Rohith Chandra-Rajan: Yes. So sorry. So just on that, so you’d expect it to be below the — you’d expect Q1 to be below 13.5% but not below 13%?
Anna Cross: It might nudge below 13.5%, but we are fully expecting to remain within our target range. We’re very clear on that. And even if it does, it will be because of the business opportunity and we will accrete thereafter.
Rohith Chandra-Rajan: Okay. And then the second question was just on the financing revenues. So firstly, thank you for that. I was wondering if we might get a little bit more from you just in terms of the driver and particularly the breakdown between volumes and spreads or rates on the financing revenue growth.
Anna Cross: Yes. So we haven’t disclosed that split. And it’s actually a little bit of both. Clearly, in a rising rate environment, you’re going to see some expansion in margin. In a volatile environment, you would see the same. And the other thing I would say is you can see that we are taking share not just from European peers, but more broadly across the street. So I think of it as a combination of both volume and margin.
Operator: Our next question comes from Martin Leitgeb from Goldman Sachs.
Martin Leitgeb: Just two questions on the U.K., please. And the first one, just to follow up on the potential for deposit migration attrition from here. I was just wondering, firstly, if you were able to share a bit of detail in terms of how the deposit back splits within Barclays UK. It seems like from the annual report of Barclays UK that there’s a very small portion within time, if any. I was just wondering what share of deposits is in current accounts, so noninterest-bearing at present, just to get a sense on how potential the scope we see for migration. And related to that, I mean, we don’t have really any history at least over the last and 15 years in terms of deposit migration. Would you expect the back of this kind of deposit migration to occur fairly near term, so within ’23?
Or could this be a longer-term prospect? And secondly, I was just wondering in terms of U.K. consumer behavior, what you’re seeing in terms of business momentum. Do you see any change in terms of customer behavior, whether it be more on the conservative side, so use some of the savings deposits to pay down loan balances, both mortgages and cards? Or do you see continued appetite for expenditure and consumption?
Anna Cross: Okay. Thank you, Martin. So we don’t disclose the split. However, the level of time deposits is actually pretty small for us, probably smaller than — well, certainly smaller than the market as a whole. We have never really — well, we’ve never been a hot money bank through all of our history. Our deposits are very strong franchise ones. So as we’re looking at our potential deposit migration, we’re actually looking largely at migration from one type of franchise deposit to another, and that very much is our strategy, as we said before. In terms of time deposits or — we have strong rates out there, but they’re very much in our control. So if we saw balances move too high, given that our loan-to-deposit ratio is as firm as it is, that’s something that we can certainly manage.
More broadly than that, how do I expect it to be? I mean, I said before, it’s the absolute movement in rates that we typically see prompting changes. There are some key differences from the past. Firstly, we and all of the rest of our U.K. peers or most of the rest of our U.K. peers are in a different liquidity position, and therefore, you might expect pricing to be different. Having said that, it’s very easy for customers to move their money around. Of the people that have opened our Rainy Day Saver account, the majority — the vast majority of those have done that online, which is clearly different, which is why we’re being thoughtful about the impact of migration because it is so uncertain. In terms of U.K. consumer behavior, really no change.
We are not seeing changes in our arrears levels. They are low and stable. The same is true when we go actually into business banking and corporate, and that probably should be less of a surprise given 2 things. Firstly, our customers have been and are being defensive in the way they’re behaving. They’re skewing the spending towards essential spend. They are repaying strongly in their cards. Cards repayment rates are above COVID levels. So they’re spending. They’re engaging with the card, but then they’re repaying. So they’re behaving very defensively. And then if you put on top of that, the fact that unemployment remains very low, it shouldn’t surprise us that actually we are not yet seeing anything untoward from a credit perspective. So we feel like we’re well prepared should that occur.
And you can see our coverage ratios are pretty robust. But that’s really why we’re guiding to something that’s very much in the historic norm of 50 to 60 basis points for next year — for this year. I keep saying next year. I mean ’23.
Operator: Our next question comes from Jason Napier from UBS.
Jason Napier: Two, if we could turn to Slide 11, please, on rate gearing. The numbers have changed, but the reality remains that the firm still discloses that rate hike of 25 basis points is worth GBP 150 million more in year 2 than it was in year 1. And so we’ve had 17 sets of 25-basis-point hikes, which should mean a tailwind of GBP 1.7 billion or something in Barclays UK. So there are obviously a lot of moving parts. We’ve discussed, I think, to some extent, all of those in various questions before. How would you invite people to use the disclosures around year 2 versus year 1, given that we should be looking at something like an 80 or 90 basis point year-on-year NIM expansion on this table, if indeed, it is useful in predicting the future?
And then secondly, the — I think the corporate lending sort of mark-to-market in Q4 was probably better than some had feared, and the disclosures that you provided around the hedges are useful. I just wondered whether you wouldn’t mind speaking a little bit more about the first loss cover. Does that only sort of kick in from a P&L perspective if you have a default on the GBP 17 billion of covered exposures? Are there mark-to-market hedges in place, too, that might have protected the firm in Q4, that risk management that you referred to? And really, the kind of bottom line in this question is, are the costs of those hedges unusually elevated? Is there something you could share in terms of quantum of protection costs that might sort of go away as conditions normalize and as that level of protection might no longer be required?
Anna Cross: Okay. Thank you. There was a lot there, and I’ll try and remember all of it. So just starting with Page 11, I would say, regard it as a sensitivity disclosure, not a forecast. It relates to a 25-basis-point upward parallel shift in the curve. That’s certainly not what we’ve seen at any point. So it’s quite difficult to go from that chart to what’s actually happening within the NIM. It’s there for sensitivity. How it will help you, though, is the following. Firstly, remember, 2/3 of that broadly is in the U.K. 1/3 is in the Barclays Bank PLC so on the BI side, specifically within transaction banking most meaningfully. And the other thing I would say is that movement from GBP 65 million to GBP 200 million is there to really serve to remind you about the momentum in the hedge.
And that’s really what we’re illustrating with actuals on the right-hand side. So that’s how I think about it. To your second question, within corporate lending, there are a few things in there. There’s clearly the marks that you call out against our leverage lending book. There is the cost of first loss cover. Yes, that’s there for default. If you look at Page 15, you’ll see that it’s covering 32% of the million GBP 54 billion of corporate lending exposure. And then finally, on the mark-to-mark hedges, they’re there, specifically for the LevFin exposures. They are typically tail hedges. It’s really difficult given the sort of idiosyncratic nature of some of the names in there or in any LevFin book for us to be too specific. But that’s how we — that’s how you should think of them.
We’ve been very prudent, I would say, in extending the coverage of those hedges. In the current environment, you can imagine our appetite for stress loss is somewhat curtailed. And therefore, we have put down more hedges, and the absolute cost of those hedges has gone up. So you’ve got 2 things going on: more coverage, greater cost. We don’t disclose either of those things, but they are quite strong impacts within that number, Jason.
Jason Napier: I guess just coming back on Slide 11 then. The — you’re right, the build in structural hedge is significant and, I think, quite well understood. Can I just ask in the whole, does this also take into account things like deposit mix migration? Just bearing in mind that the size of the moves you’ve seen to date, is deposit beta built into this number?
Anna Cross: No, it doesn’t. It’s completely mechanistic, static balance sheet, no switching.
Operator: Our next question comes from Chris Cant from Autonomous.
Christopher Cant: I just have one point of clarification on BUK NIM and then an alternative question on CC&P, please. Within the 33 bps of other in your NIM bridge, you broke out those 2 kind of broad buckets, the product dynamics and the sort of treasury impacts. Could you just give us the split, please, of the 33 bps so we can understand how much is expected to dissipate as we go through the first portion of ’23? And then on CC&P, please. There was some news in the U.S. around late payment fees and sort of curtailing bank’s ability to charge those fees. Could you give us a sense of how exposed CC&P revenues are to those changes if they do come into force? When we look at sort of industry data, it might be something like 9% of U.S. card players’ income. Obviously, you don’t get that broke down for Barclays. But if you could give us a sense on the potential headwind to CC&P revenues, that would be helpful.
Anna Cross: Okay. Thanks, Chris. On the first one, pretty straightforward. I said they’re broadly half and half. So hopefully, that gives you what you need. In relation to the late payment fees, I mean we’ll see what happens as we see the final terms of that and if, indeed, it actually moves into regulation. But given the — and we somewhat need that detail for us to be able to model it. But from the initial calculations that we’ve done, Chris, it looks like it’s manageable within the growth of that business. So we wouldn’t call it out as significant at this point.
Christopher Cant: In terms of thinking about quantifying, is there any reason to suppose that Barclays U.S. card income profile and kind of fee split is different or markedly different to the industry average in the U.S.?
Anna Cross: It’s not really that I would think about. I would think about it as the specific partner terms will vary partner by partner. Does that make sense?
Christopher Cant: Okay.
Operator: Our next question comes from Benjamin Toms from RBC.
Benjamin Toms: The first one is on the mortgage market. It feels like housing and mortgages are starting to turn. What’s your expectations for net mortgage growth for this year? And then secondly, I see you note on the slide that your triennial valuation is now on a GBP 2 billion funding surplus. That’s about a funding ratio of 108%. In other words, the scheme is now fully funded. Back in the slide, this means the capital drag from deficit reduction contributions is eliminated. Can you just confirm that you currently have a Pillar 2A add-on for pension risk and this primarily envisages a risk that now is significantly reduced as the scheme is officially a surplus on an actuarial technical provisions basis? One of your peers became fully funded a few years ago. We saw the regulator reduce their Pillar 2A add-on.
Anna Cross: Thanks, Ben. So what we see in the mortgage market is quite a change really, so it’s dominated by remortgage. It’s dominated by low loan-to-value remortgage, and the demand for high loan-to-value mortgages has reduced significantly, which is exactly what you might expect it to do in the face of HPI uncertainty. What that means is that the — if you like, the blended margin for acquisition in the market is below where it would have been previously because it’s dominated by low-margin, low loan-to-value products. In addition to that, customers are remortgaging extremely quickly, so we are seeing considerable churn across the industry as a whole. And because of that, and I would say low demand overall, you’ve got low demand, fixed supply and, therefore, a very competitive environment.
So I would call out, and that’s why we are being really thoughtful and conservative in the way that we’re playing forward our NIM that we think that’s quite a change in that market given the impact of the third and fourth quarter last year. In terms of what we’re seeing in customer behavior, again, very defensive. They’re remortgaging very quickly. We’re seeing no change in arrears. We’re seeing some slightly elevated levels of overpayment but not so much that it would move the overall balance. So nothing of concern. And actually, I would say, absolute margins are still healthy. It’s the mix and churn effect that we’re thoughtful about. On Pillar 2A, we have seen that. So we have seen a reduction in our pension risk within Pillar 2A, but you might remember that during COVID, there was a degree of relief from the PRA in the way that they calculated Pillar 2A with reference to RWAs. So they’ve gone from what was a fixed or nominal approach now back to a percentage of RWAs. Those 2 effects broadly offset one another.
Operator: Our next question comes from Guy Stebbings from Exane.
