Robert Smalley

Robert Smalley inquired about specific issues within commercial real estate (CRE), particularly regarding West Coast exposures, restructuring plans, and potential Q4 charge-offs. He also asked for clarification on the 40%+ of Stage 1/2 loans being off-balance sheet positions, their nature, and if current disclosure overstates these numbers.

Answer

CFO James von Moltke confirmed CRE concentration in West Coast exposures (California, Washington State), noting intensive work with sponsors on value preservation, though the tone has deteriorated. He stated that the portfolio is marked to recent appraisals, and while it's too early to call an end to the trend, they are closer to the end. Regarding off-balance sheet Stage 1/2 loans, he explained they are overwhelmingly derivatives and committed facilities, mostly from trading businesses, typically temporary, and associated provisions are nominal, adhering to IFRS 9.

Robert Smalley from MacKay Shields asked for specific details on commercial real estate (CRE) issues, including concentration areas, the strategy for troubled loans (restructuring vs. nursing), and potential Q4 charge-offs. He also sought clarification on the 40%+ of Stage 1/Stage 2 loans that are off-balance sheet positions, questioning if they are primarily timing issues and if this overstates the Stage 1/2 numbers.

Answer

CFO James von Moltke explained that CRE concentrations are primarily on the West Coast (California and Washington State), accounting for 60-70% of credit loss provisions. He noted that they work with sponsors on troubled loans, marking portfolios to recent appraisals, and while it's too early to call an end to the trend, they are closer to the end. Regarding off-balance sheet Stage 1/2 loans, Mr. von Moltke confirmed they are mostly derivatives and committed facilities from trading businesses, with migrations typically temporary and associated provisions nominal, acknowledging the IFRS 9 requirements.

Asked about the investment banking pipeline for the second half of the year, lending exposure to alternative asset managers and BDCs, and whether an accelerated timeline for resolving the CRE portfolio is possible given improving price visibility.

Answer

The investment banking pipeline is strong but execution is dependent on market stability. The bank has minimal BDC exposure and will follow up with details on other non-bank financial institution lending. Resolving the CRE portfolio remains a granular, ongoing process, and an accelerated timeline is not confirmed as price discovery is still idiosyncratic.

Robert Smalley of Verition Fund Management LLC asked about the Investment Banking pipeline for the second half of the year, particularly in Europe. He also requested details on the bank's lending exposure to alternative asset managers and BDCs, and followed up on whether improved price visibility in CRE could accelerate a portfolio workout.

Answer

CFO James von Moltke described the Investment Banking pipeline as strong, especially for M&A and Equity, but noted that execution depends on market stability. He expects debt capital markets to recover after the summer. On CRE, he stated that full price visibility is not yet present and the workout remains a granular, idiosyncratic process. Group Treasurer Richard Stewart noted that BDC exposure is de minimis and offered to provide more detail on alternative asset manager lending offline.

Robert Smalley of Verition Fund Management LLC asked about the strength of the Investment Banking pipeline for the second half of the year, particularly in Europe. He also requested details on the bank's lending exposure to alternative asset managers and BDCs. Lastly, he followed up on CRE, asking if an accelerated workout timeline is possible now that there is more price visibility in the market.

Answer

James von Moltke, President and CFO, described the M&A and equity pipelines as strong but noted market instability was causing delays, with an expectation for debt capital markets to recover after summer. On CRE, he stated that pricing visibility is not yet 'full' and the workout process remains granular and idiosyncratic, though the bank is actively exploring all risk-mitigating options. Richard Stewart, Group Treasurer, noted that BDC exposure is de minimis and offered to provide a more detailed breakdown of lending to alternative asset managers offline.

Robert Smalley from Verition Fund Management asked for details on the high LCR, an update on exposure to non-depository financial institutions (NDFIs) like alternative asset managers, and whether the U.S. bank might pursue larger wholesale funding transactions.

Answer

Daniel Fairclough, Group Treasurer, explained the high LCR is a function of macroeconomics and a deposit-centric strategy, and while a methodology change will lower it, it will remain robust. He disclosed the NDFI exposure in the New York branch is about $20 billion. Anna Cross, Group Finance Director, elaborated on the strategic importance of these relationships. Daniel Fairclough also confirmed there are no plans to change the U.S. wholesale funding mix, as the strategy is focused on growing retail deposits.

Robert Smalley of Verition Fund Management inquired about the reasons for the high LCR and NSFR ratios, requested an update on exposure to non-depository financial institutions (NDFIs), and asked about the potential for larger, market-sized U.S. bank-level funding transactions.

Answer

Daniel Fairclough, Treasurer, attributed the high liquidity levels to macroeconomic factors and a deposit-centric strategy, noting the LCR will moderate but remain robust. He disclosed the NDFI exposure in the New York branch is about $20 billion. Anna Cross, Group Finance Director, described the relationship with NDFIs as intertwined and important for the lending ecosystem. Daniel Fairclough also confirmed there are no plans to change the U.S. wholesale funding mix, as the strategy is focused on growing retail deposits.

Robert Smalley of UBS inquired about several areas: the outlook for provisions moving into 2026, whether the project finance loan pipeline is steady or lumpy, the reason for the high Net Stable Funding Ratio (NSFR), and the potential implications of loosening the UK's ring-fencing rules for the mortgage market and liquidity.

Answer

Group CFO & Director Katie Murray explained that while 2026 provision guidance is not yet set, the bank has been operating at the lower end of its through-the-cycle range. She described the project finance pipeline as inherently 'lumpy-ish' but smoothed by strong relationships. Treasurer Donal Quaid noted the high NSFR is an outcome of the strong deposit franchise, not an actively managed target, and stated it is too early to speculate on the impacts of ring-fencing reform, though the current regime adds cost and friction.

Robert Smalley of UBS asked about several topics, including whether provisions would rise to the 20-30 basis point range in 2026, the consistency of the project finance pipeline, the reason for the high Net Stable Funding Ratio (NSFR), and the potential implications of loosening the UK's ring-fencing rules on the mortgage market and liquidity.

Answer

Group CFO & Director Katie Murray addressed provisions, noting that while 2026 guidance is pending, the bank has recently operated at the low end of its through-the-cycle range. She characterized the project finance pipeline as inherently 'lumpy-ish' but smoothed by strong client relationships. Treasurer Donal Quaid explained the high NSFR is an outcome of a strong deposit franchise rather than an actively managed target. Regarding ring-fencing, he stated it's too early to speculate on specific benefits but acknowledged the current rules add cost and friction, without expecting changes to impact the highly competitive mortgage market.