Earnings Call Transcript
NatWest Group plc (NWG)
Earnings Call Transcript - NWG Q1 2024
Paul Thwaite, CEO
Good morning, and thank you for joining us today. I'll start with the headlines. Katie will take you through the financial performance, and we'll then open it up for questions. I said in February that we are driving returns in three ways. First, by continuing to grow our businesses in a disciplined manner; second, by driving bank-wide simplification; and third, by deploying capital efficiently and maintaining strong risk management. We are focused on these priorities in order to generate capital to both reinvest in the business and make further shareholder distributions. We have continued to make good progress in the first quarter and the year has started well. So let's turn now to the financial headlines, supporting customers and the U.K. economy is central to our strategy, creating greater value for customers, resulting in greater value for shareholders. Customer lending increased to £361 billion, making this the sixth consecutive year of lending growth. We are seeing early signs of improving demand in mortgages, and our net lending to large U.K. corporates continues to grow as business confidence improves. Our deposit balances have grown to £420 billion, ahead of expectations, with migration to higher-rate savings accounts slowing as expected. And assets under management and administration grew to £43 billion, up £2.3 billion since the year-end. This customer activity underpins our strong performance in the quarter. We generated income of £3.4 billion, with costs of £2 billion, delivering operating profit of £1.3 billion and attributable profit of £0.9 billion. Taken together, this resulted in a return on tangible equity of 14.2%. Strong earnings added 10p or 3.4% to tangible net asset value per share, which was 302p. Our CET1 ratio for the first quarter increased to 13.5%. This includes an accrual of £367 million towards our interim dividend in line with our targeted ordinary dividend payout ratio of around 40%. We have completed last year's £500 million on-market buyback program and started the £300 million buyback announced in February, which we expect to complete by the end of July. We have capacity for another directed buyback when the window opens in late May. You will be aware that the government has reduced their shareholding to below 29%, a reduction of more than 8 percentage points since the year-end, in line with their intention to exit fully by 2026. This is a shared ambition, which we believe is in the best interest of the bank and our shareholders. We will work closely with UK GI and the treasury if the government does decide to launch a retail share offer. With that, I'll now hand over to Katie.
Katie Murray, CFO
Thank you, Paul. I'll start with our performance for the first quarter using the fourth quarter as a comparator. Income, excluding all notable items, was down 0.8% at £3.4 billion. Operating expenses were 4.7% lower at £2.1 billion, which includes the new Bank of England levy. The impairment charge was £93 million or 10 basis points of loans. Taking all of this together, we delivered operating profit before tax of £1.3 billion. Profit attributable to ordinary shareholders was £918 million, and return on tangible equity was 14.2%. I'd like to talk now about our income performance in more detail. Overall, income, excluding notable items of £3.4 billion, was down 0.8% on the fourth quarter. Excluding the impact of one fewer day in the quarter, income across the three businesses increased by £14 million. Retail banking was down £30 million due to lower mortgage income and a reduction in card spending fees. Private Banking was broadly stable as lower mortgage income was offset by higher fees from assets under management, which grew £1.9 billion or 6% in the quarter. Commercial & Institutional increased to £44 million, driven by stronger markets income. This was partly offset by a reduction in the Central of £13 million. Group net interest margin was 205 basis points, up 6 basis points from the fourth quarter. However, it was broadly stable across the three businesses, excluding notable items and volatility in the Center. This stabilization of margin is pleasing to see after a reduction over the prior three quarters. Moving now to lending. We continue to be disciplined in our approach and focus on deploying capital where returns are attractive. We are pleased to see a stronger mortgage market, together with ongoing demand from larger corporates and financial institutions. Gross loans to customers across our three businesses increased by £1.4 billion to £361 billion. Taking retail banking together with private banking, mortgage balances fell by £2.1 billion as customer redemptions offset new lending. This led to a small reduction in our stock share from 12.7% to 12.6%. Mortgage flow share for the first quarter was broadly stable on the fourth at 10.5%. However, as the market has increased in size, this translated to higher applications. Unsecured balances were stable at £15.8 billion, with continued growth in cards, offset by a reduction in loans and overdrafts. In Commercial & Institutional, gross customer loans, excluding government schemes, increased by £3.9 billion or 3%. Within this, loans to Corporates & Institutions increased by £3.1 billion as we saw broad-based demand across a number of sectors. I'll now turn to deposits. These were up £0.9 billion across our three businesses to £420 billion, which is better than expected. Across retail and private banking, household deposit balances increased by £2.1 billion, and overall current account balances were stable despite annual tax payments. The reduction in commercial and institutional was mainly driven by active management of lower-value deposits and a reduction in system liquidity. Migration from non-interest-bearing to interest-bearing deposits continued at a slower pace as expected. Non-interest-bearing balances were 33% of the total compared to 34% at the end of the fourth quarter, whilst term accounts grew to 17% from 16% at the year-end. As a result, the increase in our cost of deposits has slowed further, rising around 10 basis points to 2.1%, as you can see on the chart on the right. Our strong diversified funding base has strengthened our liquidity coverage ratio to 151% at the end of the quarter, up 7 percentage points on the year-end. Turning now to costs. We remain on track for other operating expenses to remain broadly stable versus 2023. Excluding the increase in bank levies of around £100 million, costs of £2 billion for the first quarter were broadly stable with the fourth quarter. This includes £87 million of bank levies following changes to the cash deposit ratio scheme. We expect total bank levies for this year to be around £200 million, which is roughly £100 million higher than last year, with the remainder of the charge coming in the fourth quarter. We also incurred higher severance, branch, and property exit costs in the first quarter and expect these to be weighted to the first half of the year. So you should not expect first quarter costs to be the ongoing run rate. We will continue our strong track record of disciplined cost management and investment and plan to improve productivity and efficiency through bank-wide simplification. I'd like to turn now to impairments. We have not changed our macroeconomic assumptions during the quarter. And as usual, we'll update these at the half year. Our diversified prime loan book continues to perform well. We are reporting a net impairment charge of £93 million in the first quarter, equivalent to 10 basis points of loans. Stage 3 impairments continued to normalize, but this was partly offset by good book releases. Our balance sheet provision for expected credit loss includes £411 million of post-model adjustments for economic uncertainty, which is down £18 million in the quarter. We continue to expect a loan impairment rate below 20 basis points for the full year in 2024. Turning now to capital. We ended the first quarter with a common equity Tier 1 ratio of 13.5%, up 10 basis points in the quarter. We generated 50 basis points of capital from earnings, which was partly offset by RWA growth, consuming 24 basis points. The accrual for ordinary dividends was equivalent to 20 basis points. RWAs increased by £3.3 billion to £186.3 billion. This was driven by higher lending in Commercial & Institutional and the annual update to operational risk, which added £1.6 billion. We continue to expect RWAs to be around £200 billion at the end of 2025, including the impact of Basel III.1 and further CRD IV model developments. Our CET1 ratio target remains 13% to 14%, and we retain capacity to participate in a directed buyback from the U.K. government at the earliest opportunity. Tangible net asset value per share has increased by 10p, mainly as a result of attributable profits. The cash flow hedge reserve was broadly stable as the impact of the yield curve changes were mitigated by ongoing decay. Turning now to guidance for 2024. We continue to expect income, excluding notable items, to be in the range of £13 billion to £13.5 billion. Group operating costs, excluding litigation and conduct, to be broadly in line with 2023, excluding an increase in the bank levies of around £100 million, and the lower impairment rates to be below 20 basis points, altogether, delivering a return on tangible equity of around 12%. Looking beyond 2024, we believe the business is well-positioned to grow income, control costs and maintain strong risk management, providing a clear path to our 2026 target return on tangible equity of greater than 13%. And with that, I hand back to the operator for Q&A.
Chris Cant, Analyst
I wanted to think a little bit forward in time, please, and just come back to your final comment, Katie, around the greater than part of your RoTE expectation in the outer years. You haven't changed your macro assumptions. I think your base rate assumptions are now probably one of the more out-of-line set of rate assumptions in the sector relative to market expectations. And I appreciate you don't want to mark-to-market all the time. But I think you're assuming in 2026, an average base rate of 2.9% or something around that level, which is quite a long way out of kilter with where rates markets would be around 4% on average. So if I think about your rate sensitivity guidance, and I think about how that delta to market expectations develops, some of that rate gap arises this year, some of it is next year, quite a lot of it's next year. If I take your year 2 or year 3 sensitivity, we could be talking about £1 billion of extra revenues based on your sensitivity guidance. So how are you thinking about that in the context of your RoTE? Are we just waiting now for the passage of time before you update that? Or is there some other concern that lead you to not want to update us? Because, as I say, your rate assumptions do seem to be very disjointed relative to rates market expectations at the moment. And in terms of how that plays out this year, Katie, I think at full year, you had indicated second half revenues would be stronger than first half revenues even with 5 base rate cuts embedded in your assumptions back-end loaded this year. So if we don't get those rate assumption rate cuts coming through to that degree of severity, should we be expecting revenues to be ticking up very sharply half-over-half into the second half of this year?
Paul Thwaite, CEO
Katie will address Chris' second question regarding the half-on-half perspective. I'll provide an overview on RoTE and returns, Chris. As you mentioned, we have established broader economic assumptions concerning rate cuts. We are satisfied with the quarter 1 results. A RoTE of 14.2% is a positive start, particularly given our full-year guidance of approximately 12%. The driving factors include both deposits and lending balances, along with the ongoing slowdown in migration. Currently, our guidance assumes five rate cuts, with the first occurring in May. We are not updating those assumptions at this time. There has been an active discussion lately regarding the timing and extent of any reductions. It’s still early in the year, and we feel optimistic about our progress. We are becoming more confident about the outlook for 2024, and as your question suggested, our confidence about the medium term has also increased due to the first-quarter performance. However, since we are only one quarter into the year, we are not changing our guidance. You may want to consider the outlook for 2024 in relation to half-on-half performance.
Katie Murray, CFO
Yes, sure, absolutely. So I mean Q1, obviously, income was £3.4 billion, obviously, an encouraging start to the year, benefiting from that certainly better deposit volume that we had. In February, we guided to H2 income being slightly higher than H1, depending on the extent of the headwinds that we saw in H1. So I guess, given the strength in Q1, we now expect the half-on-half profile to be a bit more balanced. But Chris, as we all know, it's still early in the year. I'm not going to give you a quarterly guidance on that. But we do note that the Bank of England rate cuts come in both May and June, and that will have an impact, obviously, as you move forward from here. We do expect to see some continued pressure on the spreads in Q2, which we've talked about as well at the year-end, some potential for the deposit shifts as they assume base rate cuts coming in. We have given you the sensitivity for the full year, so you can take your own views on that shape. I would just remind you that that's a static balance sheet, so you do need to think about the evolution of the balance sheet as you build those in as well as the timing on that as we go through. But overall, comfortable the year has started well, and we'd expect it to be slightly more balanced half-on-half than the slight uptick that we talked about in February.
Aman Rakkar, Analyst
Can I inquire about the Corporate Center, which was quite volatile this quarter? It seems like the net interest margin is relatively flat and has impacted non-interest income. Specifically, regarding the 4 basis points funding cost benefit, could you clarify what's happening there? A key concern for many is whether we should anticipate any decline in this area. Another way to phrase this is whether 205 basis points net interest margin is a reasonable starting point for our modeling moving forward from Q2. Should we be concerned about it dropping? Additionally, with regard to non-interest income, are you expecting it to avoid the negative impact seen in Q1 going forward? That is one question. It would be useful if you could address these issues together. The second question pertains to a rate environment that reflects market expectations. If we do not experience rate cuts in May and June, do you foresee any substantial decline in net interest margin from this point? In a scenario without rate cuts in Q2, do you think there would be a significant drop in either net interest margin or net interest income?
Paul Thwaite, CEO
Thanks, Aman. We're happy to help with that. Katie, do you want to go with the NIM?
Katie Murray, CFO
Yes, sure, absolutely. So let me start with the NIM and the magical question. I know you've all been busy with it this morning, will the 4 basis points reserve. So reverse a bit, let me, I guess, start by reminding you that, of course, we don't guide on NIM. What we do give you is total income guidance since this is what matters for earnings and for capital generation. And the other thing I would just remind you is that our NII. It's an all-in NII. We don't make any exclusions for particular types of funding costs or any particular treasury-type activity. So on Slide 19 in the pack, you can see the NIM walk. And that shows the benefit from funding and the other of the 4 basis points you've mentioned already. And this is really driven by a change in net interest income in the Center. And as we've said, I think you should expect that the Center total income is roughly 0, since we allocate this out to the business. However, what we do find is that there can be volatility between the two lines of NII and non-interest income. So this NII in the Center, it doesn't necessarily reverse next quarter, but given it's largely offset by non-interest income, then the impact on total income from this is the dynamic, I think that you should be considering about. I would say on NIM, our overall message is a very simple one, is that NIM is broadly stable across the three businesses, and we're really pleased to see that this outcome given that it shows that the headwinds of mortgage margin and the deposit mix, they're largely offset by the tailwind that we have on the structural hedge. So I would really encourage you to focus on that. And then you're modeling, consider that Central item is kind of a 0 item as you move forward from here. I guess, when you go into the scenario, if there's no rate cuts, again, here, we don't want to guide on the NIM. But clearly, the only thing that we'd expect to change in the drivers versus Q1 is the base rate cut at this point. The mortgage margin is probably fairly similar. I think we've talked a lot over the last few quarters that we're nearing the end of that headwind, and you can see that in the valuation of the mortgage books. The mix continues to be offset by the hedge. In terms of rate cuts, let's kind of talk a bit more about that and see what happens as we speak more in July, after which we will have had or have not had some of the rate cuts the market might be suggesting.
John-Paul Thwaite, CEO
And as you know, we issued quite a lot of sensitivities. So you can, I guess, form your own judgments from that. There's quite a lot of detail available if you want to run some scenarios.
Andrew Coombs, Analyst
I think my main question was just asked, but perhaps I can ask one instead of mortgages. You talked about a much more perhaps updated outlook for completion spreads at the last quarter, which I assume it's continued. But I think you could elaborate there on current completion spreads will be helpful. But I also wanted to link that into your flow share because the two consecutive quarters, you've been running around 10.5% versus your stock share at 12.6%. So how do you see the dynamic playing out going forward between your focus on attractive completion spreads versus taking market share or maintaining market share in the mortgage market?
Paul Thwaite, CEO
Why don't I take the latter and then we come back on sort of the completion spreads specific. So Andrew, on mortgages, we've been pretty consistent on this over the course of the last couple of quarters, in my view. It's an important business for us. You know that we've demonstrated good market share growth over a number of years up to our current stock share of circa 12.6%. It remains an important business for us. Given the thinness of the market last year, especially around quarter three, quarter four and the tightness of the spreads, I was clear in February that we've taken some very conscious choices around competition and pricing in the second half of the year. That obviously affects the completion volumes in quarter one. What I would say in terms of this year so far, the system-level applications are significantly higher. You'll see and know that I'm pleased to say that's replicated in our application volumes as well. What's also encouraging is the strengthening of the margins at the front end. So what that means, all of the things being equal is that we would expect to see our volumes and share improve as we progress through the year. And over the course of the last, I guess, a number of weeks our flow share has been more in line with our structure. And obviously, with margins stabilizing, that will contribute to the income growth as we go forward through half two. Do you want to cover the completions?
Katie Murray, CFO
Yes, sure. Absolutely. Yes, I am starting to settle a little bit on. So I guess, historically, it's important that, Andrew, that we've given you application margins, not completion spreads as they've come through. You know that we always have activity going on around treasury and things like that. But clearly, they're not so different, but you can get some differences through them. We're writing around 70 basis points. I would expect that to be kind of around about that level for most of the year. It will move up and down a little bit, but in that sort of basis. What I would say, and we said this again in February, the completion spread is a little bit below that in Q1. If I look at stock, the book overall was 80 basis points at the end of the year. It's now sitting at around 74 basis points. So we're very much nearing the front end, the front book level and the back book differential is kind of coming to an end, which is great. And that's why we see that strength coming through in income and then obviously, in terms of the NIM as well. But I would kind of think of those sorts of numbers as you go forward from here.
Benjamin Toms, Analyst
Firstly, on the structural hedge, your product notion was £185 billion at the end of 2023. I think your guidance was you expected to fall to around £170 billion by the end of this year, given the deposit build in the quarter and the slowdown in migration, is £170 billion still the right number for our structural head modeling? And you noted in your presentation on costs in Q1 not to annualize the Q1 number, can you just update on the drivers which underpin your confidence that the run rate will come down from here? Would you expect a fall in the run rate to be linear as we go through the quarters? Or will there be more of a cliff edge?
Katie Murray, CFO
I apologize for interrupting, Paul. Regarding the structural hedge, we previously discussed the notional value, which stood at £185 billion at the end of the year and is projected to be £170 billion by the end of 2024 based on a static balance sheet. Given the fluctuations in the deposit balance and the mix during the first half of 2023 and our approach of looking back over 12 months, you might anticipate that most of this reduction will occur in the first half. Considering that deposits stabilized in the year's second half and have remained relatively stable in the first half of this year, the £170 billion figure should be a reliable estimate as you proceed. Reflecting on the yield we achieved, it was 152 basis points at the end of Q4 and is expected to be slightly higher in Q1. We have previously shared our assumptions regarding the reinvestment rate, which averages 3-10 for the year. The stronger performance of the 5-year swap in the first quarter will contribute to that. As we move through the coming quarters, we will monitor how this unfolds. We anticipate a modest increase in hedge income, with expectations for growth continuing into 2025 and 2026. Regarding your question about the run rate, we're looking at £3.4 billion for Q1. Looking ahead to the full year, we discussed that the second half should align more closely with the first half. Rate cuts are forthcoming in the second quarter, and I've already mentioned the Center income. It's important not to assume that this will be a recurring event each quarter, so keep that in mind when considering the run rate. Overall, we're feeling confident after a solid start to the year, and I'm happy to take any further questions.
Paul Thwaite, CEO
Good. And then for the second question, Ben, regarding the cost profile, we’re reaffirming our guidance of being broadly stable for the year. Katie frequently mentions that our costs will fluctuate, and that remains accurate. What we know about the first quarter is that we have front-loaded some of our restructuring charges, both for severance and property costs. Therefore, I wouldn’t expect a consistent trajectory. The restructuring costs are generally concentrated in the first half of the year. However, we are confident in reaffirming our broadly stable guidance, excluding the Bank of England levy.
Alvaro Serrano, Analyst
I have a follow-up question. Most of my inquiries have been addressed. Regarding the mortgage business, Katie mentioned you would expect similar 70 basis points. Considering the recovering volumes we're experiencing, shouldn't the mix improve with less remortgaging? Should we expect spreads to improve from this point? Additionally, how do you perceive the overall competitive environment?
Katie Murray, CFO
Yes. I mean, I think, I'll rather than kind of trying to subdivide that number into what's remortgage and new mortgages and things like that. I would probably take you to the total book. So the total book was 80 basis points at the end of the year, at 74 basis points, we're writing at or around kind of 70 basis points. There's obviously different other things you then bring in around SVR and all that kind of stuff. So I'll leave you to kind of clear that, I think, but we use those stats as your kind of helpful guide. Look, mortgages, I always sort of smile a little bit when we talk about this as we remain competitive, I would say, for banking. This is one of the most competitive markets every day of the week in terms of where it is and the actual activity moves around depending on the size of the market, what's happening on the rates and things like that. So yes, very competitive. Pleased with the performance that we're going through, pleased what we see coming on at the moment. Obviously, the business we're writing today will come on in 3 to 6 months as we roll through the year, as we see this stuff from the tail end of last year coming on just now. But I think a good performance, and it's good to have that kind of digestion of the higher rate business that we had, and historically kind of having come through the books. So there's less drag on our NIM as we go forward.
Alvaro Serrano, Analyst
Can you provide an update on the general environment and volumes? It seems that the volumes have improved, not only in mortgage but also in commercial institutions, better than we expected a few months ago. This is a positive start to the year. If interest rates stay high for an extended period, how much of this activity is due to pent-up demand versus new demand? Could you clarify what we might anticipate in the coming quarters if rates do not decrease as quickly as we forecasted a couple of months ago?
Paul Thwaite, CEO
Thank you, Alvaro. I’ll address that. The growth in the commercial institutional sector is promising on the lending side in the first quarter. Typically, as you know, there’s a slight lag. We identified the opportunity to invest capital with good returns in the latter part of the year, which has been reflected in our balance sheet during the first quarter. I would say that this growth is quite broad-based. It includes growth in our mid-market segment, and a significant portion of the growth comes from our large Corporate & Institutional sector. Furthermore, this growth spans various asset classes, including infrastructure, asset finance, project finance, and funds lending. I won’t speculate on the individual components and their potential evolution. However, I can say that the confidence has definitely improved, which is translating into increased customer activity. The trajectory of interest rates will influence this, but the reality is that demand has picked up in the current environment. We feel more assured about our commercial lending now compared to three or six months ago.
Robin Down, Analyst
I apologize for being overly detailed with this. Regarding the group center, I understand this is generally a neutral revenue situation. However, is the movement we've observed primarily related to the FX swaps you've previously mentioned? Is this also connected to the differences between U.S. and U.K. interest rates? I’m focusing on this to determine how long U.S. rates, which seem likely to remain elevated, might take to revert to the small negative levels we've seen before. I'm looking for some background on how this may develop in the upcoming quarters.
Katie Murray, CFO
I'm also quite interested in spotting trends. So it's nice to engage with someone focused on trading specifics. The FX swaps are one aspect as we manage our liquidity effectively. Additionally, our hedge accounting classifications can vary based on our transaction volumes, which complicates providing guidance. For your modeling, I suggest using a zero figure for that aspect. I understand this can be frustrating because there may be sporadic activity in some quarters. We do aim to allocate resources to our different businesses as much as possible, but overall, you will find that it typically doesn't impact total income significantly.
Fahed Kunwar, Analyst
It was just one really, obviously, the question has been asked on the flow. On your mortgage business, but in general, interest-earning assets, given the positivity as you've seen in the first quarter, it came in at £525 billion, it's kind of gone to £521 billion in consensus, I think it is £526 billion. Should we expect now that the approvals being stronger, you talk about unsecured momentum, C&I momentum? Should we expect now from this level, average interest-earning assets to grow throughout the course of the year?
Katie Murray, CFO
Yes. If we examine the average interest-earning assets, you can find the complete details on Page 20. From Q3 last year to Q1 this year, those assets have remained relatively stable at around £521 billion, with some minor fluctuations in the liquid asset buffer. As mortgages continue to come in, we expect that figure to increase. The commercial and industrial business has also contributed positively to this. It is useful to review the quarterly breakdown to see the movements, but I anticipate some growth as we progress from here.
Raul Sinha, Analyst
I have a couple of follow-up questions. Your deposit pass-through is at 40%, up from 38% last quarter. If we relate that to the deposit margin shown on Slide 19, which is now at a positive 1 basis point after being negative for the previous few quarters due to deposit trends, it seems that the only scenario where your net interest margin wouldn't increase from this point is if deposit trends significantly worsen in the second quarter. I'm trying to reconcile your message about the stability of the net interest margin with the changes we are observing in the deposit margin, knowing that the asset margin is likely reaching its lowest point. So, I would like to hear your thoughts on whether there are any non-repeatable aspects in the deposit trends you've experienced in the first quarter and whether you anticipate a more challenging second quarter in terms of deposit pass-through or flows. The second question concerns credit quality. We've noticed some highly leveraged large corporations in the U.K. facing difficulties, particularly in sectors like utilities, and insolvency data indicates a notable increase in such cases. While we know your portfolio is generally high-quality, could you share your perspective on how you see risks evolving over the year? Additionally, there is still a substantial provision for macroeconomic uncertainty in your books. How should we approach the timeline for unwinding that provision?
Katie Murray, CFO
Can I just jump in? So if I look at the current situation regarding the mix of deposits and its potential impact on net interest margin, it's important to consider the changes in customer behavior as savings rates have risen and recently started to decline. In the first quarter, customer behavior aligned with our expectations and reflected trends in the broader system. There has been an increase in household deposits overall, which has benefited us as well. As mentioned at the beginning of the call, we anticipate two rate cuts in the upcoming quarter, which will affect the deposit margin. It's important to note that there will be a timing lag before we can fully pass some of these changes onto our customers, which could impact market competitiveness. While we've discussed the competitive landscape in mortgages, this quarter has been relatively less competitive concerning deposits in the wider market. We need to remain aware of this as we proceed. Regarding impairments and provisions for expected losses, we experienced a slight decrease in the provision this quarter due to economic uncertainty, totaling £18 million. I have previously indicated that the provision will adjust over multiple quarters, and we do not expect significant changes in any single quarter unless there's a corresponding absorption of consumption. We expect the provision to decrease, guiding to less than 20 basis points, and at this stage, we are comfortable with that outlook. There’s no need for an update to that guidance right now, but we will keep evaluating provisions each quarter as expected.
Paul Thwaite, CEO
Maybe just a couple of build points on the corporate asset quality of it. We continue to be very encouraged by the underlying asset quality in the corporate book. We're not seeing any sort of significant deterioration there. So that's encouraging. You referenced insolvencies that tend to be at the smaller end of the market. There are some technicalities there. When we look at our customer base and insolvencies, actually, the numbers haven't increased materially, and the majority of them tend to be to smaller businesses that don't have credit exposures. So it's quite noisy that insolvency data. That's just, I guess, a little build for overall. But generally, very encouraged by the resilience of customers and the action they've taken over the course of the last couple of years.
Jonathan Pierce, Analyst
A couple of questions, please. One is on the near-term revenue and then second on the longer-term revenue. Katie, you said you don't want to change your revenue guidance for this year, just yet. So maybe I can focus in a bit more on the range, the £500 million range from £13 million to £13.5 million. I'm guessing that's really driven by a couple of moving parts. One, the response to the rate cuts that you've got in and the size, therefore, the gapping negatives? And the second again, guessing that, that's an assumption you'll potentially see a drift up in pricing regardless of any rate moves. If we do see fewer rate cuts and they're more spread out than your sort of May, June assumption, for instance. Presumably, that significantly reduces the potential hit from the gapping negative. I think I'm right that you have an increased deposit pricing on your instant access savings accounts now since September as well, certainly flexible saver hasn't moved at all. So if you're not yet willing to talk about the broad guidance at this fairly early stage in the year. Can we at least consign the lower end of the range to the dustbin, please? The second question is more around NII and consensus expectations moving forward. I don't expect to pin you down on this, but consensus has only got about £400 million, £500 million NII growth in for 2025 and '26, but based on today's yield curve, you're looking at £1.2 billion, £1.3 billion tailwind a year from the hedge, the impact per base rate cut is on the managed margin circa £100 million. The mortgage book, I think I heard you say, is already down at 74 basis points on the back book. Do you think consensus is being a little churlish here? And are those sort of drivers that the main ones to be thinking about over the next couple of years?
Paul Thwaite, CEO
Let me take the first one kind of just quickly. We're not changing the range today. The guidance is what it is. There's a range of different scenarios as you lay out in terms of the trajectory, the timing, the quantum of interest rate reductions. We've got a lot of sensitivities that allow everybody to make their own assumptions around that. I think the message we're giving is that we're increasingly confident about the guidance we've given in '24, but we're not confining any part of the guidance to the dustbin, just to quote you back to the guidance is the guidance.
Katie Murray, CFO
Yes, sure. Absolutely. As you assess the NII consensus and the potential advantages of the hedge, we have consistently stated that we believe it will provide significant benefits moving forward. We’ve mentioned that the size of the hedge is decreasing from £185 billion to around £170 billion. You can expect most of that impact to begin materializing by the middle of the year. From that point, we anticipate that the hedge will contribute positively. Jonathan, you're well aware of the sensitivities we have in this area, and you understand that they are based on a static balance sheet. So you can consider the 12-month look back and use the data you have. Overall, we are confident about income growth through to 2026 and aim for a return on tangible equity of over 13% by that time.
Ed Firth, Analyst
I have a question about capital. One effect of your share price is that the government buyback now costs about twice as much as it did six months ago, which is around 60 basis points of core Tier 1 for a 5% buyback. Additionally, there's Basel III coming, which I estimate adds another 130 basis points. So, over the next 12 to 18 months, you’re facing about a 200 basis point challenge to capital. I'm trying to understand how to consider open market buybacks in light of this. Are they still part of your plans, or should we put that on hold for now? Also, I've noticed that consensus has your dividend decreasing, likely due to a standard calculation based on a 40% payout ratio. However, looking ahead, especially with factors like impairments influenced by IFRS 9, I expect some volatility. Should we just rely on the 40% formula, or do you foresee a progressive strategy to manage that variability over time?
Katie Murray, CFO
You're absolutely right. Capital is currently at 13.5%, with a 5% market cap buyback. Given the share price improvement, our spending would be around £1.3 billion compared to the £1 billion or £1.1 billion we've done in the past. So it's not quite double the cost. As we look at our capital plans for the year, we anticipate some movement in share prices. Additionally, with Basel III.1 approaching, our guidance on RWAs remains unchanged at £200 billion by the end of 2025, keeping in mind it may vary over time. We're pleased with the completion of the buyback we announced last year and the initiation of the new one. Paul and I will discuss this with the Board in June and July as we analyze the long-term capital outlook. I agree with you about the dividends and consensus. Our dividend policy targets a 40% payout; last year, that was 17p per share. We are aware of the absolute level but have been strict in maintaining the 40% payout, and we do not expect that to change in the near future.
Ed Firth, Analyst
Sorry, just going back on that. I mean, one of your peers has dropped its core Tier 1 target. I mean, in terms of making buybacks, you obviously can see a quarter ahead. I mean, would you be happy just to go below the 13% at the point of a buyback?
Katie Murray, CFO
We manage the business to a 13% to 14% range, and that's what we'll continue to do so. We're very confident in our capacity given the 50 basis points, forgive me, generation that we had on earnings in Q1, and there's no reason to see why that would diminish. So we're very comfortable.
Guy Stebbings, Analyst
Katie might be just pointed on this one, but I'm going to ask anyway, because it's around the FY '24 revenue guidance, it's similar to Jonathan's question really. I guess maybe the way to ask it is just think about how high the bar is to raise guidance at this point in the year? I mean, I appreciate you entered into a fresh guidance for the half year and full year and refined macro assumptions then. But you changed the guidance for the bank levy. I accept you got visibility there is, it's certain and it's harder on revenue. But to many of us, I think it looks like the revenue will come in more than £100 million above the top end of the guidance this year. So I'm just trying to really work out, is it the bar to raise income guidance at this point of the year is just so high or if there are some headwinds outside of possible rate cuts that we're underappreciating? And then just to sort of follow-up that on mortgage spreads, could you give any more color on the evolution of mortgage spreads churn this year? Just thinking about whether that headwind is sort of reducing sequentially over the course of this year, with the back book now being some 80 basis points, so it would feel like it should be a pretty modest headwind?
Katie Murray, CFO
The guidance is straightforward because I've already incurred the costs. It's all settled, so we're providing you with the most current information. As you know, it will accumulate a bit throughout the year. It doesn't align perfectly in the first year, which we've discussed extensively this week. We've already recorded £6 million in the income line. Regarding the guidance, we had a promising start in Q1, and we're feeling comfortable. We'll keep you updated as we progress. Traditionally, we haven't only reported for Q2, but we'll inform you if there's something significant to share. Looking at the mortgage spreads, there isn't anything of concern. The book is now repricing, moving from 80 basis points down to about 74 basis points, as we're writing around the 70 basis points level. There's not much difference in churn moving forward, and there are no unforeseen headwinds. We've talked a lot about mortgage margins and deposit mix today, and we anticipate these pressures easing from this point onward.
John-Paul Thwaite, CEO
Okay. Thanks, Oli, and thank you, everybody, for your questions this morning, Katie and myself very much appreciate that. As you heard, we're pleased with the performance for the first quarter and the momentum we have in the business. This gives us confidence not only for '24, but for the years beyond in terms of our ability to drive future returns and to achieve our RoTE target of greater than 13% in 2026. And whilst I'm sure we'll see you before, we do look forward formally to speaking again at the half year. I wish you all a very good weekend. Thank you.
Operator, Operator
That concludes today's presentation. Thank you for your participation. You may now disconnect.