Welcome, everyone. We will now play a prerecorded audio presentation of our H1 results. This will be followed by a live Q&A session with Howard Davies, Alison Rose and Katie Murray.

Good morning, everyone. Thank you for joining us today for our first half results presentation. Our agenda for the call is follows. I will start with the first half headlines and update you on how we have been managing the business through the COVID-19 pandemic, the progress we have made on our strategic priorities during the first half and then Katie will take you through the numbers in more detail before I wrap up and we open it up for questions. So let me start with the headlines. As you know, we had a strong start to the year before the impact of COVID-19 and our preimpairment operating profit for the first half was £2.1 billion. Since we spoke in May, however, the economic outlook has worsened. And as a result, we are announcing a first half net impairment charge of £2.9 billion. This is based on extensive modeling carried out during the second quarter, which I'll talk about on the next slide. Costs were slightly lower year-on-year. And taking into account impairments, we made an operating loss of £770 million and an attributable loss of £705 million. Given the ongoing economic uncertainty, we are pleased to be operating from a position of strength in terms of liquidity, funding and capital, even after absorbing prudent provisions through impairments. This is a sign of the strength of our franchise. Our common equity Tier 1 ratio for the first half was 17.2%, and our liquidity coverage ratio was 166%. I'll talk about impairments and capital on Slide 5. Given the current level of economic uncertainty, we are managing impairments carefully. Our impairment charge for the second quarter was £2.1 billion, an increase from £802 million in the first quarter. This charge is based on modeling that takes into account a wide range…

Thank you, Alison, and good morning, everyone. There are three main areas I will spend time on this morning. Naturally, I'll start with the group income statement, and I'll be using the first half last year as a comparator. For the businesses, I'll also show the income progression from the first to second quarter this year. And as Alison mentioned, I'll give you a detailed breakdown of the impairment charge and the scenarios we have used to predict our model expected credit losses under IFRS 9. And finally, I will cover our capital and liquidity position in a little more detail. So starting with the group income statement. We reported total income of £5.8 billion for the first half, a decrease of 5% year-on-year, excluding the impact of last year's disposal of Alawwal. Within this, net interest income decreased 4% to £3.8 billion. And noninterest income reduced by 6% to just under £2 billion. These reductions were driven by a fall in rates. The impact of regulatory changes discussed in the last 2 quarters and the effect of COVID-19 trading. We reduced overall operating costs by 9% to £3.75 billion. Within this, other expenses, excluding operating lease depreciation, decreased by 1%, while strategic costs were 26% lower at £464 million. Litigation and conduct costs for the first half were an £89 million release, reflecting a PPI release of £250 million, offset by some other historical litigation matters. We are reporting operating profit before impairments of £2.1 billion, up 3% from last year, mainly as a result of lower strategic and conduct costs. The impairment charge for the first half was £2.9 billion, which represents 159 basis points of gross customer loans. I'll talk about this in more detail later. Taking all of this together, we reported an operating loss before…

Thank you, Katie. So in conclusion, as the impact of the pandemic on the economic outlook remains uncertain, our focus is on continuing to support our customers whilst protecting the performance of our business. The strength of our franchise is clear. During the first half, we have supported customers and accelerated our digital offering to deepen relationships, whilst also taking a prudent approach to risk and deploying our balance sheet carefully. We have taken swift action to address COVID-19, but also maintain focus on our key strategic priorities. We have made good progress refocusing NatWest Markets and expect to achieve the majority of our RWA reduction by the end of 2021. And we remain on track to deliver our cost reduction target of £250 million for this year. Most importantly, we have a capital-generative business with a strong CET1 ratio, giving us headroom that is somewhere between £6 billion to £8 billion above our target ratio of 13% to 14% over the medium to long term. This capital strength gives us flexibility to navigate the uncertain outlook to resume dividend payments to shareholders as soon as it is appropriate to do so, and to consider options that deliver compelling shareholder value. Thank you very much, and we're very happy to open it up to questions now.

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

So only if I could ask on a couple about -- ask on a couple of areas, please, income and capital. And firstly, on income, be really helpful, actually, to get some color on your revenue expectations for the second half of the year. I guess, I'm thinking in terms of volume growth and then the margin drivers sort of hedged loan and deposit pricing, but also mix as well. And then the second question on capital. You've given us a risk-weighted asset range, which is very helpful. But I was wondering if you could help us with the drivers of the numerator of the CET1 ratio. There's obviously earnings, but also in terms of what your expectations are for the -- beginnings to the reversal of the IFRS 9 impacts, anything you're expecting on software intangibles, if that comes through? And anything else that we should bear in mind for the CET1 progression?

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

Yes. Rohith, I think that might have been 6 questions in 1 you try to get through there. Let me have a look. So if we go with our revenue impact earlier for the rest of the year, I think at the beginning of the year, we gave some quite fulsome guidance. So we've obviously confirmed the £200 million in relation to the HCCR. I'm sure we'll talk more about our kind of NIM outlook as we're moving forward. But certainly, as we look at where kind of consensus is sitting at the end of the year at the moment, we are very comfortable with that in the round, I would say, in terms of that. If on -- in terms of the kind of revenue opportunities just to kind of look at that piece of the question. If I stick with Personal first, what we'll see as the economy begins to recover, we will see an element of increased retail sales, which will drive our customer fee income, our NII, which relates to our unsecured balances. Credit cards, that's obviously fallen off quite a bit in Q2, and we'll also see new demand for lending. Our H1 mortgage lending was £16 billion, but it was very much split £10 million and £6 million. And so it's good to see that activity to -- that activity seems to be increasing again, which we're very pleased about as well. In commercial, while the business -- all of the government lending and the business bank-backed loans, they themselves are lower margin, given the volume we've done, that also helps income, which will help us in the tail end of this year as well. So overall, relatively comfortable on income, excepting, of course, it is in the face of what's been a big…

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

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

Well, let me start a little bit on the mortgage side. And you obviously saw pre-COVID our strong preprovision profit performance and a good performance in mortgages. We expect to continue to grow market share in mortgages, consistent with prior years, with new business share sort of ahead of our stock share that has now grown to 10.5%. Our retention levels continue to improve and that is key to supporting improving mortgage margin and overall profitability going forward. Clearly, we've shared with you the impact of COVID as obviously, the market went into lockdown, and we're now seeing a strong recovery with mortgages coming back. But our retention levels are running around 55%.

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

Yes. 79%.

79% on retention level. Sorry Alison. That's no problem. So about 75% on retention and our flow share is about 15%. So it's sitting nicely. Martin, we always talk about how long it takes to move your kind of share of group. So it's nice to see the growth from 10.2% up to 10.5% in this first half of the year. So we're pleased with that. If I just pick up your comments around pricing in there. The back book is rolling off 138 basis points. Our blended rate is 124 basis points. What you would see given that mix of that £6 billion, it was much more remortgage business rather than new mortgage. So therefore, that kind of helps lift your blended rate up a little bit. I would expect and hope as we move into the year, probably more into Q4, I would say that you'll see the new mortgage kind of grow a bit more significantly as the activity of today kind of feeds through into the system, which, of course, is great for income, pools down your margin a little bit, would be great for income. So we're very happy with that. In terms of rate outlook and the structural hedge. So at the moment, in terms of the structural hedge, it's rolling off about 115 basis points at the moment. And it's coming on at around 13 basis points. So clearly, that's a big disparity. What I would say people often say, "Oh, why do you still do the hedge?" If we look at the average of what we added on and where spot rates were averagely for the first 6 months, 48 basis points compared to where it is today. So it certainly helps us at this stage. Negative rates, look, it's a great question. In our own economic scenarios, we've only got a 10% likelihood of negative rates coming in. So we don't see that as something that's particularly impactful. What we've given you the -- our usual kind of disclosure, and it's on Page 74, 75 of the accounts, Martin, you can see what the earnings would be if we're at a 25 basis point fall. That 25 basis point fall is structured with actually kind of rates flooring out at 0, in line with a lot of what our contracts would actually have at this moment, and that would be minus £162 million in year one. Hopefully, I think I got them all there.

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

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

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

Okay. The second question is on risk-weighted assets. I've got to confess, I'm slightly confused as to what's going on generally with RWAs at the moment. I think in the second quarter for you in the credit book, so there's actually about a £1 billion procyclical benefit to the risk-weighted assets. And I guess just slightly -- at odds with what's happening on the provision side of things, the IFRS 9 forward-looking provisions are clearly building very substantially. But the RWA movements, which I thought were also supposed to be forward-looking, particularly in the point in time books are going the other way. I mean if I look at your excellent disclosure on IFRS 9, I think the IFRS 9 PDs, obviously, say, the other retail book were up about 65% in the first half, but the Basel PD only moved by 10%. So I guess the question really is, these models actually need to see genuine defaults going up before the procyclicality and the risk-weighted assets comes through. And does that mean that we're likely to see a further build in RWAs for procyclical purposes into next year as well?

So I mean, the simple answer to that, Jonathan, is yes. I mean changes in RWAs in H2 will be driven -- obviously, we've got RWA reduction in NatWest Markets, but you have accounted for that already. The level of procyclical is driven by the economy. What we need to do see is the downgrades in the credit quality and the ratings in the commercial book, and also the move through into kind of default coming through as well on the mortgage book. So I do think that there is a risk, and we haven't seemed to quantify it yet into next year because it really is very dependent upon how the next half happens in the speed at which we see the deterioration that you could continue to see some RWA inflation into 2021. You're absolutely right.

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

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

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

A couple of questions on, clearly, the kind of two themes from this reporting season. Firstly, I'm trying to get a sense of the underlying revenue expectations. So if I adjust to the disposal losses and loan credit, it gives me about £5.9 billion of underlying income for H1. You've told us that you're broadly happy with consensus this year. If I then plug in the revised disposal losses, you get that. It points to just over £5.1 billion of underlying income for H2. Clearly, an annualization of H2 would give me in FY '21 income from distance below consensus. So I just wanted to ask kind of which of those half yearly revenue run rates you are more comfortable with? And then second, just on RWAs. On kind of bridge between where you printed today and your full year guidance? Because given that a large component of your lending in H2 will be government guaranteed, NatWest Markets RWA should reduce a further £3 billion by year-end. And you'd assume some of that commercial, say, RCF utilization will unwind as well. Are you trying to tell us that you could potentially have £17 billion of RWA procyclicality just in H2? That's about £0.10 inflation in 6 months?

Quickly, let me take those in turn. So you're absolutely right. We're comfortable with consensus in the round. I think we're I -- if I was to look at the kind of '21 consensus, I would say there's quite a lot of moving parts that have to happen. We've got to see actually how much of these impairments flow through because obviously, you're familiar that when they move to default, we stopped recognizing interest on the [indiscernible] to the income statement. So that will have a little bit of an impact on it. So at the moment, I would say, look, we're kind of broadly comfortable as it stands. I think there's lots of pressure. There's lots of headwinds. There's uncertainty. But it doesn't feel like that it's in a ridiculous kind of place at this stage and we'll inevitably talk much more about it in Q3 and Q4 as we kind of get into that. But in terms of the RWA guidance, it's going to be a build of a couple of different things. You've hit most of the highlights, your NatWest Markets coming off, the government lending growth. And that -- if I look at the government lending on the CBIL side, it's got about 50% RWA intensity. So it's sometimes more, I think, than people realize in that space. We'll obviously have some more -- one which is going on, obviously, much lower intensity. But in essence, then the balance will be made up with some level of procyclicality that will come through, but we're comfortable with the obvious £185 billion to £195 billion range that we've given you.

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

Yes. So I mean, the 2021, there's lots of things going on, obviously, what will happen in the next 6 months, I think none of us could have predicted the last 6 months. So I won't attempt to predict the next 6 months. But as we look at where it's sitting on 2021, I'm not broadly comfortable, not trying to move you around dramatically at this stage.

I think we now have a question on the webcast.

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

Thank you. Well, let me talk about NatWest Markets. Let me remind you with why we are refocusing NatWest Markets. So we're clearly very pleased with the performance of the business, a strong performance as it's responded to volatility in the market and activity around financing and balance sheet restructure. But that business was needed to be refocused. And so we're very comfortable with the plans. And as you can see, we're accelerating those plans. Clearly, the performance has been better in response to market needs. And as we have refocused that business around our core clients, which are strategically aligned, we would expect the products and services that we would provide with benefit from the activity of our customers in those segments. So -- but the plans for restructuring and refocusing that business remain appropriate. In terms of the unsecured question, I mean, largely, I think that will partly depend on the recovery of the economy. And just to remind you, we're lending to our own customers, but it will depend on the economy. But what we're seeing in July is improving trends as we're seeing some growth come back in the economy and some of the details we covered there.

Yes. And the only thing I would probably remind you on, Raul, is obviously, we've got a very small unsecured group. It's £3.7 billion. It's strong by £0.6 billion over the last kind of 6 months. So it's not a big driver of either our income or our impairments obviously, which is important at this time.

I hand back across to the operator, Nicole.

Your next question on the phone comes from the line of Andrew Coombs at Citi.

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

Yes, absolutely.

No change in that strategy.

And our next question comes from the line of Fahed Kunwar at Redburn.

Just a couple. The first one I want to ask on impairment. If I look at your particular Stage 3 coverage and your GDP assumptions, they're a lot stronger and a lot more conservative than your peers. If I'm thinking out to kind of 2021 loan losses, what's kind of natural run rate you're seeing at the provisions? So we think about that 2021 number. And also, when you set those provisions for this half, how much of the fact that you've got a very, very strong capital position, make you be a bit more prudent in your forecast? Because your unemployment forecast is even more prudent in Bank of England's desktop stress test. So that's my first question. And my second question is on margins as well. Obviously, thanks for your answers on negative rates earlier, but we saw in Europe, a lot of the European banks are willing to charge corporate core deposits. If we got into negative rate territory, I appreciate the sensitivity you called out, but is any headroom to actually cut corporate deposits as they get charged for having deposits with a bank, so that's something that you wouldn't do?

Well, let me start on the impairments. My philosophy is very much to take a prudent and considered approach to provisions. And you've seen the scenarios that Katie walked you through in terms of our assumptions. Now clearly, what I would also point you to, even after absorbing those provisions, we have a very strong balance sheet and very strong capital strength. So we think we've taken an appropriate view of the outcome. In terms of what we're actually seeing in impairments and in our underlying book, the government schemes and the support that has been put into the economy has actually done its job in terms of supporting businesses, navigating bridge through this period. We do have some small impairments in our commercial book but very limited flight risk. But my approach is to be prudent and considered and thoughtful on our impairments, but I would -- I'd point you to even notwithstanding that the strength of our capital. Katie, do you want to pick up the margin question?

Yes. And I -- just to finish off that impairments one, I think I wouldn't like the suggestion that we've gone big because we had plenty of capital. So I mean, I think it's done consistently in terms of the approach that we take there. In terms of -- on the conversation you had around -- the questions around margin, look, I think what we see, obviously, we've got a couple of jurisdictions in terms of also in our base [indiscernible] already charge in terms of negative rates. We do see them making charges in terms of -- to corporates. I can imagine, as you see in Europe, if you got there, that's where you would end up on that journey in time. And it has taken time for them to get there as well. But it's not something that we're actively planning for at this stage, given we don't see it as a big likelihood as we move forward.

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

Yes. It's Howard Davies here. Let me just try to pick that up. The PRA came out with the statement earlier this week to the effect that they would be reconsidering their policy on dividends in the fourth quarter. And that means that for the moment this is all or rather theoretical question. But they are fully aware that we are very strongly capitalized, that we have service capital. And of course, before we came into this highly unusual period, they were very comfortable with us making a buyback and paying a special dividend. So the moment, the position is present as it was at the end of March. There won't be any movement in the fourth quarter. But I'm sure that when they do reconsider, they will take account of us from a capital position.

Your next question comes from the line of Ed Firth of KBW.

Yes. Sorry, I've got a number of questions, but really quick ones. So on the margin, you highlighted a 10 basis point headwind from the yield curve. Should -- is that a sort of quarterly run rate that we should expect for the rest of the year? So I guess that's question number one. Question number two, in the UK PB, you obviously had a big falloff in fees, which I guess you'd expect from the shutdown, et cetera. Can you give us some idea of what the run rate is now? What sort of recovery we've seen in that in terms of payments and how that might progress? And then the third one was just on financing income. You've got this huge swing in financing income in NatWest Markets, almost £200 million. And that's always been a very stable line in the past. I'm just trying to get a sense as to how we should be thinking of that into the second half. And then very final question. Could you give us some sort of sensitivity to your impairment charge to GDP assumptions? I mean, I heard the previous question, but if I got it right, your weighted forecast for next year is a 12% growth in GDP in the U.K., which feels quite punchy relative to what other people are -- well, certainly relative to consensus, but I'm just -- how does that change if it was 10% or 8%? Can you just give us some idea of how that number moves around?

Well I'll start, and then you pick up, Alison, what I have missed there. In terms of the margin, I wouldn't -- the 10% rate cut, that's obviously, you reflect it onetime in your margin numbers. So you wouldn't expect to see that fall next quarter and coming through again. And obviously, you see a little bit coming through from the hedge. As that kind of moves through, I'd call that kind of a couple of basis points. So in that space. PD recovery, I think Alison talked about earlier in her speech. So we're beginning to see the recovery coming through. I think July numbers are kind of positive in that space. And Alison will add a bit more on that at the end. Financing income. So in the financing income, you're absolutely right, it is generally a relatively stable set of results. But bear in mind what happened in Q1, you had this massive movement in the credit markets. And so therefore, what you were seeing in that space is a revaluation of a lot of the positions that you've got, which then started to unwind. So I would almost encourage you that absent another kind of massive market volatility piece, that's not something we would see. And I would take the kind of previous relatively stable income coming from that business as a huge guide to the future rather than that volatility that we've got. And sensitivity to GDP, we haven't given you single metrics in terms of what it would mean by moving 1 metric or another. But you'll have seen -- and Ed, I'm sure, on Page 34, we give you a blend. And what you can see if we were to move all of our metrics down to either say the upside, you would see our impairment charge would have reduced by £1.4 billion in this half. If you had to move 100% to the downside, you would see that increasing by £1.9 billion. But I haven't given you any guidance on single mix. That gives you something to play with it. And Alison, do you want to touch on recovery?

Yes. I think in terms of the recovery, I mean, obviously, during the lockdown, we saw a really significant drop off in spending. And actually, consumers behaviorally doing the right thing, paying down their more expensive debt, so paying down their credit cards and activity dropped. We've seen debit and credit cards spending now up 10% on June levels and coming back quite quickly. Actually, cash transactions are still remained very low, but debit and credit cards are going up. We've seen mortgage volumes obviously increasing, which I mentioned, and commercial card and cash transactions have more than doubled by the low point in volume. So I think a lot of it is behavioral, and we'll see what happens as the economy recovers, but we are seeing those volumes and fees coming back.

Your next question comes from the line of Ben Toms at RBC.

Two for me, please. Firstly, on PPI, there was released today in the numbers. Can you remind us what the stock provisions left is for this? And how much more you have to work through on this topic? Could we see potentially more releases in coming quarters? And secondly, on mortgage prisoners, there was a consultation out this week from the FCA. Can you just confirm that you don't have any of this type of customer? And linked to this topic, there's been discussions from activists or an SVR cap, which was discussed in the report. And whilst it wasn't ruled in, it also wasn't ruled out. And the FCA said that they need think about potential impacts and have dialogue with the banks. Have you had any discussions about the topic of the cap with the regulator? And do you have any sensitivity on what the impact would be on the financials if a 2% SVR cap was implemented?

Sure. PPI, there is £506 million that's left on the balance sheet. On that, we are substantially down on PPI. We've dealt with our claims. They -- we're rolling people off the projects. We've just got the kind of the last kind of drip through of things going through. So I think for us, never say never, but it's a topic that is really behind us where we are kind of at the level of completion we're very happy with. In terms of the mortgage prisoners, this is not a big topic for us. We've done things in the past to kind of help and have tried to deal with that. And I think at this stage, we haven't had any substantive -- that conversations with the regulator in terms of that item. That's fair, Alison?

Yes, that's right.

Your next question comes from the line of Chris Cant at Autonomous.

Just a quick follow-up and then one on mortgages, please. Katie, you mentioned the SME support factor and software and you mentioned 20 to 30 bps of benefit. Was that a combined benefit? Or was that for each of them?

Combined [indiscernible].

That was Combined? Okay. Just wanted to confirm. And then on mortgages, you mentioned some numbers in terms of 138 bps rolling off on the back book. And you gave 124, I think it was as a blended, I guess, first half average. If I think about what some of your peers have been saying, they've been talking about much, much higher front book margins, 160 to 170 bps. Is that just a 1H average versus sort of July issue. And related to that, in the past, you've talked about 80 to 100 bps being a circa 15% ROE, even allowing for pending mortgage risk weight changes. If we look at where front book spreads are to the industry, but we see substantially above that. Could you just give us an update on where you think front book mortgage ROEs are at the moment, I guess, they're up significantly? And how does that play into your thinking about whether you want to actually start leading the market on pricing there and take more volume, given that you are so well capitalized?

Sure. So I'll leave other peers to comment on what they are doing. It could well be -- it's an average over the closing in July. Our July would certainly have been a bit stronger. But I do think that 124 blended is the right way to think about it. And bear in mind that in Q2, most of us would be doing any -- we'd be doing remortgages, which would be a slightly higher basis point level. So that could be pushing some of their numbers up as well. Then in terms of the ROEs, we probably not changed our guidance on that, particularly, obviously, pricing is more or less held, which is good, while rates have come down. So you'd expect to see those ROEs have continued to improve. We're not keen at this point, are going to do a race through to kind of get -- take a lot of market share. We've done some slight variations on pricing. You may have noticed last week, Chris, that we started to now just slowly move back into the 85% LTV sort of space and where we have pulled out through the last kind of 3 months. But I think it's something that -- what's the best way to manage the mortgage group to make sure that we do the right thing for customers. We're able to deliver the right kind of service levels as well, which we've been pleased about with the volume that we've been doing. I'm very comfortable in the ROEs we continue to earn on this business.

If I maybe ask the question slightly differently. In the event that the market does present you with an opportunity for something like 160 to 170 bps front book spreads, would that be enough to get you to compete more aggressively given how far above your previous expectation of 80 to 100. That would be -- I'm just trying to understand how the competitive dynamics might play out into the second half...

Yes. I think that -- so bear in mind that 80 to 100 is purely new mortgage business. So I would compare the 124 basis points to that 160. I think we view ourselves as quite competitive in this market. We're not looking to become more competitive because ultimately, you end up putting the margins down. But we do expect to continue to be competitive in that space. So I think if we were looking at something in -- still to earn 160 basis points, we certainly continue to pursue it, but not at the point of then dragging that margin all the way back down again, which versus what you would actually do. Kind of happy to continue to be as competitive as we have been.

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

Yes. I just -- could I -- just two questions, please. I'm going to ask another theoretical question on distributions. Consensus had you loss making prior to today's results for full year '20. I think given the impairment guidance, that's probably still going to be the case. On that basis, being loss making, stat loss making, does that preclude from paying the ordinary dividend this year given your policies based on the [indiscernible] profit? And then in the instance that you're not going to pay an ordinary, would you look to pursue, in theory, if you're allowed to paying a special dividend in that scenario? And I guess what would be really helpful to understand is, is there in any way that you'd need to seek approval from the regulator around paying a special dividend in a way that perhaps you don't have to, if it's the ordinary? That would be really helpful. And then the second is just on Ulster. Obviously, quite heavily loss making in the quarter. But even if I look through the impairment charge, loss making on a preprovision profit basis. I mean, how long do you expect that business to be loss-making on a preprov basis? And is it reasonable to expect that, that could be part of some broader restructuring perhaps next year? I guess, has coronavirus accelerated your thoughts in that regard?

Let me pick up on distributions again. That's -- I'm not sure that's -- we're going to be able to be enormously helpful to you on this because there are a lot of sort of hypotheticals built into your question. Let me just say a couple of things. One is that in the normal way, you don't ask the regulator for approval to pay a dividend, ordinary or special. You will ensure that you are meeting all of the capital requirements and that the regulator is comfortable with your overall financial position. And that would be -- that's the normal case. And as you know, for the -- for last year, we plan to pay an ordinary and indeed a special, and you may take it that the regulators were content with that. As for where we go from here, however, they have essentially put a block on capital distributions, which includes ordinary specials and buybacks at this point, and they said they will reconsider in the fourth quarter. And frankly, I think it's not particularly helpful to anybody to speculate on what the situation might be in the fourth quarter and what we might be able to distribute at that point.

Let me pick up the Ulster question. So as you know, our strategy was and is to grow that business organically and safely. And we have been successful in growing both the personal mortgage and some of the commercial share in 2019. That strategy hasn't changed. Clearly, COVID-19 presents different challenges to the economy, and we will continue to consider all strategic options in relation to that business. Thank you for the question. And I think we have another question on the webcast.

Indeed, this next question is a 3-part question and comes from Gary Greenwood of Shore Capital. The first part, can you expand on your comment around using surplus capital to explore other options that offer compelling shareholder value? Are you considering acquisitions? And if so, what areas of the business do you think need [indiscernible] doing? For the second question, can you explain again the mechanical changes to IFRS 9 transitional relief and how these unwind? And the final part, do you need to see greater economic clarity to assume dividend payments/buybacks? Or is your capital position so strong that you don't need to wait?

Thank you. Well, I think we've probably answered 3, and I'll get Katie to answer the IFRS 9 transitional release. But let me start with the first question. Clearly, we are very pleased to operate with the sector-leading capital strength that we have. And as I mentioned, and let me reiterate, we see our medium- to long-term CET1 ratio of 13% to 14% as being appropriate for the nature of our business. It is our clear intention to return to our dividend possible -- dividend policy as soon as possible and when it is appropriate and returning capital to our shareholders is our clear preference. Acquisitions have not changed in our priority list. We have very strong client franchises, as you can see in our Personal and Commercial bank. And we see significant opportunities to increase our share closer to our prevailing market share, so opportunity to grow. You have seen that we have made small acquisitions like free agents or looked at mortgage books in the past if we think that they add shareholder value, but let me come back to the point that it's our clear intention and our clear preference to return capital to our shareholders when it is appropriate to do so. Katie, can I give you the IFRS 9 transitional?

Absolutely. Absolutely. Look -- and Gary, I'm trying to say is that it is a complicated adjustment. So I think if you kind of wind back, you're basically getting relief on I think at Stage 1 and Stage 2. Once things move into Stage 3, you take the hit on them. So we are sitting at the moment with £1.6 billion of relief, which equates to about 90 basis points of CET1. If I was to take you to a kind of a midpoint of our range, what you would have seen happening as we got to the midpoint, you could see a natural migration of things into Stage 3, quite on a specific level. So I would've expected at that point, your transitional relief rather than being £1.6 billion kind of falls to about £1.2 billion. You can -- the math is relatively complicated behind how much you do that. But let's assume you see quite a lot of migration into Stage 3, that's why you lose such a portion of that. And then that would have a benefit of about 20 basis points in terms of your -- sorry, that would have a cost of 20 basis points in terms of your CET1 if you got to that kind of midpoint on your impairment summary. Hope that, that helps. And I think we're going to go back to Nicole.

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

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

So if you look at your ECL charge for the half, it was split £308 million in terms of Stage 1, £2.1 billion in terms of Stage 2 and £400 million in terms of Stage 3. When you look at what's in Stage 2, about 90-plus percent of that -- debts that are continuing to be serviced. And which is why -- I mean, so that's kind of where you are on that number. When I take it up to the range. I would sort of say that Stage 3 migration of £400 million for a half, it's not a bad number. It's not particularly elevated for us. It's actually slightly lower than we've seen occasionally. So it really is just the modeled kind of output. The £3.5 billion to the £4.5 billion number is very much guided on stage migration. If we see a significant move on macroeconomic assumptions, that's where that number would come under threat. Obviously, both positively and negatively in terms of what happens within there. And we talked on one of the earlier answers around some of the sensitivities which we've given you for H1. Structural hedge and deposit growth. No, you're absolutely right. We haven't converted all of that at this stage into our structural hedge. I think we're -- given the speed at which the deposits have grown, we're happy to kind of just wait a little bit and look at the behavioral life of that, but that's something that we will look through the next couple of quarters.

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

Thank you very much, and thank you, everyone, for joining and for all of your questions. So just to conclude our call this morning, you hopefully have seen the strength of our franchise is very clear. We've supported our customers well during the first half, whilst also taking a prudent approach to risk and impairments and deploying our balance sheet carefully. We've taken swift action to address COVID-19, but also maintain focus on our key strategic priorities. We expect to achieve the majority of our RWA reduction in NatWest markets by the end of 2021, and we are on track to deliver our cost reduction target of £250 million for this year. More importantly, we have a capital-generative business with a strong CET1 ratio, giving us headroom of £6 billion to £8 billion above our medium- to long-term target ratio of 13% to 14%. I'll reiterate this capital strength gives us flexibility to navigate the uncertain outlook to resume dividend payments to shareholders when it is appropriate to do so and to consider options that deliver compelling shareholder value. Thank you, again, for joining us today.