Or good evening, depending on where you are joining from, and thank you for attending our half one results presentation. Today, I will give you an update on the progress we've made with our digital first strategy, both deliverables to date and plans for the second half of the year. I will then hand you over to Clifford to walk through the financials. Over the first half of the year, we've made good initial progress delivering against the accelerated digital strategy which we announced in November. I'm pleased also to report a continued improvement in our financial performance, and this has been supported by the strategic momentum in the business, combined with an improved operating environment. Our statutory profit before tax of GBP 315 million was significantly higher than half one 2021, with stronger underlying profit of GBP 388 million.
We have also delivered a strong CET1 regulatory ROTE. Total income improved 16% versus H1 2021, with a stronger contribution from both net interest income and other income, driven by a positive rate environment and a continued improvement in customer activity levels. I am particularly pleased with our net interest margin performance, which strengthened significantly to 183 basis points for the half year, and we now expect NIM of between 180 and 185 basis points. Other income of GBP 83 million also increased, reflecting higher customer and business activity. Underlying costs of GBP 456 million were broadly stable year-on-year and despite the higher inflationary backdrop than anticipated, we continue to be well-placed to achieve our broadly stable guidance for full year 2022, GBP 5 million of gross cost savings by full year 2024.
Asset quality remains robust, with a low impairment charge of GBP 21 million or 6 basis points cost of risk. Notwithstanding the post-COVID recovery, we remain cautious going forward given the combination of the Ukraine conflict, rising interest rates, inflation, and the cost of living increase. Having returned to paying a dividend alongside our full year 2021 results and following the group's successful participation in its inaugural stress test last year, we are pleased to update the returns policy. The group will operate in a CET1 target of 13%-13.5% in the long term, although we will operate above this level for a period due to the macroeconomic considerations I have mentioned above. The group will also target a 30% full year dividend, is expected to represent around one-third of the prior year's total dividend beginning H1 2023.
Dividends may also be supplemented by buybacks, subject, however, to ongoing assessment of surplus capital, market conditions, and regulatory approval. Given our strong capital position, the board has announced an interim dividend of 2.5p. Let me now turn to our view of the economy. I've set out here the economic outlook from third-party provider Oxford Economics, which has informed our IFRS 9 modeling. The biggest change in the backdrop since we updated our full year results is the increase in inflationary pressures in energy and other commodity prices, including food, with the Bank of England increasing rates and a significant steepening of the yield curve in response. The latest outlook for GDP currently remains resilient despite slowing growth in Q1, and the base case suggests that the economy has broadly recovered back to pre-pandemic levels.
Consumer activity levels remain strong across our credit card book with spend across all categories, including travel. There is some potential that we could see slower growth in certain segments, such as the mortgage market as rates rise further, but to date, that's been limited. Expectations for peak unemployment levels continue also to reduce in the most recent outlook, with levels predicted to remain below 4% in the base case. Our early warning indicators also continue to be benign. While the outlook is more uncertain, we are tracking these inflationary pressures as happening on the costs of living for individuals and our business customers. However, overall, our book is performing well and will be closely monitored. Let me now return to slide six on growth.
We have continued to focus on leveraging our brand to drive digital growth in key parts of the year, with relationship deposits and unsecured balances continuing to benefit from strong demand. The launch of new propositions and extended loyalty schemes has also been successful. Our national launch of the business bank will ensure that we are well-placed for growth over the remainder of the year as relationship deposits grew 4.2% at half one, benefiting from higher new sales of our Virgin Money personal and business current accounts. PCA sales continue to be supported by attractive switching offers, and we added the option for debit card cashback to PCAs in January. To date, circa 120,000 customers have signed up and are earning, on average, 7.5% cashback. PCA sales in Q2 were double those of Q1.
Since the launch of the rebranded Virgin Money PCA in late 2020, we have opened circa 180,000 new PCAs. We will continue to drive this growth by introducing new packages supported by Virgin Red. Unsecured lending grew 7% over the half, supported by record new credit card account opening levels. Q2 saw circa 175,000 new accounts opened, beating the previous record set in Q1. Our overall proposition remains really strong with prudent underwriting and circa 350,000 customers have now signed up for our cashback. Strength of our entire credit card portfolio has seen us deliver above-market growth, and we now have circa 8% share of the UK cards market. We have implemented installment credit capabilities, allowing our customers access to a buy now, pay later functionality in the credit card mobile app.
Importantly, this option is offered within a customer's existing credit limit. Our version of buy now, pay later is supported by deep experience in risk management, anti-money laundering, and of course, qualifying credit criteria. Our digital BCA was launched in November. This misses debit card cashback and access to new propositions, including M-Track and our soon to be launched marketplace. The strength of the existing proposition has doubled BCA sales in Q2 versus Q1. BAU business lending saw a 20% increase in drawdowns quarter-on-quarter as the lending pipeline builds well into H2. This generating quarter, although the overall book reduced 2.5% in the half, which is a reflection of a 13% reduction in the government scheme lending book.
The government lending book is performing as expected, and claims for defaults have been paid in full by the HM Treasury, and instances of fraud are extremely low. I will now touch on the digital momentum of the bank. I'm delighted with the momentum that we have achieved at all three of our key strategic digital themes outlined in November. We announced, if you recall, our intention to move to a fully digital capability with origination, full digital processing, and a strong pipeline of new propositions, supported by a digitally led employment model, which we call A Life More Virgin. Digital sales of personal banking products excluding mortgages, are now 97% of total sales, and PCA digital adoption has picked up from 62% to 64%, driving towards our 80% target by full year 2024.
We have made good progress in digitizing key customer journeys with 42% now seen at full year 2021. An example of processing efficiency is our voice-based interactions, which have reduced 10 percentage points as digital solutions such as chatbots are introduced. Chatbots were first deployed in January, and we now have dealt with circa 650,000 customer queries, 55% of which were without colleague intervention. This percentage will increase over the rest of the year and will materially improve efficiency and customer service. We are also continuing to make strong progress in the colleagues and property work stream. We launched A Life More Virgin earlier this year, and delivered gender-neutral, harmonized working terms, enhanced colleague benefits, and a trust-based approach which enables flexible and remote working.
This has allowed us to tap into new, more diverse talent pools and applications for positions of Virgin Money have risen dramatically as a consequence. As a result, engagement scores for the period have increased to 73% from 68% at full year 2021. As we continue to evolve our senior leadership team for our digital future, we have also made progress on the diversity of our senior leadership, and I am pleased the group in November 2021 as Group Chief People and Communications Officer, and Susan Poot, who joined the group in January 2022 as Group Chief Risk Officer. As we forecast, greater remote working capability is also enabling the group to reduce its property footprint by more than 20% since full year 2021. Branch numbers have been reduced as announced in September 2021.
The changes in customer trust will probably continue to evolve, and we will monitor customer behavioral changes closely. We are mobilizing the first phase of our cloud migration in partnership with Microsoft, which will begin in full year 2023 and will drive greater cost efficiencies. We are also making good progress on the digitization of the bank's legacy applications while building the new applications required to support the new cloud infrastructure. Let me now turn to slide eight, which looks ahead to the next six months. In half two, we will continue to focus on growing in our target segments and delivering exciting new digital propositions for customers while at the same time continuing to improve our efficiency and customer service. We're making really good progress building our digital wallet with our partner, Global Payments.
As signaled in November, the wallet will offer enhanced product and payment function in Virgin Red, and we remain on track to share the first iteration of the wallet later this year. Following the successful launch of our debit card cashback program across business and personal, we will soon launch our Gen Z Multiply proposition, which is a subscription-based installment credit offering. This is designed to help Gen Z customers build their credit scores while accessing credit responsibly. In the second half of the year, we will also build on our M-Track proposition for business customers. M-Track makes it much simpler for small businesses to manage their money, saving them time and giving them control by providing customers with a snapshot view of their business performance. This snapshot draws together data from their current account, accountancy, social media, and other business tools.
We will also launch an integrated business marketplace, which helps customers realize business opportunities and to access and integrate specialist solutions such as expense management, tax management, business insurance, invoice discounting, and many other services which are important to small businesses. We've developed this customer solution in partnership with Fintechs, and the combination of the M-Track allow us to deliver a unique offering in the marketplace. In the second half of the calendar year, we will also deliver our automated direct mortgage capability. Utilizing a modern cloud-based platform, it will drive improved service across both direct and intermediary channels with better turnaround times for our customers and higher conversion. Finally, following the recent launch of our new digital travel insurance proposition, we will broaden our offering and unlock further business opportunities, starting with the launch of a refreshed home insurance proposition.
This combination of new propositions will I think, position Virgin Money as a leader in digital innovation and will drive our growth potential. Let me now pass you over to Clifford to take you through the key financials. Clifford?
Thanks David. I'm pleased to report very strong financial performance in the first half with good momentum reflecting our digital strategy and execution. You'll recognize slide 10 from the full year where we reported strong progress across our key metrics. You can see here we've developed further this track record during the first half. As David explained, we've been working and sort of continued to grow relationship deposits and unsecured balances, shown top left on slide 10. Top right, you can see that commercial performance has supported a very strong net interest margin improvement to 183 basis points in the first half. With costs and cost of risk well controlled, we continue to improve return on equity, reporting 11% underlying basis, and with the gap to statutory further narrowing. Consequently, capital continues to be strong, supporting the interim dividend per share of 2.5p.
We're pleased with our performance in our inaugural stress test, enabling us to announce today our updated capital framework as promised. Now turning to the details for the first half performance from slide 11. I'll comment on profitability first. David has given you the highlights, and I'm pleased to report a strong performance with 58% growth in underlying. That performance reflects improved NII, with NIM increasing by 27 basis points relative to the first half of last year. Other income at GBP 83 million, reflecting improving activity levels. Costs broadly stable as promised, and impairments remaining low. Moving now to statutory profit on slide 12. It's good to see strong underlying performance also driving improved statutory profit in the first half. In line with our digital first strategy, there was a GBP 46 million charge in the first half.
In the second half, as our digital first strategy builds momentum. Tangible net asset value per share improved to 313p, largely driven by statutory profit. I'll now talk you through the balance sheet, starting with funding on slide 13. We delivered further growth in customer relationship balances, which were up 40% by a strong performance in new current accounts. We improved our funding mix, reducing more expensive term funding during the period, which drove the overall reduction in cost of deposits despite higher base rates. It's good to see relationship deposits now comprising 50% of total customer deposits. A pleasing milestone. We increased our wholesale funding given the reduction in term deposits. Moving now to lending on slide 14. Total volumes broadly flat across the period, with strong growth in unsecured, offset by modest reductions across mortgages and total business.
In mortgages, we've been selective on new business volumes given the competitive backdrop. At the full year, I mentioned that we were seeing spreads below the back book. That trend has continued through the first half. We're comfortable with our defensive performance, and we'll look to regrow the mortgage book with the market when pricing is more attractive. Business, reflecting the reduction in government guarantee lending schemes as expected. In the business as usual business book, we saw growth in balances in the second quarter. As David mentioned, we're building a strong pipeline here into the second half of the year, and we expect to see these balances continue to grow. I'm delighted with our performance in unsecured, where we've grown balances by 7%, led by cards where we continue to grow market share.
In March, we saw the highest ever amount of monthly retail spend growth for the remainder of the year, supported by the strength of our digital propositions. Moving on to our net interest margin on slide 15. Our net interest margin of 183 basis points for the half year was strong. We've shown good momentum through the year, allowing us to upgrade our full year guidance to between 180 and 185 basis points. The uplift in margin through the half year was driven by our deposits performance as we continue to prove our pass through across the sector with rising rates. Structural hedge reinvestment benefiting from the steeper yield curve and good growth in high yielding unsecured lending. These positive factors were partly offset by mortgages with new mortgage volumes written at spreads meaningful earlier.
Looking ahead to the remainder of the year, we expect full year net interest margin in the range of 180-185 basis points, reflecting further growth in high yield lending and higher interest rates. A lower contribution from deposits as the savings market normalizes, offset by headwinds from low mortgage spreads. Moving now to our. I'll update you on our structural hedge first and then move on to our rate sensitivity. On the left, you can see at H1, the group had GBP 32 billion of balances in the structural hedge, having increased the size of the hedge in October last year. You'll note that the average yield has increased from around 45 basis points in Q1 to 52 basis points in Q2, reflecting the high rate earned on reinvested balances.
You'll recall we also have a legacy hedge book in full year 2020. The full year 2021 contribution was around GBP 150 million, and the full year 2022 contribution is expected to be around GBP 120 million from the legacy hedge. Overall, a strong and increasing contribution from our structural hedge going forward. On the right-hand side, we've set out what this means for interest rate sensitivity. In year one, given the scale of our structural hedge and using our standard pass through assumptions, we benefit significantly from rate rises recently as deposit pass through has been low. We've also disclosed now our interest rate sensitivity in years two and three with the benefit in these years relating to the rollover of the structural hedge which builds up meaningfully over time in the rising rate environment.
I'll move on to non-interest income on slide 17. I'm pleased with our non-interest income performance, which was up GBP 11 million year-over-year, and up GBP 7 million relative to H2 2021, excluding fair value on one-off gains. In personal year-over-year, largely driven by high interchange income from increased retail spend as a result of easing of lockdown restrictions, as well as higher credit card fees. Business fee income also improved year-over-year, driven by higher account fees and interchange income, and mortgage income was broadly stable. In the near term, we expect non-interest income to remain robust given the full easing of restrictions and the general increase in activity levels. Over time, we're targeting non-interest income to rise as a percentage of total income as we see contributions from the various initiatives we've set out on this slide. Now to costs on slide 18.
You'll recall we set out our plans to accelerate our digital strategy alongside our full year 2021 results and guided to broadly stable costs in full year 2022. We're very much on track. Investment program and then on our cost performance. We've made good initial progress in taking costs out of the business, delivering GBP 28 million of annualized gross savings during the first half. This has cost GBP 46 million, reflecting our digital-first investment program. We remain on track to deliver around GBP 175 million of gross cost savings by full year 2024, with around GBP 275 million of digital development spend. In terms of our overall performance in the first half, costs were broadly stable year-over-year at GBP 456 million.
Gross cost savings earned in the period were offset by inflation and growth, including wage inflation and higher digital development. Our guidance for full year 2022 remains unchanged, and we expect underlying costs to be broadly stable relative to full year 2021. Moving on to our asset quality on Slide 19. I'm pleased with the quality of our lending book, and we are well placed to manage through current risks and uncertainties. We are, of course, keeping a close watch, though we have no meaningful direct exposures to either Russia or Ukraine as a UK-focused lender. Overall, our final ECL provision of GBP 479 million represents a reduction of GBP 25 million from full year 2021 set out on the left. That performance reflects our solid credit quality, which has remained resilient throughout the year, with low arrears and default levels and refreshed economic scenarios.
We reduced GBP 2 million, including an additional PMA of around GBP 25 million to take into account possible impacts of affordability stresses on existing customers. Despite the reduction in provision, we've maintained a strong overall coverage ratio of 66 basis points, which remains above pre-pandemic levels. This has resulted in a modest income statement impairment charge of GBP 21 million, equivalent to a cost of risk of 6 basis points. Looking ahead, we expect the group's cost of risk to rise through full year 2022 towards through the cycle levels. Remains uncertain, especially with high rates of inflation increasing the overall cost of living. We've yet to identify any material concerns across our lending portfolios, but we are monitoring the situation very closely and have also taken additional underwriting measures to reflect affordability stresses on new customers. I'll now turn to capital on slide 20.
Our 14.7% CET1 ratio, which represents a 35 basis points increase from the full year. Looking through the benefit of software intangibles, which is now being removed. We saw strong capital generation in the first half of 2022, reflecting 103 basis points of underlying profits, offset by modestly higher RWAs, AT1 distributions, 27 basis points of adjusting items, and a further 25 basis points for the dividend accrual. Looking to the remainder of the year, we expect CET1 to remain broadly stable, reflecting continued capital generation from ongoing statutory profit, offset partly by RWA growth as we target growth in higher risk-weighted unsecured business lending, as well as a further dividend accrual for the final. Our full year 2022 RWA expectation does not include any benefits from the move to IRB for our credit cards portfolio and the adoption of hybrid.
Both of these are dependent on regulatory approval, with hybrid models expected to take effect from full year 2023 and cards IRB transition after that. We're pleased to be paying an interim dividend as part of our updated capital framework, which I'll talk you through on the next slide. We're delighted to announce our updated capital framework alongside our half year result as promised. Target CET1 target of 13%-13.5%. As David mentioned, given the heightened current macroeconomic uncertainty, we expect to operate above this range for the time being. On the left-hand side of the slide, we set out how that target range compares against our. We're also pleased to return to paying dividends sustainably and are committing to a full year dividend payout of 30%.
This payout supports our expected growth plans and allows for at least some organic net capital generation. This first year we're paying 2.5p dividend at the interim and going forward, we expect to pay around one third of the prior year's total dividend alongside our interim results with the remainder as a final. As David mentioned, we'll supplement the ongoing dividend with buybacks subject to ongoing assessment of surplus capital, market conditions, and regulatory approval. In terms of timing, we expect that any buybacks would be aligned to our May interim result alongside our November full year results. This timing reflects the conclusion of the Bank of England stress testing process and subsequent buffer determination, and which is generally at the end of the calendar year. We've not ruled out buybacks for the current financial year.
However, we would need to take into full consideration, and any buyback would remain subject to regulatory approval. Finally, I want to conclude with our full year guidance and medium-term outlook on slide 22. We've given guidance on KPIs for full year 2022 throughout our presentation and set this out on the left-hand side. We're on track for the guidance we gave at full year 2021, and in addition, we've upgraded our full year 2022 NIM guidance again, and we've also updated our capital framework and dividends as promised. We're maintaining our medium-term outlook, repeated here on the our double-digit statutory return on tangible equity, and now including our updated capital framework. I'll now hand back to David for his concluding remarks.
Thanks Clifford. In summary, I believe that Virgin Money is well positioned for the future. While there is an uncertain environment in the UK and the rest of the world, our results are strong, our books are performing well, managing our margins well, and achieving growth in our targeted areas. We are also making good progress on process automation, cost reduction, and the delivery of digital propositions, and I am confident in our future performance given our prudent management of the balance sheet. Thank you all for your attention. With that, I'll now hand to the operator. Thank you.
Ladies and gentlemen, if you would like to ask questions, please press star followed by one on telephone keypad now. If you change your mind, please press star followed by two to withdraw the questions. We have our first questions comes from Benjamin Toms from RBC, London.
Morning both. Thank you for taking my questions. Firstly, can you just tell us what deposit betas have been through this rate cycle and for the last rate rise? If I can't push you on a number, can you give color on whether this has been consistently low or whether you've seen an uptick since the last rate rise? Do you think that they'll stay low for the next 25 basis points? Secondly, on PMAs, they're about 37% of provisions, which screens as quite conservative rather as opposed to peers. What's your current thinking on how these will unwind, and how should any unwind be thought about in the context of a 30% dividend payout ratio? Would you expect any release to flow through into dividends?
Benjamin, maybe Clifford do you want to start on those?
Yeah. Thanks Ben. I think on deposit beta, I'm not gonna give specific numbers. It's clear the last rate rises have been low deposit beta across the sector, including us. We've been selective in terms of propositions. I do expect the deposit market to normalize. I think we're seeing some of that already in the last few weeks after our period end. Particularly as growth in the asset base picks up, you're seeing banks starting to price up and pass on base rate rises. In terms of PMAs, yes I think we do have a decent quantity of PMAs. I mean, we see that as a strength in the current environment.
We remain cautious, so our provisioning. In terms of payout, we think the right approach to dividend is a payout ratio. We're not exceptionals, these are positive or negative. You should expect us to pay out 30% of net earnings after. I mean, I wouldn't rule out true exceptionals, but the principle is that we'll pay out 30% of net assets as you've seen.
This period, we have a decent amount of exceptionals, and we've paid out an amount after that. Ben, I think that answers your questions.
Thank you.
Thank you. We have our next question comes from Ed Henning from CLSA . Ed, your line is now open.
Thank you. Morning, and thanks for taking my questions. Actually just following on from the last one on the deposits and the NIM outlook in the second half. You've got a second quarter NIM of 189, and you're calling for a full year of 180-185 with a second half of 183. It's a significant fall from the second quarter. You've talked about a lot of positives and one negative being the mortgage competition. Is it also in there the normalization of the deposits that have been more positive now that'll flow through in the next quarter so that it's artificially high a little bit in the second quarter as the first question?
Clifford?
Yeah. Look, I think you're right. Our guidance, I mean looking back, we've been prudent and we tend to give out prudent guidance. I would factor that in. The two themes you've highlighted, one is, mortgage spreads and, we're currently writing mortgages, at spreads below our current book, so that we expect that continues. I mean, we're pleased to see some pickup in customer rates in the last few weeks, but that trend would need to continue to mitigate that dilution. I think on deposits, I mean we're calling a normalization of the deposit market. I think our first half, and the last few months has been quite striking about how limited the pass-through, of base rates, deposit rates has been. In our guidance, we've reflected normalization of that. You know, you're quite right.
We would expect NIM to sort of track down based on those assumptions. That reflects your observation views on the market, whether it's base rates or mortgage spreads or interest rates more generally. I think we've been clear on the assumptions of which our guidance has been made.
Okay, now that's very helpful on the deposits. Looking forward obviously, if that deposit environment's normalized and you do get continued benefits of base rate rises coming through in beyond 2022, while mortgage competition is elevated, do you anticipate still net benefits going forward from the interest rate in 2022?
Just reflecting on your question Ed, but I think look, deposit pass-through has been limited, and you see that benefit come through on NIM.
Mm-hmm.
You know, in our guidance, we've definitely moderated that. You know, that might turn out to be more prudent. I think in terms of spreads, I think I'm sort of speculating in terms of how the market's thinking about things. It takes the view that while margins on deposits are strong, they'll compete hard in mortgages. Alternatively, which I think is my view, you know, rates are generally sticky, you know, whether it's deposit rates or mortgage rates. So if base rates normalize, or sort of start to flatten off, I think you'll see normalization on both the deposit and the mortgage side. If they continue to go up over time, which I don't think is consensus behavior that we've seen in the last quarter or so, continuing for some time.
Okay. That's helpful. Thank you. I'll end there.
Thank you Ed, for your questions. We have our next question comes from Grace Dargan from Barclays. Grace, your line is now open.
Questions? If I could ask one on capital and then just come back on mortgages. Good to see the capital policy today. Note the commentary around staying above that target range due to the macro uncertainty. It'd be good to hear what you think you need to see to trend down towards that CET1 target and how quickly we should be thinking. Secondly, on mortgages and kind of touch on what you were just mentioning, good to see the strong NIM print today. Maybe could you give us a little bit of a steer on how much meaningfully below the back book is? Just to clarify whether you're talking completion or application spreads there.
I guess following on from that, do you see a dynamic where that compression kind of fully offsets the benefits you're seeing, or is that going too far? Thank you.
Morning Grace. Maybe, I'll just make one comment on the capital and your question about what do we need to see is that we are just looking at the uncertainty that exists in the market. We're really feeling positive about the performance, about capital generation, but we're just looking at the market and saying, what further uncertainty or more volatility could occur? For a reasonably short period of time, we would like to assess that before taking a view. It's less about what we'd really need to see, more about just making sure that the situation doesn't deteriorate on a macro level before we make any decisions. Frankly, the same would be true in terms of buybacks. You know, when we are very open-minded and actually positive about buybacks.
At the moment, we're just saying let's just exercise an additional piece of caution and evaluate the volatility in the short term and then determine more of that approach Grace. Let me hand you over to Clifford on the other elements of your question.
Yes, on mortgages, we don't quote spreads on an application or completion basis, but I note what some of the bigger banks disclosed last week, and I recognize, I think we're operating in the same market. I think no great insight, but I can confirm that. I think it's striking how customer rates have been fairly flattish over the last few months. While the Bank of England had passed on 65 basis points, it's pretty much been absorbed by spreads. But we're seeing in recent weeks, I think, a tick up in customer rates from a number of competitors. My view is that you see rates are sticky.
We feel that the mortgage asset class, but in periods of volatility, you know, I think it's natural you get some inertia in the marketplace. So that will give you a bit of a guide in our views going forward. I hope that addresses the second part of your question, Grace.
Yeah that's clear. Thanks very much both.
Thank you Grace. Our next question comes from Joseph Dickerson from Jefferies. Joseph, your line is now open.
Good morning gentlemen. Congrats on a good set of H1 results. Just on the guides and the use of the word uncertainty, which, if I had a word count, I'm sure would come up in the transcript multiple times. You know, you've cited the macro uncertainty on capital, but yet you've. You know, if you look at the unemployment losses on unsecured, that's actually shifted downward. I guess, you know, how do we square the comments around capital with the fact that you've grown your unsecured book 7%, period on period? If you could opine upon that would be helpful. Just coming back to the NIM. On the NIM guide, can I just clarify the deposit pass-through the ground reality?
Is this a theoretical deposit pass-through in the 180-185 guide versus a lower on the ground reality today? Can you just clarify that for me? That'd be helpful. Thanks.
Yeah.
Morning Joseph. Just one quick comment on your word count on uncertainty, Joseph. I think it's the combination of geopolitical and the books growing. We're confident in the growth of the business, the quality of the assets that we are putting on our books. I have comfort around our ability to grow the business, particularly in the unsecured space with the quality that we have. What we're looking at is just the combination of geopolitical and macroeconomic is an unusual combination and a very rare circumstance. It's just exercising a little caution, reflecting our disposition on the growth of the books. Director.
Yeah. The second question, I think you put your finger on it, Joseph. Looking back at a half year, we've passed on really quite a modest amount in terms of those base rate rises, as is typical across the sector. You've seen that supporting our quite sharp NIM improvement during the period. I think looking out in our guidance, realization of the deposit market, you know, I won't get into the specifics of products and so on, but you look at it at a quite granular basis. You know that that's how we framed the guidance. Clearly, if behavior in the market is different, our print will be different.
We've tried to take a more sort of consistent approach and consistent with, for example, our interest rate sensitivities and we've talked about.
Great. Thanks. David, can I just come back on the geopolitical point that you made, the interaction between the macro and the geopolitical? What precisely on the geopolitical side is it that you're concerned about? Further commodity price disruption or military escalation? What particular aspect is it there? I think it would be helpful just to have a sense about how you're thinking about this interaction, certainly on the capital position. I hear you on the underwriting point, and I think you're it's pretty clear your underwriting acumen has been pretty good. I guess what in particular on the geopolitical side is it that you're looking at?
Thanks. Yeah. Thanks Joseph. You know, I'd be clear in my own mind that I don't want to overplay it. It's a kind of short term monitoring of the volatility. You don't want to over exaggerate the effect. What I'm looking at is if you see a deterioration on the European front around war, what does that do to economic macro growth levels, interest rates, inflation, just the combination, the cocktail. If the position is as it is and starts to improve, that would guide us in a certain direction. As the position has been so uncertain and inaccurately predicted for a reasonable period of time, we'd like to have a little bit of a longer period of time to understand the evolution of those things that could affect the macroeconomic.
Of course as you say, things like energy prices continuing, Europe could have an impact. It's just letting it play out a little bit more, but being confident in our capital base, the strength and quality of our customers and the quality of our origination. We are tailoring our acumen, as you described, around origination at the same time, and making sure that we have tightened affordability and all the things you would expect. It's looking at it from macroeconomic to execution of origination and just to make it any clearer, Joseph.
Understood. Many, many thanks.
Thank you, Joseph, for your questions. Our next question comes from Guy Stebbings from BNP Paribas. Guy, your line is now open.
Hi, m orning. Thanks for taking the questions. I had one back on margin and then one on capital. I just want to come back on the NIM guidance 'cause I expect that implied drop in a second. Maybe we could just try and unpick your assumptions a little bit more, noting your comments on striking guidance prudently in the past. I think you've talked about using your long run rate sensitivity assumptions for deposit pass-through. Sounds like a bit of spread widening on new mortgages but still very thin and clearly a big headwind in terms of the churn there. Limited benefit or no benefit on deposit repricing. Then are you using swap rates as of today?
It also sounds like a bit of benefit from any mix, but not a lot. Am I missing anything there? I'm just trying to struggle when I work through each of those individual component decline, you know, meaningfully in the second half of the year. If you could help me at all, that would be great. Then the second one was just quickly on capital. If you could update us on how much of a benefit you expect to see from the hybrid mortgage model changes and the CARD IRB changes, if that comes through. Thanks.
Yeah. I'll pick it up Guy. I think you've got those trends spot on. I think the only other comment I would make is we've materially upgraded our NIM guidance from 75 to, you know, 180-185, which is, you know, a decent range, but quite an upgrade. You know, we stand by that guidance, but with our kind of prudent track record. I think it would be a bold person to call the turn in the mortgage market. We're guiding based on the trends that we see. I think in terms of hybrid and I don't wanna put a specific number on it.
I mean, we do think in general, those should be benefits because we've. You know, our historical approach has been relatively prudent in respect to both asset classes, and you can, I think you can figure that out for yourselves, where our RWA intensity for mortgages, for example, is meaningfully ahead of some of the bigger banks who've raised. We think there should be upside in both those areas. It is a little way out, as I commented earlier in my prepared remarks, and, you know, as we've seen with hybrid, it's taking a little longer than we all expected for that process to fully run. From experience, you know, some of the benefits often get sort of eroded through the ongoing process with the regulators.
Our approach as of right now is to be prudent. That's our management strategy, so we're not calling out specific benefit or lever. But you rest assured we're working hard to deliver those.
Okay. Thank you.
Thank you Guy, for your questions. Next question comes from Rohith Chandra-Rajan from Bank of America. Rohit, your line's now open.
Hi, g ood morning. Thank you very much. I had a couple of areas that I wanted to explore with you, please. The first one was just how you're thinking about balancing volumes, margins, and credit quality. I guess on the mortgage book you talked about starting to regrow with the markets once spreads improved. I was just wondering how you think about that and what sort of level of spread you know you're thinking about this. If in the meantime, given that spreads are under a lot of pressure at the moment, you're willing to cede some market share. On the cards business, you talked about some tightening in the underwriting standards reflecting inflation, cost of living, et cetera.
I just wondered, you delivered some strong growth in that book to date, how you saw the prospects for that, and then overall were good. Should we expect growth in the overall loan book in the second half of the year? That was the first question or first set of questions. Then the second was just around the deposit mix, and this replacement of term deposits with wholesale funding. I was just wondering if that's something you expect to continue. Thank you.
Okay. Rohith, maybe I'll just comment levels, and then we can dig into some of the dynamics around that. If you look at the overall growth in the mortgage market that we would anticipate, I think it's more about keeping the book stable. I don't think we'd cede material market share in any circumstance. I think as you will recall, we talked about a couple of years ago that we were in 80% weighting in our mortgage book from a balancing perspective, we were tending to be in the 45-60 type. We were keeping our market share stable as the market grew, and I think that still stands.
The pricing today just, you know, has not been attractive, and we sort of anticipated that last year when we looked at the market. We should see that turning, and if it does, we would look to, you know, sort of returns. If you look at the unsecured space, we've stressed a lot of that at around 9% inflation, at 33% APR on cards. So we really do put strong thresholds for affordability into the mix. We've had good affordability stresses in for a continuum and still grown very well. I think the balance here is I would expect to see net growth in SME and in unsecured based on the products and propositions that we're putting out there in the marketplace, notwithstanding tightened affordability. Clifford, do you wanna make a comment?
Yes. I mean, I think I won't comment on sort of our benchmark for spreads, but we're committed to delivering double-digit returns full year 2024, and that means we expect, you know, broadly all propositions to do that over time. In current environment of very tight spreads, you know, we do wanna remain open for business. You can see we've kept the book sort of flattish. As we see the prospect of double-digit returns returning, you'll see that book return to growth and beyond. We're working hard on developing our more niche strategies in mortgages, where we see the prospect actually for better risk-adjusted returns over time.
We're also working hard to finalize our new sort of digital system on the mortgage side, which will not only give us cost efficiencies, but enable us to be even more nimble in the marketplace. That's how we're in what is today a competitive market, but we see, you know, long-term good prospects for us as a business, while recognizing it's the other areas of the business that we want us to pursue sort of growth outpacing markets more generally in cards and SME, as David indicated. In terms of, I mean, we want to maintain a diverse funding profile. We've continued there.
I think over time in the last, I would say year or so, you've seen term deposits come down sharply because we've seen, frankly, lower cost of funding in growing our relationship deposits where we have good propositions, and also, tapping the wholesale markets. I think going forward, I do expect term deposits to start to sort of flatten off and potentially environment. We're seeing opportunity to lock in term deposit funding, you know, the retail market at attractive spreads compared to other sources of financing. So you might see the trends that we've seen the last year or so start to unwind. What I'm particularly pleased about is the milestone I referred to in the presentation, which is the 50% relationship deposits. We've built that up in an environment of maybe surplus deposits across the market.
What we put forward is the strength of our propositions on PCAs and BCAs and the good initial progress that David described earlier. Thank you. That's really helpful. Could I just come back on one thing, which was just the expectation that all propositions make double-digit returns over time. Yeah. When you think about the proposition, is that just looking at the mortgage spread, less, you know, costs and credit costs? Or do you think about both sides of the balance sheet together, when you think about propositions making double-digit returns? I think, don't want to get into our pricing dynamics, but I think my comments around bringing double-digit returns, that's both sides of the balance sheet, by the way, is frankly good practice in financial institutions.
I hope it's not remarkably different. I think it's bad practice to cross-subsidize for any sustained period of time, bluntly. You know, I've heard all the excuses from colleagues in many different institutions about why it's okay, but I think all propositions should deliver double-digit returns over time. At any point in time, clearly, there's commercial judgments at play in terms of serving our customers, doing the right things for customers, delivering scale, entering a market, and so on. In principle, that guidance on returns is. It's really helpful. Thanks very much.
Thank you, Rohith, for your questions. We have our next question. This comes from Jason Napier from UBS. Jason, your line is now open.
Morning. Thank you for taking my questions. Three questions, which are quite brief. Firstly, Clifford, for you, can you confirm, please, that the Numis guidance for the balance of the year assumes a continuation of first half mortgage spreads? Secondly, can I just confirm, please, that as of today, you're still guiding to the absolute reduction in costs that was guided to at full year 2021 results? You know, sort of GBP 830 million there. And then lastly, a question for David. In days gone by, I think we probably as a market paid more attention than we do now to plans around the business side of your product expansion and offerings.
If you think about the money you're spending that are currently in train, I wonder what you'd encourage us to use from the outside to measure the success of all of that. It'll be fantastic if you could give us a sense of what sort of revenues you think might accrue to the business investment that's going on. Just some sort of sense that we can use over the next year or two to tell how well that side of the business is going. It certainly was a key part of the strategic plan of your predecessor. I certainly feel like the market's not giving much credit for any evolution of the offering there.
Perhaps you could tell us a little bit of what you think that produces for the group as a whole. Thank you.
Okay. Thank you. Maybe Clifford can start with you first in that order.
Okay. Very good.
Clifford.
We're not assuming a material improvement in mortgage spreads going forward. I won't go through the details, but we're effectively assuming current market conditions persist in the mortgage space. We're pleased to reconfirm our broadly stable for this year. I mean as you know Jason, we targeted cost savings of GBP 175 million that we announced in November last year. We said we'd reinvest around half, reflecting investment in growth and inflation. Those principles remain. I think it's up in terms of expectations of actual inflation this year and possibly going forward beyond what we all thought in November last year.
We are looking for cost reductions in nominal terms after full year 2022, and we'll update on the details, you know, as we get closer to next year.
Jason, does that cover that point for you?
I guess it does. I suspect there'll be some listening who, you know, would want more clarity about that. I think the guidance for 2023 and 2024 was very clear. That sounds like, you know, the implication being that we're not gonna be able to hit the sort of consensus numbers, but.
I'm not reframing. I don't wanna guide on consensus into next year. I'm making the point that really I think we framed, we're very careful to frame our cost outlook. We're committed to the cost savings. We're committed to lowering overall costs. You know, we just need to recognize the realities of inflation picking up. Our target of 50% cost income ratio and below remains, 'cause that underpins our ROE target, and that's really our primary target. We've not given targets on costs in nominal terms beyond this year that inflation was uncertain.
Got it. Thank you.
Okay.
Okay. Jason, if I understood you on the business side of the bank, I'll make a couple of comments. The first is that we have predicted that we would see growth in the second half, and we've started to see that in the second or the last quarter. We saw 1% growth. Obviously there's a tail effect of the BBLs, et cetera, but we're seeing the underlying growth occurring. We've seen the BCAs double in a quarter, so you can see some underlying momentum in the business. Importantly, we've been net acquiring for a period of time now, which is different than our history in the SME space, and that's a lot to do with the investment that you're talking about.
The M-Track account and the dashboard that comes with that to facilitate managing their cash flows and the broader balance sheet, and then the marketplace, which we're bringing in later this year, they're the remaining pieces of innovation which we want to bring to bear. Effectively, you're giving a business, just to be very simple about it, a platform to connect most of the files to a single dashboard to help them manage their businesses. That's been extremely well received, and that's what's driving the net growth in customers. When you talk about a 1-2 year horizon, Jason, on how to measure it, I don't want to give revenue forecasts. That gets into a difficult area.
I think net growth in customers in the business bank is going to be a key focus for us. Showing that we on a national basis with a rebranded national version business bank made significant growth in customers and attendant market share. That's what we'll be focused on. I think within the context of that, over the next year or two, we will begin to talk about the income generation associated with those, whether on what type of income we're generating, but it's just a little early to say what that is yet. I'd focus on customer numbers as a, as an indicator of the effectiveness of our strategy and the returns we'll get on it.
Thank you. Just a very brief follow-up. In terms of customer acquisition on the SME side, is the selling basically a digital and broad-based marketing and word of mouth effort, or is there something more direct that can be done to put the product in front of people and convince them to switch? You know, success in getting people to switch in business banking has been tricky in the past.
Yes. It has been tricky, Jason. I think you're right. I think in that dynamic where it's a function of many of the things you're talking about, but it's also a function of digital marketing and above the line marketing, which we've done some of to start the process off. It's a powerful word of mouth association as well. We'll look to maximize all of those. I think it is really coming down to the technology and the integrated nature of the offering, which I believe with the marketplace rolling out in the broader SME marketplace and business banking kind of banking area.
As we get to the completion of that technology, we'll be heavily marketing it through digital channels and through our network and through our sector experts to make sure that customers understand the offering and how best to benefit from it. That's why I think your horizon of 1-2 years is good. Throughout the rest of this year, we're creating momentum. We're creating a story around it. In the media who talked about their business account and how much they were enjoying using it. It is an early stage delivery of the technology, building momentum, showing net growth, and I think that will compound over the next period of one-two years. We will be able to probably effectively market it best when we complete the rollout of the marketplace, which is in the next few months.
Thank you Jason, for your questions. We have our next question. This comes from Jonathan Pierce from Numis. Jonathan, your line is now open.
Hello, g ood morning guys. Two questions, please. The first one is on the costs. There was a defined benefit pension credit of about GBP 12 million in the first half. It sounds like maybe a bit more in the second half as well. I'm guessing that is within the underlying expenses number. How should we think about that on a full year basis? Are we looking at, I don't know, GBP 20 million quids here that will disappear next year? It'd be helpful just to get a bit of guidance on that particular element of costs. The second question is on the savings accounts. When I look at the average balance sheets, you've paid 33 basis points on average in the first half, which I think is various movements we've seen there.
I was surprised that you've managed to hold the overall cost of those savings accounts which were on H2 of last year. Looking for a bit of help around what's been happening more recently. Has that 33 basis points on those savings accounts been ticking up appreciably of late? Or are you still managing in the mix to keep it at around that sort of level? Thanks very much.
Yeah. I think on, you know, page 13, you can see that's continued to track down. I think that reflects some call it products we've had over time, some longstanding products that we've had, the relationship deposits and also where the competition has been. You've seen we've been able to retain good levels of deposits despite, if you like, low-ish customer rates on deposits. What we've seen more recently at the tail end of the period is where we're offering really good value, particularly for customers who bring their current account with us, right? Our Linked Saver proposition pays 1%. Actually we pay 1% up to GBP 25,000.
What we're trying to do there, if you like, is offer to the general customer, the man or woman in the street, a really good rate up to GBP 25,000, if they open a current account with us, and so we can give them the full benefit of the Virgin relationship cashback and so on, rather than, if you like, pricing up for people to bring lots of funds with them. I think so that's our general approach. We've used the word normalization, but I think you're seeing the pickup in rates on deposits across the market as base rates have moved 65 basis points. We'll see what happens today in respect of another possible increase. I think.
I don't expect the cost of funds to take another sort of lurch downwards from here. We are earning good, we think, deposits given swap rates have moved up. I think around pensions, there are a couple of things. You've highlighted a specific credit in the first half. I mean, we do have a you know, really well-funded pension scheme. You know, our surplus is around GBP 1 billion. We have factored all of that into our guidance and taken call it a normalized approach to investment returns and management going forward. We've seen, I've noted, and I've worked elsewhere, other institutions where, you know, pensions
I joined the bank a year ago and inherited it. I'm really pleased that we're able to have a, you know, well-funded scheme to support our staff and our pensioners, and that lends resilience, frankly, both to earnings and capital as we've maintained that. We can pick up further details in due course.
Okay. Thank you for that. Can I just come back follow up on the first.
Yeah.
Basis points around deposits? There obviously is quite a big gap now between the rates and the linked accounts. To what extent are you starting to see any cannibalization of the Everyday Saver towards those linked accounts?
Yeah, I mean, we manage. I'm not gonna get into the details of pricing or behavior, you know, for obvious reasons. I think. You know, we're pleased to maintain our diverse, you know, funding mix, frankly good value to our customers, which allows us to grow the franchise, as David said. We will, you know, we'll manage our customer rates accordingly to balance that sort of, call it our P&L, but also offering the, you know, good value to customers to grow the franchise. I do think the last six months or so have been unusual. I use the word sort of sticky, if it's not just us. I think as reflected, you know, the deposits that have been built up by everybody during COVID, and also the fairly modest growth in overall assets.
You know, banks have not needed to, you know, source additional funding to grow their asset size. I think those factors could unwind, which is what we factored into our guidance.
Okay, thank you very much.
Thank you Jonathan, for your questions. We have our next question. This comes from Andrew Coombs from Citi. Andrew, your line is now open.
Good morning. I was tempted to ask another question on interest margins, but I think you've been pretty explicit there in your outlook. Perhaps I could revisit a question on unsecured as well. On capital and buybacks, I know Grace touched upon this earlier in her question. If you look at the commentary you provided, you state you plan to be above the 13%-13.5% target in the near term, given uncertainties. At the same time, you talk about supplementing the 30% payout ratio with buybacks. Just so we can try and drill timing and magnitude of buybacks, would you like to provide any framework for what the above near term means in terms of quantity? Is it 14%? Is it 14.5%? Anything you can say there would be useful.
Second question just on secured. Thank you for slide 36 in the presentation, which contains a lot of useful detail. Taking that detail in hand with also the adjustment you put through on the PMA for cost of living crisis, I note that you talk about maturing from the promo period in the next six months. You also emphasized the point your customer profile is, you know, higher quality than the industry average. I'd be interested to know more on your thoughts on what you expect to see once this promo period ends. Whether you do think you will see a slightly different experience from what you've seen in the past given the economic backdrop. Thank you.
Thanks Andrew. I'll leave it to Clifford to give you some color, reiterate the comment. From my own perspective, again, we look at this in all of the moving parts being part of the consideration. The buybacks, best way to describe it is the team as well as I are very open-minded and look at the buybacks as something which we would be willing to consider, of course. I don't want to create any negativity around that. It's really quite a positive dimension in ratios and the announcements of that into the clear domain of the 30%, and consider it as potentially supplemented by buybacks. I think it is just a judgment, as I said, about the broader environment.
It's a strange environment to find yourself in, where we had a day off from COVID, and then there was the Ukrainian war, and then there's the cost of living crisis and all the attendant rising interest rates into a slower growth environment. We just want to have a look for a period of time, and that'll affect the timing judgment. I think you should be clear, buybacks, it is really a question of balance and making sure that we understand some of that uncertainty I referred to earlier and its trend. I don't know if there's anything else you wanted to add on that.
Yeah, it's just timing. I mean, we've not ruled out any specific time or window. It's really linked to that current uncertainty. We've guided to the interims as the general period because we wanted to make the point that ACS or the stress tests are really quite important. Rule out any timing, and we keep things actively monitoring. I don't know about you, I'm still glued to events in Ukraine from a personal point of view, but it clearly ripples across the global economy, and we need to be frankly sensible about that. We'll keep all of that under active review. I think in terms of magnitude, I'm just trying to reflect on.
I think if we said it was 14.5%, right? You know, that's right at 14.7%. I think I'm not gonna put a figure on it. But if you like, the question behind the question is, you know, any possible buyback. Don't assume it's a sort of a one-off that takes us down to 13.5% in the short term, right? We've managed expectations carefully around timing, in particular in the very near term, given the current uncertainty. You know, we expect to operate above the target range, and that would still leave room for a buyback, you know, when the board felt it was wise to do so. I think that was sort of capital and buybacks.
The 19% and unsecured. I think when we look at our trends, that figure is not meaningfully different. That, call it around 20%. I think we've been, you know, one of the leaders in that balance transfer product. That's worked out really well for us. I think part of that reflects competition and where other work through that means really quite strongly over the last 6, 12 months. Those promos extend beyond the short term. That 19% you referred to relates to a business we've written somewhat in the past. The book is very stable. You know, we take a prudent assessment of our customers, but also their behavior at the end of the promo period.
you know, we've been operating well within those assumptions. Been good about the growth of that business. That business has been able to behave, really trade quite nimbly through COVID. We're really pleased about the prospects of some of our our newer propositions that will come to market that will sustain that growth. You'll see that growth continue, but perhaps be more broadly based away from that BT proposition that's delivered so well for us in the last few quarters.
Thank you.
Thank you Andrew, for your questions. We have our next question comes from Robin Down from HSBC. Robin, your line is now open.
Good morning. The stock, I think it was mentioned earlier, the stock has gone down 5% on the back of this results presentation. I think there's two or three messages, and I just wanted to confirm with you that these are the messages that you wanted people to take away from today. You know, one is that the buyback until midway through next year, because, you know, frankly, is the uncertainty gonna suddenly disappear in the next couple of months before your Q3? You know, probably not. The second one is on costs. It feels like you're intimating that there may be some upwards inflation there for future years that we need to factor in. The final message seems to be on this margin side. You've got a range of 180-185.
You're telling us that in effect, we could be as low as 180 for the year, which I think implies about 177 for the second half, which starting from 189, just run the exit rate for this year could be as low as around 170 or the high 160s. Are those? Am I correct? Are those the three messages that you think we should be taking away from this set of results?
Do you want to pick them up?
What shall I say? I mean, we give maybe taking a step back, perhaps.
We feel good about our results, you know, that we've delivered. The current set delivered on at the risk of sounding defensive from call it the bear points. You know, we've delivered, you know, we've delivered on our strategy, we've delivered on our cost guidance that we gave at the full year. We're pleased to upgrade our NIM guidance materially, restart the dividend in a sustainable way, prospects of a buyback when conditions are right. I'm not gonna speculate on what's going through the minds of investors that have traded in the last 20 minutes or so. I think from a buyback perspective, I think David has commented fully on the appetite for buybacks when conditions persist.
We've not ruled anything out ahead of. You know, watch this space. I think around costs, I find it, well, again, don't wanna be too defensive, but it would seem odd if pointing to higher inflation came as news, right? Given what our political leaders have been talking about over the last few months. I think inflation is a fact of life. You know, notwithstanding that label for the full year, we see inflation as something to manage, but we can't defy gravity in that sense. I would point out, you know, one flip side of inflation is interest rates going up.
We spent quite a bit of time on this call looking at the benefits of that which would flow through to subsequent years, and consequently, you know, underpin our confidence regarding the cost income ratio, which will deliver the returns that we're all looking to see. I think possible to give a range on them, given the assumptions regarding that, we're one player in the mortgage market and one player in the deposit market. We're pleased with the performance and the tactical judgments we've taken in the last quarter or two. We'll look to, you know, to trade sensibly through the rest of the year while, you know, safeguarding the franchise and do so.
If I could just come back. I think you're exactly right, Clifford. I think it is sensible to give a range, but the range doesn't feel sensible in the sense that you're you know, it's just simple math, that if you're telling us you could theoretically be down at kind of 180, 181.
Mm-hmm.
It is implying an exit rate for this year that could be down as low as 170. Q2 against a rising rate backdrop. I suspect you would be horrified if we actually came out with that outturn.
Look, I think draw your own conclusions from the assumptions I've guided to. I mean, what management do is give guidance. Guidance is based on judgments at the time. If interest rates move in a particular direction, we benefit from the structural hedge. If interest rates were lower than current markets indicate, that will drive the NIM going down, and then we'll have the conversation in six months' time, "Why did you miss your guidance?" You know, we're happy to provide guidance. We're clear on the assumptions. You know, we have been somewhat prudent in the past and have been pleased to upgrade on NIM. Look, you know, I'm hoping you're right. You know, hope is not a strategy.
You know, we've got conviction in the guidance that we've set out, and looking forward to having this conversation in six months' time.
Great. Thank you.
Thank you Robin, for your questions. We have our next question comes from Chris Cairns from Autonomous. Chris, your line is now open.
Good morning. Thanks. One on NIM and one on capital, please. On the margin, I guess just to follow on somewhat from Robin's question and additional clarification. Within your NIM guidance for the year, are you assuming that the deposit beta, the pass-through of rates for the rate hikes that have already happened is in line with the, I think, 50% or so baked into your sensitivity guidance? You've obviously had. Are you assuming that in the second half, the rate hikes that have already passed, you will see the beta for those hikes increase to something akin to your sensitivity? That would be the first question, 'cause I think that's quite a different assumption from essentially every other U.K. bank. Point. You know, you have given this NIM range.
You say you have conviction on your guidance. Do you have conviction that you won't be above the upper end of that range? That would be a subsequent question. On capital. I'm sort of struggling a little bit with the commentary here. Your MDA is 8.7%. I appreciate the world is uncertain, but you just passed a very severe stress test, and the capital target range is way above your MDA. Your MDA is lower than most of your domestic peers, and you have a similar target. You currently have more capital than a couple of your large domestic peers who are systemic institutions. Why is it that you have such a high level of conservatism?
Do you think that conservatism over time has been good for shareholders? It's less about the buyback decision there, and more about the fact that during 2020 and 2021, you opted not to grow mortgages during probably the richest pricing of the last 10, 15 years, as a consequence of your capital conservatism. Do you think that your conservatism is actually beneficial to shareholders?
Thanks, Chris. Maybe I'll make one comment on the general conservatism and the position we have had has been one of coming out into an IPO in volatile markets, being met with Brexit shortly thereafter, doing an acquisition integration rebranding of three institutions, and then coming out of that straight into COVID and COVID version 2, and at the same time having to move into the universe of tier one status and do capital stress tests. Highly variable and unknown outcomes until we had executed on our path through all of those items.
I think our conservatism has been natural, and I think, you know, advised in terms of a positive strategy to successfully achieve the outcomes we have done with regulators and others, and then to be able to move back into a curve in this first year, which is what we had intended. I think we would look at it slightly differently, Chris. To the specific underlying point of a mortgage conservatism, as I said at the beginning, we had an overweight book. We were open in the last number of results sessions talking about the size of that book, and that was at 80%, and that we wanted to re-weight that gradually over time. Optimizing the balance sheet with targeting growth in the higher margin areas for the future, we felt was a positive long-term strategy.
Not to be funny about it, but I think we're coming into a world where that margin strategy will be beneficial. There's of course, everyone can have a view on this. From where I sit as the CEO going through that environment, I think those were necessary steps we had to pursue. To Clifford's point, I think we've arrived at a dividend profile with an option on buybacks and a strong performance in the business for our digital strategy, which I believe will lead to really good growth potential in the future. If I look at the profile of where we're going, I think investors going forward will be well-served by the strategy we've adopted. Let me just hand over to Clifford, just 'cause there are some more detailed comments in there you might wanna make comment on as well.
Yeah. I'm probably gonna repeat what I said earlier. Our general approach or our assumptions in interest rate sensitivity is a deposit beta on par with other banks, that we've clearly outperformed that as a sector from a shareholder point of view in the last six months or so. I'm not suggesting that unwinds, but as we look forward, I think that there are a couple of things. One is we are assuming the normalization of the deposit market. I don't wanna comment on products, specific products and specific deposit rates. You know, I think markets will normalize. The principle of some of the benefits from rising rates comes through, some of which is hedged, the other 50%, and some of it relates to the lag.
In a rising environment, there is a lag. We've seen that lag. I think it's sensible to assume that lag eventually expires. A general drive from an overall guidance. We've heard the prudence from some of the commentators on this call. We strive to outperform both targets and guidance, but we think the best way of dealing with the interest that we get is to be clear on our guidance and clear on the assumptions underpinning that guidance.
You said you're not assuming that the beat is on the rate hikes that have come through change, but you're assuming a normalization, and within that there are some rate changes, but you won't comment. That sounds like you're assuming that the pass-through for the rate hikes that have happened prospectively changes. Are you even assuming no further rate hikes, you will be passing on higher rates for the rate hikes that have already happened as part of that normalization?
Yeah. I mean, it's b luntly, I'll not got into the details, all right? That you're, with respect, requesting. What we've done is assume that normalization of the market. This notion, I don't wanna sound critical, of automatic pass-through. I mean some of. We sequentially over months, including some really quite recent. You know, in the real world, all these things happen with a lag that reflect banks' funding positions and the competitive market. So there isn't a sort of mechanical approach, notwithstanding perhaps what some peers talk about on. We wanna maintain a stable funding base, grow the franchise, support our customers. Going forward, I think the right assumption is the more, call it a more normalized one.
We do that bottom up, we take a view, and then we present guidance which we explicitly say has some prudence in it and will strive to outperform it.
In terms of the conviction on the NIM range, what's your conviction that you don't end up beyond the top end of that range?
I mean, it's. I'm not ruling out that we're above. You know, I don't, I see where swap rates, for example, are, but I don't. You know, I'm just one observer. I mean, it's possible they're higher, for example.
Okay. All right. Thank you.
Thank you Chris. I will now hand over to David for final comments.
Okay. Thank you. Thanks everyone for joining the call. Obviously there's a lot to get through and a lot of questions, and we're very happy to follow on through the IR world with Richard and the team to get into any more depth you have. I would just leave you with maybe it's the CEO's view, but I look at the business we have, the team we have, the strategy we have, and I'm actually confident. We'll battle through volatility, but that's what we do. I see us with real momentum. We've left that history of all that complexity I described behind. We have a simpler, more straightforward business to manage. We have good underlying momentum and performance. We have a very clear digital strategy. We will have a better in the future.
I think in the digital space, it's already evident that across every single product is starting to bear fruit, and that will only accelerate. I recognize this is a half-year call, and it's reflecting the market circumstance at the moment. If I take a medium-term view, I have a different view of perhaps the tone of some of the questions today. We will be happy to get into and has a clear understanding. I would leave you with that thought. Thank you all for your time today, and we'll speak soon.