Operator: Our next question comes from Guy Stebbings of BNP Paribas Exane. I think we have an issue with Guy’s microphone, so we’re now going to go over to Fahed Kunwar from Redburn Atlantic.
Fahed Kunwar : Just a couple of questions. Firstly, on the returns point around the greater than 13% in 2026. I mean, if I look back to when you first gave the 14% to 16% guidance, which I think it was like August ’22, even your kind of quite conservative rate expectations, they weren’t actually that different then. If I look at the 5 year swap curve, I think it was running at like kind of like mid-2s or a little high 2s versus the 3.1% you’re assuming, so why have you — why have your return expectations come down versus that August 2023? It can’t just be base rates. Was the mix shift just far more than you had anticipated at that point? That’s question one. And the second question was on costs. I see sort of wage negotiations done, I think for 2024.
Does that mean actually the risk of costs missing, if inflation is stickier than we think is less because actually you’ve already negotiated the wages? And any sticky inflation would probably be a 2025 issue. Is that the way to think about 2024 costs?
Paul Thwaite : I’ll take costs. And then Katie, you can talk to the RoTE point. So, I think your thesis is good on costs, Fahed. As you say, we’ve agreed with the unions an offer that we think is appropriate and fair at around 4%. We obviously delivered on our costs this year. We’ve guided next year — sorry, ’24, that costs will be broadly stable. Probably worth pointing out that we do build into our cost guide the ability to kind of take restructuring on the people and the property side, but we prefer to take them in year rather than any extraordinary charges, so they’re all built into the plan, so we’re very comfortable on the cost guide. I think we’ve got a good track record over a number of years delivering on that line.
Katie Murray : So if I look at the bridge from why no longer 14% to 16%, I think there’s a number of things, Fahed, you need to kind of take into account. If I compare just to when we spoke in October, then it’s all a story of rates, in terms of the expectations that were there, but you rightly went back to kind of August ’22, when we first talked about that. And absolutely, rate expectations are not that different, but I think none of us at that point could have imagined the journey that rates went on when we saw swap curves go all the way up to 6% and then come down and then go back up again and actually what this then delivered in terms of the change in customer behavior and the mix of that. We were sitting at about 4% sitting in entire, we’re now sitting at 16% and expecting that to continue to increase.
So that’s been one of the things. I think there’s also been another couple of things. With that rate curve going up, we also saw inflation going up significantly. And we [indiscernible] 6.6% and 4%. These have all been things we’ve had to build into the cost line. We’re happy with how we’ve delivered on those, but obviously still feel the RoTE under pressure. And I think the most important thing also to think about is the denominator, the TNAV. So our TNAV is growing very well, very strongly this year. I think up 28 pence over the year. We predict it will continue to grow as you see that cash flow kind of unwinding, but the real difference from when we last spoke formally, in October, is that movements in rates which has been really bigger than any of us had anticipated.
Operator: Our next question comes from Ed Firth from KBW.
Ed Firth : I just have 2 strategic questions really for Paul, if that’s all right. My first one is if one looks at the sort of full length of this downturn. I guess one of the key characteristics or the differential characteristics has been much lower loan growth in the market as a whole and much better credit. I guess that’s, to me, one of the big highlights today is your credit outlook for this year given some of the stresses we see in the broader economy, so I just wonder. As you look forward, do you see that there’s — as a bank, there’s more appetite for loan growth going forward? Or and I suppose that’s really a question about supply versus demand. Is it a demand problem or a supply problem? Is that the key issue in terms of a sort of reasonably lackluster — because I guess the loan growth and the economic performance often go together.
