Operator: Our next question comes from Raul Sinha of JPMorgan.
Raul Sinha: Maybe a couple of follow-ups then from my side. If we look at your deposit pass-through 40% versus the 38% last quarter, and we linked that back to the deposit margin that you show on Slide 19, which is now plus 1 basis point, it was quite negative in the last 2 or 3 quarters, the deposit margin itself because of the deposit trends. The only way your NIM doesn’t actually go up from here would be if deposit trends, at least the way I look at it, if deposit trends were to get a lot worse in the second quarter of the year. So just trying to square your message around stability of the NIM with the kind of inflection point that we are seeing in this deposit margin, and we know that the asset margin is obviously going to bottom out.
So just to invite you on this point, do you think that there’s anything non-repeatable within the deposit trends that you’ve seen in the first quarter? And are you expecting to have, let’s say, a more challenging second quarter from a deposit pass-through or flows perspective? And I guess the second, that’s the first one. The second one is just on credit quality. We — obviously, on the corporate side, we have seen some large corporates in the U.K., which are quite levered having issues, whether it’s utilities or if you look at the kind of broader insolvency data that’s coming out, it does show that there’s been quite a significant tick up there. We know that your book is quite prime, but can you talk to us about how you see the risk developing through the year?
And you still got quite a big PMA attached to uncertainty there. How should we think about the timing of the unwind of that?
Katie Murray: Can I just jump in? Perfect. So I guess if I look at the kind of the post pass-through and the kind of mix of deposits and what that could kind of mean for NIM. I think, the thing for me that’s important to bear in mind is, customer behavior has changed as customer savings rates increased, and we’ve kind of reached a peak and now those rates have kind of started to fall. What we did see that in Q1, the behavior was very much in line with our expectations, but I think in line with the wider system, and piece, there’s been more household income, I mean household deposits in the system, and we’ve obviously benefited from that as well. As you know, and we’ve talked about a lot in the call. At the beginning the call, we are predicting two rate cuts.
In this next quarter that will have an impact. So that’s — so I think we’re mindful of that deposit margin as what that will do just obviously in absolute terms, it will have an impact. There’s obviously a timing lag before you can pass some of those through ultimately to your customers, but also what that might do in terms of the competitiveness of the market piece we do, still keep an eye on TFSME. And I would say that while we talked earlier around the competition we’re seeing in mortgages, this has probably been one of the lesser competitive quarters in terms of deposits, in terms of the wider market activity. And that’s something I think we all really need to be very mindful of as we move forward from here. If we then move on to kind of impairments and PMAs, Raul, I just — for us, we had a small decrease in the PMA this quarter for economic uncertainty, £18 million in total, we brought it down.
What I’ve always said on the PMA is it will be a multi-quarter event as we kind of bring that number down. We wouldn’t expect to see a big move in any one quarter unless there was some consumption that kind of happened to absorb that. So we’ll see that go down. We’re guiding you to less than 20 basis points. And for the year, I think sitting where we are just now, we remain comfortable with that. So no need to kind of update that guidance at this point, but we’ll continue to review the PMAs each and every quarter as you should expect us to.
John-Paul Thwaite: Maybe just a couple of build points on the corporate asset quality of it. We continue to be very encouraged by the underlying asset quality in the corporate book. We’re not seeing any sort of significant deterioration there. So that’s encouraging. You referenced insolvencies that tends to be at the smaller end of the market. There are some technicalities there. When we look at our customer base and insolvencies, actually, the numbers haven’t increased materially, and the majority of them tend to be to smaller businesses that don’t have credit exposures. So it’s quite noisy that insolvency data. That’s just, I guess, a little build for overall. But generally, very encouraged by the resilience of customers and the action they’ve taken over the course of the last couple of years.
Operator: Our next question comes from Jonathan Pierce of Numis.
Jonathan Pierce: A couple of questions, please. One is on the near-term revenue and then second on the longer-term revenue. Katie, you said you don’t want to change your revenue guidance for this year, just yet. So maybe I can focus in a bit more on the range, the £500 million range from £13 million to £13.5 million. I’m guessing that’s really driven by a couple of moving parts. One, the response to the rate cuts that you’ve got in and the size, therefore, the gapping negatives? And the second again, guessing that, that’s an assumption you’ll potentially see a drift up in pricing regardless of any rate moves. If we do see fewer rate cuts and they’re more spread out than your sort of May, June assumption, for instance. Presumably, that significantly reduces the potential hit from the gapping negative.
I think I’m right that you have an increased deposit pricing on your instant access savings accounts now since September as well, certainly flexible saver hasn’t moved at all. So if you’re not yet willing to talk about the broad guidance at this fairly early stage in the year. Can we at least consign the lower end of the range to the dustbin, please? The second question is more around NII and consensus expectations moving forward. I don’t expect to pin you down on this, but consensus has only got about £400 million, £500 million NII growth in for 2025 and ’26, but based on today’s yield curve, you’re looking at £1.2 billion, £1.3 billion tailwind a year from the hedge, the impact per base rate cut is on the managed margin circa £100 million.
The mortgage book, I think I heard you say, is already down at 74 basis points on the back book. Do you think consensus is being a little churlish here? And are those sort of drivers that the main ones to be thinking about over the next couple of years?
John-Paul Thwaite: Let me take the first one kind of just quickly. We’re not changing the range today. The guidance is what it is. There’s a range of different scenarios as you lay out in terms of the trajectory, the timing, the quantum of interest rate reductions. We’ve got a lot of sensitivities that allow everybody to make their own assumptions around that. I think the message we’re giving is that we’re increasingly confident about the guidance we’ve given in ’24, but we’re not confining any part of the guidance to the just spin, just to quote you back to the guidance is the guidance. On the second point?
Katie Murray: Yes, sure. Absolutely. Look, I mean, as you look at the NII consensus and what the benefit of the hedge could be, I mean, we’ve said repeatedly that we do believe it is a strong benefit as we move on from here. We’ve talked about the actual size of the hedge sort of decreasing from £185 billion to £170 billion, around that number. I’ve said you’d expect much of that to kind of get to you by the middle of the year. And from there, given that we would see stability, we’d expect to see the hedge tailwind build from here. Jonathan, you’re very familiar with the sensitivities that we have within here. You also understand they are off a static balance sheet. So you can do the 12 months look back and from the data that you have as well. But I think as we look at that, we do — we are confident about the income growth through to 2026 and obviously, delivery of our greater than 13% RoTE at that point.
Operator: Our next question comes from Ed Firth of KBW.
Ed Firth: I just had a question on capital actually. I guess, one of the impacts of your share price is that you — the government buyback now, I guess, it costs about double what it did 6 months ago. So I think it’s about 60 basis points of core Tier 1 something like that, a 5% buyback. And then on top of that, you’ve got Basel III coming through, which I guess is another 130 basis points or so. So you actually had about a 200 basis point headwind to capital over the next 12, 18 months. So I’m just trying to think, how should we think about open market buybacks in the context of that? I mean, is that — are they still something that is in your thinking? Or should we sort of part based on the one side for the time being? And I guess, slightly related to that, I also noticed consensus has your dividend coming down.
And I guess that’s just a formulaic application of 40% of payout ratio. But as we go forward over the years, there’ll be times, particularly on things like impairments the way IFRS 9 works. It’s going to be a very volatile number I suspect. Should we think of just a formula at 40%? Or should we think that actually there is a progressive element in your thinking there that perhaps you’ll try and smooth some of that out?
Katie Murray: You’re absolutely right. So capital is sitting at 13.5%, 5% of the market cap buyback. So it would be a little bit what we spent today, given the improvement we’ve got in the share price, it would be kind of £1.3 billion ticker versus the kind of £1 billion or £1.1 billion we’ve done in the past. So not quite double the cost indeed. But when we look at the capital plans for the year, we obviously plan for some share price movement. And within that, as we move forward from there, you’re absolutely right, Basel III.1 is coming in. I mean, I guess what we’ve guided to on RWAs and our guidance is unchanged. It’s £200 billion of RWAs at the end of 2025, remembering that it will be lumpy as we go around from there.
The on-market buybacks, we’re pleased with how the one that we announced last year, just completed and how the new one has started. It’s a conversation that Paul and I will have with the Board when we get to it in June and July looking really quite far out in terms of what’s happening with the capital basis. I would say, I agree with you the dividends and consensus. It will be very formulaic. We — our dividend policy is around 40% payout. Last year, that was 17p per share. We are mindful, obviously, of the absolute level, but we’ve been very strict on the application of around 40% payout, and we wouldn’t expect that to change any time soon.
Ed Firth: Sorry, just going back on that. I mean, one of your peers has dropped its core Tier 1 target. I mean, in terms of making buybacks, you obviously can see a quarter ahead. I mean, would you be happy just to go below the 13% at the point of a buyback?
Katie Murray: We manage the business to a 13% to 14% range, and that’s what we’ll continue to do so. We’re very confident in our capacity given the 50 basis points, forgive me, generation that we had on earnings in Q1, and there’s no reason to see why that would diminish. So we’re very comfortable.
Operator: Our final question comes from Guy Stebbings of BNP Paribas Exane.
Guy Stebbings: Katie might be just pointed on this one, but I’m going to ask anyway, because it’s around the FY ’24 revenue guidance, it’s similar to Jonathan’s question really. I guess maybe the way to ask it is just think about how high the bar is to raise guidance at this point in the year? I mean, I appreciate you entered into a fresh guidance for the half year and full year and refined macro assumptions then. But you changed the guidance for the bank levy. I accept you got visibility there is, it’s certain and it’s harder on revenue. But to many of us, I think it looks like the revenue will come in more than £100 million above the top end of the guidance this year. So I’m just trying to really work out, is it the bar to raise income guidance at this point of the year is just so high or if there are some headwinds outside of possible rate cuts that we’re underappreciating?
And then just to sort of follow-up that on mortgage spreads, could you give any more color on the evolution of mortgage spreads churn this year? Just thinking about whether that headwind is sort of reducing sequentially over the course of this year, with the back book now being some 80 basis points, so it would feel like it should be a pretty modest headwind?
Katie Murray: So kind of simple answer on the guidance, the cost is really easy, because I’ve paid it. So it’s one of those things you knew. It’s all kind of done. So therefore, we are sharing with you the really kind of up-to-date information. And then, as you know, that will accrue a little bit through the year. It doesn’t match properly in the first year. You talked about that a lot this week already. We’ve had £6 million in the income line already. But the thing here in the guidance, we’re at Q1, we had a promising start. We’re comfortable. We’ll update you as we move forward. I would say traditionally, Guy, we haven’t only done it on Q2. We’ll tell you whether there’s something meaningful to share in terms of that piece, and we’ll continue on that basis.
And if I look at the mortgage spreads, there’s not anything there that we’re particularly concerned about. The book is going to reprice now down to that kind of 80 — from 80 basis points down to kind of 74 basis points. We’re writing around the 70 basis points kind of level. So would you see — as you say, there’s not a lot of them. There’s not a lot of difference in terms of that churn as we go on from here. But there’s no — nothing, no headwinds that you’re not aware of, and I think we’ve talked about mortgage margin and deposit mix a lot today, and we do see them abating from here.
Operator: There are no more questions at this time. So I’d like to hand back to Paul for any closing comments.
John-Paul Thwaite: Okay. Thanks, Oli, and thank you, everybody, for your questions this morning, Katie and myself very much appreciate that. As you heard, we’re pleased with the performance for the first quarter and the momentum we have in the business. This gives us confidence not only for ’24, but for the years beyond in terms of our ability to drive future returns and to achieve our RoTE target of greater than 13% in 2026. And whilst I’m sure we’ll see you before, we do look forward formally to speaking again at the half year. I wish you all a very good weekend. Thank you.
Operator: That concludes today’s presentation. Thank you for your participation. You may now disconnect.
