Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q4 2024
C.S. Venkatakrishnan, CEO
Good morning. It's good to see you all this year. Thank you for coming, and welcome to our Full-Year 2024 Results and Progress Update Presentation. You can see the agenda for the morning on this slide. We'll go straight into results before turning to review progress in the first year of our three-year plan. And as usual, there will be an opportunity for those in the room to ask questions at the end. Note, we also include an update on key operational developments for each of our five divisions as an annex to today's presentation. We won't talk to these slides, but have included them in the spirit of transparency and to help you understand how we are delivering our plan. So let me start with some performance highlights before handing over to Anna to take you through the financials. At our investor update last February, we set out a three-year plan to deliver a better run, more strongly performing and higher returning Barclays. I'm encouraged by the progress which we have made during the first year. We are executing the plan in a disciplined way and have achieved all of our financial targets for 2024. And we are on track to achieve our 2026 targets. Last year, we delivered a return on tangible equity of 10.5%, in line with our target greater than 10%. We also announced £3 billion of capital distributions, an important step towards our target to distribute at least £10 billion to shareholders by 2026. This includes £1.2 billion of dividends, enabling a 5% increase in our dividends per share to 8.4p. And also £1.75 billion in buybacks, £1 billion of which was announced today, which we expect to initiate in the coming days. We have made progress on deploying £30 billion of additional RWAs in our highest returning U.K. businesses, while keeping investment banking RWAs broadly stable. This has resulted in the investment bank falling from 58% to 56% of the group's RWAs on its way to our 2026 target of circa 50%. We remain well capitalized, ending the year with a CET1 ratio of 13.6%, within our range of 13% to 14%. We are improving the quality of our income and the stability and durability of our returns. We are making progress towards our approximately £30 billion income target in 2026. Our top line grew by £1.4 billion or 6% year-on-year during 2024. We achieved our NII targets for the group and for Barclays U.K. Our structural hedge provides a predictable and highly visible source of net interest income growth over several years. Our cost-to-income ratio for the full-year '24 was 62%, better than our guidance of circa 63%. Our credit performance was also strong, particularly in the U.K. with a group loan loss rate of 46 basis points for the year, below our through-the-cycle 50 to 60 basis points target range. Across Barclays, we are focused on execution. We delivered £300 million of gross efficiency and cost efficiency savings in the fourth quarter, enabling us to achieve our £1 billion target for all of 2024. We remain focused on improving our operational and financial performance across each of our five divisions. Anna will review our financial performance by division shortly, but let me first cover a few highlights. Barclays U.K. delivered a return on tangible equity of 23% for the year. We completed the acquisition of Tesco Bank on the 1st of November. Through this acquisition, we have gained a strategic relationship with the U.K.'s largest retailer, supporting growth in our home market. We plan to leverage our expertise in partnership credit cards developed over decades in the U.S. to drive further growth and customer engagement. Across the rest of Barclays U.K., deposit balances have continued to stabilize and lending trends are encouraging, resulting in organic balance sheet growth in the fourth quarter. U.K. Corporate and the Private Bank and Wealth Management divisions also contributed to the group's balance sheet expansion. In the investment bank, our objective is to improve returns by regaining market share and improving our RWA productivity and cost efficiency. I'm broadly satisfied with how we have fared against these metrics. I expect further significant progress in each of the next two years to deliver our targets. The 8.5% RoTE for the Investment Bank in 2024 is up 1.5% year-on-year. It's a good step on our journey to deliver returns in line with the group by 2026. We expect the Investment Bank to deliver further progress on RoTE in the year ahead. Returns in the U.S. consumer bank improved to 9% from 4% as impairment charges normalized as expected and as we proactively improved our operational performance. We've also made good progress to simplify the bank by divesting the non-strategic businesses that we outlined at our investor update, including the Italian mortgage portfolios in 2024 and the German consumer finance business completed last month. Before I hand over to Anna, I would like to make two broad points. The first is about the composition and quality of our businesses and of our results. As I hope you see in our 2024 outcomes and in our 2025 outlook, we are aiming to construct a bank with a good mix of businesses, which performed well individually and collectively. We aim to achieve a healthy balance between consumer and wholesale activities, sound revenue weighting among fees, interest and transactions, with a geographical mix that takes advantage of our presence in the U.K., the depth and breadth of our business in the U.S., bridging to the important financial centers of the world. This aims to deliver robust and reliable performance across interest rate and credit cycles. That is the objective of the business strategy, which we presented last year and continue to prosecute. My second broad point is that, while Anna and I have the honor to present our results, this performance has been generated by over 90,000 colleagues at Barclays. They have helped implement the strategy so far, and they are core to our achieving success over the next two years. To further align their efforts with our shareholders, our colleagues should be able to participate in the ultimate outcome of their work, which is the change in our share price. Therefore, we are announcing today a share grant of approximately £500 million for the vast majority of our colleagues. Essentially, all employees across all locations outside of managing directors and what we call material risk takers. I have long felt that this kind of alignment between shareholders and employees through broad-based equity participation strengthens business outcomes. In the U.K., sadly, broad-based equity ownership has been declining. This represents our effort towards arresting and correcting this trend. So with that, I'll hand over to Anna.
Anna Cross, CFO
Thank you, Venkat, and good morning, everyone. Slide 6 summarizes our financial highlights for the fourth quarter and the full year. Profit before tax was £8.1 billion, an increase of 24%. This included a Q4 profit before tax of £1.7 billion, up from £0.1 billion. Before I dive into the details, I want to note that our results are influenced by foreign exchange rates. The year-on-year performance in Q4 was impacted by a weaker U.S. dollar, which reduced our reported income, costs, and impairments. On the other hand, the dollar strengthened from Q3 to Q4, and I will highlight these effects where relevant. The group's statutory return on tangible equity was 10.5% for 2024, exceeding our target of more than 10%, compared to the previous year's return on tangible equity of 9%, which was affected by £0.9 billion of structural cost actions in Q4. Much of the improvement in return on tangible equity came from higher income, particularly in the investment bank, Barclays U.K., and Private Bank and Wealth Management. This improvement occurred while we increased tangible book value per share by 26p during the year to 357p. Throughout the year, as you know, I have focused on four key performance areas: income stability, cost discipline, efficiency savings, credit performance, and a robust capital position. We achieved success in all four areas. I will now cover these in more detail, starting with income on Slide 8. Our income growth remains supported by the structural hedge and is now bolstered by balance sheet growth. Income in the Investment Bank, although seasonally lower in Q4, benefited from the execution of our initiatives to enhance productivity and an increase in the industry wallet. This contributed to a 6% increase in total group income for the year, reaching £26.8 billion. Excluding foreign exchange effects, income rose by 7% year-on-year. More stable income streams from retail, corporate, and financing grew by 3% year-on-year and accounted for 74% of group income. Turning to net interest income, our group net interest income increased for the third consecutive year, rising by 3% in FY 2024 to £11.3 billion. Excluding Tesco, group net interest income increased 2% to £11.2 billion, with Barclays U.K. increasing 1% to £6.5 billion. Both figures matched our Q3 guidance and were more favorable than our February guidance. This growth reflected the benefits of higher-than-expected interest rates and quicker deposit stabilization on our net interest income, including higher reinvestment income from the structural hedge. The structural hedge is designed to mitigate income volatility and manage interest rate risk. A high proportion of balances hedged reduces our sensitivity to short-term rate cuts. Net interest income from the hedge rose by £1.1 billion during the year, totaling £4.7 billion. The income generated by this hedge is substantial and predictable, as we have secured £9.1 billion of gross income over the next two years, increasing from £7.8 billion at Q3 and £4.8 billion a year ago. This income will continue to grow as we reinvest maturing assets at higher yields. As consumer deposit behaviors have stabilized, the average duration of the hedge has modestly increased to around three years. Now, moving on to costs, we achieved a cost-income ratio of 62% for the year, below our target of around 63%. This included a £90 million provision for motor finance in Q4. As planned, we delivered £1 billion of gross efficiency savings during the year, with £0.3 billion coming in Q4. These savings allowed for room to invest and grow the business. We proactively accelerated structural cost actions in multiple divisions due to strong performance throughout the year, while still achieving our cost-income ratio target. The costs of these initiatives, which will benefit our future returns and efficiency, totaled £110 million in the quarter, amounting to £273 million for 2024, well within our typical annual range. Regarding impairment, the FY 2024 impairment charge of £2 billion equated to a loan loss rate of 46 basis points. This included a day one charge for Tesco Bank of £209 million due to accounting rules requiring balances to be recorded at Stage 1. The credit outlook in the U.K. remains stable, with low delinquencies in our consumer books and wholesale loan loss rates below our long-term expectations. Specifically, the Barclays U.K. charge was £365 million, including day one effects from Tesco Bank, resulting in a loan loss rate of 16 basis points for 2024. The U.S. consumer bank impairment charge decreased by 10% year-on-year to £1.3 billion. Delinquencies in the U.S. consumer bank are occurring as expected, with 30- and 90-day delinquencies remaining stable. As previously indicated, impairment charges in this segment were lower in 2024 compared to the previous year, with second-half charges also lower than those in the first half. Coverage ratios remain strong. Looking ahead, we anticipate the loan loss rate for FY 2025 to be similar to that of 2024, accounting for the delayed effects of past delinquencies and the anticipated day one effect of the General Motors partnership in Q3 2025. It is important to note that loan loss rates generally rise in Q1 due to holiday spending in Q4. Now transitioning to our U.K. growth, this slide outlines key aspects of our organic growth. Gross mortgage lending saw an uptick throughout the year, supported by a more active property market and increased loan-to-value lending. 15% of our mortgage lending was to higher loan-to-value borrowers, up from 9% in 2023. We gained 1 million new Barclaycard customers, a 58% increase year-on-year, aligning with our strategy to regain market share in unsecured lending. In the corporate bank, we allocated around £3 billion of risk-weighted assets by extending client lending facilities to foster future lending growth. Clients have started to utilize these facilities, contributing to around £1 billion of net U.K. corporate loan growth in Q4. Focusing on Barclays U.K., you can reference financial highlights on Slide 15, but I will address Slide 16. The acquisition of Tesco Bank in November complicates Q4 comparisons, so let me clarify these details. First, there was a gain on acquisition of £0.6 billion and a day one impairment charge of £0.2 billion. Together, these factors created a one-time benefit to Barclays U.K.'s statutory return on tangible equity, which stood at 28% for the quarter. Excluding these day one impacts, Barclays U.K. return on tangible equity was 19.1%. Additionally, comparisons are influenced by the inclusion of Tesco Bank's underlying earnings for two months post-acquisition, which contributed £101 million of net interest income and approximately £60 million of costs in line with our guidance for £30 million monthly run-rate costs. We still expect around £400 million of net interest income from Tesco in 2024 and 2025. While the Q4 run rate was above this level, we anticipate future normalization. The integration of higher net interest margin balances from Tesco also accounts for around 11 of the 19 basis points rise in Barclays U.K.'s net interest margin compared to Q3. Excluding Tesco Bank, Barclays’ net interest income increased by £48 million quarter-on-quarter, reflecting continued momentum from the structural hedge and a boost from balance sheet growth, somewhat offset by delays in product repricing. Non-net interest income was £244 million, with the decline from Q3 largely due to the one-time effect of the Q4 securitization we previously mentioned. Moving forward, we expect a run rate exceeding £250 million per quarter. In Q4, total costs increased by £209 million from Q3 to £1.2 billion, which included roughly £60 million for Tesco Bank and a £36 million bank levy. The remaining increase stemmed from investments supporting growth and structural cost measures implemented. Looking at Barclays U.K.'s balance sheet, both loans and deposits grew organically in Q4. The Tesco Bank acquisition contributed an additional £8 billion in loans and £7 billion in deposits. On an organic basis, deposit balances increased by approximately £1 billion. We experienced strong flows into savings and current accounts ahead of the U.K. budget in October, and customers have maintained this liquidity thus far. Looking ahead, tax payments in Q1 typically lead to seasonal reductions in customer deposit balances. As discussed earlier, increased activity in mortgages and Barclaycard resulted in a £1 billion rise in Q4 lending before accounting for our securitization this quarter. Turning to the U.K. Corporate Bank, it achieved a Q4 return on tangible equity of 12.3%. Net interest income rose by 31% year-on-year, driven by deposit income growth and the removal of adverse liquidity pool income from the prior year. Non-net interest income fell by 9% year-on-year and remained stable compared to Q3. While this figure can fluctuate, we anticipate investments in our digital and lending offerings will foster non-net interest income growth over time. Investments to nurture this growth and enhance efficiency led to a 10% year-on-year rise in costs, excluding the structural cost actions from Q4 2023. Our full-year loan loss rate of 29 basis points remained within our through-the-cycle guidance of around 35 basis points. Now, regarding Private Bank and Wealth Management, the Q4 return on tangible equity was 23.9%. Client assets and liabilities grew by £7 billion compared to Q3 and £26 billion from the previous year. We attracted net new assets under management of £0.7 billion in Q4 and £3.7 billion for the year, a new metric we will monitor going forward. This growth in volumes, coupled with increased transactional activity, resulted in a 12% year-on-year rise in income. Excluding the structural cost actions from Q4 2023, costs increased by 15% year-on-year as we took additional measures this quarter to optimize headcount and drive growth. As discussed in our December deep dive, we will continue to prioritize investment in this segment. Concerning the Investment Bank, the Q4 return on tangible equity was seasonally low at 3.4%, yet the full-year return on tangible equity reached 8.5%, both showing improvement over the prior year. Q4 total income rose 28% year-on-year, while total costs increased by 11%, excluding structural cost actions from Q4. This marked the third consecutive quarter of positive jaws. Adjusted for foreign exchange, total income grew by 31% year-on-year, and costs increased by 12% year-on-year, excluding structural actions from the prior year. Part of the Q4 cost increase was due to initiatives aimed at enhancing future efficiency. The period-end risk-weighted assets amounted to £199 billion, up £5 billion from Q3, with foreign exchange accounting for £6 billion of this rise. Now, delving deeper into Q4 income, using U.S. dollar figures for comparison with U.S. peers, markets income increased by 36% year-on-year. Macroeconomic conditions drove a 32% uptick in fixed income, currencies, and commodities income, aided by financing, credit, rates, and foreign exchange. Equities income surged by 44%, supported by robust performance across cash, prime, and derivatives. Investment banking fees grew by 22%. For the entirety of FY 2024, our market share of banking fees rose by 30 basis points to 3.3%, but we recognize there is still work to do for further improvements. In Q4, our equity capital markets performance was strong, with income up 160% year-on-year. Advisory fees also rose by 12%, showing good momentum and a strong pipeline leading into 2025. Although debt capital markets grew by 10% year-on-year, our performance was mixed. In leveraged finance, we captured an additional 70 basis points of market share to reach 4.7% in a strong market, but we saw weaker performance in investment-grade debt, particularly in Q4, where we did not participate in a strong Asian market due to our limited regional presence. Furthermore, our activity in event financing was subdued during the quarter, presenting an opportunity for improvement as we enhance our advisory capabilities. Importantly, we witnessed progress in areas of the investment bank that typically provide more stable revenues. Financing income grew by 34%, reflecting a significant rise in client balances, while international corporate bank income increased by 22%. U.S. deposit balances surged by approximately 90% year-on-year, indicating potential income growth ahead. U.S. Consumer Bank return on tangible equity was 11.2% for the quarter, an improvement from the prior year due to reduced impairment charges following the reserve build in H2 2023. Income fell 1% year-on-year, though it increased by 1% when excluding foreign exchange effects. This downturn followed a £0.9 billion increase in card balances to £33.1 billion on a reported basis. From Q3 to Q4, net interest income rose by 5%, aided by seasonally stronger balances, which likewise grew by 5%. The net interest margin improved by 28 basis points, partly reflecting the delayed advantages of earlier repricing efforts. The successful rollout of our new tiered retail savings product in Q3 spurred a 17% year-on-year growth in retail deposit funding, with a £2 billion increase in Q4. The share of core deposits grew by 1% year-on-year to 64%, influenced by wholesale funding secured during Q4 to accommodate seasonal asset growth. As seasonal spending declines, we anticipate further progress toward our target of 75% core funding by 2026. Excluding the structural cost actions from Q4 2023, total costs increased by 8% as we continued to invest in the business's growth, resulting in a cost-to-income ratio of 51%. In terms of capital, we concluded the year with a CET1 ratio of 13.6%, which reflects around 140 basis points of capital generation from profits, excluding the one-time P&L benefit from the Tesco Bank acquisition. We previously mentioned two upcoming inorganic transactions affecting capital in the near term, both of which have now been finalized. The first represents approximately 20 basis points of capital consumption due to the acquisition of Tesco Bank in Q4. The second involves around 10 basis points of capital accretion from the recent sale of the German consumer finance business, which will support the CET1 ratio in Q1 2025. The £1 billion share buyback announced today will also reduce the CET1 ratio by about 30 basis points in Q1. Looking ahead, we maintain our guidance for regulatory-driven RWA inflation to be between £19 billion and £26 billion. The U.K. regulator's decision to delay the implementation of Basel 3.1 to January 2027 may influence the timing and composition of this change. We still anticipate that adopting the internal ratings-based approach in the U.S. consumer bank will increase RWAs by around £16 billion. Although uncertainty about the portfolio's size and composition at the time of implementation has grown, this remains our best estimate for now. Concurrently, there are some changes on the regulatory front. Prior to implementing IRB for U.S. cards, our Pillar 2A requirement will increase by 0.1% starting Q1 2025. We expect this Pillar 2A capital requirement to be removed once the IRB model is implemented, estimated for 2026 or 2027 when the £16 billion RWA increase is integrated into Pillar 1. Therefore, our maximum distributable amount ratio, or MDA, is likely to rise to 12.2% from Q1 2025. We previously anticipated that this ratio would decrease following the Basel 3 implementation set for January 2026, but that has now been postponed to January 2027. Accordingly, you should expect us to operate towards the higher end of our 13% to 14% target CET1 range, which is consistent with our current approach. Our distribution expectations remain unchanged. Now addressing recent developments in risk-weighted assets. RWAs increased by £18 billion from Q3 to £358 billion. Tesco Bank contributed £7 billion, and another £7 billion was attributed to foreign exchange fluctuations in both the Investment Bank and the U.S. Consumer Bank. As always, I’ll provide a brief overview of our overall capital and liquidity. We maintain a solidly capitalized and liquid balance sheet with various funding sources and a significant surplus of deposits over loans. Tangible net asset value per share rose by 6p in the quarter and by 26p during 2024, totaling 357p. Attributable profit contributed an additional 6p per share in Q4, while our share buyback and other movements added 1p and 3p, respectively. This was partially offset by a more adverse cash flow hedge reserve, which reduced tangible net asset value by 4p per share. This marks the fourth quarter in the 12-quarter plan we outlined in February. Today, we reaffirm our group targets for 2026 and offer additional guidance for 2025, which includes a further improvement in group return on tangible equity to approximately 11%. I will return to discuss the details behind this guidance more thoroughly, but first, I will hand the floor back to Venkat for his reflections on the progress made during the first year of our plan.
C.S. Venkatakrishnan, CEO
Thank you, Anna. So almost a year ago today, we set three key priorities for Barclays by 2026, to improve our returns, to distribute more to shareholders, and to rebalance our RWAs. We also set interim milestones for 2024, which we have delivered. Our plan was set on realistic assumptions, which together with our diversified business model allowed us effectively to navigate market, macro, and regulatory conditions throughout the year. So what were these? U.K. deposits have stabilized faster, and the investment banking wallet has been stronger than we expected. Fixed income, FICC, which is traditionally an area of strength for us, performed slightly weaker than we had expected in 2024, but our strong performance in equities where we have taken market share partially compensated for this, rebalancing our overall markets business. The economic environment has been more supportive with interest rates remaining higher alongside more benign unemployment and inflation in our main U.K. and U.S. markets. Last year, I described the important reset of our financial performance and shareholder returns since 2021. I also told you that this improvement was not sufficient and that our shareholder experience needed to be better. We are making progress on our plan and generating growth. Notably, we have achieved our fifth consecutive year of TNAV per share growth of 8% during 2024, and 7% annually since 2019. This positive outcome reflects improvements in our returns and growth of our earnings per share, including by 30% year-on-year during 2024 to the highest level in a decade. This enabled a 5% increase in total distributions, including progressive growth in our dividend per share. For the group as a whole, we look to generate higher returns in two ways. First, by allocating more capital to our higher returning U.K. businesses, which I'll come on to discuss. And second, by improving returns in the lower returning businesses, namely the investment bank and the U.S. consumer bank. That was true last year when we set out our strategy, and it remains true today. We are making progress, including in target growth areas of the Investment Bank, but further improvements are needed to achieve our RoTE target of greater than 12%. And in the U.S. Consumer Bank, too, we remain focused on rebuilding returns towards the mid-teens RoTE beyond 2026. A reduction of impairments in line with our expectations as well as other operational improvements enabled a 9% RoTE in 2024 versus 4% in 2023. Let me now discuss the allocation of capital to high-return divisions in more detail. At our investor update, we outlined the plan to create a more balanced group. To do this, we plan to allocate £30 billion of additional RWAs to our three highest returning businesses: Barclays U.K., the U.K. Corporate Bank, and Private Banking and Wealth Management. As we expected, actions taken during the year began to generate organic balance sheet growth toward the end of the year. Including the acquisition of Tesco Bank, RWAs in our highest returning U.K. businesses increased by £13 billion due to business growth and overall £15 billion in 2024. As Anna has discussed earlier, lead indicators of growth across our U.K. businesses are encouraging. Given this, we expect a step-up in our organic RWA deployment during the year with further momentum in 2026. We are committed to keeping Investment Bank RWAs relatively stable at 2023 levels, and this is the third consecutive year in which this division has operated with this level of capital. We continue to expect investment banking RWAs to fall proportionately to about 50% of the group by 2026 from 56% today as we grow the three U.K. businesses. Taking a closer look at the Tesco Bank acquisition, which we are thinking about in three stages: acquire, integrate, and improve. The first stage was completed on the 1st of November '24. The acquisition has added £8 million to our unsecured balances, moving our weighting in credit cards and personal loans towards our 2019 position. The profile of Tesco Bank's customers is attractive. As we show in our operational data pack on Slide 57, Tesco Bank's customers have a higher spend per card than the market average. Tesco's position as the U.K.'s largest retailer with strong customer satisfaction and more than 20 million Tesco Clubcard holders provides a significant customer growth opportunity. We've also gained an additional brand to operate with and an open market lending capability. The second stage is to integrate Tesco Bank, which we intend to do during 2025 and '26. This involves onboarding Tesco customers to Barclays' platform in 2026 to reduce duplication of systems and processes while maintaining a strong customer experience. The integration will require some upfront investment, but the realization of synergies will reduce the run rate costs. These actions are factored into our plan, and we continue to target a circa 50% cost-to-income ratio for Barclays U.K. in 2026, following an increase in '25 given the costs associated with Tesco Bank. The third stage is to improve the business, which we expect to gain momentum after 2027. This will involve further growing customer balances supported by better access to funding and capital. This increased scale will enable greater efficiency as fixed costs are spread over a larger customer base. Turning now to the U.S. consumer bank. We made meaningful progress in 2024, improving RoTE to 9% from 4% and achieving a cost-to-income ratio of 49%. We also announced that our American Airlines partnership will not be renewed beyond 2026. American Airlines has been a card partner in our business for seven years as part of a dual issuer model, and we valued our long relationship with them. We knew that the partnership could transition to a single issuer model. That happened last year, and we chose not to participate on that basis. The ending of our partnership provides a short-term gain on sale in 2026 and releases capital that we intend to use to diversify the business. We expect the overall credit mix of the portfolio to change, still prime but with less weighting to super prime balances. All things being equal, this will lead to a higher net interest margin, loan loss rate, and a higher risk-adjusted margin for the portfolio. Our 2026 targets are unchanged, including an RoTE of greater than 12% in line with the group, as the gain on sale offsets lower profitability due to the loss of the receivables. We are confident in our ability to grow card balances to achieve necessary scale in the U.S. consumer bank. In line with our broader group strategy, the plan is organic, and organic growth has driven around 85% of the increase in our net card receivables since 2011. Looking ahead, it will drive two-thirds of our planned growth. We have a strong foundation for such growth given that over 80% of our card receivables are under contract at least until 2029. Our success in accelerating balance growth for partners also translates into significant loyalty, with a historical partnership renewal rate of around 90%. In 2024, notable renewals included Hawaiian and RCI. At the start of 2025, we also renewed our partnership with Wyndham. In addition to being a long-standing top five partner for us, Wyndham is also a long-term investment banking client. This provides a good demonstration of how collaboration across the Barclays Group can drive successful outcomes. While organic growth is at the heart of the plan, opportunities for inorganic growth in the market are also significant. For instance, 15 relevant deals in dollars of balances were tendered annually on average in the market during the past five years. We remain confident in our ability to win new partners, given the strength of our offering and our ability to increase customer engagement and balances. This was evidenced by recent wins, including Breeze in 2023 and General Motors in 2024. The General Motors card portfolio, which we will onboard in the third quarter of '25, will offset about a quarter of the balances we expect to lose from American Airlines. Overall, we remain focused on achieving scale beyond 2026 and driving improved efficiency to deliver mid-teens RoTE for this business. Turning now to the Investment Bank. Last year, we shared our plan to increase returns in the investment bank to greater than 12% by 2026, in line with our group target. While competitive and industry dynamics are creating opportunities and challenges for individual businesses, our overall progress is as expected, and we continue to run our own race. Our objective is to generate higher and more stable income and returns by improving RWA productivity and rebalancing resources in the business, while only modestly increasing costs. We delivered 7% year-on-year income growth in 2024, broadly on track with our high single-digit annualized growth target from '23 to '26. As a reminder, more than half of our planned growth in the investment bank comes from initiatives which we control, with the remainder coming from growth in the industry wallet. We expect these initiatives to add £1.8 billion to our income by 2026. In the first year of our plan, we achieved around a third of this planned improvement. In Investment Banking, we've increased share across most products, including strong performance in ECM where we increased fee share by about 100 basis points. In leveraged finance, we increased market share by 70 basis points. Across the three focus businesses in market, we've made progress within equity derivatives and securitized products. While progress in European rates has been slower, we saw a recovery in the fourth quarter. Across our markets business, we now rank top five with 56 of our top 100 clients, up seven from a year ago and versus our target of 70 by the end of 2026. Our capital productivity has also improved, with income to RWAs increasing by 30 basis points year-on-year to 5.8%. We achieved positive jaws, with income up 7% from '23 versus a 4% increase in costs. This enabled a year-on-year improvement in our cost-to-income ratio to 67%. We are focused on making further progress on this cost-to-income ratio in 2025 toward delivery of our high 50s target for 2026 full-year. I'd like to highlight two areas of progress during the past year that helped position the investment bank to perform in a range of scenarios. First, as Anna said, we continue to prioritize growth in stable income during 2024, particularly within financing. Growing financing income enhances the durability of our returns, and we now have financing relationships with 98 of our top 100 clients. Second, our banking fee share has increased by 30 basis points year-on-year to 3.3%, with the wallet also higher. We remain particularly well positioned to benefit from stronger activity in the U.S., where we generate 68% of our total banking fees. At the same time, our market share in global markets declined by 20 basis points in the year, reflecting lower share in fixed income, the larger of our markets businesses. While we are pleased with our direction of travel, we recognize that there's further work to do to deliver the full extent of our ambition. Let me now hand over to Anna for the final installment of today's update.
Anna Cross, CFO
Thank you, Venkat. At our investor update last February, we outlined a plan to deliver ambitious financial targets and meaningfully higher shareholder distributions. We are confident that we can deliver consistent returns in a range of scenarios underpinning our ambition. I'll now go through what supports these targets. The diversification of our business model by income and by geography helps support return in a range of economic environments. This has contributed to more stable returns in the last four years. As Venkat mentioned, the external environment in 2024 was generally more supportive than we expected. But in executing our plan, we remain focused on what we can control. Our plan continues to be based on realistic assumptions. These include four U.K. base rate cuts during 2025 and a bank rate of 3.5% by the end of 2026. We also assume a five-year swap rate of around 3.5% for the purpose of our structural hedge reinvestment, although I acknowledge that current market rates are higher. We are not relying on a recovery in the investment banking wallet to deliver our plan, with our assumptions unchanged from those outlined last year. The next few slides describe how our drive towards higher and more predictable returns come together for our shareholders. Our 2026 targets are unchanged, including our North Star of a RoTE above 12%. Our foundation is strong, having delivered 10.5% last year, and we expect further improvement in 2025 to around 11%. Crucially, we expect income growth to provide a RoTE tailwind in 2025, with NII accounting for more than half of this. We will maintain cost discipline as we grow. We expect our cost-income ratio to fall in 2025, and we expect further cost efficiency savings and income momentum into 2026. This combination will support a RoTE of more than 12%. I'll now explain the drivers of our income and costs in turn. We continue to target around £30 billion of income in 2026. This means a further £3 billion of income growth over the next two years, having delivered £1.4 billion in 2024. The drivers of our growth are within our control. First, the strong NII tailwind. For 2025, we expect a £0.9 billion increase in group NII, of which £0.8 million is from Barclays U.K. Our confidence in delivering this reflects the predictable tailwind from the structural hedge underpinned by realistic assumptions about rates and reinvestment yields. This tailwind lasts beyond '25, with the structural hedge driving around half of our expected increase in total group income over the next two years. In addition, we expect balance sheet and earnings momentum from the deployment of RWAs in our three high returning U.K. businesses. This momentum was apparent in Q4 and we expect it to continue, being visible in our 2025 performance. Second, non-NII, mainly coming from the investment bank. We expect to deliver a high single-digit CAGR income growth over the life of our three-year plan and are broadly on track, having delivered 7% in '24. Overall year-on-year growth of £0.8 billion in the IB included £0.2 billion from wallet growth. Importantly, the biggest share of this increase of £0.6 billion came from the execution of our management initiatives or a third of the £1.8 billion total we expect by 2026. This leaves a further £1.2 billion of growth from management actions over the next two years. As was the case last year, we are not relying on wallet growth to meet our target. In fact, our assumptions are unchanged from a year ago with a lower banking wallet in both '25 and '26 versus '24. Should the recovery continue, our business is strongly positioned to participate in a rebound in deal activity, particularly in the U.S., where we generate around two-thirds of our banking fees. Moving on to costs. Managing costs is at the heart of what we can control. We showed this in 2024, achieving a 62% cost-to-income ratio. This improvement versus 2023 was supported by the delivery of £1 billion of gross efficiency savings in the year. These savings reflected targeted actions in respect to people, property, and infrastructure. For example, in the past year, we decommissioned around 200 legacy applications as part of our plan to exit between 450 and 500 by 2026. We increased our digitally active customers in Barclays U.K. by 700,000 and rationalized our branch network by more than 25%. In markets, our actions during the last two years have driven a 20% reduction in the number of trade capture and risk pricing systems supporting our efficiency and operational resilience. Looking forward, there are three drivers of cost change in 2025 and 2026. First, efficiency savings. We expect a further £1 billion in gross efficiency savings split broadly evenly across the next two years. Around one-third of these savings come from plans to simplify customer journeys, with the rest driven by actions to streamline businesses, including the optimization of people and technology. Second, inflation which we expect to be more meaningful in '25 versus '26. This is because inflation impacts us on a lagged basis, so '25 reflects some of the headline inflation pressure we've observed recently. It also includes a £50 million increase in national insurance contributions following the U.K. budget. And third, greater investment in our highest returning businesses in 2025. Specifically, I would call out the annualization of investment costs, which have increased during 2024 and additional Tesco Bank costs including integration. In 2025, incremental investment and inflation are expected to exceed efficiency savings, resulting in an increase in our costs. In 2026, we expect costs to be broadly stable, if not down a little year-on-year, as incremental investment and inflation moderate and are offset by efficiency savings. Given this cost profile and planned income growth, we expect our cost-to-income ratio to fall by 1% in 2025 to circa 61% and to fall more significantly to our high 50s percent in 2026. Given our 2026 income target of £30 billion, our high 50s cost-to-income target would be consistent with around £17 billion of costs. We will drive further efficiency beyond that in each of our businesses and for the group as a whole. Barclays U.K. and Investment Bank represent some 70% of our planned cost efficiency savings, and work to reduce duplicate systems and processes for Tesco Bank should reduce the cost run rate from circa £30 million per month currently as synergies are realized. Across Barclays U.K., we remain focused on streamlining and digitizing the business to improve our efficiency. In the Investment Bank, we invested significantly between 2021 and '23 to sustain and grow future income. In markets, that investment centered around technology, while the focus in investment banking was more on people. We expect these actions to result in greater productivity and a high 50s cost-to-income ratio in the investment bank by 2026, with further efficiencies expected beyond. Put differently, 2026 does not represent the full extent of our ambition. Turning now to capital and capital generation. As we grow returns in line with our plan, we expect to generate around 170 basis points of capital during 2025, rising to more than 200 basis points in 2026. We have a clear hierarchy for capital allocation in order of priority: first, to hold a prudent level of capital with an expectation that we will continue to operate towards the upper half of our 13% to 14% CET1 target range, taking into account regulatory requirements. By doing this, we deliver for our investors, customers, clients, and colleagues regardless of the environment; second, to distribute capital to our shareholders; and third, to invest selectively in our highest returning divisions, resulting in a more profitable RWA mix and a better bank for all our stakeholders. We set a high bar for investment returns, given the importance we place on shareholder distributions overall. We announced £3 billion of capital distributions in respect of FY '24. These distributions represent an important step in our target to return at least £10 billion to shareholders during the life of our plan. We expect a progressive increase in our total payout during 2025. And as a reminder, we plan to keep the total dividend broadly stable at £1.2 billion per year, growing our dividend per share progressively through lower share count. Bringing this together, we are reiterating our group targets for 2026 and providing additional guidance for 2025. This includes 2025 RoTE guidance of circa 11% and a progressive increase in our total payout compared to £3 billion per year in the past two years. The expected increase in RoTE will be supported by group NII growth to around £12.2 billion, including an increase in Barclays U.K. to around £7.4 billion. We expect to improve the group's cost-income ratio to circa 61%. Our progress during 2024 provides a solid foundation for these milestones. We continue to deliver against our plan to achieve a RoTE greater than 12% by focusing on structural actions that are within our control to improve income and efficiency. Over to Venkat for final remarks.
C.S. Venkatakrishnan, CEO
Thanks again, Anna. So one year into the three-year plan. We are pleased with our progress, but we recognize that there's still work to be done to deliver our 2026 targets. We are working hard to deliver sustainable operational and financial improvement across our businesses. This, in turn, we expect will drive higher group returns and shareholder distributions. I'll now open to question-and-answers. Please limit yourself to two questions per person so that we can get around as many of you as possible, I will begin Alvaro with you.
Alvaro Serrano, Analyst
Thank you. Alvaro Serrano from Morgan Stanley. I have two questions. First, regarding your income assumptions. I've noticed that you expect wallet share to decrease, but I want to focus on BUK since we should have some clarity there. For BUK, the guidance for 2025 indicates an underlying 2% growth compared to the Q4 run rate, which seems quite conservative considering the volume growth and the expected increase in hedge contributions. Is this just a conservative estimate, or are there factors we might be overlooking, such as increased competition in asset products like mortgages? Is this purely a matter of conservatism? My second question pertains to capital. If we exclude the buyback and the reduction in German cards, you aim to operate at the higher end of the 13% to 14% range. Are there any specific measures for RWA efficiency that you can highlight? I know there has been a Twitter sale, which seems to involve a couple of blocks that are high risk-weighted positions exceeding 50%. Will this significantly impact your ability to reallocate capital to growth areas? Thank you.
Anna Cross, CFO
Thank you, Alvaro. I'll take both of those. So let me start with the question that you didn't ask, but you sort of asked, which was about the banking wallet. So I want to be really clear here. We are assuming, or we have an assumption that the banking wallet remains as we had it last year. You shouldn't take from that that if the opportunities are greater in the market that we would seek to monetize those as we have done in Q4 and indeed all the way through 2024. So I'll just call out that distinction. Relating to Barclays U.K., we're guiding to NII next year or in '25 of £7.4 billion. As I think about that number, I reflect back on 2024. Actually, what we've seen in successive quarters is strong NII growth, and we expect that to continue in 2025 and into 2026. BUK NII is not near its peak. As I take the 7.4%, I think of it in a number of building blocks. So the first is to take the Q4 run rate ex-Tesco, multiply that by 4. Then add on £400 million for Tesco, add on the impact of maturing structural hedge this year. Now we are assuming a reinvestment rate of 3.5% in that calculation, and then take off the impact of four base rate reductions in the year. As I put those building blocks together, you will get to around £7.4 billion. In addition to that, there's two further things for you to consider. The first, as you note, we have got good momentum in the business, and you can see that in Q4. You can see that in cards and in mortgages. We expect that to continue. In our calculation, what we're assuming here is that there is some offset in margin. I wouldn't call anything out in particular. I would just say particularly in liability margins, we expect a continuation of migration. Nothing more than we've seen. So I'm not expecting it to accelerate, but I'm just assuming that those two things are somewhat offsetting within the year. You may have different expectations for those macro assumptions or indeed the swap rate. But we're trying to route this plan within factors that we can control, and we believe that we've made realistic assumptions underpinning that number. But I'd just highlight, we're expecting continued income momentum in BUK into '25 and beyond. In terms of your capital number, I mean, I'm not going to speak about any client positions, as you would expect. Our focus here is on executing the plan as it is elsewhere. We'd expect the investment bank to operate within the framework we've given it for RWAs. So you should expect those RWAs to be broadly flat. The thing that you didn't call out actually was organic capital generation. That's what we're confident in here. So throughout Q1, remember, Q1 is a seasonally strong quarter for us. We deploy RWAs into the business, but seasonally, it is very strong for us in terms of investment banking and markets activity. As we've called out in the presentation, our expectation is that organic capital generation will continue to develop, both in '25 and in '26, and the kind of capital range that we talked about today is no different from where you've seen us operate actually over the last two to three years.
C.S. Venkatakrishnan, CEO
So I'll come to you in a second, but just if I may emphasize one thing, which is behind the spirit of what we did last year and what we're doing this year is given you our slides, we've given an operational data pack. We've been very clear with our assumptions. Right. I think not just on NII, but other aspects. I think that's our approach, which is to tell you what we think structurally we are trying to achieve. Our cyclical assumptions or our macro assumptions, and allow you, therefore, to impose your view, if you'd like, right.
Unidentified Analyst, Analyst
Hello, thank you Venkat. Thank you Anna for taking my question. My first question is about the '26 targets. The share price reaction this morning may reflect that people were expecting a bit more. As you mentioned, the environment is likely better than it was a year ago when you initially set those targets. So, why didn't you upgrade the '26 targets more? I know it's greater than 12%, but could you encourage us to focus on the greater than aspect? Any elaboration on that would be helpful. If you were to create a plan today, wouldn't you feel more optimistic than you did a year ago? That's my first question. My second question is about U.S. cards, specifically the direction of the business as the AA book phases out. Do you still see it as a growth business? A few years ago, it was recognized as a growth area, so how do you view it now? Additionally, what does the exit of AA mean operationally? I’m concerned that receivables growth might slow in the next couple of years as the bill wraps up. With new books, will there be more J-curve effects and initial impairments? How will this affect the RoTE since I know you haven't revised the guidance on that?
Anna Cross, CFO
Yes, sure. So our focus is management, clearly, Pearly. What you should expect us to do is to execute the operational plan and deliver the financials without surprises. That is our objective. Our focus is on executing the plan that we've given you. I would emphasize the greater than 12 and the, at least £10 billion. But our primary focus really is on executing that plan. We're pleased with the progress that we've made in 2024. We've hit all of the targets and guidance that we gave you, and we feel we've set the business up really well for momentum in '25 and '26. I'll just call out that difference that I highlighted before. We are planning on realistic assumptions because we want as much of this plan within our control as is possible. However, if the market environment allows – whether that be interest rates, swap rates, or the banking wallet, you should expect us to monetize that opportunity.
C.S. Venkatakrishnan, CEO
Yes. Look, I'll emphasize that as well, which is that it's a realistic plan. It's a confident plan, right? It's a confident plan based on strong structural progress across the things we can control, then taking advantage of cyclical opportunities as we did last year and we expect to as they come up. On the U.S. cards business, we remain confident for a couple of reasons. First of all, we gave you the statistic of the number of accounts and the volume of receivables that come up for bid. Second, we have locked up around 90% of our – 85% of our net receivables outside of American through to 2029. And third, we have a retention rate of 90% renewal rate. We operate in a very specialized place with midsized companies for whom we have a particular ability at managing their partnership portfolio and able to grow their balances and increase customer engagement. Just like General Motors came in this year, we will continue to look for these opportunities. I'm fairly confident we'll land them because when we participate in these, we know what we provide very valuably into the market. On the operational side, we will continue – to come back to your point on J-curve. First of all, if a lot of the book, 85% of the book is locked through 2029, yes, there will be a J-curve for new things, right? But as a proportion of the business, it's smaller. Would you add anything?
Anna Cross, CFO
Yes, I would just reflect back on the plan that we set out last year. It's a plan of many parts. It's an executional plan that actually goes all the way through the P&L and balance sheet. Clearly, revenue growth is important, but it's not the only thing that we're working on to improve the RoTE of the business. We're working very hard on mitigating the impacts of regulatory headwinds. You saw that transaction in Q1 of this year. We're working very hard in terms of the cost efficiency of this business. The cost income ratio is now below 50% in this business. It's fallen for the last consecutive four years. Remember, we're targeting to get it to the mid-40s. So there's a big digitization push in this business. The third thing is we continue to work on the net interest margin of the business. We spoke again about that last year and that there are two parts. The first was repricing. We completed that repricing in 2024. You're going to see it start to accumulate in the NIM over time. The second thing is really reducing our funding cost by driving up the proportion of retail deposits. Again, I spoke about that in my prepared remarks. So Venkat is absolutely right, there are opportunities here to grow volume, but our RoTE delivery is volume, capital efficiency, cost efficiency, and NIM.
C.S. Venkatakrishnan, CEO
Go ahead, please.
Benjamin Toms, Analyst
Yes. Ben Toms from RBC. Thanks a lot for taking my questions. There's been a lot of discussion over the last month around the government going softer on regulation. For example, changes in LTV restrictions. Do any of the changes that have been put forward actually have the potential to be material tailwinds? If how you put a beat to Barclays if there was a leveling of the playing field on ring fencing so you could use the first £35 billion of your deposits to fund other parts of the group. I guess, tied to this, does the messaging around risk attitude for M&A in the U.K. have the potential to cause you to rethink your low tolerance to material transactions?
C.S. Venkatakrishnan, CEO
Good questions, both. So look, I think we are at the early stages of a regulatory debate in the U.K., which looks at what might happen on prudential regulation as well as consumer regulation. We do think that regulation is very important, and it's important to the city of London. We also think it's essential to have a balanced regulatory outlook and one that is commensurate across the globe. In the U.S., you're seeing a rethinking on Basel, on the base of Basel as well as stress testing. The PRA has postponed its decisions until 2027. We'd always want. We've always advocated for consistency in total capital requirements. That means base capital in Basel, as well as stress testing. That's what we'd like to see, but it's too soon for me to say one way or the other what the results are going to be. So you've seen the plan that we've given you with the assumptions we have.
Anna Cross, CFO
I would like to add that regarding mortgages, there are three points being discussed. The first is a potential reduction in the restrictions around loan-to-income ratios and affordability stress testing. In our view, the second point may be more significant in the current environment, particularly because the interest rate situation makes the affordability test more restrictive for the market. The third point involves possibly lowering risk-weighted asset weightings for higher loan-to-value mortgages. As an IRB bank, any changes to the standardized rules would not affect Barclays, though they would impact Kensington, but not the larger part of the Barclays group.
Andrew Coombs, Analyst
Good morning. If I could just start with costs. Thank you for Slide 47. I'm just going to rephrase the slide, I guess essentially, £16.7 billion of costs in 2024 if we're thinking about this in absolute cost terms rather than cost income, given that you've got the U.K., Tesco double run investment in corporate and PBWM, you've got FX translation. Presumably, what you're essentially saying is you're expecting the cost base to grow to in excess of £17 billion in 2025 before then fading back to around £17 million in 2026, but just wanted to make sure that understanding was correct. Then the second question on the U.S. Consumer Bank. You've specifically drawn out on Slide 39 that there is going to be a gain on the sale of the AA portfolio, and that seems to be included within the target. So does that mean that come 2027, the RoTE fades again before it then recovers thereafter within that division?
Anna Cross, CFO
Yes, I'll go ahead. So let's just look at Slide 47, please. The answer is yes. We're expecting our costs to go up in 2025 because of the annualization of Tesco, integration costs of Tesco, and those inflation headwinds that I talked about in my prepared remarks. But underneath all of this, you've got a continued focus on gross efficiency. So that's going to be continuing. In '25, inflation and investment outweigh the efficiency. In '26, it's the other way around. So actually, I'm expecting costs to go above £17 billion actually. I think consensus is not in a bad place and then drop back. That's my expectation. In terms of the U.S. Consumer Bank, in 2026, you'll have those two offsetting effects, as Venkat said, you're going to have a gain on sale and you're going to have a more immediate impact from the loss of volume. I'm not going to guide you to a 2027 RoTE at this point. I would just make a few points. Firstly, we're confident in our ability to regain volume both organically and inorganically. Secondly, I'd just remind you of what Venkat said in his remarks where he talked about American Airlines being an incredibly important partner for us. But in terms of risk-adjusted returns, it's a lower part of our portfolio. We will continue to focus on the things that I talked about in terms of cost efficiency, capital efficiency, and NIM.
Jason Napier, Analyst
Good morning. This is Jason Napier from UBS. I have two questions. First, regarding cards, there’s significant focus on whether Barclays is the appropriate owner for the asset due to the differing capital requirements you'll face at some point. One advantage is that the Investment Bank needs less capital thanks to the stress losses that the card business helps shield it from. Can you provide specifics on how much savings this represents? I believe this is a crucial part of the discussion, especially considering the potential for easier stress tests in the U.S. Secondly, about Tesco Bank, I noticed it has a cost-income ratio of around 90%. From what I see on Slide 47, it seems like it doesn't actually lead to a lower cost-income ratio by the end of 2026. Is that accurate, or is it included in the efficiency gains? Could you also discuss how much pre-provision profit you anticipate it might generate? Initially, it seemed like a cost-reduction story, but that perception has changed. Can you elaborate on the potential profit once it's fully operational? Thank you.
C.S. Venkatakrishnan, CEO
I'll take the first one, let Anna take the second one. So I think the easiest way for you to see it, obviously, under current rules is to look at the CCAR results of the top banks in the U.S. and look both at our initial level of capital, which we keep, and look at the drawdown and compare it to banks who don't have that kind of a credit card or a retail consumer portfolio in the mix. Now scenarios vary from year to year and so on. So you have to look at it for a few years, but you will get a sense of the benefit. I think it is an important regulatory benefit for us to have it in the stress test. It's under current rules, right? Anna?
Anna Cross, CFO
Thanks, Jason. I'll take the second one. So you're right that Tesco has got a high cost income ratio around 90%. I think that reflects in and of itself, its lack of scale as a standalone business. I think our view is as follows. It actually still is a cost take-out story, but this is a complex integration. It's not like a portfolio and asset runoff. It's a growing business; an active business, and credit cards have a daily and digital interaction with the customers. So actually, it's quite a complex piece of work. But we are confident that we can do it, and we can execute it well. But it doesn't happen as quickly as if, for example, we bought a mortgage portfolio. That's really what you're seeing here. Our expectation that this is RoTE accretive to BUK and indeed the group hasn't changed. Typically, I would expect the cost-income ratio of an unsecured business to be relatively low, certainly lower than BUK as a whole. If you want a good indication, look at where we're trying to get the U.S. Consumer Bank business too. So hopefully, that gives you some indication. But you're going to see an increase in '25, both from the operational cost, if you like, that you'll be running and some investment in integration. You will start to see some efficiencies flow through in 2026. But as Venkat said, the real scaling and unlocking of that value will come somewhat beyond '26. But that's included in all of the targets that we have given you for BUK and for the group.
Unidentified Analyst, Analyst
Yes, two questions. The first one is regarding the fixed income business. You discussed around the market share gains in equities. I want to understand where you are on the market share gains in fixed income. If you can talk a little bit about what has to happen for that to come through? The second question is about Tesco Bank. For me, what's more interesting is actually the customers that you gain. Can you talk a little bit about the 3 million roughly active customers in terms of overlap, but also the 20 million Clubcard customers? What is the real opportunity in terms of data that you're getting in the long term?
C.S. Venkatakrishnan, CEO
Yes. Let me take the first one, and Anna can take the second one. So within fixed income, we've had three focus areas. One is securitized products and the other was European rates. It's fair to say securitized products did well through the year. Credit, which has been a historical great strength of ours, was a smaller part of the overall wallet last year as spreads remained both subdued and tight. The third thing is that European rates started picking up only later in the year as did macro overall. When we look and we give you the market share, there are two ways to look at it. One is the market share number which we give, which we take from the top nine other banks, 10 banks total and look at what our proportion was. That's always a little bit noisy because we are not in commodities. That's part of the number. There are certain regional exposures we don't have, especially in Asia. The other number we look at is our penetration of our top 100 clients. We are #6 markets business and #6 investment bank. We ask off that top 100, how many of them are we #5 with, right? One step higher. In that number, we began at 49 in '23 and want to be at 70 by '26. We moved from 49 to 56. So I take comfort from looking at that data with those clients in the things we do. But of course, I want to see a broader improvement in fixed income. I'm confident because I think this is our strength. We have a strong structural presence and the cyclicality when it comes to trends will help us.
Anna Cross, CFO
On Tesco, I think we'd agree with you. It's an exciting opportunity. I think that comes in a number of parts. When we look at the customers, 20 million Clubcard customers, that's broadly the same scale that we have in our U.K. retail bank. Given the U.K. population, there will inevitably be some overlap between them. That said, we see the opportunity to build and grow this business. We're able to use more than one brand in these markets that we haven't previously done to target different demographics and launch different products. We are very thoughtful about that. But I'd encourage you to think about Tesco a bit more holistically than just those customers and what we can do with them, as it speaks to a much bigger part of the BUK strategy, which is more multi-branded, more partnership led. We talked when we bought Tesco about leveraging the capabilities that we have from U.S. cards and bringing it to the U.K. You're now seeing that both in terms of Avios, Tesco, and Amazon. So more of a partnership focus in the U.K. helps us grow and diversify that Cards business.
Jonathan Pierce, Analyst
Yes, good morning both. It's Jonathan Pierce from Jefferies. I can ask two questions, maybe one for each of you. Anna, the base rate sensitivity table on Slide 71 is helpful. Thank you for splitting out the impact of base rate cuts or moves in the curve more generally, sorry, into swaps and managed margin. The managed margin piece though is extremely small. I think we could work that out from the previous disclosure. Year one at £30 million, I'm assuming that's £20 million of gaping negative. But then we moved to £10 million as a sort of ongoing hit from a 25 basis point rate cut. Why is it so small? Maybe you could tell us what the pass-through assumption is behind that £10 million. That would be question one. Question two, slightly longer-term one for Venkat. Where do you see the return on tangible equity going in this business in the medium term? I know it's in the report in accounts today that the second year on the trough, we've got a 14% RoTE target to hit the top end of your LTIP awards. That's now an average across 26, 27. Is that where you see this business potentially going in the medium term? Sorry, a part two to question two; your dividend has been sub-10 for nearly two decades now. The payout ratio on your targets next year is going to be sub 20%. Are we looking at a dramatic increase in the dividend payout ratio into 2027, please?
Anna Cross, CFO
You want to take the first, and I'll come back in the middle.
C.S. Venkatakrishnan, CEO
Okay, fine. First of all, I think, as we've said on 2026, is not an endpoint. It's a sort of a waypoint on the journey. When you look at the business beyond 2026, I hope that if we've got the lower returning businesses, such as the investment bank and the U.S. cards business to at 12%, and we maintain the higher return businesses at their roughly 20%-ish range for Barclays U.K. and the corporate banks, a little less private banking, a little more. We continue to grow them, that proportionate mix would have a play into ultimately what the RoTE of the business should be, which I would hope is higher, not just because it allows me to get more of my compensation plan, as you mentioned, but because I think that takes advantage of the full potential of the business. It's a calculation we will have to come back to because right now, we are focused on 2026, right? But I do think, and I would hope that what we are building is a bank that's much more strongly performing well beyond 2026. This is not a limit of our ambition. Our ambition grows for what we achieve for ourselves and for you, our shareholders.
Anna Cross, CFO
So let me take the third point. I mean, I'll start by just reiterating what Venkat said at the beginning, which is how important we realize shareholder return is. You should reflect on our capital priorities, which are regulation first, distribution second, and investment in our businesses third. The way we think about it and the conversations that we certainly had with our shareholders are really about total return, and that's our current focus. We're pleased to see the total return go up by 5% year-on-year. As you can imagine, we do have conversations with our investors about this, and we're committed to the greater than 10%. But at this point in time, it feels like the right formulation.
C.S. Venkatakrishnan, CEO
Yes, in the center.
Chris Cant, Analyst
Good morning. It's Chris Cant from Autonomous. Thanks for taking my questions. I had a couple on RWAs, please, and then one on head office. So on Slide 45, you present your RoTE bridge and you gave us a similar slide last year. You've got a 1.3% headwind in there over the two-year period from RWA growth, but obviously, some of the regulatory impacts have been pushed back. Your American Airlines card book is coming out? Essentially, I think you're probably going to undershoot your RWA growth target for U.S. cards. Why hasn't that RWA headwind come down relative to where you were last year? So in the equivalent bridge '24 to '26 a year ago, you said greater than 1% headwind from RWAs; now you're saying less than, I think it's less than 1.3% if I add those together. So it seems to have gone up despite the fact the RWA growth outlook looks better. What’s going on there? Are we missing something? Because the reg headwinds have been pushed further into the future. The second part regarding the unreleased. Are there any material costs to watch for the Q2 earnings?Lastly, I'd be grateful for any comments on the volume trends you're seeing in the U.S. business?
Anna Cross, CFO
So on your RWA points, our expectation is no different really around RWAs. There's a timing point clearly in terms of the timing of Basel. But this chart is based on our plans to deploy £30 billion of RWAs in the U.K. and hold the investment bank flat. I think if there are more technical questions, we can come back to you on it, and I'll ask Marina to pick up after the event.
C.S. Venkatakrishnan, CEO
Yes, look, you're right that there are some people who have given it. We are looking at either U.K. implementation, we think we have already done in market risk capital calculations. We don't have the specific information right now to make judgment. We think, as we've said for '24 to '26, overall, we are keeping the investment banking RWAs flat. In that, we said last year that there would be an absorption of about £15 billion to £16 billion of RWAs that came from a variety of things including FRTB, right? We're not changing from that view.