Earnings Call Transcript - BCS Q3 2023

Operator, Operator

Welcome to Barclays Q3 2023 Results Analyst and Investor Conference Call. I will now hand over to C.S. Venkatakrishnan, Group Chief Executive, before I hand over to Anna Cross, the Group's Finance Director.

C.S. Venkatakrishnan, Group Chief Executive

Good morning. Thank you for joining Anna and me on today's third quarter results call. Against a background of mixed market activity and a competitive environment for UK retail deposits, the Group generated income of 6.3 billion pounds in the quarter, down modestly year on year, excluding last year's impact from the over issuance of securities. Our profit before tax was 1.9 billion pounds with earnings per share of 8.3 pence. We maintained a strong capital position with our CET One ratio at 14%, up around 20 basis points on the second quarter and at the top of our target range. In this context, we delivered a third quarter return on tangible equity of 11%, taking us to 12.5% for the year to date and we continue to target above 10% for the full year. We are managing credit well, with year to date loan loss rate of 43 basis points versus our through the cycle guidance of 50 to 60 basis points costs reduced by 4% in Q3 year on year, excluding over issuance costs last year and in Q4. We will continue to drive further efficiencies and greater productivity for the bank. We expect this to continue to contribute to delivering enhanced returns for shareholders. We will update you on these and other actions alongside our full year results in February. Now, turning to the business highlights. We continue to grow our US cards business with net receivables up 11% year on year at $30 billion, and we announced a new partnership with Microsoft and Mastercard to issue Xbox's first-ever co-branded card in the US. The integration of our UK wealth business and our private bank is also progressing well. We grew clients' assets and liabilities to nearly 180 billion pounds and invested assets to around 105 billion pounds, with this business making nearly 900 million pounds of income in the year to date and generating attractive returns in investment banking. We led some prominent transactions in this quarter, including the Arm ICO in the US. However, in the mixed market environment, we've had pockets of underperformance relative to US peers. In part, this has reflected our business composition. We performed well in equity capital markets, which is a smaller business for us relative to others. We were also selective on leveraged finance deals as a risk management matter, which has affected our debt capital markets performance. We continue to be cautious about the market backdrop but are confident in the potential of our business. And as an example, we are acting as sole financial advisor to Capri in their $8.5 billion acquisition by Tapestry, announced in the third quarter and expected to close in 2024. In market, this was our second highest Q3 income print in a decade, with income of 4% quarter on quarter better than the US peer average. However, income was down 13% against a record Q3 last year on a comparable basis in which we supported clients through extreme volatility and guilt in our home UK market this quarter. We did not benefit to the same extent as our US peers did from the volatility in US rates. As we have said previously, investment in our combined fixed income and equity financing business delivers stability to our overall markets. Over the past four years, our ranking in equity prime brokerage has moved up from 7th rank to joint fifth, complementing our existing strength of fixed income financing, where we rank jointly first globally for the first half of 2023. Turning now to Barclays UK, we delivered a return on tangible equity above 20% for the quarter. Both income and expenses were broadly stable, generating a cost income ratio of 56%, and we intend to improve this over time as we continue to transform the business digitally. There has been an impact on our deposits and margins from retail customers seeking a higher return on their savings, which Anna will cover in more detail. However, at the group level, deposits were up 7 billion pounds quarter on quarter, demonstrating the strength of our diversified deposit and funding base. Our performance over the past three years compared to the previous five shows that we have reset and stabilized group returns, providing a solid foundation on which to build even further. Anna and I look forward to providing an investor update in February alongside our full year results, where we will talk more about our plan to deliver further value to our shareholders. This will include setting out our capital allocation priorities as well as revised financial targets for costs, returns, and shareholder distributions. We have just completed the 750 million pound buyback announced at the half year, taking total shareholder distributions to around 1.2 billion pounds so far this year, including dividends and buybacks. This is up over 30% on the first half of last year and reflects our commitment to returning capital to shareholders. Thank you for listening and I will pass it on to Anna.

Anna Cross, Finance Director

Thank you, Venkatakrishnan, and good morning everyone. Turning now to slide six. Return on tangible equity for the third quarter was 11%, which takes us to 12.5% for the year to date. The cost income ratio was 63% in Q3 and 61% for the nine months, in line with our low 60s guidance for the full year. We continue to see limited signs of credit stress, as the loan loss rate for the quarter was 42 basis points and 43 for the nine months, and we have maintained strong capital and liquidity positions. As you just heard from Venkatakrishnan, we will update you with revised financial targets at an investor update alongside our full year results. As part of this update, we are evaluating actions to reduce structural costs which may result in material additional charges in Q4 impacting this year's statutory performance, excluding any such charges. We continue to target a return on tangible equity above 10% for the full year, focusing now on Q3. Starting on slide seven. There was no impact from the over-issuance of securities this quarter, but given the largely offsetting impact to income and costs in Q3 last year, I will again use the adjusted numbers for the prior period. Group profit before tax was around 50 million lower at 1.9 billion, with income down 2% and costs down 4% year on year. Within total costs, operating costs were stable and there were no litigation and conduct charges this quarter, compared to 164 million in Q3 last year. Impairment charges were up 52 million to 433 million, with the charge and business mix as we expected, largely driven by growth in US cards. Key NAV increased 25 pence to 316 pence, reflecting our profits and positive cash flow hedge reserve movements broadly offsetting last quarter's downward move. As usual, I will now cover the three key drivers of our returns, namely income costs and credit risk management. Starting on slide eight, group income was down 2% at 6.3 billion. The 8% stronger sterling US dollar rate in Q3 year on year reduced our reported income, around 40% of which is in dollars. Corporate Investment Bank income fell 6%, with lower activity in the investment bank partially offset by corporate income growth year on year. Consumer cards and payments income was up 9%, driven by growth in US cards receivables and the UK wealth business transfer from Barclays UK in Q2, excluding the transfer, CCNP income was up 5% and Barclays UK income was up 1%. Net interest income across the bank grew by 179 million or 6% year on year, driving a 13 basis point increase in group net interest margin to 3.98%. Barclays UK contributed around half of group net interest income this quarter, with approximately 20% from CIB and 30% from CCNP, mostly US cards, and the private bank. CCNP net interest income increased by 64 million, mainly from US cards balance growth partially offset by private client deposit migration to our higher yielding products. This generated a net interest margin of approximately 8.9% in Q3, which was up from approximately 8.3% at Q2 and included a small one-off increase in private bank, so we would expect net interest margin to step back a little in Q4. CIB net interest income increased 94 million year on year, which included an improvement of nine basis points to 3.65% in net interest margin, driven by the benefit of rate rises in transaction banking. Moving on to costs on slide ten, we are delivering our operating cost guidance with costs in Q2 and Q3 of around 4 billion below the Q1 high point. The cost income ratio improved year on year to 63%, consistent with Q2. Barclays UK cost income ratio was 56%, with total costs flat year on year. As we progress our digital transformation and rationalization of the physical footprint and headcount, consumer cards and payments operating costs increased by 9%, broadly in line with income. As we invested to grow US cards and our private bank CIB operating costs were stable year on year below the Q1 level as guided. As we said, we are evaluating actions to reduce structural costs across the group, and we'll give more detail at our investor update. Moving on to credit on slide eleven, we are seeing the benefit of our longstanding, prudent approach to provisioning, both in terms of credit decisions we have taken in the past, reflected in our balance sheet provision and coverage ratios, as well as the credit protection we have in the CIB. The impairment allowance increased by 0.3 billion to 6.4 billion. This was primarily driven by our US cards portfolio. In line with our expectations, we updated the macroeconomic variables from Q2, resulting in a modest impact on expected credit losses. We maintained robust coverage ratios of 1.4% for the group and 8.6% for our card portfolios in aggregate, which I'll cover in more detail on the next slide. Starting with UK cards, we continue to see conservative customer behavior across our UK portfolios and credit performance remains benign. Customers are being disciplined about building unsecured balances with UK card repayment rates high across the credit spectrum. Although we have grown balances modestly over the past year, interest earning lending balances have decreased impacting net interest margin but benefiting credit performance. We do expect impairments to grow in 2024 as our more recent customer acquisition activity begins to mature. 30 days arrears rates remain stable and low relative to historic levels. The nature of our US cards proposition is different. As a reminder, we are the partner card issuer for around 20 client rewards programs, including some of the biggest brands in the US. Given our historic skew to travel and airlines, this is a high credit quality portfolio. Our risk mix has improved since the end of 2019, with 88% of the book above a 660 FICO, compared to 86% at the end of 2019, including the addition of the Gap portfolio in 2022. On the chart, you can see that 30-day arrears rates are now in line with our pre-pandemic experience at 2.7% as we expected. Our impairment coverage also increased to 9.7%, with stage two now at 35%, reflecting our expectation of higher unemployment from September's low level of 3.8% to a peak of 4.4% by Q3 2024. This would of course result in increased arrears, which are reflected in our balance sheet provisioning. Moving on to the impairment charge on slide 13, the impairment charge of 433 million was up around 50 million year on year, giving a loan loss rate of 42 basis points. Most of the Q3 charge was driven by growth in US card balances. Continued seasoning of the Gap book in line with expectations and the increase in arrears that I mentioned. Our guidance of 50 to 60 basis points through the cycle is higher than the year-to-date experience. We are mindful that Q4 usually sees a higher charge, in part reflecting seasonality and our expectations of US cards growth over the holiday season. This generally leads to higher balances and some buildup in impairment under IFRS 9, where increased utilization, even by customers who are making timely payments, can trigger stage two migration. The Barclays UK charge was 59 million with a loan loss rate of ten basis points, and this has been below 30 now for nearly three years. Even though our customers are experiencing affordability pressures, this is not translating into credit stress as they manage their finances proactively. The CIB had a small release and we are seeing no real observed credit deterioration, with our synthetic credit protection also working well. Moving now to the business performance, starting with Barclays UK on slide 14. Profits were stable year on year, with a return on tangible equity of 21% for the quarter. Excluding the UK wealth transfer, income was up 1%. Costs were broadly stable as our transformation plan progressed, resulting in a cost to income ratio of 56% for the quarter. Loan growth remained muted, reflecting customer caution in the current macroeconomic environment and our prudent risk positioning. The reduction in business banking assets was driven primarily by repayment of government-backed loan schemes of 2.7 billion. Mortgage balances were stable in the quarter at 166 billion, with remortgaging still contributing most of the activity. Now looking at Buk net interest margin, which was 304 basis points. As a reminder, Buk net interest income is around 25% of group income and one basis point of net interest margin equates to around 20 million of net interest income annualized or less than 0.1% of group income at Q2. We said that we expected net interest margin to step down in Q3 and then to stabilize into Q4. Most of the moving parts played out as expected in Q3, with structural hedge tailwinds continuing and mortgage margin pressure somewhat easing. The impact of base rates was also in line given pass-through rates have increased. However, the step down in net interest margin in Q3 was larger than expected, with deposit balance and mix trends more pronounced. Average balances quarter on quarter actually contributed a larger deposit effect than period-end balances we have shown on the slide. When combined with pricing effects, this reduced net interest margin by a net 21 basis points compared to a net six basis points in Q2. You can see that we grew deposits during the pandemic by 53 billion to 258 billion by the end of 2022. As customers built up cash with us in their current and instant access accounts. We anticipated that these balances would fall as customers manage their finances proactively, paying down debt and locking in higher yields on their residual savings. Our current account moves appear in line with the latest Bank of England industry data, but intense competitive pricing meant we did not capture as much of the flow into higher rate products. We emphasized at Q2 how sensitive guidance is to the level and mix of deposits, and this remains the case. We now guide to a range of 305 to 310 basis points for the full year to help frame this. If we see similar trends in Q4 as we did in Q3, both in terms of mix and volume, full year net interest margin would be towards the top end of this range. Turning now to structural hedge income, two thirds of which accrues to Barclays UK. Slide 16 illustrates the importance of the hedge to the level and visibility of our future net interest income. The hedge is designed to reduce volatility in net interest income, so in an environment where rates are peaking and eventually start to fall, it will help to stabilize net interest margin. It also provides a high degree of certainty to future net interest income. The chart shows that 95% of 2023 gross hedge income is already locked in, and the next two years portions of locked in net interest income have increased by three to 400 million per year since H1. As we rolled a further quarter of hedge maturities, notional hedge balances reduced by 4 billion in Q3 to 252 billion. Given the trends we are seeing in retail deposits, we expect the notional balance to continue to reduce more or less in line with lower hedgeable deposits. Swap rates currently at around 4.5% mean reinvestment rates remain well above maturing yields of around one to one and a half percent for the next two years, and with 50 to 60 billion of hedges maturing annually over this period, we expect the reinvestment effect to outweigh notional hedge declines. Turning now to consumer cards and payments on slide 17, growth in our US cards balances and the UK wealth transfer drove a 9% increase in CC&P income, partially offset by FX. We grew US cards balances by 11% year on year to $30 billion. In the private bank, total invested assets were 105 billion, up 27%, excluding UK wealth, as clients moved deposits to money market funds and other investments. With US payments income modestly down year on year as customers adjusted their spending to lower value essential items which have lower margins, offsetting the 9% increase in payments. Processed return on tangible equity was 9.6%, reflecting both higher income and operating costs year on year as we grow these businesses. Moving on to the corporate investment bank, CIB income fell 6% year on year in sterling terms, in part reflecting the stronger sterling US dollar rate. The more stable elements of our CIB income performed as we expected in markets. The relative stability from our combined fixed income and equity financing businesses was visible again compared to the downward move in intermediation and corporate, delivering strong year-on-year income growth reflecting higher rates in transaction banking and the non-repeat of leveraged finance marks this time last year in corporate lending. As you heard from Venkatakrishnan, markets was down 13% in dollars versus a record third quarter in 2022. Fixed income financing fell 19% in dollars as we benefited less from US rates volatility compared to guilt volatility in the UK. This time last year, fixed income financing income reduced due to a normalization of inflation-linked benefits, as we have mentioned previously, and we are smaller in securitized products, which was an area of strength for some of our peers. Equities were up 3% in dollars as derivatives and cash performance were partially offset by equity financing as client balances continued to grow, albeit as spreads tightened. Banking fees were down 24% year on year, with a better performance in ECM not sufficient to offset weaker DCM. And advisory, given the relative scale of those businesses for us, combined with stable costs and a small impairment release, return on tangible equity was 9.2%, which, even in a mixed quarter like this one, does not reflect the potential of our franchise. CIB RWAs were relatively stable with the increase to 219 billion on Q2, largely driven by FX. Turning now to capital funding and liquidity. Starting on slide 19, we continue to maintain a well-capitalized and liquid balance sheet with diverse sources of funding and a significant excess of deposits over loans. Looking at these metrics in more detail, starting with capital and slide 20, our CET One ratio increased around 20 basis points to 14%, attributable profit generated 37 basis points, totaling 128 basis points over the last three quarters. As we indicated previously, our MDA hurdle increased to 11.8% from the increase in the UK countercyclical buffer, and we continue to operate with ample headroom whilst Basel 3.1 remains at proposal stage. We continue to guide to the day one RWA impact to be at the lower end of the five to 10% range. This reflects what we see from all the proposals across the jurisdictions we operate in, including the US. As a reminder, the PRA's rules remain the most relevant. On a group consolidated basis, our total deposit position remains stable as we have a diverse deposit franchise across consumer UK and international corporate customers. Within that, the decline in the UK deposits that we discussed earlier was more than offset this quarter by inflows from global corporates, and this places us in a strong position to manage seasonal fluctuations that we often see around year-end from balances held for financial sector clients. Our liquidity coverage ratio of 159% represents a surplus of 116 billion above our minimum regulatory requirements. We continue to be comfortable with our liquidity position, and we have demonstrated its robustness throughout the market disruption earlier this year. So, concluding with our outlook, we are evaluating actions to reduce structural costs to help drive future returns, which may result in material additional charges in Q4 impacting this year's statutory performance. Excluding any such structural cost actions, we continue to target return on tangible equity above 10% in 2023 and a cost income ratio in the low 60s. Our loan loss rate guidance remains 50 to 60 basis points. This is higher than the year-to-date experience, allowing for some potential seasonality in US cards in Q4. As of now, we are not seeing anything that concerns us and we would view the guidance as a through the cycle range. Our CET One ratio was at the top end of our target range, and strong capital generation in the year to date supports our commitment to return capital to shareholders. We will provide more details at an investor update at our full year results in February, including our capital allocation priorities and revised financial targets. Thank you for listening. We will now take your questions and as usual, please limit yourself to two per person so we get around to everybody.

Operator, Operator

Our first question today comes from an unidentified analyst from Morgan Stanley. Please go ahead. Your line is now open.

Unidentified Analyst, Analyst

Hi, good morning. A couple of questions please. On the first one on UK net interest margin, your guidance I think I understood the top end of the guidance, the 310, assumes a similar sort of deposit trend as in Q3, I guess. Your guidance implicitly says that things could get worse in Q4 in terms of mix and volumes. Can you maybe sort of explain what happened during Q3? And why have you given yourself some room for deteriorating trends? I think most of the guidance from your peers and maybe even yourselves was that once the rate sort of hikes were over, you would see much more stable deposits. So interested to see why you've left yourself some room for deterioration. And the second question is on the restructuring charge in Q4. Obviously, your 10% ROTE guidance is now excluding this restructuring charge. The question is, how much is that going to interfere with the payout and with buybacks that you may announce at the end of the year? Because I would have thought, given the provisions are going much better than expected, you would have had plenty of room to cover potential restructuring without going into your ROE guidance. But that doesn't seem to be the case. So maybe how should we think about year-end distribution? Obviously capital going better, but more restructuring costs. Maybe sizing that restructuring costs will be helpful. Thank you.

Anna Cross, Finance Director

Thank you. Good morning and thanks for starting off the questioning. I'll take the first one and then I'll pass to Venkatakrishnan for the second half of that. So let me just talk through UK net interest margin in the third quarter and just to level set and reiterate what I said on the call. A basis point of net interest margin is 20 million annualized, less than 0.1% of group's income. What we said at Q2 was that we expected net interest margin to step down in the third quarter and somewhat stabilize into the fourth. There were a few moving parts within that and much of it has played out as we expected. So we've seen a lessening of the impact of mortgage churn, we've seen a continued tailwind from the structural hedges. Actually, deposit pricing played out roughly as we expected. And you can see that that's negative in the quarter for the first time, as we indicated it might be. What's really different is the movement in deposits. And what I said on the call earlier was that actually the movement in average deposits is a bit more significant than the quarter end might indicate. And whilst we saw very similar trends to the overall Bank of England movement in current accounts through the quarter, we captured less of that into fixed term deposits than we might have expected to. And that related purely to the intensity of competition that we saw during the quarter and very intense at particular points. And it's really that that's made the difference. So I would say it's depositor behavior that has somewhat intensified in response to pricing. So previously we said that we expected that to be more stable in Q4 and that's simply because in Q4 you typically see a deposit stabilization pre Christmas. We now no longer anticipate that just because of these competitive dynamics and that's really what's causing us to change that outlook.

C.S. Venkatakrishnan, Group Chief Executive

Yeah. Thanks. I'm sure you sort of caught this through the presentation, but just to add on the net interest margin point, for the overall group deposits, as Anna said, Barclays UK net interest margin is part of our overall net interest margin. Our overall deposits grew about 7 billion quarter on quarter and our net interest income is up about 6% year on year at 3.2 billion and net interest margin itself at 3.98%. At the group level, again, 13 basis points higher. So think about in the larger context and also coming back to the restructuring charge, two things I would say. One is you should think of this structural cost action as part of the investor update which we will provide in February. So what this is, is we have to announce it now because as we work through it, we will likely take a charge in Q4. That's why we announce it now. But you should think of it as not something related to a quarter or the last two quarters, but part of the larger structural improvement of efficiency and productivity for the bank. As for your specific question, what I would say is a few things. Number one is that we very deliberately start this quarter at a strong capital position of 14% and we've got a capital generation of about 130 basis points of CET One ratio year to date. This underpins our ability to return capital to shareholders. As far as our desire, you know, we completed a 750 million buyback in the first half. And so total distributions so far this year are 1.2 billion, which is about 30% higher versus the first half of last year. And this really reflects our commitment to return capital to shareholders. We spoke about the efficiencies we are driving across the group equally. You should know that we are comfortable to operate in the full range of 13% to 14% and we have been there in the past. Obviously, any capital action ultimately is approved by the board and approved by regulators. But from our point of view, and we'll come back with the details in February from our point of view, good initial starting position, good capital generation across the bank. Understand the importance and the priority to our shareholders of returning capital, willingness to operate through the range.

Unidentified Analyst, Analyst

Thank you very much.

C.S. Venkatakrishnan, Group Chief Executive

Next question, please.

Operator, Operator

The next question comes from Jason Napier from UBS. Please go ahead. Your line is now open.

Jason Napier, Analyst

Good morning. Thank you for taking my questions. Two for me. The first is coming back to the issue of the flagged restructuring charges. As you mentioned, capital really strong and in fact, the Q3 beat alone is a billion pounds relative to consensus. And so I guess anything that you could say to provide a rough sense of how much you're looking at spending here. I appreciate this is not the venue at which you wanted to give it, but today conversations with the investors are that there seem to be risks on the payout front, with no sense of how much cost savings we might be talking about or where in the group you might be looking to be more efficient. Clearly, we think it's the right thing to be doing, but the billion beat on CET One is 7% of annual group costs. You could do a lot with that. So anything you can do to be helpful on what the payback would be for the charges that are already in mind and which are triggering these provisions, that would be the first and then secondly linked to that at your conference in New York last September. Last month, before, you said you were happy with the mix of business for the group. And so I wonder whether you'd give us a sense as to when you talk about updating investors on capital allocation priorities, whether you're really just talking about what grows faster in future or whether we should have in mind a sense that the present mix of capital allocation is up for debate. Thank you.

C.S. Venkatakrishnan, Group Chief Executive

Yeah. Good questions. Thank you. Let me begin on both of them and then I'll let Anna add on any details. So on the capital versus the spending, look, this is not the right place to be giving think you. Know, as I said in the answer to the previous question from the analyst, we started at a good point on capital. We've been accretive on capital and view the spending and the restructuring in the larger term context. I'll let Anna add to that in a minute. And on the second thing, what I would say mean I view the investor update in a simple way. It's obviously complex to analyze and execute, but I view the question in a simple way. It is what do you think is the target return that this bank can generate for its shareholders? So what's the return on tangible equity ambition? How is it comprised at the group level and in the individual businesses? How much can it improve in the individual businesses and therefore, what is it that you wish to fund in that improvement? I also said in New York, it's very, very clear that the market values different businesses differently and we obviously have to take that into account in the way in which we think about our capital. So, you know, you sort of put it all together and you get the picture of where we think we want to go. But obviously more details on that later. And then ultimately, once you do that, then to be targeted about saying what of that growth and return you wish to target returning to investors? Because I do absolutely take the point that we announce the buybacks on a half-yearly basis and we don't have a target out there for that. And that would be something that I think our investors would find desirable.

Anna Cross, Finance Director

Thanks. We're still going through the process of evaluating those actions, as we said. So we haven't come to a finalized list yet. We have called them material. Let me help you a little. You'll note that from our RWA we have called out the year-to-date restructuring charge is around 120 million. So we've shown that to you and told you that it's largely in the UK. In any typical year we run at between two or 300 million. So by calling this out, we're indicating to you that it will be higher than that. But I can't comment on specific levels simply because we haven't finished the work. But as Venkatakrishnan said, as we take those decisions, we're extremely focused on future returns and we understand and are committed to shareholder returns. So that's very much in our mind. The other point around the strength of the capital position. We've been operating with good cost and capital discipline all year. That's clearly the foundation of where we step out from in February and we'll tell you more then.

Jason Napier, Analyst

Thanks very much.

C.S. Venkatakrishnan, Group Chief Executive

Okay, thank you. Can we have the next question please?

Operator, Operator

The next question comes from an unidentified analyst from Bank of America, Merrill Lynch. Please go ahead. Your line is now open.

Unidentified Analyst, Analyst

Hi, good morning. Thank you very much. I just wanted to come back on the Barclays UK net interest margin and really the trends that you were seeing on deposits through the third quarter and then what you're seeing so far in October. So, you mentioned that the averaging effect was actually worse than the endpoint position, suggesting that actually things got better in September, perhaps. So I was wondering if that's continued in October. So really how we should think about sort of the trajectory of those deposit flows through the quarter and then into Q4. And then, just to clarify that when you say if Q3 trends continue, then expect to be at the top of the guided range, is that essentially taking the margin bridge on slide 15 and excluding the five basis points impact from pricing is how to think about that. Thank you.

Anna Cross, Finance Director

Thanks, why don't I take those? So what we really mean by the averaging point is that the outflows were probably a bit more evenly spread through the quarter than they were in the second quarter, where we saw somewhat of an increase in intensity towards the second half. I don't think it was lessened in September at all. There were certainly quite a few headline rates out there that were extremely competitive in terms of October. I just call out the fact that we haven't yet seen the first month's end, so we're still midway through the first month. There's nothing in what we can see so far that's really sort of beyond our expectations. All right. With our own forecast, that's all I can really say at this point in time. But I would just sort of highlight that what we're seeing is the impact of the pricing in terms of the sort of range of guidance. What we're really saying, rather than any particular point on the bridge, is that depending on where those deposit flows go, you could end up with a very different exit rate. So that's what we're really calling out to you. And clearly, if we saw trends similar to what we saw, i.e., the deposit trends continue similar to what we saw in Q3, we would be towards the top end of that range. And that would give you a particular jumping off point for 2024. What I would highlight, though, is that the structural hedge continues to protect the net interest margin overall. And what you have seen over the last quarter is that we've been able to lock in another large chunk, both of 2023 income, but another three to 400 million of 2024 and 2025 income just because of the way that hedge is rolling month on month.

Unidentified Analyst, Analyst

Yeah, that's very helpful. Thank you. Just a quick follow up, if I could then. So given that you talked about the hedge into the coming years and you were expecting this deposit stabilization in Q4, do you have a view going into next year in terms of deposit trajectory, given what you're seeing in terms of competition in the market? What this year has taught us is that customer deposit behavior is quite difficult to call. So what I'm not going to do is give you a 2024 net interest margin outlook. What I can tell you is that there are three factors that we're looking at. One is positive, one is neutral, and one is more negative. So the positive impact is clearly the impact of the structural hedge. And remember that two-thirds of that goes into Barclays UK. The more neutral impact is that we do expect and we are seeing that the impacts, quarter on quarter of mortgage churn are starting to dissipate, called that out for some time. What is more difficult to call is the impact of this ongoing deposit behavior, both the reduction in deposits because customers are using them in order to manage the broader economic environment, but also then seeking higher rates, difficult to call out when that would stabilize. But all I can say is that there are other factors in the mix, most importantly, the structural hedge. Thank you very much for that.

C.S. Venkatakrishnan, Group Chief Executive

Okay, thank you. Next question, please. Our next question comes from an unidentified analyst from Autonomous. Please go ahead, your line is now open.

Unidentified Analyst, Analyst

Good morning. Thanks for taking my questions. Two please. One on net interest margin and one on return on tangible equity. So appreciate everything you've said about the difficulty in predicting deposit behavior and the fact that the UK net interest margin is not the be all, end all for your group revenue dynamic. But obviously we've had some pretty dramatic shifts in your net interest margin guidance over a few quarters. And there's a huge range of possible Q4 exit levels implied by the range you're now giving us. So a very simple question. Please help us with your views on what might happen. What's the average cost of your deposit balances in the UK and what proportion? And then on return on tangible equity in terms of the risk to the 10% ROE target, if I just kind of run the numbers on your equity for the year to date and wave out of Q2 to get to, say, a 9% ROE, including restructuring charges, that would imply sort of a negative bottom line number for the fourth quarter. You've obviously delivered pretty strong ROE year-to-date. The fact that you're flagging potentially not being able to hit the greater than 10% ROE inclusive of restructuring charges implies the fourth quarter could be a net loss. Is that the right way for us to be thinking about this? And within that, when you're flagging the 120 million of restructuring charges year to date, is it the case that when we get to the fourth quarter, the catch-up to the normal 200 to 300 is going to be excluded from your ROE calculation as well? How are you thinking about that? Is two to 300 in the ROE calculation and then the exceptional charge on top of that excluded? Or is the whole amount potentially going to be excluded when you calculate your ROE at the end of the year to assess delivery on that target. Thank you.

C.S. Venkatakrishnan, Group Chief Executive

Okay, thank you very much. I think the important thing to clarify, as I said in my previous answer, is that we haven't concluded on our plans when we do those assessments. We will be coming back to you in February, both in terms of costs and the ongoing impacts that we would expect them to have.

Unidentified Analyst, Analyst

Thank you.

C.S. Venkatakrishnan, Group Chief Executive

Okay, our final question today comes from an analyst from Citigroup. Please go ahead. Your line is now open.

Unidentified Analyst, Analyst

Good morning. Thank you for squeezing me on two questions. One, hopefully very short. First question. You're encouraging us to look at the group net interest income, including the CIB. So perhaps you could just comment on the transaction banking revenues obviously up a lot year on year, but they are down Q on Q, which slightly bucks the trend versus what we've seen at US peers. So perhaps you could elaborate on what drove the Q on Q decline there. And then second and broader point on deposits and pricing just in relation to the 14-point FCA Action plan. I think their fair value assessment was due by the end of August. You had to provide details on communication and evidence, what you are providing to the consumer by the end of September. I think the next big thing is this whole debate around on-sale versus off-sale, which comes in from the 31st of July 2024. So anything you could say on on-sale versus off-sale, how big a bucket of off-sale products you have, how the pricing compares, et cetera, et cetera. Thank you.

C.S. Venkatakrishnan, Group Chief Executive

In terms of transaction banking, it did step back quarter on quarter. There was a relatively small impact from deposit migration. And again, I would say within corporate we're seeing migration from our non-interest bearing into interest-bearing, but those deposits are remaining within the bank. So that's certainly not the larger part of it. What we did see is an impact from the returns in our liquidity buffer. There's nothing idiosyncratic going on. There more that for any liquidity buffer, the returns are in two parts. The first is the carry, and then the second is, in any particular quarter, you would see some disposal income. In this environment, that disposal income has been very low. And given that much of that buffer income is actually attributed to transaction banking, it's had a disproportionate impact in this quarter that will obviously move around a little bit.

Anna Cross, Finance Director

So on the consumer duty piece on SCA, we actually did our mailing through July and August in relation to savings. That was exactly, as you point out, designed to ensure that our customers are very much aware of the savings businesses that we have and the rates on offer. And increasingly, we see our customers using digital means to look and observe that anyway. But that mailing is behind us. We will do a further mailing in November and December to our current accounts. And for us, off-sale is relatively small, so I wouldn't call it out as an impact.

C.S. Venkatakrishnan, Group Chief Executive

Thank you everyone for your questions and your participation. We appreciate it.