NatWest Group plc (NWG) Q2 2022 Earnings Call Transcript

NatWest Group plc (NWG -0.14%)
Q2 2022 Earnings Call
Jul 29, 2022, 4:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the NatWest Group H1 results 2022 management presentation. Today's presentation will be hosted by CEO Alison Rose; and CFO Katie Murray. After the presentation, we will open up for questions. Alison, please go ahead.

Alison Rose -- Chief Executive Officer

Good morning, and thank you for joining us today. I'm joined by our group CFO, Katie Murray, this morning, and I'll start with the business update before Katie takes you through the results. We'll then open it up for questions. So let's start with the headlines on Slide 3.

We're announcing a strong first-half performance today with operating profit before tax of GBP 2.8 billion, up 12.8% on the first half last year. And attributable profit of GBP 1.9 billion. Our return on tangible equity was 13.1%, up from 11.7%. We're reporting strong income growth of 16.2% and costs were down 1.5%, resulting in positive jaws of 17.7%.

We continue to target a reduction in costs of around 3% for the year and remain on track to deliver that. In a challenging macroeconomic environment, we maintain a strong balance sheet and disciplined risk management. We have a well-diversified wholesale loan book. 93% of our personal lending is secured, and we are well-provisioned.

We continue to deploy credit to support our customers and net lending grew 2.6% to GBP 362 billion during the first half. The bank is also highly capital generative. Our common equity Tier 1 ratio is now 14.3%, and we have been clear about our intention to return excess capital to shareholders. We are declaring an interim dividend of GBP 0.035 per share which represents GBP 366 million toward our distribution of at least GBP 1 billion this year.

We're also announcing today a proposed special dividend of GBP 1.75 billion with a share consolidation. In addition to the directed buyback of GBP 1.2 billion in March, this brings total distributions announced for the first half to GBP 3.3 billion. And we have also recently completed the GBP 750 million on-market buyback announced in February. Just over two years ago, we set out our purpose-led strategy, placing customers at the heart of our business as you can see on Slide 4.

The rationale was simple, by helping our customers to thrive, we too will thrive. Against the backdrop of economic uncertainty, we continue to focus on our four strategic priorities in order to drive long-term sustainable value, and that starts with supporting our customers, which I'll talk about more on Slide 5. While we are not currently seeing any immediate signs of stress, we are acutely aware of the precious customers face this year with higher inflation, rising interest rates, a steep increase in energy costs and supply chain disruption. The strength of our capital generation and balance sheet enables us to stand alongside customers and colleagues as they face into these challenges.

Many of our customers built up savings during the pandemic, so household finances are in a relatively good shape, and businesses have healthy balance sheets. To date, we are not seeing an increase in arrears or request for help, but we do know that spending on utilities and fuel bills is up between 20% to 30%. So we are proactively targeting support to help customers navigate the economic uncertainty. We have launched a GBP 4 million hardship fund to provide support for individuals and businesses delivered through organizations such as systems advice, money advice trust and step change.

We are also proactively contacting 2.7 million personal and business banking customers to offer information on managing the increased cost of living as well as support on supply chain and working capital management. And we're taking a range of actions if people do get into difficulty, including waiving fees where appropriate, agreeing repayment plans and loan forbearance. In addition, we continue to carry out three financial health checks as well as helping customers to understand and improve their credit rating. The commercial customers we are tailoring support to sectors most likely to be impacted, for example, in agriculture, which has been hit by rapidly increasing fertilizer prices, we are helping 40,000 customers, including providing an additional GBP 1.25 billion in lending for U.K.

farmers. We also have a well-established ecosystem for small and medium businesses with sector specialists and business hubs around the U.K. We are monitoring our customers carefully to identify early dose, who are having difficulties and have frozen any increase in tariffs for our smaller customers. We cannot support our customers without also supporting our colleagues who face the same challenges.

So we are making targeted pay rods for our lowest paid employees across the group. So let me turn now to how we're delivering on our strategic priorities on Slide 6. We have an extensive franchise we currently serve 19 million customers, and we are the largest business bank in the U.K. This means we start from a position of strength with opportunities to grow even in an uncertain economic environment.

I'm going to focus on three areas in particular this morning: first, deepening our relationships with existing customers as well as acquiring new ones; second, supporting customers as they transition to a low-carbon economy; and third, diversifying our income streams. I'll talk about each one in turn, starting on Slide 7. We are working to deepen relationships with customers by serving them at all stages of their lives and by engaging more effectively with them. Our recent acquisition of Rooster Money is a good example.

Rooster Money helps young children learn to manage money with real-time notifications of their spending. And gives parents the assurances they need by being able to block payments and freeze lost cards. We acquired Rooster along with 130,000 customers last October. And by connecting it with our own app have gained 17,000 new customers during the first half.

This is a perfect example of how we can serve the needs of our customers in a responsible way, while also generating growth for the bank. Our share of the youth segment has grown from 13.8% to 14.5% since 2019. Another way in which we're deepening our relationships is by using data analytics to make our communications much more personalized. Data-driven prompts now play an important role for customers across the bank.

For example, 5.7 million personalized messages have been acted upon by customers to date this year, compared to 1.4 million for the whole of 2021. We're also acquiring new customers by delivering a wider range of products and services across our franchise and by improving the customer experience through our digital transformation. For example, in retail banking, we opened 310,000 new client accounts during the first half. In private banking, we added over 1,000 new customers, of whom 20% were referred from other parts of the group.

And in commercial and institutional, we opened 49,000 new accounts or start-ups, almost 40% of which were via our digital owning business bank metal. This takes our share of start-up banking to 12.4%, up from 10.4% in 2021. Turning to Slide 8. Another way in which we're meeting customers' needs is by helping them transition to a low-carbon economy, where there is a strong commercial, economic and social imperative.

In retail banking, we have completed GBP 1.4 billion of green mortgages since they were launched in Q4 2020, which give us slightly discounted interest rate to energy-efficient properties. This is a 90% increase from GBP 736 million at the year end. We also have a carbon tracker on our app, which over 300,000 customers have access so far this year. Our private bank is well-recognized as having one of the best sustainability offerings in the U.K.

And in February this year, we committed to achieve net-zero alignment in at least 50% of the assets in each fund by 2025. We are also U.K.'s leading underwriter of green, social and sustainability bonds. Last year, we set a target of delivering GBP 100 billion of sustainable funding and financing by 2025 and have contributed GBP 20 billion toward that target to date. We also led a collaboration with other banks to launch carbon place, the world's first transparent global marketplace for carbon offset using blockchain to offer customers consistent carbon pricing and liquid market and seamless post-transaction settlement.

Turning to smaller businesses. We launched the NatWest Carbon planner at the end of June, which is a free platform to help SMEs work out their carbon footprint and then prioritize actions and targets to reduce it. We're also helping smaller businesses with green loans to finance solar panels, electric vehicles or heat pumps with no arrangement fees. The investment we're making to improve our customer propositions is also helping us to diversify income streams by both product and customer, as you can see on Slide 9.

We have relatively little unsecured lending, which we are growing judiciously within strict risk parameters and in line with our prime appetite. For example, our credit card balances have grown 8% during the first half to over GBP 4 billion. And we have issued 168,000 new credit cards, taking our share in cards to 6.5%. We have strengthened our offering for affluent customers by extending our asset management expertise to customers across the group.

Our affluent assets under management and administration have grown 4% since the year end to GBP 2.6 billion. This contributed to net new inflows of GBP 1.4 billion in the first half on a path with net new inflows for the entire year in 2020. Another area where we're benefiting from serving more customers across the group is foreign exchange, where we now offer our expertise to commercial as well as institutional customers. As a result, we have added around 350 new corporate customers since April last year, and income from our foreign exchange business has grown 37% year on year.

Turning to Slide 10. We're also working hard to improve the customer experience and increase productivity through our digital transformation. We're now in the second year of our GBP 3 billion investment program, most of which is being invested in data, digitalization, and technology, and the benefits are increasingly clear. The majority of our customers now interact with us digitally.

61% of our retail customers are entirely digital and almost 90% of retail customer needs are met digitally. 84% of our commercial customers have acted digitally and 93% of all our use accounts are opened online or via a mobile app. We are also continuing to improve customer journeys to make it easier for customers to interact with us. 70% of retail accounts and almost all credit card accounts are now opened with straight-through processing.

Retail customers used our transport core 5.3 million times during the first half, almost half of which required no human intervention. And commercial customers made 157,000 digital service requests compared to just 6,000 in the whole of 2019. By improving the customer experience, we have significantly increased customer satisfaction, and this is reflected in Net Promoter Scores. For example, retail is at 17, up from four in 2019.

Our affluent score has increased to 28 from minus two, and we have one of the leading scores in commercial banking at three. And of course, this also helps to attract new customers. We continue to proactively manage capital allocation and risk in order to maintain a strong balance sheet, Slide 11. We have a well-diversified wholesale book and 93% of our personal lending book is secured.

92% of our retail mortgages are fixed with an average loan-to-value of 53%. And the level of defaults across the group remains low. Our phase withdrawal from the Republic of Ireland continues to progress, and we now have binding agreements in place for 90% of the book. Deposits reduced 16% to EUR 18 billion during the first half as customers move their accounts to other providers.

We continue to expect the majority of sales to complete in 2022 and for our withdrawal to be capital accretive. Turning now to Slide 12. This is a highly capital-generative business demonstrated by the fact that we delivered operating profit before impairments of GBP 2.8 billion in the first half, which is broadly in line with the entire year in both 2020 and 2021. This capital strength gives us the flexibility to invest in the business figures, consider other options that create value as well as return capital to shareholders.

The proposed special dividend announced today of GBP 1.75 billion, together with the interim dividend and director back brings total distributions announced for the first half to GBP 3.3 billion. On the back of our strong performance, combined with lending growth, a robust balance sheet, well-managed risk and significant capital strength, we are upgrading our guidance today on Slide 13. We now expect income in the region of GBP 12.5 billion in 2022. We continue to target a reduction in costs of around 3% this year, but have revised our target for 2023, when we expect them to remain broadly stable.

We remain committed to growing the business while managing cost growth to deliver positive jaws. Our aim is still to achieve a CET1 ratio of 13% to 14% next year, and we are close to our target of around 14% for this year. Taking all this together, we are upgrading our 2023 return on tangible equity target to 14% to 16%. With that, I'll hand over to Katie to take you through our financial performance.

Katie Murray -- Chief Financial Officer

Thank you, Alison. I'll start with the performance of the Go-Forward Group in the second quarter, using the first quarter as a comparator. We reported total income of GBP 3.2 billion for the quarter, up 7.1% from the first. Excluding all multiple items, income was GBP 3.1 billion, up 12.3%.

Within this, net interest income was up 13.9% at GBP 2.3 billion, and noninterest income was up 7.7% to GBP 797 million. Operating expenses fell 1% to GBP 1.7 billion, driven by lower conduct costs. We made a net impairment release of GBP 39 million compared to a release of GBP 7 million in the first quarter, which reflects a continued low level of default. Taking all of this together, we reported operating profit before tax of GBP 1.5 billion for the quarter.

Attributable profit to ordinary shareholders was GBP 1.1 billion, equivalent to a return on tangible equity of 15.2%. I'll move on now to net interest income on Slide 16. Net interest income for the second quarter of GBP 2.3 billion was 13.9% higher than the first as a result of higher margin and strong lending. Net interest margin increased by 26 basis points to 272 basis points driven by wider deposit margins, which added 34 basis points.

This reflects the benefit of higher U.K. base rates, which increased by a further 50 basis points in the quarter and higher spot rates on our structural hedge. These increases were partly offset by lower mortgage margins on the front book, which produced net interest margin by four basis points and by the repayment of higher-margin loans in commercial and institutional which decreased it by a further three basis points. Turning to our interest rate sensitivity on Slide 17.

You can see here the strength of our balance sheet and the positive tailwind from rising interest rates. The U.K. base rate has increased 115 basis points since December, which has added around GBP 0.4 billion of managed margin benefit in the first half of the year compared to the same period last year. We are projecting a year-on-year increase for the full year of GBP 1.1 billion, reflecting the lower run rate in the second half.

We have reviewed our economic assumptions as usual at this time of year. And now assume the U.K. base rate will reach 2% by the end of 2022 and remain there through 2023, our revision upwards from 1.25%. Using an illustrative 50% pass-through, this would add a further GBP 0.2 billion of managed margin benefit this year with the full run rate benefit flowing through in 2023.

Turning now to the structural hedge. Total hedge income for the first half increased by GBP 0.1 billion compared to the first half last year as notional balances grew by GBP 40 billion to GBP 230 billion at the end of June. Assuming balances and new case swap rates are in line with levels at the end of June, we expect this to result in year-on-year income growth of circa GBP 0.6 billion. This brings the total year-on-year benefit in 2022 to GBP 1.9 billion.

Clearly, the actual benefit depends on the timing and size of rate increases, changes in deposit balances and pass-through decisions but this is how I am currently thinking about the potential impact of higher interest rates on our 2022 income. If we move on now to look at volumes on Slide 18. Gross loans to customers across our three franchises increased by GBP 4.4 billion or 1.3% in the quarter to GBP 338 billion. In retail and private banking, mortgages balances grew by GBP 3.6 billion or 1.9% and unsecured balances increased by a further GBP 500 million, the strongest quarterly growth since the onset of the pandemic.

In commercial and institutional, gross customer loans also increased by GBP 500 million. While lending to larger corporate and institutional customers increased by GBP 1.4 billion, driven by growth in our funds business and greater use of credit facilities. This was partly offset by continued repayments on government lending schemes. I'd like to turn now to noninterest income on Slide 19.

Noninterest income, excluding notable items, was GBP 797 million, up 7.7% on the first quarter. Within this, income from trading and other activities increased a further 8.3% to GBP 222 million as we benefited from ongoing volatility and increased customer activity across our suite of market products. Fees and commissions increased by 7.5% to GBP 575 million, driven by higher card and payment fees as consumer spending increased and demand for corporate credit generated higher lending and financing fees. I'll talk now about what this means for 2022 income on Slide 20.

We are strengthening our guidance and now expect 2022 income, excluding notable items of around GBP 12.5 billion, up from GBP 10.1 billion in 2021. As I explained earlier, our year-on-year interest rate benefit through managed margin and the structural hedge adds around GBP 1.9 billion. You then need to consider the impact of lower mortgage margins, which will partially offset this. We've also had the additional net benefit of higher average lending volumes and higher noninterest income.

This guidance is underpinned by our assumptions that the U.K. base rate increases to 2% by the end of the year, and U.K. spot rates remained broadly in line with where they were at the end of June, leading to a net interest margin above 270 basis points for the full year. Turning now to costs on Slide 21.

Other operating expenses for the go-forward group were GBP 3.2 billion for the first half. That's down GBP 50 million or 1.5% on the same period last year as we continue to work to meet our targets. This cost reduction, combined with the improvements in income has supported a nine percentage point improvement in the cost-to-income ratio to 55% in the half. Like other businesses, we are experiencing the impacts of inflation on our cost base.

Despite this, we are confident that we can deliver a reduction of around 3% for the full year. Though this will not be linear, and you should expect costs to be higher in Q3 than Q2 with the savings weighted to the fourth quarter. Looking now to 2023, we expect some of the current inflationary impacts to be more significant next year. We are protecting our investments spend and remain committed to delivering the same gross cost savings in the plan.

However, the net effect of this is that we now expect our cost base to be broadly stable in 2023. We remain committed to maintaining cost discipline and improving operating leverage with positive jaws across income and expenses. Turning now to impairments on Slide 22. As you know, we have a well-diversified loan book, and we are not yet seeing any significant signs of stress.

In the first half, we saw ongoing improvement in the performing book with migrated imbalances from stage two back to stage one. This underlying strength from the loan book with low levels of default has resulted in a reduction in ECL provisions and coverage to 93 basis points at the end of June, down from 103 basis points at the end of the year. This has driven a net impairment release for the group of GBP 54 million in the first half. We are strengthening our guidance for the full-year loan impairment charge from below 20 to 30 basis points to under 10 basis points.

This guidance is underpinned by our updated economic assumptions on Slide 23. We have summarized the changes to our base case in our economic assumptions at the top of the slide. While we have not changed the 45% weighting to our base case scenario, we have increased our weighting to the extreme downside from 5% to 14%. We have also adjusted down our expectations for GDP growth and U.K.

unemployment to reflect the latest consensus of the economists. And as I said earlier, we've increased our U.K. base rate outlook to 2% by the year end to reflect higher inflation. Other details can be found in the appendix and IMS.

The net effect of these changes was a GBP 41 million increase in the ECL provision as shown at the bottom of the slide. The post-model adjustments for economic uncertainty is stable over the first half at GBP 583 million. However, the components have changed as we reduce COVID-19 overlays and increased provisions to reflect the challenges our customers face, including the increased cost of living and supply chain disruption. We continue to be cautious on the release of these provisions as we have yet to see the full impact of these challenges playing out.

Turning now to our progress on Ulster Bank on Slide 24. We now have binding agreements for around 90% of the Ulster Bank loan book. The Irish Competition and Consumer Protection Commission announced last week that it has cleared asset sales to Permanent TSB, which means we have now the experience for around 60% of the loan book. We expect the majority of the asset sales to be largely complete by the end of 2022.

We expect the mortgage sale to AIB to complete in the first half of 2023, subject to any necessary regulatory approvals. Both income and direct costs associated with these new sales are now in discontinued operations and will roll off in line with completions. We continue to expect to incur exit costs associated with asset sales and restructuring of around EUR 900 million, with the majority incurred by the end of 2023. Around half of these exit costs will be grouped in discontinued operations and the other half through continuing.

We expect to recognize EUR 350 million of these exit costs through discontinued operations in the third quarter as the mortgage book is reclassified to fair value. Ulster Bank remains very well capitalized, and we continue to expect the withdrawal to be capital accretive. As transactions complete, we will look to restart dividend payments from Ulster Bank back to the group. Turning now to look at capital and risk-weighted assets on Slide 25.

We ended the second quarter with a common equity Tier 1 ratio of 14.3%, down 90 basis points from the first quarter due to capital distributions. This includes the IFRS transitional relief of 16 basis points, down from 23 basis points to Q1. We generated 53 basis points of capital from attributable profit net of changes to IFRS 9 additional relief. This was partially offset by higher RWAs, which are up GBP 3 billion to GBP 180 billion driven by growth in lending balances and updated models.

This reduced the ratio by 25 basis points. A reduction from shareholder distributions of 111 basis points includes a further accrual of GBP 250 million for the ordinary dividend toward our stated GBP 1 billion minimum commitment, and the proposed special dividend of GBP 1.75 billion. Turning to my next slide on the special dividend. The decision to announce a special dividend with share consolidation enables us to distribute more capital than an in-market buyback.

It reduces the share count and offset the dilution to tangible net asset value per share of the special dividend, while also treating all shareholders equally, and ensuring the government shareholding remains below 50%, which the board has determined is in the interest of all shareholders. We will publish a general meeting notice and circular with full details on August 9th, ahead of the General Meeting on August 25. Shareholders on the record date on August 26, will receive a special dividend payment on the 16th of September. However, the consolidation of shares will be effective on 30th.

Turning now to our balance sheet strength on Slide 27. Our CET1 ratio of 14.3% is moving toward our target range of 13% to 14% as planned. Our U.K. leverage ratio of 5.2% is in line with the first quarter and 195 basis points above the Bank of England's minimum requirement.

We have maintained strong liquidity levels with a high-quality liquid at and a stable diverse funding base. Our liquidity coverage ratio of 159% is down from Q1 due to growth in customer lending, redemption of own debt and share buybacks. Headroom above our minimum is GBP 76 billion. Turning to my final slide.

As you heard from Alison, we have strengthened our guidance. We now expect to deliver income, excluding notable items of around GBP 12.5 billion for 2022. This assumes U.K. base rates reached 2% by year end, supporting net interest margin for the full year of greater than 270 basis points.

On costs, we expect to deliver a reduction of around 3% this year and to keep them broadly sale in 2023 with positive jaws. On loan impairments, we still expect to remain below the through-the-cycle level of 20 to 30 basis points in 2023, but now expect to be below 10 basis points in 2022. And we reaffirm our guidance on capital. Taking all of this together, we expect to deliver a 2023 return on tangible equity between 14% and 16%.

And with that, I'll hand back to Alison.

Alison Rose -- Chief Executive Officer

Thank you, Katie. So to conclude. We are reporting a strong performance today and continue to make good progress on all our strategic priorities in an uncertain economic environment. Our strong capital generation and robust balance sheet enable us to continue supporting customers as well as to invest in growth, consider other options that create value and return capital to shareholders.

The special dividend we have announced this morning brings distributions for the first half to GBP 3.3 billion. And on the back of a strong performance, combined with a robust balance sheet, well-managed risk and significant capital generation. We have upgraded our guidance today and now expect to deliver returns in the range of 14% to 16% in 2023. And with that, thank you very much, and I'm happy to open it up for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Aman Rakkar of Barclays. Aman, could you please go ahead?

Aman Rakkar -- Barclays -- Analyst

Hi, Katie. Hi, Alison. Hopefully, you can hear me OK?

Katie Murray -- Chief Financial Officer

Hi, Aman. Yep.

Alison Rose -- Chief Executive Officer

Yes. We can hear you.

Aman Rakkar -- Barclays -- Analyst

Great. I had a question on the ROTE guide for next year, the 14% to 16% range does imply a range of outcomes on profit. I suspect that relates to your view of revenue. But I was interested in where you see the kind of sensitivities to ROTE next year.

What gets you to 14% versus, say, 16% next year? The second was around your assumed interest rate benefit as base rate goes to 2% managed margin benefit of GBP 200 million this year. Thank you very much for that disclosure. I was interested if you can help us understand what you thought a kind of full 12-month run rate for that number would look like? And what kind of deposit pass-through assumption are you embedding as part of that?

Alison Rose -- Chief Executive Officer

Great. Thank you. Well, I'll get to Katie to take you through the detail. But when you look at our rate guidance, I mean, there are a number of drivers to that.

Clearly, what we've demonstrated is a well-positioned business and we're growing revenue. Our transition plan is delivering operating leverage, strong balance sheet and risk diversification and obviously, the capital base with a clear commitment to the capital returns. And so taking that together gives us the ability to strengthen that 14% to 16%. But Katie, do you want to take through a little more detail in that and then the other questions?

Katie Murray -- Chief Financial Officer

Yes. Sure. Absolutely. So if I look at the ROCE, there's obviously a number of factors that will impact where we end in that 14% to 16%.

And one to think about is the progression of that tangible equity through to the end of '23. So with our announcement today, we've increased the pace on our journey down to our C1 target of the 13% to 14% to get to the -- around 14% by the end of this year. Clearly, the timing of further distributions from here and when they actually hit tangible equity rather than set one has a little bit of an impact. RWAs and Ulster, we have around EUR 9 billion of credit RWAs that should roll off in asset sales complete through 2022 and H1 2023.

And any residual RWAs there for some of the residual assets in risk, which will take a bit longer in terms of that in. And then for the rest of the group to the Go Forward Group, the drivers on that RWA will be very much loan growth. and any ongoing capital optimization we do. There's nothing to call out on regulatory deductions in terms of anything on that.

When you look at the interest rate benefit, and I'm glad you like the disclosure on Slide 17. I think probably the easiest way to answer your question there is to look at the sensitivity that we've given you on the -- within the accounts and also it's in the appendix of the slide. And what we've also shared with you there is what would it mean in terms of a 100 basis point rise, when we spoke originally, what we have said in that sensitivity is that as rates rise, the pass-through rate would increase. Now that we're up at the level and we're looking at that level above 2%.

We've done an illustrative pass through 50% of any rate rise as we go forward from here. I would remind you, man, we've only passed through 15% based -- 15% of the total to date, but that's how we've done the illustration going forward, and we feel that's a relatively good proxy for you to move forward from here.

Aman Rakkar -- Barclays -- Analyst

Thank you so much.

Katie Murray -- Chief Financial Officer

Thanks, Aman.

Operator

Our next question is from Rohith Chandra-Rajan of Bank of America. Rohith, if you could please unmute and go ahead. [Operator instructions]

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

Hi. Good morning. Thank you very much. Again, because I come back to your helpful slide, Slide 17.

And I just wondering if you could walk us through that in a little bit more detail in terms of the progression that you've seen in the first half and how the dynamics are different for the second half or for the full year versus what we've already seen in the first half in terms of -- you talked a little bit already about deposit pass-through there is also a lot more hedge benefit coming through as well. Thank you.

Katie Murray -- Chief Financial Officer

Lovely. Thanks very much, Rohith. Yes. No, look, it's a good side, and we enjoyed kind of pulling it together to try to give you some good guidance.

I'll give you a bit of a fuller answer so that you can understand the three component parts of that GBP 1.9 billion. Firstly, it's important to remember the margin profile during 2021. The low point for margin was in Q3 '21 when NIM was 2.28%. And as such, the year-on-year growth will be more significant in H2 than in H1.

If I just take the different components first. So the GBP 1.1 billion of managed margin benefit from the base rate at 1.25%. This is effectively the full-year benefit from the base rate increases through to June across retail, private, and commercial institution institutional, there's been limited pass-through in H1. We have, as you may know, announced the deposit rate change for our retail customers, which becomes effective on August 1.

And following that change, the cumulative deposit pass-through for the group is approximately 15% of the 115 basis point increase in the U.K. base rate since December 2021. If I move to the point to we manage margin benefit, the managed margin benefits for future rate rises 3% to 2% by year end is based upon our updated interest rate sensitivity disclosure. We've previously discussed how we expect the deposit rate deposit pass-through to be lower for rate increases below 1% and return to a more normalized level and pass-through as we approach that 2% level.

And so for the illustration on this slide, we have assumed the blended pass-through of 50% of each rate rise. So the GBP 200 million reflects the proportionate share of the full year benefit of 325 basis point increases in the second half. Clearly, the actual benefit depends on the timing and the size of rate rises and also the ultimate level of pass-through, which may vary from the illustration. And then finally, the GBP 0.6 billion of structural hedge benefit that represents the year-on-year increase we expect in total hedge income in 2022.

And there's two main factors to think about in there. First of all, we're refinancing at the higher front book rates. We have around GBP 20 billion of maturities in H2 that are rolling off at a yield of around 75 basis points, and they are being invested at the current five-year spot rate. And obviously, you'll have seen on the slide as well that we've got increase in notional of GBP 17 billion in the second quarter, and that was invested at a blended rate of 2.5%.

And it is important to remember that hedge income in H2 '21 was lower than in H1 '21. And so the year-on-year benefit is greater in the second half of the year as we move forward. Hopefully, Rohith, if that's helped just add a little bit of color to that slide.

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

Very helpful. Thanks very much.

Katie Murray -- Chief Financial Officer

Thanks, Rohith.

Operator

Our next question comes from Martin Leitgeb of Goldman Sachs. Martin, if you could please go ahead.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yes. Good morning. First of all, congratulation to the strong set of numbers today.

Katie Murray -- Chief Financial Officer

Thanks, Martin.

Martin Leitgeb -- Goldman Sachs -- Analyst

I was just wondering if I could follow up on the comment you just made on the 15% pass-through in terms of deposits so far. Is that on deposit within personnel? Or does this also include commercial. And I was just wondering -- on this slide, you show a meaningful deposit margin benefit in the period from C&I. And I was just wondering, is there any difference in terms of how C&I deposits and deposit pricing will behave going forward as opposed to personnel? And secondly, last quarter, we discussed mortgage pricing and application margins coming back into the 60 basis point range, which now has fed through in terms of completion margin ABS.

So was just wondering what you see or what the outlook is in terms of mortgage pricing going forward? Would you expect current pricing to hold? It seems increasingly swap rates are being passed through? Or could there be a scenario that some of the economics for mortgages shift over to deposit?

Alison Rose -- Chief Executive Officer

Katie, you have to take this.

Katie Murray -- Chief Financial Officer

Yes. No. Absolutely. Thanks very much, Martin.

So as we look at the pass-through assumptions of what we've done to date, so 15% of the total as we've come through. So limited pass-through across all areas. What I would say is it does differentiate Martin, across the different sectors. So if you look at the pass-through rate that we've got within our managed rate within retail savings, it's 17%, so an increase of 20 basis points compared to the 115 basis points since the rates have gone through.

Within C&I, that is 19% -- 9%, sorry. It's only 10 basis points that have gone through. So you can see that decisions are not uniform across the bank. We offer also a range of different deposit accounts in terms of things like our digital saver, which offers 3.25% for balances below GBP 1,000.

And if you're in a small business space, there's a 40 basis point account as well. When we look at Q2, the customer funding rate was 10 basis points in retail versus the five we had in Q1 and then nine basis points in C&I versus the two basis points that we had in Q1. So there will be a differential rate within there. What we've done in our illustrations is that we've used a 50% illustrative pass-through rates as we move forward.

Clearly, it will depend a little bit when the rate rises come through and the timing of those that we do look at our suite of customers and our products and then see what's actually happening in the market as well, which I think is very important to consider. But I think that illustration is a good guide for you to think as you go forward. Then in terms of the mortgage margin disclosure, what we're trying to do is to lift you a little bit to the NIM guidance for 2022. And, Martin, I know that we'll dance around that for a few quarters, and that's fine.

We are very much trying to manage both sides of the balance sheet to improve the margins and mortgages is just obviously one part of that. You can still see the disclosure in the financial supplement on the retail banking, sorry, mortgage income as well as the deposit income. And this allows you to see the development of the mortgage margins over time, which for the group book back book declined from 158 basis points to 150 basis points in Q2, driven by that lower completion margins as expected. Swap rates have continued to move up in the second quarter, and we saw significant movements in there.

When we spoke in Q1, I said that we were not happy with our application margins at 44 basis points. and following action on the customer rates, the application margins for the group were above that 60 basis point number that I was aiming for as we got to the end of Q2 with some further widening in July. Martin, your question on how we think it will develop here. But the swap curve has been so volatile over these last sort of six months.

And I think what we've seen is the market reacting to it very sustainably in terms of actually taking that customer rate up to deal with the swap rate movements. I think we've kind of got to the right place on now. I think what happens as we go forward from here will obviously depend a little bit in terms of what happens on that swap curve and also kind of wider customer behavior. But I think from our side, we've got the benefit of the strength of the hedge income coming through.

So it enables us to absorb some of that volatility should it come through. Thanks, Martin.Thank you.

Operator

Our next question comes from Alvaro Serrano of Morgan Stanley. Alvaro, if you could please unmute.

Alison Rose -- Chief Executive Officer

Hi, Alvaro.

Operator

Alvaro, you are next. If you would like to unmute and go ahead otherwise --

Alvaro Serrano -- Morgan Stanley -- Analyst

Yes. I think we're good. Just two questions. Obviously, the 14% to 16% RoTE is very healthy and nice to see.

I wonder beyond sort of the short-term sort of sensitivities in the numbers you've already provided, what do you see the biggest risks in medium term because it does look quite healthy I'm wondering if we're going to perpetuate this value on that 15% ROE. What do you think is the biggest reset competition on deposit side, competition on mortgages, the regulator sort of increasing the pressure on -- maybe on remuneration of deposits? Or what do you see as the biggest medium-term risk of making too much money if that's -- if I can say that. And on costs, just a very on that flat cost guidance for 2023. What CPI are you assuming there? What underlying inflation are you assuming?

Alison Rose -- Chief Executive Officer

Thank you. Well, the guidance we've given you, as you know, we're very thoughtful about when we give you guidance and how we look at that. Clearly, as we project forward, clearly, the impacts of cost of living, inflation are challenges. And I think we can see good growth across all of our businesses, but we're not significantly dependent on volume of lending growth as we go forward.

I think the biggest risk is we see a slowdown in growth as customers both on the consumer side and the business side, grapple with the challenges of cost of living and inflation, the supply chain disruption that we're seeing. And that's why we're being so proactive in terms of outreaching to help our customers. And obviously, we're keeping a very close eye on impairments and early warning indicators of stress in the book. But as you can see, we have a well-diversified book predominantly secured and we're well provisioned.

So I think as we look forward, the economic uncertainty is really a challenge for growth and having a strong balance sheet sort of answer your question, A strong balance sheet with capital means that we can continue to lend and support our customers through that cycle. And I think that is a positive and an important point of being a well-capitalized, well risk-diversified bank supporting customers. Katie, do you want to pick up the cost question?

Katie Murray -- Chief Financial Officer

Yes. No. Absolutely. So could you look at the sort of inflationary impact on costs, within 2022, we've obviously seen some of that in terms of the wage awards that we put through in 2021 and then implemented in Q2.

And the average increase cost and we've now done in July, a further support for our 22,000 employees earning less than GBP 32,000. Those together kind of have come to a kind of increase in salaries of GBP 100 million, as we have them implemented. And when you see as you move into 2023, we can see that there could be some more pressure on our wages. We also are seeing as many businesses are increases in our contract renewals going up to sale.

And even things like a marketing spend, you can see that kind of coming through. So inflation, you reached 9.4% in June. Our expectations is that it will rise to about 8.4 million annually for the whole year. And so that's really what we're reflecting in terms of that inflation piece.

But I think what we try to do is to make sure that we manage it tightly, focus on making sure that the investment spend is available, and that's protected within that space. And then we continue to drive out the efficiencies as we move forward. So even as we look to '23 while our guidance is flat, there's still significant cost efficiency that has to be delivered to make sure that we can maintain that broadly for that guidance. Thanks, Alvaro.

Alvaro Serrano -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from Omar Keenan of Credit Suisse. If you could please unmute, Omar, and go ahead.

Alison Rose -- Chief Executive Officer

Good morning, Omar.

Operator

Omar, you'll have to unmute, otherwise, we'll move on to our next question, which is Guy Stebbings of BNP Paribas Exane. Guy, if you could please unmute and go ahead.

Omar Keenan -- Credit Suisse -- Analyst

Hello?

Operator

Sorry. Omar is here. Omar, please over to you.

Omar Keenan -- Credit Suisse -- Analyst

Yes. Sorry about that. Good morning, everybody. Congratulations on a very strong set of numbers and the rate guidance upgrade as well.

I've had -- I have two questions, please. One on the impairment guidance for 2023. And just -- sorry, another one on deposit beta. So firstly, on the impairment guidance for '23 to remain below through the cycle levels.

I guess that depends on the base case U.K. economic assumptions that you gave. And I just wondered, given the level of economic uncertainty. What gave you the confidence at this stage to give a guidance on 2023? Is it the presence of management overlays that give you the comfort to do that when you think about the rent of outcomes that could potentially happen? And secondly, on the deposit beta, I'm still very surprised at how good it's been in the C&I business.

I understand that a lot of the -- as you said before, a lot of the deposits are managed rates, but I still would have thought that there would have been a little bit more pressure upward pressure there. Is there any more color that you can give maybe what the secret sauce is in the C&I business?

Alison Rose -- Chief Executive Officer

Thank you. Well, Katie can take you through the details of our provisioning and impairments. And so what gives us the confidence as we sit here today and as we look forward. Firstly, I think, look at the mix in our book.

We have a well-diversified book predominantly secured. 92% of our book is secured. We had good risk diversification, so -- and we are well provided for. Also, as we look at the performance of our book, we're not seeing any signs of distress or default or deterioration both in our consumer and business book.

And customers have significant liquidity and buffers sitting on both their business and consumer household balance sheet. So we are actively looking for the size of stress and early warning indicators and there's a very extensive outreach program of proactive to encourage customers to come and talk to us so we can help them manage through. So I think it is a combination of the risk diversification, the active management and the mix of our book. I think probably that's where I would start.

And then as you look at provisioning, we are well provisioned. Katie, do you want to maybe give a little bit of color on that? And then obviously, the deposit points.

Katie Murray -- Chief Financial Officer

Yes. No. Absolutely. So what we've done in 2023 is to maintain guidance we've given you previously.

And I think that's really important. Building on what Alison says, we're not seeing signs in that -- in those books of strain. If I can take you a little bit to where we are on the PMA, I think, might be helpful. So we've got various PMAs.

The one I think that's most interesting is the one for economic uncertainty, GBP 583 million. When we looked at that PMA this quarter, what we've done is released a significant portion that was in relation to COVID. And then we've also added other items, which are very much in relation to the cost of living and supply chain type issues. And we've done that very forensically.

By looking through the bots to where our customers are, who might be impacted by the challenges we think that were coming. So that GBP 583 million gives us some provision for things that are coming down the road. And then the other place I would encourage you to look at is on Page 27 of the accounts, where we show you the sensitivities and what we do there to the extreme downside 100% on that downside. What you can see in stage one and stage two ECL is to have an increase in our provisions of GBP 969 million.

Now with that PMA that you've got with that kind of level of stage one and stage two hit, there will clearly be stage three hits, which we don't provide estimates for. But that kind of altogether gets you to a place where you can see that below the cycle guidance actually has got to see some for very significant curation and still be within that guidance. I would kind of encourage you to put those bits together and then also have a look at the flow tables where you can see just the positive progression out of stage two back in stage one is really strong. And then just moving on to your deposits.

So if we look at C&I, C&I deposits are GBP 223 billion, and they are on an average cost loss of nine basis points, nine basis points to 125 basis points, I'll leave you to do the math.

Alison Rose -- Chief Executive Officer

And I think the one thing I'd add on your sort of C&I see the secret sauce, we have an incredibly strong franchise, a leading market position in commercial, No. 1 NPS sector specialists who are dedicated to sectors, so you can deeply understand what's happening, deep relationships and competitive positioning across the ecosystem, I've talked quite often about the U.K. system of SME support. And all of that combines to give us a very strong franchise, and that clearly is part of the balance that you're seeing play in here.

Omar Keenan -- Credit Suisse -- Analyst

Lovely. Thank you.

Katie Murray -- Chief Financial Officer

Thanks, Omar.

Operator

Our next question comes from Guy Stebbings. Guy, would you like to unmute and go ahead?

Alison Rose -- Chief Executive Officer

Hi, Guy.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Hi. Good morning, Alison and Katie. Thanks for taking the question. The first one was on RoTE and then a second one on cost.

So RoTE, I guess, 14% to 16% is quite striking, especially when the U.K. is expected to at a downturn. I just wondered how sustainable you view that beyond 2023. Is there anything unique about 2023 versus future years? I guess you're assuming a benign impairment, but you would expect that to jump from that level.

Cost pressures maybe build beyond that year, but you would be hopeful a mention of delivering positive jaws. And indeed, one might expect volumes to be stronger beyond 2023, if we're coming out with the silos. I'm just interested if you in sort of high-level thoughts as to whether '22 is unique in any way and sets a high base or if you think that is a return that can be sustained? Or indeed, if we're staying at those sort of levels and peers might eventually get competed down? And then secondly, on costs, it's a bit of a shift in the guidance of '23, but it's still flat costs facing into inflationary pressures and you're obviously not expecting a markedly different revenue environment. I just wondered whether -- or why flat is the right number? Had you given any consideration whether to invest even more and see absolute cost to actually rise given that revenue backdrop given 14% to 16% RoTE and the capacity to invest that provides.

I don't expose you might get to comment at all beyond '23 is to what we might expect in '24. I appreciate we don't have a crystal ball on inflation, but is it fair to assume costs might start rise and decrease in 2024. Thank you.

Alison Rose -- Chief Executive Officer

Thank you. Well, as you can imagine, I'm not really going to comment beyond 2023. We'll update you on that probably in February next year. I mean, I think on RoTE, nothing unique, nothing special.

What I would say is what you're seeing is a consistent delivery of our strategic priorities. And we're seeing the benefits of the strength of our fires. We're two years into stable investment program, which is delivering positive outcomes. And you can see pleasingly as well the growth across the whole part of our franchise.

We're seeing growth in all of the key areas that we've strategically focused on. So there is nothing unique, but positive jaws and our commitment to operational leverage, I think, is the key to think about. On -- and Katie can sort of comment a little bit more on the cost, but your question of -- could we invest more -- there is a point around how much capacity my business CEOs will always ask for more money to invest. We're being very focused on strategic delivery, making sure that we invest for growth, you can see that 80% of our investment is in data, digital and technology, and you can see the benefits of that coming through.

But we are committed going forward to continuing to drive operational through our business, and that will be something that will continue. Katie, do you want to add anything on costs?

Katie Murray -- Chief Financial Officer

No. I think on costs, I think you've done it all. Shall I take the RoTE question. So in terms of the -- in terms of answers to you net this about 2023, but there are a couple of things that are obviously interesting in 2023.

You'll be familiar with our Ulster guidance. A lot of those costs will hit in 2023. So that's actually a bit of a drag. In terms of that number, which is also, I guess, why we've got this range.

Clearly, I think you've got to have a view as to where interest rates might go beyond '23. I mean at the moment, we are assuming 22% at the end of this year and then flat into 2023. But we're comfortable with the range that we've given you is an appropriate range. I'm not going to get drawn on 2024 and 2025, what I'm sure talk more about that to be, but at this stage, we're comfortable we've given you a pretty robust number.

Guy Stebbings -- Exane BNP Paribas -- Analyst

That's helpful. Thank you.

Katie Murray -- Chief Financial Officer

Lovely. Thanks, Guy.

Operator

Our next question comes from Chris Cant of Autonomous. Chris, if you could unmute and go ahead.

Alison Rose -- Chief Executive Officer

Hey, Chris.

Chris Cant -- Autonomous Research -- Analyst

Good morning, both. Thanks for taking my questions. One on sort of balance sheet churn numbers and on asset quality, please. So you mentioned a number on hedge maturities for the second half.

Could you give us a sense of the proportion of the hedge, which is rolling into 2023. I think we should be taking something like 20%-ish of the GBP 230 billion if you've been doing it pretty mechanically. But if you could give us a number. And then against that, obviously, we have this negative churn dynamic on the mortgage book.

One of your large domestic peers called out 2023 as a particularly heavy year for mortgage refinancing pain. Do you see a similar lumpiness there into 2023? I suspect you were doing a little less two-year business back in 2021, say, a peer bank, but obviously, it's quite hard for us to assess from the outside. So any color would be appreciated. And then on asset quality, are you seeing any signs of stride in SME book specifically? So I appreciate the kind of the high-level view as everything is very benign.

But if you kind of focus in on the SME exposures you have -- are you seeing any different trends there relative to the broader commercial book, please? Thank you.

Alison Rose -- Chief Executive Officer

Thank you. So let me pick up the asset quality in SME and then Katie will take you through the other questions. So the short answer is no, we're not seeing any signs of strain. What we are seeing is still relatively muted demand in the small SME side of the book.

mainly because of that higher government scheme lending levels in this sector. And actually, what we can see, Chris, which is interesting, is still around 24% of the bounce back loans sitting on deposits what we obviously do is look at our whole commercial sector really very much by large, mid-corporate and SMEs and we also take a sector lens, but we're not seeing deterioration ores. Clearly, one of the areas we're really focused on is the degree of change of challenges that businesses are facing with supply chain disruption with fuel costs and hedging, which is why we've put this very targeted support out, and I talked this morning about the GBP 1.25 billion we put agriculture, the 42,000 farmers we support. So very short answer, no deterioration.

We're obviously keeping a very close eye on it. there's still a lot of liquidity and actually lower demand coming from the SME segment at the moment.

Katie Murray -- Chief Financial Officer

Thanks, Alison. If I just move back to the hedge book. It is very mechanistic. The product hedge rolls off sort of 160th a month given its five-year nature.

The way I would think of that in 2020, Chris is about roll-offs of GBP 35 billion to GBP 40 billion in terms of the amount that would come through. When you also look at the pressure in terms of 2023 around that two-year business, it's certainly a theme. But you're right, we have been writing a lot of five-year business, and we've seen that continue to increase in this year, but even a couple of years ago, we were up above that kind of 60% level. So that kind of helps push it further.

I mean, our five-year share of our mortgages in this quarter was 69% compared to 66% the previous quarter. And we do think that the strength of the investment that we've done this year, it certainly helps offset it in 2022. And I think we've got a relatively positive journey into 2023. Obviously, it will depend a little bit on customer pricing and what happens in the second half of this year, but we have considered that in our RoTE guidance of the 14% to 16%.

Chris Cant -- Autonomous Research -- Analyst

OK. Great. So nothing in particular to call out on mortgage lumpiness?

Katie Murray -- Chief Financial Officer

No. Absolutely.

Chris Cant -- Autonomous Research -- Analyst

Thank you, both.

Katie Murray -- Chief Financial Officer

Lovely. Thanks, Chris.

Operator

Our next question comes from Ed Firth of KBW. Ed, if you could please unmute and go ahead.

Ed Firth -- Keefe, Bruyette and Woods -- Analyst

Sorry. I think that's -- is that working?

Alison Rose -- Chief Executive Officer

Yes. We can hear you.

Ed Firth -- Keefe, Bruyette and Woods -- Analyst

Good morning, everybody. I just had two questions. One was on Ulster and costs. And I guess the indirect costs.

Now you're working through the disposals. Are you still reasonably confident of, I guess, what was annualized, almost GBP 200 million of central costs paid by Ulster at the moment, that you're going to find ways of stripping those out. I guess that would be the first question. And then the second question, yes, about the cost of living prices.

I mean, I guess there's a lot of talk politically about the cost of living crisis. look, it's not aimed just at you this question. It's more the sector, but I guess you're a big part of it. As a sector, you're obviously taking the full benefit of the rate rises.

And as we've highlighted passionate none of the downside or none of the benefit to customers, I guess, of the dawn of rising rates, which I guess we've seen in oil sector and various others after all, politicians tend to get quite interested in that. Is there a level at which you start to feel your margins are becoming sort of too big or that you should say, well, actually, we do fairness said that with 20% market share, we should actually share some of the benefits those for savers should actually get more of the benefit than we're giving them today. How do you feel about that in terms of sort of like what is sort of a reasonable margin for a big incumbent to be making?

Alison Rose -- Chief Executive Officer

Thanks. Well, let me take the question on cost of living and interest rates. Clearly, we balance both sides of the balance sheet when we're looking at the return we make. And we're very targeted around making sure we put support in the right areas.

At the moment, we're seeing lots of liquidity sitting on household balance sheets and a lot of liquidity still sitting on business accounts as I touched on before. So we're making our decisions on pass-through rates as well as obviously, what we've seen on the swap curve side and mortgage rates as we look at balancing what is what is the right return? And then very specifically, we're looking at how can we target to support those most in need, you're really going to see the squeeze in cost of living and really having a material impact. And that's where the package of measures that we talk about around proactive support have been put in place. I've put GBP 4 million into our hardship funds with our charity partners to help with outreach to around 3 million customers where we think we can do more to help them.

We're running 5,000 financial health checks a week working with our customers, looking at their balance sheets and how we can save them money and help them structure different things. We're freezing tariffs on our business current accounts for 12 months to help SMEs. And we've also, just thinking about the mortgages proactively helped around 100,000 customers secure new rates by extending our roll-off window. So we look at it in the round of the support for our customers.

The thing to remember about the mix of our book as well is we are predominantly a secure book now. 9 out of 10 of our customers are on fixed mortgage rates so we're not having any impact of the rising rates at the moment. So we do look at it in a very balanced way to make sure that we're putting the support in the right place. And as Katie mentioned, with our pass-through rates, we look at it on a product-by-product customer segment by customer segment basis.

We've got 40 basis points saving account for small businesses. We've got our digital saver accounts, paying 3.25, and we will look at it constantly on that basis, and the team will always balance that to make sure we're balancing both sides of our balance sheet and also supporting our customers in the right way.

Katie Murray -- Chief Financial Officer

Should I talk about off the costs? So if we look at the our guidance when we first spoke about this was a GBP 200 million reduction in their costs between '23 and 2021. So we've -- that's unchanged. We're fully -- so considering the also costs as we give you our RoTE guidance for 2020, both the direct and the indirect. Work is obviously ongoing to deal with both direct and indirect.

And they will certainly be on the indirect side a level of costs that get eliminated. Some, by the way, nature, will stay within the group a little bit as well, but it's something that we feel we're continuing to manage well. And that's all being built into the cost guidance we've given you today for '23 and also the RoTE guidance.

Ed Firth -- Keefe, Bruyette and Woods -- Analyst

I just thinking, Katie, in terms of you gave us the go-to group or the go-forward group. But that obviously assumes all the indirect costs are out. So I'm just trying to think, is there any risk to that go-forward group number in terms of the base going forward? In the sense that some of those costs actually then have to come back in.

Katie Murray -- Chief Financial Officer

No. We would have considered what might come back in in terms of that piece in the guidance in the projection. That would be fully reflected.

Ed Firth -- Keefe, Bruyette and Woods -- Analyst

Great. Thanks so much.

Katie Murray -- Chief Financial Officer

Lovely. Thanks, Ed.

Operator

Our next question comes from Jonathan Pierce of Numis. Jonathan, please do go ahead.

Jonathan Pierce -- Numis Securities -- Analyst

Hello to both. Just a question, a follow-up actually on one of Ed's and Alvaro earlier in the call. The RoTE guidance is obviously impressive. Lloyd's also talking about low-teens returns moving forward as well.

I mean, I guess you -- [Technical difficulty]

Operator

Jonathan, we're struggling to hear at the moment. So we're going to move on to our next question. I'll come back to you Jonathan. Andrew Coombs of Citi.

One second. Hi, Andrew Coombs, if we can move on to you, please.

Andrew Coombs -- Citi -- Analyst

I am here. I'm not sure if you can hear me with Jonathan. So let's just see what happens there.

Jonathan Pierce -- Numis Securities -- Analyst

-- on their deposits and what you're generating overnight.

Alison Rose -- Chief Executive Officer

Sorry. We -- Your line was absolutely terrible. So we got absolutely none of that. I'm so sorry.

Operator

We're going to come back to that question shortly. Andrew Coombs of Citi, if we can go to your question, please. Thank you very much.

Andrew Coombs -- Citi -- Analyst

Two questions and one might be what Jonathan is trying to ask in any case. So following on from Ed's comments just on the whole point about the magnitude of the RoTE. Interested in any discussions you've had with government authorities with regards to the bank tax. Obviously, the previous chance we have talked about reducing it from eight to three alongside the increase in corporate tax rates.

But given the act where we head with conceptive leadership contest and interest in any discussions you've had on this, both for yourselves as and the ending of the sector as a whole. And then the second question would just be on the special dividend that you've announced, clearly much larger than expectation on Slide 26, I think it is you outlined the rationale. But interested in why you have elected to go down special dividend where it's essentially a one-and-done distribution as opposed considering ongoing buybacks where you have the potential benefit of EPS accretion. It sounds like the government's 50% ownership was a barrier to you there, but interested in any comments you have.

Alison Rose -- Chief Executive Officer

Thank you. So, let me -- on the bank tax, no, we've had no discussions and no discussions have happened. And as you know, there are already bank taxes that we pay with the levy, but there have been no active discussions on that. On the special Well, look, we decided to undertake the special and share consolidation for a number of reasons.

As you know, we have a number of different ways in which we can return capital and we see all of them live, but we felt it was appropriate to go the special and share consolidation at this time for a number of reasons. And firstly, it broadly mimics the share buyback, increasing EPS and NAV per share. Secondly, it allows us to return a greater amount of capital, the GBP 1.75 billion rather than a further H2 driver program would achieve. So it gives us the pay distributions that we wanted.

And thirdly, it doesn't change the shareholding ownership structure. HMC gain below 50% was an important milestone for us, and that ensures that we don't disrupt that. So we will continue to use all the tools at our disposal. We felt this was the appropriate route to go at this stage.

Andrew Coombs -- Citi -- Analyst

And next update on capital return plans will be with the full year as you be rather than Q3, given what you've already set out in terms of general meeting.

Katie Murray -- Chief Financial Officer

I think we've got good guidance on capital return, and I think we just stick with that guidance as we go through. But yes, the general meetings on the 25th of August to deal with the consolidation.

Andrew Coombs -- Citi -- Analyst

Thank you.

Katie Murray -- Chief Financial Officer

Thanks very much.

Operator

Our next question comes from Fahed Kunwar of Redburn. Fahed, could you please unmute and go ahead.

Fahed Kunwar -- Redburn -- Analyst

Thank you, both. Thanks for the incredibly helpful disclosure on margins. I had a question on the commercial and institutional business. Within Commercial Institution, the corporate institutions business is up 60% year on year and not higher period on the last seven or eight quarters.

How much of that was the kind of the deposit margin, deposit income we've been talking about? And how much of it was just the old NatWest Markets business? And then following on from that, if I look at other income in C&I is up about 16% ex on credit. Do we expect to keep on growing? Have we reached a stabilization for NatWest Markets business now, which has been -- the revenue has been disappointing for a while. Do we start growing from here and there's still more kind of risk-weighted asset reduction, which would lead to more revenue efficient to come on that business?

Alison Rose -- Chief Executive Officer

Thank you. Well, look, on C&I, lending growth has continued. So it's increased by GBP 0.5 billion. So the main increases are in the corporate and institutional business.

And that's largely been driven by increased funds activity and facility utilization. We've seen RCF utilization in the business increased from 13% to 15% over the first half. In our commercial and mid-market business, we've seen further growth in assets and invoice financing. And then we've got, obviously, some of the offset coming from the repayment of the government scheme.

So a further GBP 0.7 billion in the quarter, which is in line with our expectations. So that's taken the total government scheme repayments in the full half of GBP 1.4 billion. So I think we're seeing good growth there. I think as we look forward, commercial lending is going to be dependent on demand as the economy covers.

Our customers do still have a lot of liquidity sitting on their balance sheet. I mentioned the 24% of the government debt still sitting on deposits. So I think as you look forward, C&I continued growth will depend on that continuing speed of economic recovery as people restructure their balance sheets and rearrange their working capital business confidence and investment spending and then that ongoing customer behavior with regard to government schemes. I mean, clearly, in the C&I numbers, you've got NatWest Markets Network Markets had another good quarter in Q2.

What we can see is the business NatWest Markets Plc income from the business lines is up 26%. So the business has managed really well, the volatility through the period, and you're seeing good performance to income in the first half of GBP 427 million. As I said, the restructuring of that business is largely complete in terms of the shape of the business. We'll continue to optimize C&I in terms of its cost base, but we're pleased with that performance.

Fahed Kunwar -- Redburn -- Analyst

Brilliant. Can I ask just one follow-up. Why is RCF utilization increase given as much cash from deposit?

Alison Rose -- Chief Executive Officer

I think -- I mean it's a mixture, RCF utilization is I mean I would look at it at a slightly different way. It has been artificially low. If you think about the pre-pandemic RCF utilization, it was much higher. -- there's lots of liquidity.

What we're seeing, particularly on large corporates as they restructure their working capital lines. They're just drawing down on those lines on a more normalized basis as they're trading out of the pandemic, but they're still at the low average levels that I would expect.

Fahed Kunwar -- Redburn -- Analyst

Brilliant. Thank you so much, both. Cheers.

Katie Murray -- Chief Financial Officer

Thanks, Fahed.

Alison Rose -- Chief Executive Officer

Thank you.

Operator

Our next question comes from James Invine of Societe General. James, could you please unmute and go ahead. Hi, James. Are you able to unmute and go ahead with your question?

James Invine -- Societe Generale -- Analyst

Sorry. Good morning, Alison. Good morning, Katie. I've got two, please.

The first on capital, the second on RoTE. On the capital, I guess the your target range has always been academic because you've had such a big circles. But now we are getting close to that range. So just wondering if you still think that 13% to 14% is the right target range given that the bank was in a very different position when it was originally set? And the second one then just on RoTE, I mean you're talking about 14% to 16% today.

Alison, I think when you set out your strategy on becoming CEO, you were talking about 9% to 11%. So it's clearly a huge upgrade from that. What impact does this change likely have on the strategy of the group. I think you kind of make it a little bit to do with investment earlier on -- but does it change the way you think about the mix of the balance sheet, the mix of products, maybe some products that you didn't expect to be kind of above cost of capital for you, but now are looking much more attractive.

Alison Rose -- Chief Executive Officer

Sure. So let me take the first question. I mean, we're very happy with our guidance of 13% to 14%. It's really shaped by what we think is the risk diversification of our book and the mix of the business that we have.

So we're comfortable with getting around 14% by the end of this year and 13% to 14% next year. So it's really dictated around having still quite significant buffers above our minimum level and the shape and mix of our book, which remains very comfortable. So our guidance on that remains. On the RoTE and our strategy, what you're seeing is a consistent delivery of our strategy.

And -- what we're seeing is with the investment that we're making, two years into the GBP 3 billion investment program, the positive impacts of the investment in data, digital and technology. And we're also seeing a broader delivery of the deepening relationships that we have. So what I'm very pleased about when you look at our lending of GBP 9 billion in the first half, it is spread and diversified across all of our product areas. We've got growth in current accounts, 310,000 current accounts opened in the first half.

49,000 start-ups, our market share is increasing part of our strategy. We're seeing judicious growth in credit cards, 168,000 new credit cards and balances prime book, and with our own customers. Green mortgages are growing by GBP 1.4 billion. That's up 90% on the full year, which is in line with our climate strategy.

So we're seeing the benefits of that investment. Clearly, I'll update you next year in terms of -- as we move forward. But I think that delivering a business that is simple and efficient data and tech legs. We're seeing the benefits of that coming through, and that will drive operational leverage continuing going forward.

Continuing acceleration of digital and better experience for our customers is driving customer acquisition improvement in our NPS. So I'm very comfortable what you're seeing is delivery of our strategy.

James Invine -- Societe Generale -- Analyst

Good. Thank you very much.

Operator

Our next question comes from Raul Sinha of J.P. Morgan. Raul, if you could please go ahead.

Raul Sinha -- J.P. Morgan -- Analyst

Good morning. Thanks very much for taking my questions. I hope you can hear me. I've got two, please.

The first one is on asset quality risks, and I'm sorry to come back to this. But if we do get a deeper downturn than the broadly benign environment you assumed for next year, where in the book do you think there might be risks this time now? I see the commercial real estate disclosure you've given us very helpfully certainly 3.5% of your book and the LTVs look pretty low. What are the areas that you might be more focused on in terms of managing credit quality, if we were to have a deeper recession? And then the second one, I guess, on the cost guidance change. Thanks very much.

I think it's much more realistic. So given the current environment. But I was interested more in where exactly you have allowed for higher costs within your new plans. So if I can just -- sorry, if I missed this untie already outlined this.

But relative to your previous assumptions, where exactly are you building in more cost? Is it wages? Or is it something else?

Alison Rose -- Chief Executive Officer

Thank you. So on asset quality, I mean, clearly, we're very mindful of the challenges of -- in the economy and the cost of living screens. So as we look -- remember, the mix of our buckets predominantly secured 92%, 93% secured. So that is the first aspect.

In terms of our business exposure, obviously, a substantial business exposure. We look at that sector by sector. We're not running high leverage. There is a lot of liquidity sitting in there, but clearly, there will be challenges for businesses as they go forward.

I do worry a little bit about post-pandemic fatigue as businesses are going into other areas. And a lot of the challenges businesses are saying at the moment is actually getting access to skills and labor to support their growth as well as obviously the cost of living challenges and supply chain disruptions. So they're facing inflation. So I think it is the normal challenge that we would expect to see in different sectors and their ability to either absorb inflation or pass on inflation to the consumers.

On the consumer level, we're keeping -- we are a prime book. We are keeping a close eye on consumer spending and proactively reaching out to customers to make sure that we can help them. Our customers are not running levels of debt, but clearly, we're mindful that they may multibank. So we're keeping an eye on those aspects as well.

So there's nothing to worry about, but I think that reduction in disposable income and the amount of debt that people are carrying bigger buffer on their balance sheet and then in business sector by sector. You're quite right. We've been actively managing our balance sheet and our risk. You can see over the last few years that we've had no single name exposures that our RWA intensity has been coming down on our CRE exposure at very low LTVs.

But clearly, we are not a risk-free business. So it's more about us proactively managing that.

Raul Sinha -- J.P. Morgan -- Analyst

Can I ask kind of significant the fact that there's now a significant chunk of the book under government guarantees of where you sort is part responsible for your confidence, just given I think if we look at broader data, corporates and SMEs have paid down bank debt and borrowed instead on [Inaudible]. Is that one of the factors that's playing out?

Alison Rose -- Chief Executive Officer

No. I mean I mean clearly, the amount of liquidity that is sitting, which is really an impact of the quantity leasing that has been putting in system and the amount of active management and personal balance sheets. I mean on the government scheme lending, that really has actually, when you -- as we've talked last year and earlier quarters that that's a muted demand for lending from us because customers are sitting on that liquidity and 24% of those bounce-back loans are still sit as on businesses, current accounts. So that lending is with our customers.

We only -- as you know, on the government schemes, we only advance them to our own customers. And clearly, we can put a close eye on that. So there is less leverage sitting on business balance sheets. That's absolutely right, which gives people a buffer, but it is the broader economic environment that they will operate in, which I think is going to be an issue.

The other thing to remember about the economic outlook. We are in an unusual situation, and this will be into a little bit of the cost question where we have pretty full employment and still high vacancy levels. And that full employment also gives us a bit of confidence going forward.

Raul Sinha -- J.P. Morgan -- Analyst

On the cost side?

Katie Murray -- Chief Financial Officer

Raul, just give you another little bit of color and data that will kind of help you as well that in our results. I think it's important to remember we've got go-forward group lending of GBP 361 billion, GBP 10 billion of that is on the government lending schemes. So it's important, but it's not a significant number in terms of that. And you can -- you can see, if you look into the -- our IMS this morning, there's a nice schedule on Page 26, which shows you the performance of the associated lending in relation to the builds, and it's performing well.

That's one of the areas that I look at a lot. And similarly, in those sensitivities, I talked about earlier in the wholesale space. We split it between property and non-property so you can take out some of the anomalies within that. And just finally, one thing to share with you at the year-end we shared in our accounts then what a single factor would be for impairments so much of the biggest trigger for me is the unemployment number.

And when we looked and we stressed that unemployment all the way up to 7.5% what we showed there that, that would increase the ECL by 4.5% for retail and 2.5% for wholesale. So I think our guidance is 20 to 30 basis points through the cycle. Those are still quite significant charges and what the sensitivities are kind of showing you within there, how the things kind of interact. So hopefully, that's helpful.

On the cost side -- the cost that we did talk about earlier, I mean, it's mainly wage inflation and supplier inflation. The same is really for all other corporates that we're dealing with that, and that's what brings us back to that broadly flat number for '23.

Raul Sinha -- J.P. Morgan -- Analyst

Got it. Thank you.

Katie Murray -- Chief Financial Officer

Thanks very much.

Operator

For our last question, we got to go back to Jonathan Pierce from Numis. Jonathan, please do go ahead.

Jonathan Pierce -- Numis Securities -- Analyst

Can you hear me OK now?

Katie Murray -- Chief Financial Officer

That's perfect, Jonathan.

Alison Rose -- Chief Executive Officer

We can.

Jonathan Pierce -- Numis Securities -- Analyst

Sorry, I think it's probably all the VPNs I'm using to make it look like I'm still working in the U.K. when I'm actually in France. I just had one very top-down question actually. One of the reasons that the domestic banks are now able to generate these sorts of returns the likes which you guided to this morning is because of all of the pandemic-related money creation and the liquidity that we've seen coming into the system in the last couple of years.

And clearly, there's an enormous gap today between the rates you're paying on your own deposit accounts versus what the Bank of England is paying on the cash you're holding with them overnight. So I'm just wondering whether you see the risk of a change in that reserve remuneration policy increasing? And particularly given the sort of RoTE guidance you're now giving, if I was in the treasury thinking about ways of saving a bit of money, given your basis cost of living pressures, then banks earning 14%, 15% RoTEs, the reserve remuneration would be one of the first places I would go. So I'm interested in your broader thoughts around that, but I'm also interested in your specific thinking at NatWest because NatWest has the most to lose with there to be a change in policy. You've got GBP 170 billion of the Bank of income, which is big versus others? Are you minded to maybe start changing the mix of your liquidity portfolio moving forward or not?

Alison Rose -- Chief Executive Officer

Thanks, Jonathan. Well, look, I think what you're talking about tail risk and so far, it's been ruled out by both the Bank of England and One of the things I would say is taking the top-down view, when I set the strategy for NatWest Group when I stood up before I said what I wanted to have was a bank that was stable and secure, well capitalized with a good balance sheet where we were able to deploy credit safely and operate in a low interest rate environment, which has really driven our strategy going forward. What we have been able to do, as you can see through our lending of the GBP 9 billion is we are deploying capital safely and responsibly in order to put capital into the economy and therefore, support both consumers and businesses with the largest business bank through what are challenging economic lies ahead. So we do -- we are aware of that conversation.

We do see it as tail risk. And in terms of cash, we do have the ability to deploy cash into other assets. So as I sit here today, highly resilient balance sheet, good risk diversification, capital accretive, which means we can support the economy as we move forward.

Jonathan Pierce -- Numis Securities -- Analyst

OK. So it's really not something you're worried about at the moment, but you may start to think about moving some cash into other forms of liquid assets. Is that right?

Alison Rose -- Chief Executive Officer

If we felt that was appropriate, we have other options. But as I said, that's been ruled out by Bank of England and H&T, it's a tail risk, we would always, as you know, Katie and I are both very prudent in how we deal with things, but we're very comfortable at the moment.

Jonathan Pierce -- Numis Securities -- Analyst

Brilliant. Thank you very much.

Katie Murray -- Chief Financial Officer

Thanks, Jonathan.

Operator

Thank you. And I hand back to Alison for any closing comments.

Alison Rose -- Chief Executive Officer

Great. Well, thank you very much, everyone, for your time and the questions. What you can see today, hopefully, is a strong financial performance building on two years of progress in challenging economic environment. We're using our robust balance sheet to deliver for customers and shareholders.

We're supporting those who are likely to need it most with very targeted support, and we are continuing to protect the investment to transform the bank that is delivering real value and sustainable returns for shareholders. Thank you very much for your time.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Alison Rose -- Chief Executive Officer

Katie Murray -- Chief Financial Officer

Aman Rakkar -- Barclays -- Analyst

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

Martin Leitgeb -- Goldman Sachs -- Analyst

Alvaro Serrano -- Morgan Stanley -- Analyst

Omar Keenan -- Credit Suisse -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Chris Cant -- Autonomous Research -- Analyst

Ed Firth -- Keefe, Bruyette and Woods -- Analyst

Jonathan Pierce -- Numis Securities -- Analyst

Andrew Coombs -- Citi -- Analyst

Fahed Kunwar -- Redburn -- Analyst

James Invine -- Societe Generale -- Analyst

Raul Sinha -- J.P. Morgan -- Analyst

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