in 2021, we are targeting above market rate lending growth across our U.K. and RBS International retail and commercial businesses through to 2023. And we expect support from a normalization of customer activity as we exit lockdown and as the economy recovers. Second, cost reduction.

We plan to reduce other expenses by around 4% per annum, excluding the impact of the phased withdrawal from the Republic of Ireland, along with continued reduction in strategic costs. Third, capital. We intend to reduce our CET1 ratio to be between 13% and 14% by 2023. And finally, we would expect ongoing impairment normalization.

So to conclude, we have delivered a resilient operating performance with growth in net interest income in the fourth quarter and the continued progress on both cost and RWA reductions accompanied by a strong capital and liquidity build. And with that, I'll hand it back to Alison.

Alison Rose -- Group Chief Executive Officer

Thank you, Katie. I'll wrap up with a brief conclusion before we open it up for questions. We delivered a resilient performance in 2020. And despite the challenges of the pandemic, exceeded our targets of growing lending, cutting costs and reducing RWAs.

In an uncertain economic environment, we continue to do everything we can to support our customers while advancing our strategy and accelerating our digital transformation. Our focus is on driving improved shareholder returns with targets set to grow income, reduce costs and maximize capital efficiency over the next three years. With our disciplined execution in each of these areas, we expect to deliver a return on tangible equity of 9% to 10% by the end of 2023. We are pleased to be able to recommence dividend payments and are reporting a final dividend of 3p for 2020.

And subject to regulatory permission, our intention remains to return capital to shareholders with a payout ratio of 40% for ordinary dividends and with the distributions of at least GBP 800 million per annum in 2021, '22 and '23, giving us the capacity to participate in directed buybacks from the government. Thank you very much, and we're now very happy to open up for questions.

Unknown speaker

Hi. So the first question are going to be going across to our phone line. So, Jody, if we can have the first question, please, on the line?

Questions & Answers:

Operator

[Operator instructions] Our first question for today is from James Invine from SG.Please go ahead.

James Invine -- Societe Generale -- Analyst

Hi. Good morning. Thanks for taking my question. Katie, can I just check something you said? You said that you have regulatory permission for a buyback from the government.

So I think 5% of the market cap is just over GBP 1 billion at the moment. So you have permission in place at the moment to do that if the government wants to sell next week?

Katie Murray -- Group Chief Financial Officer

Yes, we actually do. We actually have permission, and you can find this on the FCA website to do a maximum of GBP 1.25 billion [Inaudible] but obviously, we're limited by the 5% that we can do under the regulation. So that's all granted and has been approved. So if the government chose to act next week, we'd be a willing buyer.

Thank you.

James Invine -- Societe Generale -- Analyst

And if they don't choose to act and they don't want to sell, what happens to that permission? Do you use it in another way?

Katie Murray -- Group Chief Financial Officer

No, no. The way it works, permissions are very specific particular to the rate of buybacks. If you were to look on the FCA website, you'd see that the first six months, and we just -- we will have naturally a rolling program of renewal. So it's sitting there waiting to be used for a directed buyback specifically.

James Invine -- Societe Generale -- Analyst

OK. Lovely. Perfect. All right.

And then my second question is on Ulster Bank. So clearly, I think that what we are aiming to do is sell the various parts of it. If you can't agree a price with other parties, then would you put it into run-off? Is that a potential option or it's kind of sell it or maintain it?

Alison Rose -- Group Chief Executive Officer

Thank you. So it's a phased withdrawal that we will be undertaking over the coming years. And clearly, my focus is making sure that's done in an orderly and considered manner. You will have seen in the announcements today that we are in discussions with a number of parties as part of that phased withdrawal.

So the nonbinding agreement with AIB and a potential transaction and then also the early discussions. So our preference is to continue to focus our discussions with counterparties, you can provide customers with full banking services in the Irish market. So we'll do it in a very considered and orderly way, and we've given you an indication of some of the early preliminary conversations we're having.

James Invine -- Societe Generale -- Analyst

Lovely. Thanks very much.

Operator

Our next question is from Rohit Chandra-Rajan from Bank of America. Please go ahead.

Katie Murray -- Group Chief Financial Officer

Hi, Rohit.

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

Thank you very much. Good morning. I had a couple, please, probably for Katie. The first one was on revenues.

You flagged a few areas, including some of the margin drivers, loan growth, reduction in NatWest Markets revenues. I wondered if you might be able to flesh out a bit -- some further detail in terms of the guidance for revenue slightly down in 2021? And then the second was on risk-weighted assets. The 2021 guidance is GBP 185 billion to GBP 195 billion. And then after that, there are a few moving parts beyond that.

So how should we think about that evolving through to 2023, please?

Katie Murray -- Group Chief Financial Officer

Sure. Thanks, Rohit. Let me jump into them. So in terms of revenue, we expect 2021 income excluding notable items to be slightly down on 2020, driven by the three factors I mentioned in my speech.

So lending growth is targeted above market rates in 2021, excluding Ulster Bank. And then that gets more than offset by two headlines: the impact of our structural hedge, which is this year slightly higher, a reduction of a little over GBP 300 million in that and then on income reduction from NatWest Market. So we expect NatWest Market this year in terms of the income to go from the GBP 1.2 billion that they did in 2020 to be between GBP 0.8 billion and GBP 1 billion in that. Obviously, on a -- that's on an underlying basis.

You then have things like disposal also separately, but I think that gives you enough to get there. And then in terms of the RWA movements, there are certainly a few different things going on that's within that pack. So I think we were pleased in Q4 to see the decrease of the GBP 3.6 billion. As we move forward from here, we expect for 2021 that our RWAs will be in the range of GBP 185 billion to GBP 195 billion.

And including on a proforma basis, the impact of the Bank of England's mortgage risk weight changes and other modeling changes introduced on the January 1, 2022. So if I look at the mortgage change, that number at this stage, we expect to be around GBP 12 billion. It will be subject to the timing and quantum of procyclicality, whether a bit of it might come in a bit earlier in 2020. But here either way, on January 1, 2022, we would expect it to be about GBP 12 billion and that's in line with the 15% risk weighting that we've talked about over the last number of years.

I think the interesting challenge will be around what happens in terms of procyclicality, how that comes on, and then if you also talked about 2023, and I would really expect that by 2023 that, that procyclicality has started to roll off again. So you'll have a kind of a peak that comes through '21, '22 and by '23, you'd start to see that coming down. So I would also think if you look to '23, I would think of that GBP 185 billion to GBP 195 billion still being appropriate because you've got lending growth coming in, procyclicality coming off. And I think the one thing that I'd love to give you better guidance on today given the Ulster number, but I think we'll wait now and give you updated guidance later as the timing of that in terms of Ulster.

So you would've expected some movement on there, but that GBP 185 billion to GBP 195 billion includes the Ulster number as we've currently got it printed.

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

That's great. Thank you very much.

Katie Murray -- Group Chief Financial Officer

Thanks.

Operator

Our next question is from Raul Sinha from JPMorgan. Please go ahead.

Raul Sinha -- JPMorgan Chase -- Analyst

Hi. Good morning. Thanks for taking my questions. I just had maybe three quick ones, if I can.

The first one is just under the mortgage income disclosure that you gave. I can see that your mortgage book is up 10% over the past year, and you've got obviously some very strong mortgage margin trends. But if you look at your Q4 mortgage income, it's actually flat year over year, and it's down quarter on quarter by about 4%. And we're struggling to also reconcile this against all of your commentary.

I'm wondering if there's anything specific that I might be missing there. That's the first one. The second one, just on Ulster and this business that you sold to AIB or you you've reached a Memorandum of Understanding on. If we look at the commercial revenue contribution, I think it's about GBP 200 million.

Should we think of that as the size of your business that might get transferred over, if the deal completes? And then third one, just very quickly to clarify on the directed buyback comments. If it wasn't, let's say, a disposal by the government, would you consider sort of then to -- supplementing your 40% payout ratio next year. So that if there is no possibility of a directed buyback over the next year or two because of the lack of a government sale, would you also look to supplement that 40% payout ratio or would you also hold that capital in reserve or whenever that directed buyback comes through?

Alison Rose -- Group Chief Executive Officer

OK. Thank you. Well, let me pick up the directed buyback and Ulster and Katie can talk to you for the mortgage question. On directed buybacks, as you know, it is a decision for the government when and if they sell and we are ready to participate.

If they don't do that, then my clear preference is clearly to return capital to shareholders or explore other opportunities for value for shareholders. So we would review that at that time. But we have no intention of changing the 40% payout ratio. And I think we've given you guidance on that.

And on Ulster, just to be very clear, we're announcing today the phased withdrawal. As part of that, we are in preliminary discussions with a number of parties, including AIB, where we signed a Memorandum of Understanding. And then so we will be working with them on that potential transaction as we go forward, and it's subject to due diligence and negotiation, but it gives you an indication of some of the intent that we have around this. So I think we will continue to update you on that as matters progress.

But we expect the withdrawal from the Republic of Ireland to be the -- capital accretive over a multiyear period, and we will provide you with further guidance as we go forward. Katie, do you want to pick up the mortgage question?

Katie Murray -- Group Chief Financial Officer

Yes. No, absolutely. And the mortgage point, is actually in relation to the Metro Bank and transaction, that this slight softness in the Q4. So you can see in the notable items in the company in that spend that we had a GBP 58 million loss on day one of that.

And then that bleeds back through into income over the next couple of years. And so that's really why you see the apparent disconnect and the strength of the rates that we're charging and compared with what you see coming through in income.

Raul Sinha -- JPMorgan Chase -- Analyst

Thank you.

Alison Rose -- Group Chief Executive Officer

Thanks.

Operator

Our next question is from Andrew Coombs from Citi. Please go ahead.

Alison Rose -- Group Chief Executive Officer

Hi, Andrew.

Andrew Coombs -- Citi -- Analyst

[Audio gap] capital return and then one clarification as well, please. On capital return. Firstly, you've talked about ordinary and special dividend. You've talked about directed buyback.

There's no discussion here of general buybacks in conjunction with the directed buyback. So can we assume that general buybacks are off the table? Is it capital return mechanism? That's the first question. Second question, and more numeric. The GBP 800 million minimum of dividends that you've guided to per annum, can you just provide some indication of how you triangulate to that figure.

The reason I say that is even if you adjust for the 5% directed buybacks the 13% to 14% core Tier 1, the GBP 185 billion to GBP 195 billion RWAs and consensus retained earnings, it looks a little low in order to hit that 13% to 14% core Tier 1 ratio that you're guiding to. So perhaps you could just explain how you triangulate it by about 100 number. And then my final question, just a very quick clarification. The 2023 return target of 9% to 10%, what are you assuming for base rate expectations out for this 2023 for that?

Katie Murray -- Group Chief Financial Officer

Perfect. So let me -- and I'll do you in reverse order, if that's OK. So when we look at the -- our assumptions in terms of the base rate, is that there's a fall today of 10 basis points -- sorry, in Q2 this year. I would say that probably sits in today, that feels a little conservative, but then there was no rising from that.

So -- and that's what's in our budget plan that we're not really anticipating the rise certainly from that, but the numbers have worked to the 10 basis point fall. And we'll see what that comes through. In terms of as you triangulate in terms of the of the CET1. Let me try to help you a little bit.

So you've got RWA and target range and -- of GBP 185 billion to GBP 195 billion. If you took the midpoint of that, that would use about 1.9% in terms of the of the capital that's here available. You then have in 2021, the dividend of GBP 800 million as a minimum, that would be another 0.5 basis point, let's assume a directed buyback, that would be another 0.6 of CET1. Remember that we'll also make our pension contribution, which would take up kind of 0.3 on that.

So you'd end this year, with that kind of math, obviously, taking your own views on procyclicality. So just over 15% and then as you start the January, you have a little bit of movement going on, on software capitalization. And also, remember the IFRS 9 migrates down as well. So in terms of that benefit, it's 100% now.

It'd be 75%, 50% and so on, that you'll see that piece come down. So then from there, you think, well, actually, there'll be -- that risk group will also be capital generative. So you're now obviously, you're adding on as well. And then we'll continue to make some of those dividend payments, the directed buybacks, second and third year, depending on how those transactions are actually happening and really where the government is on their disposal as well as some further pension contribution.

So that should get you down to a range that's in 13% to 14% by the time we get to 2023.

Andrew Coombs -- Citi -- Analyst

OK. So reading between the lines, it sounds like the GBP 800 million is because that's where you feel comfortable doing this year but the minimum phrase is because in 2022 and 2023, you could potentially go beyond that. Is that fair?

Katie Murray -- Group Chief Financial Officer

Right. I think if you looked out to 2023, and you were at the 9% to 10% return, you would see that on a 40% payout ratio that your number will be a bit higher than that. So I think it's really -- it's as a base and so the minimum word is it's not accidental.

Andrew Coombs -- Citi -- Analyst

Understood. And on general buybacks?

Katie Murray -- Group Chief Financial Officer

I'm sorry. I missed that. Andrew, forgive me.

Howard Davies

General buybacks.

Andrew Coombs -- Citi -- Analyst

So I was saying that the wording seems that directed buybacks and ordinary and special dividends, but no general buybacks. Is that a fair read?

Katie Murray -- Group Chief Financial Officer

No, look, in terms of conversations that we've had with our wide investor base, I mean, the preference at the moment is there are definitely directed buybacks.

Andrew Coombs -- Citi -- Analyst

OK. Thank you.

Katie Murray -- Group Chief Financial Officer

Thanks, Andrew.

Operator

Our next question is from Jonathan Pierce from Numis. Please go ahead.

Jonathan Pierce -- Numis Securities -- Analyst

Morning, folks. Two questions, please. It's all on guidance, I'm afraid, all on the outlook. The first is income again in 2021.

Just so we're entirely clear on this, slightly down on the income ex notable items. Consensus, I think, is about GBP 200 million, GBP 250 million down on 2020, excluding notable items. Is that within the bound resort, a slight reduction? In other words, are you happy with consensus ex notable items for 2020 bond. And then can I ask about 2023, I mean the delta to a 9% ROTE versus consensus is those GBP 1.1 billion of pre-tax profit.

We know what you're thinking on costs but maybe you can give us a feel as to where the other deltas are going to land in the P&L, and particularly income impairments. If there's anything else going on there as well?

Alison Rose -- Group Chief Executive Officer

Yes. Sure. Thanks, John. Look, I probably won't to say anything more on the 2021 guidance.

I think you've been quite clear in terms of the building box from where we are today to where you'll get to on 2021. So then if I take and look at the ROTE, so we're targeting the ROTE of 9% to 10%. That's not impacted by Ulster Bank. The key drivers of that is the lending growth that we talk about in terms of the above market lending growth.

We'd also expect to see a little bit of benefit from some of the investments that we're making in this year to come through into our income line as well. The cost reduction targeting around 40% -- sorry --

Katie Murray -- Group Chief Financial Officer

Four.

Alison Rose -- Group Chief Executive Officer

4%, sorry. Quick clarification, forgive me. 4% in 2021, excluding any of the change in that direct cost base with Ulster. You will see the strategic cost reduction.

We've gone from GBP 1.4 billion to GBP 1.1 billion, now down to GBP 0.8 billion. We'd expect that reduction to continue within there. And I think one of the key things also would be the normalization of your impairment charge. Clearly, that's what we've talked about today is that we'll be -- we expect 2021 to be in the -- at or around the 30 to 40 basis points.

As we look out to 2023, we probably expect that to tighten a little bit further, as you would have seen most things work your way through our system by then.

Jonathan Pierce -- Numis Securities -- Analyst

OK. So if I were to be lucky enough to see your budget and put it next to consensus side, I would probably expect to see costs a bit lower, impairment may be a bit lower, and income GBP 200 million higher. What would that be sort of? Would it be observing?

Alison Rose -- Group Chief Executive Officer

I think if you are lucky enough to see that, then you would probably be relatively pleased with some of those loan builds. So I think work is the -- I think I would appreciate it on cost and have a rethink about impairments, and I think we've guided you on growth as well.

Jonathan Pierce -- Numis Securities -- Analyst

Thanks a lot.

Operator

The next question for today is from Alvaro Serrano from Morgan Stanley. Please go ahead.

Alvaro Serrano -- Morgan Stanley -- Analyst

Hi. Good morning. I had a question on mortgages and another one on the structural hedge. On mortgages, can you give us a sense of where pricing is at the moment? I think you said last quarter was around 160 basis points? And also how you -- how that's trending given we're probably now all the offers now are in the post stamp duty world? And related to that, if we think about volume growth, I know you said too that you plan to grow above the market.

But would you say in mortgages, you expect to grow more or less than this year than last year, obviously, excluding Metro? And the second question on the structural hedge, and just above GBP 300 million drag for this year. Are you -- what curve are you assuming that -- you would assume with the latest steepening or a bit of color on those assumptions? Thank you.

Alison Rose -- Group Chief Executive Officer

Sure, Alvaro. So if I look at mortgages and you recall it at our Q3 announcement that we talked about that we were really writing in Q4, the applications were around 180 basis points. That will still continue into Q4 and even into the early part of Q1. So what I would expect is that during kind of Q1 and into Q2, we kind of get the benefit of that sort of levels that we have said that we expect to see some tightening.

You'll have seen that in the last week, I think all the major banks have a little bit of tightening on different bands and in different places, but there has certainly been some of this tightening of that coming through. And in terms of volume growth, we grew a 10.2% share -- stock share to 10.9%, obviously, helped by Metro, sorry, we take that out. But we do feel that, that still gives us strong growth to keep moving forward. So we'll continue to look at that and try to get to that.

When we look at the GBP 300 million hedge guidance around the move-up in the yield curve, so what I would say is that the little over GBP 300 million is our base case. It's worth just reminding you that in terms of the hedge, the purpose of it is to reduce our near-term sensitivity and rate changes. So while this strengthening of the swap curve you see is helpful, we wouldn't expect that to get a particular benefit of that in the first year. You can see on the -- in the accounts on Page 234, that when you see a 25 basis point increase in interest rates, it adds GBP 371 million in year 1, but only GBP 37 million of that is in relation to the hedge, which then rises out to GBP 200 million by year three of -- and the reason for that is that these are -- they're five-year hedges.

So you only get the very small averaging impact coming in on that. So it's our base case, but the recent move, it will help us in later years, '22 and 23.

Howard Davies

Next year, probably.

Alison Rose -- Group Chief Executive Officer

If it's sustainable and in terms of that move upwards, but it doesn't have a particular impact in '21.

Alvaro Serrano -- Morgan Stanley -- Analyst

Thank you very much.

Alison Rose -- Group Chief Executive Officer

Thanks, Alvaro.

Operator

Our next question for today is from Jon Peace from Credit Suisse. Please go ahead.

Jon Peace -- Credit Suisse -- Analyst

Thank you. So my first question, I just wanted to ask Jonathan's question again in a slightly different way. To get to your 9% to 10% ROTE by 2023, if 2021 is going to be a down year for revenue, it looks like you might need a revenue CAGR of about 5% to 6% in 2022 and 2023 to hit that lower end. And I just wondered if you would agree with that back-of-envelope calculation and what the drivers of that rate of revenue growth might be? And then my second question would just be on provisions for 2021.

You mentioned you might be at or below the through-the-cycle cost of risk. Are you then implying you could see some provision releases and how should we think about what might be the triggers for these? Thanks.

Alison Rose -- Group Chief Executive Officer

Yes, sure. So just -- I'm probably not going to get into the math of your model and different kind of CAGRs. I kind of just repeat on the income piece. We're targeting above market lending growth across the U.K.

and RBSI, and we'll see a bit of benefit coming through from some of the investments that we're making, and that will get you to the income. I think you've all the building blocks you need to draw a picture out to the 9% to 10% and why we're comfortable in saying that. The 30 to 40 basis points and some of the release of provisions, it feels too early to be talking about release of provisions even at 30 to 40 basis points. That's still a charge that would be higher than what we would have seen in the years leading up to this crisis.

So still a meaningful number, though obviously quite reduced from where we are today at the 88 basis points. When I think about what we'll -- what you'll see happening to actually see any of those releases coming through, one is the improvement in economics. And you can see when you look at some of the Stage 2 analysis in commercial, that are some things have moved in this quarter from Stage 2 back into Stage 1 and then that was really to do with the strengthening of economics. But what we've done as a firm is that we've created in our post model adjustments.

So what we're saying is while the economics have definitely improved, the impact of the government support has been such that it's kind of protecting the quality of the underlying book. So I think before you start to see any releases, you'll start to see that support coming off. And you will also then start to see business failures. But if really -- although there have been a few, we haven't had any tall trees at all this year.

You need to start to actually see that real degradation coming through in the business failure. So I -- lovely to get talking about releases, but I don't think it's time to have that conversation just yet. That feels quite far away just now.

Jon Peace -- Credit Suisse -- Analyst

Fair enough. Thank you.

Alison Rose -- Group Chief Executive Officer

Thank you, Jon.

Operator

Our next question for today is from Guy Stebbings from Exane BNP Paribas. Please go ahead.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Hello. Thanks for taking the questions. The first question was just on margin. Would you able to give any sense of sort of shape of margin for this year? And perhaps if we exclude an assumption around the base rate cut, but it sounds from your commentary like Q1, you're not expecting a lot of movement given the benefit from mortgage spread completions, quite elevated levels, hopefully offsetting other headwinds.

But as you look further into the year, you're sort of talking to mortgage spreads likely coming down slightly across the hedges and flowing through. So would you expect a sort of gradual decline over the course of the year? And just one quick clarification as well to check. Is your income consensus 2021 a little down factoring any reduction in Ulster income for this year? And then my second question was just on the government-guaranteed lending, I think it's about GBP 14 billion now in the balance sheet, which is a good majority of the bounce back loan scheme. Just wondering if you have a sense as to how much of that is your starting deposits here rather than being utilized by corporates right now? And if the interest becomes due once and -- sort of one year post being drawn, would you expect to see a big decline in those balances? And associated with that, do you have any sense or any confidence as to whether there's much [Inaudible] businesses within the facility or should those be quite negative? I'm just trying to think about whether that GBP 14 billion of government-guaranteed lending could fall in balance terms quite quickly over the course of the next 12, 18 months or so? Thank you.

Alison Rose -- Group Chief Executive Officer

Well, look, let me answer the bounce back loan scheme and then -- and Katie, then will pick up the rest. So we've advanced GBP 14 billion under the bounce back loan scheme. And as I said at the outset, we were lending that to our existing customers. So customers who we know and he banks with us.

I think in terms of the behavior that we're seeing from our customers, and I think that's probably where our focus. Demand for those schemes has really now tapered off since really the sort of second, third quarter last year. If you think at the peak, we were sort of getting in something like 70,000 applications a day, that's tapered down to around seven. And our deposits remain very high.

What we've seen when we talk to our customers is there -- and it will depend on the sector because some sectors will be using their cash much more. It's that a lot of customers are sitting on the cash, they could -- and they are equivalent to the amount of cash on their balance sheet versus their loan that they could pay down their loan. However, while things are still uncertain, they're not making that decision. So we're in sort of very benign period at this point.

You're not really going to see, I think, much of a change until those loans start falling due for repayment. So toward the Q3, Q4 this year, in reality, I think, when customers have the choice to repay these loans, start repaying their loans, may take advantage of the pay-as-you-grow scheme where they could extend the tenor. And these are quite cheap loans. But I think the issue of how quickly that cash will burn as people start spending the money or paying down the loan, will depend on the recovery of the economy but I think really in terms of behavior, it's the back end of the Q3 or Q4.

On the fraud point, just to touch on that. As you know, the bounce back scheme is predominantly a self-attested scheme, and we're required to undertake sort of minimal checks on eligibility and frauds. But we have abided fully by the terms of the scheme. We've implemented our usual fraud checks on the scheme.

So we've put in the usual protection. I think where we've seen these issues of potential areas of fraud where customers are applying for multiple bounce back loans from different banks or where they haven't been trading, so not filling the eligibility criteria. But we've applied our usual fraud checks that we would do and in fact, have put enhanced fraud checks during this period. So hopefully, that gives you a flavor both of behavioral and what's happening.

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

Katie Murray -- Group Chief Financial Officer

Yes, no, absolutely. So in terms of income for Ulster, I would assume -- and I mean I think you should take our guidance, assuming that we have Ulster in the numbers for 2021. So I think I've given you just quite a lot of our 2021 guidance on that already, so I won't repeat it. If I look to NIM, so if I look sort of Q1 2021, I would remind you, there's three buckets that you need to think about the yield curve.

So we're now expecting a three basis point decrease in Q1 from a lower hedge income driven by some high yield positions that are due to roll off in 2021. Liquidity. This is impacted by the TFSME repayment that we did in early January as well as the changes in loan and deposit volumes and I think I'll leave you to decide what might happen on as of the micro or macro basis on them. And then mix and pricing.

I've spoken a lot already around the mortgage applications in Q4 were a little stronger. Obviously, the commercial loan book impacted by this lower front book yield. And we also can expect in certainly in the early quarter, lower unsecured volumes is due to this lockdown that we're in at the moment.

Guy Stebbings -- Exane BNP Paribas -- Analyst

OK. Very helpful. Thank you.

Katie Murray -- Group Chief Financial Officer

Thanks, Guy.

Operator

Our next question is from Chris Cant from Autonomous. Please go ahead.

Chris Cant -- Autonoumous Research -- Analyst

Good morning both. Thank you for taking my questions. Two follow-ups, really. The first, on the revenue guidance, just so we can get this straight.

I think what you're saying there, you've guided us to GBP 300 million of disposal losses in 2021. So that implies something like 10.9% of the headline revenues post multiples. And I think you've said with the base rate cut you've assumed, which hasn't yet happened, that might be worth about GBP 60 million. So I get that you're saying a bit less than around 10.9%, but maybe with no base rate cut, we just get back to square 10.9%.

Consensus is at 10.6%. I mean, there's a bit of upside. Are you comfortable with that? Coming back to the early question on Ulster Bank. Maybe I missed the answer.

But if you do sell this portfolio of loans to AIB during 2021, which it doesn't seem like you're assuming, how much would that knock off that 10.9% in -- of income guidance? And then secondly, on investment spending. Your slide deck talks about GBP 3 billion. How much of that is going to be opex, please, how much is going to be capex? And thendoes that include the restructuring charges you are guiding for in the P&L or are those entirely separate?Thank you.

Chris McPherson -- Regional Managing Director, South West & Wales, Business Banking at NatWest Bank

It's Chris. So look, let me touch on Ulster, and Katie can pick up the other. I think she sort of talked you through the revenue guidance, but we'll try and pick up those points. On Ulster, we're also announcing a gradual withdrawal.

As we said, the discussions we are having are at a very preliminary stage. These discussions with AIB relates to the performing commercial loan book, which is GBP 4 billion but I think we are at very early stages, so you shouldn't make any assumptions around completion this year. Katie, do you want to touch on the other point?

Katie Murray -- Group Chief Financial Officer

Yes, absolutely. So just in terms of opex and capex, you can see from our accounts that we -- the way that it flows through, and we shared this with you in the past that we have about a 60% opex and capex away. So though 60% of the spend would come through, what I would say is that's not really very relevant these days because, obviously, things have capitalized in the past, and they're hitting our accounts today. So it kind of smooths itself out.

So I wouldn't I would probably encourage you not to hurl yourself down there too deeply, I have to admit. When we talk about the investment piece, that's -- the investment numbers are embedded in our other operating costs, so the impact of historical depreciation plus what we kind of have coming through today. Then we -- when we talk to the restructuring or strategic costs that we talked about, the GBP 1.4 billion going to the GBP 1.1 billion going to the GBP 0.8 billion. Those are very much in relation to things like redundancy and the property type charges.

So that's separate from there. So it really is around the big hits and you have to do things at some of your property. Profitability provisions that are there. So it's the GBP 3 billion that goes into that base piece.

And just in terms of income, and I was obviously talking to income, excluding notable items, I think you had all the building blocks there, Chris, in terms of the lending growth, the impact of the structural hedge, and the NatWest markets reduction. And then of course on a total basis, you have a GBP 300 million of disposal losses that you've talked about. So I think you've got all the building blocks. Thanks, Chris.

Unknown speaker

Thank you very much. Our next question is a question from Robin Down of HSBC. And it says, on the structural hedge, what reinvestment rate are you assuming for the GBP 300 million? With the recent rise in five-year swap rates and assuming they're maintained, I would have expected that GBP 300 million to be a little lower.

Katie Murray -- Group Chief Financial Officer

Yes. So at the moment it's rolling off, I think, about 88 basis points. And our assumption would have been certainly below what you see today. If I look at the early part of the year, it was much more around this kind of 20 basis points level.

I guess I'd just repeat what I said earlier, and it's possible just around the timing of your question coming in on the web. It is really to do with the fact that these are five- and 10-year hedges. So you don't get an immediate uptick in the hedge income as a result of the strengthening of the curve. You can see the disclosure quite well on Page 234.

So as curve strengthens up by 25 basis points, you have a GBP 37 million income benefit that would come off into this year. Clearly, if there's a rate change, you then get much -- you get a much bigger impact and much more quickly in terms of your managed margin, which you, again, can see on that note, but just in terms of the structural hedge, it dances a little bit, it takes time to roll out. But the disadvantage, and of course, is it takes a little bit of time to roll back on. And so that's the GBP 37 million this year.

Thanks, Robin.

Operator

Our next question is from Edward Firth from KBW. Please go ahead.

Edward Firth -- KBW -- Analyst

Yeah. Good morning, everybody. Sorry to go back to this, but I'm just trying to be clear. In terms of -- sorry, I've got two questions.

One was in terms of your forecast out to 2023, they are based on your targets. They are based on assuming that you had kept Ulster, and you've got like a sort of business as usual Ulster in there. Is that correct firstly? Just to be -- to clarify that. And then, I shall --

Alison Rose -- Group Chief Executive Officer

What I would say is -- sorry, on you go.

Edward Firth -- KBW -- Analyst

Yes. I'll give you my second question, sorry. And then the second question was just going back to Guy's questions on the bounce back loan. A number of your peers have suggested that, and obviously, during the course of this year, customers are going to have to start paying interest themselves on these loans, whereas at the moment, is paid by the government.

And a number of your peers have also said we might expect quite a big step down in those volumes once people have to pay the costs themselves. And it doesn't sound like you're expecting that. Is that fair?

Katie Murray -- Group Chief Financial Officer

Look, if I think of the bounce back loans and how they will unwind, I think it's obviously an incredibly interesting topic. They'll start making payments in May. What we've seen is a lot of extension of these payment terms and how they can pay it. We know that people are sitting on a lot of cash deposits.

I think we'll just -- we'll just have to wait to see how that unwinds. We're not necessarily assuming that we see a massive paydown come through. I mean. And Alison would you like to add?

Alison Rose -- Group Chief Executive Officer

Yes. I mean, one thing I would add is bear in mind that on the bounce back loans, these loans are averaged GBP 35,000 to GBP 37,000 in terms of individual loans. They're at very cheap costs for our borrower. And if you look at the pay-as-you-grow scheme and the ability to extend the term, you could quite easily see a lot of customers taking advantage of that to extend the term and keep low borrowing.

And I think we will start to see what will happen as those loans start coming due for repayment and customers start making the decision of what they want to do. At the moment, as I said, when I'm talking to customers, they're very much keeping their cash on deposit looking ahead at the uncertainty that they're facing. So I think we'll have a clearer view on that going forward. I think for a lot of businesses, they will be facing the choice of how is the economy going to recover? How are they going to position their business? Are they going to reopen their business? I think that is a consideration.

And how much uptake will there be of the pay as you grow, which gives them a lot more flexibility, to manage both the recovery and the growth in the economy versus the extra debt they've taken onto the business? So I guess that's a long-winded way of saying, it's too early to say that we can definitely see the attraction of people extending and keeping their loans for longer if they are going to continue trading.

Katie Murray -- Group Chief Financial Officer

And if I could just add on the Alison's point in the 2023 target, try to be crystal clear. So we expect to manage the withdrawal from Ulster in such a way that it is gradual and supportive of our 9% to 10% group ROTE target in 2023. So what you would see is income reduction will come with RWA reduction, and then we'll work on reducing the direct cost base as is appropriate. So this Ulster plan is to inherent in that guidance that we've given you today.

Edward Firth -- KBW -- Analyst

OK. It's inherent within it's -- OK. Thanks very much.

Katie Murray -- Group Chief Financial Officer

No problem. Thanks, Ed.

Operator

Our next question is from the line of Rob Noble from Deutsche Bank. Please go ahead.

Rob Noble -- Deutsche Bank -- Analyst

Morning all. Sorry, I have two questions. One on Ulster and one on capital return. How much of the book are you actually actively in negotiation on and sort of I presume that there's just a large proportion of the mortgage book that you both are actively talking about selling at the moment? Then how confident are you that it will be capital accretive, given that I presume you're not -- haven't completed negotiations yet? And then on capital return, I just wanted to clarify, you say payout ratio will also be around about 40%.

So how much flex is there? And I just didn't quite understand one of the answers, which was if the government doesn't do a buyback, a directed buyback, and then are you happy to increase the 40% payout ratio or not? Thank you.

Katie Murray -- Group Chief Financial Officer

OK. I'll ask --

Alison Rose -- Group Chief Executive Officer

Let me pick up Ulster. So to be clear, we are doing a phase withdrawal. The discussions that we are having with strategic partners and strategic counterparties are at preliminary stages at the moment. And as I mentioned, we've signed a nonbinding MoU in relation to a portion of the book, and we are also in early discussions with PTSB around certain retail SME assets and liabilities.

So those discussions are also preliminary, and we will obviously work very hard to ensure that we have an orderly and supportive transition over a number of years. And once we have more detail on that, and we'll update you but we are -- we expect our withdrawal from the Republic of Ireland to be capital accretive over a multiyear process.

Katie Murray -- Group Chief Financial Officer

And let me try just, Rob, on the payout ratio to kind of help you. So we, like other companies, have our dividend practice that we adopt to. So that's a 40% ordinary payout ratio in any one year. On top of that, you could expect us to do some special dividends, which -- and if you look at the forward look of this, you would certainly -- you would see that in the next couple of years.

So therefore, you would say, actually, the minimum -- what we said to you is the minimum today is around GBP 800 million, and that will be a build of ordinary and special, keeping in line with that 40% payout ratio as we go through because that's a longer-term ratio that we try to work with. We'll then also got capacity in retaining that capacity to do directed buyback transactions with the government. If they were not to do that, and we've not made any confirmation say as what we would do with that. I would go back to our base philosophy, which is all our intention to return our capital back out to our shareholders, but our clear preference is the GBP 800 million and directed buybacks, and the GBP 800 million being a minimum to start from.

Rob Noble -- Deutsche Bank -- Analyst

OK. Thanks very much.

Katie Murray -- Group Chief Financial Officer

Lovely. Thanks, Rob.

Operator

Our next question is from the line of Benjamin Toms from RBC. Please go ahead.

Benjamin Toms -- RBC Capital Markets -- Analyst

Good morning both. Thank you for taking my questions. Firstly, on just conduct and litigation. In the quarter, you had a notional item of GBP 200 million, which included the reversal of PPI provisions.

Is there anything particular driving the higher number here? Are you building up potentially a provision to deal with the potential bounce back of loan litigation? So this sounds like there's going to be no industry solution on the problem? And then secondly, you said you plan to grow assets under management significantly over the next three years. Could you potentially do something inorganic here? Thank you.

Alison Rose -- Group Chief Executive Officer

And so let me pick up assets under management. As you can see, we've had strong growth in assets under management report, a real focus around that and making sure that we're using our asset management capabilities in all private banks to support our customers. So we think there's very good growth organically within our existing business, and you can see that from the results that we've delivered. And as always, we will consider inorganic opportunities if they offer shareholder value from our perspective.

Katie, so do you want to take the other question?

Katie Murray -- Group Chief Financial Officer

And if I look at conduct, so you can see in disclosures as -- we've taken a small provision in relation to 166. It's in our litigation and conduct notes. So you can see that. But over the year, we had sort of our conduct charges of about GBP 400 million, made up of a number of smaller items.

And that was obviously offset by and the PPI release. And we were pleased that we've made our assessment with this official receiver as well. So that's good to get that cleared up. And we're certainly not building up any loan provision in terms of bounce back lending.

Despite that being old-fashioned accounting and in terms of being able to do that, and it's not something that we really feel that we have the need to do. So that's that, but can't really find the detail on the litigation piece.

Alison Rose -- Group Chief Executive Officer

Yes. And then on the bounce back loans, we're working very closely. One of the things I've talked about before is making sure that there are common protocols and standards. So as customers who've been now able -- delivered this scheme in a very digital way, have a very consistent way in how we run the collection process.

So we've been working very closely with U.K. finance and the treasury team on recoveries protocols, and so there's consistent customer treatment then as we go forward, and that's our approach.

Howard Davies

[Inaudible] wind up fairly soon as we press on. I don't now if perhaps we could fit one more in.

Operator

Our next question is from Aman Rakkar from Barclays. Please go ahead.

Aman Rakkar -- Barclays -- Analyst

Good morning, Alison. Good morning, Katie. Good morning, Howard. Just one from me actually.

Just around -- so the excess deposit formation that you're seeing in the system on the household side, so you are seeing pretty material growth in current accounts. Savings, it looks like it's probably going to balloon in the first half of this year, given the lockdown. So I was just wondering, I mean how are you thinking about managing this? So are you ascribing much liquidity value to this? Is there a chance for you to detune pockets of funding? Is there anything you can do on the hedge in terms of deploying additional balances? I mean, how are you thinking about this or are you having to look through it because of the uncertainty?

Katie Murray -- Group Chief Financial Officer

So, look, it's a great question. I mean, and you might recall that when we spoke around Q2 and Q3, what we had sort of said there was that we were probably taking a bit of a cautious approach in terms of building that into the hedge, just because we didn't really know then that there was just that but I would say we're kind of managing it on a much more business as usual way now. What we can see is there's huge saving build up. I mean I think the saving rate is 17%, whereas normally, you defer out 5% across the U.K.

So some big numbers there. We think it will take quite some time to unwind and actually they are more than likely just kind of flow around this kind of economy rather than necessarily leave it in any short order. So we're not really -- so we are -- there's some liquidity value ascribed to it certainly, so I'm pleased to be getting in seeing the strength of the deposit growth within there. We have sought to manage rates down.

And you'll see a slight fall in the retail rate to 10 basis points of funding. That will come down a little bit more as we move into Q1 as well as some of this rate reductions to take effect. Thanks, Aman.

Alison Rose -- Group Chief Executive Officer

Great. Well, thank you very much, everyone, for your questions. I appreciate your time today. Thank you very much.

Katie Murray -- Group Chief Financial Officer

Take care. Thanks. Bye-bye.

Duration: 92 minutes

Call participants:

Howard Davies

Alison Rose -- Group Chief Executive Officer

Katie Murray -- Group Chief Financial Officer

Unknown speaker

James Invine -- Societe Generale -- Analyst

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

Raul Sinha -- JPMorgan Chase -- Analyst

Andrew Coombs -- Citi -- Analyst

Jonathan Pierce -- Numis Securities -- Analyst

Alvaro Serrano -- Morgan Stanley -- Analyst

Jon Peace -- Credit Suisse -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Chris Cant -- Autonoumous Research -- Analyst

Chris McPherson -- Regional Managing Director, South West & Wales, Business Banking at NatWest Bank

Edward Firth -- KBW -- Analyst

Rob Noble -- Deutsche Bank -- Analyst

Benjamin Toms -- RBC Capital Markets -- Analyst

Aman Rakkar -- Barclays -- Analyst

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