And then on U.S. Cards, you highlighted the increase in core deposits percentage balance. I just wondered how much of that is a sort of dollar increase or how much has that been impacted by the fall in lending balances and perhaps a reduction in other funding? And sort of how are you going to grow the growth — drive that growth in core deposits as we look forward? Is it really about the changes in providing deposit proposition the same at or some of the lending? Or is it pricing? If I can just squeeze in a follow-up on U.S. cards. You talked about mitigating the late payment fees. I just wondered how much of what’s embedded in the plan is sort of the market reacting to that versus what’s more in your control? Thank you.
Anna Cross: Okay. Thank you, Guy. So just reflecting back on Slide 15. I mean I’d just reiterate what I said before, that really ’24, we see about a bit more stabilization in the margin because of the factors you call out and the strength of that hedge. And then also, you’ve got continued deposit migration. So even though it’s slowing down, we still expect it to be there. And in terms of the mortgage market, while we’re seeing encouraging signs in terms of the market, it is going to take a while for that to start flowing into the balance sheet. So you see a balance sheet that contracts before it starts to expand, and that’s really what underpins our circa £6.1 billion. So it’s playing out in the first quarter sort of as we expected it might.
In terms of your question 2a on dollar deposits, it is exactly what you say. So we’re expecting really, this is a product led and actually, the way we go to market with those dollar deposits reaching more directly to consumers. And again, this is the first quarter in a 12-quarter plan. It’s going to move around a little bit. And actually, I’ve been looking for longer-term trends there really, but it’s product propositionally driven. And then finally, just in terms of the market on late fees, I think we do see some price changes coming through, which is sort of what we anticipated and we would expect to participate in that which is why I said late fee legislation happens first, the pricing changes will drift through over time. The only other thing I would say is, of course, given the nature of our business, we are able to share the impact of those late fees with some of our partners.
So you might expect the impact for us to be slightly less than it would be more market-wide. But overall, we considered all of that and included it in the RoTE sort of pathways and guidance that we gave you on the 20th of February. So no change.
Guy Stebbings: Okay, thank you.
Anna Cross: Thank you, Guy. Next question, please.
Operator: The next question comes from Chris Cant from Autonomous. Please go ahead, Chris. Your line is now open.
Christopher Cant: Good morning. Thank you for taking my questions. One very quick one to follow-up on the last question, please. Could you just give us some quantification of the expected annualized impact around the late fee changes for your U.S. consumer business? I think it would be helpful to understand what the sort of initial impact you’re expecting there is even if you expect some industry-wide and idiosyncratic mitigations over time. That would be the first question, please. Secondly, on NII, just conscious that you do have this £120 million Bank of England levy. You’re indicating that there’s a £70 million offsetting revenues this year, I think, you said £50 million net impact year 1. And I understand that’s going to go through the NII line.
And when I think about what swap markets have done since your guidance would have been struck at the full-year, I guess it’s a bit more supportive, slightly higher average base rate for this year, slightly higher average swap rates than have £70-or-so millions of benefit to come through relative to plan from this Bank of England funding adjustment. Why hasn’t the NII guidance being nudged higher? Is that just prudence? Or is there something else going on in there, which is maybe a little bit worse than expected? And I guess related to that, what is your guidance around NII sensitivity to base rate at this point, please? You haven’t given us anything in the slides quite some time. And given the relative size of your hedge versus peers and some of the commentary you gave at 2Q results last year, I do wonder actually whether in the very short term base rate not coming down as much as negative or very near-term NII trends?
Thank you.
Anna Cross: Okay. Thanks, Chris. I will take those. So on the first one, we haven’t quantified it publicly. However, on the 20th of February, we did include it in the flight path. You can see that it’s actually a net negative over the period. So you can see it being a drag on the RoTE, but it is part of that. But I’d just reiterate, I would expect it to be slightly less than other market participants some are calling out just because of the impact from the partners. So in terms of NII more generally, we continue to guide to circa £10.7 billion for the full business excluding the IB and head office and to circa £6.1 billion for BUK. And you’re right, there have been some movements in swap markets. But of course, they do move around a great deal.
And what we did on the 20th of February was try and underpin our targets with prudent macroeconomic assumptions. Of course, we monitor those very regularly. We consider the impacts on the business, but we’re not going to mark-to-market those targets on a quarterly basis. Just mathematically, you’re right, we would expect some offsetting income from that Bank of England levy. I think we’ve called that out, around £75 million. But one quarter end, we’re not going to adjust the targets that we’ve given you. In terms of your specifics around the sensitivity, I would say, given the scale of our hedge, we are and always have been less sensitive to immediate changes in base rates. That remains true. The — any sort of near-term change in rates is less important to us than just a mechanistic rolling of that hedged quarter in, quarter out.
And there’s nothing that I would call out as a negative in terms of rates being higher for longer. Of course, you might expect some benefit in liabilities, but there might be some offsetting matters in terms of asset formation, for example. So that’s why at this stage, we’re really happy with the £6.1 billion and the £10.7 billion. Okay, thank you, Chris. Perhaps, we can go to the next question, please.
Operator: The next question comes from Robin Down from HSBC. Please go ahead, Robin. Your line is now open.
Robin Down: Good morning. Just two. Just to quickly follow-up on Chris. So just to confirm, the £300 million reduction in NII within BUK, that was set before the BOE levy kind of changes? I guess you are going to get probably about a £50 million NII benefit within BUK. Just could clear that up. Second question, a much broader question. Obviously, you’ve got an RoTE target for this year of greater than 10%. I think consensus is currently around 8.8%. And when I look at the numbers, it looks like you need about £1 billion revenue growth based on your 2024 RoTE bridge. And that’s just not something at consensus or my own forecast currently have factored in. I think consensus has about £250 million of income growth. I guess a great disparity there must particularly be in the IB given you’ve given us fairly precise guidance on things like NII elsewhere.
I’m just wondering if there’s any kind of anything hardened — you kind of point to and say, look, I think consensus is just wrong on this number when you look at our models? Any color there, that would be greatly appreciated.
Anna Cross: Okay. Thanks, Robin. So on the first one, our circa £6.1 billion for BUK was struck for the 20th of February, which was before these BOE changes. They just mathematically, that is true. But we are in the first quarter, which is why I’d reiterate, we’re happy with our progress thus far. In terms of your RoTE of greater than 10%, the 12.3% that we’ve delivered in the first quarter is exactly where we thought we would be. So — and within that, the constituent parts are what I was looking for. So number one, real stability and income, particularly in NII and particularly in our financing businesses. They provide real balance to our income overall, the 63% of income in the quarter, and that’s what we’re focused on growing because it’s a really good base for us to deploy the RWAs into the U.K. and to focus on those areas within the IB.
The second thing I was looking for was delivery of cost and efficiency. We said £1 billion for the full-year. We’ve delivered £200 million of that in the first quarter. So we’re on track there. Third thing was continued good credit conditions. And again, we’ve seen that. So good credit performance at 51 basis points, really at the bottom end of our sort of through-the-cycle range, which again gives us a good base to grow from. And then finally, the capital position. So there’s nothing different in our performance versus we expected when we spoke to you on the 12th — on the 20th of February. However, there probably are some changes in shape relative to last year. So last year, we had an income — sorry, we had an impairment profile that was very back-end loaded.
This year, it’s pulled forward, driven very much by the U.S. positioning. The second thing is we did see quite a sharp change in NII — sorry, in NIM last year, driven by the deposit mechanics that really started to kick in, in the second and the third quarter. The third thing is we did see a drop-off last year driven by the cash flow hedge reserve and the way that was impacting the tangible equity of the group. And then finally, I’d also call out, in the current quarter, that Bank of England levy has a 70 basis points impact. Now we expect that to be not quite neutral, but nearly neutral over the year as a whole. So that is depressing the first quarter RoTE. Now of course, last year also, after a strong first quarter, we saw a dramatic force in IBCs in particular, to a decade low year for the whole market.
And we’re seeing more positive signs this year. So I think it’s quite a nuanced question. But overall, we still believe that we can hit greater than 10% for the year, and we’re exactly where we thought we’d be at this point.
Robin Down: Great, thank you.
Anna Cross: Okay. Thanks, Robin. Next question please.
Operator: Thank you. [Operator Instructions] Our next question comes from Jonathan Pierce from Numis. Please go ahead, Jonathan. Your line is now open.
Jonathan Pierce: Good morning guys. A couple of questions. Back on the hedge and then a broader question [indiscernible]. On the hedge, I think you probably pushed on about a quarter of this hedge now since medium-term rates moved above 3%, yet the yield on it is still only 1.8%. And it sort of implies that the rest of the hedge, despite all the hedges earning closer to 1%. So I’m just trying to square that with a 1.5% maturity guidance — yield guidance that you’ve given over the next few years. Is that just a prudent number you’ve thrown out there and actually the maturity yield on the hedges over the next few years is closer to 1% rather than 1.5%? Or is there actually a very decent tailwind expected into 2027 and ’28 as well?
The second question is not entirely unconnected. When I look at 2026 consensus RoTE, NII rebase for £30 billion revenue number rather than where consensus is in the mid-28s you’re getting to your target. So I assume on that basis, you recognize the consensus TNAV numbers out end of ’25 and into 2026. And then there’s a — sorry, final question on this, maybe to the Venkat. The LTIP targets, incredibly commendable, but you don’t get paid out in full unless you hit the 14% RoTE in 2026. But I’m just wondering what’s your thinking there? It looks extremely aggressive, given consensus doesn’t even believe you’ll make the 12%. So why did you put a 14% RoTE target into that latest delta? Thank you so much.
Anna Cross: Okay. Jonathan, thanks for the question. I think there are three. So let me deal with the first two, and then I’ll pass the third one to Venkat. So on the hedge, no, it wasn’t prudent. It’s the actual number. So we do expect the average maturing yield to be 1.5%. We do expect £170 billion to roll ’24 to ’26, inclusive. We haven’t talked about the tailwinds, ’27 and ’28. We talked about the tailwind for ’26 which we said, given the assumption that we gave you or the indicative number rather that we gave you of 3.5% swap rate, that would add £2 billion or around £2 billion of income by 2026 relative to ’23. And you can see the progress that we’ve made in the quarter. So for 2024 alone, when we were at the year-end, we locked in £3.8 billion.
Now we’ve locked in £4 billion. And that compares to a total gross hedge income of £3.6 billion last year. So there is a very powerful tailwind that comes from this hedge. To your second question, we do — I won’t specifically comment on the consensus numbers that far out, but we do expect an increase in the tailwind — sorry, an increase in TNAV. We’re seeing it grow as we expected, both because of the mechanics of the cash flow hedge reserve. And you might recall, we called that out specifically on the 20th of February. It was one of the moving parts as a headwind to RoTE, both in 2024 and beyond into 2026. So it’s being driven by just the mechanics of the cash flow hedge reserve. It’s being driven by AP accretion. And of course, it’s being driven by the reduced share count over time.
And that’s really why we’re seeing it move forward. And clearly, as a management team, we’re most focused on the loss of those two, just noting that the cash flow hedge reserve can move around quite a bit. So it’s AP accretion and really that buyback value creation that we’re focused on. And Venkat?
C.S. Venkatakrishnan: Yes. I mean I would just say, and to pick up on that point on TNAV, this is a very important fundamental improvement in the bank when you just see the TNAV go up. And as Anna said, we emphasize the second two parts, which is AP accretion and share count. Coming back to the LTIP. Well, first of all, it should be clear, the LTIP targets and the composition and levels of compensation for both Anna and me are set by the Board. And normally, there is in the LTIP, it’s aligned to, obviously, these financial targets, but there’s always a little bit of stretch in them so that — sort of incentivization of management. And that’s all there is to it. So I think with that — questions are over, if I may, I’d just like to say thank you very much for your time.
As Anna and I have emphasized throughout, we are on track with the three-year plan which we laid out in February 2024. We both, Anna and I, look forward to seeing many of you on the road and on the 18th of June for our business deep dive with the U.K. Corporate Bank. So thank you very much.
Operator: Thank you, everyone, for joining. This concludes today’s call.
