We’re continuing to invest in it. I’m very focused on cost. You mentioned that, but that isn’t a particular focus for retail. It’s across the whole business. I’m very keen that we have good cost discipline. We have good cost management, but also we invest in the business to drive those productivities and efficiencies out. So what I’d say in summary is I think we’ve got a retail — we’ve got a good retail bank. There are areas in which that bank could grow. We’ll obviously work on productivity and efficiency, but we’ll do that at a bank-wide level, not just in our retail bank.
Operator: Our next question comes from Chris Cant from Autonomous.
Chris Cant : I had one on your RoTE aspiration and one on the ’24 income guidance, please. So on the 2026 RoTE target, I just wanted to understand a little bit more about what you’re assuming here as a denominator. I think this is an area where consensus looks a little bit probably different to how you’re thinking about things. So if I look at your disclosures today, you tell us 225 bps of rate cuts. And you’ve given us a cash flow hedge reserve sensitivity of just over GBP 1 billion per 100 bps, so that alone would knock your cash flow hedge reserve down by over GBP 2 billion. You’re then going to have pull-to-par effects on top of that. You’re going to have the removal of the IFRS 9 add back on top of that. If I think about your RWA guidance, your CET1 target, you’re looking at about a GBP 27 billion CET1 base, which I think would imply, once you allow for those cash flow hedge reserve, movements, both the print today and the future sensitivity, probably for a TNAV in 2026 of about GBP 31 billion.
And I think consensus is quite a lot lower than that around 27 something or rather for ’26 on average. So is that math right? Because I think what that’s telling me is, if you think you can do a 13% RoTE on that meaningfully higher TNAV base, it’s about a GBP 4 billion net profit number, but it really comes down to that TNAV piece. And to your point, Katie, RoTE is you North Star, but it’s impacted by this math around the cash flow hedge reserve, which doesn’t appear to be factored into consensus, so I was just wondering if you could speak to that. Is that math the right way we should be thinking about it? Is that kind of GBP 31 billion peak at the right sort of level for the denominator, in your view based on your rate assumptions? And obviously we make our own.
And then on the 2024 guidance, just in terms of the comment around income being better in the second half than the first half. So I understand the argument around sort of deposit mix stabilizing and then we start to see more of a net tailwind from the hedge. The hedge starts to overpower the other forces, but in terms of your rate cut assumptions, you said 5 cuts starting from May. But I guess your rate cuts are back-end loaded in the year. And I presume you’re assuming within the guidance some negative pricing lag effects. i.e., there is that limitation for, say 6 weeks on the actual pass through to customers. And all of that negativity is then baked into your second half income guidance. So I just wanted to try to square the circle there.
How is it that, with all of that repricing lag effect, you still end up with income up in the second half?
Katie Murray : Thanks very much, Chris. So look. I mean, Chris, you’re absolutely right. And I’d probably encourage you, as you’re already there, but also others to kind of look at the denominator piece. I think it’s important for us. It’s been great to see the growth that we’ve got within the denominator this year, as we saw the GBP 25.7 billion at the end of 2023. Chris, I’m not going to give you a profit guide for 2026, as we go through there, but I think you’ve got the various component parts. That cash flow hedge will unwind as we go through. Rates have been volatile so it would be linear. I think, if you looked at what happened in rates just in the first part of this year and if I was to cut the numbers now, you’d actually see it reverse a little bit in the other direction, but overall with our rate assumptions, we’ll definitely see that continue to come down.
And that’s important for us. So if you look at the TNAV, think of the profits, think of the movement on the cash flow hedge. There are some other movements on some other reserves, but those are the 2 important ones. And then obviously deduct distributions, and then I think it will get you to a better kind of view on TNAV. And I think we need to kind of catch up a little bit on that. As I look to the income guidance, so second half better than first half: There are 5 cuts, starting in May. There’s — we have considered within those timing lags as to how long it takes to from the cut if you would to make the decision at that point how long it will take you to go through. Clearly, the absolute time when we make decisions on pass-through will be dependent on what’s happening in terms of competition and customer behavior.
