Natwest Group PLC

LSE:NWG

Earnings Call Analysis

Bank Reports Strong Profits and Capital Ratio

In the first nine months, the bank's operating profit surged to GBP 4.9 billion, up 33% year-over-year, with a strong CET1 ratio at 13.5%. The return on tangible equity hit 17.1%, with income at GBP 10.9 billion and costs under control, striving to meet the annual cost target of GBP 7.6 billion. Despite income and net interest margin (NIM) lower than expected due to changing customer behavior, the bank remained competitive. A revised full-year income guidance of around GBP 14.3 billion and bank NIM over 3% reflects a slowdown in deposit margin pressure and easing lending margin pressures into the fourth quarter. The loan book is healthy and well-diversified, while provisions for expected credit losses remain stable, reflecting well-managed risk. The cost-to-income ratio for the first nine months was 49.9% or 51.4% excluding foreign exchange gains, implying efficient cost management.

NatWest Group Reports a 33% Increase in Operating Profit amidst Market Challenges

In the first nine months of 2023, NatWest Group has evidenced its resilience and adaptability in a challenging market. Newly appointed CEO Paul Thwaite confirmed the bank's commitment to supporting its customers and communities by lending over £8 billion into the U.K. economy, aiding hundreds of thousands in purchasing or refinancing homes, and opening a substantial number of savings and currency accounts. The bank reported a robust operating profit of £4.9 billion, a significant 33% increase from the previous year, with a notable attributable profit of £3.2 billion.

Navigating Customer Behavior and Competitive Pressures to Preserve Income

Despite its positive financial performance, NatWest Group acknowledged that income and net interest margin (NIM) fell short of expectations, primarily due to shifts in customer behavior towards lower-margin savings products and heightened market competition. To address this, the bank has revised its full-year income and net interest margin guidance, intending to balance short-term margin pressures with long-term customer relations and strong liquidity.

CFO Katie Murray Elaborates on Q3 Performance and Outlook

CFO Katie Murray provided a detailed analysis of the bank's Q3 performance, highlighting a 9.4% decline in total income to £3.5 billion, stable operating expenses, and an increase in impairment charges reflecting market normalization. The bank's operating profit before tax stood at £1.3 billion, with an attributable profit of £866 million. Murray stressed the bank's continued net lending growth, especially within corporate segments, and the uptick in both retail and business deposits despite a competitive market environment.

Strategic Adjustments and Guidance Amidst Interest Rate Fluctuations

With the U.K. base rate adjustment to 5.25% and changes in customer savings behaviors, the cost of customer deposits escalated from 0.5% in the previous year to 1.8% in Q3. The bank's deposit margin has suffered as a result, prompting a recalibration of deposit strategies and hedging practices aimed at mitigating margin pressure and enhancing structural hedge income in the coming years. Full-year guidance estimates income, excluding notable items, to be approximately £14.3 billion, with a bank net interest margin above 3%.

Cost Control Measures to Maintain a Sub-52% Cost-Income Ratio

Cost management remains a pivotal focus, as illustrated by the planned reduction of other operating expenses towards the full-year guidance of £7.6 billion. This disciplined approach to costs aims to yield a cost-to-income ratio of less than 52% for the year. Impairment charges have risen to £229 million in Q3, yet the bank maintains an outlook for an impairment rate below the expected cyclical range of 20 to 30 basis points.

NatWest Group Strengthens Its Capital Position While Delivering Shareholder Value

NatWest Group's financial health is further underlined by a comfortable common equity Tier 1 ratio of 13.5%, reflecting strong underlying earnings and measured RWA growth. The bank upholds a commitment to a 40% payout ratio for ordinary dividends and has the potential for future buybacks. Discussions on capital return plans are set for December, with an update anticipated in February.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the NatWest Group Q3 Results 2023 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. [Operator Instructions]

Paul, please go ahead.

[Paul Thwaite, executive]

Good morning, and thank you for joining us for the first set of results since becoming CEO. I'm going to start with the financial headlines and my near-term priorities for the business. Then Katie will run you through the quarter 3 results in greater detail. And after that, we'll open it up for questions.

Our customers and communities are central to our strategy, so I'd like to begin by putting the financial headlines in the context of recent customer activity. During the first 9 months of this year, we have lent over 8 billion into the U.K. economy, opened over 80,000 new business start-up accounts, helped 312,000 customers buy or refinance their homes and opened over 1 million savings accounts alongside around 800,000 currency accounts. In addition, we have delivered over GBP 53 billion of climate and sustainable funding and financing since July 2021.

Turning now to the financial headlines. We delivered operating profit of GBP 4.9 billion for the first 9 months, which is up 33% on the prior year, with attributable profit of GBP 3.2 billion.

Income was GBP 10.9 billion and costs were GBP 5.6 billion. Our cost/income ratio was just under 50%, with some benefit from foreign exchange gains, and we are on track to meet our cost target of GBP 7.6 billion for the year.

Our balance sheet remains strong and our funding is well diversified with GBP 424 billion in deposits, GBP 358 billion of customer loans and a loan-to-deposit ratio of 83%. We remain committed to a 40% payout ratio with capacity for buybacks, and have paid or accrued GBP 1.1 billion in dividend payments in the first 9 months.

In addition to the directed buyback of GBP 1.3 billion in May, we have also carried out almost half of the GBP 500 million on-market buyback announced in July. Taken together, this represents distributions of GBP 2.9 billion, more than 90% of our 9-month attributable profit, and brings our CET1 ratio to 13.5%.

Our return on tangible equity was 17.1%, and we expect to be at the top end of our 14% to 16% target range by the year-end.

Despite the strong set of results, I recognize that income and net interest margin came in below expectations, reflecting an accelerated change in customer behavior during the quarter. Customers are more actively searching for yield, and moving balances from noninterest-bearing accounts, to lower-margin saving and fixed-term products. And in a competitive market environment, we have taken the decision to compete. Whilst this comes at a cost in the near term, we are balancing income and margin with the long-term value of deepening customer relationships and maintaining a strong funding and liquidity profile.

As a result of changes in customer behavior relating to both assets and liabilities as well as assumptions on interest rates, we are revising our income and net interest margin guidance for the full year, which Katie will cover in more detail.

So let me turn now to my near-term priorities for the business. I've been very focused on running the business, ensuring we continue to serve and support our customers and our communities.

At a time of macroeconomic uncertainty and evolving behavior, it is essential that we continue to be a strong, stable and trustworthy partner for our 19 million customers. It is important to me that we are the very best bank we can be, and I would like to thank all of my colleagues for their continued hard work and dedication.

There is more to be done, as we continue to make it easier for our customers to engage with us, either by our digital channels or our extensive presence across the country. We remain focused on driving and delivering the outcomes we set out earlier this year, simplification, digitization and using data and technology to better serve our customers. I've already made several decisions to improve efficiency, and strengthen our focus on simplification and productivity.

This is very much in line with the agenda I drove in my previous roles here at the bank. And as I continue to spend time with our businesses during the quarter, it has only confirmed my view that there is more value and growth we can deliver.

We are also in the midst of the planning cycle. And as you'd expect, I've spent a lot of time with Katie and the team going over the plan, stress testing it and challenging ourselves to look at a range of scenarios. We have worked hard to absorb the recent inflationary pressures. But given the macroeconomic environment, it will come as no surprise that we continue to tighten our approach to cost, in order to deliver attractive returns and capital generation, consistent with our medium-term target of 14% to 16% RoTE.

An important strength of the bank in recent years has been the robustness of its balance sheet, which positions us well, both for the upside and the downside. Our customers remain resilient and impairments are low, but I'm very alive to the ongoing risks associated with higher rates, inflation and supply chain shocks. I'm also clear that these impacts may still be working their way through the system, so we are closely monitoring a wide range of indicators and testing our balance sheet for a wide range of economic scenarios.

Our strong common equity Tier 1 and liquidity ratios position us well to navigate the macro environment, changing customer behavior and remaining uncertainty on the impact and timing of upcoming regulatory change. We, therefore, need to be dynamic and disciplined in the way we manage and allocate our liquidity and capital. We have made good progress over the year to diversify our deposit product offering, better leveraging our data and using a broader range of tools on both sides of the balance sheet. That said, I still see opportunities to be smarter and quicker.

Our recent track record of capital generation is strong, and allows us both to invest in the business, and provide shareholders with attractive returns. I fully appreciate the stability and predictability of our capital distributions, together with their timing through the cycle is central to our value and investment case.

Finally, the recent appointments to my leadership team have settled well, and I am pleased with the team's ability to focus on delivering for our customers and driving the execution of our plan. We have a strong business and are making good progress, but I'm keenly aware that will be judged on our ability to deliver.

With that, I'll hand over now to Katie to go through the results in more detail.

[Katie Murray, executive]

Thank you, Paul. I'm going to talk about the performance in the third quarter using the second quarter as a comparator on Slide 6.

Total income of GBP 3.5 billion was down 9.4%, as foreign currency gains in the second quarter were not repeated in the third. Income, excluding all notable items, was also around GBP 3.5 billion, down 1.4%. Within this, net interest income was 4.9% lower at GBP 2.7 billion, while noninterest income grew 12.2% to GBP 829 million.

Operating expenses were stable at GBP 1.9 billion. The impairment charge increased to GBP 229 million or 24 basis points of loans, reflecting normalization and the non-repeat of releases in the second quarter, when we updated our economic assumptions.

Taking all of this together, we delivered operating profit before tax of GBP 1.3 billion, and profit attributable to ordinary shareholders of GBP 866 million, which is equal to a return on tangible equity of 14.7% in the quarter.

We are pleased to have delivered further net lending growth. This was driven by our corporate customers, while net mortgage lending moderated following a strong first half. Gross loans to customers across the 3 businesses increased by GBP 2 billion to GBP 358 billion.

Taking retail banking together with private banking, mortgage balances grew by GBP 200 million, representing stock share of 12.6%. Gross new mortgage lending was GBP 7.9 billion, representing flow share of around 13%. Unsecured balances increased by GBP 500 million to GBP 15.5 billion, driven by continuing customer demand and share gains within cards.

In commercial and institutional, gross customer loans were up by GBP 1.3 billion. At the mid to large end, we saw demand for current credit facilities and private financing. At the smaller end, demand remains muted and customers with surplus liquidity continue to deleverage, including repayment of government scheme lending.

So let me now turn to deposits on Slide 8. Customer deposits across our 3 businesses were up in the quarter at GBP 424 billion. Across retail and private, deposits grew by GBP 2.1 billion, reflecting market share gains in term deposits. In commercial and institutional, deposits increased by GBP 300 million. Our stable loan-to-deposit ratio of 83% allows us to manage our deposit base for value, as well as support customers and grow our lending share in target markets.

The U.K. base rate has increased by 25 basis points to 5.25% since we presented our first half results. And customers continue to move balances from noninterest-bearing to term accounts. Noninterest-bearing balances have reduced from 37% of the total, to 35%. And as you can see on the slide, the absolute reduction in noninterest-bearing balances, which is the main transaction accounts for our customers, has continued in line with the second quarter across each of the businesses.

Within interest-bearing balances, we have seen an accelerated change of mix, and term accounts are now around 15% of the total, up from 11% at the end of the second quarter.

There were high levels of deposit migration amongst our existing customers. In particular, to lower-margin term accounts. We also launched a new fixed rate savings product for retail customers to the entire market at the end of the second quarter. This attracted new term balances from customers that are new to the bank, helping to grow our share and contributing to the change in deposit mix.

This launch has enabled us to grow our customer franchise, strengthen our liquidity position and grow income, albeit at tighter margins. Going forward, we expect the pace of migration to reduce, given a slowdown in late September and October, and our expectation that U.K. base rates will remain at 5.25% through to the second half of 2024.

Turning now to how this impacts our deposit margin on Slide 9. The top left of the slide shows the average third-party customer deposit rates across all 3 businesses on both interest-bearing balances and total deposit balances over the last 4 quarters. The cost of our total customer deposit base has increased from 0.5% in the fourth quarter last year to 1.8% in the third quarter this year.

As a result, interest payable to customers grew from GBP 588 million to GBP 1.9 billion. The rise in interest payable has outpaced the rise in interest receivable since the second quarter this year, which is why group net interest income has fallen since then.

The average U.K. base rate in the third quarter was 5.2%, up around 80 basis points on the second. This compares to 60 basis point increase in the cost of deposits, yet our deposit margin fell. This is because a significant proportion of our deposits are hedged, and did not yet benefit from the rise in interest rates.

The bar chart on the right-hand side of the slide shows that GBP 195 billion or 45% of our customer deposits form part of the product structural hedge. This has a weighted average life of 2.5 years. Meaning, it takes 5 years to fully reprice.

We also hedge our term deposits separately, and this income is not included in our structural hedge disclosures. As a result, less than half of our deposits are unhedged and benefit immediately from the increase in [indiscernible].

As you consider the outlook for our deposit income, you should think about the margins we earn on each of the component parts, how the margin will develop going forward and the balance of mix.

Starting with the product structural hedge. Given the ongoing reduction in 12-month average eligible balances, we expect the size of the hedge to reduce during the fourth quarter and into 2024. However, we expect the reinvestment uplift to offset this balance reduction, so that structural hedge income increases year-on-year in '24 and more meaningfully in 2025.

Turning to hedge term deposits. This remains a competitive market with tight margins, where we are seeing the fastest growth in balances.

Finally, unhedged instant access deposits. As you know, our cumulative pass-through on instant access accounts has been around 50% to date. This means that unhedged margins are currently around 2.5%. The margin outlook will depend on competition, customer behavior and, of course, the U.K. base rate.

Let me explain how deposit margins impacted income on Slide 10. Income, excluding all notable items, was GBP 3.5 billion, down 1.4% on the second quarter. Net interest income was 4.9% lower at GBP 2.7 billion, driven by lower margins and broadly stable average interest-earning assets. Bank net interest margin reduced by 19 basis points to 2.94%, as a result of lower lending margins, which accounted for 12 basis points driven by mortgages, and lower deposit margins accounting for 14 basis points, reflecting additional interest expense, which more than offset the structural hedge reinvestment this quarter.

These 2 movements were partly offset by a 6 basis point benefit from funding and other movement, as a result of one-off reallocations from noninterest income, which we do not expect to repeat.

Noninterest income, excluding notable items, grew GBP 90 million to GBP 829 million. Corporate activity improved in the quarter, resulting in higher lending fees. We are pleased that noninterest income for the first 9 months of the year is up 7% on the same period last year. Turning to the full year. We now expect income, excluding notable items, of around GBP 14.3 billion, and bank net interest margin greater than 3%.

This guidance is the result of changes in customer behavior, on both the asset and liability side, as well as revised assumptions on interest rates.

On liabilities, as I just mentioned, we expect the future pace of migration to slow, and noninterest-bearing accounts to represent 34% of the total at the year-end, with term at around 17%. This means that we do not expect deposit margin pressure to continue at the same pace into the fourth quarter.

On the asset side, our mortgage customers are refinancing on to rates that are higher, but at a tighter margin for us. We expect this headwind to moderate over the coming quarters.

Finally, the interest rate outlook has changed. As you know, our income guidance assumed a 50 basis point increase in August to 5.5%. We now expect the U.K. base rate to remain at 5.25% for the rest of the year. We expect both lending margin and deposit margin pressures to ease into the fourth quarter. And therefore, we do not expect bank NIM to reduce by a similar 19 basis points, as we saw in the third quarter.

Moving on to costs on Slide 11. Other operating expenses were GBP 1.8 billion for the third quarter, down GBP 82 million or 4.4% on the second. This was driven by lower staff costs due to our ongoing exit from Ulster Bank, where we have incurred GBP 206 million of direct costs in the first 9 months, and continue to guide to around GBP 300 million for the full year.

We expect other operating costs of around GBP 7.6 billion for the full year, in line with our guidance. This delivers a cost income ratio of 49.9% for the first 9 months, benefiting from foreign exchange gains. Excluding these, the cost-to-income ratio is 51.4%.

I'd like to turn now to impairments on Slide 12. We booked a net impairment charge of GBP 229 million in the third quarter, equivalent to 24 basis points of loans on an annualized basis. This reflects a normalization of trends and the absence of releases made in the second quarter, when we revised our economic assumptions. These assumptions remain appropriate and are unchanged.

Our impairment loss rate for the first 9 months is 16 basis points, and we now expect to be below or through the cycle range of 20 to 30 basis points for the full year.

Our balance sheet provision for expected credit loss is broadly stable at GBP 3.6 billion, equivalent to coverage of 94 basis points of loans. This includes GBP 453 million of post-model adjustments for economic uncertainty, which are also broadly stable in the quarter.

We remain comfortable with coverage of the book, which continues to perform well. I'll talk a little more about the composition and quality of our loan book on Slide 12.

We have a well-diversified prime loan book. Over 50% of our group lending consists of mortgages, where the average loan to value is 55% or 69% on new business. 92% of our book is fixed and the majority of 5 years, 5% are trackers and 3% is on a standard variable rate.

Our customers continue to refinance early, to take advantage of lower rates in the 6-month window before roll-off. And we monitor the impact of higher rates on customers closely after they refinance.

We are seeing a return to a more normalized level of arrears in our mortgage book, but these remain a little below 2019 levels, and we are not seeing any material increase in the request for forbearance.

Our personal unsecured exposure is less than 4% of group lending and is performing in line with expectations. Our corporate book is well diversified and is performing well. We have seen some sectors rebuild cash buffers over the past quarters, and we continue to hold PMAs for those sectors, where liquidity pressures may be more acute.

Turning now to look at capital and return generation on Slide 13. We are pleased to have delivered 14.7% return on tangible equity this quarter, driving good capital generation. We ended the quarter with a common equity Tier 1 ratio of 13.5%, in line with the second quarter.

Earnings delivered an uplift of 49 basis points, which was partly offset by RWA growth of GBP 4.1 billion, absorbing 30 basis points. This led to a net capital generation of 21 basis points in the quarter and 118 basis points for the first 9 months, excluding nonrecurring impacts, such as our acquisition of Cushon. We accrued the equivalent of 20 basis points in the third quarter towards the final dividend, in line with our 40% payout ratio.

Looking to the fourth quarter, we expect RWAs to increase by around GBP 3 billion as a result of CRD IV model updates, which remain subject to further development and final approval by the PRA. We expect net RWA growth to be broadly in line with this GBP 3 billion increase, given our current expectations for credit growth and typical market risk seasonality. We now expect RWAs to be around GBP 200 billion at the end of 2025, including the impact of Basel 3.1 and the further CRD IV model development.

At this point, we view around GBP 200 million as an appropriate basis for planning. But this guidance is clearly subject to final rules on credit and output floors, which will not be published into the middle of 2024, as well, of course, as equity approval.

We note recent comments on the PRA and its intention to evolve some of the credit risk proposals, and we will seek to mitigate these changes and optimize our balance sheet as much as we can through to 2025.

Earnings have generated 180 basis points of capital in the first 9 months before RWA growth, and we are comfortable with our ongoing capacity to generate and distribute capital over this period.

In December, Paul and I will discuss our capital return plans for 2024 with the Board, including both directed and on-market buybacks, and we will update you at the full year results in February.

Turning now to our balance sheet strength on Slide 14. Our CET1 ratio of 13.5% was within our target range of 13% to 14%, which includes a buffer above our minimum requirements.

Our U.K. leverage ratio of 5.1% was stable in the second quarter, and remains well above the Bank of England minimum requirements.

Our liquidity coverage ratio was 145% at the end of the third quarter on a spot basis and 142% on a 12-month average basis. This is well above our minimum requirements.

Turning to 2023 guidance. We now expect income, excluding notable items, to be around GBP 14.3 billion at a U.K. base rate of 5.25%, with net interest margin above 3% and group operating costs, excluding litigation and conduct, of around GBP 7.6 billion, delivering a cost income ratio below 52%.

We anticipate a loan impairment rate below the range of 20 to 30 basis points. And together, we expect this to lead to a return on tangible equity at the upper end of our 14% to 16% range.

And with that, I'll hand back to Paul.

[Paul Thwaite, executive]

Thank you, Katie.

As you can see, we have performed well in the first 9 months, as our customers continue to adopt in an uncertain economic environment, and I remain optimistic about our ability to deliver good performance.

My focus remains on consistently serving our customers' needs, whilst continuing to drive the execution of our strategic plan, with an emphasis on further digitization and simplification. We are able to do this supported by a strong balance sheet, which allows us to grow in attractive parts of the market, whilst maintaining strong originating discipline.

As we continue to generate capital, we are committed to continuing to drive returns and shareholder distributions with a 40% payout ratio for ordinary dividends and with capacity for further buybacks.

I expect to provide you with more detail in February. Thank you very much. We're happy to open it up for questions now.

[Operator]

[Operator Instructions] Our first question comes from Raul Sinha from JPMorgan.

[Raul Sinha, analyst]

Paul, Katie, couple of questions to start with, I guess. The first one, I think you've been reasonably clear on the direction of NIM travel in the second half of the year coming into these results. But I guess the magnitude of some of the moves has surprised most people.

So I guess the question that I want to address is, how should we think about the direction of travel in Q4? And if you can give us a little bit more color around the exit run rate?

And related to that, I guess, the broader question, is that some of the external factors that are impacting your NIM and the industry NIM such as competition migration, deposit levels in the industry are all quite difficult to predict an external [ 2 year. ] So what sort of gives you the confidence around slightly better outlook for NIM decline next quarter? That's the first one.

The second one, just maybe staying on deposits. You've taken the decision, as you said, Paul, to compete in deposits. And I was just wondering if you might elaborate a little bit around your thinking, just given the very low loan-to-deposit ratio at NatWest. What does that really mean in terms of -- what are you looking to do with your deposits? Are you expecting to grow your deposits on an absolute basis? And are you -- how do you look at sort of the returns dynamic within that?

[Paul Thwaite, executive]

Great. Why don't I take the deposit question. The second question first, then Katie, you can cover the NIM piece.

So as you rightly said, Raul, we made a very conscious and deliberate decision around competition in deposits. You can see that we've stabilized the book quarter 2, quarter 3. That's allowed us to retain deposits and in certain parts of the market, gaining some share.

As you rightly point out, there's a trade-off there. It has a cost. The judgment I've made really is balancing that cost versus retaining and acquiring the customer relationships, but also liquidity value. That's the kind of strategic judgment that we've made, and we stand behind that. We think that's the right move for us.

The link to the loan deposit ratio, you referenced, is a good one. And you're right, our LDR is different from some of our peers. As you can see from the growth in some of our products on the asset side, we still want to grow part of our asset balance sheet and some of our customer segments there. So we'll be looking to deploy that where we see good opportunities. We'll be very disciplined around the returns that we want to get for the deployment of that capital on the asset side, but I do see various areas to deploy.

So we're very focused on getting those, I think, is your final part of your question, those dynamics between what we pay for deposits versus then how we pass those pricing on to the asset side. And you can see some of that in the C&I asset book as well. Katie, NIM?

[Katie Murray, executive]

Sure. Thanks so much, Paul. So full year guidance for total income ex notable items of around 14.3. We don't give you specific NII guidance. This implies the income for the fourth quarter starts to stabilize relative to the third.

Our current view is NIM is greater than 3% for the full year, which means that we would expect that the Q4 reduction is less than the Q3 reduction.

When we look at the current view, there's a couple of factors you need to keep in mind. Base rates remaining at 5.25% until the end of the year, broadly stable deposit balances through to the end of the year as we've delivered this quarter. And customer behavior, we do assume a slowdown in deposit migration, with [ NIMs ] at 34% and term at 17% at the year-end.

I guess, Raul, your second part of the question is the confidence in that slowdown, is very much what we've seen really through the last 7 weeks, where you have started to see it slowing down. We do expect that to become short-term movements as you see people and other banks do kind of special offers at any one time, but we're comfortable with that kind of slowdown. So we would expect to end, sort of 34% and 17%. Thanks, Raul.

[Operator]

Our next question comes from Aman Rakkar from Barclays.

[Aman Rakkar, analyst]

Katie, Paul. Could I throw on 2 things, please. One was around your hedge commentary. So I'm just wondering if you could tighten up some of the -- some of your expectations around the hedge? I think you talked about hedge [indiscernible] being down in Q4 and into '24. You've obviously given us some kind of deposit mix expectations into year-end, which is actually really helpful.

So presumably, you've got a pretty decent view on where you expect the kind of hedge in terms of [indiscernible] go from here. But I guess also, I mean, it sounded like you're looking for it to be a tailwind into '24 and '25. I mean -- I would definitely hope that to be the case, right? Given the repricing tailwind. So can you help us kind of quantify that? Yes, it should be a material headwind going forward, do you see that?

And then the second one was just around your medium-term aspiration. So I kind of note around the outlook statement, you continue to target medium term growth [ year ] 14 to 16, but particularly around the sub-50% cost income ratio in '25. I guess there's 2 parts to that.

One is -- is that a proper reiteration of that medium-term aspiration? So do you continue to target a sub-50% cost income ratio? And do you remain confident in achieving that in '25 ? Or should we expect to kind of refresh of that update here?

And I'm kind of interested in the employed recovery in the revenue performance of that inherently assumes and implies, which I think is quite important. So if you do believe that, where is that coming from? And would it mean for NIM -- kind of -- did you expect NIM to recover in coming quarters?

[Paul Thwaite, executive]

Thanks, Aman. Very clear. So let me take the kind of RoTE and the guidance point, and then Katie, you can take us through the hedge.

So from a RoTE perspective -- let's do the guidance first for this year. We're still very clear, we'll be at the upper end of the range. We're also, in terms of the outlook, medium to target RoTE 14 to 16, that's unchanged. We do expect to operate in that range. So very clear on that.

You also correctly highlighted that the target is 2025 cost-income ratio of 50%. Obviously, there's 2 parts to that. I think you would agree, and I hope you'd agree, we've got a very strong track record on cost reduction, very focused on managing costs.

In my prepared statement, hopefully, you heard that given the change in macro, I've been very focused on getting a grip on both the cost outlook and the capital outlook. So really trying to take control on the things that we can control. Some of the customer behavior as we can't. Obviously, the economics we can't, but I'm determined to mitigate some of those external impacts with the actions we take on cost and capital.

So that's where the guidance is for the medium term. Obviously, it links to the first part of your question, how does the hedge flow through to that, Katie?

[Katie Murray, executive]

Sure. Thanks very much, Paul. So if we look at the hedge, the notional balance, as you know, at the end of the third quarter, GBP 195 billion, down from GBP 202 billion at the end of the -- end of June.

Based on our expectation for deposit mix at the end of 2023 and our 12-month lookback, we expect the hedge notional to reduce to around GBP 190 billion at the end of 2023, and then a further reduction in 2024 in line with the fall in the average eligible balances.

As you know, Aman, 60, sorry of the hedge matures each month, currently equivalent to around GBP 10 billion per quarter. The roll-off of the hedge yield is about -- around 1% in the fourth quarter, falling to an average of 80 basis points in 2024 and then 50 basis points in 2025.

We will continue to reinvest them at the prevailing 5-year swap rate. I would say that the average that we had in October for reinvestment was around 4.6%. So clearly, the difference between roll-off and roll-on rates with the increase in yield over time, which was at 1.5% in Q3 is a benefit. We do expect the higher rate to lead to higher hedge income year-on-year in 2024, and increasingly so in 2025 as we talked about at the half year.

I think one of the key factors within there is obviously the timing of the stabilization of deposits and the -- in terms of the mix of those deposits. Clearly, quicker stabilization means that the benefit of the hedge will become greater, and it will come to us sooner. Currently, our estimation is that we will start to see stabilization sort of during Q2 next year.

Aman, hopefully, that answers your question. Thanks very much.

[Operator]

Our next question comes from Ed Firth of KBW.

[Edward Hugo Firth, analyst]

I just have 2 questions. The first one was about your comments around expectations for deposit pricing to ease or deposit pressures to ease. Because if I look at market pricing, I mean, spreads on deposits now are at almost all-time highs. And the only reason it's not coming through in your margin is obviously because of the hedge drag. I mean if a hedge was repriced at today's price, your margin would be about 450 basis points or something.

So it seems to me, in a market where you've got a lot of competitors who don't have these hedges, and you can think of people like [ Chase or Marcus, ] et cetera, I don't understand why you think that they're going to be easing off the pedal in order to help you with your hedge. It seems to me that if you put in things like TFSME coming through as well, the pressure is only going to build, because my spreads are very, very wide for people who don't have a hedge. So I guess that's my first question.

And the second question, I was just struck that in terms of risk-weighted assets, you highlighted that the increase in this quarter was driven by market-related risk-weighted assets. And I'm just wondering, is that like a strategic shift, because it seems to me you're making a trade-off there in terms of share buybacks, which look reasonably unlikely now at the year-end. Again, putting capital into market-based activities, which I suspect has not traditionally been where you've been focused. And it's perhaps something that I guess, a number of shareholders would be would be less than keen on. So I just wondered, is that now an area where you see opportunity? And is that the sort of trade-off that you're thinking in terms of capital allocation?

[Paul Thwaite, executive]

Thanks, Ed. I'll take the second point and be very clear. It doesn't represent any change in strategy around our markets business at all. All that is, is a normalization in quarter 3, given that there were some significant reductions in quarter 2. So it's really the comparison point has gone up, as Katie rightly said, but it's more a normalization of where that business was earlier in the year.

Absolutely no change. We see markets as an important part of our C&I franchise, but we're not proposing to allocate materially more capital to it at this stage.

[Edward Hugo Firth, analyst]

Would you expect it to go down in Q4? Like I mean, traditionally, it's quite a low activity. Is that correct?

[Paul Thwaite, executive]

Yes, that would be our expectation.

[Katie Murray, executive]

Lovely. Thanks very much, Ed. So I think, first of all, just to clarify, is I don't think that competition will ease. We think that the transition into fix will start to ease and stabilize.

So I do expect the deposit market to remain to be highly competitive as we move forward from here. And I think the impact of TFSME, as we've seen with some of our competitors over this summer, will cause people to do very short-term offers to enable them to make repayments on the TFSME. I think we'll continue to see that as we go as we go through.

I would probably just quickly remind you that the hedge is there to help smooth out our income over a number of years. It's not there to make short-term gains and losses on the interest rate levels. And I think that's really important to remember.

We did show you on Slide 9 that we're paying customers on average, 2.7% on interest-bearing deposits and 1.8% on all deposits. I think I would remind you that we're not earning the difference between 1.8% and the average base rate of 5.2%, because of how we hedge that and how that all kind of interacts.

But as I look forward from here, I think we've taken some very strategic action in this quarter, to make sure that we retain and build our deposit base for the long term, so that we're able to withstand what I do think will be very competitive next 9 to 12 months, as people deal with the repayments and things on the TFSME. But we're comfortable with where we are, and that we've got the right product out in the market to deal with that.

Thanks, Ed.

[Edward Hugo Firth, analyst]

Katie, do you have going to just come back on that? As we look at Q4, we can all do the maths about where the Q4 margin will end up, but I guess it's somewhere in the 280, 290 level. But I guess more importantly, what happens next year? Because the question is certainly talking to your peers that they're generally talking about margins going down from there into next year, which is obviously a huge difference to where the market thought early this morning, your margin was going to be next year.

So is that analysis correct for you that, that margin we should expect to continue to deteriorate next year, because deposit pricing is only getting tougher, not easier? And obviously, the roll-off of the hedge is going to take 5 years.

[Katie Murray, executive]

Yes. So I think there's a couple of things going on within there. So as I look -- Ed, I'm not a big fan of forecasting, NIM, as you know, a lot of moving parts within [ IP. ] But if you think you kind of lift up a little bit to kind of the income story.

So if I think your 2024 income. So full year this year, we've guided you to 14.3, which is implying that 3.4 billion in the fourth quarter. So that is the expectation that NIM will be above 3% for the full year. And Ed, I do mean above when I've said above. So I'm not trying to guide you there, but I think you kind of clicked on that.

We do not expect to fall in NIM in the fourth quarter to be as severe as it has been in the third quarter. So I do expect to see NIM stabilizing as we go through 2024. I think there's a couple of things that will impact the timing of that stabilization. So I don't think it will be instant. We've talked about the headwinds of deposit migration and mortgages. They do moderate over the coming quarters, but they do not end at the end of 2023.

The hedge tailwind, which I talked about already, it does become stronger as we move through 2024, and that will eventually offset the headwinds of that deposit migration and the timing on stabilization.

So this gives us confidence on the medium-term income. I would urge you not to annualize the fourth quarter for those various reasons around the stabilization.

[Operator]

Next, we'll be going to Alvaro Serrano of Morgan Stanley.

[Paul Thwaite, executive]

You're there, Alvaro?

[Operator]

Alvaro, if you'd like to unmute and go ahead and ask your question.

[Alvaro de Tejada, analyst]

Sorry, I'm here, just struggling with the technology. Sorry to ask more questions about deposits and NIM.

You've given a very precise number for the end of the year on the 17% or 34% which is given this 2 months ago and the turmoil we've seen in the last 3 months, I think it's very good. But -- and I know you've said that the last few weeks gave you a bit of confidence that things have slowed down and become more predictable. But maybe, I don't know if you can share any more precise numbers around the last sort of what you've seen in October that could help us gain conviction on that number?

And also, related to that, deposit balance is the absolute number. You've gained market share. I know you've explained why you've decided to gain market share and balances are up. But would you be willing to let those balances slip a bit to protect the margin? What's the overall balance of deposit outlook, do you think, for Q4 and as we think about '24?

[Katie Murray, executive]

Yes. Sure, well, let me kind of pick those apart. So first of all, I think as I look at why the kind of conviction? I think there's a few different industry comparators being looked at. What we know is that the U.S. is generally a little bit ahead of us. So we've had a look at where they are.

We've also looked within our own book. And what we saw in our own book is that private moved faster than retail. And what I've seen very consistently over the last number of weeks is that kind of level of stabilization. Clearly, they are much smaller numbers and far fewer people, but that kind of -- that stabilization is clear.

When we've then looked and we'll see the September data, I guess, will come out as well. What we're expecting is well after the kind of peak of July, slightly slower August and then in our own numbers, what we saw coming into September within the retail world, that kind of level of stabilization.

Now that doesn't mean that it's -- so there's not going to be movements and there definitely will be movements as we move into that piece. But I'm comfortable as we kind of see -- what we've seen in our data what we've seen elsewhere, logically, that stabilization would kind of start to come through.

If I then kind of look at your deposit numbers, Paul, do you want to jump in on that one?

[Paul Thwaite, executive]

I think important to clarify one point. The share gains have been on the term side rather than the overall stock side. So that's what we referred to the -- so you've seen an increase in market share.

Overall, you'll see it from the Bank of England data. Our share has kind of remained relatively flat, I would say. That's the way to think about it. So it's not that we're taking outsized market share gains.

In terms of how we're thinking about that moving forward, my view is we're comfortable with our current position. In terms of would we compete more, we'll do that very much through a value ends, and do the trade-off between the value from the P&L value from the deposit and the margin impact versus retaining the relationships and the liquidity value that, that gives us. So that's how we think about it.

[Operator]

Our next question will come from Joseph Dickerson from Jefferies.

[Katie Murray, executive]

We can't quite hear you.

[Operator]

Unfortunately, we are struggling to hear you, Joseph. If you'd like to rejoin the call, and then we'll come back to you for more questions.

Our next question will come from Guy Stebbings of BNP Paribas Exane.

[Guy Stebbings, analyst]

[indiscernible]

[Operator]

Guy, if you'd like to unmute and ask your question.

[Guy Stebbings, analyst]

Hopefully, you can hear me now of. Apologies for that.

[Paul Thwaite, executive]

Yes, we got you.

[Guy Stebbings, analyst]

So the first question was back to the medium-term RoTE guidance. I'm just trying to understand why you're not changing that guidance at this stage. On the face of it, you're now expecting quite a meaningfully lower net interest income performance than previously. And in very round numbers, we could be talking [ first ] 1 billion low and your expectations for risk-weighted assets and by association required tangible equities is also higher.

So just trying to gauge where are the positive offsets that help to mean that you still can deliver a 14% to 16% range? Or that still sort of the same range as previously? I mean it does sound like perhaps some incremental work on cost, but presuming not enough to fully offset some of those headwinds. So I'm just trying to [indiscernible] is there an element of timing here as well and really medium-term RoTE guidance is something that's really for discussion at the full year, especially given the challenges in judging exactly how deposits evolve?

And then just a quick follow-up on the 2025 RWA guidance. Could you elaborate on what assumptions you're making there in terms of how the PRA may tweak the final rules. Some of the commentary recently sounds constructive on the face of it. So just interested in any color you're giving on how you think those rules [indiscernible].

[Paul Thwaite, executive]

I want to say a little bit on the RoTE piece. And then, Katie, maybe you can talk about some of the building blocks.

So crystal clear that RoTE's the North Star, we know how [indiscernible] that is for capital generation and distribution capacity. You're right. We do believe in the medium-term perspective. We're not changing the 14% to 16%. We expect to operate in that range to stress on the medium term.

We now, as you alluded to, it's difficult to be precise, because there's a number of moving parts. But I do think there's a number of building blocks we want to kind of be helpful there and help you with some of those building blocks.

So Katie, do you want to talk a little bit about how we're thinking about it?

[Katie Murray, executive]

Yes, sure, absolutely. So I've already talked kind of quite at length about income, so I won't repeat that, other than to say that I do kind of urge you that not to annualize the Q4 number.

If we look at costs, full year guidance for the year, GBP 7.6 billion. We're comfortable we're going to hit that. I'd remind you that, that includes 300 million for Ulster direct costs, which we do expect to reduce materially in 2024. We do recognize that we've got headwinds of higher inflation, and we're working hard to ensure that our investment program delivers savings to help mitigate this, as you have seen us do [ guidance ] for many years now.

Impairments, clearly, we're better on impairments than expected to date. We're talking about being below 20 basis points in 2023. We then, as you know, got through the cycle guidance of 20 to 30 basis points. I think when we meet in February, we'll give some views as to where we think we're heading for 2024. But I would remind you that we've got 0.5 billion of PMAs on the balance sheet, and our cautious approach to the release of these. So that also gives you a little bit of protection as you go through.

If you then look at the capital piece, we will continue to operate within a range of 13% to 14% CET1, and you've seen this year our comfort to toggle up and down within that range. So I'd expect that to continue.

While we do expect the RWA to trend higher and through to 2025, I think the other thing you've got to also bear in mind is that we've demonstrated a very strong commitment to distributing excess capital, as and when it becomes available. And that's also an important point when you think of that kind of average denominator number as you do your calculations.

And Guy, you also asked a little bit on the RWA assumptions as we go into next year and where the changes might be. So what we've guided you to is including the CRD IV changes and the Basel 3.1, my kind of best counting assumption that the Board would be to encourage to use that 200 billion.

What we've been talking about and we've been quite vocal about is the kind of the business factor in terms of the small lending, and then also what treatments they're using on some of the infrastructure lending.

We were heartened by the comments that we heard from the PRA over this last week, and I think we'll wait and see what comes through. As you know, we're getting some of the rules in January, and then we're getting credit and output floor is only coming through in July.

So what I've tried to do today is to give you a kind of a good estimate to thinking of those factors to kind of help you with your modeling. We do think at the end of this year, when we talk about that 3 billion uplift that I would add that on just to where we ended this year at 182.

Paul's already talked about the fact that we do expect market risk and timing just to come back in. So that's the kind of that gets you to kind of 185 sort of number by the end of this year.

And Guy, I'll leave you to have a think about how you might want to roll in those differences over the 2 years that follow. I'd probably be pretty linear about it myself, but you'll take your own views as to how best to do that.

[Guy Stebbings, analyst]

Okay. That's very helpful.

[Operator]

We're going to retry with Joseph Dickerson of Jefferies.

[Joseph Dickerson, analyst]

Can you hear me now?

[Paul Thwaite, executive]

Yes, we got you.

[Katie Murray, executive]

Perfectly.

[Joseph Dickerson, analyst]

Sorry about that. I just had a question just on the RWA guide as well. Is the 200 billion pre or post mitigation, firstly? And then secondly, I think you've been guiding more towards in prior quarters guiding more towards the lower end of the 5%, the 10% inflation range. So I'm just wondering what's changed to get you to the higher end of that, given if anything, it seems like some of the commentary from the PRA is a little bit more friendly on the RWA front.

And I think if I look at where our estimates are and why I think consensus is, I think we're about 10 billion, that number is coming about 10 billion higher, which is fairly material in CET1 terms. So I'm just trying to get to the bottom of the moving parts here, if you don't mind.

[Katie Murray, executive]

Yes, no, sure. I'm happy to say a bit of time about it. So always post mitigation in terms of the numbers that we work with. I mean, we clearly put a lot of emphasis into the business about managing our capital, and making sure that we get the very best return.

Kind of -- we've talked a lot in the past about our pleasing kind of results around the lower kind of risk-weighted asset density. So that mitigation is something that we really try to build into the DNA of the organization.

Joe, I probably correct you a little bit in the past. I've been very careful not to guide you to the bottom or the top end. Sorry, if you've taken away that I haven't completely managed that on the 5% to 10%. But I think one of the things that really has probably changed, pleased with the positivity we've heard from the PRA. I do think, and you've heard other banks talk about it in terms of that CRD IV for pressure that, that is seeing a kind of increase in the kind of underlying models as we're going through our first pieces in relation to mortgages as it is for others, and we'll continue to kind of work through that.

But at this point today, it does feel the 200 billion fuel is the right number to kind of be thinking about by the time you get to end 2025. And historically, I've always been -- I think, quite good at kind of when I know more, I'll share it with you. And as the rules develop, we'll continue to make sure that we maintain that transparency with you in terms of the developments and the numbers.

[Paul Thwaite, executive]

What I would add, Joe, is you can be sure that we're going to have a very tight and disciplined approach to managing capital, given that regulatory backdrop. So it's a big focus for me because to me, it's one of the obvious operational levers we can influence. So a big focus over the course of the next [ 2 ] years. Thank you.

[Operator]

Our next question comes from Benjamin Toms of RBC.

[Benjamin Toms, analyst]

Paul, you note that you've been very focused on costs since you started your role. I mean consensus has costs for 2024 at about GBP 7.6 billion. Are you comfortable with that number without the bank having to take any additional material restructuring costs which would have implications for capital?

And then secondly, your mortgage stock was resilient in the quarter. In half 1, NatWest issued a much higher proportion of peers of greater than 90% mortgage flow. Can you comment on that dynamic and how that trend continued into Q3?

[Paul Thwaite, executive]

Thanks, Ben. I'll take the cost piece. So we're not guiding on '24. You're right, we've confirmed GBP 7.6 billion or Katie confirmed earlier in the question, GBP 7.6 billion in terms of '23. You're right, both along balance sheet management, capital management and cost have been a focus for me and the team over the course of the last couple of months.

What I would say is we've -- I think we've got a very good track record in terms of taking cost out of the business. I think we've done that in a way that hasn't been detrimental to either customer experience or to revenue. So we are taking a very tight approach. I'll talk more in February in terms of in-year guidance for '24, but I'm not signaling any big restructuring charge or anything like that in this call.

[Katie Murray, executive]

Thanks, Paul. So in terms of the mortgages, a couple of things I would say. You're absolutely right. What we've seen is we saw higher flow in the first half of the year, and we've been moderating during this quarter to deal with kind of movements in pricing to make sure that we're really always managing the book for value and not just for volume. So the 16% falling down to the 13% inflow, I think for me was important to see in this quarter, given where some of the pressures on swap curves have been.

I would say, as you look at that above 90% mortgage flow, there's -- there is a technical thing behind there. We haven't changed our approach. There's a bit of indexing impact happening in our reports. So as you see the kind of house pricing fall, then you actually see more things being kind of moved up above the line.

What I would say -- but then, as you look at our new business, our LTV of our new business is 69% overall. So I wouldn't read too much into what's a relatively small part of our portfolio that's been indexed up into that greater than 90%. Thanks very much, Ben.

[Operator]

Our next question comes from Adam Terelak of Mediobanca.

[Adam Terelak, analyst]

I've got a bit of a technical one on the hedge. Clearly, you're talking about GBP 10 billion of maturities and the hedge is down, what, GBP 7 billion in the quarter. I mean, that means that your hedge reinvestment each quarter is pretty minimal. If you then add that you've got further mix shift to come on a 12-month look-back period. It feels like a good 18 months or so or a good few quarters until we can really talk about the hedge volume stabilizing and that tailwind coming through. Is that the right way of thinking about it from a pure hedge standpoint? Is that why you sound a little bit more confident on the longer-term story rather than the 2024 story?

And then secondly, just feeding that into the NIM conversation. You said to avoid annualizing Q4 or annualizing exit rates, but it sounds like with mix shift, we're going down before going up. So why are we confident that the acceleration in NIM in the back half of next year can take us back above that 4Q annualized figure?

[Katie Murray, executive]

Yes. Perfect. So a few things within there that I'll try to help you with, Adam.

So I guess as I look at the hedge volume stability, what -- you're absolutely right, we do the hedge on a 12-month roll back. And then what we need to see is that mix stabilizing within our deposit base. What I said already on the call, we are expecting that stabilization to come. You're absolutely right. I think it's a couple of quarters away before we kind of get there. So it's probably kind of post-Q2 then before we really get that kind of stabilization.

Then at that point, what's happening is that kicking off about GBP 10 billion a quarter. We'll be investing that at rates that are significantly above the roll-off. The roll-off next year is 80 basis points. I think I said earlier that our average reinvestment was 4.6%. So there's a natural delta. I'll let you take your own views as to where you think that 5-year rate might be by the end -- by the time we get to that piece.

So you'll get some benefit in the earlier quarters because there is some reinvestment, and then that will continue to grow as you go into the second half of the year. And then what you then see is -- you've then got stabilization. Then when I get into 2025, my 12-month loopback is clearly more stable again. And so therefore, I'm now reinvesting at a rate that is going to far exceed the 50% roll off -- the roll off -- the 50 basis point, forgive me, roll-off rate that I've got into 2025.

So I mean, when we spoke in Q2, I think I talked there that there was more confidence in the recovery of income into 2025. That still remains the case, because exactly of that point, if you need the deposits kind of stabilization to come through in terms of the blend, we've demonstrated the quantum very well now for kind of 2 quarters. And then overall, the book will start to yield and better.

So at the moment, we're yielding about 1.5%. I would expect that to continue to see improvements in that as I go into 2024, because of the benefit of those different kind of factors. Hope that works for you, Adam.

[Adam Terelak, analyst]

So on the NIM profile into 1H and beyond?

[Katie Murray, executive]

Well, I mean, I guess my answer is probably is very similar. So we've talked about that as we go into Q4 this year, you shouldn't expect to see the level of fall that we've seen in Q3. What we have said is that we expect NIM to be above 3% for the year. So therefore, your kind of exit rate is going to be lower than where we are now, but don't take it down as steeply as we fell in this quarter.

You're then going to have the dynamics of a stabilizing mortgage book. We talked about the mortgage book, getting to kind of around about kind of 80 basis points. We're sitting at 86 basis points now. I think there'll still be movement around that 80 basis points piece, but that will stabilize. We said that, that stabilization would happen towards the end of this year, early next year. And then I've already talked a lot about deposit stabilization, so I won't see any more on that piece.

But I certainly see this step down is less. And then I'm talking a bit of an active stabilization of coming. So I wouldn't let you -- I wouldn't run away with the NIM.

[Operator]

Our next question comes from Jonathan Pierce of Numis.

[Jonathan Richard Pierce, analyst]

I've got a couple of questions, please. The first, on the NIM bridge in Q3, is the lending margin and I'm struggling with a bit, down 12 basis points. You said that was largely mortgages. That's about a 400 million annualized hit to revenue in the quarter. Now I think there's no more than 15 billion to 20 billion of refinancings or churn every quarter. So it implies a huge delta between what's come off and what's gone back on in spread terms, is that right? Were we sort of 200 basis points of step down in mortgage margin on the churn in Q3? So that's the first question.

The second question, just sort of standing back and thinking about deposit income as a whole. As I think Slide 9 shows about 340 basis points of margin at the moment, if you want to look at it as what you're paying the customers versus base rate. Probably 320 basis points spot at the end of September, I suppose.

But then the product hedge that I prefer to think about this is GBP 195 billion position that's costing you a floating leg of 5.25 and only receiving 1.5. So that's knocking about 170 basis points, clean off what you're earning on the deposits, such that you're back at about 150 basis points, and that's the margin you're earning on deposits going through the P&L. Is your confidence, forgetting about hedge income and notionals and all the rest of it, is your confidence around deposit income over time that the 150 that you're earning net of the cost of the hedge at the moment is more likely to go up in this sort of rate environment than it is sideways or down? Is that a way of thinking about it?

[Katie Murray, executive]

I don't think you've always spent a lot of time with Claire as well. So I mean, as we got it exactly right.

So look, definitely, you'd see that 150 go up. I mean it's just the mechanics of reinvestment. I'm rolling off numbers that are falling. So I'm going from a roll-off of about 1, rolling off next year at 80, rolling off the next year at 50. So I mean it's exactly the right question. So look, I do expect to see that improve as we go into next year.

I think on the mortgages, there's a lot of puts and takes and takes going on there. There's a lot going on. There's not as much as you suggest. It's not just as simple as the way what we're writing on the front curve, because as you see at any one moment within the banks, you've got different customer behavior going on. So we've got people who are paying more at the time of their refinancing. We probably got a bit more refinancing going on rather than new mortgage. You're familiar with the fact that the new mortgage market is smaller. And then also, you have people that are paying -- who used to pay more in advance of their new rate coming up, and they're not doing that so much now. They're waiting until it ends. So a few different things going on within there.

I do think that the mortgage headwind will be smaller going forward. But I would say that we're paying a lot of attention at the moment to that kind of customer behavior and how they behave at the moment of kind of refinance and in the months leading up to it as well.

[Jonathan Richard Pierce, analyst]

That is helpful. But if I can just press on that a little bit more, because it is a huge delta quarter-on-quarter. It's almost as much as the deposit movements.

If you keep writing at the front end at 80 basis points, the book is pretty flat actually in Q3, the mortgage book. Can you keep writing at 80 basis points and the stuff that's coming off next year is, I don't know, 90 to 100 basis points. Where does the math go wrong? If we just take 10, 20 basis points on the quarterly churn?

[Katie Murray, executive]

So I think a couple of things there. So we definitely seek to write the book at around 80 basis points over time. What I would say, and we said a few times that there were probably under a little bit of pressure at the moment because of the movement in the speed of the swap curve and some of the competition in the market, but that's a timing issue. I do think the same way to continue to think of the book and our aspiration is around that 80 basis points.

The book itself this quarter is repriced from 102 down to 86. And then what we had said was that we'd expect it to kind of more or less fully reprice kind of by the end of this year. So I actually think your roll-off number is a little bit high, but we would expect to see that kind of moving to around 80 basis points. And I'm sure in Q2 and Q1 next year, you'll be saying, Katie, why is it a bit lower, why is it a bit higher? But we're getting into a much tighter kind of corridor of where those numbers are, because of the real high-value margin pieces will have substantially rolled off by the end of this year.

There are some mortgage income disclosures for the retail bank. I think you'll find in the financial supplement. They'll be able to help you with some of the some of the bits and pieces that are going on as well. So I'd point you to them as well. And obviously, John, be happy to talk more later.

[Operator]

Our next question comes from Chris Cant of Autonomous.

[Christopher Cant, analyst]

I wanted to just clarify something you said, Paul, first, around restructuring charges. Maybe I wasn't listening carefully enough, but it seems a little bit ambiguous as to what you were trying to convey to us there with regards restructuring charges.

[Paul Thwaite, executive]

Let me -- Chris, no ambiguity. The question was, would there be a restructuring or the potential for restructuring charges? And I said no. So apology as it wasn't as clear as that.

[Christopher Cant, analyst]

And just to confirm as well in terms of the sort of medium-term RoTE expectation and the sub-50% cost income ratio for 2025 that you see is deliverable without sort of ramp? Obviously, you always have restructuring charges within your kind of normal cost run rate every year. But there's no expectation for that to sort of spike up dramatically to deliver that 50% into 2025?

[Paul Thwaite, executive]

That's correct. The way I think about it is -- and we've talked in the past about investing GBP 3.5 billion over 3 years. And a lot of that is going towards driving simplification, digitization, productivity. So we're very much -- because when I think about we work and we pull the cost lever in the organization, it's that in existing investment part that I'm thinking about. I've also been spending a lot of time on making sure the shape of that investment part is focused on that cost-out simplification agenda. So that's how you should think about it rather than additional charges beyond the existing investment plan.

[Katie Murray, executive]

Thanks, Paul. I might just add a little bit more on the kind of help you a little bit on the RoTE point.

Christian, it's almost this -- this quarter is actually a really good quarter to think about the kind of the RoTE piece. So what you've got is kind of stable and gently growing lending, relatively stable and gently growing kind of deposits. So that kind of gives you some comfort on the quality and stability of the balance sheet.

In this quarter, we delivered 14.7% RoTE. That was after a kind of a one-off charge in terms of a property charge, which actually was a drag in the quarter of 1.9%. You can see that in the notable items. So that going to put you above kind of 16% level.

The way that I look at it, we've talked a lot about NIM and incomes and not going to say any more on that. But actually, it's a very nice quarter when you look at kind of the normalized cost number, quite a normalized impairment level. There's a bit of conduct charge within there as well. We've also had a bit of an increase in terms of the RWAs.

So I almost think as you look at this quarter, it's quite a nice kind of blueprint for what you could see going forward. I wouldn't read too much into that and tell you I'm giving you the exact shape as you go forward. But I do think that 14.7% RoTE is a good way to think of us as we go forward as well. Hopefully, that's helpful.

[Christopher Cant, analyst]

That is helpful. Actually, was the other question I wanted to ask. I mean, conscious, you're not going to sort of give us the NIM number. It is clearly very possible for people to take the greater than 3% NIM guide, and as you put it run away with the NIM into 2024. If I sort of come at this slightly differently, you've talked about the medium term 14% to 16% RoTE, are you expecting to be in that range for 2024 as well?

[Katie Murray, executive]

And I think let's talk more about that as we get into February. But I do think those comments I just made around this quarter, I think they're quite helpful when you look at all the different line shapes with -- and some of the RWA growth and Chris, I do say, we'll chew on this out on that a little bit more of that when we meet in February.

[Operator]

Our next question comes from Robin Down of HSBC.

[Paul Thwaite, executive]

Are you there, Robin?

[Operator]

Robin, if you'd like to unmute then you may ask your question.

[Paul Thwaite, executive]

No?

[Operator]

Unfortunately, we don't have Robin at the moment. So we're going to go to Andrew Coombs of Citibank.

[Andrew Coombs, analyst]

If I just have a couple of follow-ups, please. Just firstly on the structural hedge notional on a 12-month look back, you talked about 2024 decline in line, I think, with the balances. But if I look at our 12-month look-back component, if I look at the PCAs, they're down GBP 20 billion year-to-date, your PCAs and savings are down GBP 30 billion, your guidance on the structural hedge notional is for GBP 19 billion decline over the course of the year to get to that 190. So just -- is there now a catch-up in the first half '24, relative to those deposit balances? Just to fully understand that 12-month look back point. That's the first question.

And then the second question just core the lending margin and to the point about being fully repriced by year-end. I also appreciate that you've moved away from giving quarterly completion spreads, and instead talked about this 80 bps over time. But just given the magnitude of the move down driven by lending margin, and that comes despite growth in higher-margin areas like unstrand commercial. Just trying to understand exactly where your front book completion spreads are today, because they must be well below that 80 basis points that you're talking about. And I know the [indiscernible] been volatile, but it does look like you're running well below that at the moment.

[Katie Murray, executive]

Yes. So Andrew, I guess I'm not going to be drawn on that we have talked about the book repricing. It's definitely under some pressure just now. Everyone would be called on the exact number. And as you know, it's something that moves not quite week to week, but in terms of pricing, there's a lot of activity is, I think, one of the most competitive mortgage markets we've been in for some time at the moment, excepting it's always competitive.

In terms of the 2024 decline, mean we're very mechanistic about how we do this. We look at the previous 12 months of the eligible balances. We've given you a lot of disclosure over this year. You can see it in the fence up in terms of what's been exactly happening in current accounts and into term accounts. We've also given you disclosure today around those term accounts and our look forward for them.

We do expect the number to decline into next year. We will see some stabilization, we think, and we talked about that a lot on the call today. And so that will then start as you then move forward and have the 12 months to look back at the end of Q3 and the end of Q4 and into 2025, then you start to see that stabilization of the hedge and then you'll see the reinvestment of the kind of GBP 10 billion at its full level, and that will come through in the later part of the year.

We do, I think, consider the margin on other deposit categories, and how they kind of work out compared to where our hedge balances are. And obviously, those term balances, I think that will help you a little bit as well. Thanks, Andrew.

[Operator]

We are going to come back to Robin Down of HSBC.

[Robin Down, analyst]

Does that work?

[Paul Thwaite, executive]

It does here, Robin.

[Robin Down, analyst]

Sorry, you think after all this training on the Zoom calls, we get the mute function right. Just one quick numbers question and one kind of slightly more conceptual question. Did I hear you earlier say that the mortgage book had dropped to 86 basis points in Q3?

[Katie Murray, executive]

Yes.

[Robin Down, analyst]

Okay. And that's from 102?

[Katie Murray, executive]

Yes. So -- and that's a very consistent pattern in each of the quarters I've got a seen for the last 6 or 7 quarters. So it's just been generally repricing around about 15-ish basis points each quarter.

[Robin Down, analyst]

Okay. And then the second question is kind of a conceptual one. And I've not really sure whether you can ever answer this, but the assumption we all make is that when the structural hedge benefits come through, they're retained by the bank and retain for shareholders, and not pass that to customers through kind of higher deposit rates.

What -- just what gives you confidence that that's -- because the track history of U.K. Banking the last 30 years is that when these benefits come through, they tend to get passed on to the customers. What gives you confidence you're going to able to retain that for shareholders?

[Katie Murray, executive]

So look, I mean, I think I'm probably not going up to give you a perfect answer. But I guess if I look at that structural hedge just now, it's yielding 1.5%. If I look at what we're paying to customers in different accounts, they vary across all of the accounts, whether it's the tricks term where the customer is yielding 5.25%. Clearly, I'm hedging that in the background. So it's not less costly all of that or the term accounts where we've passed through about half 50% of the rate, and obviously, we don't pay on the deposit cuts.

So I think it's very hard to say as that structural hedge number goes up, then automatically, it will go back. I think what's really important is that we balance all of the stakeholders, and that we make sure that we do the right level of pass-through to our customers.

And what you can see as you look at that graph on Slide 8, there's been a real ramp-up in that pass-through during this year. I mean we've -- in terms of kind of interest payments, it's 4.1 billion this -- the first 9 months of this year. That compares to about 375 million last year. So there's been huge pass-throughs kind of going through.

So I would find it very difficult to tell. This is what happened to the hedge, and that was your pass-through. We are clearly managing the whole balance sheet, making sure that we've got stability and gentle growth in our lending side and the same on our deposit side, and we're just kind of making -- trying to make sure we have balance and deliver for all of the stakeholders.

[Operator]

Our final question comes from Fahed Kunwar of Redburn Atlantic.

[Fahed Kunwar, analyst]

Katie, Paul, just a couple of questions. Firstly, on the [ '24 ] cost, I know I don't know if you've drawn into it, but obviously, the report are today about kind of a phrase serious failings regarding the dealing of the de-banking issues. Are you confident that isn't going to result in more kind of controls and compliance rated costs to improve those processes? Or do you think what you've done to date is enough to kind of abate or kind of make regulators happy with where you are at the moment given the findings in that report?

And I ask the question because I think the '24 costs are only up 1% or 2% in consensus, there's big wage inflation, there's that potential cost line coming through, and it going to get to the cost income point that other people have been raising.

And then my second question was just on the 80 basis points and the fact that the front book is probably a lot lower than that right now. I mean listening to other banks, my understanding is a mix issue that new business spreads are higher, remortgaging spreads are lower and a lot more remortgaging is happening right now.

So is that a fair understanding of why your front book is lower than 80 bps right now? And if it is, why do you think that mix is going to adjust away from remortgaging back to new business purchasing given the kind of environment right now, which is quite difficult?

[Paul Thwaite, executive]

Thanks, Fahed. I'll take the systems cost controls and Katie, the mortgages.

So the simple answer, Fahed, is a number of the processes, systems and controls referenced in today's report, we've already implemented changes. There are additional changes to policies and procedures that we will put in place as a consequence of fully accepting the recommendations. But I would say that, as you know, we already spent a significant amount on risk and compliance, and we'd expect that to be within our normal bridges and cost funds.

[Katie Murray, executive]

If I look to mortgage's point, I mean, you can see at the moment that mortgage pricing is very competitive just now. You can observe that when you look at all the kind of the best buy tables and where we are, and then you compare that to obviously, the various funding rates and different sources of funding.

So we are pricing below that level. We do expect this number -- I mean, it moves around a lot. That's why we talk about over time. This is what we aim to do. I mean, one of the -- I think the last time I kind of talked about it in Q1 2022, we were below that, and then you've seen us kind of come up and down. So I think it's something that that's our kind of gold star that we try to manage to, and there will be movements around the time.

What we have seen is that we have now substantially repriced out the higher margin numbers, which is why we're now seeing us for the book kind of coming down to 86 this quarter, and we expect a little bit of more further fall in the next couple of quarters.

[Fahed Kunwar, analyst]

Just -- it's not a remortgage new business thing for you, it is just general competition?

[Katie Murray, executive]

I mean there's a bit of that. I think it's much more general competition that kind of flows through. And this market is very interesting. If I look at it quarter-to-quarter, it moves enormously in terms of the volumes. So it is a market that does change over time.

So I guess for me, that's what gives me confidence on it is that it will change again in the next 6, 7 months, and we'll see that as it flows through.

[Operator]

I would now like to hand back to Paul for any closing comments.

[Paul Thwaite, executive]

Okay. Thank you, everybody. We appreciate you joining your questions, and we look forward to seeing most of you, if not all of you, over the next few weeks. Thanks.

[Operator]

That concludes today's presentation. Thank you for your participation. You may now disconnect.