Good morning, and welcome to the NatWest Group Annual Results 2022 management presentation. Today's presentation will be hosted by Chairman Howard Davies, CEO Alison Rose, and CFO Katie Murray. After the presentation, we will open up for questions. Howard, please go ahead.
Good morning, everyone, thank you for joining Alison, Katie, and me for our full year 2022 results presentation. Against a difficult and uncertain backdrop, with at times turbulent financial markets, NatWest Group delivered a strong financial performance in the year. We achieved continued growth in our lending and further progress against our strategy. In addition, the government shareholding fell below 50% for the first time since the financial crisis. They have continued to sell in the market, their stake is now well below 44%. While the majority stake in itself had no material effect on the way the bank operates and the government did not and does not interfere in our commercial decisions, it was an important milestone underlining the progress we have made in recent years.
The outlook for this year remains challenging, with a decline in economic activity expected and a further tightening of real incomes, which will inevitably affect spending and borrowing. Our strong financial performance, continued capital generation, and robust balance sheet mean that we nonetheless look forward with confidence. Our strong capital position also allowed us to continue lending through the pandemic while investing to create a simpler and better banking experience for our customers and delivering on our purpose, about which Alison will say more shortly. I'm confident that the bank's strategy will ensure we can continue to support all of our stakeholders and to deliver sustainable growth and returns in the years to come. With that, I'll hand over to Alison, who will take you through our results and our future priorities in more detail.
Thank you, Howard. Good morning. I will start with a business overview and our priorities going forward before Katie takes you through the bank's performance for 2022. We will open it up for questions. You can see the strength and resilience of our business in the results we are announcing today. In a difficult macroeconomic environment, we remain well-positioned as a result of our strong customer franchise, disciplined risk management, and robust balance sheet as we continue to support customers in order to generate growth. Let's start with the highlights. We delivered operating profit for the full year of GBP 5.1 billion, up 34% on the prior year, with attributable profit of GBP 3.3 billion. Our return on tangible equity was 12.3%, up from 9.4% in 2021.
We are reporting income of GBP 13.1 billion, and we have continued our tight cost discipline, reducing expenses by 2.9% in line with our target. This resulted in a much improved cost income ratio of 55.5%, down from 70% for 2021. During the year, we distributed or accrued a total of GBP 5.1 billion for shareholders, which comprised GBP 1.3 billion in ordinary dividends above our committed distribution of at least GBP 1 billion, a special dividend of GBP 1.75 billion announced at the half year, the directed buyback of GBP 1.2 billion completed last March, and our third on-market buyback announced today of GBP 800 million. As a result, our common equity tier one ratio at the year-end was 14.2% in line with our target.
We have made excellent progress on the strategic priorities we set out three years ago. Despite the disruption caused by a global pandemic and the Russian invasion of Ukraine, we have remained focused on supporting our customers and delivering on our commitments. We have delivered organic growth as we improve both our offering and service for customers. We have maintained tight cost discipline, yet continue to invest for the future in our digital transformation. We have refocused our markets business and made significant progress on our phased withdrawal from Ulster Bank, Republic of Ireland. We are now much more capital efficient. This has delivered an excellent outcome for shareholders with very significant distributions and a return on tangible equity of 12.3%, well above our initial target.
In an uncertain economic environment, our strong balance sheet, high quality deposit and disciplined risk management continue to give us a competitive edge. While arrears are currently broadly stable, we are very aware of the pressures that customers face as a result of high inflation, a steep increase in energy prices, and a challenging macroeconomic environment. The strength of our balance sheet, evidenced here by our capital, leverage, and liquidity ratios, together with the quality of our loan book, which is almost all secured in personal lending with prudent loan-to-value ratios, make it possible for us to continue supporting customers and the U.K. economy through difficult times. Given the uncertain economic outlook, our purpose-led strategy has never been more relevant.
We have continued to support customers by lending responsibly and helping them save for the future with lending across our three business segments up 6.7% year-over-year. We have also proactively contacted customers with advice on managing the cost of living, carrying out free financial health checks, delivered hardship funding through charities, and offered targeted support such as forbearance for those in need. Our colleagues face the same challenges as our customers. We have supported them with targeted pay rises for the lowest paid, as well as enhanced parental leave and ongoing training and development. Three years ago, I outlined four strategic priorities designed to achieve sustainable returns for shareholders. I'd like to update you on our progress since then. By supporting our customers across every stage of their lives, we have continued to grow organically and built on our strong franchise.
Customers want a bank that is easier to deal with, so we have invested in digital transformation to simplify our processes and improve customer journeys at the same time as reducing costs and increasing efficiency. For example, 72% of new retail accounts were opened with straight through processing in 2022 compared to just 14% in 2019. 88% of retail customer needs were met digitally, and over 60% of our retail customers are now digital only. We are also using data analytics more effectively, so around 12 million personalized messages were acted on by customers last year, up nearly 40% on 2021. All of this has significantly improved customer satisfaction. Since 2019 our retail Net Promoter Score has increased from 4 to 22.
Our affluent Net Promoter Score has gone from -2 to 25, and we have the leading Net Promoter Score for commercial banking in the UK at 22. We also set out to deploy capital more effectively within a culture of strong risk management. We have reduced our RWA density from 53% to 47%, and by refocusing NatWest Markets and making significant progress on our phased withdrawal from Ulster Bank, Republic of Ireland, we have decreased RWAs by GBP 20.8 billion within these entities. We actively manage risk by maintaining a well-diversified loan book where we monitor at-risk sectors closely. Our focus on driving innovation and developing strategic partnerships is enabling us to offer customers a wider range of services. As the leading commercial bank in the UK, we are proud of our digital only business bank Mettle, which now serves 44,000 customers.
We are building out a comprehensive payments proposition for our commercial customers, which includes our payment provider Tyl and a platform using the U.K.'s open banking infrastructure called Payit. Our new strategic partnership with Vodeno Group is just one example of how we are accessing the expertise of others and combining it with our own to deliver innovation. By putting Vodeno's technological capabilities and cloud platform together with banking technology developed by Mettle, we aim to create a leading U.K. banking as a service business. In short, we are now serving existing customers better and gaining new ones as a result of our focus on deepening relationships, digital transformation and the provision of a wider range of innovative services. I'd like to move on now to our plans moving forward. Over the past 3 years, we have successfully delivered our transformation.
This is now a simpler organization that is more focused, more capital efficient and easier for our customers to interact with. The purpose and priorities we set out three years ago will not change. We will continue to be a purpose led, helping our customers to thrive, to focus on becoming a simpler organization that is highly cost efficient, to allocate our capital and resources on areas that generate the best returns for shareholders and to advance digitization as well as foster innovation through strategic partnerships to better serve our customers. We are shifting our investment over the next three years more towards growth, and we are now focused on further acceleration. First, by increasing our personalized engagement with customers at every stage of their lives. We've shown that we can generate value for both customers and shareholders by deepening relationships.
Second, by leveraging our competitive edge as a leading UK provider of renewable financing to support customers in their transition to a net zero economy. Third, by further embedding our services into customers' digital lives. Our customers spend more time online than ever before, and we have to be where they are. We are doing all this to deliver sustainable growth and diversification of income as we participate in areas which are set to outgrow traditional banking revenue pools. Let me give you some examples in each of our businesses. In retail banking, we start from a strong position with 17 million customers, strong Net Promoter Scores and a growing share in mortgages and credit cards. Yet we have capacity to grow further by driving higher levels of engagement and enhancing our customer proposition.
For example, we are strengthening our youth and family offering to build on the success of our RoosterMoney acquisition, which helps young children manage money. Last year, we connected Rooster with our own app, which resulted in 90,000 new card openings during the year. We know that customers who join us in childhood have greater lifetime value than those who join us as adults, and that when we serve a full family, parents become more valuable. Supporting households to act on energy efficiency is not just an essential part of making a transition to a net zero economy, but also commercially valuable.
That's why we are funding a green home retrofit pilot, helping customers to decide what improvements they need to make, and then financing solutions such as insulation upgrades, heat pumps and solar panels. Our green mortgages offer a discounted interest rate to customers who buy a property with an energy efficiency rating of A or B. As part of our ambition to provide GBP 100 billion of climate and sustainable funding and financing, we aim to make at least GBP 10 billion of lending available for homes with these ratings by the end of 2025, helping homeowners to improve energy efficiency and reduce emissions. Further embedding our services in our customers' digital lives allows us to improve both customer experience and our own efficiency. A good example of this is our digital-only mortgages.
We were the first UK bank to offer a paperless mortgage so that an offer could be made within 24 hours. This has completely transformed the process of buying a property, as well as increased our market share. We are building on this success to grow our share further. We will also support financial wellbeing by extending our free credit score service, which is currently available just for our own customers to everyone in the UK. One of the major changes we have made in our private bank is making better use of our asset management expertise to serve our customers more effectively across the group. This has enabled us to grow assets under management to GBP 33.4 billion since 2019, delivering a strong performance despite significant macroeconomic challenges.
With GBP 6.5 billion of net new money and a 60% increase in digital net new money. We saw new customer inflows of 5% into our private bank in 2022, of which a fifth were referrals from other parts of the group. We see a significant opportunity to grow assets under management further by increasing the number of referrals. We also plan to scale our wealth offering, which includes not just investing, but also saving, lending, and financial planning. We want to help more people invest sustainably and have set a target for our own discretionary funds to achieve net zero by 2050. As we continue to embed our services in customers' digital lives, we are enhancing and expanding our digital investment platform, NatWest Invest. This week, we have also announced our intention to acquire a majority stake in fintech Cushon.
This allows us to enter the workplace savings and pension market, which is expected to double in size to well over GBP 1 trillion by 2031. After a successful pilot last year, we plan to extend their offering to our commercial customers in order to improve financial wellbeing, as well as drive long-term fee income. Last year, we created a new business segment, bringing together commercial and institutional banking. This is now a less capital-intensive business, helping to extend our expertise in foreign exchange, interest rate management, and capital markets to more commercial customers. As we look to the future, we plan to continue growing our share in start-ups and high-growth businesses. We are the number one U.K. high street bank for start-ups, with a share of 16.4%. Last year, we opened 99,000 new start-up accounts, almost 40% of which were via Mettle.
This is supported by our regional network of free accelerator hubs, which offers a program specifically tailored to high-growth businesses. We also plan to launch a new enhanced trade finance platform to meet more customers' international needs. We have an important role to play in helping our business customers transition to a net zero economy. We are already a leading underwriter and provider of renewable financing in the U.K., and we have delivered over GBP 27 billion of climate and sustainable funding and financing towards our GBP 100 billion target. We have led a collaboration with other banks to launch Carbonplace, the world's first marketplace for carbon offsets, and we are rolling out the NatWest Carbon Planner, launched last summer, which is a free platform to help SMEs reduce their carbon footprint.
Good examples of embedding our services in customers' digital lives include building out our comprehensive payments proposition delivered through Tyl and Payit, as well as extending our foreign exchange offering via digital channels. At the same time as focusing on targeted growth, we will continue our strong track record of disciplined cost management and investment. Since 2020, we have made an 18 percentage point improvement in our cost-income ratio. We are targeting a ratio below 52% this year and less than 50% on a sustainable basis by 2025. We are now two years through our GBP 3 billion investment program, with a significant proportion going into our digital transformation. We expect to invest in the region of GBP 3.5 billion over the next three years, you can see the mix of spend change as our digital transformation advances.
We will also continue to deploy capital effectively across the business. You can see here how our allocation of capital has changed since 2019, with a reduction of RWAs in commercial and institutional and Ulster Bank Republic of Ireland, and an increase in the retail bank. This more effective deployment of capital, combined with our strong capital generation, has enabled us to support our customers in difficult times, as well as invest for growth, consider other strategic options, and make shareholder distributions of almost GBP 11 billion since 2019. By continuing to deliver targeted growth, to manage cost in a disciplined manner, and to deploy our capital effectively, we plan to operate with a CET1 ratio of 13%-14% over the medium term and deliver a sustainable return on tangible equity of 14%-16%.
We expect to generate and return significant capital to shareholders in 2023 and intend to maintain our payout ratio of 40% with the capacity to deploy any excess capital by making additional buybacks. Thank you very much, I'll now hand over to Katie to take you through our full year performance in detail.
Thank you, Alison. I'll start with performance in the fourth quarter using the third quarter as a comparator. Total income increased 14.8% to GBP 3.7 billion. Income, excluding all notable items, was GBP 3.8 billion, up 10.9%. Within this, net interest income was up 10.2% at GBP 2.9 billion, and non-interest income was up 13.2% at GBP 857 million. Operating expenses rose 12.8% to GBP 2.1 billion, including Ulster exit costs and the annual UK bank levy. The impairment charge decreased to GBP 144 million or 16 basis points of loans. This brings the full year charge to 9 basis points in line with our guidance of less than 10. Taking all of this together, we delivered operating profit before tax of GBP 1.4 billion.
Profit attributable to ordinary shareholders was GBP 1.3 billion after the benefit of deferred and other tax credits. Return on tangible equity was 20.6%, including a 6 percentage point benefit from tax credits. Before I take you through our performance in more detail, I'd like to share some of our assumptions about the economic outlook on my next slide. We are showing you here our current expectations for interest rates and economic activity. Clearly, the backdrop of low economic growth and high inflation makes this a challenging time for our customers. There are some signs that inflation peaked in October last year, though it remains high at around 10%.
Our base case assumption is that inflation will fall to the Bank of England 2% target by mid-2024, resulting in interest rates reducing from the second quarter of that year to 3.25% by the year-end. We have not modeled any further rise in interest rates beyond the Bank of England's decision earlier this month to increase them to 4%. It is also worth noting that we assume the five-year swap rate will steadily decline from 3.6%, averaging 3.3% over 2023. This is important for the rollover of our hedge positions, which I will talk about later. All in, our outlook is aligned to the consensus of forecasts from economists with both upside and downside risks. We will monitor and react to market conditions as they develop during the year.
We are pleased that the macroeconomic environment has stabilized since we spoke at Q3, and we note the improved outlook from the Bank of England this month. I'd like to move on now to net interest income on slide 19. Strong momentum continued as net interest income increased 10.2% to GBP 2.9 billion. This was the result of higher lending volumes with growth across all three businesses and higher margin. We also incurred a one-off GBP 41 million impact from the redemption of legacy debt in line with our disclosure in December. Net interest margin, excluding notable items, increased 26 basis points to 325.
Wider deposit margins added 44 basis points, reflecting the benefit of higher UK base rates, which increased by 125 basis points in the quarter, net of pass-through to our customers and higher swap rates on our structural hedge. This was partly offset by a 10-basis point reduction as a result of lower mortgage margins on the front book and a 2-basis point reduction from commercial and institutional fixed-rate lending. Net interest margin for the full year of 285 basis points is in line with our guidance of more than 280. If the current UK base rate remains at 4% throughout 2023, we expect NIM to average around 320 basis points for the full year. This takes into account the run rate benefit of recent base rate increases, net of further pass-through to customers.
The reinvestment of the hedge into higher swap rates, lower front book mortgage margins, the reduction in deposits towards the end of 2022, and further mix changes in deposits. Average interest earning assets increased by 1.5% in the quarter to GBP 355.8 billion, driven by higher lending. The future impact of these assets on NIM is dependent on lending volumes since they do not include the liquid asset buffer. Turning to loans on the next slide. We are pleased to have delivered a strong year of balanced growth across the group. Gross loans to customers across our three businesses increased by 6.7% or GBP 21.9 billion to GBP 350 billion year-on-year, of which GBP 3 billion was in the fourth quarter.
Taking retail banking together with private banking, mortgage balances grew by GBP 4.7 billion or 2.4% in the quarter. Gross new mortgage lending for the full year was a record GBP 45 billion, representing flow share of 14%. Combined with good retention, this resulted in our stock share growing from 11.8% at the end of 2021 to 12.3% at the end of 2022. Unsecured balances increased by a further GBP 200 million in the quarter to GBP 14.2 billion, driven by higher spending on credit cards. In Commercial and Institutional, gross customer loans decreased by GBP 2 billion. This was driven by continued repayment of government lending schemes, which reduced by GBP 1.4 billion in the quarter and GBP 3.4 billion over the year.
Within this, mid-sized corporates increased borrowing by GBP 1 billion, driven by working capital demands and asset financing. This was offset by net repayments from large corporate and institutional customers, reflecting usual year-end balance sheet management. I'd like to turn now to deposits on slide 21. Customer deposits across the group were GBP 450 billion at the end of 2022, down 4.8% in the quarter. This includes a reduction of GBP 5.1 billion in Ulster Bank as customers moved to other banks as planned. Across our three businesses, deposits amount to GBP 433 billion, over GBP 80 billion more than loans, resulting in a loan-to-deposit ratio of 80%. During the fourth quarter, deposits reduced by GBP 15 billion, of which GBP 12 billion was in Commercial and Institutional.
When I look at this GBP 12 billion, one-third was the result of typical year-end movements, including a reduction in system liquidity. Another third was caused by lower foreign currency balances as a result of market volatility. The final third was balance attrition, where we took the decision not to compete aggressively on price for balances with low margin and low liquidity value, given our strong funding and liquidity position. Across Retail Banking and Private Banking, deposits were down GBP 3.5 billion as a result of lower current account balances in line with trends across the U.K. banking sector. Around 60% of our deposits are interest-bearing and 40% are non-interest-bearing, in line with the third quarter and prior years.
Within interest-bearing balances, there is some migration from instant access to term accounts, which is positive from a relationship perspective, but clearly has an impact on deposit margins. We launched a new fixed term savings product for retail customers in January to meet rising demands, and this is going well. We remain competitive across our customer savings rates and continue to pass through higher interest rates. Including recent pricing decisions after the base rate increased to 4%, our cumulative pass-through is now around 35% across interest-bearing deposits, up from 25%-30% at Q3. As I said earlier, in our current modeling, there are no further base rate increases from here, and we expect rates to start coming down in the second quarter of 2024.
Our disclosures show the third-party funding rate for all three businesses, which reflects the average cost of all deposits, including those that are non-interest-bearing. Here you will see that the rise in customer deposit rates has lagged the increase in base rates. The outlook for customer deposit rates will be a function of customer behavior as well as competition. We expect the average cost of customer deposits to continue trending higher in the coming quarters as a result of recent pass-through decisions, as well as a change in mix as customers move to term and higher yielding accounts, though the pace of this change is clearly uncertain. Turning now to our structural hedge on slide 22. As you know, we hedge the majority of our current accounts and a smaller proportion of our instant access savings.
From deposit balances totaling GBP 450 billion, GBP 184 billion are included in the product structural hedge. The notional amount was stable during the quarter. Given the reduction and mix change of deposits in Q4, we do not expect to reinvest all the balances maturing during 2023, which is approximately GBP 40 billion. As we show in the chart, before we consider reinvestment, product hedges already written will deliver income of GBP 2 billion in 2023. In addition to this, you should consider the reinvestment yield available with 5-year swaps. We model an average reinvestment yield of 3.3% for 2023 compared to a rate of 3.75% today and relative to an average redemption yield of around 1.1%.
The volume of hedges that are reinvested will be a function of both the flow and the mix of deposits. If there are no change to year-end deposit volumes or mix, we would expect the product hedge notional to reduce by GBP 5 billion over the course of the next 12 months. I'd like to turn now to non-interest income on slide 23. Non-interest income, excluding notable items, was GBP 857 million, up GBP 100 million on the third quarter. This was driven by fees and commissions, which increased GBP 62 million, GBP 650 million due to higher lending fees, increased investment fee income, and the end of our no-fee foreign exchange offer for retail customers. Looking back over the full year, we are pleased that non-interest income increased 19% year-on-year to GBP 3.2 billion.
There was a more stable trading performance following the completion of our markets restructuring, net fees and commissions grew 8% as a result of increased customer activity, combined with the impact of inflation on nominal spending. Going forward, non-interest income will be influenced by economic activity and customer confidence, as you would expect. I'll summarize our income performance and outlook on the next slide. 2022 income, excluding notable items, was GBP 13.1 billion, up GBP 3 billion or 30% year-on-year. This exceeded our expectations largely due to our strong lending performance and the pace of interest rate increases, which resulted in net interest margin of 285 basis points. In 2023, we expect group income, excluding notable items, to grow about 13% to around GBP 14.8 billion, with net interest margin of about 320 basis points.
This is modeled on the assumption of a stable U.K. base rate of 4% throughout the year, with full run rate benefits into the second quarter. Income will also be driven by the positive impact of our hedge reinvestment, the negative role on mortgage refinancing, volume and mix development across the balance sheet, as well as consumer and market activities. Turning now to costs on slide 25. Other operating expenses for the go-forward group were GBP 6.6 billion for 2022. That's down GBP 201 million or 2.9% on the prior year, in line with our guidance. This was driven by continued automation of customer journeys. I'm going to break down our cost guidance to give you full transparency on this and our ongoing tight management of expenses.
Now that Ulster is in central items, we start with GBP 6.6 billion for 2022. We incur GBP 221 million of Ulster indirect costs, which we expect to reduce over time. As these costs are shared, they will not disappear entirely. This takes us to GBP 6.9 billion. Ulster direct costs of GBP 433 million include GBP 195 million of exit costs, most of which was booked in the fourth quarter. This brings us to group other operating expenses of GBP 7.3 billion as per the income statement. Turning now to 2023 costs on the next slide. We start with GBP 6.9 billion of operating expenses for 2022, excluding Ulster direct costs. Acquisitions include the impact of both Vodeno and Cushon, which we announced this week.
Pro forma for acquisitions, 2022 costs are around GBP 7 billion, which I view as the business as usual cost base of the group. In 2023, we expect this to grow by around 5% to GBP 7.3 billion. With another GBP 300 million of Ulster direct costs, this takes us to an expected group other operating expenses of GBP 7.6 billion. We also expect a further improvement in operational leverage with a reduction in the cost income ratio from 56% to below 52% for the year. Litigation and conduct costs totaled GBP 385 million for 2022, and we expect them to be broadly in line with this in 2023. As you know, these costs can fluctuate. Let me tell you more about the drivers of costs in 2023 on slide 27.
Staff costs represent around half our operating expenses. A further 23% are admin costs, with the remainder being property and depreciation. In 2023, we expect other operating expenses to increase 4% on a reported basis to around GBP 7.6 billion, including reduced Ulster direct costs. This increase is driven by staff and admin costs. We manage salary costs carefully and will continue to do so. Staff costs were broadly stable in 2022 as the impact of a 3.6% pay award and the cost of living support was offset by lower average headcount. In 2023, the average pay award is 6.4%, effective from April. In addition, we made one-off payments of around GBP 60 million to staff in January to support ongoing cost of living pressures.
Admin costs increased 8% in 2022 as a result of strategic investment in data and financial crime prevention. We are now seeing higher inflation feed through into supplier contract renewals, which is the main driver of growth in 2023. We expect premises and equipment costs to be broadly stable this year and for depreciation and amortization to increase slightly as a result of higher investments. I'd like to turn now to talk to credit risk on slide 28. We have a well-diversified prime loan book. Over 50% of our group lending consists of mortgages, where the average loan to value is 53% or 69% on new business. Overall, we have low levels of arrears and forbearance in our mortgage book. 92% of our book is at fixed rate, 4% are trackers, and 4% is on standard variable rate.
Two thirds of mortgage balances are on five-year fixed rates, and a quarter are two year. 17% of the book is interest only, most of which is our buy to let book, with the rest concentrated in our private bank. Our personal unsecured exposure is less than 4% of group lending and is performing in line with expectations. Our corporate book is well diversified, and we have brought down concentration risk over the past decade. For example, our commercial real estate exposure represents less than 5% of group loans, with an average loan to value of 47%. Whilst we have well diversified high quality loan book with low level of defaults, we are mindful of the economic uncertainty. Let me tell you how we have addressed this on slide 29. We have four economic scenarios where we have updated our forecasts and relative weightings.
For 2023, this has driven a slight improvement in our weighted average expectations for GDP, but a deterioration in levels of employment, which are the two key drivers of expected loss. In terms of sensitivity, a 100% weighting to the extreme downside scenario would increase stage 1 and 2 expected credit loss by a further GBP 1.6 billion or around 40 basis points of loans. In this scenario, stage 3 expected credit loss would also increase, though this is not modeled here. The net effect of changes to economic forecasts in the fourth quarter is an increase of GBP 171 million in the good book expected credit loss provisions. Overall, expected credit loss reduced during 2022, reflecting the phased withdrawal of Ulster Bank, stable trends in portfolio performance and a related net release of post-model adjustments and write-offs.
The post-model adjustment for economic uncertainty decreased by GBP 193 million in the fourth quarter to GBP 352 million. We continue to be cautious on the release of these provisions as we have yet to see the full impact of economic and cost of living challenges play out. Now to look at impairments on slide 30. We reported a net impairment charge of GBP 144 million in the fourth quarter, equivalent to 16 basis points of loans on an annualized basis. This took our charge for the full year to GBP 337 million, equivalent to 9 basis points of loans. You can see that our impairment charge has largely been driven by unsecured lending and commercial property, where we have relatively small exposures. You will also see that our ECL coverage of unsecured and property exposures compares favorably with pre-COVID levels.
As you know, our through the cycle impairment guidance is 20-30 basis points, and I continue to see this as an appropriate level for 2023, given both the economic outlook and relatively benign trends in our book. Turning now to look at capital and risk weighted assets on slide 31. We ended the fourth quarter with a CET1 ratio of 14.2%, down 10 basis points on the third quarter. We generated 59 basis points of capital from earnings. This was net of deferred tax credits, which are not recognized in CET1 capital and changes to IFRS 9 transitional relief.
This was offset by accrual to shareholder distributions of 79 basis points, which includes the impact of the GBP 800 million in market buyback that we have announced today of 445 basis points, and the final pension accrual of 5 basis points. Given the strong funding position of the pension fund, we have reached agreement not to make a final GBP 500 million cash payment in 2023, but have set it aside in case of future needs, which we view as a low probability. We do not expect any further capital deductions for pension contributions going forward. RWAs decreased by GBP 2.4 billion due to lower counterparty credit risk and market risk, partly offset by GBP 0.4 billion increase in credit risk.
Our phased withdrawal from the Republic of Ireland delivered a further reduction of GBP 2.6 billion as the majority of the residential mortgage portfolio was transferred to Permanent TSB. Pro-cyclicality has remained positive throughout 2022, leading to a total RWA reduction of GBP 4 billion, of which GBP 0.5 billion was in the fourth quarter. Changes in risk weightings are typically driven by events that increase the probability of default. We would need to see an increase in defaults and stage three charges before RWAs are meaningfully impacted. We expect a normalization of risk parameters in our medium-term RWA guidance, and we anticipate an increase in RWAs of 5%-10% between the end of 2022 and 2025, which includes possible pro-cyclicality and the day one impact of Basel 3.1. Turning now to our balance sheet strength on slide 32.
Our CET1 ratio of 14.2% is moving towards a range of 13%-14% as planned. Our U.K. leverage ratio of 5.4% increased from 5.2% at Q3 and remains well above the Bank of England minimum requirements. Our liquidity coverage ratio of 145% is down from Q3 due to higher lending across our three businesses and the reduction in surplus deposits. We maintained strong liquidity levels with a high quality liquid asset pool and stable diverse funding base. Headroom above our minimum is GBP 52 billion. Turning to guidance on my final slide. In 2023, we expect income excluding notable items to be around GBP 14.8 billion.
Net interest margin of about 3.2%. Group operating costs excluding litigation and conduct to be around GBP 7.6 billion, delivering an improvement in the cost income ratio to below 52%. We anticipate a loan impairment rate in the range of 20 to 30 basis points. Together, we expect this to lead to a return on tangible equity of 14%-16% and to be at the upper end of this range. As Alison said earlier, we expect to return significant capital to shareholders in 2023. We also have permission from the PRA to participate in a directed buyback from the U.K. government of up to 4.99% of issued share capital. With that, I will hand back to Alison.
Thank you, Katie. As I look back over the past three years, I think it's fair to say that we have dealt with the shock of a global pandemic, the invasion of Ukraine and economic uncertainty by remaining focused on supporting our customers and delivering our strategic objectives. We now have a simpler, more capital efficient organization, which is benefiting from digital transformation and growing customer franchises. We have met our targets by growing income, reducing costs, and making significant shareholder distributions, which has helped us to achieve our 2022 target CET1 ratio of 14.2%. As we continue to focus on delivering long-term sustainable value for shareholders, we are investing in growth in three ways.
By accelerating our engagement with customers at every stage of their lives, by supporting customers in their transition to a low carbon economy, and by further embedding our services into customers' digital lives. We expect to operate with a CET1 ratio of 13%-14% over the medium term and to return significant capital to shareholders in 2023, with a payout ratio of 40% and with capacity for additional buybacks. By building on our strong customer franchise and continuing to deliver targeted growth, to manage cost in a disciplined manner and to deploy our capital effectively, we plan to deliver a sustainable return on tangible equity of 14%-16% over the medium term. Thank you very much, and we'll now open it up for questions.
Ladies and gentlemen, if you'd like to ask a question today, you may do so by using the raise hand function on the Zoom app. If you are dialing in by phone, you can press star nine to raise your hand and star six to unmute once prompted. We ask that you limit yourselves to two questions each to allow more of you a chance to ask a question. We'll pause for a moment to give everyone an opportunity to signal for questions. We'll take our first question from Raul Sinha of JPMorgan. Val, please do unmute and go ahead.
Hi. Good morning. Thank you very much for taking my questions. The first one is on NII and kind of your NIM assumptions. Thank you very much for the long list of assumptions that you have made. They do look very conservative. I guess the one question I have related to your assumptions is around the deposit pass-through. I think you talked about 35% so far on interest-bearing balances. Can I ask what you might have assumed on that going forward? I guess related to that, perhaps, Alison, if I can ask you, at the Treasury Select Committee meeting, you talked about how 80% of your depositors had less than GBP 5,000 in their accounts. Can I ask about the customer behavior for the remaining 20%?
Are you seeing elevated levels of switching amongst people with higher deposits, and do you expect that to be a driver? Related to that, if I can ask on the NII medium term, just to try and understand, given your rate assumptions, you obviously expect rate cuts from 2024. Is it, should we assume that NII follows the direction of interest rates medium term, or do you think that some of the positive drivers, like the structure hedge, the growth in your loan book and unsecured could offset and you end up with a more flat outcome, more medium term on NII? Thanks.
Great. Thank you very much. I'll let Katie pick up some of those. Let me pick up the point around customer deposits and what we're seeing. Look, I think we are, we've got strong capital and funding levels. What we've focused on, particularly on consumers, is helping build the savings habit. That 80% of customers with less than GBP 5,000 in their deposit accounts, we've really targeted something called our Digital Regular Saver on that and building sort of saving habits. The balance between our NIBs and IBAs has remained broadly stable, which is what we're seeing from a behavioral perspective.
In terms of, you know, competitive products, we've offered some fixed term products out to our consumers around the 3%-4%, and we've seen good uptake on that, which remain competitive. Broadly, you know, we're seeing customers engage a little bit more in their financial capability and management of their deposits. NIBs and IBAs broadly stable. We've got competitive products, and we're targeting regular savings. We're not seeing any shift in customer relationships, and the liquidity value of outflows have been very low. Katie, do you want to pick up the NIM assumption on pass-through?
Yeah, sure, absolutely. As we look at the pass-through, piece, obviously we're at 35% just now. We give you the structural hedge sensitivity in terms of that. That works, as you know, on a static balance sheet, but that is worked on a 50% pass-through. I think that's probably a good kind of proxy to go through. You know, as we go into 2024 and the kind of drivers that you're thinking of there, I think we would expect similar kind of drivers. You can see in our economics that the rate does start to fall off at the end of Q1, so hit kind of from Q2.
I would say, there's clearly some uncertainty of how rates do evolve in that time, but we do see benefits coming through on the structural hedge. In our assumptions, I talked about in my speech, about 3.33% is the average. You know, if you look at your 5-year swap rate today, it's a little bit higher. That will give you a little bit of a benefit as you move through from here today. Obviously, what happens with them as we move from 2023 and into 2024 will be a bit of a movement as well. Hope that helps you a little bit, Rahul.
Thank you very much. Our next question comes from Alvaro of Morgan Stanley. Alvaro, if you could please unmute and go ahead.
Good morning. Hopefully you can hear me. To follow up on margins and another one on costs, please. On margins, just to help us assess the headwinds. I don't suppose you can share with us the proportion of term deposits within the sort of balances. On the mortgage side, I realize there's been some adjustments to in the product margin of mortgages in the quarter. To assess the headwinds going forward, could you share with us the application margins in Q4 and early trends in January maybe? The second question on costs, it's more about a sense of how much visibility you think you have now on costs. Obviously, a year ago you were looking for a reduction of 3%.
Now it's more like five. Do you feel you've got more certainty now? The outlook has narrowed in terms of of going forward, what you could expect. When I think about Ulster cost, when should we expect that to effectively shut down? Is that included in your less than 50% cost income in 2025? Thank you.
Great. Thank you. Let me start with that. Fixed terms, single digits.
Mid-single digits.
Mid-single digits.
They don't move particularly quickly.
They don't move very quickly. Cost visibility, I think we've given you some really clear visibility on costs and some guidance there. We're starting to see inflation come down, and we actively manage our costs, as you can imagine. I think, yes, on that. On Ulster costs, yes, those are included. I think that's, covers that one. Mortgages. Katie, do you want to pick that one up?
Yeah, sure. Absolutely. I'll take that. In terms of the mortgage piece, as you know, Alvaro, we try not to get drawn too deeply on the ins and outs on particular quarters. I guess as I look at it, the group declined from GBP 141 in Q3 down to GBP 126. If we think of how we're kind of managing this book and how we think about it, what we seek to do is to kind of manage it with an application margin that's in a range around 80 basis points. It will move a little bit up and down, but that's kind of how we think of the managing of it.
I would, of course, as you'd expect, encourage you to focus on the retail NIM, which at 2.74 is very strong, up 47 basis points in the quarter as well. But that should help you a little bit on your, on your math.
Thank you very much.
Thank you. Our next question comes from Chris Cant of Autonomous. Chris, if you could please go ahead.
Hi, Chris.
Hi, good morning. Thanks for taking my questions. If I could just come back on the, on the margin debate, really. On your mortgage comment just then, is the 126, is that the whole book or is that, just the fixed book, please? And in terms of the manifestation of that headwind, when I think about the 320, it doesn't actually feel like that's gonna be as pronounced as I might have guessed, given that 2/3 of your book is in 5-year. Is there anything in particular you'd call out on the, progression of the mortgage churn through 23? Is there a particularly fat spread piece of the back book churning, which means it's a more acute headwind?
Given that two-thirds in five years, I guess that's gonna play out over a slightly longer period than we might have anticipated. If I could just come back on a previous question, really, around your deposit pass-through assumptions, again, thinking about the various puts and takes, it feels like you must be making a fairly conservative assumption in respect of deposit pass-through this year. Could I again just ask around your expected migration upwards in that deposit beta assumption of 35% across the interest-bearing book, how high are you assuming that goes in the coming quarters? Thank you.
Great. Thanks, Chris. Well, let me do deposit pass through. As we said, at the moment, our average pass through is around 35%. We're actively managing very carefully both sides of our balance sheet. The guidance we gave you previously was, as interest rates go higher, we would expect to pass a higher proportion through, and the assumption we talked about, you should broadly assume sort of 50%. We're currently sitting at 35% on pass through, and we'll continue to actively manage that based on, you know, the competition, our need for funding and liquidity, and you can see our funding, liquidity and capital position. I think that probably gives you a sense of how we're managing that.
On mortgages, you know, obviously, we have a predominantly fixed book, as you know. We have a small SVR book and tracker book. Our mix is 66% on 5 year, and we know exactly which customers are rolling off during the course of this year. You know, we contact them with 6 months before they roll off their fix. We'll actively manage that book, and we'll continue to target in the same way we have done, and I think you've seen we've managed pretty turbulent markets very well, the balance between volume and value. Katie, do you want to pick up anything else on mortgages?
Just to ask, answer one of your quite specific points. Yes, there is the whole book in terms of what we're talking about. 4% tracker, 4% SVR, 92% fixed as Alison says. In terms of the kind of call-out, you're absolutely right. The fact that the book is now 60% 5 year, that kind of dampens some of the effect a little bit. I would probably encourage you, Chris, to cast your mind back through 2021, and what margins we were writing then. They're obviously rolling off a little bit. It's not particularly significant as a drag on that, but there's nothing exceptional to call out, but there will be a little bit of an impact from that piece.
Thank you. Just to confirm, we should be thinking that within the guidance it's something like a 50% pass through assumed, and then with regards to the mortgage book, there's a little bit of lumpiness on, I guess, the two-year piece that you would have been writing in 2021. Effectively, the big headwind, I mean, you're essentially guiding for NIM down versus 4Q levels. The big headwind here is really that progression on the beta, implicitly, I think.
What I would say on the beta is we're at 35%. We always assumed it would maybe get to 50. I think that's the assumption. We'll actively manage it based on competitive dynamics. You're right. What I would say it's now less about pass through and more about customer behavior, and we're keeping a close eye on that, and I touched on that earlier.
Thank you.
Thanks.
Our next question comes from Aman Rakkar of Barclays. You can please go ahead.
Good morning, Alison. Good morning, Katie.
Hi.
Yeah. Could I ask a question around the deposit commentary? Thanks very much for kind of elaborating on that. I just wanted to kind of work out how you guys have factored in the potential deposit outflow dynamic or what kind of risks you see going forward from deposit outflows. I guess the observation is that you've probably been the stand up beneficiary of deposit inflows since 2019 and the various support schemes that were announced, and it's allowed you to kind of outperform your own rate sensitivity, kept deposit betas very low. You know, looking forward, clearly the, you know, the outlook's evolving. How do you think about the risk of outflows, you know, your particular deposit mix and profile?
Could you help us understand the potential earnings impact that you might expect, you know, in particular, what you may have actually assumed as part of that 320 basis points NIM guide? The second question was around the mix of net interest income and fees. You know, I think your guidance is pointing to a shift towards a bit more fee income than what consensus has. But I think, you know, taking your guidance at face value, you know, you're still set to generate around 77% of revenues from net interest income.
I think that compares to kind of mid-60s in 2019. I'm just interested in your assessment, probably one for Alison, around whether that mix might evolve going forward. What do you see as your kind of steady state fee income contribution? The thing that I guess I'm interested in is whether you think you can achieve that kind of in-house by virtue of some of the investment that you've announced today, or actually, you know, are inorganic, ongoing inorganic acquisitions potentially part of that path? Thank you very much.
Okay. Let me talk about deposits. Let's starting point, deposits are still up around GBP 80 billion, even with outflows this year. As you can see, we have offer competitive rates across our balances. We look at deposits very much as through a number of lenses. Firstly, we have a strong funding and liquidity position which is underpinned by our leading customer deposit franchises. That up GBP 80 billion gives us a competitive advantage. That advantage has allowed us in recent quarters, as rates have risen, to be very disciplined and manage our deposits for long-term value. That's a combination of relationship, margin and liquidity value. We have a very disciplined approach in terms of how we're looking at it.
We'll defend the deposits we need to, we won't chase volumes at the expense of our back book or detriment of existing relationships. We've lost no customer relationships, the liquidity value of outflows that we've seen have been relatively modest, reflecting the nature of customers and balances. You know, what I would say is, you know, it's something that we manage very well. It aligns with our strategy to help customers save, we've got competitive products, that we have out there. I think that's really how we're thinking about it. When you look at, the deposit outflows, the way I would think about it is we're managing volume and value and being very disciplined about it.
The strength of our funding and liquidity is a good point. We're a net gainer of new customer relationships, across our franchises as the result of, our strategy there. I think, you know, I think about it, we're managing them for value and we're being competitive, and we're able to retain them. Clearly, customer behavior is changing. There is an excess of deposits from pre-COVID level. I think we're managing that sensibly. Katie, do you want to pick up there?
The revenue guidance.
Yeah.
In terms of as we look to the impact of deposits, Alison is absolutely right. I'd use that sensitivity. That will give you some guidance. We've got the 4% base rate assumption in there. We're not modeling any further increases in that. That obviously has an impact on the NIM. The other place I would suggest that you have a think about, you know, is the guidance I've given you on the hedge. If we assume no further changes to volume and mix of deposits at the end of 2022, we would expect that product hedge to reduce gently over the year by about GBP 5 billion. Bear in mind, it's averaged, so it comes through relatively slowly.
Given the reduction balances in the second half of the year, that will have a little bit of an impact. It's obviously offset by the fact of reinvestment, yield that we're getting on that, which is sort of 3.7% as we kind of sit here today. There's a few kind of moving parts, those are the bits that we'd be thinking of if I were you.
Cool. On the mix between NII and fees, kind of how do you think about the structural balance between those two? Do you think you can achieve it by virtue of your investment spending?
Look, I think if we look at the mix, I'm probably not going to get too drawn on that. The way that I think of revenue, and particularly of the sort of GBP 14.8 billion of guidance, three things you want to think about. You know, NIM we've spoken about already. Volume, and we've seen sort of good volume growth this year in terms of the 6.7% growth that we had. You know, and we do expect to continue to see growth, certainly in the mortgage market. Commercial will obviously be more dependent on the macro environment. In terms of non-NII, we're up 19% this year. Very pleased with the NatWest Markets performance.
We wouldn't expect that to grow at the same kind of pace as we go into this next year, as it's linked from kinda spending and confidence, but comfortable with its performance. Probably not going to get drawn on a relative mix in the medium and long term. I think we're guiding you to that 14.8% for the year and the sustainable RoTE of 14%-16%.
Thank you so much.
Thanks, Aman
Thank you. Our next question comes from Benjamin Toms of RBC. Benjamin, if you'd like to go ahead.
Morning both, thank you for taking my questions. Firstly, on your ROT guidance of 14%-16%, which is considered sustainable in the medium term. By saying this target's sustainable, presumably you feel you can hit the target under a range of base rate outcomes. What's the lowest level that you think rates can go to and the bank still hit a 14%-16% range? I guess put it another way, what rate assumption does the bottom end of this guidance assume, please? Secondly, sorry if I missed the answer to this question, but in relation to Ulster costs, where your full year 2023 guidance assumes GBP 300 million in direct costs, what will that number go to over time, and how long will it take to get there? Thank you.
Thanks. Look, I think we're very comfortable with the guidance we've given you on the 14%-16% as a sustainable number. There are a number of elements in that. As you know, you've got our economic assumptions. We're assuming a 4% interest rate through the course of this year, and then that will gradually reduce. Don't forget, the number includes a 1.5% RoTE drag in 2023, which we'll reduce. There are a number of factors in there, but what I would say is we're very comfortable with the guidance. As you go forward, lower drag from Ulster, there will be a reduction in interest rates, and a number of different factors in there, but I think we're pretty comfortable.
Apologies if we didn't cover Ulster.
Let me just close off that Ulster question.
Yeah.
You're absolutely right. Direct costs expected to fall to GBP 300 million end of this year. We've always said that we'd be largely complete in sort of 2024. You would expect another material reduction on that. I'm not gonna be drawn on the specific number, but making good progress. Really delighted with the Ulster team are delivering.
Thank you.
Thank you. Our next question comes from Omar Keenan of Credit Suisse. If you could please unmute and go ahead.
Good morning, everybody. Can you hear me okay?
Yes, we can.
Good morning, Omar.
Good morning.
Yeah, good morning. Thank you for taking the time to answer the questions. I'm afraid I've got another question on deposit migration. I didn't really want to throw too many numbers around because it's not fair to the other conference call. I just wanted to double-check my thinking around some of the assumptions. The idea that, you know, the cumulative pass-through on interest-bearing deposits at NatWest, it's currently sitting at 35%, the assumption that we'll end up at 50% with Bank of England rates fairly unchanged from where they are today at 4%.
I've just done a bit of back of the envelope math, but it seems to imply really to get to that number, and given the 400 basis points of rate hikes roughly we've seen so far, that you're assuming an interest increase in deposit costs or else equal of about 60 basis points. If I look at the difference between fixed term deposit costs and inter-access accounts, I'd just come up with a number that looks like you're assuming that about a quarter of the interest-bearing deposits migrate into time deposits. Can I just double-check ballpark whether my thinking is accurate on that, the deposit migration assumption within the interest-bearing account looks to be, you know, around 25% moving into time deposits? I've just got a second question after that.
Yeah. Look, I'm not gonna comment on your assumptions. That's not an appropriate one to make. Let me take a step back for you. We will manage our pass-through as we have consistently said, taking into account our liquidity and funding and our competitive position that we need to own deposits. Our liquidity and funding position is very strong. At the moment, we're at around 35% pass-through. We've not said we will end up at 50%, but we've said that's an appropriate level to think about as an incremental level of pass-through. What we are seeing is broadly stable between NIBs and NIBs. We are seeing customers take advantage of some of the fixed term deposits that we're offering, which are competitive.
I've given you some guidance around what the deposit levels of our customers in terms of what they have in their accounts, and we're very comfortable that we're able to compete effectively, and we're a net gainer in terms of new customer accounts coming into the business. You know, the uncertainty in all of this is customer behavior, and we continue to track and monitor that very closely. Very comfortable we can compete with the market, and we're very comfortable with our position. Of course, our liquidity and funding remains very strong. The way I would think about it in terms of how we're thinking about our deposits, we'll manage volume and value, and we'll keep it broadly stable over the period. That's what I would think about for your assumptions and leave it there for you to model.
Okay, fair enough. I think we could play around with our own numbers, but that's very helpful. Thank you very much.
Thanks, Omar.
just.
You had another question, Omar.
Yeah.
Yeah.
Just the next question, sorry, another one on costs. I know you don't want to be specific around, you know, how quickly, you know, stranded Ulster costs may come down when we look forward into 2024 and 2025. Perhaps could you talk around some of your maybe inflation assumptions beyond 2023? I guess we can look at, you know, the, you know, your inflation forecasts, but do you think there's any lagged inflation effects from high inflation in 2023 that we need to consider in 2024 or 2025, or can you help us a little bit with the, with the absolute moving parts looking beyond 2023?
I think on hopefully what we've given you, and I think Katie covered quite a lot in the presentation of the mix of our costs, so you can see really clearly what's happening. I think with regard to Ulster, that's all included in our numbers as we go forward. Ulster indirects, they're part of BAU, there will be some reductions, but there are lots of puts and takes in costs, and so overall we're very comfortable with the guidance. I think in terms of our economic scenarios, those are in the presentation on what we're assuming on inflation. I think what we've given you, I think, is clear guidance on where we expect costs are today, our cost income ratio, and that we'll actively manage our costs as we go forward.
Okay, lovely. Thank you very much.
Thanks, Omar.
Thank you. Our next question comes from Jonathan Pierce of Numis. Jonathan, if you could please unmute and go ahead.
Hello.
Hi, Jonathan.
Can you hear me?
We can. Hi, Jonathan.
Hello, good morning. I've got two questions. Sorry, back on this, short and medium term RoTE guidance to 14%-16%. I'm still struggling a bit with it. I mean, the NIM has obviously got this circa seven basis point a quarter tailwind coming from the hedge for the foreseeable future. I mean, even if the hedge is reduced in size, I mean, the, the overnight rate is now ahead of the five year swap rate anyway, so I'm not sure that's particularly relevant. Except in the near term, mortgage headwinds are, you know, a bit bigger than they might be moving forward 'cause of the two year fixes from two years ago coming off. You got the deposit migration.
Again, those latter dynamics should recede, I would think, later this year and into next year, but you've still got that powerful hedge tailwind. You're telling us into 2024 that the RoTE is still going to be 14%-16%. You're also telling us, of course, that the income this year of GBP 14.8 billion, it's a very specific number six weeks into the year. My question, getting to the point, it feels to me that you've almost decided that a 14%-16% RoTE is the maximum acceptable return in the medium term, and you'll do whatever you need to do on pricing, particularly deposits, to prevent it going above that.
That's not necessarily a bad thing 'cause of course it's gonna make the ROT more defendable when rates start coming back down again. Is there anything in that? That would be my first question. Then I've got a question on some accounting movements in the TNAV, if that's okay.
Okay. I'll let Katie take, TNAV when you get to it. Let me try and get you comfortable on RoTE and the answer, very simply is what we want to give you is a very clear view on the sustainable return on tangible equity of this business. There are a number of economic scenarios, that we have given you and the assumptions that we have there. We're actively managing the business, to deliver sustainable RoTE and certainty for you. I think what I would say is, on your point that the hedges are positive tailwinds, there are some economic uncertainties which we're taking into account. We're very well-placed with strong capital, good risk discipline, capacity to grow.
What you can expect to see is us continuing to deliver a strong position. I'm not actively managing the business only to deliver a 14%-16%, which was, I guess, the opening part of your comment. I think that is a good performance of our business in pretty turbulent markets, and obviously there are headwinds and tailwinds, but we're very comfortable with the guidance that we've given to you. What I would say is when we think about some of the ups and downs, you know, UBIDAC is no longer gonna be a material drag once we get through the end of this year. Interest rates, you know, we would expect to decline as we go forward. We've got customer behavior and competition and some RWA procyclicality and regulation coming in as well.
I think, you should feel comfortable that we're managing the business well for growth, and that 14%-16% is sustainable, without huge peaks and troughs within that. Do you want to ask your TNAV question to Katie?
Yeah. That's really useful. sorry, just a quick follow-up on that. this point on sustainability, I think is really important and to the question before me. Sustainable ROTE, the word sustainable, I think is used about 30 times in the slides today. The message coming out is, regardless of the income guidance and all the rest of it this year that looks perhaps a little softer than consensus, your very clear message is you're gonna do 14%-16%, and that is going to be sustainable for the next several years. You know, not just this year and next year.
Yes. That's right. We're giving you a view on what our RoTE will be and, you know, we don't give out targets without a great deal of thought and analysis. They're based on sort of various economic scenarios, and we've tested them against upside and downside risk scenarios. As a result, based on the economics given today, our current views of market competition, customer behavior, we're confident on the RoTE range we've given you.
Okay, brilliant. That's helpful. Second question on this TNAV. Is my understanding on the pensions correct, that the GBP 500 million is gonna be kept against capital, but there won't be a TNAV hit this year from that pension fund payment? Can I also ask on the cash flow hedge reserve. That's a negative GBP 0.30 at the moment within the TNAV. One or two other banks are suggesting a lot of that will unwind this year rather than it being spread over three, four, five years. How do you see that progressing over this year? Just thinking again about the denominator in the RoTE.
Yeah, no. absolutely. You're absolutely correct, Jonathan, as I expect you to be. No impact on TNAV from that pension. The duct is purely something that's hitting our capital line. In terms of the cash flow hedge, we did see a fair amount of unwind in that certainly sort of October, early November last year. Probably, you know, over time, you know, that line. It kinda ebbs and flows depending what's going on within the different bits of hedging that we've externalized from the group. We don't kind of think it would unwind particularly this year. It's kind of got a life of about five years, is how we think about it, but I wouldn't expect to see that all come back. We've had some benefit already, and we'll see how it kind of goes through.
Okay, brilliant. Thanks a lot.
Thanks, Jonathan.
Our next question comes from Robert Noble of Deutsche Bank. Rob, if you could please unmute and go ahead.
Hey, Rob.
Morning all. Thanks for taking my questions. Two, please. The behavior assumption change that you made on your mortgages through the effective interest rate. How long does your average customer stay on SVR within your current assumptions? How much has that shifted? Is there a difference between what you have in your assumptions now in the stock and then what you're lending on? Is there a flow and stock difference between your assumptions on EIR in the mortgage book? Secondly, just on the deposits again. How much of the structural hedge is based against commercial deposits versus retail deposits? I think I heard you say that you think deposits will start to come down at the end of the end of 2023. Is that more driven, commercially or retail in your view? Thanks.
Okay. I don't think we said deposits would come down at the end of 2023. We said there's sort of customer behavior. What you're seeing actually is on the commercial side, 'cause I haven't touched on that already, that generally there's a lot of liquidity still sitting in commercial balances. Just to give you a sense, you know, with the Bounce Back Loans, 25% of those are still sitting in cash on people's balance sheets, so there's still a lot of liquidity sitting there. On your SVR question, most customers, I mean, SVR is a relatively small part of our book. It's around less than 4% and most customers are on short-term SVR, which is about 3%.
On the behavioral life, we haven't adjusted for a couple of years and update moves to a more stable position, depends on the customer's time on SVR. It's a very small part of our book, and it's largely short term. Katie, do you want to pick up the structural hedge point?
Yeah. No, absolutely. Of the structural hedge, GBP 230 billion. GBP 184 billion of that is sitting on deposits. What you know of our hedge is that it's mainly based on our Non-Interest Bearing assets, so those kind of transactional accounts that we have. That forms a large part of the hedge, and then a smaller portion is then the instant access portion of the balances that we hedge, but that is much smaller.
What we can see when we look at our customers, they generally do prefer to stay in transactional. What's been really interesting for Alison and I is that NIMs number hasn't moved really since the end of 2021, so proportionately it's still there. Therefore, you can see the kind of robustness of the hedge position within there. I gave you some guidance earlier as to what we thought it could maybe do if we did the kind of 12-month look back from here.
Thanks. Just to follow up on the SVR, EIR point. What are the spreads that you quote in terms of application rates and back book margins, which as you said on the back, includes the SVR. What proportion of the spread on new lending will be attributed to people staying on SVR? Is it maybe 10% of the kind of profitability of the spread of the mortgage that you're expecting?
It's 4% of our book in terms of that piece, you know, and that kind of back book is 126 basis points for the entirety of the book. I'll probably let you do your math yourself. In terms of that, it's not a significant feature at all.
Okay, thank you.
Thank you.
Thanks. Our next question comes from Jason Napier of UBS. Jason, if you could unmute and go ahead.
Morning, Jason.
Good morning. Thank you. I'm afraid I'm gonna come back to NIM. I think Jonathan's right, the response on sustainable RoTE is super important. If you are to average 3.2% NIM for the year, after being up 25 basis points in the last quarter and with rates going up in Q1, it's gotta start falling sequentially during the period. I wondered whether there was anything at all you could say about the rate to which that happens or some kind of sense as to where the exit margin is for this year. 'Cause again, there's some danger in the market that people don't believe the NIM guidance that you've given today.
Secondly, whether there's anything that you might say about the size of the balance sheet into next year. That's one of the few missing pieces when it comes to the 2023 guide and how we should be thinking about average interest earning assets, including, I guess, yielding liquid asset buffers and the like. Thank you.
Thank you. Katie, do you want to pick that up?
I'll kick off and then jump in, Alison. Look, Jason, you know we've modeled at the current base rate of 4%, throughout 2023, and we do expect it to be around that 320 basis points. I do think that we've probably hit the end of those kind of, these huge increases that we've seen in NIM, coming through, that we all have got very comfortable with over this last year, and actually we'll start to see it being much kind of more muted as we move forward from here. I'm not gonna give you an exit rate, sitting in February in terms of what the NIM will do.
You know there's a number of different puts and takes within there, whether it's the structural hedge reinvestment, the negative roll-off on the mortgage refinancing, what happens on deposits, which we've spoken a lot about this morning in terms of that. I'll probably leave you to kind of work it through, but we're comfortable that that 320 is in a good position. If we look then in terms of the book, I mean, it really, I guess, moves to what our thoughts are around loan growth and what we're assuming as we move forward. Look, we delivered really good loan growth this year, 6.7%. Overall, we do expect to grow at or above market in our chosen sectors and products. Volume growth for the year will of course be dependent on business and consumer confidence. For our modeling and our guidance, we're not dependent on significant volume growth from here.
Thank you.
Thanks, Jason.
Thank you. Next question comes from Andrew Coombs of Citi. Please go ahead.
Good morning. If I could just come back to the remark about 80% of your deposit customers having less than GBP 5,000. I guess my first question's a very simple one: How many retail customers do you have?
We, um-
Sorry, Andrew.
You've thrown us by the simplicity, Andrew.
Yeah, you've thrown us by the simplicity. Eighty percent of our deposit accounts, which is in retail, have less than GBP 5,000. In terms of the numbers of customers we have in retail, we have 17 million customers. Not all of them will have deposit accounts with us. They will have different products, across the piece. When we look at our deposit accounts, from our customers, 80% have less than GBP 5,000, which is why, you know, we think about our strategy around helping people save and building a savings habit, which is more about a long-term strategy about helping people build financial resilience.
Okay. My second question would be, if you've got 17 million customers, 80% of those, 13.6 million, have less than GBP 5,000 of savings. If I look on your savings website, it says your Digital Regular Saver product join over 840,000 NatWest customers who save every month with our regular savings account. Of those customers, is it a case of only, what, 6% actually are in the Digital Regular Saver product?
Andrew, I'm probably not gonna give you that comment. For a lot of our customers, they have more than one savings account, they may have an instant access, they may have a Digital Regular Saver. What we've seen is our fixed deposit accounts, when we launched them in January, were very popular, we saw that being competitive to our customers. It will vary. One of the things that we talk about a lot is the level of savings that exist in the U.K.
One in four people in the U.K. do have less than 100 GBP savings in their accounts. Helping customers build financial resilience is a positive strategy for us. Things like our roundup tool, which sounds very simple, over 1 million people are using that on a regular basis, which helps them build savings. I'm very comfortable we have a good suite of competitive products that allows us to compete, that meets the needs of our customers and targets our long-term strategy of helping people save.
Okay. My final question on this is 80% of your customers have less than 5,000 GBP of savings. Can you provide an idea of what proportion of the total deposit balance those 80% of customers account for? I assume it's a much smaller sort of proportion.
Yeah. I'm probably not gonna go into that level of detail with you. I think what you can see is we have a very strong funding and capital position, a competitive position in terms of deposits, and a good acquisition and track record of bringing customers into the bank. You know, you can see the strength of our deposit franchise, you can see the strength of our funding and capital, and we're very comfortable we are able to be competitive, and you can see that through how we're managing our deposits for volume and value.
Okay. Thank you.
Thanks, Andrew.
Thank you. Our next question comes from Fahad Khan of Redburn. Please do go ahead.
Hey, Fahad.
Hi, Alison. Hi, Katie. Thanks for taking the questions. Just a couple of quite direct ones, I guess. The first one is the go-forward cost base in 2023 based on the guidance, it seems to imply around a kinda 6%, 7% year-on-year growth versus 2022. Obviously, that's still generating tons of operating leverage in 2023 given the revenue growth. Going into 2024, it looks like consensus is 3% revenue growth, 3% cost growth. Do you think operating leverage remains positive in 2024? That would be my first question. My second question would be on the Basel 3.1 guidance. The exit rate of RWAs in 2024, are we looking at about a GBP 200 billion number based on that guidance?
If I can sneak in a really quick question on the third one. Your peers at Barclays talked about corporate deposit time, mixed moving to time, whereas household isn't. Obviously, you've got a very big corporate deposit base, especially in current accounts. Are you seeing differences in behavior between your SME customers and your household customers? Do you think you will see differences in behavior in 2023? Sorry to sneak in that extra question. Thank you.
Okay. We're very happy to answer all three. On the cost base, we don't talk about the go-forward cost base. I think we've given you really clear guidance on costs. We've also talked about what our cost income ratios are going to be. What I would say is we have a very good track record of running costs. We will continue to focus on operating leverage and discipline across the business, and you will see that as we go forward. I think that's probably all I would say on that. On deposits, and corporate deposits, look, I think what we're seeing is from a business perspective, customers are largely wanting to stay transactional.
At the smaller end, I talked a little bit about the example of Bounce Back Loans still sitting in cash in people's transactional accounts. There's definitely a different behavior between sort of consumers and business in how they manage their deposits and so we would see different behaviors. You know, for at the moment, what we're seeing, small and medium-sized businesses are really focused on managing their operating costs.
They're looking to stay liquid. They have the benefit of term deposits that they can make use of. At the larger end of corporates, we can see people being sensitive to where they put their deposits, and we're competing effectively on that. On the consumer side, it really does vary from a consumer perspective. Different behaviors across retail and business, but we actively manage both. RWAs?
Yep, sure.
Katie?
Absolutely. Thanks, Fahad. A couple of things to think about on RWAs. One, we still have GBP 6 billion of RWAs of Ulster. We'll see them substantially roll off this year. You know what? I said in terms of the guidance is if you think of the impact of both procyclicality, which we've yet to see come through, and the impact of Basel 3.1, you should think of that as 5%-10% uplift from our spot just now. We're at 176, 5%-10% on that would be a bit shy of the number you're suggesting. I would be mindful, obviously, at the end of 2024, the Basel requirements currently as drafted need to be in place on 1 January.
You would expect to be holding a little bit more there rather than them all occurring smoothly till the end of 2025. There's those few different things that are going on, but that 5%-10% guidance I think is very helpful. Just don't forget about Ulster Bank.
That's great. Thank you so much. Cheers.
Thanks, Fahad.
Thank you. Our next question comes from Martin Leitgeb of Goldman Sachs. Please do go ahead.
Yes. Good morning. Thank you for taking my question, and also thank you for all the disclosure provided in the slide deck, which is really helpful. Just a follow-up on, and probably the last one I guess. A follow-up on the kind of headwind assumption within NII in terms of consumer at some of the deposit side, consumer behavior and what you have assumed.
How quickly do you assume that this change in consumer behavior, so the shift either out of deposits in form of attrition or into other deposit products in form of migration to savings or time deposits, how quick would you expect that shift to happen? Would you expect everything to be pretty much front-loaded into 2023?
I mean, similar to other questions earlier today, I'm just trying to square up, obviously, the NIM guidance, particularly considering the back end loaded nature of rate hikes in 4Q and obviously further rate hikes in 1Q, which would suggest quite a material headwind particularly this year. Secondly, on cost, just briefly, obviously historically, very strong focus on reducing the absolute cost base of NatWest Group in terms of its efficiency measures. Should we assume these efficiency measures are now mostly done, so the cost base to grow broadly in line with inflation, or do you still see scope for the cost base to lag behind inflation in terms of cost growth from here? Thank you.
Thanks very much. Well, look on consumer deposits, you know, it's very early days. What we're seeing is, you know, very strong funding and liquidity from our perspective. We're seeing real stability in nibs and ibs. We are seeing customers engage more actively in their deposits and we've got competitive rates. I think it's very early to say. Obviously there is, you know, if you take a step back, there are excess deposits from post-COVID. You know, people will increasingly spend those deposits. We'll see more seasonality. Don't forget seasonality in deposit flows. You know, January is a big tax month, so you'll definitely see a bit of activity in January, and then we expect it to return to more stable levels.
I think from our perspective, what I would say is we have a very disciplined approach. We have very competitive products. We've not lost any relationships. We're managing our liquidity, and it's very early days in terms of customer behavior. On costs, we have a good track record. You would expect us to continue to manage costs actively. Our continuing investment in customer journeys, digitization, which are part of our strategy, will continue.
Obviously, we factored in the impact of inflation and Katie's given you some really good visibility on what's happening on our costs. You've got our guidance going forward of what we expect to see on costs, and you can expect both Katie and I to continue to manage costs very actively going forward.
Absolutely. Absolutely. Martin, in terms of your NIM guidance, I'm not entirely clear what your question was. I think I've probably said everything I'm able to say about NIM, so if there's something I'm missing, please do jump in.
No. There wasn't any more question on NIM specifically.
Okay, perfect. Thank you.
Just trying to understand whether the headwind of deposit attrition is pretty much front-end loaded and then that base part.
Yeah. I think Alison's dealt with that. Thanks very much. Thanks, Martin. Have a good day.
Thank you.
Thank you. Our last question comes from Joseph Dickerson of Jefferies. Joseph, please do go ahead.
Hi, good morning. Just a quick one from me. I mean, the NIM's been beaten to death. Just on slide 22, can you just clarify what you mean by the already written? Is that assuming no further-
Yes
... maturities in the hedge, are effectively reinvested? We get the pickup in 23 from the existing book. By 24 and 25 you're effectively not reinvesting. 'Cause it's quite significant in the outer years as that's where a lot of the, you know, call it two-thirds of the rate sensitivity in the out years comes.
Yeah, I know. Thanks, Joe. I'm glad we haven't left without talking about this slide. The IR team worked hard on it. As I think about it, the already written is the hedges we already have in place that are gonna just roll through. What I'm trying to tell you here is GBP 2 billion, GBP 1.6 billion, GBP 1.4 billion of stuff that's already kind of in the tank. What you know is that we have maturing each year about GBP 40 billion a year. It comes across the year, you have to think about averaging of returns there. In our own models, we've modeled 3.3%. In terms of that, I would note that today, if I was putting on today, it's closer to kind of 3.7%.
I would expect in addition to this already written, there's the reinvestment of that GBP 40 billion per annum. What I talked about as well, if I looked as of today, if balances didn't change, they stayed very static, I would expect that the size of the hedge would reduce over the year by about GBP 5 billion. There certainly is significant reinvestment to come as we go on top of this book that's already written.
That reinvestment is not effectively embedded in the forward revenue guidance?
It's, it's naturally in the RoTE guidance. What it's not in is in that GBP 2 million, GBP 1.6, GBP 1.4. It's, it's very certainly in our around 14.8% for the year and the sustainable sort of 14%-16% in there. I've clearly made some assumptions on of that reinvestment and the rates on that, but it is in addition to the gray boxes that are on this slide.
Okay. Okay, all right. Perfect. That's what I wanted to get at.
Lovely. Thanks very much.
Thanks, Katie. Take care.
Thank you. I'd now like to hand back to Alison for any closing comments.
Great. Thank you. Well, thank you everyone for your time and your questions as always. I guess the message, just to leave you with, I think, from our perspective, we're very well positioned for the current environment. We have a well-diversified, largely secured balance sheet, which means we're positioned well in terms of the macroeconomic for any downside risk, and we're also positioned well for the future. We have attractive growth opportunities, very strong franchises with capacity to grow. We will maintain our proven experience on expense and investment discipline as we go forward. We're well diversified. We're de-risked. We have a high-quality loan book. We will effectively manage our capital and deploy our capital returns to shareholders. I think good and sustainable returns and attractive capital distributions as we go forward. Thank you very much, everyone.
Thanks for your time.
That concludes today's presentation. Thank you for your participation. You may now disconnect.