Barclays PLC

LSE:BARC

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Barclays Third Quarter 2022 Results Analyst and Investor Conference Call. We will begin shortly. [Operator Instructions]. Thanks for your patience.

Welcome to the Barclays Third Quarter 202 Results Analyst and Investor Conference Call. I will now hand you over to CS Venkatakrishnan, group Chief Executive; and Anna Cross, group Finance Director.

[Coimbatore Venkatakrishnan, executive]

Good morning, everyone, and thank you for joining us today. I am pleased to report another strong quarter extending the robust operating performance that Barclays has delivered so far this year. In the third quarter, profit before taxes was GBP 2 billion, generating a return on tangible equity of 12.5% and an earnings per share of 9.4p. This leaves us in a good position to deliver our full year statutory return on tangible equity target of above 10%.

I would like to highlight, in particular, the strength and consistency of our results as we continue to execute on our business. We see broad-based income momentum across all our 3 operating businesses. Group income growth was 17% in third quarter year-on-year excluding the impact from the over-issuance of securities, a subject to which I'll return to in a moment.

There were several important drivers of this performance that I wish to highlight. First, in the Corporate and Investment Bank, we continue to gain revenue share in our markets business, driving the best Q3 income in both markets and fixed income, FICC, in recent years. Notably, our FICC performance was particularly strong and ahead of our U.S. peers with income up 63% in dollars as we supported our clients in very challenging markets. In Barclays U.K., we positioned ourselves well for rising interest rates with a growing contribution from our structural hedge as we locked in higher yields.

Within the Consumer Cards and Payments business, growth in our U.S. Card balances was delivered by a recovery in spending and the first quarter of our partnership with GAP, which is starting to show results. Taken together, both balanced growth and the management of our sensitivity to higher interest rates contributed to significant growth in the net interest income for the group.

And finally, whilst we are a U.K.-domiciled bank we have a truly global footprint, providing attractive exposure to the U.S. economy with over 40% of our group income generated in U.S. dollars.

While our income story paints a compelling picture, we remain, however, cautious about the macroeconomic outlook globally, and have been approaching it accordingly over the last year. In fact, we have been prudent in our balance sheet management for many years in particular since the days following the EU referendum in the U.K. We have reviewed our corporate loan portfolios, particularly in more vulnerable sectors, reducing exposure and managing our risk by acquiring significant credit protection.

As with many of our peers, we have taken markdowns in some elements of our syndicated loan book, but here, too, we have been managing our risk prudently and increasing our batches.

In our U.K. credit card portfolio, our balances remain some 40% below pre-pandemic levels. And while our U.S. credit card portfolio has grown, credit quality remains very strong, and customers continue to repay balances at near-record levels. That said, although we feel we are carefully positioned, we remain alert to signs of stress.

Our U.K. debit and credit card spending data give us early insights into how customers are adjusting to prevailing trends. So far, we have not seen emerging signs of stress, although our September data showed a slight fall in consumer confidence. People are being prudent with a reduction in nonessential spending, such as clothing, as they adjust their household expenditure for large increases in utility bills. We are drawing on this insight as well as our data and listening to our customers to understand how best we can support them. We have put in place a range of options to support individuals and businesses who banked us. This ranges from providing basic information such as mortgage renewal base or how to build a household budget through to helping these customers with more complex needs. Today, we have over 8,000 colleagues available to engage with our customers in the U.K. and to discuss their finances. We know the demand for this customer support is growing, and we aim to hire nearly 1,000 more people in the coming weeks to boost that capacity.

Let me now address the regrettable matter of the over issuance of securities under our U.S. share registration statements. We have resolved the matter with the SEC, and the total financial impact was broadly in line with what we disclosed at the second quarter. I said it before and I say it again, this issue was entirely avoidable, and we are taking action to prevent this kind of failure from recurring. The external council read review is now complete, and has reinforced the findings of our own extensive internal reviews. We are already using these findings to improve specific controls across the bank and to reinforce more broadly a strong controllers culture.

I continue to be clear with all my colleagues that we have no higher priority and ensuring that our operations and our risk and control processes are robust and effective at all times.

Before I conclude, I want to give you a brief update on one of our strategic priorities which is capturing opportunities from the transition to a low carbon economy. Governments continue to play a critical role in this transition and considering the Inflation Reduction Act in the U.S. and other business factors. In our year-end climate update, we expect to bring forward the phase out date for financing thermal coal power in the U.S. from 2035 to 2030 in line with our approach in the U.K. and in the EU. And demonstrating Barclays' leadership in the energy transition, we are very honored and pleased to act as the sole M&A adviser to Con Edison based in New York on the announced $6.8 billion sale of their clean energy business to RWE based in Germany earlier this month. This was the largest ever sale of renewable assets globally.

So in conclusion, Barclays has had a strong third quarter financial performance, building on our performance in the first half of the year. This gives us a solid platform as we continue to target statutory return on tangible equity above 10% for 2022. Our capital position is robust with a CET1 ratio of 13.8%, which is comfortably in our target range of 13% to 14%. Our announced total capital return for the last 12 months, comprising both dividends and buyback is a yield of about 10.5% on the stock at current share price levels.

As I have said consistently, returning excess capital to shareholders remains one of our priorities. And while I'm pleased with the results, I'm very conscious that we live an unusually uncertain times. This drives our conservative approach to managing our balance sheet and provision levels and our careful stance towards the expected deterioration in the global economy.

With that, thank you very much, and let me turn it over to Anna.

[Angela Cross, executive]

Thank you, Venkat, and good morning, everyone. Q3 was another quarter of delivery across our businesses, contributing to a year-to-date statutory RoTE of 10.9% despite elevated litigation and conduct costs. We delivered a RoTE of 12.5% for the quarter. PBT was up 6% year-on-year and EPS was 9.4p. The CET1 ratio ended the quarter at 13.8%, and we remain highly liquid and well funded with a liquidity coverage ratio of 151% and a loan-to-deposit ratio of 72%.

As Venkat mentioned, we reached resolution with the SEC on over issuance. As expected, the net profit effect of the over issuance in the quarter was immaterial. However, there were offsetting effects on income and costs, and there's a slide giving the details in the appendix. I'm going to exclude those effects in my commentary on the cost and income trends.

As in recent quarters, this robust performance is being driven by broad-based income momentum. Income was up 17% or total costs were up by 18%. However, operating costs which exclude LSC, were up by 14%, reflecting our focus on positive jaws. Both income and cost numbers are, of course, affected by the stronger U.S. dollar.

Impairment was GBP 381 million, up from GBP 120 million last year, and I'll say more about provisioning and our coverage level shortly. But I'm going to start with income momentum.

All 3 operating businesses delivered income growth. In the Investment Bank, whilst the market environment for primary assurance remains challenging, that same environment is driving high levels of client activity across both financing and trading in the markets businesses. So in the CIB, income grew 5% against a strong comparator with markets up 22% in U.S. dollars, more than offsetting the reduction in banking. The standout in market is again FICC up 63% in U.S. dollars. Clearly, the volatility across global markets provides a tailwind for this business as we help clients manage their risk. However, FICC comprises both intermediation and the more stable financing revenues.

Fixed income financing balances are up over 30% year-on-year, and margins have widened as rates have risen globally. The trends give us confidence in a more sustainable base effect income as volatility subsides.

Equities revenues were down 21% in dollars. Whilst derivatives were weaker, the year-on-year growth in our equity financing income provides a good base for sustainability. Overall, our Q3 share of wallet and markets has increased by over 100 basis points year-on-year compared to peers who have reported so far.

Investment banking fees were down 54% in U.S. dollars, broadly in line with the reduction in the industry fee pool. However, the deal pipeline is strong.

The corporate and consumer businesses are well positioned for the rising rate environment forever boosted by transactional growth and indeed nominal economic activity. Although corporate income overall was down 17%, the strong growth in transactional banking significantly offset the corporate lending income expense.

Income in CC&P increased 54%, reflecting strong growth across all 3 constituent businesses and including the effect of the stronger U.S. dollar. In International Card, income was up 68%. In contrast to the U.K., we grew average balances strongly in the U.S. by around 30% or $6 billion year-on-year, both organically and with the $3.3 billion GAAP book.

In payments, income grew 15%, and the Private Bank achieved 44% income growth with the continued build in client assets and liabilities up 14% to GBP 138 billion.

Barclays U.K. grew income by 17%, notably in Personal Banking where earnings on deposits in the rising rate environment more than offset very competitive mortgage margins.

Before I talk about interest rates, it's worth noting that our franchise is a global one with a little over 40% of income in U.S. dollars. Clearly, this has an FX translation impact but more importantly, demonstrates our exposure to the U.S. economy and capital markets.

Moving on to the effect of interest rates, we have maintained a consistent hedge strategy for a number of years, the aim of which is to smooth the impact of the interest rate changes on net interest income. Each month, we currently roll 4 to 5 billion of the hedge, mainly into 3- to 5-year rates. The consequence of this is that Barclays has sensitivity, not just a base rate, but also to the yield curve.

The left-hand chart on the slide illustrates then for 25 basis point parallel shift in the curve. In year 1, the majority of the sensitivity comes from product decisions around the pass-through of increased base rates to customers. But thereafter, with a cumulative effect of the hedge rolling on to higher rates, the hedge impact becomes more significant and reaches around 2/3 of the [ GBP 500 million ] increase by year 3. But of course, this is just illustrative, and is not a prediction of what will happen with multiple rate rises.

On the right-hand chart, we have shown the actual impact in recent quarters. Given the recent move in the yield curve, we were locking in an average 5-year swap rate of 3.05%, for example, in Q3 following the average yield on the hedge up to 93 basis points.

We have around GBP 50 billion maturing in 2023. Although we don't know exactly where swap rates will go, the likely uplift on the current hedge yield is clear, even if the rate cycle is shorter or shallower than current expectations. And of course, that is locked in with each passing month.

Looking now at costs, the Q3 figure was GBP 3.6 billion, but this is net of a reduction in over issuance costs of GBP 0.5 billion. Excluding that, costs would have been GBP 4.1 billion, up from last year's equivalent of GBP 3.5 billion. This increase was partly attributable to the other litigation and conduct charges of GBP 164 million.

Operating costs, which exclude L&C, increased 14% against income growth of 17%. This increase of 0.5 billion included FX movements and inflation plus investment spend focused on our 3 strategic priorities. Around 30% of our costs are in U.S. dollars, so the 14% change in the U.S. dollar rate year-on-year has a significant translation effect. The currency effects have been more pronounced quarter-on-quarter with a 6% strengthening in the U.S. dollar.

Assuming an average dollar rate of [ 112 ] for Q4, we expect total operating expenses for 2022 to be in line with our previous guidance at around GBP 16.7 billion with a tailwind from both net L&C credit of GBP 0.3 billion in Q3 being broadly offset by the stronger dollar and other cost inflation.

I'm not going to give absolute cost guidance for 2023 at this stage, but we will continue to manage the trade-off between cost efficiencies and investments. Of course, a strong dollar will affect the sterling cost figure, but with over 40% of our income in U.S. dollars, this is positive for the cost income ratio. We manage our statutory costs, which include litigation and conduct charges and are very focused on generating positive jaws on a statutory basis.

Moving on to impairment, the current macroeconomic outlook informs our approach to provisioning. But before I look at how this affects impairment, I want to summarize briefly the evolution of key portfolios in recent years. The U.K. mortgage book has grown by 13% since December 2019, but the average loan to value has declined, and only 2.3% of the book has an LTV over 85%.

Our U.K. Cards book has reduced by around 40% over that period. We continue to see high levels of repayment across the credit spectrum and arrears rates remained stable at low levels.

By choice, we have a different dynamic in U.S. Cards. Whilst repayment rates have also been high, we are growing balances, including through the launch of the GAP partnership. However, the quality of the book as measured by average FICO scores has improved and arrears rates are still below the pre-pandemic level.

Wholesale balances have increased recently, but the majority of the growth has been in debt securities, collateralized lending to financial institutions and the lower risk areas of corporate lending. In addition, we have increased our first loss credit protection over the corporate loan book, thereby reducing our exposure to loan losses. 35% of this book is now covered by some form of protection, up from 26% pre-pandemic.

Across our portfolio, we feel confident that we are well positioned. As you can see on the next slide, our title impairment allowance was GBP 6.4 billion, an increase in the quarter from GBP 6 billion. And this includes GBP 0.7 billion of post-model adjustments or PMA for economic uncertainty.

The forecast macroeconomic variables on net we have used at Q3 for models impairments are shown in the appendix. These show some deterioration compared to Q2. For example, modeling baseline U.K. unemployment of 4.4% in 2023, up from 4.1% and U.S. unemployment of 4%, up from 3.5%. Applying these maths to the Q3 balance sheet had an effect of around GBP 300 million, but we created the PMA for economic uncertainty to capture this type of deterioration. So in the quarter, we have released around GBP 300 million of the PMA balance. Therefore, the model's allowance plus the economic uncertainty PMA is roughly flat quarter-on-quarter at GBP 5.2 billion and covers the further modeled increase we would see if we were to use our Downside 1 scenario.

We still don't see significant signs of deterioration in credit metrics. Although coverage ratios overall are slightly down on pre-pandemic, we have increased coverage for Stage 1 and Stage 2 credit cards, as you can see in the appendix slides. The chart on the right shows the overall loan loss rate over recent years. Ignoring the volatility during the pandemic, you can see that it has been around 50 to 60 basis points. Although this is sensitive to the portfolio mix, we think it's a reasonable range to be considering for us through the cycle loan loss rate.

In Q3, this was 36 bps and the charge was GBP 381 million, and we expect this to rise modestly over the coming quarters as we grow. This is obviously subject to further potential deterioration in the macroeconomic outlook beyond that, which could be offset by the uncertainty PMA balance of GBP 0.7 billion.

A quick summary now on our results of our business. In CIB, income grew 5% against a strong comparator. I focused on the key drivers earlier, but I wanted to go into a bit more detail here on the corporate income. Transaction banking was up 57%, reflecting strong NII growth, and we would expect further growth in Q4. The corporate lending income expense reflected both fair value losses on leveraged finance lending of GBP 190 million net of mark-to-market gains on related hedges and also higher costs of hedging and credit protection. The underlying corporate lending income remains stable.

Operating costs, which exclude L&C, increased by 17%, reflecting the 14% appreciation in the U.S. dollar, and investment in talent, systems and technology to support income growth initiatives plus the impact of inflation.

The cost income ratio was 62%, excluding the effect of over issuance. Overall, the CIB generated a statutory RoTE for the quarter of 11.9%.

We are pleased with the sustainability of the business through the pandemic and current geopolitical disruptions. The franchise is developing well and over half of the income is dollar-based, reflecting the strength of our position in the largest global capital market.

Moving on to CC&P. Income increased 54%, reflecting growth across international cards, payments and the private bank, as I mentioned earlier. Total costs were GBP 835 million, which included GBP 102 million of litigation and conduct, mainly in respect of our review on legacy loan portfolios. Excluding this, the increase in operating costs was 30%, principally investment in the growth of partner brands in U.S. Cards and the dollar strength, but still delivering positive jaws.

The impairment charge was GBP 249 million compared to GBP 110 million last year. This reflected growth in U.S. Card balances back to pre-pandemic levels with some normalization of economic activity. As balances grow, we do expect some stage migration but risk metrics remain below pre-pandemic levels. The RoTE was 9.5% despite the L&C charge.

Turning now to BUK. Income grew 17%. Our costs were up 2%, delivering strong positive jaws and reducing the cost income ratio by 8 percentage points to 56%. The NIM for the quarter was 301 basis points, up 30 basis points from Q2 as we saw benefits from rate rises, and we've shown a bridge on this slide analyzing that. We're continuing to guide for the full year to a range of 280 to 290 basis points and expect to be in the upper part of that range.

The cost phase that we flagged previously provides significant offset to cost inflation, and we're keeping a tight control over credit risk. There's a slide in the appendix on the head office result.

Turning now to capital, the CET1 ratio ended the quarter at 13.8%, an increase from 13.6% at the half year and comfortably within our target range. Our capital generation from profits was strong, contributing 43 basis points. We completed the half year buyback, returning capital to shareholders and further reducing the share count to 15.9 billion, but down 1 billion in the last 12 months. Combined with the dividend paid and accrued, this was a return to shareholders of 22 basis points.

Over time, increases in interest rates are a tailwind to profitability, but the effect on reserves from market movements caused a headwind of 12 basis points in the quarter, principally through the fair value effect on bond holdings.

The completion of the rescission offer and termination of related hedges released RWA, increasing the ratio by 17 basis points. FX had little net effect given our policy of hedging the ratio with an increase in RWA, but also a positive effect on the currency translation reserve in the numerator. Our MDA Hurdle was 10.9%, so we have comfortable headroom. We remain confident in the organic capital generation and our target range remains 13% to 14%.

A quick comment on the moves in equity. TNAV decreased 11p in the quarter to 286p per share, reflecting the effect of increased interest rates, partially offset by earnings and the benefit of stronger dollar on reserves. Finally, on leverage, our spot leverage ratio was 5%, and the average leverage ratio was 4.8%.

So to summarize on targets and outlook. We reported statutory earnings of 9.4p per share for Q3 and generated a 12.5% RoTE against our target of over 10%. We continue to target a cost income ratio of below 60% and our capital ratio remains strong at 13.8%. We have confidence in the continued revenue momentum across all of our businesses. We continue to focus on the cost trajectory given the inflationary pressures and have maintained our cost guidance for the year of GBP 16.7 billion.

We are well provisioned in readiness for potential deterioration in the macroeconomic environment, but expect a modest increase in quarterly impairment charges over coming quarters as we grow.

Overall, the business performance is robust, and we remain focused on delivering our target of double-digit RoTE this year and on a sustainable basis going forward. We are confident of being able to invest for future growth and delivering attractive capital returns to shareholders.

Thank you, and we will now take your questions. [Operator Instructions].

[Operator]

[Operator Instructions] Our first question is from Alvaro Serrano from Morgan Stanley.

[Alvaro de Tejada, analyst]

One question on costs and other on asset quality, please. On costs, I heard you, Anna, saying that you're not going to talk about 2023, and I don't expect you to give a hard number. But if I take your guidance for this year, it looks like operating expenses are annualizing north of GBP 16 billion, considering there's inflation, likely inflation, and consensus is closer to GBP 15 billion, so there's a significant delta. Is there any sort of cost actions or anything I should bear in mind in that number beyond, obviously, the exchange rate? Any actions you're able to take, or do you feel there's even more flexibility on variable comp than in other times of -- in other times of the cycle?

And the second question is around asset quality. You said that you expect a trend towards through-the-cycle loss rate. Obviously, there's been some changes in the mix increasing sort of retail cards in the U.S. and shrinking the U.K. I don't know if you can update us on what that number looks like now. And related to that, in your Downside 1 scenario, I think you've got accumulated almost 20% correction in house price. What impact would that have on RWAs?

[Angela Cross, executive]

So let me take costs first. So we guided this year to GBP 16.7 billion. That has an assumption embedded within it, that the fourth quarter dollar rate will be [ 112 ]. As we look forward into next year, here's kind of how I'm thinking about it. We would expect that given we've seen elevated levels of L&C this year for that to be considerably lower, however, the FX impact that we've seen intensifying through the year, you might expect annualize into next year. So if rates stayed at [ 112 ] that would be about GBP 500 million of cost increase into next year. But what we have to remember is that, that has a greater impact on the income line. So the equivalent to that GBP 500 million in income terms would be [ 1 billion ]. So as you're updating your cost expectations, I would encourage you to think about the FX impact in income as well.

As it relates to other factors, clearly, there is inflation, but you've also got the investment that we focused on our 3 strategic priorities. You can see that's not deployed equally throughout the bank. In terms of actions, we could clearly modify that investment plan, but to the extent that we feel that it's driving revenue growth, obviously, we'll be thoughtful about doing that.

In terms of managing inflation, we do have efficiency programs in place. You can see that particularly in the U.K. where you've got strong income growth dropping to the bottom line with minimal cost growth. So I would say, consider the impact of efficiency programs there. I mean, obviously, also, if we see a drop in CIB revenue, we've got another lever in comp. But overall, I'd just leave you with a message that we're very focused on the RoTE target and very, very focused on delivering positive jaws.

In terms of asset quality, it's difficult to give you an adjusted version of that historic number. You're right. We're actively growing balances in U.S. Cards. We're seeing them fall away in U.K. cards. But at the same time, you can see that the level of risk that we're holding in the balance sheet versus pre-pandemic is lower. And well, to some extent, we're going to have to see how that pans out. So it's lower because LTVs are lower, and actually, if you look at the staging, you can see that the proportion of Stage 1 and 2 balances is also considerably higher than it was pre-pandemic.

And to your final point, we haven't seen [ proceeds ] in our RWAs yet. You're right. If there was a substantial decrease in HPI, we would expect that to impact the loss given default in our capital models, and would lead to some RWA pressure. And they equally remember that within there, there's the probability of default piece as well. And therefore, you should consider the strength of customer balance sheet as we sit here today. So we'll update on that as we see it happen. But to date, no signs.

[Operator]

Our next question is from Joseph Dickerson from Jefferies.

[Joseph Dickerson, analyst]

You already answered my question on the FX sensitivity there, on revenue versus costs. But I guess just on capital return, Venkat, I think you've spoken earlier this year about the conversion of earnings and the buybacks, and you did GBP 500 million at Q2. I guess, what held you back at Q3, given you've got clearly a reasonable capital buffer? Yes, there's some headwinds coming in Q4 from pension at Kensington, but another GBP 500 million, I don't know, what is 14, 15 bps of capital. Is this a management decision around being prudent? Or are there other regulatory considerations at play here?

[Coimbatore Venkatakrishnan, executive]

Joseph, it's a position which we will take in Q4. I mean, basically, that's it. We sort of did it at the year-end and the half year this year. And so we will talk about that on our annual earnings.

[Operator]

Our next question is from Jonathan Pierce from Numis.

[Jonathan Richard Pierce, analyst]

A couple of questions, one on the hedge and one on these fair value movements, if that's okay. The hedge, there was another GBP 10 billion, I think, added to the notion in Q3. I don't know whether FX has any influence on the size of that hedge. But clearly, in the U.K. bank, deposits haven't grown now for 3 or 4 quarters, but the hedge is still building. Just wondering, are you now fully hedged, do you think?

Thinking about, excuse me, headwinds in the other direction moving forward, are you yet seeing any early signs of the hedged balances, particularly the 0% current accounts starting to shift into higher rate deposit accounts, either within Barclays or to other institutions? That's the first question.

The second question, the fair value movements through OCI, particularly regard to the debt portfolio. They were fairly small actually in the third quarter versus what we saw in the first half despite much bigger movement in interest rates. I've always been slightly confused as to what this portfolio is. And I guess the question is, given the extent of the rate moves we're now seeing, can I ask you to give us a bit more detail on why you have this seemingly unhedged debt pool? And can I infer from the relatively limited impact in Q3 that you've reduced the sensitivity to rate movement slightly significantly over the course of the last quarter or 2?

[Angela Cross, executive]

Jonathan, on the hedge, the movement quarter-on-quarter is not a sterling movement. It actually relates to -- because your rate -- central bank rates have gone from negative to positive, it's a change in eligibility. So it doesn't impact the U.K. sterling parts ahead at all. So you're right, U.K. liabilities are broadly stable. We are seeing some take-up of savings products, but actually in a positive way and in a way that's completely in line with our expectations. We've got some good savings rates out there. And so we're seeing customers migrate to those as we expected them to. And all of that within our rate -- sorry, our hedge assumptions and the way that we created a buffer in that hedge.

As it relates to your fair value through OCI question, I can see why you might have expected a larger impact. If you look at the disclosure in the annual report, that gives an amount for a 25 basis point shop. And I guess your question relates to the fact that the gilt curves moved by more than that. What's going on here is, firstly, the disclosure in the annual report actually includes not only the liquidity buffer but shows the impact on the pension fund assets because the pension is in surplus, those movements are obviously neutral to capital. So you're not seeing that go through.

And then in relation to the liquidity buffer itself, a couple of things. Firstly, the portfolio is diversified. It's not just gilt. So there's a range of products in there. And secondly, we have taken down that risk. We've reduced outright risk as the year has progressed. And it's that really that's giving the smaller result in the third quarter.

[Operator]

Our next question is from Rohith Chandra-Rajan from Bank of America.

[Rohith Chandra-Rajan, analyst]

Congratulations on a record FICC performance in the quarter. Just on, I guess, I mean, you discussed, Anna, in your comments that volatility is particularly heightened at the moment and you'd expect these trading revenues overall to decline over time. So in terms of helping us to think about the offsets to that, you mentioned FICC financing. I don't know if you can help us with what sort of proportion of FICC revenues that is and how that's grown year-on-year or over time. You mentioned a 30% increase in balances but just in terms of -- and wider margins, but just in terms of the revenue contribution?

And then more generally, just how we should think about CIB revenues over the medium term versus very strong revenues for the last few years. So if trading income declines, what are the offsets to that? And how should we think about the medium term? And then the second area is just on asset quality. U.S. Cards particularly 30 days picked up in the quarter. I don't know if there's anything that you'd want to highlight there, in particular. And then back on your Downside 1 scenario, you've already talked about the sort of 20% HPI impact. So if I understand correctly, your current reserves effectively are equivalent to something like a 2.5% GDP contraction, 6.5% unemployment and 18% to 20% HPI. I just wanted to confirm if that's the case. And then also how quickly you think provisions normalize? What will be the drivers for that?

[Angela Cross, executive]

Okay, I'm sure there's at least 2 questions if not a little bit more, but I'll let you get away with that. Okay. So we are pleased with FICC. That's our third quarter at over GBP 1.5 billion. And there's a few things in that. We've called out obviously the financing revenue. After proportions, that will move around a bit depending on what's going through trading. So it's actually -- we think it's actually a less helpful start. But we have seen balances grow by over 30% year-on-year. Spreads have widened. But more broadly than that, I think even in the flow side of FICC, we are seeing increased share pretty much across markets now. We think that's as a result of our client focus, but also the investment that we have put in the infrastructure and the talent in that business. So you're right, when volatility recedes, we might expect revenues to drop back. But they won't drop back, we believe, to levels pre-pandemic. And we think that's the most important thing.

What are the offsets to that? Well, there's clearly banking is having a quieter period right now. That is clearly driven by the same piece. Volatility in the market gives us elevated market revenue, depresses banking. So we'd expect that to come back somewhat. The other piece to remember because we always all forget is corporate and particularly transaction banking. Transaction banking is a stable franchise business, but one that is also benefiting from the investment that we've put behind it. You're seeing balances grow, you're seeing margins somewhat wider, but also through kind of nominal economic activity is staying sort of trade [ finance ], FX, et cetera, goes through there in fees. So whilst individual pieces might drop back, Rohith, we do have, I would say, increased confidence in the whole.

Venkat, before I go on to U.K. Cards, is there anything you would add for U.S. Cards?

[Coimbatore Venkatakrishnan, executive]

Yes, I think I would echo what Anna said about confidence in the whole. I think as rates have risen and spreads have widened, system cum financing, not just balances, but profitability per unit of balance has increased. And it's long been part of the DNA of Barclays, we've got a market-leading position in this area. So I think it's part of a broad set of things within the markets business that represents a diversified portfolio of activity. But I think look to this in this kind of environment to provide an increasing -- I mean, a strong amount of balance to our returns.

[Rohith Chandra-Rajan, analyst]

So sorry, just before we move on to the cards, could I just -- if you don't want to -- I appreciate, I don't want to give a proportion, but just can you help us scale the contribution from FICC financing?

[Angela Cross, executive]

We wouldn't give that out on a call like this, Rohith. We'll continue to consider our disclosure around FICC and indeed the other parts of the market, and we'll come back to you on that.

On U.S. Cards, arrears have ticked up a little. Balances are growing. We're seeing increased economic activity in the U.S. manifesting itself in our cards. But people are spending more, we're seeing organic growth. Given that movement from a very, very low base, we would expect to see some movement in staging and some movement in delinquencies. So we're not concerned by what we're seeing. It looks broadly in line with industry. It's what we would have expected. It remains quite a long way below pre-pandemic. And the fundamentals of the U.S. economy are pretty strong. Unemployment at 3.5%, and we're still seeing strong levels of repayment across that book. So no concern now.

I would -- so let me move on to your final part, which was around the disclosure on Downside 1. So yes, what we've done is we've shown you what would happen if we weighted 100% to Downside 1 scenario. And we've called out for you the main macroeconomic variables that Downside 1 represents. So 6.5% unemployment in the U.K., for example. So you're right, that's the comparison we're drawing. So in other words, if we saw Downside 1 pan out exactly as we show it in that model, then we would expect to cover it with the PMAs. Sometimes the macroeconomic variables don't flow exactly the way we model them to. So that's a specific scenario that we're calling there. But we feel like we're well covered. Finally, on provisions, just remind me of your last...

[Rohith Chandra-Rajan, analyst]

There were 2 topics, but the pace of normalization.

[Angela Cross, executive]

Yes, so the pace of normalization. I guess we would expect to trend towards that 50 to 60 as we grow and economic activity recovers. The thing I'd just call out for you is given the nature of IFRS 9 that pathway won't necessarily be linear. We can see some lumpiness. So that's more a sort of go-to position once we see economic volatility sort of settle down a bit.

[Operator]

Our next question is from Omar Keenan from Credit Suisse.

[Omar Keenan, analyst]

I've also got a follow-up question on the Downside 1 scenario, and a second question on bank taxation. So firstly, on the Downside 1 scenario, thank you for that helpful disclosure. And I think we can more make kind of assumptions of various downside cases, but GDP down to unemployment of 6%, probably not as bad as you can imagine things, but it's probably a reasonable downside case for now. So if things were to materialize in that direction, could we assume that there would be a smooth allocation of the post-model adjustments towards the modeled provisions, kind of somewhat like we have seen this quarter? Or do you think there could be pressures to keep the uncertainty buffer at a high level despite the macroeconomic deterioration?

And just related to that, could I ask you how confident you feel in that Downside 1 model scenario? I guess the question is that with interest rates where they are, could that affect the ability of otherwise performing exposures to pay. Just want to get a feel as to how confident you are in that modeled number given that is a model.

And then the second question on bank taxes, obviously, there's a bit of discussion around where the surcharge is going to be set. I wonder if you can give us any update there and whether you've had any discussions with the Bank of England on reserve tiering.

[Angela Cross, executive]

Omar, good question on the impairment. We'll take that quarter-by-quarter. You can see what we've done this quarter. We've seen a general sort of movement in the [indiscernible] and we broadly offset that. And the answer is whether or not or where that impairment starts to manifest itself. So for example, in the U.K. -- in the U.K. retail bank, we are holding a sort of general economic uncertainty PMA, whereas in the wholesale side of things, we have much, much more sector-specific. So I would expect it to have some smoothing impact. Whether or not it's exactly smooth quarter-by-quarter will depend where that impairment manifests itself.

And in relation to Downside 1, I mean you're right, no model is ever perfect, and I'm going to hand to Venkat in a moment because I know you'll have a view. These models were built during periods of low interest rates. And so there is clearly an impact on affordability from inflation and from interest rates, which is difficult for those models to represent. But that's why we've been conservative in our Stage 1 and Stage 2 provisioning. So when you look at the Stage 1 and 2 provisioning across the unsecured books, in particular, that's how we're trying to protect ourselves against that.

[Coimbatore Venkatakrishnan, executive]

Yes, I mean, exactly right, Anna. I think what you should see -- look at is the combination of the model output plus our extra post-model adjustment as our view of what we think is appropriate given the current macroeconomic conditions and the uncertainty of the model behavior around it. Now if conditions change and we get less uncertainty, we will do what we just did this quarter. But it's sort of -- we're also looking at signs of consumer behavior, and we will make adjustments to that. But I think you've got to expect all other things being equal, that we would look at it the way we did this quarter.

And if I can then go to your second question, which is about taxes, and you have 2 parts. One is reserve tiering and the other was surcharge. Look, on the overall taxation matter, it is something for the government and for the [indiscernible] to say, we read the same newspapers as you do. And so we'll wait for the budget statement to know what it is and on reserve tiering, I think the Bank of England has been fairly clear that they don't believe in reserve tiering as tool of monetary policy. So we'll go with that too.

[Operator]

Our next question is from Chris Cant from Autonomous.

[Christopher Cant, analyst]

Thanks to the FX color in the slides as well. That's much, much appreciated. If I could just invite you to talk about your view on returns into next year, please. You've had a very long-standing, greater than 10% RoTE target. I think you originally gave that back in 2017 as a medium-term target. You're expecting to deliver that this year despite obviously the shelf over issuance charges you've taken, which you're not expecting to repeat next year. Your TNAV is dropping because of rates. You've got a meaningful FX tailwind, per your earlier comments, looking into next year. Should you not be targeting something more punchy on a forward-looking view?

And do you expect to be revisiting that 10% figure, please? And then on the structural hedge, obviously, we've had years of growth in the structural hedge. It's up very materially since pre-COVID levels. I appreciate your comments about some migration into savings products as an alternative to current account. Do you expect your structural hedge notional to shrink in the coming years, please, do you expect that size to be coming down as the yield is in...

[Angela Cross, executive]

Okay, so on returns, you're right, we've made good progress towards that target for FY '22, and we delivered greater than 10% in FY '21. The target is deliberately a slow -- so it's greater than 10%. And you can see that for a few quarters now, that's where we've set our expectation. And we won't update, Chris, at this juncture. I'll take your point on TNAV. But given the effect on reserves of some of the macroeconomic volatility that we've seen, that TNAV number is moving around quite a lot. It's probably moved significantly since the quarter end, again, I would think. So we're not going to update at this point. But I would just note it is a floor to our expectations. Venkat, anything you'd add?

[Coimbatore Venkatakrishnan, executive]

I'll repeat what Anna and echo what Anna has said, which is it is a floor. You're right that we said it in 2017 is a medium-term target, and I'm glad we've lived up to that medium-term target. And we'll continue to think about it. Do you want to go to the second?

[Angela Cross, executive]

Yes, sure. So when we put the structural hedge together, Chris, you'll note that we've done it over a series of quarters. We've been very thoughtful about how we've built the hedge and at all stages, we've assessed the outflow risk versus the opportunity cost of not putting their hedge on. And we've obviously maintained a buffer for conservatism as we put that together. That buffer contains our expectations of product migration. If that proves to be wrong, obviously, we are rolling a portion of the hedge month-by-month as well. So that gives us further flexibility. But to date, the moves that we've seen have been in line with our expectations, and we did build it conservatively, we believe.

[Christopher Cant, analyst]

So if -- I mean I'm just trying to think through everything you just said there, the size of the buffer that you had in scaling the hedge took into account, things like large competitors' offering to 75 bps on instant access savings and 4% on 1-year fixed bond, that was sort of part of your scaling of the hedge? I guess the move in rates in recent months has been very dramatic. We're talking about U.K. base rate going to maybe double the level of consensus would have been thinking about even 3 months ago. But that was part of your scaling of the hedge, you were factoring in that magnitude of rates movement?

[Angela Cross, executive]

So as we scale the hedge, we identify what we believe are rate-sensitive -- rate-sensitive balances. So in part, yes, clearly, not the specific rates that you've quoted their rates are moving all the time. We have a -- we believe we've got a competitive savings products ourselves. And actually, we're seeing a little migration and in fact, thought to be no migration out of the bank and migration within our expectations to those products. So I mean, that's probably where I'd leave it, Chris. We do consider migration when we put the hedge together.

[Operator]

Our next question is from Martin Leitgeb from Goldman Sachs.

[Martin Leitgeb, analyst]

I was just going to ask a broader question with regards to the outlook for your U.K. business and just specifically with regards to mortgage rates. Mortgage rates in the U.K. have risen from around 2% at the turn of the year to around 6% most recently. And I was just wondering how do you see this impacting your business? One, in terms of affordability? Has the underwriting been at such a level that essentially the back of your mortgage borrowers can essentially afford this higher rates without cutting spending too much?

And secondly, in terms of what this higher mortgage rate means in terms for the outlook for growth in terms of balances both on the loan side, so mortgage growth, credit card growth, but also in terms of deposit balances could the higher mortgage rates essentially be an incentive for customers using some of their deposits to more aggressively pay down mortgages as incentives [ leading to a ] meaningful change in terms of the outlook for growth?

[Coimbatore Venkatakrishnan, executive]

Let me try to take the first crack at it, and I'll ask Anna to join in, good questions all. First of all, on mortgages, we've got a very large mature book. Our average LTV is around 50%. The way the U.K. market is with a combination of 3-year and 5-year effects, about 30% of our mortgage book will refinance over the next year, let's say, by the end of 2023. And so a little bit of that in 2022 and about 1/4 of it in 2023. And so what that does, and to part of your other question is, obviously, when we do issue mortgages, we do stress them with a fairly big shock in interest rates in terms of affordability. So the combination of that and the fact it's about 25% to 30%, I think mutes its impact on its portfolio. And I think also what you want to -- what we are seeing in the U.K. is a little bit of monthly over payments. It represents 20% -- 20 basis points, sorry, of our total balances. It's a very small fraction. But you are seeing it, which is good from a credit quality point of view, but it's also prudent financial management, as you might expect. So I think broadly, the behavior is, as you would expect it in an environment like this. Anna?

[Angela Cross, executive]

Yes, I think I'd agree with all of that. And the other thing I would say is that given the house price inflation we've seen over the last few years, the LTV of the customers coming to refinance now will be lower than it was when they took out their mortgages. And that might be part of the incentive that's behind the overpayment trends that we see right now, the opportunity to sort of move yourself down an LTV bracket.

From here in, in terms of sort of loans growth, I would say this feels like a remortgage market rather than a house price market. That will necessarily lead to lower net growth, I would think. So I'd expect to see strong remortgage demand but a large part of that will be churn in the market. In terms of sort of the rest of loans growth, I mean you can see from repayment rates that we've sort of talked about in cards, IEL growth, the interest-earning lending growth in cards will probably be a bit sluggish as well. But given where we are in the credit cycle, I think we're okay with that. So probably a little bit more muted on loans growth. And similar in deposits, in comparison to what we saw during the COVID period, we've already seen that slow down a bit seeing a bit of migration, but within our expectations as customers putting that money to work, whether that be in savings or indeed through mortgages.

[Martin Leitgeb, analyst]

Could I just follow up on the outlook for cost growth in the U.K. It was obviously started the year with a very strong trend. Would you expect that to slow down as a consequence?

[Angela Cross, executive]

Card growth in the U.K., I would say -- so let me distinguish 2 things. I think headline growth or headline balances may grow, but that's in part our strategy. We are trying to pivot the book towards spend rather than lend, our newer way of product is doing pretty well in terms of take up. I wouldn't expect that to translate through to significant increases in interest-earning lending. Customers are being very cautious in the current environment and the repayment rates that we are seeing remain very elevated.

[Operator]

Our next question is from Edward Firth from KBW.

[Edward Firth, analyst]

I just had a couple of questions really both around credit. What I'm trying to do in my mind is I'm just trying to square your comments at the beginning about the outlook for the U.K. and the demand in an uncertain environment, and I guess that's sort of consistent with what consensus is viewing the U.K. with your comment that you expect provisions to normalize because it seems to me those 2 are inconsistent. Either that means your normal provisions is not a normal provision, it's actually a peak provision, and we should be thinking about Barclays through-the-cycle provisions being much lower than perhaps you have done in the past? Or potentially, we could see provisions go somewhere above normal because the environment is not normal, I guess, I suppose that would be my first question.

Just really to understand how you're talking about normalized in the economic outlook. And I guess related to that, in terms of your PMAs, am I right? Just to get this clear. If you hadn't released the GBP 300 million PMA, sort of override, your charge this quarter would have been about 70 basis points. Is that -- I just checked that my understanding is correct on that.

And then finally, could you tell us something about what's happening at the front line in terms of just in the last month? I know it's not really part of the quarter, but I'm thinking we saw this big uptick in mortgage costs really just over the last month. And I just wondered if you could give us some insight in terms of what is happening in terms of volumes of new business in October. Are you seeing an uptick in rejection rates? Are you finding that people are not meeting your affordability criteria anymore? Or just something that's very specifically in the last month really since the results end rather than during the quarter, if that would be okay.

[Angela Cross, executive]

Ed, so let me deal with the simple one first. And so your articulation of the impact of the PMAs is exactly correct. However, what I would say is that, that's exactly why we established the PMAs in the first place because we felt that the economic environment was extremely uncertain and that the consensus that we were using for the models did not adequately capture the best that we have. So that's what we expect it to happen, that is what happened. And therefore, that's why we released the PMA.

In relation to your credit question, I think I followed it. So let me have a go. There's a bit of a dichotomy here between what we see now on the ground, no visible stress and the macroeconomic forecast and indeed beyond those macroeconomic forecast into some of the economic commentary. So there's a number of different views that we are dealing with here. But to a certain extent, it points to the conversation we had before, which is we would expect to trend towards a through-the-cycle cost of risk. But if we are to see macroeconomic shocks in terms of expected environment, in 1 direction or another, I would expect that to be lumpy. That's just the nature of IFRS 9 and a little bit of what you've seen in the current quarter.

[Coimbatore Venkatakrishnan, executive]

Let me take the other question about what's going on in the front line, especially since the end of September. Well, obviously, the end of September came in the middle of the peak of the scale volatility. And the -- outside of the capital markets, there was a bit of a rush for people to adjust their mortgages fearing even higher rates. And what we were doing was we were processing the applications, and we saw a little bit of an uptick on that. On the consumer -- on the credit side, what I would say is initial conditions coming into this has been very strong. So a high consumer balance sheet, high amount of support that people have experienced in COVID, low unemployment which continues. All of these things continue. And then, obviously, higher energy prices, but increased government support to manage those energy prices. So with all of that and with our rising cost of living and then at the end, higher mortgage rate, we're seeing a little bit of decline in consumer confidence in our own private pooling of it. So how people feel about their consumer -- about their finances. We see people being more careful in their spending and the management and certain nonessential types of spending, but we are not seeing credit stress. About 1% of our customers are in financial assistance, which is a fairly low number. So we're not seeing it. Obviously, we have to be cautious because we don't know how much deeper some of these things can get. We are in the middle of a rate rising cycle, which just generally tends not to be good for growth. Growth in the U.K. has been low anyway. So we've got to be cautious looking ahead. But as sort of a live indication right now, people are managing their finances carefully.

[Operator]

Our next question is from Guy Stebbings from BNP Paribas Exane.

[Guy Stebbings, analyst]

The first one was just on the appetite to lend in the U.K. right now. I guess, you've given a bit of a flavor around why you're happy to see sluggish growth given the backdrop. But how does that sort of play into the spreads you'd like to get on new lending? Obviously, there's a lot of volatility on mortgage rates given where stock rates have moved. The interest in where you'd expect things to settle if we see some stability in swap rates. I mean should we expect slightly larger spreads than what we might have seen in recent history given just to account for high risk of credit losses, RWA migration, et cetera? So that's the first question.

The second one was on ECL coverage. It's been clear there's been very little change in the quarter. And I know you've reduced the weighting for downside scenarios in the IFRS models, you might expect the opposite. Although appreciate Downside 2 scenario is very severe. But in coverage terms, I think most would say things have got worse, not better than the last 3 months for, say, mortgage debt service ratios, et cetera. Is it just the case that it's just not bad enough to really move the needle on the ECLs that you would look to hold? And just a quick follow-up on that as well. Thanks for all the color on the downside scenarios. Can you just remind me how you account for negative stage migration into, say, wholesale Stage 3, for instance, when you come out with those ECL numbers?

[Angela Cross, executive]

Okay. Let me try those and I'm sure Venkat will add. So in terms of, I guess, lending demand, lending supply and how that plays into margins specifically in relation to mortgages. I mean the mortgage market is competitive. It's always competitive. We've seen it move in line with the yield curve, and we'd expect it to do that. As I said before, pricing will be keen not least because if this is a remortgage market that tends to be very competitive. Customers are remortgaging early, they will be looking for the best possible value. So we'd expect margins to be quite keen not only on the front book, but that will create some churn pressure I would expect also. As it relates to sort of credit expectations and how that plays into pricing, I mean, I would expect that market participants price for us through the cycle view of risk. So increased sort of credit concerns sort of per se, I wouldn't expect it to impact pricing significantly.

In terms of your sort of coverage point, I think we believe that our coverage is appropriate. You've obviously seen it go up from Q1 -- sorry, from Q2 to Q3 in terms of our early-stage coverage in unsecured, in particular, that we feel like we're appropriately covered there. Venkat, anything you would?

[Coimbatore Venkatakrishnan, executive]

Yes, I agree with Anna. Look, we're dealing with an environment that has been choppy. We are dealing with models that tend to be procyclical and which has been built on a period, as Anna mentioned earlier, of generally falling rates and falling employment -- unemployment. So we have to recognize the weaknesses in the models we use, and that's what we've tried to do. And I think we put forward our best estimates. And I think using the combination of the 2, try to manage it in a predictable way related to the environment that's outside. So we feel reasonably comfortable with the way we are reflecting both of these 2 things.

[Angela Cross, executive]

I think if you look at the balance sheet on aggregate, Guy, what you can see is that we've got GBP 6.4 billion of provisions, GBP 2.4 billion of that relates to defaulted stock. So GBP 4 billion that is against non-defaulted stock. And that's in an environment where, as you can see from the chart that we showed in the presentation, we strongly feel that the quality of the book that we have in terms of the risk on it or its shape is lower than it was. And indeed, in wholesale, we've increased the level of first loss protection. So it's actually a number of things coming together and looking at individual sort of scenarios. I don't think it quite captures the extent of our confirm. Could you just repeat your third question, please?

[Guy Stebbings, analyst]

Yes, the third question, sort of follow-on, was just around how stage migration is embedded into the ECL disclosure you give for downside scenarios, just to sort of gauge the relative conservatism of the ECLs that come out and sort of comments around you could switch the PMA to absorb the Downside 1 scenario.

[Angela Cross, executive]

I'm sorry, I still don't understand your question. Guy, we want to just take that out of the room. We'll come back to you, probably need to -- can we have the next question, please?

[Operator]

Our next question is from Adam Terelak from Mediobanca.

[Adam Terelak, analyst]

I have a couple around capital management in the CIB. I know you've had the roll-off of the ETN hedging, but RWA generally just look quite light for the quarter. You've got loans up kind of double-digit Q-on-Q but risk weights are at much less than that. So I was just wondering what's going on behind the scenes there in terms of balance sheet management into quarter end. I know you mentioned kind of you're adding credit hedges on the wholesale portfolio, whether that's had an impact. And then as a follow-on to that, clearly, you guys are involved in a big leverage finance deal, headlines suggest that might end up on your balance sheet. Rather than commenting specifically on the deal, can you just maybe anecdotally talk about how you'd be managing that risk in reference we've already done in the third quarter?

[Angela Cross, executive]

Okay, in relation to capital management in CIB, we're just very disciplined. There's nothing in particular going into that quarter end. It doesn't relate to a quarter end rapid increase in that coverage at all. And I would say through the quarter, we've been helping facilitate client business in terms of what we've been holding on our own balance sheet is actually being handled extremely conservatively. So I don't think there's anything untoward that other than RWA efficiency. Venkat?

[Coimbatore Venkatakrishnan, executive]

So as far as the leverage finance business goes, we've always run a fairly systematic approach to managing the risk and deleverage finance book. I can't comment on the particular transaction. But let me say generally that, that risk management has 2 parts to it. One part of it is to buy protection against extreme movements in markets. And the most recent time that, that's really protected us quite well was during COVID when you had obviously fairly rapid movements within the month of March 2020 and then back in April. The second way is occasionally for what might be large exposures, trying to see if there's a way, again, to protect ourselves against extreme moves in that. So you should expect us to employ both. The first one systematically, the second one opportunistically to try to manage the risk in our leveraged finance book. But that's something we look at closely over time.

[Adam Terelak, analyst]

Just on the loan book, why is it up double digit Q-on-Q, CIB loan book?

[Angela Cross, executive]

CIB loan book, are you looking at the total assets?

[Adam Terelak, analyst]

No, total loans, CIB?

[Angela Cross, executive]

Well, there'll be an RWA impact in the -- sorry, an FX impact in that. So there's some FX inflation. In terms of sort of corporate lending, by the time you sort of strip out the FX, it's not significant particularly. And the increase in the wholesale lending that we've seen has been largely to sort of investment-grade businesses, existing clients, nothing of concern.

[Operator]

Our next question is from Rob Noble from Deutsche Bank.

[Robert Noble, analyst]

Two, please. Can you give us some idea of the composition of your mortgage book split by loan-to-income multiples rather than by loan-to-value? And what proportion of your broker mortgages and your credit card book in the U.K. to lower household income [indiscernible], so if we can get an idea of how cost of living impacts the book that way around?

And then secondly, in Barclays U.K., you're still seeing decent growth in noninterest income. So if I see a decline in real household spending, will that number come down or will the inflation and the nominal growth still see growth in noninterest income for U.K. retail business?

[Angela Cross, executive]

Okay. Rob, let me take this one by one. So we don't give a loan-to-income split. However, like all banks in the U.K., we have some regulatory limits on higher loan-to-income. So loan to income above 4.5x is significantly reduced. In terms of cards, again, we wouldn't disclose that in particular. What I can tell you is that repayment rate across the risk deciles are all elevated so even in what we would describe as lower deciles of risk, repayment rates are significantly in excess of the monthly contractual payment and significantly in excess of what they were pre-COVID. And of course, balances are also lower. So we are identifying clearly customers who we believe are under more financial pressure using our data. But we believe that their behavior is in managing their risk down. In terms of noninterest income, I mean, that is geared in part to card fees and also interchange fees. So it's linked to cards' usage. So to the extent that customers continue to use their cards, but pay them off, we might expect those trends to continue. If we were to see customer spending for shop, then obviously, that number would go down.

[Operator]

Our next question is from Fahed Kunwar from Redburn.

[Fahed Kunwar, analyst]

Just a couple. One on the hedging and one on your U.K. NIM guidance. Maybe I'll start with NIM guidance. This [ opco ] has gone up about 200 bps since you gave your [indiscernible] NIM guidance. I'm just wondering why you haven't upgraded that guidance given the size of your hedge.

And then the second question is just going back to Chris' question on the hedge. Do you see something structurally different in the way consumers save and corporate sales? And the reason I ask that is when rates -- when time deposits rates is this high, time deposits are around 50% of all savings pre-financial crisis. They are now a lot lower than that. At that point, your hedge is probably running more like GBP 100 billion rather than GBP 260 billion at the moment. So is there a reason why the hedge ultimately a level of interest-free balances be structurally higher right now than there were pre-global financial crisis?

[Angela Cross, executive]

Okay, so on the NIM guidance, we have guided towards the top end of the range that we gave you of 2.80% to 2.90%. That reflects 2 things. Firstly, the NIM year-to-date, but obviously, that hedge picked up. And the reason that we have split out the 2 impacts that we've shown you there, so the hedge movement and then the product impact is we said for some time that we expect the product dynamics, as rates started to rise, would become less beneficial for NIM. And we see that coming in 2 ways. It's not just about pass-through of any rate rises from here. It's actually about the dynamic that your second question points to, which is customers moving their savings.

And secondly, the compression and the competitiveness that we see in the mortgage market. So we feel at the moment like those product dynamics are going to go more heavily than perhaps they have done to date. That's the reason for our caution. And that's the reason that we split out the structural hedge impact so that you can think about those 2 things separately.

In terms of your second question as to why things might be structurally different, I think there's 1 macro piece and then there's 1 probably more bank structure piece. The first is that total deposits are higher. We've seen sort of sustained QE. There is a lot of liquidity in the system. And I would also say that banks, retail and corporate banks, in particular, are in a materially different position liquidity-wise versus where they were pre [indiscernible]. So there, you had loan-to-deposit ratios of well over 100%, that's relying on term deposits as a source of funding.

I think here, what you're seeing is term deposits as a franchise offering, that's a different mechanic. So we'll see how this pans out. But I would say there are structural differences to the macro and also the way banks are constructed versus sort of 2005, '06, '07 and beyond. Hopefully, that is helpful. Okay.

You are the last -- sorry, did you have anything more?

[Fahed Kunwar, analyst]

I just wanted to follow up with one thing. Does that imply you'd let your loan-to-deposit ratio tick up because you wouldn't need time deposits to structurally price a lot lower than your peers because you wouldn't need those time deposits?

[Angela Cross, executive]

I think most U.K. banks are in a similar position. The loan-to-deposit ratios are lower than they were. So I think it's -- and I wouldn't comment on competitive pricing on this call. I think it's more of a structural piece across the industry.

So thank you. Thank you, everybody, Fahed, the last question. Looking forward to seeing some of you next week and many of you in the coming weeks. Thank you.

[Coimbatore Venkatakrishnan, executive]

Thank you.

[Operator]

Thank you, everyone, for joining today's call. You may now disconnect your lines.