Earnings Call Transcript
NatWest Group plc (NWG)
Earnings Call Transcript - NWG Q3 2025
Operator, Operator
Good morning, and welcome to the NatWest Group Q3 Results 2025 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we will take questions.
Paul Thwaite, CEO
Good morning, and thanks for joining us today. I'll start with a short introduction before I hand over to Katie to take you through the numbers. We have delivered another strong quarter as we continue to execute on our priorities of disciplined growth, bank-wide simplification, together with managing our balance sheet and risk well. Though inflation is above the Bank of England's 2% target, the economy is growing, unemployment is low, wage growth is above the rate of inflation, and businesses and households have relatively high levels of savings and liquidity. This is reflected in the levels of customer activity we're seeing across the bank. So let me start with the headlines for the first 9 months. Lending has grown 4.4% since the year-end to GBP 388 billion, in line with our annual growth rate of more than 4% over the past 6 years. Growth has been broad-based across our 3 businesses, and we attracted a further 70,000 new customers in the quarter. Mortgage lending was up by more than GBP 5 billion for the first 9 months as we broadened our customer proposition with new offers for first-time buyers and family-backed mortgages, and issued mortgages to landlords in collaboration with buy-to-let specialists. Unsecured lending grew GBP 2.9 billion or 17.3%, and we made good progress integrating our recently acquired Sainsbury's customers. They're now able to view their credit card, link their Nectar card, and view their Nectar points from credit card spending via the NatWest app. In commercial and institutional, we delivered lending growth of GBP 7.9 billion or 5.5% across both our large corporate and institutional and commercial mid-market businesses in areas such as infrastructure, social housing, and sustainable finance. As the #1 lender to infrastructure, we are supporting many large-scale programs up and down the country. And we have delivered GBP 7.6 billion towards our 2030 group climate and transition finance target of GBP 200 billion announced in July. Deposits grew 0.8% to GBP 435 billion as we balance volume with value in a competitive market and as customers manage their savings across cash deposits and investments. Furthermore, more customers across the bank chose to invest with us; assets under management and administration have grown 14.5% to GBP 56 billion. This has contributed to growth in noninterest income, along with higher fees from payments, cards, and good performance in our currencies and capital markets business. This customer activity has resulted in a strong financial performance. Income grew to GBP 12.1 billion, 12.5% higher than the first 9 months last year. Costs were up 2.5% at GBP 5.9 billion resulting in operating profit of GBP 5.8 billion and attributable profit of GBP 4.1 billion. Our return on tangible equity was 19.5%. Given the strength of our performance, we are revising our full year guidance for income to around GBP 16.3 billion and for returns to greater than 18%. We continue to make good progress on both simplification and capital management. We have reduced the cost/income ratio by 5 percentage points to 47.8%. We generated 202 basis points of capital for the 9 months and ended the third quarter with a CET1 ratio of 14.2%. This strong capital generation allows us not just to support customers but to invest in the business and deliver attractive returns to shareholders. As you know, we announced a new share buyback of GBP 750 million at the half year, of which 50% has now been carried out, and we expect to complete the buyback by our full year results. Earnings per share have grown 32.4% year-on-year and TNAV per share is at 14.6% at 362p. So a strong performance for the first 9 months. I'll hand over to Katie to take you through the numbers for the third quarter.
Katie Murray, CFO
Thank you, Paul. I'll talk about the third quarter using the second quarter as a comparator. Income, excluding all notable items, was up 3.9% at GBP 4.2 billion. Total income was up 8.2%, including GBP 166 million of notable income items. Operating expenses were 2.1% more at GBP 2 billion due to lower litigation and conduct charges. The impairment charge was GBP 153 million or 15 basis points of loans. Taken together, this delivered operating profit before tax of GBP 2.2 billion for the quarter and profit attributable to ordinary shareholders of GBP 1.6 billion. Our return on tangible equity was 22.3%. Turning now to income. Overall income, excluding notable items, grew 3.9% to GBP 4.2 billion. Across our 3 businesses, income increased by 2.5% or GBP 101 million. Net interest income grew 3% or GBP 94 million to GBP 3.3 billion. This was driven by further lending growth and margin expansion as tailwinds from the structural hedge and the benefit from the Sainsbury's portfolios for a full quarter more than offset the impact of the base rate cut in August. Net interest margin was up 9 basis points to 237, mainly due to deposit margin expansion and funding and other treasury activity. Noninterest income across the 3 businesses was up 0.8% compared with a strong second quarter. This was due to increased card fees in retail banking, higher investment management fees in private banking and wealth management, and a good performance in currencies and capital markets with heightened volatility. Given continued positive momentum and a clearer line of sight to the year-end, we have refined our income guidance and now expect full year total income, excluding notable items, to be around GBP 16.3 billion. We continue to assume 1 further base rate cut this year with rates reaching 3.75% by the year-end. This improved guidance alongside strong Q3 returns means we now expect return on tangible equity for the full year to be greater than 18%. Moving now to lending, where we have delivered another strong quarter of growth. Gross loans to customers across our 3 businesses increased by GBP 4.4 billion to GBP 388.1 billion, with growth well balanced between personal and corporate customers across retail banking and private banking and wealth management. Mortgage balance grew by GBP 1.7 billion, and our stock share remained stable at 12.6%. Unsecured balances increased by a further GBP 100 million, mainly in credit cards. In commercial and institutional, gross customer loans, excluding government schemes were up by GBP 3 billion. This includes GBP 1.6 billion across our commercial mid-market customers, particularly in project finance, social housing, and residential commercial real estate, as well as GBP 1.5 billion in corporate and institutions, mainly driven by infrastructure and funds lending. I'll now turn to deposits. These were broadly stable across our 3 businesses at GBP 435 billion. Retail banking deposit balances were down GBP 0.8 billion, with growth of GBP 0.6 billion in current accounts, more than offset by lower fixed-term saving balances following large maturities. Private banking balances that reduced by GBP 0.7 billion with flows into investments as customers diversify and manage their savings as well as tax payments made in July. We saw a small increase in commercial and institutional of GBP 0.4 billion, with higher balances in both commercial mid-market and business banking. Deposit mix across the 3 businesses was broadly stable. Turning now to costs. We are pleased with our delivery of savings this year, which allows us to invest and accelerate our program of bank-wide simplification. Costs grew 1% to GBP 2 billion, including GBP 34 million of our guided one-time integration costs. This brings integration costs for the first 9 months to GBP 68 million. We remain on track for other operating expenses to be around GBP 8 billion for the full year, plus around GBP 100 million of one-time integration costs. This means you should expect expenses to be higher in the fourth quarter, driven by the annual bank levy and the timing of investment spend. I'd like to turn now to impairments. Our prime loan book is well diversified and continues to perform well. We are reporting a net impairment charge of GBP 153 million for the third quarter equivalent to 15 basis points of loans on an annualized basis. Our post-model adjustments for economic uncertainty of GBP 233 million are broadly unchanged. Following our usual review, our economic assumptions also remain unchanged. Overall, we are comfortable with our provisions and coverage, and we have no significant concerns about the credit portfolio at this time. Given the current performance of the book and the 17 basis points of impairments year-to-date, we continue to expect a lower impairment rate below 20 basis points for the full year. Turning now to capital. We ended the third quarter with a common equity Tier 1 ratio of 14.2%, up 60 basis points on the second. We generated 101 basis points of capital before distributions, taking the 9-month total to 202 basis points. Strong third quarter earnings added 84 basis points, and the reduction in risk-weighted assets contributed another 8 basis points. Risk-weighted assets decreased by GBP 1 billion to GBP 189.1 billion. GBP 0.9 billion of business movements, which broadly reflects our lending growth, and GBP 0.3 billion from CRD 4 model inflation, were more than offset by a GBP 2.2 billion reduction as a result of RWA management. This brings our CET1 ratio before distributions to 14.6%. We accrued 50% of attributable profits for the ordinary dividend as usual, equivalent to 42 basis points of capital. We continue to expect RWAs of GBP 190 billion to GBP 195 billion at the year-end, with a greater impact from CRD4 expected in the fourth quarter. Turning now to guidance for 2025. We now expect income excluding notable items, to be around GBP 16.3 billion, and return on tangible equity to be greater than 18%. Our cost, impairment, and RWA guidance remain unchanged. And with that, I'll hand back to Paul. Thank you.
Paul Thwaite, CEO
Thank you, Katie. So to conclude, we're pleased to report another very strong quarter of income growth, profits, returns, and capital generation. This has been driven by customer activity across all 3 of our businesses, leading to strong broad-based lending growth and robust fee income. Our continued focus on cost discipline has delivered meaningful operating leverage. As we actively manage both our balance sheet and risk, the business remains well positioned to deliver strong shareholder returns. As you've heard, we have upgraded our full year income and returns guidance today. We'll update you on our guidance for 2026 and share our new targets for 2028 at the full year in February. Many thanks. We'll now open it up for questions.
Operator, Operator
Our first question comes from Benjamin Caven-Roberts of Goldman Sachs.
Benjamin Caven-Roberts, Analyst
So 2 for me, please. First on deposits and second on noninterest income. So on deposits, could you talk a bit about deposit momentum in the business? And in particular, you mentioned the retail fixed term outflows over the quarter. Could you talk a bit more about how much of that is reflecting conscious pricing decisions? And then looking ahead, the sort of trajectory for deposits going forward? And then on noninterest income, very strong even when adjusting out the notable items related to derivatives. Could you talk about momentum in that franchise and what business drivers you're particularly focused on looking ahead?
Paul Thwaite, CEO
Thank you, Ben. It's great to connect with you. Let's address your points one by one. Regarding deposits, the overall picture shows an increase of about GBP 3.5 billion, which is around 1% year-to-date. There are varied stories across different sectors. Earlier this year, we discussed the ISA season and the broader discussions surrounding its future, which influenced the swap curves because of tariffs, leading to variations in pricing. That period has passed, and since April and May, pricing has stabilized. Looking at our three business segments, the trends differ slightly. I'll delve into retail last since there's more to explore there. On the commercial side, it's encouraging to see deposits rising, particularly in the business bank and commercial mid-market segments, which is a positive sign. Conversely, private bank cash deposits have decreased due to several factors, including some tax payments in July and a shift of funds from cash deposits into securities and investments, which is a positive trend. In retail, current account balances have increased, especially in operational and salary accounts, with numbers trending upward. The specifics are available in our disclosures. Instant access balances have remained flat, while we've experienced reductions in fixed-term accounts, largely due to several large maturities during the quarter. We're satisfied with our retention rates, which are around 80% to 85%. However, as you mentioned, with our loan-to-deposit ratio at 88% and liquidity coverage ratio at 148%, we are striking a careful balance between value and volume. We've been quite agile and are concentrating on areas that provide funding and customer value. That summarizes the deposit situation. Each business presents its own narrative, but overall, our funding profile remains stable, and we're committed to managing it for value. Regarding your second question about non-interest income, we are pleased with both the current quarter and year-to-date results, with good momentum in our targeted areas. The growth is quite broad-based when we break it down, particularly in cards and payments, but we also see significant contributions from our markets business within C&I, driven by a robust foreign exchange franchise and our capital markets business. Quarter three has been stronger than we anticipated when we last spoke, reinforcing our strategy in various sectors such as the market segment of commercial institutional and our payments business. Additionally, in our wealth business, fees from assets under management are also on the rise. Overall, we are making strong progress and maintaining good momentum in fees, which remains a strategic focus for us. Thank you, Ben.
Operator, Operator
Our next question comes from Sheel Shah of JPMorgan.
Sheel Shah, Analyst
Great. Firstly, on the costs. You've reiterated your cost guidance for the year despite the strong third quarter performance. How should we think about cost growth going forward, given we have CPI going back towards 4%? You're clearly simplifying the bank internally. Do you think a 3% cost growth number is the right level for the bank? Or do you think that maybe understates your ability to manage the cost base? And then secondly, on capital, could you give us a steer on the CRD impact that we expect for the fourth quarter? And maybe thinking about the fourth quarter capital level, how are you thinking about operating in that 13% to 14% range? Is there anything preventing you from moving down towards the 13%, or are you managing maybe for M&A or anything else that you're thinking about?
Paul Thwaite, CEO
Thanks, Sheel. Katie, I'll take the cost and then turn it over to you on the capital piece of that, okay?
Katie Murray, CFO
Yes, it's been a strong year-to-date performance when compared year-on-year. We have the one-off integration costs related to Sainsbury's, but I'm pleased with the progress we are making on our simplification efforts. This is starting to show positive results and is creating the capacity to invest in further transformations within the business. We're not just cutting costs; we are also enhancing both customer and colleague experiences. As you mentioned, we are maintaining our current year guidance of GBP 8 billion, plus the GBP 100 million in integration costs, and we are encouraged by the progress on the simplification agenda. While I won’t discuss specific costs for 2026 or beyond, we’ll address that in February when we provide guidance for 2026 and our new targets for 2028. Overall, we are very focused on managing costs, with strong conviction in our simplification agenda. To give you some context, achieving this year's cost performance requires us to reduce over 4% from our underlying business, which allows us to support investments and adapt to inflation-related changes, such as wages and tech contracts. We have momentum in driving efficiency, managing costs effectively, and enabling investments. Going forward, we will continue to leverage strategies like digitization and modernizing our tech environment. For example, we've decommissioned 24 platforms in retail this year. Our operational model has also seen simplifications, such as relocating some support functions from Switzerland to the U.K. and India, and streamlining our European and legal entity footprints. The initiatives we’ve implemented are sustainable, and we are also benefiting from productivity improvements through AI in areas like customer contact and software engineering. While I cannot provide a specific number for 2026, I hope this gives you insight into our thought process and the source of our confidence in maintaining a healthy cost structure going forward. Sure. I'll start by discussing CRD regarding the interest on capital. You're right, the impact of CRD4 was limited this quarter, and we expect most of it to manifest in Q4, with some effects possibly extending into 2026. When considering our risk-weighted assets, it's primarily about loan growth, management actions, and the significant influence of CRD4 arriving in the fourth quarter. Looking ahead, remember that Basel 3.1 will be introduced in 2026, which will include a slight reduction in Pillar 2 capital. It's essential to think about the growth in our book, the composition of that growth, and the risk density we will encounter once CRD4 and Basel 3.1 are implemented. Additionally, our management action program remains robust. On the capital side, we had a strong performance this quarter with an increase of 101 basis points, totaling 202 basis points for the first nine months—an impressive result overall. We've always indicated our willingness to operate at a 13% capital level. Capital generation is a key focus for us, especially when considering dividends and our future positioning. We are mindful about maintaining a consistent capital return program while also considering the incoming RWA generation, influenced by regulatory changes and the growth in our portfolio. Therefore, when contemplating our future outlook, keep these various factors in mind. Thank you.
Paul Thwaite, CEO
Thanks, Sheel.
Operator, Operator
Our next question comes from Aman Rakkar of Barclays.
Aman Rakkar, Analyst
I have two questions, please. It seems we are all focused on 2026 at this point. Specifically regarding income, I would like your perspective on how we should view the various drivers going forward, particularly in relation to margin developments. Loan growth continues to exceed expectations, but any insights you can share about the drivers of fee income would be very helpful. My second question pertains to your long-term targets, which I hope you will present to the market in the new year. It appears there is a solid foundation for considerable operating leverage over the next few years, partly due to the structural tailwinds you mentioned extending to 2028. So, Paul, I’m interested in your thoughts on structural operating leverage in your business from a multi-year perspective and your confidence in that, especially regarding the levers you may want to utilize. I am ultimately interested in the return on tangible equity output. Currently, you are achieving 18% this year, and I see no reason why you shouldn’t increase that level nicely as you leverage your operating capacity.
Katie Murray, CFO
Perfect. That's great. Thanks, good to hear your voice. Look, we do continue to expect the income growth that we've seen throughout our guidance period, and we do remain confident in that growth trajectory beyond 2025. So as I look at 2026, there's probably a few things I would kind of guide you to. One, growth. I mean, we've talked about this a lot, but we've got a strong multiyear track record of growth across all 3 of our businesses. We outpaced the wider sector on that. If we look at the breadth of our business, we know that we're well placed to capture demand as it comes through, and we'll continue to deploy capital throughout 2026, and we do expect that growth to continue. Obviously, there's a mix of growth across both sides of the balance sheet, and that's very much a function of customer and competitor behavior. The hedge, I think you're all very familiar with the hedge these days. We've talked about it such a lot over this last year, but certainly, strong growth into 2026, over GBP 1 billion higher in absolute terms in 2025. I think that's well understood by all of you. Rate cuts, we do expect one further rate cut in Q1 after our plans still have a rate cut in November. So we get to a kind of terminal rate of 3.5%. And then you'll see the kind of averaging impact of the rates we've had this year coming through into 2026. Paul has already spoken on noninterest income and our confidence in that business, very much the strength of the customer franchise, always dependent on customer volatility and customer activity and volatility, but it served us very well this year. But if I think of all of those trends together, Aman, they will continue beyond next year as well, obviously, with the exception of rate cuts, as we believe we'll get to that terminal rate in 2026. But I'd agree with you, we feel quite well placed at the moment. Paul?
Paul Thwaite, CEO
Thanks, Katie, and thanks, Aman. And yes, A, we've announced today that we'll share targets for '28 in February. So we've been very explicit on that. So we look forward to that session. But as you say, it's obvious we've got good momentum in the business, and that's predicated on strong operating leverage. If you look at today's numbers, we've got a 5% cost/income ratio improvement, and we've guided to over 9% jaws for the year. So a very strong proof point of the operating leverage that we've got in the current business model and business mix, which we have talked about previously. But as I said, I'm just very pleased that it's bearing fruit as the income growth and the simplification agenda comes through. As I said to Sheel's question, we are high conviction on the simplification agenda. The levers we are pulling are working, and we can see a path to continue to pull those levers, which should further support the operating leverage to link it to Katie's answer as we see the top line growth through the different aspects. It's our seventh year of growth above 4% on the lending side. So that gives us confidence there that we've got customer businesses that will capture demand and have grown above market growth levels over a multiyear track record. So that's what's going to inform our thinking as we go through. But the underlying thesis here is very tight management of costs that creates capacity to invest, growing the customer franchises, strong jaws, generates a lot of capital, over 100 basis points in the quarter, over 200 for the year, and that gives us confidence about the outlook. So hopefully, that gives you a sense of how we're thinking about it. And obviously, we'll talk specific numbers in February. Thanks, Aman.
Operator, Operator
Our next question comes from Alvaro Serrano from Morgan Stanley.
Alvaro Serrano, Analyst
Hopefully, you can hear me okay. I have a couple of follow-up questions. I'm interested in how well NatWest Markets is performing. I understand there’s a history there, and I think the cautious guidance stems from limited visibility due to the nature of the business. However, since it has been consistently performing well, consensus is projecting a decline in its contribution by 2026, and there seems to be a lack of medium-term growth in noninterest income. Given the performance over the last few years, could you share your insights on that business? How much of its performance is cyclical versus what changes have been made? Is it correct to expect a normalization in the medium term, particularly next year? Also, regarding loan growth, it continues to perform well in corporate lending. Initially, it was somewhat inconsistent in the corporate and institutional sectors, but it appears to be more evenly distributed in the mid-market now. As we look to the next few quarters, how do you view this momentum? Should we anticipate that this growth rate is sustainable?
Katie Murray, CFO
Thank you, Alvaro. It's noteworthy that you've been with us for quite some time and have experienced the evolution of NatWest Markets. A significant strategic development from the beginning of last year has been the integration of Commercial and Institutional (C&I) into the commercial and institutional business, allowing us to have a unified team focused on serving our customers effectively. We've seen the positive impact of this integration, reflected in our strong noninterest income and increased fee income from payments, with C&I’s robust performance playing a key role. This aligns with our strategy of extending more banking services to a broader customer base. Consequently, we observed heightened demand for foreign exchange management and effective risk management amid prevailing market volatility. This strategy of aligning NatWest activities with the C&I framework is crucial for our ability to respond to customer needs moving forward, and we anticipate this trend to persist. While volatility remains a significant factor, making predictions about its direction can be challenging. Customer engagement is essential, and we believe this provides a solid foundation for the future. I want to remind you, as I usually do on these calls, to consider our noninterest income in relation to our three business segments. There might be some fluctuations at the center that are likely to diminish over time. Overall, we are pleased with our income outlook, which has led us to elevate our guidance for this year. As I mentioned, we have great confidence as we approach 2026 as well. Thank you, Alvaro. Paul?
Paul Thwaite, CEO
Thanks, Katie. And Alvaro, I sense your question on lending was specifically around the commercial institutional business. But just, I think it's worth framing our lending growth and our lending opportunity more broadly before that. I say we've got a decent multiyear track record now of growing the 3 businesses. That's 7 years at above 4%. This year, it's currently running up GBP 16 billion. It's up 4.4%. So it's quite broad-based the growth. If you drop down into the commercial franchise, it's a good spot. The quarter 3 print and the growth of around GBP 3 billion split between, I guess, the large corporates and the mid-market. It's pleasing to see the momentum in the commercial mid-market. You'll have heard me say before, I do think that's kind of a helpful proxy on the kind of wider U.K. environment. When you look at where the growth is coming from in the mid-market, you can see it in social housing, certain parts of real estate, and infrastructure. So again, it's quite broad-based. Lending as a total quantum, yes, strong, but the constituent businesses it's coming from is encouraging as well. Infrastructure is a big part of that. What I'd say is I feel as if our commercial business is very well positioned to some of those bigger structural trends that we're seeing. So whether it is infrastructure, project finance, or the social housing agenda. The combination of the structural trends and the policy trends supports those areas we have deep specialisms in and have had for quite a few years. So yes, encouraging, as you say. Thanks, Alvaro.
Operator, Operator
Our next question comes from Chris Cant of Autonomous.
Christopher Cant, Analyst
Just on loan growth, Paul, I mean, I think it's been an area where if I look at consensus, consensus has got 3% or less loan growth in over the next couple of years. It's been something that as a management team, you've typically been reluctant to sort of give an expectation on beyond saying you have a track record of growing quicker than the market. But as you think out to the next planning period, how are you thinking about that in absolute terms? I presume you have a view on how much growth you think the market is likely to see and you want to exceed that. But should we be thinking about 4% as a sort of reasonable expectation or in excess of 4% as a reasonable expectation, assuming no kind of macro volatility or blow up? And then on the returns target, please. So again, it's an area where you're a little bit different from your domestic peers. The last 2 return targets you've given, I guess, have been a little bit more of a through-the-cycle expectation where you would expect to hit them sort of regardless of what was happening to rates and the macro environment. Now that things have settled down from a customer behavioral perspective, in particular, on the deposit front, are you going to be giving us a different flavor of return expectation when you're looking out to 2028? So will you be guiding on where you think the business will be in '28 with your base case assumption rather than a sort of a floor underpinning a broader range of potentially more downside scenarios around customer behavior and macro activity and so on?
Paul Thwaite, CEO
Great. Okay. Thank you, Chris. So I'll take the second one quickly first. Obviously, we'll see you in February and talk about it. Some of the topics you alluded to are what we're thinking about as we go into February and we'll share '28 numbers. But obviously, we will lay out what assumptions we've made around those targets at that time. But it's a very active debate, as you rightly allude to. On the lending side, I think you characterized the position very well and very consistent with how we see it. We're very confident in the track record that we've had. Our ability to grow above market has been proven year-on-year. It does vary by business and market conditions as well. But that's what gives us confidence in terms of the outlook for the lending position. I'm not going to declare new targets or new deltas relative to market growth on the call. I think I've given quite enough color about, I guess, our historic track record and how we're thinking about the business going forward to hopefully give you a sense of confidence and optimism we have around the lending profile. Thanks, Chris.
Operator, Operator
Our next question comes from Jonathan Pierce of Jefferies.
Jonathan Pierce, Analyst
I've got 2 questions. One is on the equity Tier 1 target moving forward. Is that something you'll potentially give us a bit more of an update on in February, or are we going to have to wait until the back end of the year once Basel 3.1 is pretty much nailed down? I ask, of course, because the MDA is 11.6. I guess it drops 30 bps, something like that on Basel 3.1. And it feels like the scope to probably operate towards the lower end of your current range rather than the middle or upper end of it. The second question is a bit more detailed, I'm afraid, around deferred tax assets. In the 9 months to date, the DTA deduction from capital has fallen by GBP 250 million, and it was GBP 100 million in the last quarter alone. So it's not an insignificant amount of capital build that's now coming from that DTA. So I just wondered if we should expect that sort of run rate to continue until the stock has run out a few years forward. I guess we should because RBS plc is now generating good profit and so on and so forth. And sorry, just a supplementary on that. The last 3 years, you bought back around GBP 300 million a year of unrecognized DTA back onto the balance sheet. Are we going to see the same again in the fourth quarter of this year, Katie?
Katie Murray, CFO
I will now address the deferred tax assets. As you know, the Bank of England is currently reviewing capital requirements, and we eagerly await the update from the FEC on this assessment, which is expected on December 2. Our capital strategy has consistently involved reviewing it within our annual ICAP process and our risk appetite assessment, in addition to collaborating with the PRA on their annual stress tests. Our capital position has significantly improved over the past couple of years as we have reduced risks in the business and injected a considerable amount of capital due to RWA inflation. Notably, during this year's SREP process, which was released in Q3, our Pillar 2A was decreased by 17 basis points, lowering our statutory minimum requirement to 11.6%. I anticipate that this number will decrease further once Basel 3.1 is implemented on January 1, 2027, and we have clear visibility on this. Our current targets show strong buffers relative to that lower limit of 13%. While I'm not finalizing today the timeline or any changes to our 13% to 14% target, we are actively considering the suitable capital targets and buffers needed for our business in the medium to long term. Regarding deferred tax assets, it's essential to note that the treatment of these assets differs in capital compared to accounting, leading to timing discrepancies in recognition and utilization. Currently, we have just over GBP 800 million in DTA assets, and we've recognized approximately GBP 1.2 billion since 2023, leaving us with limited additional recognition. The utilization of deferred tax assets also depends heavily on our legal entity structure. We anticipate that our Q4 utilization will align with Q3 levels, and for 2026 onwards, we expect a slight decrease to around GBP 100 million to GBP 150 million per year. This will continue to support capital generation but at a different level due to the use of many historic losses. Jonathan, I'm happy to discuss deferred tax assets further offline if that would help.
Paul Thwaite, CEO
Okay. Thanks, Jonathan. So Katie, why don't you lead out on the CET1?
Operator, Operator
Our next question comes from Guy Stebbings of BNP Paribas Exane.
Guy Stebbings, Analyst
So just around NII and the NIM bridge in Q3, and then I had one very short supplementary. So the hedge build was, I think, broadly as expected. The better performance in terms of the NIM bridge, I think came from funding and other, and then to a lesser extent, the asset margins, which were up fractionally. So firstly, on the funding and other, I think that included some hedge accounting and reallocations between NII and OI. So perhaps you could just clarify exactly what's going on there. And to be clear, if it's correct to think that we should expect any sort of sequential benefits from there, but nor it reverses, that's the right way to think about it? And then on the asset margins, do you think we should expect to see further growth in there? Or is that really just a function of Sainsbury's coming in fully and then perhaps need to be mindful of some minor mortgage spread churn as we look forward? And then just a very quick point of clarification. On RWAs, I recognize the guidance hasn't changed. You flagged the business growth and CRD IV model changes. But just interested if we're coming into Q4 in a slightly better position than you originally thought and whether that means we might be more towards the lower end of that range for the full year guide.
Katie Murray, CFO
Thank you, Guy. To start, funding and other items increased by 3 basis points, with 2 basis points attributed to treasury, which we don't expect to recur. This area is always complex due to its various components, reflecting the management of a £700 billion balance sheet we assess each quarter. Occasionally, there are minor fluctuations. In this quarter, we implemented a hedge accounting solution for some of the FX swap activity we've discussed in previous quarters, providing a one-off benefit of 2 basis points in net interest margin; we do not anticipate this benefit to happen again or to reverse. However, moving forward, you should see reduced volatility in net interest margin from this activity on a quarter-to-quarter basis, resulting in a lesser negative impact on net interest income and less positive effect on noninterest income. Importantly, the overall economic benefit remains the same. Regarding asset margin, the increase of 1 basis point is quite small. You're correct, Guy, that we're benefitting from a full quarter of Sainsbury's. I don't foresee significant expansion in this area, as it largely depends on the mix each quarter. About our mortgage margins, you're right to highlight that while our margins are lower compared to the overall net interest margin, which is generally around 70 basis points, we are currently writing slightly below that due to the intense competition in the mortgage market. This trend will influence net interest margin going forward. Regarding risk-weighted assets, I believe it's mainly a timing issue and won't have a significant impact in the next quarter. I've mentioned that we expect more substantial CRD IV impacts to come, along with a small amount of loan growth. We've also continued to focus on our risk-weighted asset management program, but I wouldn't view this as a factor that will significantly lower them. It’s primarily about timing. Thank you, Guy. I hope that answers your questions.
Operator, Operator
Our next question comes from Robert Noble at Deutsche Bank.
Robert Noble, Analyst
I wanted to ask one on liquidity, please. So there's been a continued rotation in your liquidity from cash into government bonds that seems to pick up, right? So what's the spread pickup you're getting off that? And hypothetically, could you move all cash into gilts? Or what's the regulatory restriction that caps you out from doing that? And then just on the term deposit outflows in the quarter, should we expect the same next quarter, given that 1 year and 2 years ago, rates looked equally as high? Is there a similar maturity issue in Q4?
Paul Thwaite, CEO
Thanks, Rob. So I take the deposit one quickly and then back to your liquidity piece. On deposits, Rob, we did have some particularly large maturities in the third quarter. And you're right, if you think back 2 years ago when we had the kind of the backup in rates, they related to that. So it's not that we don't have maturities in quarter 4, but they're not of the same size or price or margin price points as what we had in quarter 3. Our retention rates are actually quite good. We're just being very dynamic in where we see value and retention and where we don't. So that's how to think about that. Katie?
Katie Murray, CFO
Sure, regarding liquidity, there are a few factors affecting our liquidity ratio. Firstly, we are about to proceed with the TFSME repayment, which is something to keep in mind for the upcoming weeks. You are correct that our swap into gilts was intended to capture some additional return, approximately 50 basis points in the 5- to 7-year range, and we are pleased with this move. However, we don’t plan to allocate our entire liquidity portfolio into gilts, as that would be equivalent to taking a significant risk. We do have certain restrictions regarding where our holdings must be, primarily due to the leverage ratio, which helps us maintain the right balance. Currently, the portfolio is evenly divided, leaving us with opportunities to adjust our position in gilts if it proves attractive. You can expect us to manage the portfolio dynamically. Thank you, Rob.
Operator, Operator
Our next question comes from Benjamin Toms of RBC.
Benjamin Toms, Analyst
First one is just to help my structural hedge model, if that's all right. Your guidance this year for structural hedge maturities of GBP 35 billion. Should we be making the same assumption for next year? I'm just conscious that you added to the hedge in '21 and 2022. So I'm not sure whether that should mean there's a pickup in maturities or whether you're just feathering at the front end, which means maturities should be pretty consistent as we go through the years. And then secondly, on other income, you purchased cushion in 2023 to provide workplace pension solutions. Can you just give us your latest strategic thoughts on that part of the business, what you think you do well, and what you think you lack?
Katie Murray, CFO
Yes, perfect. So in terms of the maturity, I mean, Ben, the way that we look at it - it's GBP 172 billion at the moment. It's obviously a function of current account and NIBS growth. We're pleased to see the growth in that. You'll recall that we do a kind of look back of 12 months as we work out how much we're going to reinvest. We also do some work during the year on the behavioral life in terms of what's happening with our actual current account holders and things like that. But actually, what I would guide you to at the moment is think of it really as GBP 35 billion a year. If we see particularly strong growth on those current accounts, it might change in the future years. But for your model, I would stick to the GBP 35 billion number. It's very even because we've been so mechanistic. So I wouldn't kind of deviate from there. Paul, do you want to?
Paul Thwaite, CEO
Yes. So Ben, cushion is a good business. It's got a strong proposition, very strong technology, and it's proven attractive to our commercial mid-market customers. Obviously, there's kind of legal and market dynamics that make it important for a lot of those clients to be able to offer workplace pensions to their employees and colleagues. And it's proven very attractive. Going forward, I think it's an important part of the proposition that we can provide or facilitate that service. There has also been a series of reg changes in the last couple of years around Master Trust, which certainly lend themselves to Master Trust having significant scale. So net-net, it's a good business. It's an important proposition to offer to our commercial clients, but there have been some regulatory changes as well. So that's how we're thinking about, I guess, that workplace pensions area. Thanks, Ben.
Operator, Operator
Our next question is from Ed Firth of KBW.
Edward Firth, Analyst
I have two related questions. First, looking at your Q3 returns, they are over 20% even without one-time factors. If you normalize, the hedge and capital appear strong, suggesting you could easily reach mid-20s or high 20s. How do you view the appropriate level of return in this context? Considering operating leverage and reduced capital requirements that might drive those returns higher, I'm particularly thinking about a potential bank tax discussion in November with the government regarding acceptable return levels. So, at what point do you feel we are making enough, and how should we focus on growing and improving returns from here? My second question is tied to that. Although it's two years away, what happens when the hedge expires? If you're at peak returns then, what are your next steps? Earlier discussions hinted at possible acquisitions, but you've now moved away from that approach. Should we consider that for future planning? Given your current returns, it seems challenging to find alternatives that can offer equivalent levels.
Paul Thwaite, CEO
Thanks, Ed. It's great to hear from you. There are several points that connect with one another. Firstly, as you know, it has taken a long time for many banks to return their cost of capital, so having this discussion is somewhat healthy. When considering the situation, U.K. banks are still valued quite differently than many other regions which have similar business models and regulatory frameworks. I must admit I’m going to give a somewhat vague answer regarding what the ideal returns should be. From the perspective of the management team and the Board, it’s essential to find the right balance between supporting our customers, deploying our capital to assist their growth, and investing in our business in this highly competitive sector with a diverse range of competitors. Investing in technology and people is vital, and we must achieve the right returns while presenting an appealing investment case. The debate revolves around balancing these three components. For the quarter, the return on tangible equity is as you mentioned, with some one-offs included. Year-to-date, it stands at 19.5%, and without those one-offs, it’s in the high 18% range. We are diligently working on various fronts, not just the structural hedge. We're striving for lending growth, reducing costs, and efficiently managing the balance sheet. We view those returns as reflecting the outcomes of our efforts. As a Board, we need to ensure we create a sustainable and attractive long-term business while also supporting our customers and delivering returns. That's our perspective. I haven't provided a specific number because I don't think that is the right approach. Regarding M&A, it's related to a connected question, and our strategy is effectively working. I've explained this two years ago, and our organic plan is showing success as we grow all three of our businesses and drive simplification. We've achieved this without altering our risk profile, which has not hindered our growth. The organic plan looks strong, and if opportunities arise to accelerate it, we will consider them. I've mentioned the high financial bar many times, and that remains our standard. Any capital deployment to accelerate our plan must be compelling for shareholders. Otherwise, it will be difficult for me to justify to investors. We will examine opportunities, but we will do so with a critical mindset. Given that our organic plan is performing well, considering alternatives can indeed be more challenging. However, I believe I have a responsibility to assess those alternative uses of capital. I hope this gives you an insight into how management approaches these topics.
Operator, Operator
We are now approaching 10 a.m. So we'll take our last question from Andrew Coombs from Citi.
Andrew Coombs, Analyst
I guess one follow-up and 2 follow-ups really. Just firstly, on that point about capital return versus inorganic versus organic loan growth. I mean, you yourself have said there's a very high bar for inorganic given the returns you're already producing. And obviously, now you're trading well above tangible book. The buybacks are also slightly less accretive than they would have once been. So when you're thinking about the dividend payout, the 50% policy, any reason why that couldn't be higher going forward? What are the pros and cons of shifting that dividend payout ratio? And then second question, just on the structural hedge. You're still at 2.5-year average duration. Your peers are all now at 3.5, partly due to what they see to be the behavioral life of the deposit base. I'm sure partly due to technical reasons as well. But perhaps you could elaborate on the maturity profile of the hedge and why you don't see the need to increase it here.
Paul Thwaite, CEO
Great. Thanks, Andrew. I'll take the first. You take the second, Katie?
Katie Murray, CFO
Yes, definitely. It's interesting to note that the hedge consists of two parts: the equity hedge and the product hedge. You're correct that the product hedge is at 2.5%, while the total hedge is closer to 3%. It's vital to understand that the mechanistic model we've implemented has been effective for us. I believe you would only consider extending your duration if you thought the duration of your eligible deposits had increased based on behavioral assumptions. However, based on our observations, particularly regarding current accounts, we haven't seen any significant shifts in our data. It's also crucial to recognize that the hedge is not intended for us to predict where rates are heading. Others may have differing opinions on that, but our approach remains consistent. Attempting to extend the duration at this point wouldn't be logical, given the minimal advantages it would bring. Moreover, our underlying data does not indicate the behavioral changes necessary to support a duration extension. Overall, the product hedge remains at 2.5 years, with the total hedge at approximately 3 years, and we are very satisfied with its performance, which has served us well for many years. As we look ahead to the increased income projections for the next year into 2026, which are expected to exceed GBP 1 billion, and continuous growth through 2028, we are quite pleased with how things are progressing. Thank you.
Paul Thwaite, CEO
Thanks, Katie. So to wrap things up, we're very pleased with the performance in quarter 3 and the continuing momentum we've got in our 3 businesses. We've upgraded our income and returns guidance, and we continue to see opportunities, as I think we've conveyed today, to continue to take market share and grow those businesses. We look forward to catching up with you at a couple of things. We've got the retail banking spotlight on November 25. And also, as I said earlier, we'll update you on our guidance for 2026 and share our new targets for 2028 at the full year in February. So I wish you all a good weekend. Thank you.
Katie Murray, CFO
Thanks very much.
Operator, Operator
That concludes today's presentation. Thank you for your participation. You may now disconnect.