Good morning, thank you for joining the Virgin Money U.K. PLC 2023 interim results fixed income presentation. There'll be an opportunity to ask questions at the end of the call following a brief presentation. If you would like to ask a question, please press star followed by one on your telephone keypad. I will now hand over to Justin to commence the call.
Thanks, Nadia. Good morning, everybody. Thanks for taking the time to join us. Of course, hopefully, you all know me. I'm Justin. I'm the Group Treasurer, and I'm joined on the phone this morning by Richard Smith, our Head of Investor Relations, Matthew Harrison, Head of Treasury Debt Capital Market, and Gareth McCrorie, our Debt Investor Relations ESG Manager. Yesterday, we presented our 2023 interim results. Hopefully, a number of you had a chance to watch that online. If you didn't, and you want the materials, please go to the Financial Results section of the website, where you'll find the webcast from yesterday's presentation and today's slides, which Richard and I will go through. From my point of view, we have both the small luxury and curse of reporting after our peer group.
Therefore, you know, in many ways, yesterday, May the fourth wasn't with us, really. I think debt and equity took a turn to the dark side. We're gonna try and rectify that this morning and basically cover a little bit more detail some of the themes that we discussed yesterday. As always, we're very grateful for any feedback you have on the content of this morning's session. Well, basically the first half of our financial performance, we'll walk you through the key elements of our capital funding and liquidity position, and then update you on our issuance plans for the remainder of the year. Then we'll offer up some other themes for, you know, we think are interesting and worth talking about, and then we'll open up for Q&A.
I'm now gonna hand over to Richard to talk you through our interim results. Richard.
Thanks, Justin. Good morning, everyone. Starting with the key performance headlines on slide four. In the first half, our strategy and rate backdrop have continued to translate into good financial performance. We saw the benefit of our digital investment in our relationship banking model coming through increasingly, both in terms of income and customer numbers, as well as the strength of our balance sheet. Our previous investment in efficiency and the automation of our customer journeys has so far delivered GBP 93 million of the GBP 175 million cost savings target. In other words, halfway through the planned savings has been achieved halfway through the plan. While our costs are temporarily 5% higher in H1, our cost income ratio has declined from 54% to 51%. We're pleased with our earnings momentum in H1.
Our pre-provision profits of GBP 456 million are up 16% year-on-year. We've seen a strong performance in income growth of 10%, primarily driven by the further expansion of our net interest margin, which reached 191 basis points for the half. Given the recent market volatility, we've been very focused on delivering profitable growth. With price mortgage, stack mortgages practically given the margin compression caused by the 41% reduction in mortgage application volumes. We tightened our credit criteria and unsecured further, while in the business bank we've targeted growth in sectors that are performing well in the current cycle. Our growth strategy is proving effective in terms of building improved margins overall. In terms of our balance sheet, our funding and liquidity remain robust, supported by strong deposit inflows which grew 3% in the half.
Our LCR has increased to 153%, with 72% of our total balances insured under FSCS. Our loan deposit ratio has declined further to 108%. Our updated provision coverage already reflects the expectation that arrears will continue to rise from recent low levels. These changes are model driven, and although we expect arrears to continue to increase, we have not seen any material arrears in the portfolio overall to date. Given the historical performance and quality of our portfolios, 72 basis points of coverage represents a strong provision level which remains above the pre-pandemic level. Our CET1 ratio of 14.7% is strong and includes the absorption of 30 basis points for our latest view of hybrid mortgage models and the completion of our H1 buy.
The completion of our previous buyback in H1, I should say. As we look out over the remainder of the year, we expect our cost income ratio to be in the range of 51%-52%, reflecting some temporary spending to improve customer service and a slower implementation of our mortgage platform. As we re-accelerate our automation activity in H2 and these temporary costs drop away, we remain very confident in delivering our less than 50% cost income ratio in FY 2024. We're upgrading our NIM guidance for FY 2023 based on the strong margin performance seen during the first half, and we now expect to deliver a circa 190 basis point level, which is at the top of our previous guidance range.
Finally, given the surplus capital being generated, we'll continue to build our track record of returning capital to our shareholders this year, and we are announcing a GBP 0.033 interim dividend for the first half. As previously guided, we'll make further announcements on buybacks later in the year after the ACS. Let me now turn to slide five and the macroeconomic environment that we're operating in. Our strategic delivery has been achieved despite a muted economic backdrop, although there are signs of this already starting to improve in the second half of the year. Inflation in the U.K. is proving stubborn, particularly in some areas of core spending like food. Although there are offsets coming through in lower energy prices and generally a tight labor market overall. The GDP outlook is modestly lower, but at the same time, the U.K. looks set to avoid a significant recession.
As markets and the economic outlook are starting to improve, we've seen the rate curves flattening out, driving a lower outlook compared to Q1 and FY 2022. Even at these lower levels, the rate outlook offers us opportunities in the refinancing of our structural hedge at meaningfully higher levels than where the swaps were struck. Justin will discuss this in more detail in his section. Critically, we continue to see unemployment remaining low by historical standards, which underpins credit quality and overall the more balanced outlook is setting the scene for the next phase of our delivery, which moves us on to lending on slide six. In lending, we traded well over the course of the half against a tough backdrop. Overall lending finished flat as growth in business was offset by a reduction in mortgages and unsecured remained stable.
Mortgage balances were a little under 1% lower, a decent performance against a challenging market as activity levels slowed. We're particularly pleased with our growth in business, where despite the slower market, this reflects the strength of our national and sector specialist franchise. In unsecured, we saw modest growth in credit cards offset by a reduction in personal loans. Card balances were up around 2% during the first half, a slower pace of growth compared to last year, reflecting a further tightening of our credit criteria and our disciplined approach to profitability on the portfolio overall. Looking forward, we expect total lending balances to remain broadly stable in the second half of the year. In mortgages, we expect activity to remain muted. In business, we expect a more moderate pace of growth through the remainder of the year.
In unsecured, we'll look to grow balances modestly further. I'll now talk through the key balance sheet items from slide seven. We're pleased with the strength of our funding franchise, supporting both a robust balance sheet and our margin outlook. It's good to see our continuing growth in relationship deposits over the first half. In line with the market, we are also seeing higher flows into term deposits reflecting the rate environment. We are actively participating here, enabling us to lock in term funding at pricing below swaps. Altogether, we grew relationships and overall customer deposits at 3%, outperforming the market and our large U.K. peers and reducing our loan to deposit ratio to 108%.
The strength of our deposit gathering capability and continued improvement of our funding mix leave us well placed despite recent turbulence, to support our lending growth and the refinancing of our TFSME over the coming years. I'll now provide an update on credit performance on slide eight. We're happy with the quality of our lending book, and we remain well positioned to manage through current risks and uncertainties. On the left, we set out ECL over time. You can see that during the first half, the increase in ECL was primarily model driven. We adopted updated macroeconomic scenarios at our half year, which now reflects the post Mini-Budget downgrades to the economy, given the timing of our reporting cycle. Our macros are now broadly in line with what we've seen from peers, who are December reporters.
Alongside this, we've also reduced post-model adjustments relating to the potential cost of living impacts, as these risks are now better reflected in the modeled outcome. The net impact of all of this is that at headline level, total provisions have increased from FY 2022, resulting in a GBP 144 million impairment charge, equivalent to an annualized cost of risk of 40 basis points, modestly above our previously guided run rate. Whilst our credit quality is resilient, we do expect to see a continued normalization of arrears. That expectation is reflected in our provision coverage, which strengthened further to 72 bits. As you can see from the chart on the right, this coverage level is prudent and well above the pre-pandemic level.
Given the increase in our credit provisions in the first half, we now expect the cost of risk for the year to be in the range of 35-40 basis points in 2023. While our credit quality indicators remain relatively benign, we're well positioned for uncertainty that lies ahead, as I'll now explain in more detail on slide nine. We've updated this slide from our full year results in November, which shows the strength of our portfolio and why we're comfortable with our credit quality and underwriting. Overall, our total portfolio is defensively positioned with balances strongly weighted towards mortgages, which remain around 80% of group lending. Our mortgage book is a low risk prime book weighted towards owner occupied, originated with strict affordability assessments, with only 6% above an 80% LTV and largely on fixed rates.
Our business portfolio remains well diversified, with strong collateral levels and skewed to lending to resilient sectors. We have minimal commercial real estate, just 8% of business lending or 1% of overall group lending. This is conservatively positioned with an average LTV of around 50%. In unsecured, our underwriting criteria are prudent, and we've tightened this further over the course of the year to reflect affordability stresses on customers. Our unsecured customers are generally more affluent. Their retail spend has remained resilient over the past year and continues to be weighted towards discretionary or luxury items. Their repayment rates remain stable, and all of that indicates continued good credit quality. Finally, I'll conclude on the guidance on slide 10. We summarize here the guidance for FY 2023 on the left and reiterate the outlook for FY 2024 on the right.
We've mentioned the various details over the course of the results presentation yesterday. Just to summarize, we're now upgrading the full year NIM to be around 190 basis points. We anticipate that the cost income ratio for FY 2023 will be in the range of 51%-52%. Following the increase in credit provisioning levels in the first half, we now expect that the full year cost of risk will be in the range of 35-40 basis points. We expect to resume buybacks after the results of the ACS in July, while maintaining our CET1 above 14% for the year. In terms of our FY 2024 guidance, we remain committed to our double-digit ROTCE target set out in November 2021, supported by a less than 50% cost income ratio.
Finally, we expect to operate within our target capital range by FY 2024. Overall, I conclude by saying that our strategy remains the right one in the current environment. We've continued to make good progress during the first half, and our outlook is positive. With that, I'll hand back to Justin.
Thanks, Richard. As you can see on slide 12, the group remains very strongly capitalized and with the business that has delivered 72 basis points of underlying capital generation. In the first half, we recognized a management adjustment reflecting the impact of adopting mortgage hybrid models, something we mentioned at full year. This resulted in an extra additional GBP 400 million of risk-weighted assets and a modest increase in ex-excess expected loss, together consuming around 30 basis points of capital. That's below the 60 basis points that we had originally anticipated. This allowed us to close the half year with a 14.7% CET1 position, considerably above our target range, which I will come on to. If we can move on to slide 13. As you can see, our capital position remains robust across all measures.
Against the 14.5% requirement, our total capital of 21.2% remains strong and our leverage ratio of 5% remains in excess of minimum requirements. Finally, I'll expand on this a little further on slide 16. We have MREL resources of 31%, which when expressed as a percentage of our RWAs, provides a prudent headroom of GBP 1.3 billion, 5.4% above the loss-absorbing capacity requirement of 25.6% when expressed as a percentage of our RWAs. Moving on to slide 14. Again, you'll recognize this slide from our full year and our target capital range of 13%-13.5%. As we said in November, we expect to stay above 14% this year, reflecting current economic uncertainties.
We currently have around GBP 300 million of surplus capital before future capital generation gets considered, and that's relative to the 13.5%. As Richard mentioned, we expect to operate within our target capital range by the end of FY 2024. We remain less susceptible to future headwinds on capital. Basel 3.1 should be largely neutral on day one, our pension fund still has a strong IAS 19 surplus. Now turning to the breakdown of our capital stack on slide 16. We've mentioned this in prior presentations, it's worth reiterating. Compared to others in the market, we have a very straightforward capital structure. All the group's regulatory capital and MREL is issued by a holding company, Virgin Money U.K. PLC. It's fully eligible, there are no issues around grandfathering.
There is also no FX exposure in the capital structure, providing stability during periods of market volatility. We have excess total capital of 6.8% over and above our regulatory minimum or a buffer of roughly GBP 1.7 billion. While we don't have a target level of AT1 or Tier 2 per se, we're always looking to manage our buffers in an efficient manner whilst maintaining headroom above regulatory optimum levels to support both future growth and any potential RWA headwinds. Over the medium term, our AT1 and Tier 2 stack will evolve as we manage buffers within the parameters I've just mentioned, primarily through reductions in refinancing activity, and this was evidenced with the way we managed the AT1 bucket over 2022. As a reminder, our core policy remains unchanged.
Like future core decisions, capital core decisions will be assessed on a broad economic basis. We will try and balance factors including balance sheet movements, relative funding costs, current and future regulatory capital and MREL value, rating agency treatment, wider wholesale funding needs, prevailing circumstances at the relevant time. Of course, cores are all subject to PRA approval with whom we have an active dialogue. Finally, whilst our next AT1 core date is not due until next June, it's worth taking a moment to address the asset class given recent events.
The structure of our AT1s are in line with that of larger U.K. banks and are convertible into shares upon breach of the standard 7% CET1 trigger, or can be converted or written down at the discretion of the Bank of England at the point of non-viability through the exercise of their statutory powers under the Banking Act 2009. Bank of England have been very clear in stating that they would respect the credit to hierarchy in any resolution or insolvency event, which should provide further reassurance to all you debt investors.
If I can turn to our MREL position on slide 16, we have been subject to MREL and state requirements since the 1st of January 2022, which requires the group to hold capital resources and eligible debt instruments equal to the greater of 2x total capital requirement, being 2x the sum of Pillar 1 plus Pillar 2A or 2x the U.K. leverage ratio requirement. In addition to MREL, the group must also maintain any applicable capital buffers, which together with MREL, represent the group's loss-absorbing capacity or LAC requirement. Just to note, we have changed our disclosure slightly here to give you both the leverage-based and the RWA-based LAC requirement. Both are expressed as a percentage of our RWAs. As you can see, there's currently very little difference between the two.
In the future, we do expect to revert to the RWA measure being the binding requirement for MREL purposes. With this in mind, as of the 31st of March 2023, the group's leverage-based LAC requirement of 7.5% of leverage exposures, or 25.6% when expressed as a percentage of RWAs, was greater than the RWA-based LAC requirement of 25.4%, meaning the leverage measurement is the binding requirement. MREL resources were GBP 7.7 billion, equivalent to 9.1% of leverage exposures or 31% when expressed as a percentage of RWAs.
This provides prudent headroom of about GBP 1.3 billion, or 1.6% above the LAC requirement of 7.5% of leverage exposures, or 5.4% above the LAC requirement of 25.6% when expressed as a percentage of RWAs. We do aim to maintain a suitable buffer over our end state requirements to help better manage maturity risk. With respect to our OpCo senior issuance plans, we've announced our intention to call the GBP 500 million MREL senior note on its first call date at the end of this month, having already refinanced this via the EUR 500 million MREL senior transaction issued in early February. Previously guided, given our MREL position going forward, issuance will be broadly limited to maintain the current surplus to regulatory requirements.
Finally, it's just worth noting that our total capital and MREL buffers would remain comfortable even in our target operating CET1 range and fully optimized AT1 and Tier 2 buffers. Turning to funding on slide 17. The quality of our deposit franchise has supported both resilience and margins. In terms of resilience, the group has a stable funding base, with customer deposits representing roughly 80% of total funding. As the top left shows, our customer deposits are weighted towards retail customers, about 76%, with the balance being from business customers, predominantly SMEs with an emphasis on the S. Importantly, of the total customer deposit book, 72% is insured via FSCS. Of the portion that is uninsured, a high percentage is fixed term and or would incur a charge if customers wanted to withdraw their money.
The stability of our funding sources is also highlighted in our NSFR ratio of 136%, which is comfortably in excess of the binding minimum requirement of 100%. Top right, you can see that we have continued to attract strong deposit inflows across the first half, demonstrating our deposit cap-gathering capability and the strength of the franchise and new product propositions. Now turning now to income. Richard mentioned earlier that our deposit performance has underpinned our margin performance. Looking back, you can see bottom left that we have significantly matured our deposit mix, growing lower cost relationship for deposits while reducing reliance on secondary savings. More recently, we've been active in the market for term deposits, given the pricing opportunities available and the state of the market. This demonstrates our ability to trade tactically, make our size work for us when market conditions are favorable.
This mix shift, alongside higher rates, has contributed to a material improvement in our deposit book spread. While offering good value to customers, as you can see bottom right. At this point in the cycle, we feel we are less exposed to rising deposit rates and deposit attrition than some of our larger peers, given our strong franchise, our deposit mix and customer-friendly proposition. We expect to continue to grow deposits modestly further in FY 2023. Moving to slide 18. The group has a stable and diversified wholesale funding base. As noted in prior presentations, we have negligible short-term wholesale funding, and that position hasn't really changed. Of our total debt securities and issuance, only 20% has a less than one year to effective maturity, reflecting term issuance rolldowns. Again, both drivers of our NSFR strength.
Following the recently announced MREL call, we have no further capital MREL call dates and maturities ahead of this year's financial year-end. We've also repaid GBP 200 million of TFSME in the period, so we now have GBP 7 billion outstanding, with contractual maturities ranging from the end of full year 2024 to full year 2026. Given our strong deposit performance and proven wholesale funding market access, we feel well placed to manage this refinancing requirement, and we still expect to repay TFSME about one year ahead of contractual maturity, with flexibility to repay sooner subject to market conditions.
Noticing the above, given the strong deposit performance in the first half of 2023 highlighted in the prior slide, our security issuance requirements are now expected to be at the lower end of the GBP 1.5 billion-GBP 2.5 billion guidance we gave at full year 2022. As ever, subject to ongoing deposit flows and relevant costs. Moving on to slide 19. In response to recent market volatility, we opted to hold more liquidity on balance sheet. This has provided additional headroom to both internal and regulatory requirements, with the LCR increasing by 15 percentage points compared to the end of full year 2022 to 153%. As you can see from the slide, we've consistently held prudent buffers in excess of regulatory requirements, and we would expect this to continue going forward.
Our liquid assets are high quality and consist primarily of cash at the Bank of England, and the remainder consisting of U.K. government securities, AAA rated listed securities, i.e. bonds issued by Supras or cover bonds. From an LCR perspective, this means the majority of our HQLAs are classified as level one, with only circa 2% classified as level 2A. Just to reassure everybody, our liquid asset portfolio is fully hedged from an interest rate inflation and net X risk, and the portfolio is accounted for at fair value through other comprehensive income, meaning movements in fair value are recognized in our CET1 position by the FVOCI reserve .
On top of that, we also have unencumbered pre-positioned collateral at the Bank of England, representing roughly GBP 5 billion of secondary liquidity drawing capacity via the Bank's Sterling Monetary Framework. That does not form part of our liquid asset portfolio for LCR or for internal stress outside purposes. Over time, the stock of unencumbered pre-positioned collateral will increase as remaining TFSME drawings are repaid. In addition to that, the group has a further GBP 19 billion of unencumbered assets that are eligible and readily available but not currently pre-positioned at the Bank of England. Turning now to the structural hedge and our rate sensitivity on slide 20. We set out here how our structural hedge is supporting margin alongside our usual rate sensitivities. The hedge is a strong underpin to our margin outlook.
We introduced a structural hedge when the rate environment was significantly lower, now continue to benefit from materially higher reinvestment rates. You can see from the chart on the left how we expect the structural hedge to continue to be supported from net interest margin. Even before considering reinvestment, hedge already written will deliver gross income in FY 2023 higher than what we saw in FY 2022. In addition to this, you should consider the reinvestment yield available with current five-year swap rates of around roughly 4% relative to the average redemption yield in the second half of around 1%. Expect the hedge notional to begin to reduce somewhat over the second half of the year, reflecting the modest shrink in the variable savings stock.
However, this will have little effect on net interest income given the current shape of the rate curve, that is with SONIA broadly equivalent to the five-year rate. On the right, we have set out our usual interest rate sensitivity using our standard pass-through assumptions. You'll note our rate sensitivity remains positive in year one, even in a 25 basis point down scenario. This reflects prudent assumptions on product pricing from more elevated rates today. Overall, the combination of our structural hedge and rate sensitivities leaves us well positioned to maintain margin in the current environment. Turning finally to slide 21. If I look back over the last six months, it's amazing to think just how long ago September was.
In that period, the market has been through quite fundamental shifts in sentiment ranging from optimism, realism, and at certain points in March, something that felt approaching despair. In our position, this has been both a blessing and a curse to be an onlooker as events unfold. As a newly designated Tier 1 bank, you have to step up to demonstrate you have a good handle on events. I think we did a reasonable job of navigating markets, exemplified by the underlying balance sheet strength that we have talked about in this presentation. Being smaller but still being Tier 1 means that you can be more agile in your approach, but you're still held to a very high standard at the same time.
When I look at our spread performance in that time, we continue on, to underperform relative to periods, both as spreads widen but also as they retrace. Like I say, it's both a blessing and a curse to be our size. What to do? Fundamentally, I think time is the answer. Time allows proof to emerge that there is a resilient model at work here. During recent debt engagement events across both Europe and the U.K., we saw evidence of these proof points permeating to investors with the acknowledgement of the bank's Tier 1 regulatory status and consideration of our name in the same conversations as our larger peers.
This was further supported by good performance in our inaugural stress tests, and with the release of the results of our second stress test during the summer, it provides the opportunity to demonstrate another tangible proof point in the near future. To land this point further, it could be argued our balance sheet has been tested regularly since Brexit, through Covid, the mini budget, cost of living pressures. It's pleasing, particularly surprising to see that the asset quality remains resilient and our improved provision coverage, which is well above pre-pandemic levels, ensures we are well positioned to manage what remains an uncertain outlook.
Despite the economic backdrop, we continue to deliver on our digital strategy, focusing on supporting our customers, continuing to grow profitability, reducing our cost income ratio, and delivering exciting and compelling digital propositions, all the while maintaining a strong capital, stable funding and prudent liquidity position. That's pretty good when I think about it, when you know, when you think about the fact that these two banks only came together four and a half years ago. To summarize, we are very focused on managing down the overall difference to larger peers. Of course, you don't need to expect us to say we don't think the current levels are reflective of where the fair value point is relative to those peers.
We will continue creating proof points, continue to tell our story, and actively seek the benefit of the force in bringing those together in creating a compelling investment proposition and support further spread compressions appears. That's it, everybody. Thank you for your attention, and we'll now open up for a line of questioning. Nadia, please go ahead and see if there are any questions this morning.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that's star followed by one on your telephone keypad. We have a question from Lee Street of Citigroup. Lee, please go ahead. Your line is open.
Hello. Good morning, all. Thank you very much for doing the call. A couple from me. I guess the first one, you know, I'll from my perspective, I don't really see any parallels between what's happening in the U.S. regional banking sector and, you know, whether it's in U.K. or Europe. Just any thoughts from you? I presume you agree. Secondly, you know, appreciate you being very, you know, upfront about where you spread your trade versus your larger peers. I suppose is the issue not more on the equity price as well, if you could be discount to book value versus, you know, the likes of Lloyds and NatWest?
Is it almost, you know, almost needs that to be bridged a bit first before we, you know, start trying to bridge the spread to give them, you know, relatively speaking, the spread to a fair bit closer to where the equity trades. Third one, and I know I've asked you this before. Obviously, you know, as you say, it's a blessing and a curse to be your size. I mean, you know, while I don't think there are any parallels with what's happening in the U.S. banks, we do have a general trend in the market of, you know, the number of banks disappearing and, you know, banks generally getting larger. Do you think, you know, around your size that's sort of is sustainable?
You, you know, you might ultimately be forced to go out and sort of, you know, accumulate some more assets as and when, you know, things become available in the market, and obviously once, you know, you've fully integrated your last acquisition. Those are my three. Thank you.
Perfect, Lee. I'll take the first one, and then Richard, if I can ask you to sort of cover off equity and-
Yeah.
-acquisitions, if that's okay. Good question on U.S. regional banks. It is something over the last month and a half we've done an awful lot of thinking about. I mean, quite clearly, we get a lot of questions from the PRA. As I say, you know, we have to do the same thing the very largest banks are often on a daily basis with the regulator. We have a lot of inbound from the board and the LT in terms of questions. We're very conscious that, you know, the number of regulatory deliverables like ICAAP and ILAAP, but we've got the 2nd round of the sort of resolution process to do later this year. We spent a lot of time thinking about and looking at...
We got inbound from customers, some customers saying, "Well, look, you know, is there a read-across?" I think we were surprised on the Friday it happened to understand that U.S. regional banks are subject to a different regulatory path to the one that we're subject to. In some ways, it's not quite the same, but we're closer in terms of regulatory approach here in the U.K. than, say, the largest money center banks in the U.S., you know, JP, Wells, or Citi, right? You know, but, you know, we have a higher regulatory test. That's why we're clear to call out, well, look at the diversify our deposits, the franchise, look at the spread, look at, look at things like the balance between insurance and uninsured. Look at the...
We don't have that deposit concentration, you know, we understand Silicon Valley sort of had. We've got a really diverse customer base, again, both within retail but also through the business deposit structure. Then also we prudently managed interest rate risk and market risk generally within the bank. Effectively we weren't exposed to the movements in interest rates that U.S. banks have been exposed to. I also think there's been an element of catch up or refreshing within the market around liquidity rules and liquidity treatment generally. On the sort of worry bead side, we've also been doing a lot of work around trying to understand, I'd say, both the impact of social media and increasingly through our ILAAP, we focus on risks posed by digital channels.
You know, we're working all of that through because that's happening in sort of real time. I think when I come to think about in terms of positioning us in terms of things like LCR, I think 153% for now feels about the right value. Very focused around, you know, how we go about repaying TFSME. That's very much in our thinking. Also saying, you know, think measures like LDR, we think we're kind of at the right level there too. I don't think there's a direct read-across. I think on the other two points, I'll let Richard come in now, and see how we're reflecting on those. Richard?
Sure. Look, thanks, Lee. I mean, I guess, couple of things just in terms of your second point around the sort of equity valuation, you know, leading into the spread side of things. I think, you know, as we look at it, there are a lot of factors, some of which Justin's just touched on there, that are pretty correlated in terms of the drivers rather than one being necessarily causal of the other in terms of equity versus debt spread. You know, I mean, some of the areas where the equity market's particularly focused at the moment, and we do recognize that we trade at a discount relative to some of the other U.K. banks, given some technical factors in some sense around liquidity and size.
Also I think, you know, what we tend to get questioned around has been strength of deposit franchise, credit in the current environment. Also sort of, I think, you know, the slight concern around competition across both mortgages but also deposits as well. What we've aimed to do through some of the disclosure that we've given, that we talked through in the presentation, particularly on the deposit space, is to demonstrate the strength of the deposit franchise as we see it in terms of ability to gather inflows through the period, but also in terms of our ability to do that at quite good spreads as well. Giving more detail around that side of things, you know, for us on the mortgage side, actually we see spreads on the front book being marginally below back book.
Sort of, you know, application spreads in the kind of 70 to 80 basis point territory against a 100 bit back book. It, you know, that in essence, that gap having narrowed compared to where we were historically. What we were aiming to land yesterday was a bit more detail around the drivers of NIM as we see them, and pleasing to kind of be able to upgrade that from a competitive point of view. I think in terms of the credit side of things, we've obviously played catch up in terms of the timing of taking through new economics compared to December reporters, and having a more negative view compared to the ones that we had at full year. Actually in terms of book performance, we feel reasonably well-placed across all of the portfolios, as I was saying.
Really then, in terms of what drives the equity forwards from here, you know, we can see a number of tangible catalysts to do that. Most notably, you'll have seen some of the information that we gave around strength of capital position, but also our thinking around timings of buybacks. Obviously the language there, we talked to doing that after the ACS. Clearly that's something that's a particular focus for the equity market side of things. As we look out into 2024, we're also reiterating our double-digit ROTE guidance and the less than 50% cost income ratio. Now, as we see it today, there is an element of, you know, continuing to demonstrate that delivery, building that track record will drive a rerating in terms of the equity side of things, certainly.
Also, I think, you know, doing that with a strong fundamental set of fundamentals on the balance sheet will also support spreads on the wholesale funding space as well. Your point three in terms of scale, I mean, I think ultimately we feel like we do have sufficient scale to be able to compete well. We have very strong organic strategies, have just been laying out there in terms of getting towards double-digit returns, and that really is the sort of guiding principle in terms of our focus today. You know, we would consider, you know, particularly small tactical insults in terms of capability. There's nothing that's particularly front of mind for that.
Actually if it was something that were immediately accretive, and didn't disrupt through a large-scale integration, that would certainly be something that we would think about. Clearly, I mean, we consider all options, but for now, you know, given the proximity to our FY 2024 and our sort of year in terms of the targets that we set out, that remains very much our focus from a delivery perspective.
All right. No, that is fair often. Thank you very much. Those are very detailed responses to my three questions. Thank you.
Perfect. next question. Nadia.
Thank you. Firstly, as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. Our next question goes to Daniel David of Autonomous. Daniel, please go ahead. Your line is open.
Hi. Morning, all. Thanks for doing the call. It's been really helpful. I have two questions. The first one's just on issuance and the way you see different currencies. Just looking at your outstanding stack, I guess you've mainly targeted sterling and euros. I'm just interested to hear your thoughts on whether you might look at dollar markets in a bit more size and potentially what benefits that might bring or if there's a reason why you haven't gone there so far. Secondly, just looking at TFSME and appreciate the disclosure. And realize this isn't kind of a today topic, but just looking at your maturities, contractual maturities that you've got coming up, I guess a note on the slide to talk about secured issuance.
I'm just interested to hear if there are any other options to replace that TFSME, clearly covered issuance, secured issuance is one, but are there any other options? Then potentially the cost implications, earnings implications of those other replacement options would be interesting to hear. I guess there are some parallels to TLTRO in Europe and no doubt that the market might start looking towards the impact of TFSME in the U.K. Interested to hear your thoughts on that topic as well. Thanks.
As I bet every single DCM banker is literally on this call. "Oh, are these guys gonna do dollars?" You're absolutely right, Daniel, right? Our approach to date has been to really try and grow our investor coverage.
In the next nearest market, in euros. We have looked at dollars, and in the past, and I think the test for me is, one, it would need to be complementary to what Richard does on the equity side, right? In terms of that, looking at that market. It's also our ability to commit to being a regular issuer. When I look at similarly sized issuers, and I talk to the Irish banks, you know, it is that ability to come up with repeat and sustainable issuance, from my point of view. It's clearly a market, that would be attractive.
I think the other challenge we would have right now is, again, would U.S. investors feel slightly bearish because, again, we're a mid-sized bank, in the U.K. Back to Lee's previous question, is there a read across? We don't see one, you know, that would possibly be a hesitancy on their part. You know, I think as we grow, it's certainly part of what we would look to do. Clearly we have tapped the dollar market in the past through our secured RMBS issuance. If I look at TFSME, it's a fair question. My overall view and test is that we shouldn't be looking to repay all TFSME through, exclusively through wholesale funding.
I look at Treasury have a role to play, but bear in mind, TFSME was brought in to support the franchise's customers, so the franchise has a role to play, and it'll be a combination of the both. I don't think that pushes us towards considering opco issuance. We have it as a capability, but it's not something I would choose to do because we're trying to build into the forward-looking plan a cost-effective way of delivering that refinancing. Similarly, at the same time, right, we don't expect TFSME to be extended or changed in any way, right. We work on the basis that, alongside all other banks, that scheme will come to end and this long period of central bank liquidity support that's existed in the U.K. will unwind.
From my point of view, we're about to get into our planning cycle, so this all then will be further refined, certainly as we think about FY 2024 and FY 2025 and beyond. Does that answer your question?
Yeah. I guess some of the other options that other banks have been discussing is repo and commercial paper. I guess just asking about the options, I was kinda-
Yeah.
-pushing towards kind of what sort of capacity there are to kind of replace there. I guess this is the big one of our large unknowns as analysts.
Yeah. I mean, we typically historically, this goes back a long time ago, you know, Clydesdale as was pretty big in the short-term space, and we haven't been particularly active in it for many years. We do have a small amount of capacity, and we're building out our name recognition. One of the things that we're looking to do there is we work very, very closely with our business franchise around, you know, is there crossover in customers between what you see to the short-term broker market and what you see, what they see coming through in terms of relationship deposits and to get alignment and pricing efficiency there. Equally, we do look at the repo market.
What I've been keen to develop, certainly over the last 18 months, given the market environment, is expanding our tool set of options that we have, from a, you know, both from a treasury but also from an overall deposit franchise perspective.
Thank you very much. Interesting.
Nadia, next question.
We currently have no questions. As a final reminder, if you would like to ask one, please press star followed by one on your telephone keypad. We'll pause for just a moment. Thank you. It appears we have no further questions. I'll now hand back to you, Justin, for any closing comments.
Listen, thanks for all listening in this morning. Hopefully, that was helpful. From, you know, it's always good to have these opportunities for Rich and I to engage with you all. If you do have specific follow-ups or specific questions, you know, please reach out to myself, to Matthew, to Gareth, to Richard. We are here to help. With that, call to a close. Hopefully, everybody will enjoy, if you're in the U.K., at least, a good long weekend of coronation cheer. Thank you everybody, and have a great day. Bye.
Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your line.