Welcome to the Barclays Third Quarter 2022 Results Analyst and Investor Conference Call. I will now hand you over to C.S. Venkatakrishnan, Group Chief Executive, and Anna Cross, Group Finance Director.
Good morning, everyone, and thank you for joining us today. I am pleased to report another strong quarter, extending the robust operating performance that Barclays has delivered so far this year. In the third quarter, profit before taxes was GBP 2 billion, generating a return on tangible equity of 12.5% and an earnings per share of GBP 0.094 . This leaves us in a good position to deliver our full year statutory return on tangible equity target of above 10%. I would like to highlight, in particular, the strength and consistency of our results as we continue to execute on our business.
We see broad-based income momentum across all our three operating businesses. Group income growth was 17% in third quarter year-on-year, excluding the impact from the overissuance of securities, a subject to which I'll return in a moment.
There were several important drivers of this performance that I wish to highlight. First, in the corporate and investment bank, we continue to gain revenue share in our markets business, driving the best third quarter income in both markets and fixed income FICC in recent years. Notably, our FICC performance was particularly strong and ahead of our US peers, with income up 63% in dollars as we supported our clients in very challenging markets. In Barclays UK, we positioned ourselves well for rising interest rates, with a growing contribution from our structural hedge as we locked in higher yields.
Within the consumer cards and payments business, growth in our US card balances was delivered by recovery and spending and the first quarter of our partnership with Gap, which is starting to show results.
Taken together, both balance growth and the management of our sensitivity to higher interest rates contributed to significant growth in the net interest income for the group. Finally, while we are a UK domiciled bank, we have a truly global footprint, providing attractive exposure to the US economy with over 40% of our group income generated in US dollars. While our income story paints a compelling picture, we remain, however, cautious about the macroeconomic outlook globally and have been approaching it accordingly over the last year.
In fact, we have been prudent in our balance sheet management for many years, in particular since the days following the EU referendum in the UK. We have reviewed our corporate loan portfolios, particularly in more vulnerable sectors, reducing exposure and managing our risk by acquiring significant credit protection.
As with many of our peers, we have taken markdowns in some elements of our syndicate loan book, but here too, we have been managing our risk prudently and increasing our hedges. In our UK credit card portfolio, our balances remain some 40% below pre-pandemic levels. While our US credit card portfolio has grown, credit quality remains very strong and customers continue to repay balances at near record levels. That said, although we feel we are carefully positioned, we remain alert to signs of stress.
Our UK debit and credit card spending data give us early insight into how customers are adjusting to prevailing trends. Far, we have not seen emerging signs of stress. Although our September data showed a slight fall in consumer confidence.
People are being prudent with a reduction in non-essential spending, such as clothing, as they adjust their household expenditure for large increases in utility bills. We are drawing on this insight as well as our data and listening to our customers to understand how best we can support them. We have put in place a range of options to support individuals and businesses who bank with us. This ranges from providing basic information such as mortgage renewal dates or how to build a household budget through to helping these customers with more complex needs.
Today, we have over 8,000 colleagues available to engage with our customers in the UK and to discuss their finances. We know the demand for this customer support is growing, and we aim to hire nearly 1,000 more people in the coming weeks to boost that capacity.
Let me now address the regrettable matter of the overissuance of securities under our US shelf registration statements. We have resolved the matter with the SEC and the total financial impact was broadly in line with what we disclosed at the second quarter. I've said it before and I'll say it again, this issue was entirely avoidable and we are taking action to prevent this kind of failure from recurring. The external counsel-led review is now complete, and it reinforced the findings of our own extensive internal reviews.
We are already using these findings to improve specific controls across the bank and to reinforce more broadly a strong controls culture. I continue to be clear with all my colleagues that we have no higher priority than ensuring that our operations and our risk and controls processes are robust and effective at all times.
Before I conclude, I want to give you a brief update on one of our strategic priorities, which is capturing opportunities from the transition to a low carbon economy. Governments continue to play a critical role in this transition. Considering the Inflation Reduction Act in the US and other business factors, in our year-end climate update, we expect to bring forward the phase-out date for financing thermal coal power in the US from 2035 to 2030, in line with our approach in the UK and in the EU.
Demonstrating Barclays' leadership in the energy transition, we were very honored and pleased to act as the sole M&A advisor to Con Edison, based in New York, on the announced $6.8 billion sale of their clean energy business to RWE, based in Germany, earlier this month. This was the largest ever sale of renewable assets globally.
In conclusion, Barclays has had a strong third quarter of financial performance, building on our performance in the first half of the year. This gives us a solid platform as we continue to target a statutory return on tangible equity of above 10% for 2022. Our capital position is robust, with a CET1 ratio of 13.8%, which is comfortably in our target range of 13% to 14%.
Our announced total capital return for the last 12 months, comprising both dividends and buybacks, is a yield of about 10.5% on the stock at current share price levels. As I have said consistently, returning excess capital to shareholders remains one of our priorities. While I'm pleased with the results, I'm very conscious that we live in unusually uncertain times.
This drives our conservative approach to managing our balance sheet and provision levels and our careful stance towards the expected deterioration in the global economy. With that, thank you very much, and let me turn it over to Anna.
Thank you, Venkat, and good morning, everyone. Third quarter was another quarter of delivery across our businesses, contributing to a year-to-date statutory ROTE of 10.9% despite elevated litigation and conduct costs. We delivered a ROTE of 12.5% for the quarter. PBT was up 6% year-on-year, and EPS was GBP 0.094 . The CET1 ratio ended the quarter at 13.8%, and we remain highly liquid and well-funded , with a liquidity coverage ratio of 151% and a loan-to-deposit ratio of 72%.
As Venkat mentioned, we reached resolution with the SEC on overissuance. As expected, the net profit effect of the overissuance in the quarter was immaterial. However, there were offsetting effects on income and costs, and there's a slide giving the details in the appendix.
I'm going to exclude those effects in my commentary on the cost and income trends. As in recent quarters, this robust performance is being driven by broad-based income momentum. Income was up 17%, while total costs were up by 18%. However, operating costs, which exclude L&C, were up by 14%, reflecting our focus on positive jaws. Both income and cost numbers are, of course, affected by the stronger US dollar. Impairment was GBP 381 million, up from GBP 120 million last year. I'll say more about provisioning and our coverage level shortly. I'm going to start with income momentum.
All three operating businesses delivered income growth. In the investment bank, whilst the market environment for primary issuance remains challenging, that same environment is driving high levels of client activity across both financing and trading in the markets businesses.
In the CIB, income grew 5% against a strong comparator, with markets up 22% in US dollars, more than offsetting the reduction in banking. The standout in markets is again FIC, up 63% in US dollars. Clearly, the volatility across global markets provides a tailwind to this business as we help clients manage their risk. However, FIC comprises both intermediation and the more stable financing revenues. Fixed income financing balances are up over 30% year-on-year, and margins have widened as rates have risen globally.
The trends give us confidence in a more sustainable base to FIC income if volatility subsides. Equities revenues were down 21% in dollars. While derivatives were weaker, the year-on-year growth in our equity financing income provides a good base for sustainability.
Overall, our third quarter share of wallet and markets has increased by over 100- basis points year-on-year compared to peers who have reported so far. Investment banking fees were down 54% in US dollars, broadly in line with a reduction in the industry fee pool. However, the deal pipeline is strong. The corporate and consumer businesses are well positioned for the rising rate environment, further boosted by transactional growth and indeed nominal economic activity.
Although corporate income overall was down 17%, the strong growth in transactional banking significantly offset the corporate lending income expense. Income in CCP increased 54%, reflecting strong growth across all three constituent businesses and including the effect of the stronger US dollar. In international cards, income was up 68%.
In contrast to the UK, we grew average balances strongly in the US by around 30% or $6 billion year-on-year, both organically and with the $3.3 billion Gap book. In payments, income grew 15%, and the private bank achieved 44% income growth with a continued build in client assets and liabilities up 14% to GBP 138 billion. Barclays UK grew income by 17%, notably in personal banking, where earnings on deposits in the rising rate environment more than offset very competitive mortgage margins.
Before I talk about interest rates, it's worth noting that our franchise is a global one with a little over 40% of income in US dollars. Clearly, this has an FX translation impact, but more importantly, demonstrates our exposure to the US economy and capital markets.
Moving on to the effect of interest rates. We have maintained a consistent hedge strategy for a number of years, the aim of which is to smooth the impact of interest rate changes on net interest income. Each month, we currently roll GBP 4 to 5 billion of the hedge, mainly into three-to-five-year rates. The consequence of this is that Barclays has sensitivity not just to base rates, but also to the yield curve. The left-hand chart on the slide illustrates this for a 25-basis point parallel shift in the curve.
In year one, the majority of the sensitivity comes from product decisions around the pass-through of increased base rates to customers. Thereafter, with the cumulative effect of the hedge rolling onto higher rates, the hedge impact becomes more significant and reaches around 2/3 of the GBP 500 million increase by year three.
Of course, this is just illustrative and is not a prediction of what will happen with multiple rate rises. On the right-hand chart, we have shown the actual impact in recent quarters. Given the recent move in the yield curve, we were locking in an average five-year swap rate of 3.05%, for example, in third quarter, pulling the average yield on the hedge up to 93- basis points. We have around GBP 50 billion maturing in 2023.
Although we don't know exactly where swap rates will go, the likely uplift on the current hedge yield is clear, even if the rate cycle is shorter or shallower than current expectations, and of course, that is locked in with each passing month. Looking now at costs. The third quarter figure was GBP 3.6 billion, but this is net of a reduction in overissuance costs of GBP 0.5 billion.
Excluding that, costs would have been GBP 4.1 billion, up from last year's equivalent of GBP 3.5 billion. This increase was partly attributable to the other litigation and conduct charges of GBP 164 million. Operating costs, which exclude L&C, increased 14% against income growth of 17%. This increase of GBP 0.5 billion included FX movements and inflation, plus investment spend focused on our three strategic priorities.
Around 30% of our costs are in US dollars, so the 14% change in the US dollar rate year-over-year has a significant translation effect. The currency effects have been more pronounced quarter-over-quarter, with a 6% strengthening in the US dollar.
Assuming an average dollar rate of 112% for fourth quarter, we expect total operating expenses for 2022 to be in line with our previous guidance at around GBP 16.7 billion, with a tailwind from both net L&C credit of GBP 0.3 billion in third quarter being broadly offset by the stronger dollar and other cost inflation. I'm not going to give absolute cost guidance for 2023 at this stage, but we will continue to manage the trade-off between cost efficiency and investment.
Of course, a strong dollar will affect the sterling cost figure, but with over 40% of our income in US dollars, this is positive for the cost income ratio. We manage our statutory costs, which include litigation and conduct charges, and are very focused on generating positive jaws on a statutory basis. Moving on to impair ment.
The current macroeconomic outlook informs our approach to provisioning. Before I look at how this affects impairment, I want to summarize briefly the evolution of key portfolios in recent years. The UK mortgage book has grown by 13% since December 2019, but the average loan to value has declined, and only 2.3% of the book has an LTV over 85%. Our UK card book has reduced by around 40% over that period.
We continue to see high levels of repayment across the credit spectrum and arrears rates remain stable at low levels. By choice, we have a different dynamic in US cards. Whilst repayment rates have also been high, we are growing balances, including through the launch of the Gap partnership.
However, the quality of the book, as measured by average FICO scores, has improved and arrears rates are still below the pre-pandemic levels. Wholesale balances have increased recently, but the majority of the growth has been in debt securities, collateralized lending to financial institutions, and the lower risk areas of corporate lending. In addition, we have increased our first loss credit protection over the corporate loan book, thereby reducing our exposure to loan losses. 35% of this book is now covered by some form of protection, up from 26% pre-pandemic.
Across our portfolios, we feel confident that we are well positioned. As you can see on the next slide, our total impairment allowance was GBP 6.4 billion, an increase in the quarter from GBP 6 billion, and this includes GBP 0.7 billion of post model adjustments or PMAs for economic uncertainty.
The forecast macroeconomic variables or MEVs we have used at third quarter for models impairments are shown in the appendix. These show some deterioration compared to second quarter. For example, modeling baseline UK unemployment of 4.4% in 2023, up from 4.1%, and US unemployment of 4%, up from 3.5%. Applying these MEVs to the third quarter balance sheet had an effect of around GBP 300 million. We created the PMA for economic uncertainty to capture this type of deterioration. In the quarter, we have released around GBP 300 million of the PMA balance.
Therefore, the models allowance plus the economic uncertainty PMA is roughly flat quarter-on-quarter at GBP 5.2 billion and covers the further modeled increase we would see if we were to use our downside one scenario. We still don't see significant signs of deterioration in credit metrics.
Although coverage ratios overall are slightly down on pre-pandemic, we have increased coverage for stage one and stage two credit cards, as you can see in the appendix slides. The chart on the right shows the overall loan loss rate over recent years. Ignoring the volatility during the pandemic, you can see that it has been around 50-to-60- basis points. Although this is sensitive to the portfolio mix, we think it's a reasonable range to be considering for our through the cycle loan loss rate. In third quarter, this was 36- basis points and the charge was GBP 381 million.
We expect this to rise modestly over coming quarters as we grow. This is obviously subject to further potential deterioration in the macroeconomic outlook beyond that which could be offset by the uncertainty PMA balance of GBP 0.7 billion.
A quick summary now on our results by business. In CIB, income grew 5% against a strong comparator. I focused on the key drivers earlier, but wanted to go into a bit more detail here on the corporate income. Transaction banking was up 57%, reflecting strong NII growth, and we would expect further growth in fourth quarter. The corporate lending income expense reflected both fair value losses on leveraged finance lending of GBP 190 million net of mark-to-market gains on related hedges and also higher costs of hedging and credit protection. The underlying corporate lending income remained sta ble.
Operating costs, which exclude L&C, increased by 17%, reflecting the 14% appreciation in the US dollar and investment in talent systems and technology to support income growth initiatives, plus the impact of inflation. The cost income ratio was 62%, excluding the effect of overissuance.
Overall, the CIB generated a statutory RoTE for the quarter of 11.9%. We're pleased with the sustainability of the business through the pandemic and current geopolitical disruptions. The franchise is developing well and over 1/2 of the income is dollar-based, reflecting the strength of our position in the largest global capital market. Moving on to CCP.
Income increased 54%, reflecting growth across international card, payments, and the private bank, as I mentioned earlier. Total costs were GBP 835 million, which included GBP 102 million of litigation and conduct, mainly in respect of our review of legacy loan portfolios.
Excluding this, the increase in operating costs was 30%, principally investment in the growth of partner brands in US cards and the dollar strength, but still delivering positive jaws. The impairment charge was GBP 249 million compared to GBP 110 million last year. This reflected growth in US card balances back to pre-pandemic levels with some normalization of economic activity. As balances grow, we do expect some stage migration, but risk metrics remain below pre-pandemic levels.
The ROTCE was 9.5% despite the L&C charge. Turning now to the UK. Income grew 17% while costs were up 2%, delivering strong positive jaws and reducing the cost income ratio by eight percentage points to 56%.
The NIM for the quarter was 301- basis points, up 30- basis points on second quarter as we saw benefits from rate rises, and we've shown a bridge on this slide analyzing that. We're continuing to guide for the full year to a range of 280-to-290- basis points and expect to be in the upper part of that range. The cost base that we flagged previously provides significant offset to cost inflation, and we're keeping a tight control over credit risk. There's a slide in the appendix on the head office results.
Turning now to capital. The CET1 ratio ended the quarter at 13.8% and increased from 13.6% at the half year and comfortably within our target range. Our capital generation from profits was strong, contributing 43- basis points.
We completed the half year buyback, returning capital to shareholders and further reducing the share count to 15.9 billion. That's down 1 billion in the last 12 months. Combined with the dividend paid and accrued, this was a return to shareholders of 22- basis points. Over time, increases in interest rates are a tailwind to profitability, but the effect on reserves from market movements caused a headwind of 12- basis points in the quarter, principally through the fair value effect on bond holdings.
The completion of the rescission offer and termination of related hedges released RWA, increasing the ratio by 17- basis points. FX had little net effect given our policy of hedging the ratio with an increase in RWA, but also a positive effect on the currency translation reserve in the numerator. Our MDA hurdle is 10.9%, so we have comfortable headroom.
We remain confident in the organic capital generation, and our target range remains 13% to 14%. A quick comment on the move in equity. TNAV decreased GBP 0.11 in the quarter to GBP 2.86 per share, reflecting the effect of increased interest rates, partially offset by earnings and the benefit of stronger dollar on reserves. Finally, on leverage, our spot leverage ratio was 5% and the average leverage ratio was 4.8%.
To summarize on targets and outlook, we reported statutory earnings of GBP 0.094 per share for third quarter and generated a 12.5% ROTCE against our target of over 10%. We continue to target a cost income ratio of below 60%, and our capital ratio remains strong at 13.8%. We have confidence in the continued revenue momentum across all of our businesses.
We continue to focus on the cost trajectory given inflationary pressures and have maintained our cost guidance for the year of GBP 16.7 billion. We are well provisioned in readiness for potential deterioration in the macroeconomic environment, but expect a modest increase in quarterly impairment charges over coming quarters as we grow. Overall, the business performance is robust and we remain focused on delivering our target of double-digit ROTCE this year and on a sustainable basis going forward.
We are confident of being able to invest for future growth and delivering attractive capital returns to shareholders. Thank you, and we will now take your questions. As usual, I would ask that you limit yourself to two per person, so we get a chance to get around to everyone.
If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one on your telephone keypad to ask a question. Our first question is from Alvaro Serrano from Morgan Stanley. Alvaro, your line is open. Please go ahead.
Hi. Thanks for taking my questions. One question on cost, another on asset quality, please. On costs, I heard you, Anna, say that you're not gonna talk about 2023, and I don't expect you to give a hard number, but if I take your guidance for this year, it looks like operating expenses are annualizing north of GBP 16 billion, considering there's inflation, likely inflation and consensus is closer to GBP 15 billion. There's a significant delta. Is there any sort of cost actions or anything I should bear in mind in that number beyond obviously the exchange rate?
Any actions you're able to take or do you feel there's even more flexibility on variable comp than in other times of the cycle? The second question is around asset quality. You've said that you expect a trend towards through the cycle loss rates. Obviously, there's been some changes in the mix, increasing sort of retail cards in the US and shrinking UK I don't know if you can update us on what that number looks like now. Related to that, in your downside one scenario, I think you've got accumulated almost 20% correction in house prices. What impact would that have on RWAs? Thank you.
Okay. Thanks, Alvaro. Let me take costs first. We guided this year to GBP 16.7 billion. That has an assumption embedded within it that the fourth quarter dollar rate will be 1.12. As we look forward into next year, here's kind of how I'm thinking about it. We would expect that given we've seen elevated levels of L&C this year, for that to be considerably lower. However, the FX impact that we've seen intensifying through the year, you might expect annualize into next year.
If rates stayed at 112%, that would be about GBP 500 million pounds of cost increase into next year. What we have to remember is that that has a greater impact on the income line. The equivalent to that 500 in income terms would be GBP 1 billion.
As you're updating your cost expectations, I would encourage you to think about the FX impact in income as well. As relates to other factors, clearly there is inflation, but you've also got the investment that we focused on, our three strategic priorities. You can see that's not deployed equally throughout the bank.
In terms of actions, we could clearly modify that investment plan, but to the extent that we feel that it's driving, revenue growth, obviously we'd be thoughtful about doing that. In terms of managing inflation, we do have, efficiency programs in place. You can see that particularly in the UK, where you've got strong income growth dropping to the bottom line with minimal cost growth. I would say, you know, consider the impact of efficiency programs there.
I mean, obviously, also, if we see a drop in CIB revenue, we've got another lever in comp. Overall, I'll just leave you with a message that we're very focused on the RoTE target and very very focused on delivering positive jaws. In terms of asset quality, it's difficult to give you an adjusted version of that historic number. You're right, we're actively growing balances in US cards. We're seeing them fall away in UK cards.
At the same time, you can see that the level of risk that we're holding in the balance sheet versus pre-pandemic is lower. To some extent, we're gonna have to see how that pans out. It's lower because LTVs are lower.
Actually, if you look at the staging, you can see that the proportion of stage one and two balances is also considerably higher than it was pre-pandemic. To your final point, we haven't seen procyclicality in our RWAs yet. You're right. If there was a substantial decrease in HPI, we would expect that to impact the loss given default in our capital models and would lead to some RWA pressure.
But equally remember that within there's the probability of default piece as well, and therefore you should consider the strength of customer balance sheets as we sit here today. We'll update on that as we see it happen, but to date, no signs.
Thank you very much.
Thank you. Next question, please.
Thank you. Our next question is from Joseph Dickerson from Jefferies. Joseph, your line is open. Please go ahead.
Hi. Thanks very much. You already answered my question on the FX sensitivity there on revenue versus costs. I guess just on capital return. You know, Venkat, I think you've spoken earlier this year about the conversion of earnings into buybacks, and you've done, you know, you did GBP 500 million at second quarter. I guess what held you back at third quarter, given you've got clearly a reasonable capital buffer?
Yes, there's some headwinds coming in fourth quarter from pension and Kensington, but you know another GBP 500 million is, I don't know, what is 14, 15- basis points of capital. Is this a management decision around being prudent or are there other regulatory considerations at play here? Thanks.
Yeah. Hey, Joseph. It's a decision which we will take in fourth quarter. I mean, it's basically that's it. You know, we sort of did it at the year-end and the half year this year, and so we will talk about that on our annual earnings.
Thanks Joe. Next question, please.
Our next question is from Jonathan Pierce from Numis. Jonathan, your line is open. Please go ahead.
Hello there. A couple of questions, one on the hedge and one on these fair value movements, if that's okay. The hedge, there was another GBP 10 billion, I think, added to the notional in third quarter. I don't know whether FX has any influence on the size of that hedge, but clearly in the UK, bank deposits haven't grown now for three or four quarters, but the hedge is still building. Just wondering, are you now fully hedged, do you think?
Thinking about, excuse me, headwinds in the other direction, moving forward, are you yet seeing any early signs of the hedged balances, particularly the 0% current accounts, starting to shift to the higher rate deposit accounts, either within Barclays or to other institutions? That's the first question.
The second question, the fair value movements through OCI, particularly regarding the debt portfolio. They were fairly small actually in the third quarter versus what we saw in the first half, despite much bigger movement in interest rates. I've always been slightly confused as to what this portfolio is.
I guess the question is, given the extent of the rate moves we're now seeing, can I ask you to give us a bit more detail on why you have this seemingly unhedged debt pool? Can I infer from the relatively limited impact in third quarter that you've reduced the sensitivity to rate movements fairly significantly over the course of the last quarter or two? Thanks a lot.
Thanks, Jonathan. On the hedge, the movement quarter-over-quarter is not a sterling movement. It actually relates to because euro rates, central bank rates have gone from negative to positive. It's a change in eligibility, so it doesn't impact the UK sterling part of the hedge at all. You know, you're right. UK liabilities are broadly stable. We are seeing some take up of savings products, but actually in a positive way and in a way that's completely in line with our expectations.
We've got some good savings rates out there, and so we're seeing customers migrate to those as we expected them to. All of that within our rate, sorry, our hedge assumptions and the way that we created a buffer in that hedge.
As relates to your fair value through OCI question, I can see why you might have expected a larger impact. If you look at the disclosure in the annual report, that gives an amount for a 25- basis point shock. I guess your question relates to the fact that the gilt curves moved by more than that. What's going on here is firstly, the disclosure in the annual report actually includes not only the liquidity buffer, but shows the impact on the pension fund assets.
Because the pension's in surplus, those movements are obviously neutral to capital, so you're not seeing that go through. In relation to the liquidity buffer itself, a couple of things. Firstly, the portfolio is diversified. It's not just gilts. There's a range of products in there. Secondly, we have taken down that risk. We've reduced outright risk as the year has progressed, and it's that really that's giving the smaller result in the third quarter.
Okay. That's really helpful. Thanks a lot.
Okay. Thank you. Next question.
Thank you. Our next question is from Rohith Chandra-Rajan from Bank of America. Rohith, your line is open. Please go ahead.
Thanks very much. Good morning, and congratulations on a record FICC performance in the quarter. Just on that, I guess, I mean, you discussed, Anna, in your comments, you know, that volatility is particularly heightened at the moment, and you'd expect its trading revenues overall to decline over time. In terms of helping us to think about the offsets to that, you mentioned FICC financing.
I don't know if you can help us with what sort of proportion of FICC revenues that is and, you know, how that's grown year-on-year or over time. You mentioned a 30% increase in balances, but just in terms and wider margins, but just in terms of the revenue contribution.
More generally, just how we should think about CIB revenues over the medium term versus, you know, very strong revenues for the last few years. You know, if trading income declines, what are the offsets to that and how should we think about the medium term? The second area is just on asset quality. US card rates, particularly 30 days, picked up in the quarter. I don't know if there's anything that you'd want to highlight there in particular. Back on your downside one scenario, you've already talked about the sort of 20% HPI impact.
If I understand correctly, your current reserves effectively are equivalent to something like a 2.5% GDP contraction, 6.5% unemployment and 18% to 20% HPI. I just wanna confirm that that's the case. Then also how quickly you think provisions normalize. What would be the drivers for that? Thank you.
Okay. I'm sure there's at least two questions in there... [crosstalk]
At least.
If not a little bit more, but I'll let you get away with that. Okay. We are pleased with FICC. That's our third quarter at over GBP 1.5 billion. There's a few things in there. We called out, obviously the financing revenue. As to proportions, that will move around a bit depending on what's going through trading. It's actually, we think it's actually a less helpful stat. You know, we have seen balances grow by over 30% year-on-year, and spreads have widened. More broadly than that, I think even in the flow side of FICC, you know, we are seeing increased share pretty much across markets now.
We think that's as a result of our client focus, but also the investment that we have put in the infrastructure and the talent in that business. You know, you're right, when volatility recedes, we might expect revenues to drop back, but they won't drop back, we believe, to levels pre-pandemic, and we think that's the most important thing. What are the offsets to that? Well, there's clearly banking is having a quieter period right now.
That is clearly driven by the same piece. Volatility in the market gives us elevated markets revenue, depresses banking, so we'd expect that to come back somewhat. The other piece to remember, because we always all forget, is corporate and particularly transaction banking.
Transaction banking is a stable franchise business, but one that is also benefiting from the investment that we've put behind it. You're seeing balances grow, you're seeing margins somewhat wider, but also through kind of nominal economic activity, you're seeing sort of trade finance, FX, et cetera, go through there and indeed. Whilst individual pieces might drop back, Rohit, we do have, I would say, increased confidence in the whole. Venkat, before I go on to UK cards, is there anything you would add? Or US cards.
Yeah. I think I would echo what Anna said about confidence in the whole. I think, you know, as rates have risen and spreads have widened, fixed income financing, not just balances, but profitability per unit of balance has increased. It's long been part of the DNA of Barclays. We've got a market-leading position in this area. I think, you know, it's part of a broad set of things within the markets business that represents a diversified portfolio of activity. I think look to this in this kind of environment to provide I mean, a strong amount of ballast to our returns.
Sorry, just before you move on to the cards. Could I just, if you don't want to, I appreciate you don't want to give a proportion, but just can you help us scale the contribution from FICC financing?
We wouldn't give that out on a call like this, Rohith. We'll continue to consider our disclosure around FICC and indeed the other parts of markets, and we'll come back to you on that.. . [crosstalk]
Okay.
On US cards, arrears have ticked up a little. Balances are growing. You know, we're seeing increased economic activity in the US manifesting itself in our cards, but people are spending more. We're seeing organic growth. Given that movement from a very low base, we would expect to see some movement in staging and some movement up in delinquencies. We're not concerned by what we've seen. It looks broadly in line with the industry. It's what we would have expected.
It remains quite a long way below pre-pandemic. You know, the fundamentals of the US economy are pretty strong. You know, unemployment at 3.5%, and we're still seeing strong levels of repayment across that book, so no concerns now.
Let me move on to your final part, which was around the disclosure on downside one. Yes, what we've done is we've shown you what would happen if we weighted 100% to downside one scenario. You know, we've called out for you the main macroeconomic variables that downside one represents, so 6.5% unemployment in the UK, for example.
You're right, that's the comparison we're drawing. In other words, if we saw downside one pan out exactly as we show it in that model, then we would expect to cover it with the PMAs. You know, sometimes the macroeconomic variables don't flow exactly the way we model them to. You know, that's a specific scenario that we're calling there, but we feel like we're well covered. Finally on provisions, just remind me of your last probably your... [crosstalk] fifth question.
Yeah. There were two topics, but so the pace of normalization.
Yeah. The pace of normalization. I guess we would expect to trend towards that 50% to 60% as we grow and economic activity recovers. The thing I'd just call out for you is, given the nature of IFRS 9, that pathway won't necessarily be linear. We can see some lumpiness. That's more a sort of go-to position once we see economic volatility sort of settle down a bit.
Okay. Thank you very much.
Okay. Thank you. Next question, please. Hello, operator. Can we have th e next question, please?
Our next question is from Omar Keenan from Credit Suisse. Omar, your line is open. Please go ahead.
Good morning, everybody. Thank you very much for taking the questions. I've also got a follow-up question on the downside one scenario and a second question on bank taxation. So firstly, on the downside one scenario, thank you for that helpful disclosure. I think we can more make our kind of assumptions of various downside cases. You know, GDP down to an unemployment at 6% are probably not as bad as you can imagine things, but it's probably a reasonable downside case for now.
If things were to materialize in that direction, could we assume that there would be a smooth allocation of the post-model adjustments towards the modeled provisions, kind of somewhat like we have seen this quarter?
Do you think there could be, you know, pressures to keep the uncertainty buffer at a high level, despite the macroeconomic deterioration? Just related to that, can I ask you how confident you feel in that downside one model scenario? I guess the question is that, you know, with interest rates where they are, you know, could that affect the ability of otherwise performing exposures to today? Just want to get a feel as to how confident you are in that modeled number, given that it is a model.
Then the second question on bank taxes. Obviously, there's a bit of discussion around where the surcharge is going to be set. Wonder if you can give us any update there and whether you've had any discussions with the Bank of England on reserve clearing. Thank you.
Okay, thanks, Omar. Good question on the impairment. We'll take that quarter by quarter. You can see what we've done this quarter. We've seen a general sort of movement in the MEVs, and we've broadly offset that. The answer is whether or not, or where that impairment starts to manifest itself.
For example, in the UK retail bank, we are holding a sort of general economic uncertainty PMA, whereas in the wholesale side of things, we are much more sector specific. I would expect it to have some smoothing impact. Whether or not it's exactly smooth quarter by quarter will depend where that impairment manifests itself. In relation to downside one, I mean, you're right.
No model is ever perfect, and I'm gonna hand to Venkat in a moment because I know he'll have a view. These models were built during periods, you know, of low interest rates. You know, there is clearly an impact on affordability from inflation and from interest rates, which is difficult for those models to represent. That's why we've been conservative in our stage one and stage two provisioning. You know, when you look at the stage one and two provisioning across the unsecured books in particular, that's how we're trying to protect ourselves against that. Venkat?
Yeah. I mean, exactly right, Anna. I think what you should see, look at is the combination of the modeled output plus our extra post-model adjustment as our view of what we think is appropriate given the current macroeconomic conditions and the uncertainty of the model behavior around it. Now, if conditions change and we get less uncertainty, we will do what we just did this quarter. You know, it's sort of we're also looking at signs of consumer behavior, and we will make adjustments to that.
I think you've got to expect, all other things being equal that we would look at it the way we did this quarter. If I can then go to your second question, which is about taxes, and you had two parts. One was reserve tiering, the other was surcharge.
Look, on the overall taxation matter, it is something for the government and for the, you know, the chancellor to decide. You know, we read the same newspapers as you do, and so we wait for the budget statement to know what it is. On reserve tiering, I think the Bank of England has been fairly clear that they don't believe in reserve tiering as a tool of monetary policy. You know, we go with that too.
That, that's super clear. Thank you very much.
Okay. Thank you. Next question please.
Thank you. Our next question is from Chris Cant from Autonomous. Chris, your line is open. Please go ahead.
Good morning. Thanks for taking my questions. Thanks for the FX color in the slides as well. That's much appreciated. If I could just invite you to talk about your view on returns into next year, please. You've had a very long-standing greater than 10% RoTE target. I think you originally gave that back in 2017 as a medium-term target. You're expecting to deliver that this year despite obviously the shelf over issuance charges you've taken, which you're not expecting to repeat next year. Your TNAV is dropping because of rates.
You've got a meaningful FX tailwind to your earlier comments looking into next year. Should you not be targeting something more punchy on a forward-looking view? Do you expect to be revisiting that 10% figure, please?
On the structural hedge, obviously, we've had years of growth in the structural hedge. It's up very materially since pre-COVID levels. I appreciate your comments about some migration into savings products as an alternative to current accounts. Do you expect your structural hedge notional to shrink in the coming years, please? Do you expect that size to be coming down as the yield is increasing? Thank you.
Okay. On returns, you know, you're right. We've made good progress towards that target for fiscal year 2022, and we delivered greater than 10% in fiscal year 2021. The target is deliberately a floor, so it's greater than 10%, and you can see that for a few quarters now, that's where we've set our expectations. We won't update, Chris, at this juncture.
You know, I take your point on TNAV, but given the effect on reserves of some of the macroeconomic volatility that we've seen, you know, that TNAV number is moving around quite a lot. It's probably moved significantly since the quarter ended again, I would think. You know, we're not gonna update at this point, but I would just note it is a floor to our expectations. Venkat, anything you'd add?
Yeah. Look, I think I would repeat what Anna and echo what Anna has said, which is it is a floor. You're right that we set it in 2017 as a medium-term target, and I'm glad we've lived up to that medium-term target. You know, we'll continue to think about it. Do you want to go to the second question?
Yeah, sure. When we put the structural hedge together, Chris, you'll note that we've done it over a series of quarters. We've been very thoughtful about how we've built the hedge. At all stages, we've assessed the outflow risk versus the opportunity cost of not putting the hedge on. We've obviously maintained a buffer for conservatism as we put that together. You know, that buffer contains our expectations of product migration.
If that proves to be wrong, obviously we are rolling a portion of the hedge month by month as well, so that gives us further flexibility. To date, the moves that we've seen have been in line with our expectations. We did build it conservatively, we believe.
I mean, I'm just trying to think through everything you've just said there. The size of the buffer that you had in scaling the hedge took into account things like large competitors offering 275- basis points on instant access savings and 4% on one-year fixed bonds. That was sort of part of your scaling of the hedge. I guess the move in rates in recent months has been very dramatic.
You know, we're talking about UK base rate going to maybe double the level consensus would have been thinking about even three months ago. That was part of your scaling of the hedge. You were factoring in that magnitude of rates movement.
As we scale the hedge, we identify what we believe are rate sensitive balances. In part, yes. Clearly not the specific rates that you've quoted there. Rates are moving all the time. You know, we believe we've got a competitive set of savings products ourselves, and actually we're seeing little migration, in fact, practically no migration out of the bank, and migration within our expectations to those products. I mean, that's probably where I'd leave it, Chris. We do consider migration when we put the hedge together.
Okay. Thanks.
Okay. Thank you. Next question.
Thank you. Our next question is from Martin Leitgeb from Goldman Sachs. Martin, your line is open. Please go ahead.
Yes, good morning, and also thank you for taking my question. I was just going to ask a broader question with regards to the outlook for your UK business and just specifically with regards to mortgage rates. Mortgage rates in the UK have risen from around 2% at the turn of the year to around 6% most recently. I was just wondering how do you see this impacting your business, one, in terms of affordability? Has the underwriting been done at such a level that essentially the bulk of your mortgage borrowers can essentially afford these higher rates without cutting spending too much?
Secondly, in terms of what these higher mortgage rates means in terms for the outlook for growth in terms of balances, both on the loan side, so mortgage growth, credit card growth. Also in terms of deposit balances. Could these higher mortgage rates essentially be an incentive for customers using some of their deposits to more aggressively pay down mortgage assets and to lead to a meaningful change in terms of the outlook for growth. Thank you.
Yeah. Martin, thank you. Venkat. Let me try to take the first crack at it, and I'll ask Anna to join in. Good questions all. First of all, on mortgages, you know, we've got a very large mature book. Our average LTV is around 50%. The way the UK market is with a combination of three-year and five-year fixed, about 30% of our mortgage book will refinance over the next year, let's say by the end of 2023.
And so a little bit of that in 2022 and about a quarter of it in 2023. What that does, and to part of your other question is, obviously when we do issue mortgages, we do stress them with a fairly big shock in interest rates in terms of affordability. The combination of that.
It's a combination of that and the fact it's about 25% to 30%, I think mutes its impact on its portfolio. I think also what we are seeing in the UK is a little bit of monthly overpayments. It represents, you know, 20%, 20- basis points, sorry, of our total balances. It's a very small fraction, but you are seeing it, which is good from a credit quality point of view, but it's also prudent financial management as you might expect. I think, you know, broadly the behavior is as you would expect it in an environment like this. Anna?
Yeah. Thanks, Venkat. I'd agree with all of that. The other thing I'd say is that given the house price inflation we've seen over the last few years, you know, the LTV of the customers coming to refinance now will be lower than it was when they took out their mortgages. That might be part of the incentive that's behind the overpayment trends that we see right now. You know, the opportunity to sort of move yourself down an LTV bracket.
From here in terms of sort of loans growth, I would say, you know, this feels like a remortgage market rather than a house price market. That will necessarily lead to lower net growth, I would think. I'd expect to see strong remortgage demand, but a large part of that will be churn in the market.
In terms of sort of the rest of loans growth, I mean, you can see from repayment rates, that we've sort of talked about in cards, IEL growth, so interest earning lending growth in cards, will probably be a bit sluggish as well.
Given where we are in the credit cycle, I think we're okay with that. Probably a little bit more muted on loans growth and similar in deposits, you know, in comparison to what we saw during the COVID period. We've already seen that slow down a bit, seeing a bit of migration, but within our expectations, and customers putting that money to work, whether that be in savings or indeed, through mortgages.
Thank you. Could I just follow up on the outlook for card growth in the UK, which obviously started the year with a very strong trend. Would you expect that to slow down as a consequence?
Card growth in the UK? I would say... [crosstalk]
Yeah.
Let me distinguish two things. I think headline growth or headline balances may grow, but that's in part our strategy. You know, we are trying to pivot the book towards spend rather than lend. Our new Avios product is doing pretty well in terms of take-up. I wouldn't expect that to translate through to significant increases in interest earning lending. Customers are being very cautious in the current environment and the repayment rates that we are seeing remain very elevated.
Thank you very much.
Okay, thank you. Next question, please.
Thank you. Our next question is from Edward Firth from KBW. Edward, your line is open. Please go ahead.
Yeah, morning, everybody. Thanks. Thanks very much for the question. I just had a couple of questions, really, both around credit. What I'm trying to do in my mind is I'm just trying to square your comments at the beginning about the outlook for the UK and the demanding and uncertain environment, and I guess that's sort of consistent with what consensus is viewing the UK, with your comments that you expect provisions to normalize. Because it seems to me those two are inconsistent.
Either that means your normal provisions is not a normal provision, it's actually a peak provision, and we should be thinking about Barclays through the cycle provisions being much lower, than perhaps we have done in the past.
Potentially we could see provisions go somewhere above normal because the environment is not normal, I guess. I suppose that would be my first question, just really to understand how you're talking about normalized in the economic outlook. I guess related to that, in terms of your PMAs, am I right?
Just to get this clear, if you hadn't released the GBP 300 million PMA sort of override, your charge of this quarter would've been about 70- basis points. Is that? I just check that my understanding is correct on that. Then finally, could you tell us something about what's happening at the front line in terms of just in the last month?
I know it's not really part of the quarter, but I'm thinking, you know, we saw this big uptick in mortgage costs really just over the last month. I just wondered if you could give us some insight in terms of what is happening in terms of volumes of new business in October. Are you seeing an uptick in rejection rates?
Are you finding that people are not meeting your affordability criteria anymore? Or just something that's very specifically in the last month, really, since the results end rather than during the quarter, if that would be okay. Thanks so much.
Thanks. Thanks, Ed. Let me deal with the simple one first. Your articulation of the impact of the PMAs is exactly correct. However, what I would say is that that's exactly why we established the PMAs in the first place. Because we felt that the economic environment was extremely uncertain, and that the consensus that we were using for the model did not adequately capture the risk that was out there.
Okay... [crosstalk]
That's what we expected to happen. That is what's happened, and therefore, that's why we released the PMA.
Uh-huh.
In relation to your credit question, I think I followed it. Let me have a go. There's a bit of a dichotomy here between what we see now on the ground, no visible stress, and you know, the macroeconomic forecast, and indeed, beyond those macroeconomic forecasts into some of the economic commentary. You know, there's a number of different views that we are dealing with here.
To a certain extent, it points to the conversation we had before, which is we would expect to trend towards a through the cycle cost of risk. If we are to see macroeconomic shocks in terms of expected environment in one direction or another, I would expect that to be lumpy. That's just the nature of IFRS 9 and a little bit of what you've seen... [crosstalk]
Yeah.
In the current quarter.
Let me take the other side of t he other question about what was going, what's going on in the front line, especially since the end of September. Well, obviously the end of September came in the middle of the peak of the scaled volatility. Outside of the capital markets, there was a bit of a rush for people to adjust their mortgages, fearing, you know, even higher rates.
Mm-hmm.
What we were doing was we were processing the applications, and we saw a little bit of an uptick on that. On the consumer, on the credit side, what I would say is initial conditions coming into this have been very strong. High consumer balance sheet, high amount of support that people have experienced in COVID, low unemployment, and which continues. All of these things continue.
Obviously higher energy prices, but increased government support to manage those energy prices. With all of that, and with our rising cost of living, and then at the end, higher mortgage rates, we're seeing a little bit of decline in consumer confidence in our own private polling of it.
Mm-hmm.
How people feel about their finances. We see people being more careful in their spending and, you know, diminishment in certain non-essential types of spending. We are not seeing credit stress. You know, about 1% of our customers are in financial assistance, which is a fairly low number. We're not seeing it. Obviously, we have to be cautious because we don't know how much deeper some of these things can get.
We are in the middle of a rate rising cycle, which just generally tends not to be good for growth. Growth in the UK has been low anyway, we've got to be cautious looking ahead. As a sort of a live indication right now, you know, people are managing their finances carefully.
Great. Okay. Thanks so much.
Okay. Thank you. Next question, please.
Thank you. Our next question is from Guy Stebbings from BNP Paribas Exane. Guy, your line is open. Please go ahead.
Hi. Morning, everyone. Thanks for taking the questions. The first one was just on the appetite to lend in the UK right now. I guess you've given a bit of a flavor around why you're happy to see sluggish growth, given the backdrop. How does that sort of play into the spreads you'd like to get on new lending? Obviously, there's a lot of volatility on mortgage rates given where swap rates have moved. I'd be interested in where you'd expect things to settle if we see some stability in swap rates.
I mean, should we expect slightly larger spreads than what we might have seen in recent history, given just to account for high risk of credit losses, RWA migration, et cetera? That's the first question. The second one was on ECL coverage.
Just intrigued, there's been very little change in the quarter, and I know you've reduced the weighting for downside scenarios in the IFRS 9 models. You might have expected the opposite, although I appreciate the downside you saw is very severe. But in coverage terms, I think most would say things have got worse, not better in the last three months for, say, mortgage debt service ratios, et cetera. Is it just a case of it's just not bad enough to really move the needle on the ECLs that you would look to hold?
Just a quick follow-up on that as well. Thanks for all the color on the downside scenarios and associated ECL coverage. Can you just remind me how you account for negative stage migration into, say, wholesale stage three, for instance, when you come out with those ECL numbers? Thank you.
Let me try those, and I'm sure Venkat will add. In terms of, I guess, lending demand, lending supply, and how that plays into margins, specifically in relation to mortgages. I mean, the mortgage market is competitive. It's always competitive. We've seen it move in line with the yield curve, and we'd expect it to do that. As I said before, you know, pricing will be key, not least, because if this is a remortgage market, that tends to be very competitive.
Customers are remortgaging early. They will be looking for the best possible value. We'd expect margins to be quite keen, not only on the front book, but that will create some churn pressure, I would expect also.
As relates to sort of credit expectations and how that plays into pricing, I mean, I would expect that market participants price for a through the cycle view of risk. You know, increased sort of credit concerns sort of per se, I wouldn't expect to impact pricing significantly. In terms of your sort of coverage point, I think we believe that our coverage is appropriate. You know, you've obviously seen it go up from second quarter to third quarter in terms of our early stage coverage in unsecured in particular. We feel like we're appropriately covered there. Venkat, anything you... [crosstalk]
Yeah. I agree with Anna. Look, we're dealing with an environment that has been choppy. We are dealing with models that tend to be procyclical and which have been built on a period, as Anna mentioned earlier, of you know, generally falling rates and falling unemployment. We have to recognize the weaknesses in the models we use, and that's what we've tried to do.
I think, you know, we put forward our best estimates, and I think using the combination of the two, try to manage it in a predictable way related to the environment that's outside. We feel, you know, reasonably comfortable with the way we're affecting both of these two things.
I think if you look at the balance sheet on aggregate, Guy, what you can see is that we've got GBP 6.4 billion of provisions. GBP 2.4 billion of that relates to defaulted stock. GBP 4 billion is against non-defaulted stock. That's in an environment where, as you can see from the charts that we showed in the presentation, we strongly feel that, you know, the quality of the book that we have in terms of the risk on it or its shape is lower than it was.
Indeed, in wholesale, we've increased the level of first loss protection. You know, it's actually a number of things coming together and looking at individual sort of scenarios, I don't think quite captures the extent of our comfort. Could you just repeat your third question, please?
Yeah, sure. Thanks for the color so far. The third question or sort of follow on was just around how stage migration is embedded into the ECL disclosure you give for downside scenarios, just to sort of gauge the relative conservatism of the ECL that come out and just sort of comments around, you could switch the PMAs to absorb a downside one scenario.
I'm sorry. I still don't understand your question, Guy. We might need to take it out of the room. We'll come back to you. Probably need to talk that through.
Okay.
Can we have the next question, please?
Thank you. Our next question is from Adam Terelak from Mediobanca. Adam, your line is open. Please go ahead.
Morning. Thank you for the questions. I have a couple around capital management in the CIB. I know you've had the roll-off of the ETN hedging, but RWA generally just look quite light for the quarter. You've got loans up kind of double digit quarter on quarter. But risk weights are up much less than that. I was just wondering what's going on behind the scenes there in terms of balance sheet management into quarter end.
I know you mentioned kind of you were adding credit hedges on the wholesale portfolio, whether that's had an impact. And then as a follow-on to that, clearly, you guys are involved in a big leveraged finance deal. Headlines suggest that might end up on your balance sheet. Rather than commenting specifically on the deal, can you just maybe anecdotally talk about how you'd be managing that risk, in reference to what you've already done in the third quarter? Thank you.
Okay. In relation to capital management in CIB, we're just very disciplined. You know, there's nothing in particular going into that quarter end. It doesn't relate to a quarter end, you know, rapid increase in that coverage at all. I would say, you know, through the quarter, we've been helping facilitate client business in terms of what we've been holding on our own balance sheet is actually being handled extremely conservatively. So I don't think there's anything untoward there other than, you know, RWA efficiency. Venkat?
Yeah. As far as the leveraged finance business goes, we've always run a fairly systematic approach to managing the risk in the leveraged finance book.
I can't comment on the particular transaction, but let me say generally that that risk management has two parts to it. One part of it is to buy protection against extreme movements in markets. You know, the most recent time that that really protected us quite well was during COVID, when you had obviously fairly rapid movements within the month of March 2020 and then back in April. The second way is occasionally for what might be large exposures, trying to see if there's a way, again, to protect ourselves against extreme moves in that.
You should expect us to employ both the first one systematically, the second one opportunistically, to try to manage the risk in our leveraged finance book. But you know, that's something we look at closely all the time.
Okay... [crosstalk] Thank you for that.
Thank you.
Just on the loan book, why is it up double digit quarter on quarter? CIB loan book.
CIB loan book. Are you looking at the total assets?
No. Total loans. CIB.
Well, there'll be an RWA impact in there. Sorry, an FX impact in there.
Yeah.
There, there's some FX inflation. In terms of sort of, corporate lending, you know, by the time you sort of strip out the FX, it's not significant particularly. The increase in wholesale lending that we've seen has been largely to sort of investment grade, businesses and, you know, existing clients. Nothing of concern.
Okay. Thank you.
Okay. Thank you. Next question, please.
Thank you. Our next question is from Robert Noble from Deutsche Bank. Rob, your line is open. Please go ahead.
Morning. Thank you for taking my questions. Two please. Can you give us some idea of the composition of your mortgage books split by loan to income multiple rather than by loan to value? What proportion of both your mortgages and your credit card book in the UK is to lower household income deciles, so we can get an idea of how cost of living impacts it, but that way around.
Secondly, in Barclays UK, you're still seeing decent growth in non-interest income. If I see a decline in real household spending, will that number come down or will the inflation and the nominal growth still see growth in non-interest income for UK retail businesses?
Okay. Rob, let me take those one by one. We don't give a loan to income split. However, like, all banks in the UK, we have some regulatory limits on higher loan to income. Loan to income above 4.5x is significantly reduced. In terms of cards, again, we wouldn't disclose that in particular. What I can tell you is that repayment rates across the risk decile are all elevated.
Even in what we would describe as lower deciles of risk, repayment rates are significantly in excess of the monthly contractual payments and significantly in excess of what they were pre-COVID. Of course, balances are also lower. You know, we are identifying clearly customers who we believe are under more financial pressure using our data.
We believe that their behavior is managing their risk down. In terms of non-interest income, I mean, that is geared in part to card fees and also, you know, interchange fees. It’s linked to card usage. To the extent that customers continue to use their cards but pay them off, we might expect those trends to continue. If we were to see customer spending fall sharply, then obviously that number would go down.
Thank you very much.
Okay. Thank you. Next question, please.
Thank you. Our next question is from Fahed Kunwar from Redburn. Fahed, please go ahead. Your line is open.
Hi. Thanks for taking my questions as well. Just a couple. One, on the hedge and one on your UK NIM guidance. Maybe I'll start with NIM guidance. The swap curve's gone up about 200- basis points since you gave your 2.8% to 2.90% NIM guidance. I'm just wondering why you haven't upgraded that guidance given the size of your hedge. Then the second question was just going back to Chris's question on the hedge.
Do you see something structurally different in the way consumers save, and corporates save? The reason I ask that is, you know, when time deposits rates are this high, time deposits are around 50% of all savings pre-financial crisis. They're now a lot lower than that.
At that point, your hedge is probably running more like GBP 100 billion rather than the GBP 260 billion it is at the moment. Is there a reason why the hedge and ultimately the level of interest free balances be structurally higher, right now than they were pre-Global Financial Crisis? Thank you.
Okay. On the NIM guidance, we have guided towards the top end of the range that we gave you of 2.80% to 2.90%. That reflects two things. Firstly, the NIM year to date, obviously that hedge pick up. The reason that we have split out the two impacts that we've shown you there, so the hedge movement and then the product impact, is, we said for some time that we expect the product dynamics as rates started to rise would become less beneficial for NIM.
We see that coming in two ways. It's not just about pass through of any rate rises from here. It's actually about the dynamic that your second question points to, which is customers moving their savings. Secondly, the compression and the competitiveness that we see in the mortgage market. We feel at the moment like those product dynamics are going to, you know, bear more heavily than perhaps they have done to date. That's the reason for our caution, and that's the reason that we split out the structural hedge impact, so that you can think about those two things separately.
In terms of your second question as to why things might be structurally different, I think there's one macro piece and then there's one probably more bank structure piece. The first is that total deposits are higher. You know, we've seen sort of sustained QE. There is a lot of liquidity in the system.
I would also say that banks, retail and corporate banks in particular, are in a materially different position liquidity-wise versus where they were pre-GFC. You know, there you had loan-to-deposit ratios of well over 100%. Banks relying on term deposits as a source of funding. I think here what you're seeing is term deposits as a franchise offering. That's a different mechanic. You know, we'll see how this pans out, but I would say there are structural differences to the macro and also the way banks are constructed versus, you know, sort of 2005, 2006, 2007 and beyond. Hopefully... [crosstalk] that's helpful.
Sorry.
Okay.
Sorry.
Sorry. Do you have anything more, Fahed?
I just wanted to follow one thing. Does that imply you'd let your loan-to-deposit ratio tick up because you wouldn't need time deposits? You'd structurally price a lot lower than your peers because you just wouldn't need those time deposits.
I think most UK banks are in a similar position. You know, their loan-to-deposit ratios are lower than they were. I think it's. I wouldn't comment on competitive pricing on this call. I think it's more of a structural piece across the industry.
Great. Thank you.
Thank you. Thank you, everybody. Fahed, the last question. Looking forward to seeing some of you next week, and many of you in the coming weeks. Thank you.
Thank you.
Thank you, everyone, for joining today's call. You may now disconnect your line.