Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q3 2024
C.S. Venkatakrishnan, Group Chief Executive
Good morning, everyone, and thank you for joining us for Barclays at Third Quarter 2024 Results Call. As a reminder, at our investor update in February, we set out a 3-year plan to deliver a better run, more strongly performing and higher return in Barclays. I'm encouraged by our progress since then. We are continuing to execute in a disciplined way against this plan and are on track to achieve our 2024 as well as our 2025 targets. Return on tangible equity was 12.3% in the third quarter and 11.5% year-to-date. We achieved this even as we grew tangible book value by 0.35 pence per share year-on-year to 3.51 pence at the end of the quarter. This resulted from strong organic capital generation and the meaningful impact of buybacks in reducing our share count. Total income for Q3 was £6.5 billion and is £19.8 billion year-to-date with a continued focus on the quality and stability of our income mix. Given the ongoing healthy support from our structural hedge, we remain confident in the strength of the income profile of our business in a falling rate environment. These factors lead to our upgrading Barclays U.K. as well as group NII targets today. We continue to control costs well and are seeing the benefit of the cost actions which we took in the fourth quarter of 2023. Our cost-to-income ratio was 61%, both in the third quarter and year-to-date. Impairment charges have improved in the U.S. consumer bank in line with our expectations, and our overall credit performance was strong, particularly in the U.K. with a group loan loss rate of 42 basis points year-to-date and 37 basis points in the quarter. Importantly, we also remain well capitalized, ending the quarter with a 13.8% CET1 ratio comfortably within our target range of 13% to 14%. Across the bank and within each of our 5 divisions, we are focused on delivering an improved operational and financial performance. Anna will take you through our financial performance division by division shortly, but let me cover first a few highlights. Barclays U.K. delivered a return on tangible equity of 23.4% for the quarter and over 20% year-to-date. We have seen a continued stabilization in deposit balances and gross lending trends are encouraging. We are on track to complete the acquisition of Tesco Bank on the first of November this year. This strategic relationship with the U.K.'s largest retailer forms part of our commitment to invest in our home market, where Barclays has a crucial role to play in mobilizing the finance and investment which is required to deliver growth. Our partnership with Tesco will help create new distribution channels for our unsecured lending and deposit businesses. And our expertise in partnership cards developed over decades in the U.S. will further enhance the well-established Tesco Club Card Loyalty scheme. In the investment bank, we are committed to delivering improved RWA and operational productivity to drive higher returns. RoTE for Q3 was 8.8%. Year-on-year, the Investment Bank has delivered positive cost-to-income jaws and improved market share in investment banking. And the U.S. Consumer Bank delivered an improved ROTE performance at 10.9% as we continue to grow the business and drive operational improvements, while impairment charges reduced against the background of subdued inflation and a strong labor market. Overall, as an organization, we remain execution focused. We achieved a further £300 million of gross cost savings this quarter, taking the total for the first 9 months to £700 million, on track for our targeted £1 billion for the full year 2024. Simplifying the bank has been an important part of our strategy. We continue to make progress with the non-strategic business disposal that we spoke about at our investor update. Earlier this week, we announced the sale of our non-performing Italian mortgage portfolio. Finally, we are about two-thirds of the way through executing the £750 million share buyback which we announced in the first half of the year, which, together with the first half dividend is the first step towards achieving our target of greater than £10 billion of capital return by 2026. I will now hand over to Anna to take you through our third-quarter financials.
Angela Cross, Group Finance Director
Thank you, Venkat, and good morning, everyone. On Slide 6, we have laid out Barclays financial highlights for the third quarter as well as year-to-date. Profit before tax was £2.2 billion, up 18% from £1.9 billion in Q3 '23. Before going into the detail, I would just note that the quarterly performance was impacted by a weaker U.S. dollar which is a headwind to income and profit but positively impacted costs, impairment and RWAs. I'll call these out where appropriate. Turning to Slide 7. Q3 performance is in line with the plan we laid out in February. We delivered a statutory ROTE of 12.3%, up from last year's 11%. And the year-to-date ROTE of 11.5% leaves us on track for our statutory ROTE target for 2024 of greater than 10%. We continue to target a 2024 ROTE, excluding inorganic activity of circa 10.5%. We now expect that the impact of all inorganic activity in 2024, including Tesco Bank, will be broadly neutral. So, I don't anticipate a material difference between the two measures. As in the first half of the year, I was looking for four things in our performance: income stability, cost discipline and progress on efficiency savings, credit performance and a robust capital position. On all four, we are where we expected to be and I'll cover these in more detail on the subsequent slides. Starting with income on Slide 8. Total income was up 5% year-on-year at £6.5 billion. Excluding FX, income was up 7% year-on-year. Since our investor update in February, we have been emphasizing continued stability in our income streams. Revenues from retail and corporate as well as financing in the Investment Bank provided boost to our income profile and together contributed 74% of income in Q3. Turning to net interest income on Slide 9. Group NII, excluding the investment bank and head office, was stable year-on-year at circa £2.8 billion. We now expect our full-year group NII to be greater than £11 billion. Within this, we have increased NII guidance for Barclays U.K. to circa £6.5 billion, having previously guided to circa 6.3. Both numbers exclude the impact of the Tesco Bank acquisition. We also now assume a U.K. bank rate of 4.5% by the end of the year or a total of 325 basis point cut in 2024, compared to the 5 basis points we had assumed in February. Deposits continue to stabilize and increased structural hedge income continued to provide a strong tailwind, as you can see on Slide 10. As a reminder, the structural hedge is designed to reduce volatility in NII and manage interest rate risk. As rates have risen, the hedge has dampened the growth in our NII and in a falling rate environment, we will see the benefit from the protection that it gives us. The expected NII tailwind from the hedge is significant and predictable. £12.4 billion of aggregate gross income is now locked in over the three years to the end of 2026, up from £11.7 billion at Q2. We have around £170 billion of hedges maturing between 2024 and 2026 at an average yield of 1.5%. As we said in February, reinvesting around three-quarters of this at around 3.5% would compound over the next three years to increase structural hedge income in 2026 by circa £2 billion versus 2023. Given the high proportion of balances hedged and the programmatic approach we take, we are relatively insensitive to the short-term impact of potential rate cuts. Please note that we have added additional disclosure on Slide 38 in the appendix on the split of the structural hedge income allocation across our five divisions. Moving on to costs on Slide 11. Total costs in Q3 were flat year-on-year at £4 billion. Excluding FX, costs were up 2% in the same period. We delivered a further £0.3 billion of gross efficiency savings, bringing the total for the nine months to £0.7 billion. These efficiencies have helped us to more than offset inflation and created capacity for investments. We remain on track to deliver £1 billion for the year and continue to expect a further £1 billion of efficiency savings across 2025 and 2026. Our cost-to-income ratio was 61% in Q3 and for the nine months year-to-date. We remain on track for our full-year target of around 63%. Turning now to impairment, where credit conditions continue to trend positively and in line with our expectations. The Q3 impairment charge of £374 million equated to a loan loss rate of 37 basis points. The U.S. consumer bank charge reduced to £276 million, a loan loss rate of 411 basis points, which benefited from methodology enhancements in the quarter. Our U.K. customers continue to act prudently with few current signs of stress, evidenced by continued low and stable delinquencies. The Barclays U.K. charge was just £16 million, a loan loss rate of 3 basis points, and this included a post-model adjustment release of around £50 million. I'd remind you that under IFRS 9 accounting, we expect to incur a day 1 impairment charge for the Tesco unsecured lending balances on completion in Q4. As we said in February, the Tesco Bank acquisition alongside our broader U.K. balance sheet growth plan are factored into our guidance for the Barclays U.K. loan loss rate to track towards 35 basis points over the life of our 3-year plan. All in all, we reiterate our through-the-cycle guidance of 50 to 60 basis points for the group and expect FY '24 to be at the bottom of this range inclusive of the estimated day 1 impact of Tesco Bank. Excluding the impact of Tesco Bank, we would expect to be below this range as we are seeing limited signs of stress in our U.K. customer base. And our guidance for the U.S. Consumer Bank impairment charge to improve overall in the second half remains unchanged.
Jason Napier, Analyst
Two questions on Slide 16, please, which is the Barclays U.K. margin and NII walk. Just first, and I appreciate the reiteration of guidance around hedge tailwinds into next year. But I just noticed that the quarter-on-quarter tailwind there is down about one-third, and it looks to us like maturing swaps and incoming swaps should have been fairly stable, down about 30 basis points each in the period. And so I just wonder how you think about the sort of quarter-to-quarter volatility around this component of NII, trying to avoid a situation where we worry unduly about nearer-term dynamics from that? And then secondly, on the same chart, quite surprising to see the product margin as a net positive. Can I just confirm, please, that includes whatever the leads and lags on depository pricing there are? There's some feedback in the investment community that perhaps Barclays hasn't been able to cut deposit rates as others have done as rate cuts began. I just wonder whether you could talk about what you're seeing on deposit pass-through as rates start to decline. I just confirm that I'm looking at the right block when I look to track that going forward.
Angela Cross, Group Finance Director
Thanks, Jason. Thanks for the questions. I’ll take back those. So just looking at Slide 16, I can see why you’re asking the question. The structural hedge impact is lower than the previous quarter. Last quarter, the product dynamic was negative; now it’s positive. So I’ll pick those up in turn. I mean last quarter, we did have a slightly higher swap rate, as you point out, but we also topped up the hedge a little bit, particularly around business banking. That’s now obviously in a run rate. So it’s no longer causing that sort of quarter-on-quarter impact. Sort of going forward from here, we're going to continue to see momentum from the structural hedge. You can see that from the other disclosures that we’ve given you, for example, on Page 10. So I still expect it to be a net tailwind overall to this business and really supporting the NII growth that we’re seeing. So nothing more really than that. On the product margin, you’re right, that does include all product margins, so it’s including assets and liabilities. I think it’s important to point out that some of the drags that we’ve seen historically are no longer there. So you’re no longer seeing that really significant deposit drag from migration coming through. Actually, our mortgage position is broadly neutral from a churn perspective now. So you’re no longer seeing that. What you are seeing is some positive momentum from both mortgage and card margins, which is a little bit offset by deposit pricing, as you point out. But actually, I’d expect, given the kind of regulatory lag that we have in deposit pricing for that to be more meaningful, that lag impact to be more meaningful in the fourth quarter. So a bit of a lot of small numbers here because it is only a quarter-on-quarter movement, and it is only 6%, but that’s the things that I would call out.
Benjamin Toms, Analyst
The first one, thank you for the new disclosure around the structural hedge income around how that should be allocated to the group. That's like Christmas came early. One of your peers this week implied they expect the structural hedge notional to be flattish from here. Based on your guidance for February and movements in the notional since year-end, I think you're actually expecting a 13% reduction in the notional from here. Do you really expect to see such a big reduction going forward, given you mentioned just previously, the stabilization in deposits? Or can we assume that that assumption is now somewhat stale? And then secondly, just a chance my luck on 2025. One of your peers guided to a gradual increase in NIM in 2025 in the U.K. Should we expect a similar trend at Barclays?
Angela Cross, Group Finance Director
Okay. Thank you, I’ll take both of those. So yes, please put that disclosure in on Page 38, you haven’t seen it. I mean we often talk about the structural hedge and the support that it gives to the U.K. I guess, in absolute percentage terms, that’s where it is most meaningful, but it does provide support elsewhere in the group, particularly through the equity structural hedge. So you’ll see perhaps surprising to many that it’s providing some support into the IB, and because we allocate that equity portion by RWAs. So hopefully, that’s helpful. But the structural hedge notional I’m not going to give you specific guidance spend, but what I would say is we’d expect it to sort of trend broadly in line with where the deposits are going. When we spoke in February, that was less guidance, more sort of a framework to help you model it as time goes on. So we talked about £170 billion of maturing and rolling about three-quarters of that. But that was designed really to give you the math that you could then update rather than a forecast itself. So clearly, as we look at the moment, there are some positives in there, but we will continue to update you as we go through. But I wouldn’t call out anything more than we should expect it to move in line with deposits. On your second question, I’m not going to talk about NIM then is going to be quite – it’s going to move around quite a lot over the next few quarters. As you can imagine, we’re about to onboard £8 billion worth of unsecured lending. That’s going to move the NIM materially. What I would really focus you on is actually the net interest income. So we’ve upgraded our net interest income for the group and for the U.K. in the current year. So now we're expecting circa £6.5 billion for the U.K. And if I take you back to what we said in February, we said we expected mid-single-digit growth in NII in the U.K. We still expect that. And what’s driving that? Well, clearly, we’ve got asset growth coming through. What was a drag coming from deposits, we now see stabilization. And hopefully, as deposits start to grow across the market, we would see the same. And whilst we’ve got some uncertainty coming through from rate changes, I would offset that with the kind of momentum that we've got from the structural hedge. So we are expecting NII to be higher in '25 and in ‘26 than it has been in ‘24. And that’s, obviously, we would be putting Tesco on top of that.
Chris Cant, Analyst
I wanted to talk about the head office, please.
Angela Cross, Group Finance Director
Gosh, Chris, we can't hear you, sorry. Could you start again, please? We picked up head office, but perhaps you could start the question again?
Chris Cant, Analyst
Yes. Can you hear me now?
Angela Cross, Group Finance Director
Yes, we can. Loud and clear. Thank you.
Chris Cant, Analyst
Hello. Okay. Great. Yes. So head office, I wanted to ask about looking into '25, '26. Could you give us some color on what the sort of underlying group center numbers look like after the various mortgage books have gone and the German cards business have gone? I think this is a source of significant dispersion within consensus how people are thinking about sort of the underlying head office, and it has been an area where historically, consensus has got a little bit out of kilter with your own expectations. So any color on once the transactions you've currently got in the pipeline are done, what does that group center income cost run rate look like? And I appreciate that there's still the payments business in there, which may or may not go at some point. But sort of what's the sort of go-to run rate, how things stand for the transactions once the transactions you've got in train are done? And then on BUK NII, just a point of clarification. So it's mid-single-digit growth on the 2024 number, excluding Tesco and then we put Tesco on top. So take essentially the £6.5 million that you're now guiding mid-single-digit growth on that and then £400 million on top is what you're saying for 2025?
Angela Cross, Group Finance Director
Okay. Thanks, Chris. Let me pick up both of those. So the first one, look, I appreciate head office has been a bit volatile in the current year, both because it's housing or inorganic activity and those businesses before they actually flow out. So just to remind you, there's no inorganic activity in the current quarter. You can also get some volatility in there from educating. So we're seeing a bit of that in the quarter, but year-to-date, that is a zero number, and we expect it to be timing only. It's a bit early to guide you to what that run rate is, Chris, but we will do that in time. But just to remind you, nothing in the current quarter and just appreciate it's very difficult to model at the moment. But once we get beyond that, we'll give you more guidance. On the BUK NII, let me just clarify for you. So ex Tesco, I expect some increase. The mid-single-digit guidance that we gave you for BUK did include Tesco because that was from '23 to '26. So we include Tesco, obviously, in our RWA bridge to £30 billion, and it's included in the mid-single. So I would say, overall, we're expecting some organic ad Tesco on top of that. Is that clearer?
Edward Firth, Analyst
Thanks for the questions. Sorry. Yes, I have two questions. One was just on the U.K. interest rate sensitivity. It's quite striking that you're not highlighting to get at all as an impact this quarter. I think you said it was minimal or marginal. I can't remember your exact words in terms of your sensitivity rates falling going forward. And I'm just trying to understand a commentary you could just help us understand why that is? Is that just like a temporary thing? And as the hedge rolls off, then you would expect some more sensitivity? Or is there something that you sort of structurally changed? Obviously, on the way up, we saw NII grow very strongly on the back of higher rates. So that's one question. And then the other question was on the U.S. margin there. I get your comments about you're still targeting greater than 12%. And I think you said there was a lot of incentive programs or loyalty programs that you were running at the moment. And just again, any help you could give us to understand from a business perspective, how that works? Because I do obviously the U.S. loyalty program is a huge part of the business. It's a huge part of attracting volumes and customers, et cetera. And I'm just trying to think what is it you're expecting to change in the market more broadly? Or how is your offering going to change that's going to allow you to reduce those loyalty offerings but still maintain momentum in the business.
Angela Cross, Group Finance Director
Okay. Thanks, Ed. I will take both of those. On the first one, we gave you some guidance on the interest rate sensitivity in the previous quarter, and that really shows for a 25 basis point parallel shift, it was £50 million in the first year. And then what you saw was that build over time. The way I think about it, Ed, is in the first year, it’s dominated by the lag effect. So the sort of 60-day regulatory lag that we have, particularly in the U.K. And then in the outer years, you see the impact of the hedge grinding lower in response to that parallel movement. So that’s really what’s going on there. If I go back to what I said in products for that product margin on Page 16, just to clarify, we’ve got two offsetting impacts in that. There is a negative movement from the delay in pricing or repricing the liabilities. But there is an offset, which is coming through from our asset margins, which are expanding. Now you might expect that in a downward movement. Sort of overall, we would expect that as a liability margin starts to compress, you see asset margins widening out. And of course, we’ve got specific actions around things like high loan-to-value mortgages that are perhaps driving that a little bit faster. And so it's not that it's not there. It’s just that there are some offsets. And actually, I would expect a bit more of that lag just because of the way the months sort of pan out. On your second question on U.S. margin, yes, the NIM is clearly lower than it was at the beginning of the year and indeed last year. But our expectation is that this is still a greater than 12% NIM business. And all of the actions that we are taking to underpin that are taking place. So in the current quarter, and if you look sort of sequentially across the last few quarters, there are a few things going on. There’s natural seasonality in this business. So you see more purchase activity, more borrowing activity as you go into the holiday season, which is much more seasonal in the U.S. than it is in the U.K. So you’ll see that natural shape. The second thing is, remember, we did that risk transfer in Q1. What that meant was we swapped out NII for fee income, but obviously, it’s ROE accretive overall. So you see some movement in the geography of the P&L and the balance sheet. And then thirdly, as we've called out, there are a couple of things that we’re just observing as a customer master. Actually, I don’t think they’re unhelpful, but there are two. The first is that customers are managing their balance as well; they’re repaying, perhaps a little bit faster than we expected. In the context of the broader discussions about the U.S. economy, I don’t think that’s unhelpful; and we see the other side of it in positive impairments. So we’re not uncomfortable with that. The second point is that customers are using their awards not necessarily more, but faster than we would have previously expected. Again, long term, for the franchise whilst that puts a bit of a headwind into near-term NIM. It means they’re really engaged with the loyalty program. They’re really engaged with the brand program. So it’s good news. So that kind of explains Q3. As I go beyond Q3 and think about that build to greater than 12, the deals that we talked about in February were our number one repricing. That repricing action has actually taken place; it’s complete. But what happens is customers have to actually purchase under the new terms and conditions. So it’s going to drift through into NIM over time. The second action was really around the funding mix. So we are now around 7% of retail funding. We want to get that to around 75%. That’s going to take a while for us to build. But we’ve launched the tiered savings products that will underpin that, and you’ll see more on that in time. So those things are really important. The last thing I would add is a key part of that move to 12 is how we start to morph this portfolio towards having a richer mix in retail. And you can see that we’ve announced our new partnership. That again, is another plank of the strategy. So we’re not going to get to 12% or greater than 12% immediately. You’re going to see it sort of emerge over the next few quarters. But greater than 12% is still our target, and we feel like we’re on track.
Guy Stebbings, Analyst
I had one on capital and then one back to product margins in the U.K. On the capital on Slide 30. Thanks a lot for clarifying the various timings. And clearly, some of the moves being pushed out in the U.S. consumer business. I'm just wondering if that changes how you manage capital in theory, it sort of frees up some capital in the next 12 months to perhaps distribute a little bit more early in the plan? Or should we think that you're more likely to run at the very top end of the 13% to 14% range, maybe even above it, especially if there's a Pillar 2A temporary uptick? Just thinking about how you think about that capital ratio during 2025 now as you have to wait for 26 for some of those come through. And then on the product margins, I just come back to that point in terms of the lag effects and saying it might be more meaningful in Q4 in deposits. I would have thought there'd be some sort of catch-up from the August rate cut, if you like, and you take the day 1 hit on the unhedged deposits, and you have to wait to pass some of it back on the rate card. So I just checked that sort of thinking is correct. And your comment around the lag effect being greater in Q4 is maybe a reflection of an assumption of two rate cuts, and then maybe if it was just one rate cut, it wouldn't be as more powerful versus what you saw in Q3.
Angela Cross, Group Finance Director
Okay. Thanks, Guy. I’ll take both of those. I’m hoping Venkat’s going to get a question at some point. But just on the first one, our own capital, look, these regulatory movements that we set out for you on Page 30 are timing and timing only. And we’d reiterate today our expectation about distributions here. So greater than £10 billion for the three years of the plan. For the current year, we’d expect it to be broadly similar to last year, so around £3 billion. And we said in February that we would expect it to be progressive thereafter. And I’d just say exactly the same today. Q4 is normally when we talk about distributions, and we’ll do so then. But we see this really around timing, and you would expect us to build capital as we head towards both Basel and the IRB implementation. Just on product margins. Really what I was referring to is you’ve got sort of about a month’s worth of that lag in Q3. You’re going to see the remainder of it in Q4, and we are expecting because we use consensus. So consensus has got three rate cuts in the current year. We’re expecting a couple of rate cuts in Q4. So you’re going to see impacts in Q4 and actually into Q1 of next year.
Amit Goel, Analyst
So two questions from me. So one, just related to the product margin. But essentially, just on the U.K. business, I kind of see the balance sheet still contracting a little bit in terms of total loan balances and deposit balances versus, I guess, some of your peers showing a little bit of growth now. So just kind of curious the interplay between the kind of the pricing, which goes into that product margin versus balance sheet growth? And when can we start to see a bit more organic growth and capital redeployment into the BUK business? And the second question just relating to the U.S. consumer business. I'm just curious how significant or not to the American Airlines partnership, if there's any color you can give there in terms of the contribution of that piece to the broader business.
Angela Cross, Group Finance Director
Okay. Thanks. I'll take the first of those and then hand to Venkat. So it's probably helpful if we start on the sort of leading indicators page that I've included this time. It's on Page 14. And if I take you back to February, what we said in February was we didn't expect significant change in the net balance sheet, particularly in the U.K. in the current year. And that was because of our expectation and the known maturities that we have, not just the mortgages, but for example, in business banking. What we did expect was the change in the gross production and comfort that we are driving that gross production. So in mortgages, it's relatively straightforward. It's actually our gross lending. You can see that stepping forward quarter-on-quarter. It's obviously helped by the fact that the mortgage market itself is strong and robust. But also the fact that we are broadening out our range within that market, and we're really putting Kensington to work now, which we've been unable to do over the last few years. The second point is on card acquisitions, and you can see that meaningful step-up in '24, but we've already started that journey in 2023. And actually, what you see over time is that those cars volumes will start to feed into interest-earning lending. And then finally, on U.S., U.K., CB, I know you're not asking about corporate here, but it's a bit more difficult there because clearly, what you do is you put out lines to clients which is shown here in terms of RWAs. And then those clients in time will draw down on them. So in terms of what happening in terms of lead indicators in the balance sheet, I'm happy we're going in the right direction. In BUK, specifically, we saw positive net lending in the businesses that we've got in focus. So we saw positive net lending in mortgages. We're seeing it in cards. What we've got offsetting that is some runoffs in portfolios, which are obviously no longer callable. Not the right word. But if I use the example of government lending within business banking, I don't think that's different, either in percentage terms or in directional terms from our peers. You're hearing similar things there. So I think we're happy overall. And obviously, as we increase our card lending, you get a mix impact as we've increased the proportion of lending at higher loan to values, you get a mix impact, and that's really what's flowing into the product margin and giving that positive.
C.S. Venkatakrishnan, Group Chief Executive
Yes. Look, Amit, on cards, obviously, we will not talk about any specific account until there is time to talk about the right time to talk about in the contract, we have something to say. We also do not talk about individual client profitability or financials. We announced a couple of days ago, and so we're speaking about that. And if there's news on any other clients, we'll tell you at the right time.
Angela Cross, Group Finance Director
Okay. Thanks, Amit. Perhaps we can go to the next question.
Chris Hallam, Analyst
So two for me as well. First, in the IB, if we think about the gradual rebalancing of that business, clearly, dynamics in the quarter for DCM were very strong, both for you and across the street. But given the organic reduction in RWAs you saw in the quarter in the IB and the improvement in asset productivity, year-over-year. Are you starting to make those selective decisions to deemphasize DCM? And where are you comfortable doing less, I guess? And when we think about reallocating those RWAs into the financing businesses, should we sort of assume £750 million as a floor for market financing revenues, assuming supportive markets? That's the first topic. And then second on Tesco. So thank you for the additional disclosure in the update today. So what steps are you planning to take over the next sort of 12 to 24 months to improve the product margins in Tesco Bank? If I look at asset productivity or NII versus RWAs, it's quite a bit lower in Tesco Bank than the rest of the U.K. business, looking at the £400 million and the £7 billion. So how are you planning to scale NII faster than RWAs to optimize that capital resourcing question?
C.S. Venkatakrishnan, Group Chief Executive
Right. So Chris, let me take the IB and then Anna will talk about Tesco. On the IB, first of all, big picture, we're looking to keep RWAs in absolute terms relatively flat to their current number of around £200 billion. The relative reduction in RWAs as a percentage of the group happens because the rest of the group is growing. Second, in the Investment Bank RWAs came down by about £9 billion this quarter compared to the previous one, but about £6 billion of that was due to FX and £3 billion was actual action. A 1% up and down or 1.5% up and down in the quarter is normal business mix. Third, we are not looking to deemphasize DCM. What we are looking to do is, within the investment bank, be prudent in assigning capital to clients, looking at the totality of their relationship, and that relationship is not just DCM but it includes M&A and equities and what corporate banking we do with them. And that's the way to think about it. And lending is a part of it. Lending is not the only part of it, and we don't want lending to be the main part of it. And as far as revenue of £750 million from financing, look, we've been stable at that number. What I would say is while we have been gaining clients and gaining market share in that business, the actual revenue is a function of two things. It's a function of what happens in the composition of balances, fixed income and equity and so what the markets do as well as spreads within that. So I can't tell you that it's going to stay at this level or not go up or down. It depends on that mix. What we do think we have is a diversified business between fixed income and equities, a competitive business in both but particularly strong fixed income business and a diversified business among the types of clients who use it regionally, product-wise and within fixed income asset class, meaning spread versus government. So that's what we think contributes to a good and stable mix, but I'm reluctant to put sort of floors and ceilings on numbers.
Angela Cross, Group Finance Director
Thanks, Chris. The only thing I’d add to that is if I take that £9 billion reduction, £6 billion was FX as Venkat said, the other £3 billion was just the reversal of the client positioning that we saw that we said was temporary. So it just kind of brings us back to where we started at the beginning of the year. On Tesco, for the next year or so, for the next sort of 12 to 18 months, our focus is really on integration and our focus will be on customer service. So that is our primary focus as it would be in any partnership as it was in GAAP in the U.S. So this is just a replication of what we would do with any other partner across the firm. Over time, we would expect this to be ROE accretive for a number of reasons, whether that be efficiency, whether that be funding benefits that you might expect to accrue. And obviously, we’ll update you on that in sort of in the course of time. But really, our objective over the short term is going to be to integrate it well and really ensure that that customer experience is foremost.
Alvaro Serrano, Analyst
A couple of questions on the Investment Bank for me, please. First of all, on the fee performance, obviously, very strong in the quarter. But similar to Q2 where you called out a large deal there, is there any lumpy deals that we should bear in mind? Is the performance sustainable? I'm guessing ultimately, I'm asking about the pipeline from here, given the strong performance? And second is on the leveraged finance marks. It feels like it's a bit of a hard quarter to take those marks and with credit spreads actually very tight. So maybe could you give us a bit of color on what's driving that? Is it portfolio? Is it a single sort of ticket or are you looking to sell something in the mark? Or should we expect more of this in the coming quarters? Just a bit of color on this.
C.S. Venkatakrishnan, Group Chief Executive
I'll take the first question, and then Anna will take the last question. So on fee performance in Q3, nothing special to call out. Look, we are part of certain larger deals, but I wouldn't say that unduly if there's anything I would call out. And as I've said elsewhere, we've obviously seen activity pick up over this year compared to the previous year. We expect it to continue to be relatively firm. Obviously, there are a couple of wild cards out there in terms of what happens with the U.S. elections and economic policy and rent policy in the U.S. on M&A activity after that. But assuming no major surprises or changes, we expect to continue to see it to be firm.
Angela Cross, Group Finance Director
Okay. Thanks, Venkat. So let me pick up that second one, Alvaro. I mean leveraged finance is a really important part of our business. And you’re right; in the current environment, what we see is that the market overall is performing really well. Deals are clearing quickly. Occasionally, we find that either some of those don’t. That is episodic. It’s a feature of our business; it’s a feature of the market overall and not something that we would particularly call out. So it’s normal. What we do at the end of every single quarter is we assess our balance sheet and we use prevailing market information in order to assess the fair value of that balance sheet. And where we feel we need to take more than we do, and that’s what we’ve done in the current quarter. So it’s very much BAU, and as I say, it occasionally occurs; it’s episodic. I wouldn’t comment on clients as we would never do. I would just remind you also that this is a book which has some hedging set against it. The cost of that hedging also flows through corporate lending. So we protect ourselves in that way. And I would say, overall, our exposures are probably, whilst they’re higher than ‘23, they’re lower than they have been historically. So it’s a well-risk-managed book. And really, this is sort of the kind of thing we see normally, but on an episodic basis.
Jonathan Pierce, Analyst
I have two questions, please. First, I'm looking for clarification on rate sensitivity. Thank you for the hedge allocation data; it's helpful in understanding the tailwinds for Barclays U.K. The area I'm concerned about is rate sensitivity. Regarding the £50 million in year one, I understand that much of it relates to deposit backing. However, with £40 billion of hedge maturities annually as guided, one would expect that a 25 basis point shift in the curve would reduce hedge income by £50 million in year one. I'm unclear about what’s happening here. Are you indicating that there is no impact on the managed margin from a 25 basis point rate reduction at all, simply because the structural hedge has become so large in relation to the deposit book? It would help to understand why this figure is so low, as it's the lowest in the sector and quite challenging to assess. My second question pertains to the year-end models. I need clarity on Barclays U.K., which saw a £4 billion increase earlier this year due to methodology and policy changes. At that time, you mentioned it would partially reverse over the year, but it doesn't seem to have done so yet. Should we expect that in Q4? Additionally, the year one forecast indicates a £2.5 billion risk increase in the fourth quarter. Is that approximately the right figure to include in the spreadsheet?
Angela Cross, Group Finance Director
Okay, Jonathan. Let me take the first one. So I would say we said £170 billion over three years, so I think you're probably closer to around £60 billion of hedge maturing. And really, what's going on here is remember, you've got that underlying maturing rate at around 1.5%. So even though rates are coming down, you're still getting a pickup from the structural hedge. And it's only really in the outer years when that grinds out that you're seeing that more meaningful difference. So I think it's nothing more than that, but we can talk you through that outside of here, if that's helpful. As it relates to our relative sensitivity, we talked about this quite a bit as rates went up because we were clearly less rate sensitive on the way up. So you'd expect us to be less sensitive on the way down. So that is exactly what's coming through right now. Perhaps we hedge a little bit more. We certainly hedge more proactively, we are looking forward and assessing that on a monthly basis and adjusting those hedges very very actively as we go to reflect the detail of customer and client behavior. So I think it's a benefit of that approach that we're seeing and the fact that we've just done this very programmatically over a very long period of time. We're not seeking here to have any kind of view as to where rates will go. We're just lifting the hedge roll and we're reacting to customer behavior. And on the second question, I think we'll have to come back to you on that on the operational risk. So let us do that.
Robin Down, Analyst
And also thank you for the added disclosure on the structural hedge, that's very useful. Apologies, but I'm going to bring you back to the U.K. interest income issue. And I think it is important because it's the main topic of conversation amongst investors this morning. If we look at your £6.5 billion guide for this year. It kind of implies a Q4 run rate ex Tescos of kind of £6.8 billion, £6.9 billion. If we add in kind of £400 million for Tesco is we're at kind of 7.3%, I think you're looking to grow next year. I think especially given the product hedge is in the U.K., but the structural hedge benefit is more than going to outweigh any kind of rate reduction impact. So why are you not going to end up materially above the 7.1% that consensus has penciled in next year? Is there something I'm missing, some big kind of negative drag that you're anticipating?
Angela Cross, Group Finance Director
So Robin, I'm not going to comment on consensus income for 2025 at this stage. But I'm just going to reiterate the fundamentals of what we're talking about here, which is U.K., we expect over the plan to have NIR growth of mid-single digits; Tesco is part of that. You can see that there is NII momentum in the business organically. We've called that out. You can see it over the last two quarters. It's coming from us at growth. It's coming from the momentum from the structural hedge. Now, as I said before, we haven't really seen the full impact of the rate cuts yet, but we would still expect the net of all of that into 2025 to be positive. And then obviously, you're going to have Tesco.
Andrew Coombs, Analyst
Two questions, one more precise on board. On the precise question, just Pillar 2 offset. You talked about the Pillar 2 modest increase followed by a part offset of the later RWA inflation, it's probably too early, but anything you can provide in terms of quantum. And does that potentially even change your 13% to 14% core Tier 1 ratio target? So that's the first question. Second question, a much more broad-based question, but budget. Looking into the budget, thinking about both the U.K. business and the investment bank, I assume we don't get a bank tax. Is there anything else you're particularly looking at in terms of when you're thinking about future customer activity, be that CGT and the buy-to-let market be employers national insurance contributions and the SMEs, et cetera, et cetera.
Angela Cross, Group Finance Director
Okay. Thank you, Andy. So really too early to say. What we called out here is that as you can imagine, in advance of implementing this model, we actually have been holding some Pillar 2A already. There may be some modest increase in that before we implement the model in full. So that's all we're calling out. It's difficult to give any specific guidance around quantum or exact timing, but you'll note that we said modest. And just reiterating, we are already holding Pillar 2A for this. And then the other point I'd make is that, obviously, we still await some Basel guidance from the PRA. So there is some expectation that we'll get some guidance around Pillar 2 offset where they're really trying to avoid double counting between Pillar 1 and Basel and Pillar 2A that exists currently. And really, we need to see all this put together holistically before we give you firmer guidance.
C.S. Venkatakrishnan, Group Chief Executive
And on budget, listen, obviously, we're a large U.K. bank, which operates across different sectors of the economy. So whether it's taxation, whether it's borrowing and financing by the government, whether it is private investment and helping with public investment, whether it's individual investment behavior that comes out of whatever the budget says, we would expect to see activity across everything which we do. I can't tell you where and how much and what the net of it is, but expect us to be actively engaged across all the different dimensions of it. With that, thank you, everybody.
Angela Cross, Group Finance Director
Yes. Thank you very much, everybody. I really look forward to seeing some of you on the road, and we will see you at the sell-side breakfast in November. But thank you for your continued interest in Barclays. Have a great day.
Operator, Operator
Thank you. That concludes today's conference call. You may now disconnect.