NatWest Group plc (NYSE:NWG) Q4 2023 Earnings Call Transcript

NatWest Group plc (NYSE:NWG) Q4 2023 Earnings Call Transcript February 16, 2024

NatWest Group plc  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the NatWest Group Annual Results 2023 Management Presentation. Today’s presentation will be hosted by Chairman Howard Davies, CEO Paul Thwaite and CFO Katie Murray. After presentation, we’ll take questions.

Howard Davies : Good morning, everyone, and thank you for joining Paul, Katie and me for our full year results call. This will be the last set of results the bank publishes before I stand down as Chairman. And in addition to our full year results this morning, we’ve also announced the appointment of Paul Thwaite as our permanent Group CEO. As you will know, Rick Haythornthwaite was announced as my successor in September last year. He joined the group board formally as a non-executive director at the start of last month and will take over from me as Chair on the 15 of April. He led the process to appoint our new CEO. The bank this new leadership team inherits is very different from the one I joined in 2015. The group has returned profitability, is more customer focused and is fundamentally stronger.

In my first year, we declared a loss of over GBP 2 billion. Last year, we report a profit of over GBP 6 billion. So as I prepare to leave, there’s a lot to be positive about. The strong returns delivered in 2023 enabled us to make further significant capital distributions to our shareholders through dividends and buybacks. And as you would expect, we’re working closely with UKGI as they explore potential retail share offer, which would further help in returning the bank to private ownership. I’m personally pleased the succession process has been completed and we can look forward with an incoming Chair and a new CEO who have proven skills to support the group’s continued progress and who I know care deeply about this business and its customers.

So, I’ll now hand over to Paul and Katie for an update on the bank’s performance. Thank you.

Paul Thwaite : Good morning, everyone. Naturally, I’m delighted to have been confirmed as the CEO of NatWest Group today and look forward to driving the very best performance we can for the benefit of our customers and shareholders. Our customers’ needs and expectations are changing at pace, as they engage with technology, adapt to new social trends and build ever more resilience in a fast-evolving world. Our priority is to deliver more value for customers, which in turn creates more value for shareholders. Over the last 6 months, the focus for me and my team has been on supporting customers as they manage the impact of inflation and a rapid rise in interest rates. This gives us an opportunity to be a trusted partner to customers at a time of ongoing change.

And by doing so, we are shaping the future of NatWest to deliver its full potential. So, I’ll start with the business update this morning. Katie will take you through the full year numbers. And then we’ll open it up for questions. Since our performance is grounded in supporting our customers, I’d like to begin by putting the financial headlines in that context. In 2023, we increased our lending to customers by GBP 9 billion. We opened over 100,000 new start-up accounts for entrepreneurs and more than 1 million current accounts for individuals. We helped customers to save, with GBP 21 billion more fixed-term savings at the year-end as well as to invest, growing assets under management and administration by GBP 7 billion. And we helped over 6 million customers manage their finances better with support such as financial health checks, understanding their credit scores and encouragement to save.

We provided GBP 29 billion of climate and sustainable funding and financing, bringing the total to GBP 62 billion since July ’21, so we are well on our way to achieving our GBP 100 billion target by the end of 2025. And we continue to support the growing renewable sector, where we have been a leading lender in the U.K. over the last 10 years. This customer activity underpins our strong financial performance. We delivered operating profit before tax of GBP 6.2 billion, with attributable profit of GBP 4.4 billion. Income was up 10% at GBP 14.3 billion, with cost growth of 5% to GBP 7.6 billion. Taken together, this resulted in a return on tangible equity of 17.8%. We remain committed to generating capital in order to reinvest in the business and make shareholder distributions.

Today, we’re announcing a final dividend of 11.5 pence, bringing the total to 17 pence. This is an addition to a directed buyback of GBP 1.3 billion last May and the GBP 500 million on-market buyback announced in July which will complete this quarter. We are also announcing a new on-market buyback of GBP 300 million, which is included within our CET1 ratio of 13.4%. We expect this to complete by the end of July. This brings total distributions announced for the year to GBP 3.6 billion. These buybacks have supported a reduction in the government stake from 46% at the start of last year to under 35% today. You will also be aware of the government’s intention to fully exit its NatWest Group shareholding by 2026, including a potential retail share offer.

Our performance naturally reflects the rates environment in 2023, but our strong capital and risk management made an important contribution too. You can see this in the strength of our balance sheet. On the asset side, our personal lending is almost secure and our corporate book is well diversified. This disciplined approach is reflected in the low levels of impairment at 15 basis points of loans. On the liability side, our deposit base has remained broadly stable. Our loan-to-deposit ratio at the year-end was 84%. And our repayments due by 2025 on term funding for SMEs stand at just GBP 4 billion. This balance sheet strength and well-diversified funding underpins our ability to continue supporting customers through the economic cycle. As you know, we were operating in a rapidly changing environment last year as persistent inflation led to interest rate rises of 175 basis points.

As a result, individuals moved balances from noninterest-bearing accounts to fixed-term products. They also drew on savings to pay down debt in the face of cost-of-living pressures. And in 2023, for the first time in at least 30 years, U.K. households repaid as much mortgage debt as they drew. This change in customer behavior clearly had an impact on our income and net interest margin as the year progressed. However, inflation has fallen and market expectations for interest rates have come down. So our plan assumes that rates will reduce materially this year and next. These expectations have flowed through to customer rates for both mortgages and fixed-rate savings, which have decreased by over 100 basis points from the peak. This means we are seeing early signs of improving mortgage demand and deposit migration to higher-rate savings accounts has slowed, yet mortgage payments are likely to remain elevated this year as customers pay down debt before refinancing onto a higher rate.

Business confidence is also improving, and our net lending to large U.K. corporates grew in 2023. However, overall demand from personal and business customers is currently muted. And together with the impact of lower interest rates, this will impact our 2024 income. Household and corporate balance sheets remained strong and the resilience of our customers is evident from our low level of impairments in 2023. We expect this to continue in 2024, despite a slight increase in unemployment. Of course, I recognize that heightened geopolitical uncertainty has potential implications for global trade and supply chain security, so whilst we expect inflation and rates to reduce, the timing and quantum of this is difficult to predict and we remain vigilant.

A significant benefit of the scale and breadth of our customer base is that it gives us access to large flows of data. We are using these insights to understand and react to customer behavior as the environment evolves. We believe the strength from our customer franchise positions us well for 2024 and beyond. We serve 19 million customers, meeting a wide range of needs in our 3 businesses: Retail Banking, Private Banking, Commercial & Institutional. We have leading market positions and we also have a track record of growing share in attractive segments. For example, we now serve around 20% of both the youth segment and new startup businesses. So we’re winning new customers and building for the future. I also know, from listening to existing customers, there is a clear opportunity to deepen these relationships by introducing more of our products and services alongside the expertise of our colleagues.

By serving our customers well, we create value for all our stakeholders. We are targeting growth in areas with attractive returns, managing for value by striking a balance between volume and margin. There is also more we can do to improve productivity and cost efficiency. We have a strong record on cost reduction and we’ll direct our investment spend to areas that deliver savings to mitigate ongoing inflation. We’re also actively shaping our balance sheet and deploying capital thoughtfully, which is helping to manage regulatory change. This discipline on both costs and capital will allow us to continue investing in the business and making attractive distributions to shareholders. Between 2021 and ’23 returns to shareholders totaled GBP 12.5 billion and a 28% reduction in share count led to higher earnings per share.

Against this backdrop, we have 3 key priorities all focused on driving returns. Our first priority is to continue growing our 3 customer businesses in a disciplined way, building on our strong market positions, so let me share some examples. We brought commercial and institutional banking together to deliver greater value for customers and the bank. And we are now able to serve the needs of a much wider range of customers in foreign exchange rates and capital markets. Over 1,500 of our mid-market commercial customers have now signed up for our foreign exchange services. Our leading mid-market business has an extensive network of specialist relationship managers across the U.K., which gives us a significant competitive advantage of scale and reach.

This segment delivers attractive returns and we see this as an area of further growth. In retail banking, we have grown our share to become the second largest mortgage provider in the U.K. Our mortgage business is well positioned, following significant multiyear investment with strong through-the-cycle returns. It is highly digitized and scalable and a driver of efficient growth when market demand and pricing are right. Our second priority is to drive bank-wide simplification. There is a lot more we can do to make it easier for our customers to do business with us, to improve engagement and productivity for our colleagues and to drive significant efficiencies and operating leverage. Since 2021, we have delivered run rate savings of around GBP 250 million a year through digitizing customer journeys, so we continue to simplify journeys across the bank in order to improve customer experience and deliver further savings.

We are streamlining systems and processes. For example, in our retail bank, we are integrating 5 legacy front-office systems into one digital platform to give us a single view of the customer. This has enabled us to spend more time with our customers and improve the quality of our interactions. We are also using artificial intelligence and data to improve productivity, and we have seen some very encouraging results from recent pilots. We’ve reduced scam losses; freed up time, to focus on customer relationships; and identified ways to reduce our complaints resolution time. This is a significant opportunity as we roll it out across the bank. Our third key priority is to deploy capital efficiently and maintain strong risk management in order to drive capital generation.

Our exit from the republic of Ireland is now largely complete, and we received a further EUR300 million dividend in the fourth quarter. 2023 was also the year we delivered on our CET1 ratio target of 13% to 14%, but we can do more to optimize capital allocation. This means working dynamically to capture attractive growth opportunities and being very disciplined at origination. We will also address RWA efficiency on the back book, for example, through greater use of insurance or risk transfer, where we are less active than some of our peers. So as you can see, we are very focused on the levers that we can control, but the macroeconomic environment, coupled with an expected reduction in interest rates and changes in customer behavior means that we are adjusting our target for return on tangible equity.

We now expect to deliver greater than 13% in 2026 whilst operating with a CET1 ratio of 13% to 14%. We are committed to delivering value for shareholders, so we maintain our payout ratio of around 40% for ordinary dividends, with the capacity for buybacks. And with that, I’ll hand over to Katie to take you through the full year numbers in more detail.

Katie Murray : Thank you, Paul. I’ll start with discussing our strong performance for the year. Income excluding all notable items was GBP 14.3 billion, up 9.8% and in line with the guidance we gave last quarter. Operating expenses rose 4% to GBP 8 billion, including GBP 7.6 billion of other operating expenses. Together, this contributed to a cost-to-income ratio below 52%. The impairment charge was GBP 578 million or 15 basis points of loans. Taking all of this together, we delivered operating profit before tax of GBP 6.2 billion. And profit attributable to ordinary shareholders was GBP 4.4 billion. And return on tangible equity was 17.8%, ahead of guidance, in part due to the recognition of historic tax losses. Turning now to fourth quarter compared to the third.

Income excluding all notable items was GBP 3.4 billion, down 2%. Operating expenses were GBP 2.2 billion, including the annual U.K. bank levy. The impairment charge decreased to GBP 126 million or 13 basis points of loans, bringing operating profit before tax to GBP 1.3 billion. Profit attributable to ordinary shareholders was GBP 1.2 billion, including a deferred tax asset recognition. And return on tangible equity was 20.1%. I’d like to now talk about key performance trends across 3 businesses on Slide 12. We have delivered strong returns across our 3 businesses in both 2022 and 2023. Retail Banking continued to be our highest-returning business in 2023 with good income growth. However, this was offset by higher costs and an increase in impairments, which impacted the return on equity, reducing it to 23.8%.

Private Banking return on equity was 14.8% and was affected by lower deposit balances and mix changes as well as cost inflation. Our Commercial & Institutional business delivered the strongest year-on-year improvement, growing income by 16% and operating profit by 27%. It is now the largest profit engine of the group, delivering GBP 3.2 billion or 52% of group operating profit, equivalent to a return on equity of 15.4%. Our business diversification enabled us to deliver a strong group performance whilst responding to a broad range of customer behaviors and market dynamics. Turning now to our 2023 income performance on Slide 13. Full year income excluding notable items was GBP 14.3 billion. And bank net interest margin was 304 basis points. Net interest income was 12.1% higher, benefiting from favorable yield curve movements, partially offset by the change in deposit volume and mix.

Non-interest income excluding notable items grew 2.5%, supported by increased customer activity and higher income from the markets business. Turning to the fourth quarter, underlying net interest income was GBP 2.7 billion, broadly stable versus the third quarter. Non-interest income fell 6.9%, reflecting seasonally lower trading and other income. Bank net interest margin reduced by 8 basis points to 286 which includes a 3 basis point drag from notable items. As expected, the rate of margin compression was slower than in the third quarter. Going forward, we will report group net interest margin which presents statutory group net interest income as a proportion of all average interest-earning assets. We see this as the most useful measure of how we are managing spreads between our interest-earning assets, including the liquid asset buffer, and our interest-bearing liabilities.

Bank NIM is a less-relevant measure now that interest rates are above 0. Full year group net interest margin increased 31 basis points year-on-year to 212 as a result of higher deposit margins, net of pass-through and mix changes and lower mortgage margins. Group NIM in the fourth quarter was 199 basis points, reflecting a gross yield on interest-earning assets of 450 basis points and 251 basis points cost of funding. I’d like to move on now to our disciplined approach to lending growth on Slide 14. We are pleased to have delivered another year of balanced lending growth across the group. Gross loans to customers across our 3 businesses increased 2.6% or GBP 9.1 billion to GBP 359 billion. During the first half, we delivered strong mortgage growth, whereas in the second half, we delivered strong corporate loan growth as we took a disciplined approach to capital allocation in a competitive and dynamic market.

During the fourth quarter, customer loans across our 3 businesses increased by GBP 1.1 billion. Taking retail banking together with private banking, mortgage balances reduced by GBP 500 million, as customer repayments off set new lending. Mortgage flow share for the full year was 14% or GBP 31.2 billion. However, this flow share reduced to 10.5% in the fourth quarter, as we managed the balance sheet in a smaller, more competitive market. Our stock share increased from 12.3% at the start of the year to 12.7% at the end. Unsecured balances increased by a further GBP 300 million in the quarter to GBP 15.8 billion, reflecting strong demand for credit cards. In commercial and institutional, gross customer loans increased by GBP 1.4 billion in the fourth quarter.

Within this, loans to corporate and institutions increased by GBP 2.2 billion, including higher revolving credit facility drawdowns, where utilization was close to pre-COVID levels at 25%. This growth was partly offset by companies continuing to pay down government scheme borrowing. Across 2023, our C&I customers have accessed bank loans for house building, acquiring vehicles and managing working capital. We have deepened relationships with our large corporate and financial institutions by providing increased lending, cash management and foreign exchange services. I’ll turn now to deposits on Slide 15. Customer deposits across our 3 businesses were GBP 419 billion at the year-end, broadly in line with the first quarter as expected. A reduction in the fourth quarter was primarily driven by our larger corporate and institutional customers as we managed down low-value deposits and as a result of normal year-end balance sheet management.

Across retail and private banking, deposits grew by GBP 4 billion in the quarter, mainly in term savings. The migration from non-interest bearing to interest bearing deposits slowed during the fourth quarter. Non-interest bearing balances were 34% of the total, down from 35% at the end of the third quarter and 40% at the start of the year. However, customers did continue to move balances to term accounts, which now represent 16% of our total deposit mix. This was slightly lower than our expectations as a result of active management in December yet up from 15% at the end of the third quarter and 6% at the start of the year. I’d like to turn to the drivers of deposit income on Slide 16. Deposit income was the key driver of group income in 2023, so it’s important to consider how the component parts of our deposit base may evolve and impact income in 2024.

During 2023, deposits across our 3 businesses reduced by GBP 14 billion, the majority of which was in the first quarter. Our noninterest-bearing deposits reduced to GBP 142 billion. And term deposits increased to GBP 68 million. As the deposit mix changed, so did the proportion of hedged and unhedged deposits. Starting with term deposits, where we lock in the margin at origination. Given the strong growth in a competitive market, these are some of our tightest deposit margins. Overall, we expect term deposit income to grow moderately in 2024 due to higher average balances. Our unhedged deposits reduced to around GBP 166 billion at the year-end, and they earned the widest margins. These are managed rate deposits and this is where we expect to see the most significant income reduction as the base rate reduces.

Turning now to the product structural hedge. The notional balance at the end of 2023 was GBP 185 billion, down GBP 23 billion from the start of the year. We expect this to reduce further in 2024, reflecting the reduction in eligible balances during 2023. We expect the yield to increase from 152 basis points in the fourth quarter through reinvestment of maturities at the prevailing 5 year swap rate. This will more than compensate for the notional reduction, supporting higher structural hedge income in 2024, with more meaningful growth in 2025 and 2026 as eligible balances stabilize. Let me explain how this feeds into our rate sensitivity disclosures on Slide 17. The change in deposit mix contributed to a significant increase in the costs of our deposit funding from 0.5% in the fourth quarter of 2022 to 2% in the fourth quarter of 2023.

This moderated in the fourth quarter with an increase of 20 basis points compared to 60 basis points in the third as customer rates stabilized and migration to higher-interest-paying accounts slowed. Lower deposit balances, mix changes and our 12-month look-back approach to the structural hedge means our balance sheet has become less rate sensitive in absolute terms. The chart on the right is our illustrative interest rate sensitivity disclosure. It shows the year 1 impact on net interest earnings for a 25 basis point downward shift in the yield curve. This illustrative disclosure naturally has limitations, not least because it assumes a static balance sheet and a parallel shift in the yield curve, but it helps explain how our income is affected by change in interest rates both in relation to the structural hedge and the managed margin.

The managed margin is the most relevant sensitivity for changes in the base rate and deposit pass-through. Based on our year-end balance sheet, a 25 basis point downward shift would reduce annual income by GBP 125 million. This is mainly driven by our unhedged deposit balances of GBP 166 billion at the year-end. It assumes a pass-through of around 60% on our instant-access savings of GBP 209 billion at the year-end, with minimal timing lag. As you think about our income progression through 2024, you should consider, first, the quantum of pass-through to customer deposit rates; and second, the associated timing lags, including the contractual notice periods. We continue to actively manage our deposits, aware that there is uncertainty on both the timing of rate cuts, competition and how our customers will behave.

Turning to Slide 18. As you have heard, interest rate changes associated pass-through and the second-order impacts on customer behavior are the key considerations when we think about income in 2024; and they remain difficult to predict. So to summarize, the 4 key income drivers today are: First, our plan assumes the Bank of England will start to reduce rates from May, reaching 4% by the end of 2024. We assume this will be reasonably spread out and in 25 basis point increments, though actual outcome will be different. We expect to pass-through changes in interest rates to our customers’ deposit rates, but the quantum and timing is subject to competition as well as contractual terms and conditions. The second driver is deposit volumes and mix.

Overall, we expect deposit balances to follow a similar pattern to 2023, reducing in the first quarter due to annual tax payments and then some recovery after that subject to market dynamics. We anticipate less change in deposit mix than we experienced in 2023. Third, we expect the hedge to deliver a tailwind in 2024 despite a reducing hedge notional and for the strength of this tailwind to increase into ’25 and ’26 as volumes stabilize. And then finally, on the asset side, we experienced significant mortgage margin pressure in 2023 as our mortgage customers refinanced onto higher rates at a tighter margin. This headwind continues to moderate. And we expect the mortgage book margin to stabilize around the middle of 2024, although this is dependent on market dynamics.

Taking all of this together, we expect 2024 income excluding notable items to be in the range of GBP 13 billion to GBP 13.5 billion. Turning now to costs on Slide 19. Other operating expenses were GBP 7.6 billion for 2023, in line with our guidance. That’s up 4.6% on the prior year mainly due to staff costs, which are almost half of our cost base. This includes the average annual wage increase of 6.4% and a one-off payment in January last year to support colleagues with the rising cost of living. We also faced cost inflation on utilities and other contracts. Our ongoing investment in technology is reflected in higher depreciation and amortization costs. In 2024, we expect to hold other operating expenses broadly stable. You’ll see that our fourth quarter costs, excluding Ulster and the bank levy, are annualizing at around GBP 7.5 billion, including the inflation embedded into our cost base during the year.

We expect to incur around GBP 100 million of Ulster direct costs and around GBP 100 million for the bank levy, which brings annual run rate costs to around GBP 7.7 billion. In order to keep costs broadly stable from here, we will continue our strong track record of mitigating inflation by making cost savings. I’d like to turn now to Slide 20. We have a well-diversified prime loan book that is performing well. Over half of our group lending consists of mortgages, with an average loan-to-value of 55%; and around 70% on new business. Our customers continue to take advantage of the best possible rate in the 6-month window before roll-off. And recent behavior has shown an increased preference for 2-year deals. We monitor the impact of higher rates on customers closely after they refinance, and whilst arrears have increased slightly, they still remain low.

Our personal unsecured lending is less than 4% of group lending and is performing in line with expectations and good-quality new business. Across our wholesale portfolios, our corporate book and other exposures such as commercial real estate, remain well diversified and are still performing well. And we are not in scope for the FCA review into motor finance. Let’s move to impairments and our economic scenarios on Slide 21. We have reviewed and updated our economic scenarios, both forecasts and relative weightings. Our weighted average expectations for GDP are slightly improved in 2024, but with a small decline in 2025. We also anticipate a slight deterioration in levels of employment in both ’24 and ’25. Our balance sheet provision for expected credit loss includes GBP 429 million of post-model adjustments for economic uncertainty.

We remain comfortable with 93 basis points of coverage of the book, which continues to perform well. We reported a net impairment charge of GBP 578 million for the full year, equivalent to 15 basis points of loans. The current performance of the book, combined with our updated economic outlook, means we are expecting a low impairment rate below 20 basis points in 2024. Turning now to look at capital and risk-weighted assets on Slide 22. We ended the fourth quarter with a common equity Tier 1 ratio of 13.4%. In 2023, we generated 154 basis points of capital before the impact of non-recurring notable items and RWA model updates totaling 43 basis points. This net capital generation was offset by distributions to shareholders equivalent to 195 basis points.

RWAs increased by GBP 6.9 billion in the year to GBP 183 billion. This includes a GBP 7.9 billion increase from business movements; and a further GBP 3 billion of model updates, which includes the CRD IV regulatory inflation we discussed in Q3. This was partly offset by a GBP 4 billion reduction as a result of our phased withdrawal from the republic of Ireland. We continue to expect RWAs to be around GBP 200 billion at the end of 2025, including the impact of Basel 3.1 and further CRD IV model development. This is subject to final rules on credit and output floors which we expect later this year; as well, of course, as regulatory approval. As is our practice, we will continue to update you on development of RWAs. Turning now to our track record on delivering for shareholders on Slide 23.

Our capital generation has enabled us to support our customers in difficult times as well as invest for growth and shareholder distributions of almost GBP 12.5 billion over the last 3 years. Our improving profitability has supported increases in the total ordinary dividend in 2023. Combined with our multiyear buyback programs, this has delivered a significant improvement in the dividend per share of 17 pence, up 3.5 pence year-on-year. Our share count has reduced by 28% since the end of 2020 or 30% pro-forma for the GBP 300 million buyback we announced today. We remain committed to returning surplus capital to shareholders, as demonstrated by our strong track record. Turning to guidance on my final slide. In 2024, we expect income excluding notable items to be in the range of GBP 13 billion to GBP 13.5 billion; group operating costs, excluding litigation and conduct to be broadly stable versus 2023; and the loan impairment rate to be below 20 basis points, delivering a return on tangible equity of around 12%.

And with that, I’ll hand back to Paul.

Paul Thwaite: Thank you, Katie. So to conclude. Our priority is to continue supporting our customers in an uncertain macroeconomic environment. We are pursuing opportunities for targeted growth across our businesses, with a focus on returns as we strike a balance between volume and margin. By combining this disciplined approach to growth with tight cost control and efficient capital allocation, we plan to drive strong capital generation so that we can both reinvest in the business and continue making attractive distributions to shareholders. With a payout ratio of around 40% and capacity for buybacks, we remain fully committed to creating sustainable long-term value for shareholders. Thank you. I will now hand back to the operator.

See also Top 20 Companies With the Most Cash Reserves and Jim Cramer’s Top 10 Stock Picks This Week.

Q&A Session

Operator: [Operator Instructions] Our first question comes in from Aman Rakkar of Barclays.

Aman Rakkar: First of all, congratulations, Paul on the appointment. And I wanted to just pay my regards to Howard, on your tenure at the firm, I had a couple of questions. One, I think it’s the main question that I’m getting this morning is around your revenue guide for ’24. And obviously, at face value, there is a pretty material kind of step off in the revenue run rate through ’24. And there’s clearly some downside versus consensus, but I guess, to push back against that it doesn’t really feel that surprising to see you come out with a revenue number that’s that low. I think the uncertainty that’s faced by rate cuts, competition, various bits and pieces — I think it kind of makes sense, but can you help kind of elaborate on exactly a bit more on the moving parts there and whether you recognize the conservatism here?

And indeed I’m sure you won’t answer this, but I’ll ask you anyway. But if I was to look at the spot rate market right now, it is not implying base rate of 4% at year-end. It’s implying something more like 4.4% at the end of the year. I know these things are volatile, but I don’t think we’re going to get the rate cuts predicated on the current forward curve that you guys are basing your guidance on, so this does look to me to be quite a conservative revenue guide for ’24. I’d really be interested in your thoughts, any help there. I had a second question. Shall I give it to you now or afterwards?

Paul Thwaite: Keep going, Aman.

Aman Rakkar: Just in terms of distributions. I was interested in — obviously it’s great to see the GBP 300 million open-market buyback. The retail share offering that the government is looking to kind of execute this summer, I’m interested in how this influences you’re thinking at all. It doesn’t look to me like you’ve budgeted for a directed buyback in May. Maybe you’re confident on capital generation in the coming quarters, which would be a good thing, but retail share offering might mean that there’s less likelihood of a directed buyback. And then hence, do you then feel as though you can kind of execute open-market buybacks more regularly? Again anything you can give us on your updated approach to distribution is really helpful.

Paul Thwaite : I’ll take number two and number three. And then Katie will allow you to talk through the revenue guide. So on — Aman, on directed buyback, simple answer is it is in our plans and our budget. So that’s very simple. So we have assumed that we make the DBB. Obviously, we can do that after the annual anniversary. On the question around — or the challenge around conservatism and interest rate outlook, I hear you in terms of the where the curve is now. I’m sure you’ll understand we have to look at the balance of the economic consensus. Even in the space the last 7 or 10 days, as you well know, it’s moved around, so what we’ve done is — we’ve got a set of assumptions there which has 5 cuts in ’24, 4 in ’25, with the first one in May.

What I would say is Aman, is that we’ve been the — I guess we’ve given a lot of disclosure around the sensitivities, so for those who want to take a different view around some of that volatility, it’s pretty easy to do given the disclosures we’ve got, depending on where your views are on the 5 and 4, 4 and 3, 3 and 2 et cetera. So that’s where we are on those two. Katie, do you want to talk revenue guide?

Katie Murray : As I look at it, as you know, there’s a number of variables. And even in your question, I think you kind of know the answer I’m about to give you but — that are impacting that kind of income range. The customer behavior has been relatively difficult to predict. And we may see different competitive dynamics, so the way that I think about it is I would think of 4 things as you try to kind of build in with your own model. Obviously, base rate cuts, Paul has already talked about them. We’ve got 5 in for May and 4 in for later. The timing of that rate cut is important for income. We’ve got it in — starting in May. It could be different from that, but as Paul said, you’ve got the sensitivities there. You can take a view on that.

The second one, deposit volumes and mix. We expect deposit balances to fall a little in Q1 as a result of tax payments and thereafter move broadly in line with what you see happening in the market. We do expect the deposit migration to continue into 2024 but obviously at slower pace than we’ve seen. As we talked about it, Q3, we could already see that slowing down, but again we don’t expect that to be linear. The third thing, the structural hedge, you’re very familiar with that it’s tailwind in 2024 as the higher yield offsets lower volume. And then finally, mortgage volume and margin, which I’m sure we’ll get into in more detail as the call goes on. Overall, as we look at the income, we’re very focused on managing both sides of the balance sheet to make sure that we deliver our income and our returns guidance.