Barclays Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 15 speakers on the call.

Operator

I will now hand over to C. S.

Operator

Venkatakrishnan, Group Chief Executive, before I hand over to Anakaras, Group Finance Director.

Speaker 1

Good morning, everyone, and thank you for joining us for Barclays' 3rd quarter 2024 results call. As a reminder, at our Investor Update in February, we set out a 3 year plan to deliver a better run, more strongly performing and higher returning Barclays. I'm encouraged by our progress 3 quarters in. We are continuing to execute in a disciplined way against this plan and are on track to achieve our 2024 as well as our 2026 target. Return on tangible equity was 12.3% in the 3rd quarter and 11.5% year to date.

Speaker 1

We achieved this even as we grew tangible book value by 0.35p per share year on year to 3.51p at the end of the quarter. This resulted from strong organic capital generation and the meaningful impact of buybacks in reducing our share count. Total income for Q3 was GBP 6,500,000,000 and is GBP 19,800,000,000 year to date, with a continued focus on the quality and stability of our income mix. Given the ongoing healthy support from our structural hedge, we remain confident on the strength of the income profile of our business in a falling rate environment. These factors lead to our upgrading Barclays UK as well as group NII targets today.

Speaker 1

We continue to control costs well and are seeing the benefit of the cost actions, which we took in the Q4 of 2023. Our cost to income ratio was 61%, both in the Q3 year to date. Impairment charges have improved in the U. S. Consumer Bank, in line with our expectations, and our overall credit performance was strong, particularly in the UK with a group loan loss rate of 42 basis points year to date and 37 basis points in the quarter.

Speaker 1

Importantly, we also remain well capitalized, ending the quarter with a 13.8 percent CET1 ratio, comfortably within our target range of 13% to 14%. Across the bank and within each of our 5 divisions, we are focused on delivering an improved operational and financial performance. Anna will take you through our financial performance division by division shortly, but let me cover first a few highlights. Barclays UK delivered a return on tangible equity of 23.4% for the quarter and over 20% year to date. We have seen a continued stabilization in deposit balances and growth lending trends are encouraging.

Speaker 1

We are on track to complete the acquisition of Tesco Bank on the 1st November this year. This strategic relationship with the UK's largest retailer forms part of our commitment to invest in our home market, where Barclays has a crucial role to play in mobilizing the finance and investment, which is required to deliver growth. Our partnership with Tesco will help create new distribution channels for our unsecured lending and deposit businesses. And our expertise and partnership cards developed over decades in the U. S.

Speaker 1

Will further enhance the well established Tesco Club card quality scheme. In the Investment Bank, we are committed to delivering improved RWA and operational productivity to drive higher returns. RoTE for Q3 was 8.8%. Year on year, the Investment Bank has delivered positive cost to income jaws and improved market share in Investment Banking. And the U.

Speaker 1

S. Consumer Bank delivered an improved RoTE performance at 10.9%, as we continue to grow the business and drive operational improvements, while impairment charges reduced against the background of subdued inflation and a strong labor market. Overall, as an organization, we remain execution focused. We achieved a further GBP 300,000,000 of gross cost savings this quarter, taking the total for the 1st 9 months GBP 700,000,000 on track for our targeted GBP 1,000,000,000 for the full year of 2024. Simplifying the bank has been an important part of our strategy.

Speaker 1

We continue to make progress with the non strategic business disposals that we spoke about at our Investor Update. Earlier this week, we announced the sale of our non performing Italian mortgage portfolio. Finally, we are about 2 thirds of the way through executing the GBP 750,000,000 share buyback, which we announced in the first half of the year, which together with the first half dividend is the first step towards achieving our target of greater than GBP 10,000,000,000 of capital return by 2026. I will now hand over to Anna to take you through our Q3 financials.

Speaker 2

Thank you, Venkat, and good morning, everyone. On Slide 6, we have laid out Barclays financial highlights for the Q3 as well as year to date. Profit before tax was $2,200,000,000 up 18 percent from $1,900,000,000 in Q3 2023. Before going into the detail, I would just note that the quarterly performance was impacted by a weaker U. S.

Speaker 2

Dollar, which is a headwind to income and profits, but positively impacts cost, impairment and RWAs. I'll call these out where appropriate. Turning to Slide 7. Q3 performance is in line with the plan we laid out in February. We delivered a statutory ROTE of 12.3%, up on last year's 11% And the year to date ROTE of 11.5% leaves us on track for our statutory ROTE target for 2024 of greater than 10%.

Speaker 2

We continue to target a 2024 ROTE excluding inorganic activity of circa 10.5%. We now expect that the impact of all inorganic activity in 2024, including Tesco Bank, will be broadly neutral. So I don't anticipate a material difference between the two measures. As in the first half of the year, I was looking for 4 things in our performance: income stability, cost discipline and progress on efficiency savings, credit performance and a robust capital position. On all four, we are where we expected to be, and I'll cover these in more detail on the subsequent slides.

Speaker 2

Starting with income on Slide 8. Total income was up 5% year on year at €6,500,000,000 Excluding FX, income was up 7% year on year. Since our investor update in February, we have been emphasizing continued stability in our income stream. Revenues from retail and corporate as well as financing in the Investment Bank provided ballast to our income profile and together contributed 74% of income in Q3. Turning to net interest income on Slide 9.

Speaker 2

Group NII, excluding Investment Bank and Head Office, was stable year on year at circa €2,800,000,000 We now expect our full year group NII to be greater than €11,000,000,000 Within this, we have increased NII guidance for Barclays UK to circa £6,500,000,000 having previously guided to circa £6,300,000,000 Both numbers exclude the impact of the Tesco Bank acquisition. We also now assume a UK bank rate of 4.5% by the end of the year or a total of 3.25 basis points cut in 2024 compared to the 5 we had assumed in February. Deposits continued to stabilize and increased structural hedge income continued to provide a strong tailwind, as you can see on Slide 10. As a reminder, the structural hedge is designed to reduce volatility in NII and manage interest rate risk. As rates have risen, the hedge has dampened the growth in our NII.

Speaker 2

And in a falling rate environment, we will see the benefit from the protection that it gives us. The expected NII tailwind from the hedge is significant and predictable. €12,400,000,000 of aggregate gross income is now locked in over the 3 years to the end of 2026, up from €11,700,000,000 at Q2. We have around $170,000,000,000 of hedges maturing between $24,000,000,000 $26,000,000 at an average yield of 1.5%. As we said in February, reinvesting around 3 quarters of this at around 3.5 percent would compound over the next 3 years to increase structural hedge income in 2026 by circa €2,000,000,000 versus 2023.

Speaker 2

Given the high proportion of balances hedged and the programmatic approach we take, we are relatively insensitive to the short term impact of potential rate cuts. Please note that we have added additional disclosure on Slide 38 in the appendix on the split of the structural hedge income allocation across our 5 divisions. Moving on to costs on Slide 11. Total costs in Q3 were flat year on year at €4,000,000,000 Excluding FX, costs were up 2% in the same period. We delivered a further €300,000,000 of gross efficiency savings, bringing the total for the 9 months to €700,000,000 These efficiencies have helped us to more than offset inflation and created capacity for investments.

Speaker 2

We remain on track to deliver €1,000,000,000 for the year and continue to expect a further €1,000,000,000 of efficiency savings across 20252026. Our cost to income ratio was 61% in Q3 and for the 9 months year to date. We remain on track for our full year target of around 63%. Turning now to impairment, where credit conditions continue to trend positively and in line with our expectations. The Q3 impairment charge of GBP 374,000,000 equated to a loan loss rate of 37 basis points.

Speaker 2

The U. S. Consumer Bank charge reduced $276,000,000 a loan loss rate of 411 basis points, which benefited from methodology enhancements in the quarter. Our UK customers continued to act prudently with few current signs of stress, evidenced by continued low and stable delinquencies. The Barclays UK charge was just £16,000,000 a loan loss rate of 3 basis points and this included a post model adjustment release of around £50,000,000 I'd remind you that under IFRS 9 accounting, we expect to incur a day 1 impairment charge for the TESSCO unsecured lending balances on completion in Q4.

Speaker 2

As we said in February, the Tesco Bank acquisition, alongside our broader U. K. Balance sheet growth plan, are factored into our guidance for the Barclays UK loan loss rate to track towards 35 basis points over the life of our 3 year plan. All in all, we reiterate our through the cycle guidance of 50 to 60 basis points for the group and expect FY 2024 to be at the bottom of this range, inclusive of the estimated day 1 impact of Tesco Bank. Excluding the impact of Tesco Bank, we would expect to be below this range as we are seeing limited signs of stress in our UK customer base.

Speaker 2

And our guidance for the U. S. Consumer Bank impairment charge to improve overall in the second half remains unchanged. Looking now in more detail at the U. S.

Speaker 2

Consumer Bank charge on Slide 13. The mix of reserve build to write offs within the impairment charge for the U. S. Consumer Bank continues to trend as we guided. We expected write offs to increase during 2024, which you can see is the case from the light blue bars on this page.

Speaker 2

30 90 day delinquencies are broadly stable, and we expect them to follow seasonal trends. There is no change to our impairment guidance. As mentioned, we still expect the U. S. Consumer Bank impairment charge to improve overall in the second half, resulting in a lower full year charge in 2024 versus 2023.

Speaker 2

And we continue to guide to a loan loss rate trending towards the long term average of 400 basis points. Our coverage ratios remain strong. Our IFRS 9 coverage ratio reduced 70 basis points quarter on quarter to 10.3%, primarily driven by a debt sale, whilst our CECL coverage ratio increased 20 basis points to 8.1%. Before going into individual business performance, let me say a few words on the lending trends that we are seeing. Growth lending activity is encouraging across our portfolios, reflecting our focus on growth in the UK.

Speaker 2

In mortgages, we are seeing a pickup in gross lending with increased flow in higher loan to value lending and customer confidence is also returning with strong purchase activity from first time buyers and home movers. In a similar vein, U. K. Card acquisition volumes remain strong. We have added around 800,000 new Barclaycard customers this year, consistent with our strategy to regain market share in unsecured lending.

Speaker 2

In the UK Corporate Bank, we have extended client lending facilities by deploying around €1,200,000,000 additional RWAs this year, which we expect to drive lending balance growth as customers draw down, and we have seen some evidence of this in Q3. Turning now to Barclays UK. You can see Barclays UK financial highlights and targets on Slide 15, but I will talk to Slide 16. ROTE was 23.4 percent in the quarter and total income was €1,900,000,000 up €73,000,000 year on year or 4%. NII of $1,700,000,000 was up $69,000,000 on Q2 as NIM increased by 12 basis points to 3.34%.

Speaker 2

As you can see on the bottom chart, we saw continued structural hedge momentum and small tailwinds from product margin and lending volume. We have updated our 2024 BUK NII guidance to circa £6,500,000,000 from circa £6,300,000,000 excluding Tesco Bank, reflecting balance sheet trends turning more positive earlier than expected. Non NII was €280,000,000 in Q3, and we continue to expect a run rate above €250,000,000 per quarter going forward, although we expect the securitization that we announced earlier in the week to have a modest negative impact on non NII in Q4. Total costs were circa €1,000,000,000 down 4% year on year and versus Q2, demonstrating continued progress on delivering efficiency savings from the ongoing BUK transformation. The cost to income ratio improved to 52% this quarter.

Speaker 2

Moving on to the Barclays UK customer balance sheet on Slide 17. The stabilization in deposit trends that we called out at Q2 has continued in Q3. Deposit balances reduced by €500,000,000 in the quarter, a similar quantum to Q2. Net lending was broadly flat in the quarter at €199,000,000,000 Within this, we saw growth in mortgages, cards and unsecured personal lending, offset by continued pay down of runoff portfolios, notably government backed lending in Business Banking. As Venkat mentioned, we have made good progress on the acquisition of TESSCO Bank.

Speaker 2

Following the court process last week, we will complete the acquisition on 1st November with estimated financials to be confirmed at full year 2024 results. The current estimated day 1 financial impact is a circa €300,000,000 net positive profit before tax, driven by an income gain resulting from consideration paid being below fair value, which is partially offset by a day 1 impairment charge. The impairment charge assumes all balances are required as Stage 1 loans, reflecting 12 month expected losses with subsequent impairment bills required in future years. The profit before tax benefits statutory group ROTE in 2024 by about 50 basis points. Overall, when including the circa 7,000,000,000 RWAs, we expect to see around a 20 basis point negative impact to the group CET1 ratio, which is lower than the circa 30 basis points previously guided.

Speaker 2

Moving on to the U. K. Corporate Bank. U. K.

Speaker 2

Corporate Bank delivered Q3 ROTE of 18.8%. Income grew 1% year on year to €445,000,000 Non NII was flat year on year, but down in the quarter, mainly due to lower income from transactional products. This line can be variable due to the inclusion of non product items such as liquidity pool income. However, we do expect non NII to increase over time as we invest in our digital and lending proposition. Total costs were flat year on year at $222,000,000 with future investment spend expected as we continue to support our growth initiatives.

Speaker 2

Lending balances decreased by €900,000,000 in the quarter and underlying growth was more than offset by a circa €2,000,000,000 reduction due to refinements to the perimeter with the International Corporate Bank. This same adjustment also impacted deposit balances. Turning now to Private Banking and Wealth Management on Slide 22. Q3 ROTEI was 29%, supported by strong growth in client assets and liabilities, up around €3,000,000,000 on Q2 and around €23,000,000,000 versus the prior year. Income reduced 3% year on year, driven by lower NII from the non repeat of a timing related one off in Q3 2023, which offset growth from increased client assets and liabilities.

Speaker 2

Versus Q2, NII was up 1% driven by increased client balances overall. Costs were up 3% year on year as we continued to invest in this business, including in growing platform, hiring and efficiency related measures. Turning now to the Investment Bank. Q3 ROTEI was 8.8%, up 0.8% year on year. Total income of CHF 2,900,000,000 was up 6% year on year and total costs up 4%, delivering positive cost to income jaws.

Speaker 2

Excluding FX, total income was up 9% year on year and costs up 7% year on year. RWA productivity measured by income over average RWAs was 5.7% in the quarter, 30 basis points better year on year with year to date RWA productivity at 6%. Period end RWAs were 9 point €1,000,000,000 lower versus Q2 at €194,000,000,000 with FX accounting for around €6,000,000,000 of the move. At Q2, we had an uptick in RWAs, which I said was temporary in nature. The reduction we've seen this quarter excluding FX is a reversal of that.

Speaker 2

Now looking at the specific income line in more detail on Slide 25. Using the U. S. Dollar figures as usual to help comparison to our U. S.

Speaker 2

Peers, markets income was up 7% year on year. FICC income was up 7%, driven by a strong performance in credit, securitized products and fixed income financing. Equities income was up 7% volatility in August. Financing income was up 6% year on year, reflecting increased client flows and balances with this business delivering more than GBP 750,000,000 in 4 of the last 7 quarters. Investment Banking fee income in dollars was up 67% year on year with gains across all products, in particular, a strong quarter in advisory, which was up 146%.

Speaker 2

DCM was up 55%, delivering improved performance across both investment grade and leveraged finance. ECM was up 9% against the wallet that was down 6%. Our year to date banking fee share was 3.5%. We have increased share across most products in a rising industry wallet, but we still have work to do to sustainably improve this. Finally, in the International Corporate Bank, transactions banking was up 5%.

Speaker 2

We continue to grow U. S. Deposit balances, which we see as a lead indicator of future client product take up and fee income growth. This was more than offset by an €85,000,000 impact from fair value losses on leveraged finance lending, which are reported in corporate lending, resulting in total ICB income being down 21% year on year. Turning now to the U.

Speaker 2

S. Consumer Bank. U. S. Consumer Bank generated a ROTE of 10.9%, up from 0.4% in Q3 last year, mainly due to the lower impairment charge following a higher provision build in the second half of twenty twenty three.

Speaker 2

Income fell 2% year on year, driven by a weaker U. S. Dollar. Excluding FX, income was up 2%, driven by an increase in card balances, which were up €1,400,000,000 year on year on a reported basis to €31,600,000,000 dollars NIM was stable on Q2 at 10.4 percent, but down from 10.9% in the prior year, reflecting higher rewards earned by customers through increased spend. In Q4, these impacts are expected to be less of a headwind, and we continue to target a NIM for this business of greater than 12% by 2026.

Speaker 2

In terms of the funding mix of the business, the proportion of core deposits was broadly stable versus Q2 at 66%, as we target above 75% by 2026. Costs were down 3% on the prior year as efficiency savings and the FX tailwind offset inflation and growth driving a cost to income ratio of 50%. Excluding FX, costs were up 1%. We still expect costs to trend up modestly in Q4 as marketing spend during the holiday season will support continued growth in the business. Turning now to Slide 28 and the summary of the financial impacts from inorganic activity announced in 2024.

Speaker 2

As a reminder, at our Q2 results, we announced the disposal of our performing Italian mortgage portfolio and the German cards business. Earlier this week, we announced the disposal of our non performing Italian mortgage portfolio, which is expected to complete in Q4 2024. These disposals, along with the Tesco Bank acquisition, have a broadly neutral impact on statutory 2024 Group ROTE, whilst causing a circa 10 basis point drag to the CET1 ratio. These transactions are a key component of reshaping the bank to be more focused in areas we have competitive strength, enabling us to deliver higher future returns. Turning now to the balance sheet and starting with our capital position.

Speaker 2

The CET1 ratio was 13.8% at the end of Q3, up 24 basis points versus Q2 and comfortably within our target range. This includes the impact of the ongoing €750,000,000 half year buyback that came off capital post the Q2 quarter end, 46 basis points of capital generated from profits in the quarter and a $4,000,000,000 reduction in RWAs, excluding FX. We continue to expect this year's total capital return to be broadly in line with the 2023 level of $3,000,000,000 consistent with the capital distribution plan we laid out in February. Let me turn briefly to our regulatory capital and the upcoming changes under Basel 3.1 as well as the U. S.

Speaker 2

Cards model migration. The combined expected RWA impact of €19,000,000,000 to €26,000,000,000 is in line with previous guidance of the lower end of 5% to 10% of group RWAs as at the end of 2023. However, the timing has changed for both items. You will have seen that the PRA's Basel 3.1 implementation date moved to 1 January 2026 and the impact is expected to be between €8,000,000,000 €15,000,000,000 post mitigation. The IRB migration of our U.

Speaker 2

S. Cards portfolio has also moved from our prior expectation of Q1 2025 and will now take place after Basel 3.1 implementation, for which we are building a Basel compliant model. The total impact to RWAs from the IRB migration still stands at circa €16,000,000,000 of which around €5,000,000,000 will be reflected at the time Basel 3.1 is implemented and is now included in our Basel 3.1 impact estimate. The remaining $11,000,000,000 relating to the IRB model will come after Basel 3.1 implementation at a date to be determined and is subject to model build and portfolio changes over time. Specific to this, there is likely to be a modest increase in Pillar 2A applicable at some point in 2025 and until the model is implemented, reflecting the difference between modeled and the current standardized risk weighting, acknowledging we already hold Pillar 2A capital against the majority of this risk.

Speaker 2

As previously noted, the total impact of Basel 3.1 will also depend on further guidance from the PRA on the approach to Pillar 2A, where we expect some offsets for risk now to be capitalized under Pillar 1. Risk weighted assets decreased by €11,000,000,000 from Q2 to €340,400,000,000 as you can see in more detail on Slide 31. FX drove around €7,000,000,000 of the reduction with lower investment bank and head office RWAs also contributing. As usual, a brief word on capital and liquidity on Slide 32. We maintain a well capitalized and liquid balance sheet with diverse sources of funding and a significant excess of deposits over loans.

Speaker 2

Turning now to TNAV. TNAV per share increased 0.11p in the quarter and 0.35p year on year to 3.51p Of the elements we controlled, attributable profit added 0.11p per share in the quarter and the share buyback, which reduced our share count by 2%, added 0.02p per share. We have seen further unwind of the negative movement in the cash flow hedge reserve in 2022 to 2023, which caused a drag on shareholders' equity and this added 9p in the quarter. These positive moves were partially offset by dividends paid and other reserve movements. In summary, we remain focused on disciplined execution.

Speaker 2

This is the 3rd quarter of progress against the targets that we laid out in February, which we are either reiterating today or upgrading. Thank you for listening. Moving now to Q and A. As usual, please could you keep to a maximum of 2 questions so we can get around to everyone in good time.

Operator

Our first question comes from Jason Napier from UBS. Please go ahead.

Speaker 3

Good morning, Venkat. Good morning, Anna. Two questions on Slide 16, please, which is the Barclays U. K. Margin and NII walk.

Speaker 3

Just first and I appreciate the reiteration of guidance around hedgetailwinds into next year. But I just noticed that the quarter on quarter tailwind there is it's down about onethree. And it looks to us like maturing swaps and incoming swaps should have been fairly stable, down about 30 basis points each in the period. And so I just wonder how you think about the sort of quarter to quarter volatility around this component of NII, trying to avoid a situation where we worry unduly about nearer

Speaker 4

term dynamics from that.

Speaker 3

And then secondly, on that same quite surprising to see the product margin as a net positive. Can I just confirm please that, that includes whatever leads and lags on depository pricing there are? There's some feedback in the investment community that perhaps Barclays haven't been able to cut deposit rates as others have done as rate cuts began. Just wonder whether you could talk about what you're seeing on deposit pass throughs as rates start to decline. I just confirm that I'm looking at the right block when I look to track that going forward.

Speaker 3

Thank you.

Speaker 2

Thanks, Jason. Good morning. Thanks for the questions. I'll take both of those. So just looking at Slide 16, I can see why you're asking the question.

Speaker 2

The structural hedge impact is lower than the previous quarter. Last quarter, the product dynamic was negative. Now it's positive. So I'll pick those up in turn. I mean last quarter, we did have a slightly higher swap rate, as you point out, but we also topped up the hedge a little bit, particularly around Business Banking.

Speaker 2

That's now obviously in the run rate, so it's no longer causing that sort of quarter on quarter impact. So that going forward from here, we're going to continue to see momentum from the structural hedge. You can see that from the other disclosures that we've given you, for example, on Page 10. So I still expect it to be a net tailwind overall to this business and really supporting the NII growth that we're seeing. So nothing more really than that.

Speaker 2

On the product margin, you're right, that does include all product margins. So it's including assets and liabilities. I think important to point out that some of the drags that we've seen historically are no longer there. So you're no longer seeing that really significant deposit drag from migration coming through. Actually, our mortgage position is broadly neutral from a churn perspective now, so you're no longer seeing that.

Speaker 2

What you are seeing is some positive momentum from both mortgage and card margins, which is a little bit offset by deposit pricing, as you point out. But actually, I'd expect, given the kind of regulatory lag that we have in deposit pricing, for that to be more meaningful, that lag impact to be more meaningful in the 4th quarter. So a bit of a lot of small numbers here because it is only a quarter on quarter movement and it is only 6, but that's the things that I would call out.

Speaker 3

Thanks very much.

Speaker 2

Okay. Perhaps we could go to the next question, please.

Operator

The next question comes from Benjamin Thomas from RBC. Please go ahead.

Speaker 5

Good morning. Thank you for taking my questions. The first one is

Speaker 6

to say thank you for

Speaker 5

the new disclosure around the structural hedge income, around how that should be allocated to the group. I mean, that's a bit like Christmas come early. One of your peers this week implied that they expect the structural hedge notional to be flattish from here. Based on your guidance in February and movements in the notional since year end, I think you're actually expecting a 13% reduction in the notional from here. Do you

Speaker 6

really expect to see such

Speaker 5

a big reduction going forward given you mentioned just previously the stabilization in deposits? Or can we assume that assumption is now somewhat stale? And then secondly, just a chance of my luck on 2025. When your peers guided to a gradual increase in NIM in 2025 in the UK, should we expect a similar trend at Barclays? Thank you.

Speaker 2

Okay. Good morning, Ben. Thank you. I'll take both of those. So yes, please put that disclosure in on Page 38.

Speaker 2

You haven't seen it. I mean we often talk about the structural hedge and the support that it gives to the U. K. I guess, in absolute and percentage terms, that's where it is most meaningful. But it does provide support elsewhere in the group, particularly through the equity structural hedge.

Speaker 2

So you'll see that perhaps surprising to many that it's providing some support into the IB and because we allocate that equity portion by RWAs. So hopefully, that's helpful. For the structural hedge notional, I'm not going to give you specific guidance then, but what I would say is we'd expect it to sort of trend broadly in line with where the deposits are going. When we spoke in February, that was less guidance, more sort of a framework to help you model it as time goes on. So we talked about €170,000,000,000 of maturing and rolling about 3 quarters of that.

Speaker 2

But that was designed really to give you the math that you could then update rather than a forecast itself. So clearly, as we look at the moment, there are some positives in there, but we will continue to update you as we go through. But I wouldn't call out anything more than we should expect to move in line with deposits. On your second question, I'm not going to talk about NIM. NIM is going to be quite it's going to move around quite a lot over the next few quarters.

Speaker 2

As you can imagine, we're about to onboard £8,000,000,000 worth of unsecured lending. That's going to move the NIM materially. What I would really focus you on is actually the net interest income. So we've upgraded our net interest income for the group and for BUK in the current year. So now we're expecting circa €6,500,000,000 for BUK.

Speaker 2

And if I take you back to what we said in February, we said we expected mid single digit growth in NII in the U. K. We still expect that. And what's driving that? Well, clearly, we've got asset growth coming through.

Speaker 2

What was a drag coming from deposits, we now see a stabilization. And hopefully, as deposits start to grow across the market, we would see the same. And whilst we've got some uncertainty coming through from rate changes, I would offset that with the kind of momentum that we've got from the structural hedge. So we are expecting NII to be higher in 'twenty five and in 'twenty six than it has been in 'twenty four. And that's obviously, we would be putting TESSCO on top of that.

Operator

The next question comes from Chris Can't from Autonomous. Please go ahead.

Speaker 7

Thanks for taking my questions. I wanted

Speaker 8

to ask about head office please.

Speaker 2

Gosh, Chris, we can't hear you. Sorry. Could you start again, please? We picked up head office, but perhaps you could start your question again.

Speaker 7

Yes. Can you hear me now?

Speaker 2

Yes, we can. Live and clear. Thank you.

Speaker 1

Hello?

Speaker 8

Okay. Okay, great. Yes, so head office, I wanted to ask about looking into 2025, 2026, could you give us some color on what the sort of underlying group center numbers look like after the various mortgage books have gone and the German card books have gone? I think this is a source of significant dispersion within consensus how people are thinking about sort of the underlying head office. And it has been an area where historically consensus

Speaker 7

has got

Speaker 8

a little bit out of kilter with your own expectations. So any color on once the transactions you've currently got in the pipeline are done, what does that group center income cost run rate look like? And I appreciate that there's still the payments business in there, which may or may not go at some point, but sort of what's the sort of go to run rate as things stand for the transactions, once the transactions you've got in train are done? And then on BUK, just a point of clarification. So it's mid single digit growth on the 2024 number excluding TESSCO and then we put TESSCO on top.

Speaker 8

So take essentially the 6.5 that you're now guiding mid single digit growth on that and then €400,000,000 on top is what you're saying for 2025? Thank you.

Speaker 2

Okay. Thanks, Chris. Let me pick up both of those. So the first one, look, I appreciate head office has been a bit volatile in the current year, both because it's housing our inorganic activity and those businesses before they actually flow out. So just to remind you, there's no inorganic activity in the current quarter.

Speaker 2

You can also get some volatility in there from hedging. So we're seeing a bit of that in the quarter. But year to date, that is a zero number, and we expect it to be timing only. It's a bit early to guide you to what that run rate is, Chris, but we will do that in time. But just to remind you, nothing in the current quarter and just appreciate it's very difficult to model at the moment.

Speaker 2

But once we get beyond that, we'll give you more guidance. On the BUK NII, let me just clarify for you. So ex TESSCO, I expect some increase. The mid single digit guidance that we gave you for BUK did include TESSCO because that was from 23 to 26. So we included TESSCO, obviously, in our RWA bridge to €30,000,000,000 and it's included in the mid single.

Speaker 2

So I would say overall, we're expecting some organic add TESSCO on top to that. Is that clearer?

Speaker 9

Thank you.

Speaker 2

Yes. Okay. Thank you. Next question, please.

Operator

The next question comes from Edward Firth from KBW. Please go ahead.

Speaker 7

Hi. Good morning, everybody. Thanks for the questions. Sorry. Yes, I had two questions.

Speaker 7

One was just on the BUK

Speaker 2

interest rate sensitivity.

Speaker 7

It's quite striking that you're not highlighting it at all as an impact this quarter. And I think you said it was minimal or marginal. I can't remember your exact words in terms of your sensitivity rates falling going forward. And I'm just trying to understand any sort

Speaker 2

of commentary you could give to

Speaker 7

help us understand why that is? Is that just like a temporary thing? And as the hedge rolls off, then you would expect some more sensitivity? Or is there something that you sort of structurally changed? Obviously, on the way up, we saw NII grow very strongly on the back of higher rates.

Speaker 7

So that's one question.

Speaker 2

And then the other question was on the U. S,

Speaker 7

the margin there. I get your comments about you're still targeting greater than 12%. I think you said there was a lot of incentive programs or loyalty programs that you were running at the moment. And just again, any help you could give us to understand from a business perspective how that works? Because I do know, obviously, in the U.

Speaker 7

S. Loyalty program is a huge part of the business. It's a huge part of attracting volumes and customers, etcetera. And I'm just trying to think what is it that you're expecting to change in the market more broadly? Or how is your offering going to change that's going to allow you to reduce those loyalty offerings but still maintain momentum in the business?

Speaker 2

Okay. Thanks, Ed. I will take both of those. On the first one, we gave you some guidance on the interest rate sensitivity in the previous quarter, and that really showed for a 25 basis point parallel shift. It was €50,000,000 in the 1st year.

Speaker 2

And then what you saw was that build over time. And that build over time the way I think about it, Ed, is in the 1st year, it's dominated by the lag effect. So this sort of 60 day regulatory lag that we have, particularly in BUK. And then in the outer years, you see the impact of the hedge grinding lower in response to that parallel movement. So that's really what's going on there.

Speaker 2

If I go back to what I said in products for that product margin on Page 16, just to clarify, we've got 2 offsetting impacts in that. There is a negative movement from the delay in pricing or repricing the liabilities. But there is an offset which is coming through from our asset margins, which are expanding. Now you might expect that in a downward movement. Sort of overall, we would expect that as the liability margins start to compress, you see asset margins widening out.

Speaker 2

And of course, we've got specific actions around things like high loan to value mortgages that are perhaps driving that a little bit faster. And so it's not that it's not there. It's just that there are some offsets. And actually, I would expect a bit more of that lag just because of the way the months sort of pan out in Q4. On your second question on U.

Speaker 2

S. Margin, yes, the NIM is clearly lower than it was at the beginning of the year and indeed last year. But our expectation is that this is still a greater than 12% NIM business. And all of the actions that we are taking to underpin that are taking place. So in the current quarter, and if you look sort of sequentially across the last few quarters, there's a few things going on.

Speaker 2

There's natural seasonality in this business. So you see more purchase activity, more borrowing activity as you go into the holiday season, which is much more seasonal in the U. S. Than it is in the U. K.

Speaker 2

So you'll see that natural shape. The second thing is, remember, we did that risk transfer in Q1. What that meant was we swapped out NII for fee income. But obviously, it's ROTE accretive overall. So you see some movement in the geography of the P and L on the balance sheet.

Speaker 2

And then thirdly, as we've called out, there are a couple of things that we're just observing as a customer matter. Actually, I don't think they're unhelpful, but there are 2. The first is that customers are they're managing their balances well. They're repaying perhaps a little bit faster than we expected. In the context of the broader discussions about the U.

Speaker 2

S. Economy, I don't think that's unhelpful, and we see the other side of it in positive impairment. So we're not uncomfortable with that. The second point is that customers are using their rewards not necessarily more, but faster than we would have previously expected. Again, long term for the franchise, while that puts a bit of a headwind into near term NIM, it means they're really engaged with the color.

Speaker 2

They're really engaged with the brand program. So it's good news. So that kind of explains Q3. As I go beyond Q3 and think about that build to greater than 12, the things that we talked about in February were number 1, repricing. That repricing action has actually taken place.

Speaker 2

It's complete. But what happens is customers have to actually purchase under the new terms and conditions. So it's going to drip through into NIM over time. The second action was really around the funding mix. So we are now around 67% of retail funding.

Speaker 2

We want to get that to around 75%. That's going to take a while for us to build, but we've launched the tiered savings products that will underpin that, and you'll see more on that in time. So those things are really important. The last thing I would add is a key part of that move to 12 is how we start to morph this portfolio towards having a richer mix in retail. And you can see that we've announced our new partnership with GM.

Speaker 2

That again is another plank of this strategy. So we're not going to get to 12% or greater than 12% immediately. You're going to see it sort of emerge over the next few quarters. But greater than 12% is still our target, and we feel like we're on track.

Speaker 1

Great. Thanks so much.

Speaker 2

Okay. Thanks, Ed. Next question, please.

Operator

The next question comes from Guy Stebbings from PNB Baraba. Please go ahead.

Speaker 9

Hi, good morning. Thanks for taking the questions. I had one on capital and then one back to product margins in BUK. On Caton, on Slide 30, thanks a lot for clarifying the various timings. Clearly, some of them have been pushed out, including the U.

Speaker 9

S. Consumer business. I'm just wondering if that changes how you'll manage capital. So in theory, it sort of frees up some capital in the next 12 months to perhaps distribute a little bit more early in the plan? Or should we think that you're more likely to run at the very top end of the 13% to 14% range, maybe even above it, especially if there's a pillar to a temporary uptick?

Speaker 9

Just thinking about how you think about that capital ratio during 2025 now as we have to wait for 2026 for some of those wins to come through. And then on the product margins, just come back to that point in terms of the lag effects and saying it might be more meaningful in Q4 on deposits. I would have thought there'd be some sort of catch up from the August rate cut, if you like. And you take the day 1 hit on the unhedged deposits and you have to wait to pass some of it back on the rate cut. So I just checked that sort of thinking is correct and your comment around the lag effect being greater in Q4 is maybe a reflection of an assumption of 2 rate cuts and then maybe if it was just one rate cut, it wouldn't be as more powerful versus what you saw in Q3.

Speaker 9

Thanks.

Speaker 2

Okay. Thanks, Guy. I'll take both of those. I'm hoping Meghan is going to get a question at some point. But just on the first one around capital.

Speaker 2

Look, these regulatory movements that we set out for you on Page 30 are timing and timing only. And we'd reiterate today our expectation about distributions here. So greater than €10,000,000,000 for the 3 years of the plan. And for the current year, we'd expect it to be broadly similar to last year, so around €3,000,000,000 And we said in February that we would expect it to be progressive thereafter. And I just say exactly the same today.

Speaker 2

Q4 is normally when we talk about distributions, and we'll do so then. But we see this really around timing, and you would expect us to build capital as we head towards both Basel and the IRB implementations. Just on product margins. Really, what I was referring to is you've got sort of about a month's worth of that lag in Q3. You're going to see the remainder of it in Q4.

Speaker 2

And we are expecting, because we use consensus, so consensus has got 3 rate cuts in the current year. We're expecting a couple of rate cuts in Q4. So you're going to see impacts in Q4 and actually into Q1 of next year.

Speaker 1

Yes, that's good. Thank you.

Speaker 2

Okay. Thank you, Guy. Next question, please.

Operator

The next question comes from Amit Goel from Mediobanca. Please go ahead.

Speaker 6

Hi, good morning. Thank you. So two questions from me. So one just related to that product margin. But essentially just on the BUK business, I kind of see the balance sheet still contracting a little bit in terms of total loan balances and deposit balances versus I guess some of your peers showing a little bit of growth now.

Speaker 6

So just kind of curious the interplay between the kind of the pricing which goes into that product margin versus balance sheet growth. And when can we start to see a bit more organic growth and capital redeployment into the BUK business? And the second question, just relating to the U. S. Consumer business, I'm just curious how significant or not with the American Airlines partnership, if there's any color you can give there in terms of the contribution of that piece to the broader business?

Speaker 2

Okay. Thanks, Amit. I'll take the first of those and then hand to Venkat. So it's probably helpful if start on the sort of leading indicators page that I that we've included this time. It's on Page 14.

Speaker 2

And if I take you back to February, what we said in February was we didn't expect a significant change in the net balance sheet, particularly in the U. K. In the current year. And that was because of our expectation and the known maturities that we have, not just in mortgages but, for example, in Business Banking. What we did expect was a change in the gross production.

Speaker 2

And what we've shown you on Page 14 is what I look at, what we look at week in, week out to give ourselves comfort that we are driving that gross production. So in mortgages, it's relatively straightforward. It's actually our gross lending. You can see that stepping forward quarter on quarter. It's obviously helped by the fact that the mortgage market itself is strong and robust, but also the fact that we are broadening out our range within that market, and we're really putting Kensington to work now, which we've been unable to do over the last few years.

Speaker 2

The second point is on card acquisitions. And you can see that meaningful step up in 2024, but we've already started that journey in 2023. And actually, what you see over time is that those cards volumes will start to feed into interest earning lending. And then finally, on U. S.

Speaker 2

UKCB, I know you're not asking about corporate here, but it's a bit more difficult there because clearly what you do is you put out lines to clients, which is shown here in terms of RWAs. And then those clients, in time, will draw down on them. So in terms of what's happening in terms of lead indicators in the balance sheet, I'm happy we're going in the right direction. In BUK specifically, we saw positive net lending in the businesses that we've got in focus. So we saw positive net lending in mortgages.

Speaker 2

We're seeing it in cards. What we've got offsetting that is some runoffs in portfolios, which are obviously no longer core is not the right word. But if I use the example of government lending within Business Banking, I don't think that's different either in percentage terms or sort of in directional terms from our peers. You're hearing similar things there. So I think we're happy overall.

Speaker 2

And obviously, as we increase our cards lending, you get a mix impact. As we've increased the proportion of lending at higher loan to value, you get a mix impact. And that's really what's flowing into the product margin and giving that positive. So let me hand to Venkat on the second part.

Speaker 1

Yes. Look, Amit, on cards, obviously, we will not talk about any specific account until there is time to talk about the right time to talk about an account or we have something to say. We also do not talk about individual client profitability or financials. We announced GM a couple of days ago and so we're speaking about that. And if there's news on any other clients, we'll tell you at the right time.

Speaker 2

Okay. Thanks, Amit.

Speaker 7

Perhaps we

Speaker 2

can go to the next question.

Operator

The next question comes from Chris Hallum from Goldman Sachs. Please go ahead.

Speaker 4

Good morning, everybody. So 2 for me as well. First, in the IB, if we think about the gradual rebalancing of that business, clearly dynamics in the quarter for DCM were very strong both for you and across the street. But given the organic reduction in RWAs you saw in the quarter in the IB and the improvement in asset productivity year over year, are you starting to make those selected decisions to deemphasize DCM? And where are you comfortable doing less, I guess?

Speaker 4

When we think about reallocating those RWAs into the financing businesses, should we sort of assume EUR 750,000,000 as a floor for markets financing revenues, assuming supported markets? That's the first topic. And then second on Tesco, so thank you for the additional disclosure in the update today. So what steps are you planning to take over the next sort of 12 to 24 months to improve the product margins in Tesco Bank? If I look at asset productivity or NII versus RWAs, it's quite a bit lower in Tesco Bank than the rest of the BUK business, looking at the €400,000,000 and the €7,000,000,000 of RWAs.

Speaker 4

So how are you planning to scale NII faster than RWAs to optimize that capital resourcing question?

Speaker 1

Right. So Chris, let me take the IB and then Ana will talk about Tesco. On the IB, first of all, big picture, we're looking to keep RWAs in absolute terms relatively flat to their current number of around $200,000,000,000 The relative reduction in RWAs as a percentage of the group happens because the rest of the group grows. 2nd, in the Investment Bank, RWA came down by about $9,000,000,000 this quarter compared to the previous one, but about $6,000,000 of that was due to FX and $3,000,000 was actual action. And 1% up and down or 1.5% up and down in the quarter is normal business mix.

Speaker 1

3rd, we are not looking to deemphasize CCM. What we are looking to do is within the investment bank, be prudent in assigning capital to clients, looking at the totality of their relationship. And that relationship is not just DCM, but it includes M and A and equities and what corporate banking we do with them. And that's the way to think about it. And lending is a part of it.

Speaker 1

Lending is not the only part of it. We don't want lending to be the main part of it. And as far as revenue of $750,000,000 from financing, look, we've been stable at that number. What I would say is while we have been gaining clients and gaining market share in that business, the actual revenue is a function of 2 things. It's a function of what happens in the composition of balances, fixed income and equities, and so what the markets do, as well as spreads within that.

Speaker 1

So I can't tell you that it's going to stay at this level or not go up or down. It depends on that mix. What we do think we have is a diversified business between fixed income and equities, a competitive business in both, but particularly strong fixed income business and a diversified business among the types of clients who use it regionally, product wise and within fixed income asset class wise, meaning spread versus common bonds. So that's what we think contributes to a good and stable mix. But I'm reluctant to put sort of floors and ceilings on numbers.

Speaker 2

Thanks, Chris. The only thing I'd add to that is if I take that €9,000,000,000 reduction, €6,000,000,000 was FX, as Venkat said. The other €3,000,000,000 was just the reversal of the client positioning that we saw over Q2 that we said was temporary. So it just kind of brings us back to where we stopped at the beginning of the year. On Tesco, for the next year or so, for the next sort of 12 to 18 months, our focus is really on integration.

Speaker 2

And our focus will be on customer service. So that is our primary focus as it would be in any partnership as it was in GAAP in the U. S. So this is just a replication of what we would do with any other partner across the firm. Over time, we would expect this to be ROTE accretive for a number of reasons, whether that be efficiency, whether that be funding benefits that you might expect to accrue.

Speaker 2

And obviously, we'll update you on that in sort of in the course of time. But really, our objective over the short term is going to be to integrate it well and really ensure that, that customer experience is foremost.

Speaker 4

Okay. Thanks very much.

Speaker 2

Thanks, Chris. Perhaps we could go to the next question, please.

Operator

The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Speaker 10

Good morning. Maybe a couple of questions on the Investment Bank for me, please. First of all, on the fee performance, obviously, very strong in the quarter, but similar to Q2 where you called out a large deal there, is there any lumpy deals that we should bear in mind? Is the performance sustainable? I'm guessing ultimately, I'm asking about the pipeline from here given the strong performance.

Speaker 10

And second is on the leverage finance marks. It feels like it's a bit of an odd quarter to take those marks and with credit spreads actually very tight. So maybe could you give us a bit of color on what's driving that? Is it portfolio? Is it a single sort of ticket?

Speaker 10

Or are you looking to sell something in the March? Or should we expect more of this in the coming quarters? Just a bit of color on this. Thank you.

Speaker 1

Hi, Alvaro. I'll take the first question and then Anne will take the last question. So on fee performance in Q3, nothing special to call out. Look, we are part of certain larger deals, but I wouldn't say that unduly that there's anything I would call out. And as I've said elsewhere, we've obviously seen activity pick up over this year compared to the previous year.

Speaker 1

We expect it to continue to be relatively firm. Obviously, there are a couple of wildcards out there in terms of what happens with the U. S. Elections and economic policy and reg policy in the U. S.

Speaker 1

On M and A activity after that. But assuming no major surprises or changes, we expect to continue to see it to be firm. Anna?

Speaker 2

Okay. Thanks, Venkat. So let me pick up that second one, Alara. I mean, left fin is a really important part of our business. And you're right, in the current environment, what we see is that market overall performing really well.

Speaker 2

Deals are clearing quickly. Occasionally, we find that either some of those don't. That is episodic. It's a feature of our business. It's a feature of the market overall and not something that we would particularly call out.

Speaker 2

So it's normal. What we do at the end of every single quarter is we assess our balance sheet. And we use prevailing market information in order to assess the fair value of that balance sheet. And where we feel we need to take margin, then we do. And that's what we've done in the current quarter.

Speaker 2

So it's very much BAU. And as I say, it occasionally occurs. It's episodic. I wouldn't comment on clients as we would never do. I would just remind you also that this is a book which has some hedging set against it.

Speaker 2

The cost of that hedging also flows through corporate lending. So we protect ourselves in that way. And I would say overall, our exposures are probably whilst they're higher than 23%, they're lower than they have been historically. So it's a well risk managed book. And really, this is sort of the kind of thing we see normally on an episodic basis.

Speaker 1

Thank you.

Speaker 2

Thanks, Alvaro. Perhaps we could go to the next question, please.

Operator

The next question comes from Jonathan Pierce from Jefferies. Please go ahead.

Speaker 11

Hello there. I've got 2, please. The first is I'm sorry, it's back on rate sensitivity. Thanks for the hedge allocation data again, by the way. It helps us to be a bit more precise in the tailwinds there in Barclays U.

Speaker 11

K. But the piece that's still struggling with a bit is the rate sensitivity. The $50,000,000 in year 1, I hear what you're saying about a lot of that being relating to deposit back. But if there's GBP 40,000,000,000 of hedge maturities a year as per guidance, you'd have thought a 25 basis point shift in the curve would be knocking £50,000,000 out of the hedging come in year 1. So I'm not quite sure what's going on here.

Speaker 11

Are you saying that there is no impact on what we might call managed margin from a 25 basis point rate reduction at all, just simply because the structural hedge is now so large in the context of the deposit book. So it'd be helpful just to understand why that 50 is so low. I mean, it's the lowest in the sector. It's quite difficult to triangulate. The second question sorry, this is just for the models really.

Speaker 11

I guess, like I said, it's into year end. There's 2 bits that like a bit of clarity on Barclays UK saw the GBP 4,000,000,000 increase in the early part of the year for methodology, policy changes. At the time, you said that would partially reverse over the rest of the year. It doesn't seem like it has reversed yet. Is that coming in Q4?

Speaker 11

And then in the other direction, the OR1, I think, is pointing to about a $2,500,000,000 op risk increase in the Q4. Is that about the right number to be sticking in the spreadsheet? Thanks.

Speaker 2

Okay, Jonathan. Let me take the first one. So I would say we said €170,000,000,000 over 3 years, so I think you're probably closer to around €60,000,000,000 of hedge maturing. And really, what's going on here is remember, you've got that underlying maturing rate around 1.5%. So even though rates are coming down, you're still getting a pickup from the structural hedge.

Speaker 2

And it's only really in the outer years when that grinds out that you're seeing that more meaningful difference. So I think it's nothing more than that, but we can talk you through that outside of here, if that's helpful. As it relates to our relative sensitivity, we talked about this quite a bit as rates went up because we were clearly less rate sensitive on the way up. So you'd expect us to be less sensitive on the way down. So that is exactly what's coming through right now.

Speaker 2

Perhaps we hedge a little bit more. We certainly hedge more proactively. We are looking forward in assessing that on a monthly basis and adjusting those hedges very, very actively as we go to reflect the

Speaker 7

detail of customer and client behavior.

Speaker 2

So I think it's the benefit of that approach that we're seeing and the fact that we've just done this very, programmatically over a very long period of time. We're not seeking here to have any kind of view as to where We're not seeking here to have any kind of view as to where rates will go. We're just letting the hedge roll, and we're reacting to customer behavior. And on the second question, I think we'll have to come back to you on that one on op risk. So let's do that.

Speaker 2

Venkat, do you want to weigh

Speaker 1

in on the hedging? Yes. I just want to emphasize the final point Anna made on structural hedging. This is programmatic, this is a hedge. But we try to understand as best we can deposit behavior, deposit balances, customer behavior affecting that and hedge it.

Speaker 1

And as Anna said, therefore, if it works very well, it should provide you with a protection, meaning you don't see the benefits as rates rise as much as you would otherwise. And you see you don't see the losses as rates fall, meaning that your NII remains more stable because of that. And that's what we are trying to do and what Anna said is perfectly right about that.

Speaker 11

Yes. And sorry to just follow-up on that. I mean, I'm fully behind the idea of hedging. That's not the issue. Just to check though, Anna, I thought the rate sensitivity table ignored any sort of yield pick up on the hedge.

Speaker 11

I thought it was purely if the yield curve is 25 basis points lower, this is the impact on us. In which case, if you're reinvesting €40,000,000,000 of hedge a year at 25 basis points less, that's the entirety of average out over the year, the entirety of the €50,000,000 you're pointing to in year 1, which just implies everything else is nothing. Just checking that's the case.

Speaker 2

Yes. It's just very small in year 1, Jonathan. Let us take it outside with you. We'll come back

Speaker 11

to you. Okay.

Speaker 2

Thank you. All right. Thank you. Next question, please.

Operator

The next question comes from Robin Down from HSBC. Please go ahead.

Speaker 12

Good morning. Thanks for taking the questions. And also thank you for the added disclosure on the structural hedges. That's very useful. Apologies, but I'm going to bring you back to the BUK interest income issue.

Speaker 12

And I think it is important because it's the main topic of conversation amongst investors this morning. If we look at your €6,500,000,000 guide for this year, it kind of implies a Q4 run rate ex Tesco's of kind of €6,800,000,000 €6,900,000,000 If we add in kind of €400,000,000 for Tesco's, we're at kind of €7,200,000,000 I think you're looking to grow next year. I think especially given that 85% of the product hedge is in BUK, the structural hedge benefit is more than going to outweigh any kind of rate reduction impact. So why are you not going to end up materially above the $7,100,000 the consensus has penciled in next year? Is this something I'm missing, some big kind of negative drag that you're anticipating?

Speaker 12

Thank you.

Speaker 2

So Robin, I'm not going to comment on consensus income for 2025 at this stage. But I'm just going to reiterate the fundamentals of what we're talking about here, which is BUK, we expect over the plan to have NII growth of mid single digit. Tesco is part of that. You can see that there is NII momentum in the business organically. We called that out.

Speaker 2

You can see it over the last two quarters. It's coming from asset growth. It's coming from the momentum from the structural hedge. Now as I said before, we haven't really seen the full impact of the rate cuts yet, but we would still expect the net of all of that into 2025 to be positive. And then obviously, you're going to have Tesco on top of that.

Speaker 2

So I'm not going to give you specific numbers now, but the view here has not changed from where we were in February, which is we expect NII for BUK to grow.

Speaker 12

But if I can add to that, the view kind of has changed in the sense that we've now got a GBP 6,500,000,000 interest income forecast for BUK for this year, kind of up from what was the original kind of €6,100,000,000 So can I put it slightly differently then? Is there any reason why I can't annualize Q4 at kind of €6,900,000,000 and add €400,000,000 for Tescos? And so I have a starting base of €7,300,000,000 when I look at 2025 numbers.

Speaker 2

So Robin, you're right. We have upgraded our BUK guidance. So we did start at 6.1%, and we're now around 6.5%. And really, what's happening here is clearly there is a change in our expectation of rates for the current year. We started in a position where we had 5 rate cuts in February.

Speaker 2

Now we're expecting 3. And then the other 3, including the one we've already held, so a further 2. And then the other thing that's happening here is clearly, we've seen a stabilization in that balance sheet earlier than we expected. So at the beginning of the year, I said I expected the balance sheet to get smaller before it got bigger. We've seen 2 quarters now, nearly 3 quarters of real stabilization in deposits, perhaps a bit earlier than we expected.

Speaker 2

And we've seen the asset momentum turn perhaps a little bit earlier than we expected. I'm not going to comment on your numbers for 2025. I'm really going to leave that to you, but just bring you back to our expectation that we expect NII for the U. K. To grow.

Speaker 13

All right. Thank you.

Speaker 2

Okay. Thank you. Next question, please.

Operator

The next question comes from Perlee Mong from Bank of America. Please go ahead.

Speaker 14

Hello. Hi, Anna. Thanks for taking my questions. So can I sorry, can I bring you back to the hedge? So obviously, the hedge is a very large component of the way you manage the interest rate risk.

Speaker 14

So with the scale of the hedge, does that mean that your sensitivity to long rates would be higher than perhaps other banks or your peers? Or just all else equal, would you expect more sensitivity to the long rates? Because the reason I'm asking is because there's obviously a lot of discussion around neutral rates in Europe and in the U. K. So I'm just wondering, is the reason why your sensitivity is a bit lower on if it's in a parallel shift scenario is because maybe there's a little bit of difference between a short end and a long end?

Speaker 14

And so that's the first part of the question. And the second part is that it sounds like the notional is more stable than you that we or might have expected previously. And you previously assumed a reinvestment of 75% of the maturing hedges. I guess the question is, does it matter whether you reinvest or just simply let it roll off? Because obviously, you're reinvesting into a higher yield is a positive.

Speaker 14

But equally, if you run off a 1.5% hedge and then just sort of let it roll on to the variable rate, that is removing a negative and removing a drag. So does that matter whether you're reinvesting or not?

Speaker 2

Okay. Thanks, Parley. I will take both of those. The first is the tenor of what we're hedging is between 27. So I wouldn't say we're any more sensitive to the long end of the curve than others.

Speaker 2

We really try and reflect what we think the varying behavioral lives of the different pockets of deposits that we have. So I wouldn't call that out as a key difference. And then on your second point, just to bring everybody back to this, the €75,000,000 and the €170,000,000 was indicated to give you some math that you could then update as we go rather than a specific forecast from us. To the extent that the notional is more stable, I mean, clearly, we have a choice every single quarter or every single month as it rolls. At the moment, you're right, we're getting a pickup from that maturity as it rolls off even if we just left it overnight.

Speaker 2

The difference that the structural hedge gives you is it obviously secures it. So the structural hedge gives you certainty, which is why we do it programmatically and why we're really focused on how much income are we locking in to 25% 26%, which we've shown you again on Page 10. So that locked in number is now €12,400,000,000 over the 3 years. So for us, it's really about the certainty and stability of NIR rather than the opportunists kind of every month passing. And just to remind you, that equivalent number was 8.6

Operator

Our final question today comes from Andrew Coombs from Citigroup.

Speaker 13

Two questions, one more precise one, Board. On the precise question, just Pillar 2 offset. You talked about the Pillar 2 modest increase followed by a part offset of the later RWA inflation. It's probably too early, but anything you can provide in terms of quantum? And does that potentially even change your 13% to 14% core Tier 1 ratio target?

Speaker 13

That's the first question. 2nd question, much more broad based question, but budget. Looking into the budget, thinking about both the UK business and the investment bank, assuming we don't get a bank tax, is there anything else you're particularly looking at in terms of when you're thinking about future customer activity, be that CGT in the buy to let market, be it employers, National Insurance Contributions in the SMEs, etcetera, etcetera? Thank you.

Speaker 2

Okay. Thank you, Andy. So really too early to say. What we called out here is that, as you can imagine, in advance of implementing this model, we actually have been holding some Pillar 2A already. There may be some modest increase in that before we implement the model in full.

Speaker 2

So that's all we're calling out. It's difficult to give any specific guidance around quantum or exact timing, but you'll note that we said modest. And just reiterating, we are already holding Pillar 2A for this. And then the other point I'd make is that, obviously, we still await some Basel guidance from the PRA. So there is some expectation that we'll get some guidance around Pillar 2 offsets where they're really trying to avoid double counting between Pillar 1 in Basel and Pillar 2a that exists currently.

Speaker 2

And really, we need to see all this put together holistically before we give you firmer guidance.

Speaker 1

And on the budget, listen, obviously, we're a large UK bank, which operates across different sectors of the economy. So whether it's taxation, whether it's borrowing and financing by the government, whether it's private investment and helping with public investment, whether it's individual investment behavior that comes out of whatever the budget says, we would expect to see activity across everything which we do. I can't tell you where and how much and what the net of it is, but expect us to be actively engaged across all the different dimensions of it. With that, thank you, everybody.

Speaker 2

Yes. Thank you very much, everybody. I really look forward to seeing some of you on the road, and we will see you at the sell side breakfast in November. But thank you for your continued interest in Barclays. Have a great day.

Speaker 1

Thank you.

Operator

Thank you. That concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Barclays Q3 2024
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