Paul Thwaite: Thanks, Ben. I’ll take the cost piece. So we’re not guiding on 2024. You’re right. We’ve confirmed £7.6 billion or Katie confirmed earlier in the question £7.6 billion in terms of 2023. You’re right. Both along balance sheet management, capital management, and costs have been a focus for me and the team over the course of the last couple of months. What I would say is we — I think we’ve got a very good track record in terms of taking cost out of the business. I think we’ve done that in a way that hasn’t been detrimental to either the customer experience or to revenue. So we are taking a very tight approach. I’ll talk more in February in terms of in year guidance for 2024, but I’m not signaling any big restructuring charge or anything like that in this call.
Katie Murray: Thanks. Thanks, Paul. So in terms of the mortgages, a couple of things, I would say, you’re absolutely right. What we’ve seen is that we saw higher flow in the first half of the year and we’ve been moderating during this quarter to deal with kind of movements in pricing to make sure that we’re really always managing the book for value and not just for volume. So the 16% falling down to the 13% in flow, I think for me was important to see in this quarter given where some of the pressures on swap curves have been. I would say as you look at that above 90% mortgage flow, there’s a technical thing behind there. We haven’t changed our approach. There’s a bit of indexing impact happening in our reporting. So as you see the kind of house pricing fall, then you actually see more things being kind of moved up above the line.
What I would say, Ben, as you look at our new business, our LTV of our new business is 69% overall. So I wouldn’t read too much into what’s a relatively small part of our portfolio that’s been indexed up into that greater than 90%. Thanks very much, Ben.
Paul Thwaite: Thanks, Ben.
Benjamin Toms: Thank you.
Operator: Our next question comes from Adam Terelak of Mediobanca. If you’d like to unmute and ask your question.
Katie Murray: Hey, Adam.
Adam Terelak: Good morning. Thank you for the questions. I’ve got a bit of a technical one on the hedge. Clearly, you’re talking about £10 billion of maturities and the hedge is down, what £7 billion in the quarter. That means that your hedge reinvestment each quarter is pretty minimal. If you then add that you’ve got further mix shifts to come on a 12-month loopback period, it feels like a good 18 months or so or a good few quarters until we can really talk about the hedge volume stabilizing and that tailwind coming through. Is that the right way of thinking about it from a pure hedge standpoint? And is that why you sound a little bit more confident on the longer-term story rather than the 2024 story? And then, secondly, just feeding that into the NIM conversation.
You said to avoid annualizing Q4 or annualizing exit rates, but it sounds like with mix shift we’re going down before going up. So why are we confident that the acceleration in NIM in the back half of next year can take us back above that 4Q annualized figure? Thank you.
Katie Murray: Yes. Perfect. So a few things within there that I’ll try to help you with, Adam. So I guess as I look at the hedge volume stability, what you — you’re absolutely right. We do the hedge on a 12-month rollback and then what we need to see is that mix stabilizing within our deposit base. What I’ve said already on the calls, we are expecting that stabilization to come. You’re absolutely right. I think it’s a couple of quarters away before we kind of get there. So it’s probably kind of a post-Q2 thing before we really get that kind of stabilization. Then at that point what’s happening is they’re kicking off about £10 billion a quarter. We’ll be investing that at rates that are significantly above the roll-off. The roll-off next year is 80 basis points.
I think I said earlier that our average reinvestment was 4.6%, so there’s a natural delta. I’ll let you take your own views as to where you think that five-year rate might be by the end — by the time we get to that piece. So you’ll get some benefit in the earlier quarters because there is some reinvestment and then that will continue to grow as you go into the second half of the year. And then what you then see is you’ve then got stabilization. Then when I get into 2025, my 12-month loopback is clearly more stable again. And so therefore I’m now reinvesting a rate that is going to far exceed the 50% roll-off, the roll-off, 50 basis points, forgive me, roll-off rate that I’ve got into 2025. So I mean when we spoke in Q2, I think I talked there that there was more confidence in the recovery of income into 2025.
That still remains the case because exactly of that point, if you need the deposit kind of stabilization to come through in terms of the blend, we’ve demonstrated the quantum very well now for kind of two quarters and then overall the book will start to yield and better. So at the moment, we’re yielding about 1.5%, I would expect that to continue to see improvements in that as I go into 2024 because of the benefit of those different kind of factors. Hope that works for you, Adam.
Adam Terelak: Yes, very clear.
Katie Murray: Lovely. Thanks a lot.
Adam Terelak: And on the — sorry, on the NIM profile into 1H and beyond.
Katie Murray: Well, I mean I guess my answer is probably its very similar. So we’ve talked about that as we go into Q4 this year, you shouldn’t expect to see the level of fall that we’ve seen in Q3. What we have said is that we expect NIM to be above 3% for the year. So therefore your kind of exit rate is going to be lower than where we are now. But don’t take it down as steeply as we fell in this quarter. You’re then going to have the dynamics of a stabilizing mortgage book. And we talked about the mortgage book getting to kind of around about kind of 80 basis points. We’re sitting at 86 basis points just now. I think there’ll still be movement around that 80 basis points piece, but that will stabilize. We’d said that stabilization would happen towards the end of this year, early next year.
And then I’ve already talked a lot about deposit stabilization, so I won’t see any more on that piece, but I certainly see the step down as less. And then I’m talking a bit of a narrative stabilization of coming, so I wouldn’t let you — I wouldn’t run away with the NIM.
Adam Terelak: Okay. Great. Thank you.
Katie Murray: Lovely, thanks. Thanks, Adam.
Operator: Our next question comes from Jonathan Pierce of Numis. Jonathan, if you’d like to unmute and ask your question.
Katie Murray: Hi, Jonathan.
Jonathan Pierce: Hi, how are you doing? I got a couple of questions, please. The first on the NIM bridge in Q3, is the lending margin that I’m struggling with a bit down 12 basis points. You said that was largely mortgages. That’s about a £400 million annualized hit to revenue in the quarter. Now I think there’s no more than £15 billion to £20 billion of refinancings or churn every quarter. So it implies a huge delta between what’s come off and what’s gone back on in spread terms. Is that right? Were we sort of 200 basis points of step down in mortgage margin on the churn in Q3? That’s the first question. The second question just sort of standing back and thinking about deposit income as a whole, as I think its Slide 9 shows —
Katie Murray: Yes.
Jonathan Pierce: It’s about 340 basis points of margin at the moment. If you want to look at it as what you’re paying the customers versus base rate, it’s probably 320 basis points spot at the end of September I suppose. But then the product hedge, I prefer to think about this as £195 billion position that’s costing you a floating leg of 5.25% and only receiving 1.5%. So that’s knocking about 170 basis points clean off what you’re earning on the deposit such that you’re back at about 150 basis points. That’s the margin you’re earning on deposits going through the P&L. Is your confidence — forgetting about hedge income and notionals and all the rest of it, is your confidence around deposit income over time that the 150 that you’re earning net of the cost of the hedge at the moment is more likely to go up in this sort of rate environment than it is sideways or down? Is that a way of thinking about it? Thanks.
