Good morning. Welcome to NatWest Group Q1 Results 2023 management presentation. Today's presentation will be hosted by CEO Alison Rose and CFO Katie Murray. After the presentation, we will open up for questions. Alison, please go ahead.
Good morning. Thank you for joining us today. I'll start with the business overview, and then Katie will talk about our financial performance. Our strategy continues to deliver against a backdrop of increased market volatility since we last spoke in February. In an uncertain environment, we're well-positioned based on the upside as we build on our strong customer franchise to drive targeted growth, and for any downside as a result of our strong balance sheet and liquidity, high-quality deposit base, and disciplined risk management. I'll start with the financial headlines. We delivered operating profit of GBP 1.8 billion in the first quarter, an increase of 49% on the same period in 2022. Attributable profit was GBP 1.3 billion, up 52% on the first quarter last year. Our return on tangible equity increased from 11.3%- 9.8%.
Income grew 37% to GBP 3.8 billion. Costs increased by GBP 240 million, which includes the one-off payments we made to staff in January to help manage the rising cost of living. We continue to focus on tight cost discipline and are on track to achieve our 2023 cost guidance of around GBP 7.6 billion. We told you at the full year that we expect to generate and return significant capital to shareholders this year and intend to maintain our 40% payout ratio. Our Common Equity Tier 1 ratio of 14.4% includes an accrual of just over GBP 500 million for the full year ordinary dividend. We have also completed more than half of the GBP 800 million on market buyback announced in February.
The government shareholding now stands at just over 41%. We have regulatory permission to undertake a directed buyback, though any transaction remains at the government's discretion. Recent market volatility has had little impact on the bank and the average UK consumer. We have seen an expected reduction in deposits during the quarter. Customer tax payments have increased about GBP 8 billion from the fourth quarter as more people fall into higher tax brackets. Customers also continue to pay down debt, including government lending. We are actively balancing value and volume, taking into account customer behavior as well as competition in the market. Our funding is well diversified. Our loan-to-deposit ratio is 83%, resulting in surplus deposits of GBP 53 billion.
Our deposits amount to GBP 422 billion across the three businesses. Our primary liquidity includes over GBP 120 billion of cash. This gives us a liquidity coverage ratio of 139%, well in excess of minimum requirements, with headroom of GBP 43 billion. On the asset side, we have a well-diversified loan book where our top 10 wholesale customers account for around 5% of total loans. We have limited exposure to commercial real estate, which is less than 5% of the book, with an average loan-to-value of 47%. 93% of personal lending is secured. Our retail mortgage book has prudent loan-to-value ratios with an average of 53%. Our books performance demonstrates our strong risk management with low levels of arrears and impairment. Procyclicality remains at low levels. We continue to monitor this closely.
The quality of our balance sheet and risk management enables us to continue to support our customers and the economy in these uncertain times. We are growing lending responsibly with an increase across our three business segments of GBP 5.7 billion to almost GBP 356 billion. Within this, we have seen strong growth in mortgage lending, with flow share increasing from 15%-17%. In commercial and institutional, lending to large corporates grew GBP 2.4 billion- GBP 56.1 billion. We also continue to support entrepreneurs and small businesses, which represent over half The U.K. economy. In March, for example, we issued our third social bond dedicated to women-led enterprises, the first of its kind from a European bank.
Over the past three years, we have successfully delivered an organization that is more capital efficient, growing responsibly, and increasingly easy for our customers to deal with. This enables us to shift the balance of our investment over the next three years. As we outlined in February, we will focus on growth, first, by increasing our engagement with customers at every stage in their lives. Secondly, by supporting customers in their transition to a net zero economy. Third, by embedding our services further in customers' digital lives. Our purpose-led strategy and priorities remain unchanged. We will continue to focus on creating a simpler organization that is highly cost efficient, to deploy our capital effectively in order to generate the best returns for shareholders, and to foster innovation and digital transformation to serve our customers better.
I'd like to give you a brief update on how we're delivering on these priorities. I'll start with some examples of our growth initiatives. We continue to deepen customer engagement through tailored propositions for customers at every stage of their lives. A good example is our youth and family offering. We are the only High Street bank with a tailored proposition supporting children from the age of three upwards, building on the success of our acquisition of Rooster Money, which helps young people manage money. Last year, we connected Rooster with our own app and we have extended our offering by making a free Rooster debit card available for all our customers between the ages of six and 17. As a result, we opened 19% more youth accounts in the first quarter compared to the four th, taking our flow share to 18.1%.
In our private bank, we are leveraging our expertise in asset management to serve more customers across the group. We attracted GBP 600 million of net new money in the first quarter, which is double that of the fourth quarter last year. We are also the number one UK high street bank for start-ups with a share of 16.4%. We continue to enhance our propositions to help high-growth businesses scale up and have increased volumes 9% during the quarter. As a leading provider of sustainable financing, we play an important role in helping our customers transition to a net zero economy. We have delivered just over GBP 40 billion of climate sustainable funding and financing since July 2021 to meet our GBP 100 billion target.
Within this, we set an aim in January to provide at least GBP 10 billion of lending for homes with an energy efficiency rating of A or B, and have contributed GBP 1.3 billion during the first quarter. As we continue to embed our services in customers' digital lives, 93% of our retail customers' needs are now met digitally, and 64% of retail customers are entirely digital. We are also focused on expanding our services and have recently extended our cards offering beyond our own customers to the entire market, while maintaining our prudent approach to risk. As a result, we have acquired 30,000 new card customers during the quarter, and this has contributed to an increase in share from 6.9%-7.2%.
In addition to our focus on driving targeted growth, we continue our strong track record of disciplined cost management and investment. We are on track to meet our cost guidance for the year of around GBP 7.6 billion and our guided cost income ratio of less than 52%. We expect to invest in the region of GBP 3.5 billion over the next three years, continuing our digital transformation, which includes improved customer journeys, data analytics, machine learning, and robotics. We continue to allocate capital effectively across the business as we progress our phased withdrawal from Ulster Bank, Republic of Ireland. RWAs have reduced a further GBP 800 million in the quarter to GBP 4.6 billion. Around 95% of accounts are now closed or in the process of closing.
We have shut all our branches in the Republic of Ireland, and we expect the agreed asset sales to complete by the year end. You can see from this slide we are making good progress on our objectives and are on track to meet our 2023 guidance on income, costs, and capital. As I said earlier, we expect to make significant distributions to shareholders in 2023 and to maintain our payout ratio of 40% with capacity for additional buybacks. By focusing on targeted growth, disciplined management of costs, and the effective allocation of capital, 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%. With that, I'll hand over to Katie to talk about our financial performance in more detail.
Thank you, Alison. I'm going to talk about the performance in the first quarter using the fourth quarter as a comparator. Total income increased 4.5%, GBP 3.9 billion. Income excluding all notable items was GBP 3.8 billion, up 1.4%. Within this, net interest income was stable at GBP 2.9 billion, and non-interest income was up 7.1% at GBP 980 million. Operating expenses fell 7% to GBP 2 billion, driven by the absence of the annual UK bank levy, partly offset by the one-off cost of living payment to staff in January. This delivers a cost income ratio of 49.8% for the quarter. The impairment charge approximately halved to GBP 70 million, or 7 basis points of loans.
Taking all of this together, we delivered operating profits before tax of GBP 1.8 billion. Profit attributable to ordinary shareholders was GBP 1.3 billion, and return on tangible equity was 19.8%. I'll move on now to net interest income on slide 11. Net interest income, excluding notable items, was broadly stable at GBP 2.9 billion. This was the result of two fewer days in the quarter, which offset the benefit from higher average lending volumes. Net interest margin, excluding notable items, increased 2 basis points- 327 basis points. Wider deposit margins added 12 basis points by reflecting the benefits of higher average interest rates, partly offset by lower average deposit balances, ongoing pass-through to savers for which there is a timing lag, and ongoing customer migration to higher interest-paying accounts.
This was partly offset by lower lending margins, which reduced NIM by 9 basis points driven by the mortgage front book. We continue to expect NIM for the full year of around 320 basis points. This assumes the current UK base rate remains at 4.25% throughout 2023, up from 4% in our previous projections. The average reinvestment rate of our product structural hedge for the full year is 3.6%, up from 3.3%, which is largely offset by our expectation of lower average deposit balances. Let me turn now to deposits on slide 12. Customer deposits across our three businesses were GBP 422 billion at the end of the first quarter, down 2.6% or GBP 11 billion.
This was mainly driven by tax payments, which were around GBP 8 billion higher than the fourth quarter. This is a larger share of overall additional U.K. tax payments than our deposit share. We saw increased competition for balances. Breaking this down by business, retail banking deposits reduced GBP 4.4 billion, driven by tax payments and higher customer spending. In private banking, the impact of tax was most pronounced given the customer demographic. We also saw continued reallocation of cash into investments. In commercial and institutional, deposits reduced GBP 2.8 billion, mainly reflecting the reduction in system liquidity. Within central and other, we saw a further GBP 8.7 billion reduction. Half of this is the result of Ulster Bank customers' migration to other banks as expected, and it also includes normal treasury activity. Turning now to how we think about deposits on the next slide.
Customer behavior in the first quarter was broadly in line with expectations. We saw limited change between Interest Bearing Balances, which account for 60%, and Non-Interest Bearing Balances, which make up the remainder. Within Interest Bearing Balances, we continue to see migration from instant access to term accounts, which is positive from a relationship perspective, but clearly has an impact on deposit margins. Term deposits across the three businesses are now around 8% of the total, up from around 6% at the year-end and around 3% at the end of 2021. Around 40% of total deposits are insured. Clearly, this varies by customer type. For our personal customers, 6%-8% are insured. This is higher for retail banking than private banking, as you would expect, given larger average balances.
We view deposits in Coutts as more stable as a result of our private banker model for this customer base. For our corporate customers, around 11% of balances are insured. This will be higher for our smaller business banking customers and lower for our market and fund banking customers. Our commercial and institutional business is relationship manager-led with regional and product expertise. We serve a broad customer base with a comprehensive product set, providing core transaction, clearing, and cash management services. This provides us with significant relationship-led operational balances. Future deposit flows will be determined by macroeconomics, including ongoing quantitative tightening as well as changes in net lending. Customer behavior and competitive dynamics will also play a significant role.
Evolution of deposit balances is difficult to predict, but in light of higher tax payments in the first quarter, we now think deposit balances at the end of 2023 are likely to be broadly stable or modestly lower than the end of 2022, when they were GBP 433 billion. We remain competitive across our customer savings rate and continue to pass through higher interest rates. Our cumulative pass-through is now around 40% across interest-bearing deposits, up from 35% at Q4. This includes pricing decisions after the base rate increase to 4.25% in March. As you can see on the bottom of the slide, customer deposit repricing has lagged the increase in base rates. The change in the cost of deposit funding is accelerating as there were more significant pass-through in the first quarter.
This compares to the change in the average UK base rate, which is decelerating. This negative lag effect has meant less deposit margin expansion than in prior quarters. Turning now to loans on slide 14. We are pleased to have delivered a strong quarter of balanced lending growth across the group. Gross loans to customers across our three businesses increased by 1.6% or GBP 5.7 billion- GBP 356 billion. Taking retail banking together with private banking, mortgage balances grew by GBP 3.9 billion or 2% in the quarter. Gross new mortgage lending was GBP 10 billion, representing flow share of around 17%. This is higher than normal, reflecting our decision to stay in the market during the volatility in Q4, where others withdrew, as well as a shorter period between application and completion that we saw in the first quarter.
This is a good demonstration of how we have positioned this business for growth. Unsecured balances increased by a further GBP 200 million- GBP 14.4 billion, driven by new card issuance and market share gains. In commercial and institutional, gross customer loans increased by GBP 1.5 billion. At the mid to large end, we saw good demand across revolving credit facilities, term lending, and fund banking. At the small end, demand remains muted, and we have seen some deleveraging by customers with surplus liquidity, including the ongoing repayment of government scheme lending. I'd like to spend a bit of time explaining how these balance sheet dynamics feed through into our strong liquidity position on slide 15. We have a highly liquid balance sheet with a diverse and robust funding base.
This allows us the strategic flexibility to manage our deposit route for value in a considered and disciplined manner. We ended the quarter with a loans deposit ratio of 83%, demonstrating the strength of our capacity to grow. Our liquidity coverage ratio was 151% on a 12-month rolling average view and 139% at the end of Q1. This decrease was driven by a reduction in deposit balances and strong lending growth. Our primary liquidity was GBP 149 billion at the end of the quarter. Four-fifths of this is cash, and most of the remainder is government bonds held at fair value. This means that we are very well prepared to manage any unexpected changes in customer behavior. I'd like to turn now to non-interest income on slide 16.
It was a good start to the year, with non-interest income, excluding notable items, up GBP 61 million- GBP 918 million. We are pleased with the performance of our markets business, which delivered higher fixed-income revenues and also benefited from currency volatility. Our capital markets income grew as we supported more commercial customers with their issuance. Fees and commissions decreased GBP 32 million- GBP 583 million due to seasonally lower spending. Going forward, non-interest income will be influenced by economic activity and customer confidence, as you would expect. Turning now to costs on slide 17, where my comparison will be with the first quarter of last year. Other operating expenses were GBP 1.9 billion for the first quarter.
That's up GBP 214 million or 12.5% on the same period last year, including a one-off cash payment to staff in January of around GBP 60 million to help with the cost of living pressures and an increase in strategic costs of around GBP 40 million relating to our withdrawal from the Republic of Ireland. Excluding these items, cost growth was around 7% year-on-year. As we have often said, costs are inherently lumpy across the year. We continue to expect other operating costs of GBP 7.6 billion for the full year, equivalent to around 4% annual cost growth in line with our guidance at the year-end. I'd like to turn now to credit risk on slide 18. We have a well-diversified prime loan book which is performing well.
Over 50% of our group lending consists of mortgages, where the average loan to value is 53% or 69% for new business. Overall, we have low levels of arrears and forbearance in our mortgage book. 91% of our book is at fixed rate, 5% are trackers, and 4% is on a standard variable rate. Over two-thirds of mortgage balances are fixed for five years and less than a quarter are fixed for two 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. As Allison said earlier, our top 10 wholesale customers represent around 5% of wholesale loans.
Our commercial real estate exposure represents less than 5% of group loans with an average loan to value of 47%. We have carefully managed it for several years by reducing absolute exposure and pivoting away from retail towards industrial. We are comfortable with the risk in this portfolio. Turning now to look at impairments on slide 19. We are reporting an impairment charge of GBP 70 million in the first quarter, equivalent to 7 basis points of loans on an annualized basis. This includes a net release of GBP 44 million in our commercial and institutional business. We have not updated our economic scenarios this quarter, as we are comfortable that they adequately reflect the range of potential outcomes. This charge largely reflects Stage 3 impairments, which remain stable.
As you know, our through-the-cycle impairment guidance is 20 basis points- 30 basis points, and I continue to see this as an appropriate level for 2023, given both the economic outlook and the relatively benign trends in our book. Our expected credit loss coverage is broadly stable at GBP 3.4 billion, equivalent to 89 basis points of loans. This includes GBP 333 million of post-model adjustments for economic uncertainty, which are also broadly stable in the quarter. We remain comfortable with the coverage of the book, which is not showing any material signs of stress. Turning now to look at capital and risk-weighted assets on slide 20. We ended the quarter with a Common Equity Tier 1 ratio of 14.4%, up 20 basis points on the fourth quarter. We generated 50 basis points of capital before distribution.
This includes 72 basis points of capital from earnings, partly offset by the change in the IFRS 9 transitional relief on the 1st of January, which absorbed 8 basis points and RWA growth consuming 16 basis points. In line with our commitments to distribute 40% of earnings via the ordinary dividend, we have accrued 40% of the first quarter attributable profit, equivalent to 29 basis points. RWAs increased by GBP 2 billion due to stronger lending, which added GBP 1.8 billion and an impact of GBP 1.1 billion from our annual operational risk recalibration exercise. This was partly offset by a reduction of GBP 0.8 billion in market risk. Turning now to our balance sheet strength on slide 21. Our CET1 ratio of 14.4% is above our target range of 13%-14%.
We are well-positioned to participate in a directed buyback from the government when they choose to sell. Our total capital ratio of 19.6% is above our minimum requirements. We operate with a management buffer at the CET1 level and hold additional Tier 1 and Tier 2 securities broadly in line with our minimum requirements. We have GBP 3.9 billion of AT1 securities outstanding, equivalent to 2.2% of RWAs and the minimum requirement of 2.1%. Our next AT1 call date is not until August 2025. Our U.K. leverage ratio of 5.4% was stable in the quarter and remains well above the Bank of England minimum requirement. Turning to 2023 guidance on my final slide. We continue to expect income, excluding notable items, to be around GBP 14.8 billion.
Net interest margin of about 3.2% and 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 the loan impairment rate in the range of 20 basis points- 30 basis points. Together, we expect this to lead to a return on tangible equity at the upper end of our 14%-16% range. With that, I'll hand back to Alison.
To conclude, in an uncertain environment, our strategy continues to deliver. We are well-positioned both for the upside as we build on our strong customer franchise to drive targeted growth and for any downside as a result of our strong balance sheet and liquidity, high quality deposit base, and disciplined risk management. We expect to return significant capital to shareholders this year with a payout ratio of 40% and capacity for additional buybacks. In the first quarter, we have already accrued just over GBP 500 million for dividend payments and completed more than half of our GBP 800 million on market buyback. While Katie has summarized our guidance for 2023, over the medium term, we plan to operate with a CET1 ratio of 13%-14% and deliver a sustainable return on tangible equity of 14%-16%.
Thank you very much, and we'll now open it up for questions.
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. Our first question comes from Rohith Chandrarajan of Bank of America. Rohith, please do unmute and go ahead.
Hi, Rohith.
Hi. Thank you. Morning. Thank you very much. I've just got one, please, on net interest income. You slightly raised your interest rate assumptions but left the revenue guidance unchanged. The market is currently expecting rates to rise close to 5%. If that were to play out, I just wonder if you could talk through how that would impact your GBP 14.8 billion revenue guidance, please.
Great. Thanks. Katie, do you want to start off?
Yeah, sure. Thanks so much. Thanks. Thanks, Rohith. As we look at it all comes down to where we are on our interest rate sensitivity, and we continue to believe that we are interest rate sensitive. Importantly, the level of sensitivity has reduced due to a couple of things. First of all, a decrease in the surplus liquidity on the balance sheet, and you can see that through the reduction in our liquid assets, interest earning assets on slide 11. Also an increase in the incremental pass-through as base rates have gone higher. As we expected this, we've talked about this with you all a number of times. Our disclosure at the end of 2022 showed around GBP 200 million of additional income for each 25 basis points upward shift in the yield curve.
Remember, that assumed a static balance sheet and a 50% pass-through, both of which were illustrative and not in reality the current experience. Our updated sensitivity based on the end of March balance sheet, assuming a 60% pass-through, would take that GBP 200 million number and reduce it to GBP 175 million of additional income. How the sensitivity develops going forward will be very much a function of changes in the balance sheet and competition. I would just remind you, Rohit, that all of this is baked into our income guidance of around the GBP 14.8 billion for 2023 and our 2023 and medium term ROTCE target of 14%-16%, which we comfortably expect to be at the upper end of this year. Thanks, Rohith.
Thank you.
Thank you. Our next question comes from Alvaro Serrano of Morgan Stanley. If you could please unmute and go ahead.
Hi. Can you? Hopefully you can hear me okay.
Yeah.
Two questions, please. One on deposit structural hedging, the other one on the mortgages. It sounds like deposits might slip a bit more during the year or you're de-emphasizing the flat for the full year. I don't know if you can maybe speak to the visibility you have on the deposit flows for the rest of the year and why you're confident that now it's gonna be more stable. The structural hedge, maybe you can update us what's happened in Q1 and do you still expect a small reduction there? On mortgage spreads, you're clearly taking an impressive amount of market share.
I know Katie, you've touched on why, but maybe you can speak to the spread you're underwriting, what you're seeing early in Q2. Thank you.
Great. Thank you. Well, look, I will get Katie to go through that. On deposit flows, I mean, clearly, what we've seen, so far is nothing idiosyncratic on deposits. We've got really strong franchises. I was very clear that we will manage our deposit base for value, rather than chasing volume. That value is liquidity and income. We've got the right products to compete. I think in terms of what will happen with deposits, we've guided you to sort of stable to modestly down. It's gonna be determined by customer behavior and some of the macro dynamics. You know, you can see we've got a very robust LDR, and we're continuing to lend very well. You know, we're not seeing anything unusual in our deposits. Broadly stable to modestly down.
it's really gonna be customer behavior, and market competition, both of which we're very comfortable with. Katie, do you want to pick up the hedge and the mortgages?
Yeah, sure. No problem. Thanks so much. I'll start with the hedge, overall. First of all, it's important to say no change in our mechanistic approach to the hedge. What we talked about when we spoke in March was around the product structural hedge notional was GBP 184 billion, and we expected this to reduce by about GBP 5 billion over 2023. We have around GBP 40 billion of maturing balances which come evenly over the year, and they have an average yield of 1.1%. At the moment we're assuming an average reinvestment rate of 3.6%, so slightly up from when we spoke in February. At the end of Q1, the product notional hedge was GBP 182 billion, so GBP 2 billion lower.
Given the reduction in deposits in Q1 and the ongoing mix shift, we would expect that hedge to reduce a little bit further over the course of 2023. You know, as a reminder, term deposits do not form part of the structural hedge. The purpose of the product structural hedge is to reduce the sensitivity to changes in the short rate and smooth that income over five years. You know, when I look at the 5-year swap rate being below SONIA, the impact on 2023 income from not reinvesting maturing any balances would be limited. This would be taking from me a play on the interest rates. That's not something that we do. The general sensitivity is to total deposit balances.
We are investing at the higher rate of 3.6%, the change in our average reinvestment rate is around 25 basis points. If I take you to the sensitivity disclosure, in terms of the structural hedge piece, we talked around at the year-end an income of GBP 50 million in year one. That doesn't change particularly in terms of the balances where we are given the investment rate. In reality, the reinvestment for this year, I would say if you think of our product hedge income for the year of kind of around GBP 2 billion that's already baked in and the sensitivity we gave you at the beginning of the year, they're still sitting around about that GBP 2.4 billion number. Very comfortable on that.
Mm-hmm.
If I look at the mortgages point, mortgages, yeah, absolutely 17% flow. We talked about it in my speech as to what was there. We're writing that at, or in Q1, it was around 80 basis points. We've talked about that we like to manage this book at around kind of 80 basis points over time. There will be puts and takes on different quarters depending what the swap curve has done and what pressure it's in, but that's the kind of number we aim to over a period, and that's what we got in Q1. You know, comfortable with that in terms of that piece. The additional flow was really positive using our strong LDR and making sure we were in place for our customers as and when they needed us.
Was that application or completion margin that?
That was a completion margin. Much higher than what you would normally see just as a result of the actions we took in Q4. Also in Q1, we saw people moving slightly faster from application to completion, I think as they were trying to make sure that they were assuring their ones. You know, I'm comfortable with the 80 basis points. That's how we seek to manage the book, and we'll move on from there.
Thank you very much.
Thanks very much.
Thank you. Our next question comes from Chris Cant of Autonomous. Chris, if you could please unmute and go ahead.
Morning, Chris.
Good morning. Thanks for taking my questions. I just wanted to think a little bit about your GBP 14.8 billion revenue guide. Obviously you had a strong other income print, and you're annualizing clean in the first quarter GBP 15.5 billion. I appreciate there's a bit of seasonality probably within the NatWest Markets number, but it does feel like to get to the[audio distortion] , you seem to be pointing to quite a significant deterioration in overall revenue run rates for the remainder of the year. If you could just unpick that and explain what is it in the one key revenue run rate that won't be repeating and give us some quantification, that would be helpful, I think.
Just looking a bit more longer term on the revenue outlook, I appreciate there's a lot of assumptions that can be made. If deposits stabilize, as you seem to be indicating towards the end of the year, and rates are flat beyond 2023, and I know you do make a different assumption, but if policy rates were flat, would you expect NII to be sequentially higher in 2024 versus 2023? 'Cause obviously this year you've got some deposit repricing lag effects coming through, and the mortgage repricing headwind is a bit more acute just in terms of some of the COVID era vintages rolling. Looking into next year, I would expect your structural hedge benefit to more than outweigh the mortgage headwind, which will be persisting.
If you could just speak to that, in terms of NII expectations beyond this year, and if we can park base rate to one side, 'cause we can all make our own assumptions on that would be really helpful. Thank you.
Look, I'll get Katie Murray to do that. I mean, Chris Cant, one thing I would say, what you can see from our performance in Q1 is the strength of our franchises. You've heard me talk about the fact that we've positioned this business with good risk diversification and capacity to grow. I think that capacity to grow is pretty important. We've got all of the right products to do that and, you know, the GBP 5.7 billion of revenue growth you've seen in Q1 is spread across the piece. I think the strength of the franchise's capacity to grow and the momentum we're building gives you the underlying confidence of the robustness of the franchises. We can go into the assumptions obviously around the different dynamics between, you know, interest rates, et cetera.
Katie, do you want to sort of pick those points up?
Yeah, perfect. I'll start with the revenue, and then I'll do a little bit of picking on the what if scenario, Chris. If I look at it, I think, you know, revenues are. The interest rates are up one factor. It's only 25 basis points. It's not a huge kind of movement when we compare to the guidance we've given you of GBP 14.8 billion in terms of revenue. I think that it's important to remember that 25 basis points would only apply for nine months of this year. There are a number of other factors which are at play, some of which are uncertain as we look out to the rest of the year. I'd say the two primary uncertainties are around the deposit balances and deposit repricing.
As we look at it today, a smaller balance sheet will affect income. We have said we now expect deposit balances to be stable to modestly lower to the end of 2023 number. Bear in mind that was a GBP 433 number that we're comparing to that we talked about in February. Repricing will be a function of the incremental pass-through rate and also customer migration. On pass-through, we've always said that we expect this to be higher when we're at higher levels of interest rates. The announced changes we made to our savings rate since March rate rise are equivalent to around 60%. This brings our cumulative pass-through on interest-bearing balances to around 40%. Other factors you need to think about, lending volumes and margins.
We've a nice strong start to the year with that, with the GBP 5.7 billion of additional lending. Markets and the customer activity driving non-interest income. Again, a solid start. We've considered all of these factors in our NIM guidance of around 320 basis points the full year and the total income of GBP 14.8 billion, and we remain comfortable with these targets. If I look to 2024, I mean, Chris, I'm not gonna give you specific guidance on 2024. As ever, I think you're in the right kind of place. You can see clearly what our hedge is doing.
We've been very open around that, how that behaves. We do have some of the roll-off that happens from the peak of the mortgages coming off. Do bear in mind that I think mortgages over the last few years have trended more to five and a two year. It's not quite, I think, the kind of abrupt or two years past that they're all kind of. It all kind of comes out. As I look at, you know, what I've said about mortgage income, what you could imagine around the volume of that mortgage income, what I've said very publicly around the hedge, it's comfortably covering any of that drag as we go through 2023, 2024 and onwards.
Very, very comfortable, and that's the real power of the mechanistic approach we have to the hedge that we use internally. I hope that helps.
That's helpful. Thank you. Just to reconfirm on that latter answer. Setting aside base rate changes, you would expect essentially the structural hedge to be outweighing asset spread pressures into 2024 and beyond, and then it just becomes a question of, well, what do we think happens.
Yes.
the base rate piece.
I would expect that. I think the slide 22 we gave you on disclosure at the year-end really helps you kind of model that in quite some detail. Clearly, there's uncertainties around what happens with deposits, et cetera, but I'm comfortable.
Okay. Thank you.
Thank you. Our next question comes from Aman Rakkar of Barclays. Could you please unmute and go ahead?
Hi, Aman. We can't hear you.
Hey. Hey, guys, can you hear me?
Yep.
Yep.
We can now. Yep.
Sorry about that. Good morning, Alison. Good morning, Katie.
Morning.
I had a question on deposit mix, if I could. Thanks very much for the slide on it. I guess the two questions I have in relation to deposit mix, what kind of what mix have you assumed in the revenue guidance, the NIM guidance that you've given this year? I'm specifically thinking about, you know, 40% current accounts, 8% term deposits. I know that number's rising. You know, those numbers, if I look back in history, you know, they look outsized, right? You know, we've typically had a lot lower current accounts historically and a lot more term deposits. What have you assumed, and what are you seeing in terms of mix shift now?
Is it simply just, you know, when base rate's moving that this dynamic takes place, or is this a, is this a trend that you expect to kind of pick up from here? I mean, ultimately, where do you think these numbers land? What's the kind of steady-state mix for your deposit base going forward, and what does it mean for net interest income? Thank you.
Thanks. Thanks, Alison. Look, I think, Aman, you're asking me the 50,000 dollar question here in terms of that. I think a few things I would kind of point to is as we kind of look at it, what's been really interesting is we haven't seen a particular move on interest-bearing to non-interest-bearing. It stayed more or less around that 40% non-interest-bearing, 60% interest-bearing. It might have moved up 1% and the next one has moved back down again. It's pretty stable. You kind of look at the current account mix and go, "Well, actually, it's not moving significantly." That probably helps you on that piece. In terms of the term, we were at 6% at the end of Q4. We're up to 8%.
That's across all of the businesses. Obviously we introduced our own term account within retail. We've seen really good performance, within there. You know, I said that in March it would probably move up another couple of percent. I don't expect that number to move that quickly in terms of that piece. I would really kind of look to that IBBs and NIBBs mix and then think about how much more term would be there. I think what will be interesting as we get later on in the year, what you'll see is the recycling of people's term accounts rather than more necessarily moving in as people come up to their kind of one year kind of anniversaries in terms of that piece.
I think that kind of IBBs and NIBBs disclosure is probably the best guidance that we've got out there. You know, and we'll see how that continues to evolve, and we'll continue to update you as we see that.
Is there any way you could tell us what you've assumed for this year in terms of that mix? It doesn't sound like you're assuming much more. Is that about right?
I mean...
We're not assuming much more. Look, I think, you know, so we're not assuming significant shifts. I think it's really gonna depend on sort of, you know, evolutions of balances overall are gonna be dependent on customer behavior. What we're seeing in the first quarter and what we saw, you know, in Q4 was rational customer behavior. Seeing some, you know, some customers take advantage of excess balances by, you know, putting it into term. You know, paying down some debt. You know, with inflation for people on lower balances, you know, more spend of their balances. Those are the kind of macro dynamics but no major shift in terms of that mix.
I think also what's really important, we're sitting with an LDR of 83% and an LCR of 149%. We're very comfortable to cope with mixes as they come, we'll deal with that as it moves forward. We're, you know, very keen to keep moving forward with our customers as they span both sides of their balance sheets.
Katie, given that you just mentioned LCR, just as a quick second question then. I mean, your LCR has come down a decent chunk Q on Q, and, you know, I'd describe it as middling of the pack versus some of the peer group in Europe. is there I mean, what's the right ratio for LCR, and is there anything that you can do to bolster that number? I mean, you know, the regulators potentially taking a look at it. The market's clearly focused on it. Is it something that you're Sounds like you're relaxed about?
Look, we're pretty relaxed about it in terms of LCR. Also I'd look at our LCR. We have lower TFSME than others. Our loan to deposit ratio is very strong. We have a lower LDR than some peers, which gives us capacity to grow. We're very comfortable. I'd look at it through a kind of mix and then our LDR.
Thank you.
Thank you very much. Our next question comes from Ed Firth of KBW. Ed, if you could please unmute and go ahead.
Morning, everybody. Can you hear me okay?
Morning. Yep, we can hear you.
Great. Thanks so much. Yeah, I have two questions. Not on the NIM, you might be pleased to know. One was on capital. You're at 14.4. I mean, I guess if you had done the directed buyback, which many of us expected, you'd be down at about 13.6, something like that. I'm just trying to think. In terms of your range, it feels like there's not a huge amount of capacity for further buybacks over and above what you've already announced if you're gonna keep enough for the directed buyback. That's the first question. Is that sort of logic broadly right? I guess that's my first question. The second one is a slightly broader question, probably more for you, Alison.
If we look at U.K. data at the moment, inflation is persistently coming in higher than people are expecting. If I talk to all the banks, all of you are saying no signs of any stress in the consumer at all. Which sort of leads me to believe that interest rates may well have to go quite a lot higher than we were expecting because people are clearly still spending, they're still expecting rates to fall, and they're budgeting on that basis. Firstly, is that analysis broadly right from what you're seeing, or is there anything that you could highlight within the behavior of consumers that suggests that actually some stress is starting to build and people are starting to take higher interest rates seriously, or not?
Sorry, that's a bit of a rambling question. I hope it's clear.
Okay. I'll do my best to answer it. look, on the capital, don't forget we're generating capital. so, you know, our range that we've guided you is 13%-14%. That's based on, you know, we're very comfortable with the risk diversification on the book and the robustness, that we have. and we're generating capital. clearly, if the government decide to do a directed buyback, we still believe that's a good use of our capital as well as I've been very clear on distribution of capital to shareholders. Don't forget about the capital generation of the business, which is very strong. on the.
If you take it down to 13 then. I mean, would you be happy with it at 13? I know that's within your range, would you be happy taking it right to the bottom end?
You know, I think, Ed, the way that I would think about it is, it's a range that we'll toggle up and down between. You know, you see that we generated 50 basis points of capital this quarter. When we do the directed buyback, it will come down, we'll start to build it back up again, we'll accrue dividends. We're comfortable within that range. That's the range, you know, we're very happy to work within.
Great. All right. Thank you.
On your second question. Look, we are seeing very low levels of impairments across our book and very, you know, that is symptomatic of very low levels of distress or impairments across our book. As you know, our book is predominantly secured. You know, LT, average LTV in our mortgage book, 53%, less than 5% of our book in CRE. Average LTV, 47%. We actively, you know, manage our book really well. We're very comfortable with the risk diversification. We're very proactive in our outreach with customers. Impairment levels are very low, and that is, you know, real resilience in both consumer and the businesses that we support. That risk discipline is pretty important. You know, we're very comfortable.
They were very, very low levels. You know, there are signs of increasing confidence. You know, our recent PMI data shows increasing business confidence, so that's good as well. What we're seeing with consumers is really rational behavior. So what we're seeing, and, you know, I've talked before about we look at a lot of soft and hard indicators of behavior. On the soft indicators, you know, we're seeing people, you know, consumers adjusting their spending. Absolute spending is not going up fully in line with inflation, which means people are economizing and adjusting for the inflationary environment. We have seen through this last quarter, you know, for some of our customers who have higher balances than starting to maybe prepay some of their mortgage. You know, pay down more expensive debts.
We're not seeing irrational behavior in spending, as in, you know, we're not seeing credit card spending being used to pay for, you know, household bills or food spending, which would normally be an indication of concern. We're not seeing that sign of distress coming through, and we are seeing rational behavior with people economizing. Of course, what is true is those on the lowest income deciles are struggling more, which is why we're doing proactive outreach. But we are seeing as energy price, fuel prices come down, less people in what we would describe as food and fuel energy poverty. That's again, a good sign. There is rational behavior. However, exactly as you say, inflation is staying a little bit persistently higher than planned.
We've seen it coming down, not as quickly as the Bank of England original forecast. The OBR is still predicting that it will be down at 2.9 by the end of the year. That's the dynamic I think I can say between what the Bank of England are looking at on interest rates. I think rational behavior, low levels of distress and impairment. You know, our book is in pretty robust shape. You can see the low impairments, and we're actively monitoring it and keeping a very close eye. Hopefully that. Does that answer your question?
Yeah. Thanks very much.
Yeah.
Thank you very much. Our next question comes from Jonathan Pierce of Numis. Jonathan, please do unmute and go ahead.
Yeah, hello. Can you hear me?
Hi, Jonathan. Yeah. Hey, Jonathan.
Hello. Got two questions, please. The first on deposit flows. I mean the industry data tends to, over the years, show that most of these tax repayments, probably for reasons of January and February, you begin to see a sizable reversal in March and beyond, particularly in the household sector. It was just mid-February, I think, that the full year results. I assume you would have seen quite a lot of the tax effect by that point. I'm just wondering if, you know, something additional has caught you a bit offside over the last, or the 6 weeks to the end of March, that's led to this slightly weaker income guidance given certainly the context of higher interest rate assumptions.
Whether you can maybe talk a little to the performance of the deposit book in March and April. Are we seeing stability now after outflows in January and February? The second question, I suppose the one bright spot of these numbers was the interest earning asset growth, GBP 360 billion in the first quarter. Consensus I think is below that for the full year. I guess people will go away today lower than in forecast. We have to operate the interest earning asset number. Can you give us a sense as to what you're expecting now on interest earning assets for the full year? If that's too much in the way of guidance, maybe give us an idea of where the spot interest earning assets were at March.
As I say, you know, GBP 360 billion average in Q1 is above where consensus is for the full year. That's gonna be an important component of the number changes, I think.
Thanks. Look, on the deposit flows and January, February. No, we haven't seen anything unusual. We'd always, you know, when I was speaking to you in January and February and the market, we talked about the fact that Q1 would see deposit outflows because of the usual seasonal tax. We know from the Bank of England data that more people have been caught in the tax bucket because of the changes in taxation. We'd always predicted that Q1 would see deposit declines. We also knew that with the progress that we were making on Ulster that we would see, you know, the rundown of deposits there. Nothing unusual.
Clearly, as we also said, customer behavior would be an issue and customers behaving and engaging in their financial affairs. You know, Katie mentioned the sort of slight uptick of moves on interest bearing in, into a little bit more into fixed as our competitive products came in. We have seen very strong loan growth in the first quarter, the GBP 5.7 billion that we've talked about, which is very strong across the book. Exactly as you say, strong tax comes out in sort of January and February. Obviously in our private bank, we have people who may be caught in a higher tax bracket, high outflows from that tax perspective, but nothing unusual. Katie.
Yes. I mean, Jonathan, I probably have an argument with you that our one bright spot in our numbers, which I think are really, really, really excellent set of kind of numbers for the, for the quarter, is the improvement in our average interesting earning assets. In terms of the growth of that, look, we do give you the average number. The way that I would think about it is to think about your kind of your loan dynamics. Is where do we see going from here? Obviously, mortgages I think they performed exceptionally well in Q1. I think they're actually performing a bit better than all of us would have effectively thought as we came into this year, and we look at the size of that market, so we're comfortable with what's kind of going in there.
It's great to see the loan growth happening across the mid-market and the large corporate end. As Alison said, at the smaller end, people are behaving rationally. They're pulling down on their continuing to repay their government lending and also if they've got excess surplus ability, they're pulling down on some of their other debts. A bit more muted in that space. The growth we see in mortgages, credit cards, the large end of the group, the mid-cap, they'll all kind of help within there. I think these are all built into our strong guidance for the year of the GBP 14.8 billion of income and the upper end of the 14%-16% return. I think you can find a few more bright spots.
Yeah, sorry. I should have said one of the bright spots.
Thank you.
Can I just follow up on that deposit point?
Of course.
How's the deposit base excluding repos and Ireland? Has that been more stable in March and April, please, versus end of February?
Yes.
Okay, good. Thank you.
Thank you very much. Our next question comes from Jason Napier of UBS. Will you please unmute and go ahead.
Good morning. Can you hear me?
Hey, morning, Jason.
Morning, Jason.
Thanks very much. Alison Rose, I guess first question for you, please. I wondered whether you wouldn't, sort of reflect on how the business has performed over the last sort of nine months and what that means for the sort of the outlook for the business over the next couple of years. The reason I ask is that when the 14-16 ROTI was first shared as an objective last July, the market thought that rates could be at about 2.5%, and now it's 200 basis points higher than that, and yet the ROTI target is much the same. Clearly higher inflation's impacted the cost line and so on.
I wonder whether you wouldn't mind just having a talking to us about why we've not seen better ROTI leverage from a what we would have thought would have been a much more benevolent kind of rate environment, notwithstanding the fact that, you know, you've produced a 20% ROTI in Q1, and that has barely come up in the Q&A. I wonder whether you could talk about, you know, what the puts and takes have been, and whether that tells us anything about how the franchise will perform if rates do start to fall again.
Yeah.
Then second question, if I may, perhaps this one's for Katie? Mortgage performance in Q1 was enormously impressive. I just wonder whether you could talk a little bit to the state of refi within the portfolio, how lumpy it is, whether you sort of see more of those COVID era loans coming due in Q1 versus other quarters in the year, just trying to get a sense as to what that asset spread compression piece may look like for the balance of this year. Thank you.
Thanks, Jason Napier. Look, let me try and address your question. Look, I think a medium-term ROTCE of 14%-16% is a pretty good performance for the bank, and, you know, a strong performance that we're giving you. When you look at how we're performing, you know, very strong franchises. We have good positions with capacity to grow. You can see the, you know, consistent delivery of that capacity to grow in our franchises. You know, good, well-diversified balance sheet with good risk diversification. You can see that we are acquiring customers across all of our franchises, you know, net acquirer of customers in our retail franchise with good diversification and growing market share.
You can see that our business bank has and commercial institutional bank has leading market positions and continuing to grow. You can see our wealth business, which we haven't even touched on, you know, net new money of GBP 600 million, opening AUMA of 7.8%, up from 5.6% last year. I think the strength of the franchise is very, very clear and delivering. Obviously, we've guided you this year that on the 14%-16%, we will be at the upper end of that range. Obviously, as we go into next year, the drag of 1.5 from Ulster will move away and be negligible. What are the dynamics that you need to think about? Clearly, the macro environment has been, you know, pretty challenging.
If we move into a more positive dynamic, I think that is positive for us. We've positioned the bank from, you know, to be able to withstand downside risk, but well-positioned for growth as well. That's what I would think about. As you look forward in terms of that guidance, obviously macroeconomic factors, customer behavior, interest rates, and what's happening there as they move down. We're very comfortable that we can deliver that long-term sustainable performance, which I think is pretty robust.
To the mortgage question.
Mm-hmm.
Perfect. Thanks very much. Hi, Jason. If I look at it, you know, the remortgages, it's fairly even over the course of the year. We do good performances on remortgages that we aim to be 75%-80%. We're right in the sweet spot of that on this quarter. Very comfortable with that piece. We're clearly very aware when you can see in the market that there's lumps coming up that were particular anniversary for remortgages and that the team, you know, through the investment we've made in our digital mortgages and just our insights that we use on data, we'll be approaching people as they're coming up for remortgages with other banks to make sure that they really understand.
When I look at that gross new lending number, I've not really split it up for you exactly, but remos are a significant part of that. You know, first-time buyers are important, and then obviously the home mover piece is important in there. Remortgages has been a very big focus for us over the last number of years, and it's something that works incredibly well, and that's why we have such good retention in there. It's important for the development of the book. Our own book is pretty even, but very mindful that there are peaks within the market, and we make sure that we're absolutely ready for them as they approach.
That's helpful. Thanks very much.
Yeah. No, thanks, Jason. Have a good day.
Thank you. Our next question comes from Fahed Kunwar of Redburn. Could you please unmute and go ahead.
Hi, Katie. Hi, Alison. Thanks for taking the questions. Just a couple of questions. The first was just a clarification. I think you gave the completion mortgage spreads. Would you mind giving us the back book mortgage spreads at the moment, please? The second question was just again, sorry, on deposit mix. You made the point that it was fascinating that really a lot of the movement's been from instant access at the time, but not from the kind of NIBBs. Do you expect that to remain the case going forward? Could we get some sense of how the deposit behavior is different or changed or moved versus kind of how the retail business has changed versus how corporate, large corporates SMEs have changed?
Just some sense of which customer cohorts are moving and how you think that could change over time would be incredibly helpful. Thank you.
Katie, do you want to take that?
Yep. Yes, sure. On the mortgage piece, I think, you can work out kind of from the book as well, but you can see it's kind of the book margin comes down. It will trend towards data. It won't ultimately kind of get there 'cause of things of mix of SDR and things like that, but it's about 117 at the end of the quarter on a kind of blended basis for the group. Shall I carry on to deposits, Alison?
Yep.
Yeah. Perfect. Look at the deposits. It's a very interesting time. It's very different, I think from where we were when we all naturally look back to kind of history to kind of think where were NIBBs and IBBs and things before the last crisis. I think there's quite a few differences in terms of the level of liquidity that we see within there and the level of kind of savings that customers have kind of behind them. What's been really interesting since we started to share with you that NIBBs and IBB disclosure, which I think we did for the first time in Q3, it really hasn't moved.
I'm not sitting here going, "Gosh, I've got a big indicator that all of a sudden I'm now gonna see some seismic change within our customer behavior," because I have not seen it over the last three quarters. What we did see a lot in October, November was a move into term accounts. Some of that would've come from current accounts, but it mainly came from instant access into term. In our own situation, it also came from people from other banks bringing their money into our product 'cause they saw them as the right competitive place for them to be in that sort of space. Fahad, I'm sorry, I don't have a particular looking glass to kind of give you.
We've obviously got some internal assumptions as to how that will evolve, but it has been stable over the last number of quarter in terms of, in terms of that split in a time where you've seen quite a lot of different customer behavior. That feels as a reasonable guide as we move forward. Alison, what would you-
Yeah, just I mean, look, I'd agree with that. On the corporate and business side, again, you know, nothing, no major change. What you tend to see is corporate treasurers at quarter ends managing their liquidity and their balances. you know, there is excess liquidity in the system as a result of QE. we're seeing, you know, one of the reasons is muted demand for lending, particularly at the small end of the business banking book is because there is still excess liquidity from some of the injections during COVID sitting on balance sheets. Businesses tend, you know, in the small and medium size to largely remain transactional and operational balances. and that fits in with the product mix that we have. Again, we're not seeing anything unusual.
We are seeing the large end corporates treasurers managing their balances in an efficient way. That's always been the case. There's, you know, obviously with higher interest rates, a bit more, a few more options for them, but we're not seeing anything unusual.
Thank you. Just a clarification. Is it right to think that most of the shifts have been large corporates, so SMEs and retail customers, there is some shifts, but it remains pretty small? Is that the right inference?
No, no. I wouldn't. I don't. We haven't seen any particular shift in corporates and SMEs, in terms of, you know, typically sort of SMEs and mid-markets will keep, you know, balances. You know, they'll tend to hold more operational balances just as they're managing their businesses. Corporate treasurers always manage their balances over quarter ends. And there's, you know, different seasonal elements. We're, we're not, again, very similar to consumer not seeing anything unusual or different trends and behavior.
Excellent. Thank you both. Cheers.
Thanks, Fahed.
Thank you. Our next question comes from Robert Noble from Deutsche Bank. Rob, would you please unmute and go ahead.
Morning. Thanks for taking my questions. First on deposits. I presume you've got some visibility on deposits into Q2, given that you're guiding to a full year kind of increase from the Q1 level. How do you go about forecasting beyond Q2? Is there a sensitivity range that you think about? Like how much could you miss your expectation on deposits? And if we think about it going beyond 2023, we've got continued Bank of England's reduction in balance sheets, seeing all this comes about, TFSME repayments, less liquidity in the market. On top of this, banks trying to stay more liquid 'cause of what's happened in the last few months. Is the reality in the medium term a smaller, more liquid, less profitable banking system than we thought with just purely rate rises beforehand? Thanks.
Thanks. Look, I think what you can see from our results, you've got a very profitable banking performance and banking system. Look on deposits. I think we've been clear. They're quite difficult to predict because customers' behavior and customers engaging in deposits in terms of now higher interest rates and different options with high inflation, different depositors will behave in a different way. For some households, that means taking more of a prudent approach and paying down debt. For others, inflation, if it remains persistent and doesn't drop, then that's going to eat into some of the buffer that they built up pre-COVID. You know, there are some quite macro dynamics on deposits and customer behavior in terms of how they're engaging.
From our perspective, clearly the approach that we take, we have a well-diversified balance sheet and strong customer franchises, Strong relationships and good liquidity, in terms of that and our ability to compete effectively. We have the right products to do that. We stay very engaged. We manage our deposits in a way that we would manage our asset side of our book. We will compete, where we want to, where we need to maintain either income or liquidity. You can see we have really strong LDR ratio. We have capacity to grow, and we'll balance it from that perspective.
There are, you know, there are uncertainties in deposit behavior just from how customers will behave and also some of these macro and economic dynamics in terms of how persistent inflation is, what happens on interest rates, which will impact on that behavior as we move forward.
Thank you.
I think you also talked a little bit about TFSME. Can I just say a couple of words on that? If I look at our LCR, it's 139.9%. Includes obviously GBP 12 billion of TFSME. If you took that TFSME out, our surface primary liquidity is still kind of GBP 32 billion. I think it's important not to confuse TFSME with the kind of liquidity. It's a repayment, it's a multi-year window. For us, we start in a third of it in Q4 2025 and two-thirds of it in Q1 2027. It's an important component of the LCR. In reality it's a very good kind of free source of funding for us. I really do think about it as medium-term funding.
We'll deal with it as part of our medium-term kind of funding plans. In terms of that, it's not a particular liquidity consideration.
The problem though is that it's not you specifically, it's the entire system that the liquidity is coming out of. That's going to shrink the available pool of liquidity for the whole banking system rather than specifically being a funding issue for you. Does it not make everything in the banking system just less profitable compared to what we would have thought otherwise? Obviously, everything's getting more profitable because of rates.
Look, I think it's puts and takes. There's increased competition. The way I would look at it is, you know, our book is very well-positioned. We're comfortable we can compete. You know, our liquidity levels are very strong. Our reliance on TFSME is relatively low. You know, what you're talking about effectively is part of normalization post QE. You know, we're planned and positioned very well for that.
Okay, thanks a lot.
Thanks.
Thank you. Our next question comes from Benjamin Toms of RBC. Benjamin, if you could please unmute and go ahead.
Hi, Ben.
Morning. Thank you both for taking my questions. Your underlying non-interest income was up quarter on quarter, driven by trading income. Within that, fees and commissions net were down 5%. Given that the macroeconomic backdrop, including GDP expectations, have been improving, what shape should we expect for the rest of the year on this line, ex trading income relative to the Q1 print? Is a slow upwards trend the right way to model this? Secondly, on cost of risk, the print in the quarter was 7 basis points, and you've reiterated your guidance of 20 basis points-30 basis points. Can we assume that there's quite a high level of conservatism based into how low the Q1 print was and the fact you're still holding a decent PMA, which is around 10% of your stock of impairments?
How long do you think you can hold on to that PMA? I mean, I think you said in the presentation that you've not updated your macroeconomic assumptions. Presumably, that implies a certain level of macroeconomic stability. That sits slightly at odds with having an economic uncertainty PMA. Thank you.
Great. Thank you. Well, I'll let Katie take you through those. You know, clearly we're very happy with the asset quality of our book. Well-diversified de-risk and a high-quality loan book. You know, retail side, 93% secured, very low levels of impairments, and we've seen no material signs of distress. I think with clearly there are still challenges in the economy, but some good signs of optimism and positivity. We're really pleased with how that's performing. That gives us increasing confidence on the quality of the book and the continuing underlying resilience. Katie, do you want to pick those points up?
Yeah, sure. Absolutely. If I look at the kind of macroeconomic picture, each quarter we review where are we against macroeconomics, and we make changes if we see that there's something that's appropriate to do so. What I would say, things look a little bit better, actually not meaningfully so. We haven't made a particular update on that. We'll do another, obviously look at that as we approach kind of Q2. When I look at the 7 basis points compared to our guidance of 20 basis points- 30 basis points, I think I would say that I'm increasingly comfortable on that 20 basis points- 30 basis points and where we'll land in that range. Clearly, it's a strong start in Q1. We always expect Q1 to be a bit better.
We've just done so much work on the year-end that, you know, Q1, it would need to have been something quite significant to have a particularly large hit. Certainly feeling more comfortable all the time on that 20 basis points-30 basis points as you look at that. In terms of PMA, we review it every quarter. I've always said it would be a multi-quarter event in terms of the release of that. Pretty stable this quarter. Again, I'd expect to see probably some movements as we come through on the next. If I can leave kind of cost of risk and move over to your query on the non-interest income. It looked very nice to see the performance we saw on the trading side.
You know, Q1 is always expected to be a strong quarter in that space, and it was great to see the business doing what we've built that business to do in terms of fixed income. Kudos to them on that piece. You know, in retail, you do often see it's a little bit seasonally lower in the first quarter. In terms of people's just kind of personal activities, the first quarter is acquired to kind of month, I would say. As you move forward from here, it's really going to depend on customer confidence, what's happening on the macro and kind of customer activity. We're pretty happy with the evolution. It's kind of in line with our expectations, and we'll continue to see it evolve as we move up throughout the year.
Thank you.
Thanks, Ben.
Thank you. Our next question comes from Raul Sinha of JP Morgan. Raul, could you please unmute and go ahead.
Hi, Rahul.
Hi. Good morning. Thank you.
Thanks
...for giving me a chance to ask my questions. I'm sorry, I'm a little bit unclear on some of the NIM answers. I was just hoping to ask a couple of clarifications if that's okay.
Sure.
Just firstly, are you assuming that hedgeable deposits will be broadly stable within your NIM guidance for the year?
You want to give me all of them and I'll answer them at once?
That's the first one. The second one is when you talked about the incremental rate hike impact, Katie, are you indicating a 60% deposit beta on the incremental rate hikes from here? Or was that sensitivity just a sort of indication that obviously things are less sensitive and the actual beta could be higher from here? Those are the kind of two clarifications if I could. The third one was just on corporate SME defaults. I think some of the external data seems to be suggesting a pickup in March. I was just wondering if you'd seen anything within your businesses or within specific sectors that might correlate with that. Thank you.
Thanks. Well, let me do the corporate SME, and Katie can pick up your NIM clarifications. What we're not seeing any significant deterioration or signs of distress. Actually, you know, there are obviously some sectors we're keeping a close eye on, those which are, you know, very consumer spending driven, so leisure, hospitality, retail. We're seeing, you know, cases going into what we call our heightened monitoring, which is where we, you know, if we start seeing things going off track and we work with our customers and our relationship managers work with them. What you can see from the data we've given you, things like our Bounce Back Loans are continuing to pay down and perform as we expected.
That gives you a sense of people trading and paying down well. Look, I mean, the reality is it's pretty tough if you're a business right now because you're dealing with high inflation, getting access to skills and labor and uncertainty. The PMI data we've seen is, you know, business confidence is starting to come back. There are sectors that we're keeping a close eye on, but we're not seeing, you know, significant signs of distress and impairment. You can see that coming through obviously in the numbers that we talked about for our disclosure in Q1. Katie, do you want to pick up the NIM? Sure.
On the hedgeable deposits, what we said in February is that looking at the balances over the year, we'd expect there to be a GBP 5 billion decrease, forgive me, in terms of that shape of that hedgeable deposits pool. What we saw on the product hedge is that it decreased by GBP 2 billion in the quarter. You can see that we've had a little bit of reduction obviously in our deposits. That will feed through a little bit. I would expect a little bit of a further kind of decrease in here. What I would say though, when you look at the reinvestment rate and where that's performing, it's not making a significant difference in terms of the outcome we're seeing in the hedges.
This is maybe where the need for clarification is coming. When I look at the incremental rate hike, Raul, as you know, what actually happens on each individual rate movement or each pricing decision we make, it very much depends on the customer behavior and what we're seeing in terms of the kind of the market, the market dynamics and market competitiveness. What we have seen in our most recent rate hikes is that the pass-through was that 60% of the pass-through went through. If I looked at the kind of the sensitivity disclosure that I've kind of given you, what we actually see is the hedge kind of performance for our plus 25 basis point movement on a static balance sheet, it doesn't actually move particularly in terms of that.
We see a little bit of a fall in the managed margin. If you look at the disclosure we gave you at the year-end, it was 148. I would say that number now is about 125. If I was doing a 60 basis points, 60% kind of pass-through of any kind of further changes as we move kind of forward from here. It does have an impact in terms of that increased pass-through. You need to think about the shape and size of the balance sheet in terms of that piece and at which point it's going to go through. Hopefully, that helps a little bit.
Yes. Thank you very much, Katie. I guess, you know, one of the issues is that, obviously the size of the hedgeable deposit base is probably going to shrink faster than your overall deposits. That's the reason for my question, because it looks to me like there isn't a lot of room left within your kind of new guidance for hedgeable deposits to shrink further. If that was to happen, would it be fair to assume your rate sensitivity would be higher into next year when potentially rates could fall?
If I look at where we are, what we have, GBP 40 billion of the kind of the hedge that rolls off each year, we've said that that will shrink a little bit, and we kind of expect that to go back on. I'm kind of giving you the size of it. It's the NIM percentage-wise are staying kind of the same, I agree with you balances in terms of system liquidity could be down. I've brought you back to the 433 for the year-end, I've said broadly stable or kind of slightly down. I'm kind of probably gonna leave you with all those building blocks to make your kind of own conclusions on kind of market activity within that space.
It's very much built into the guidance that we've given you today of the 14%-16% return at the upper end of that for this year. Comfortable for that remaining is our 2025 guidance as well. Around the GBP 14.8 billion of income as well for the end of the year.
Great. Thank you very much.
Thanks very much, Raul. Take care.
Thank you. Next question comes from Umar Khan of Credit Suisse. If you could please unmute and go ahead.
Hi, Umar.
Hi, if you'd want to unmute and go ahead. Thank you.
Hello.
Hello.
Hi. Thank you very much for taking the questions. I've just got a quick follow-up on NatWest Markets. I just wanted to also ask your thoughts about changes to the U.K. deposit guarantee scheme, possibly. Just firstly on NatWest Markets, I guess it's really pleasing to see the improvement in revenues there. I just wanted really to get your thoughts around whether the recovery in the fixed income rates revenues, is that a run rate that we should think about now, or is there still some more restructuring of the Markets business to come through? Is this kind of the finished article that we're looking at, or is there still a bit more to go?
Then just on the UK deposit guarantee scheme, I was just curious about your thoughts, you know, whether you'd welcome an increase in the level of guaranteed deposits and how you're thinking about that and how relevant levies and costs might change.
Great. Thank you. NatWest Markets, yeah, we're really pleased to see the performance of that business. Robin and his team are doing a very good job. As we said, the restructuring of that business is finished. It's about the right shape. We'll continue to optimize the normal BAU, I think, you know, good performance and good recovery, so doing what we wanted it to do. On UK deposits and guarantee scheme, we're not aware of any proposed changes. I know there's a lot of discussion going on at the moment and press speculation. I think, you know, if you look at it, deposits are a factor in 2 fees we pay.
There's the bank levy charge, which is around GBP 105 million each year, depending on the level, mix, and term of the deposits we hold in each of our legal entities. That's one aspect. The Financial Services Compensation Scheme, regulatory fees. I think, look, if... I know there's a press speculation and discussion, we would look at that, but that's how we would think about it.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from Martin Leitgeb of Goldman Sachs. Martin, if you could please unmute and go ahead.
Yes, good morning. Just a quick clarification please, on net interest income. I was just wondering in terms of some of the time lag, impacts of higher deposit rates, the time lag of NatWest or a bank passing on higher rates on savings accounts. I was just wondering if you can help us size how big the time lag is. We're speaking, is it most likely around four weeks or six weeks just to help us modeling the impact going forward. Secondly, more broadly, I was just wondering if you could comment on commercial real estate in The U.K and appreciate the exposure is comparatively small within a group context.
I was just wondering, which pockets of risk you are particularly concerned or focused on in The U.K. and maybe if you can help us size what % of the book, the exposure is there. Thank you.
Great. Thank you. Look, thanks, Martin. Why don't I talk to Chris? As you know, commercial real estate is less than 5% of group lending. It's part of our book that we've managed very actively over the last, you know, 5 or 6 years, on an ongoing basis. The average LTVs are around 40%. We've been carefully managing the portfolio, including actively reducing the retail aspects of it. You know, we regularly stress test that portfolio to ensure its robustness as part of careful review and monitoring. Two of the key risks we've been focusing on are the falls in commercial real estate capital values and the heightened interest rate environment and how those impact, you know, the book and refinance ability.
We obviously engage very actively. We have a dedicated commercial real estate team, we actively engage with all of our customers on refinances sort of 12-18 months in advance, in advance and discuss risk appetite. Our exposure to the retail and office sector is geographically very diversified across all regions in the UK. Typically, about 20% of our book expires each year, but a proportion of that will usually have been prepaid or refinanced. There is nothing in that book as we do these regular reviews that is concerning us, and we've not identified any material risks or weaknesses in that portfolio. It's a very actively managed and much smaller part of our book than perhaps historically it would have been. Katie, do you want to pick up the NII question?
Yeah, sure, because it's a great question. Unfortunately, it's not one that has a particularly simple answer. You know that some of our businesses, our books are linked to that rate, so it happens almost kind of immediately. Others, it will depend on what's happening on competition. How quickly we might move in commercial might vary from what we might do in retail. If I look at the most recent retail example, and you can see this, Martin, as we publish, size our rates. The rate change came through in March. We've released our update as to what we've been doing in that 425. It actually impacts the accounts on May 10th. That talks more to a six week. I wouldn't take that as a rule of kind of thumb.
It will vary depending on what's going on. It does vary across the group from kind of immediate all the way out to that piece. What you have seen, and you can see it nicely on slide 13, is that it's accelerating in terms of the speed of which the pass-through is from where it was earlier. Look, I couldn't give you a specific date because it does vary across the group in terms of how we act appropriate to that customer segment and what's happening in that bit of the market dynamic.
Thank you very much.
Thanks, Martin. Take care.
Thank you. Our last question comes from Guy Stebbings of BNP Paribas Exane. Guy, please do unmute and go ahead.
Good morning, Alison and Katie. Thanks for squeezing me in. I had one on NIM and one on cost. I think all the detailed questions I was hoping to ask have been asked. I guess in the round on NIM, given all the comments you've made, I'm struggling to see what suppresses the NIM to land at the guidance. Working it all through, in order to bring that NIM down, I would have thought you need to see more negative deposit mix from here, which it sounds like from your comments you aren't planning for. I mean, unless the delayed deposit pass-through is very material. I'm just trying to gauge how conservative the NIM has been struck, further rate hike assumptions aside.
If we do see more negative deposit mix, does that put pressure on NIM guidance or has that NIM guidance been constructed to absorb some uncertainty around deposit mix and other items? The second question on costs. For your guidance unchanged, maybe the answer is very simple and everything is going to plan. Other operating expenses are running a bit higher than consensus had in for Q1. I think if you strip out the GBP 60 million one-off, you're analyzing at GBP 7.5 billion Ulster direct costs, maybe a bit lower on average than what we saw in Q1. It doesn't seem to give a lot of flexibility to absorb inflationary pressures over the course of this year to land at the GBP 7.6 billion.
Are there any other lumpy items or cost saves that come through later in the year, perhaps? Thank you.
Great. Thank you. Look, I think we've given you quite a lot on NIM. We're very comfortable obviously, you know, competition on deposits and assumptions there. We're very comfortable with the guidance that we've given you. On costs, again, the costs are lumpy. They always are lumpy. What you see in Q1, they're up because of the one-off payments that we made to staff, cash payments for cost of living. Also, you know, we're making great progress on Ulster, we accelerated some of the strategic costs on that as we progress that very well. We're very comfortable with our guidance of 7.6. We've got a good track record on that. Cost reductions are never linear. They're always lumpy.
There's no nothing, no surprises in there. We're comfortable with our guidance of 7.6%.
Okay. Thank you.
Thanks, Guy.
Thank you. Those are all the questions we have time for. Apologies if we didn't reach you. The IR team will follow up with you afterwards. I will now hand back to you, Alison.
Great. Well, look, thank you very much everyone for joining us and for taking the time with the questions. I think we're very happy with the Q1 results. A very strong performance in terms of right the way across the piece. We've deliberately positioned the bank and the balance sheet to have in an uncertain environment, both protection for any downside, but also well-positioned for upside continued delivery of our strategy. Strong customer franchises, you know, with strong growth in Q1, as a result of that good diversification and liquidity that we have on our balance sheet and super disciplined risk management, which speaks to the levels of impairments that we have there. I think a good Q1.
There's still uncertainty in the macro, but I think signs of positivity in terms of business confidence, and we look forward to catching up with you in Q2. Thanks very much for your time, everyone.
That concludes today's presentation. Thank you for your participation. You may now disconnect.