Earnings Call Transcript
NatWest Group plc (NWG)
Earnings Call Transcript - NWG Q3 2023
Paul Thwaite, CEO
Good morning and thank you for joining us for the first set of results since becoming CEO. I'm going to start with the financial headlines and my near-term priorities for the business. Then, Katie, will run you through the quarter three results in greater detail, and after that we'll open it up for questions. Our customers and communities are central to our strategy. So I'd like to begin by putting the financial headlines in the context of recent customer activity. During the first nine months of this year, we have lent over £8 billion into the UK economy, opened over 80,000 new business startup accounts, helped 312,000 customers buy or refinance their homes, and opened over 1 million savings accounts alongside around 800,000 current accounts. In addition, we have delivered over £53 billion of climate and sustainable funding and financing since July 2021. Turning now to the financial headlines. We delivered operating profit of £4.9 billion for the first nine months, which is up 33% on the prior year, with attributable profit of £3.2 billion. Income was £10.9 billion and costs were £5.6 billion. Our cost income ratio was just under 50%, with some benefit from foreign exchange gains, and we are on track to meet our cost target of £7.6 billion for the year. Our balance sheet remains strong and our funding is well diversified with £424 billion in deposits, £358 billion of customer loans, and a loan to deposit ratio of 83%. We remain committed to a 40% payout ratio with capacity for buybacks and have paid or accrued £1.1 billion in dividend payments in the first nine months. In addition to the directed buyback of £1.3 billion in May, we have also carried out almost half of the £500 million on market buyback announced in July. Taken together, this represents distributions of £2.9 billion, more than 90% of our nine-month attributable profit, and brings our CET1 ratio to 13.5%. Our return on tangible equity was 17.1%, and we expect to be at the top end of our 14% to 16% target range by the year-end. Despite this strong set of results, I recognize net income and net interest margin came in below expectations, reflecting an accelerated change in customer behavior during the quarter. Customers are more actively searching for yield and moving balances from noninterest-bearing accounts to lower margin saving and fixed term products. And in a competitive market environment, we have taken the decision to compete. Whilst this comes at a cost in the near-term, we are balancing income and margin with the long-term value of deepening customer relationships and maintaining a strong funding and liquidity profile. As a result of changes in customer behavior relating to both assets and liabilities, as well as assumptions on interest rates, we are revising our income and net interest margin guidance for the full-year, which Katie will cover in more detail. So let me turn now to my near-term priorities for the business. I've been very focused on running the business, ensuring we continue to serve and support our customers and our communities. At a time of macroeconomic uncertainty and evolving behavior, it is essential that we continue to be a strong, stable, and trustworthy partner for our 19 million customers. It is important to me that we are the very best bank we can be, and I would like to thank all of my colleagues for their continued hard work and dedication. There is more to be done as we continue to make it easier for our customers to engage with us, either via our digital channels or our extensive presence across the country. We remain focused on driving and delivering the outcomes we set out earlier this year, simplification, digitization, and using data and technology to better serve our customers. I've already made several decisions to improve efficiency and strengthen our focus on simplification and productivity. This is very much in line with the agenda I drove in my previous roles here at the bank and as I continued to spend time with our businesses during the quarter, it has only confirmed my view that there is more value and growth we can deliver. We are also in the midst of the planning cycle, and as you'd expect, I've spent a lot of time with Katie and the team going over the plan, stress testing it, and challenging ourselves to look at a range of scenarios. We have worked hard to absorb the recent inflationary pressures, but given the macroeconomic environment, it will come as no surprise that we continue to tighten our approach to cost in order to deliver attractive returns and capital generation consistent with our medium-term target of 14% to 16% royalty. An important strength of the bank in recent years has been the robustness of its balance sheet, which positions us well both for the upside and the downside. Our customers remain resilient and impairments are low. But I'm very aware of the ongoing risks associated with higher rates, inflation, and supply chain shocks. I am also clear that these impacts may still be working their way through the system, so we are closely monitoring a wide range of indicators and testing our balance sheet for a wide range of economic scenarios. Our strong common equity Tier 1 and liquidity ratios position us well to navigate the macro environment, changing customer behavior and remaining uncertainty on the impact and timing of upcoming regulatory change. We therefore need to be dynamic and disciplined in the way we manage and allocate our liquidity and capital. We have made good progress over the year to diversify our deposit product offering, better leveraging our data, and using a broader range of tools on both sides of the balance sheet. That said, I still see opportunities to be smarter and quicker. Our recent track record of capital generation is strong and allows us both to invest in the business and provide shareholders with attractive returns. I fully appreciate that stability and predictability of our capital distributions together with their timing through the cycle is central to our value and investment case. Finally, the recent appointments to my leadership team have settled well and I am pleased with the team's ability to focus on delivering for our customers and driving the execution of our plan. We have a strong business and are making good progress, but I'm keenly aware that we'll be judged on our ability to deliver. With that, I will hand over now to Katie to go through the results in more detail.
Katie Murray, CFO
Thank you, Paul. I'm going to talk about performance in the third quarter using the second quarter as a comparator on Slide 6. Total income of £3.5 billion was down 9.4%, as foreign currency gains in the second quarter were not repeated in the third. Income excluding all notable items was also around £3.5 billion, down 1.4%. Within this, net interest income was 4.9% lower at £2.7 billion, while non-interest income grew 12.2% to £829 million. Operating expenses were stable at £1.9 billion. The impairment charge increased to £229 million or 24 basis points of loans, reflecting normalization and the non-repeat of releases in the second quarter when we updated our economic assumptions. Taking all of this together, we delivered operating profit before tax of £1.3 billion and profit attributable to ordinary shareholders of £866 million, which is equal to a return on tangible equity of 14.7% in the quarter. We are pleased to have delivered further net lending growth. This was driven by our corporate customers while net mortgage lending moderated following a strong first half. Gross loans to customers across the three businesses increased by £2 billion to £358 billion. Taking retail banking together with private banking, mortgage balances grew by £200 million, representing a stock share of 12.6%. Gross new mortgage lending was £7.9 billion, representing a flow share of around 13%. Unsecured balances increased by £500 million to £15.5 billion, driven by continuing customer demand and share gains within cards. In commercial and institutional, gross customer loans were up by £1.3 billion. At the mid to large end, we saw demand for term credit facilities and private financing. At the smaller end, demand remains muted and customers with surplus liquidity continue to deleverage, including repayment of government scheme lending. So let me now turn to deposits on Slide 8. Customer deposits across our three businesses were up in the quarter at £424 billion. Across retail and private deposits grew by £2.1 billion, reflecting market share gains in term deposits. In commercial and institutional, deposits increased by £300 million. Our stable loan to deposit ratio of 83% allows us to manage our deposit base for value as well as support customers and grow our lending share in target markets. The UK base rate has increased by 25 basis points to 5.25% since we presented our first half results. And customers continue to move balances from noninterest-bearing to term accounts. Noninterest-bearing balances have reduced from 37% of the total to 35%, and as you can see on the slide, the absolute reduction in noninterest-bearing balances, which is the main transaction accounts for our customers, has continued in line with the second quarter across each of the businesses. Within interest-bearing balances, we have seen an accelerated change of mix and term accounts are now around 15% of the total, up from 11% at the end of the second quarter. There were high levels of deposit migration amongst our existing customers, in particular to lower margin term accounts. We also launched a new fixed-rate savings product for retail customers to the entire market at the end of the second quarter. This attracted new term balances from customers that are new to the bank, helping to grow our share and contributing to the change in deposit mix. This launch has enabled us to grow our customer franchise, strengthen our liquidity position and grow income, albeit at tighter margins. Going forward, we expect the pace of migration to reduce, given a slowdown in late September and October and our expectation that UK base rates will remain at 5.25% through to the second half of 2024. Turning now to how this impacts our deposit margin on Slide 9. The top left of the slide shows the average third-party customer deposit rates across all three businesses on both interest-bearing balances and total deposit balances over the last four quarters. The cost of our total customer deposit base has increased from 0.5% in the fourth quarter last year to 1.8% in the third quarter this year. As a result, interest payable to customers grew from £588 million to £1.9 billion. The rise in interest payable has outpaced the rise of interest receivable since the second quarter this year, which is why Group net interest income has fallen since then. The average UK base rate in the third quarter was 5.2%, up around 80 basis points on the second. This compares to a 60 basis points increase in the cost of deposits, yet our deposit margin fell. This is because a significant proportion of our deposits are hedged and did not yet benefit from the rise in interest rates. The bar chart on the right-hand side of the slide shows that £195 billion or 45% of our customer deposits form part of the product structural hedge. This has a weighted average life of 2.5 years, meaning it takes five years to fully re-price. We also hedge our term deposits separately, and this income is not included in our structural hedge disclosures. As a result, less than half of our deposits are unhedged and benefit immediately from the increase in SONIA. As you consider the outlook for our deposit income, you should think about the margins we earn on each of the component parts, how the margin will develop going forward, and the balance in mix. Starting with the product structural hedge. Given the ongoing reduction in 12 months average eligible balances, we expect the size of the hedge to reduce during the fourth quarter and into 2024. However, we expect the reinvestment uplift to offset this balance reduction, so that structural hedge income increases year-on-year in 2024 and more meaningfully in 2025. Turning to hedged term deposits, this remains a competitive market with tight margins where we are seeing the fastest growth in balances. Finally, unhedged instant access deposits, as you know, our cumulative pass-through on instant access accounts has been around 50% to date. This means that unhedged margins are currently around 2.5%. The margin outlook will depend on competition, customer behavior, and of course, the UK base rate. Let me explain how deposit margins impacted income on Slide 10. Income excluding all notable items was £3.5 billion, down 1.4% on the second quarter. Net interest income was 4.9% lower at £2.7 billion, driven by lower margins and broadly stable average interest-earning assets. Bank net interest margin reduced by 19 basis points to 2.94% as a result of lower lending margins, which accounted for 12 basis points driven by mortgages and lower deposit margins accounting for 14 basis points reflecting additional interest expense, which more than offset the structural hedge reinvestment this quarter. These two movements were partly offset by a 6 basis point benefit from funding and other movement as a result of one-off reallocations from non-interest income, which we do not expect to repeat. Non-interest income, excluding notable items grew £90 million to £829 million. Corporate activity improved in the quarter, resulting in higher lending fees. We are pleased that non-interest income for the first nine months of the year is up 7% on the same period last year. Turning to the full-year. We now expect income excluding notable items of around £14.3 billion and bank net interest margin greater than 3%. This guidance is the result of changes in customer behavior on both the asset and liability side, as well as revised assumptions on interest rates. On liabilities, as I just mentioned, we expect the future pace of migration to slow and noninterest-bearing accounts to represent 34% of the total at the year-end with term at around 17%. This means that we do not expect deposit margin pressure to continue at the same pace into the fourth quarter. On the asset side, our mortgage customers are refinancing onto rates that are higher but at a tighter margin for us. We expect this headwind to moderate over the coming quarters. Finally, the interest rate outlook has changed. As you know, our income guidance assumed a 50 basis point increase in August to 5.5%. We now expect the UK base rate to remain at 5.25% for the rest of the year. We expect both lending margin and deposit margin pressures to ease into the fourth quarter. And therefore, we do not expect bank NIM to reduce by a similar 19 basis points as we saw in the third quarter. Moving on to costs on Slide 11. Other operating expenses were £1.8 billion for the third quarter, down £82 million or 4.4% on the second. This was driven by lower staff costs due to our ongoing exit from Ulster Bank, where we have incurred £206 million of direct costs in the first nine months and continue to guide to around £300 million for the full-year. We expect other operating costs of around £7.6 billion for the full-year in line with our guidance. This delivers a cost income ratio of 49.9% for the first nine months benefiting from foreign exchange gains. Excluding these, the cost income ratio is 51.4%. I'd like to turn now to impairments on Slide 12. We booked a net impairment charge of £229 million in the third quarter, equivalent to 24 basis points of loans on an annualized basis. This reflects a normalization of trends and the absence of releases made in the second quarter when we revised our economic assumptions. These assumptions remain appropriate and are unchanged. Our impairment loss rate for the first nine months is 16 basis points, and we now expect to be below our through the cycle range of 20 basis points to 30 basis points for the full-year. Our balance sheet provision for expected credit loss is broadly stable at £3.6 billion, equivalent to coverage of 94 basis points of loans. This includes £453 million of post-model adjustments for economic uncertainty, which are also broadly stable in the quarter. We remain comfortable with coverage of the book, which continues to perform well. I'll talk a little more about the composition and quality of our loan book on Slide 12. We have a well-diversified prime loan book. Over 50% of our Group lending consists of mortgages where the average loan to value is 55% or 69% on new business. 92% of our book is fixed and the majority at five years. 5% are trackers and 3% is on a standard variable rate. Our customers continue to refinance early to take advantage of lower rates in the six-month window before roll off, and we monitor the impact of higher rates on customers closely after they refinance. We are seeing a return to a more normalized level of arrears in our mortgage book, but these remain a little below 2019 levels and we are not seeing any material increase in the request for forbearance. Our personal unsecured exposure is less than 4% of Group lending and is performing in line with expectations. Our corporate book is well diversified and is performing well. We have seen some sectors rebuild cash buffers over the past quarters, and we continue to hold PMAs for those sectors where liquidity pressures may be more acute. Turning now to look at capital and return generation on Slide 13. We are pleased to have delivered 14.7% return on tangible equity this quarter, driving good capital generation. We ended the quarter with a common equity Tier 1 ratio of 13.5% in line with the second quarter. Earnings delivered an uplift of 49 basis points, which was partly offset by RWA growth of £4.1 billion absorbing 30 basis points. This led to net capital generation of 21 basis points in the quarter and 118 basis points for the first nine months, excluding non-recurring impacts such as our acquisition of Cushon. We accrued the equivalent of 20 basis points in the third quarter towards the final dividend in line with our 40% payout ratio. Looking to the fourth quarter, we expect RWAs to increase by around £3 billion as a result of CRD IV model updates, which remain subject to further development and final approval by the PRA. We expect net RWA growth to be broadly in line with this £3 billion increase, given our current expectations for credit growth and typical market risk seasonality. We now expect RWAs to be around £200 billion at the end of 2025, including the impact of Basel 3.1 and the further CRD IV model development. At this point, we view around £200 billion as an appropriate basis for planning, but this guidance is clearly subject to final rules on credit and output floors, which will not be published until the middle of 2024, as well, of course, as an equity approval. We note recent comments from the PRA and its intention to evolve some of the credit risk proposals, and we will seek to mitigate these changes and optimize our balance sheet as much as we can through to 2025. Earnings have generated 180 basis points of capital in the first nine months before RWA growth, and we are comfortable with our ongoing capacity to generate and distribute capital over this period. In December, Paul and I will discuss our capital return plans for 2024 with the Board, including both directed and on-market buybacks, and we will update you at the full-year results in February. Turning now to our balance sheet strength on Slide 14. Our CET1 ratio of 13.5% was within our target range of 13% to 14%, which includes a buffer above our minimum requirements. Our UK leverage ratio of 5.1% was stable on the second quarter and remains well above the Bank of England minimum requirement. Our liquidity coverage ratio was 145% at the end of the third quarter on a spot basis and 142% on a 12-month average basis. This is well above our minimum requirement. Turning to 2023 guidance. We now expect income excluding notable items to be around £14.3 billion at a UK base rate of 5.25% with net interest margin above 3%, and Group operating costs excluding litigation and conduct of around £7.6 billion, delivering a cost-income ratio below 52%. We anticipate a loan impairment rate below the range of 20 basis points to 30 basis points, and together, we expect this to lead to a return on tangible equity at the upper end of our 14% to 16% range. And with that, I'll hand back to Paul.
Paul Thwaite, CEO
Thank you, Katie. As you can see, we have performed well in the first nine months as our customers continued to adapt in an uncertain economic environment, and I remain optimistic about our ability to deliver good performance. My focus remains on consistently serving our customers' needs whilst continuing to drive the execution of our strategic plan with an emphasis on further digitization and simplification. We are able to do this supported by a strong balance sheet, which allows us to grow in attractive parts of the market whilst maintaining strong originating discipline. As we continue to generate capital, we are committed to continuing to drive returns and shareholder distributions with a 40% payout ratio for ordinary dividends and with capacity for further buybacks. I expect to provide you with more detail in February. Thank you very much. We're happy to open it up for questions now.
Operator, Operator
Our first question comes from Rahul Sinha from J.P. Morgan. Please proceed.
Katie Murray, CFO
Hi, Rahul.
Paul Thwaite, CEO
Hey, Rahul.
Rahul Sinha, Analyst
Good morning, Paul and Katie. I have a couple of questions to start with. First, while you've been quite clear about the direction of NIM in the second half of the year leading up to these results, the extent of some of the shifts has taken many by surprise. Can you provide insight into the expected direction for Q4 and offer more details on the exit run rate? Additionally, external factors like competition, migration, and industry deposit levels are hard to predict. What gives you the confidence for a slightly improved outlook for NIM decline next quarter? My second question is about deposits. You've decided to compete in this area, and I'd like to hear more about your strategy, especially considering NatWest's low loans to deposit ratio. What are your plans regarding deposit growth, and how do you weigh the returns in this context? Thank you.
Paul Thwaite, CEO
Great. Thanks, Rahul. Why don't I take the deposit question, the second question first then, Katie you can cover the NIM piece. So, as you rightly said, Rahul, we made a very conscious and deliberate decision around competition in deposits. You can see that we've stabilized the book quarter two, quarter three that's allowed us to retain deposits and in certain parts of the market gain some share. As you rightly point out, there's a trade-off there. It has a cost. And the judgment I've made really is balancing that cost versus retaining and acquiring the customer relationships, but also the liquidity value. That's the kind of strategic judgment that we've made, and we stand behind that. We think that's the right move for us. The link to the loan deposit ratio you reference is a good one, and you're right. Our LDR is different from some of our peers. As you can see from the growth in some of our products on the asset side, we still want to grow parts of our asset balance sheet and some of our customer segments there. So we'll be looking to deploy that where we see good opportunities. We'll be very disciplined around the returns that we want to get for the deployment of that capital on the asset side. But I do see various areas to deploy, so we're very focused on getting those. I think it's your final part of your question. Those dynamics between what we pay for deposits versus then how we pass those pricing on to the asset side. And you can see some of that in the C&I asset book as well. Katie, NIM?
Katie Murray, CFO
Sure. Thanks so much, Paul. And so full-year guidance for total income ex-notable items of around £14.3 billion. We don't give you specific NII guidance. This implies that income for the fourth quarter starts to stabilize relative to the third. Our current view is NIM is greater than 3% for the full-year, which means that you would expect that the Q4 reduction is less than the Q3 reduction. When we look at the current view there's a couple of factors you need to be keep in mind. Base rates remaining at 5.25% until the end of the year. Broadly stable deposit balances through to the end of the year as we've delivered this quarter and customer behavior, we do assume a slowdown in deposit migration with NIBBs at 34% and term at 17% at the year-end. I guess, Rahul, your second part of your question is the confidence in that slowdown is very much what we've seen really through the last seven weeks, where you have started to see it slowing down. We do expect there to be some short-term movements as you see. People and other banks do kind of special offers at any one-time, but we're comfortable with that kind of slowdown. So we would expect to end 34% and 17%. Thanks, Rahul.
Operator, Operator
Our next question comes from Aman Rakkar from Barclays. Aman, please unmute and go ahead.
Katie Murray, CFO
Good morning, Aman.
Aman Rakkar, Analyst
Good morning, Katie. Good morning, Paul. I hope you can hear me well. I have two questions, please. First, I would like to ask about your hedge commentary. Could you clarify your expectations regarding the hedge? You mentioned that the hedge national is expected to decrease in Q4 and into 2024. Your insights on deposit mix expectations for year-end are very helpful, so thank you. It seems you have a solid view of the hedge movement in terms of notional from here. Additionally, it sounds like you anticipate this being a positive factor into 2024 and 2025, which I certainly hope will be the case given the re-pricing tailwind. Can you provide some quantification on that? I would expect it to be a significant headwind moving forward. Do you see that? Secondly, regarding your medium-term goals, I noticed in the outlook statement that you’re still targeting a medium-term royalty of 14% to 16% and particularly aiming for a cost-income ratio below 50% by 2025. Is that still your target? Are you confident in achieving this by 2025, or should we expect an update on that at the full-year mark? I’m also interested in the revenue recovery that this targets and implies, which I find quite important. If you believe in that recovery, where do you see it coming from, and what does it mean for NIM? Do you expect NIM to improve in the upcoming quarters? Thank you.
Paul Thwaite, CEO
Thanks, Aman. Very clear. So let me take the kind of royalty and the guidance point, and then Katie, you can take us through the hedge. So from a royalty perspective, let's do the guidance first for this year. We're still very clear; we'll be at the upper end of the range. We're also in terms of the outlook medium to target royalty 14% to 16% that's unchanged. We do expect to operate in that range. So very clear on that. You also correctly highlighted that the target is 2025 cost-income ratio of 50%. Obviously, there's two parts to that. I think you would agree, and I hope you'd agree. We've got a very strong track record on cost reduction, very focused on managing costs. In my prepared statements, hopefully you heard that given the change in macro, I've been very focused on getting a grip on both the cost outlook and the capital outlook. So really trying to take control on the things that we can't control, some of the customer behaviors we can't, obviously the economics we can't. But I'm determined to mitigate some of those external impacts with the actions we take on costs and capital. So that's where the guidance is for the medium-term. Obviously, it links to the first part of your question, how does the hedge flow through to that? Katie?
Katie Murray, CFO
Sure. Thanks very much, Paul. So if we look at the hedge, the notional balance, as you know, at the end of the third quarter £195 billion down from £202 billion at the end of June. Based on our expectation for deposit mix at the end of 2023 and our 12-month loopback, we expect the hedge notional to reduce to around £190 billion at the end of 2023 and then a further reduction in 2024, in line with the fall in the average eligible balances. As you know, Aman, the story of the hedge matures at each month, currently equivalent to around £10 billion per quarter. The roll-off of the hedge yield is about around 1% in the fourth quarter, falling to an average of 80 basis points in 2024 and then 50 basis points in 2025. We will continue to reinvest them at the prevailing five-year swap rate. I would say that the average that we had in October for reinvestment was around 4.6%. So clearly the difference between roll-off and roll-on rates with the increase in yield over time, which was at 1.5% in Q3 is a benefit. We do expect the higher rate to lead to higher hedge income year-on-year in 2024 and increasingly so in 2025 as we talked about at the half year. I think one of the key factors within there is obviously the timing of the stabilization of deposits and in terms of the mix of those deposits. Clearly quicker stabilization means that the benefit of the hedge will become greater and it will come to us sooner. Currently, our estimation is that we will start to see stabilization sort of during Q2 next year. Aman, hopefully that answers your question. Thanks very much.
Paul Thwaite, CEO
Thanks, Aman.
Operator, Operator
Our next question comes from Ed Firth of KBW. Ed, if you'd like to unmute and ask your question.
Katie Murray, CFO
Hi, Ed.
Ed Firth, Analyst
Thank you very much, and good morning, everyone. I have two questions. Firstly, regarding your comments about expectations for deposit pricing to ease, I notice that market spreads on deposits are at almost all-time highs. The only factor preventing this from impacting your margin seems to be hedge drag. If hedges were re-priced at current rates, your margin could be around 450 basis points. Given that many competitors like Chase or Marcus lack these hedges, I’m curious why you believe they will ease their pricing pressure to assist with your hedge situation. Considering influences like TFSME, it appears that the pressure will only intensify, especially since spreads are very wide for those without hedges. My second question pertains to risk-weighted assets, as you noted the recent increase was largely due to market-related risk-weighted assets. Is this indicative of a strategic shift? It seems you may be making a trade-off regarding share buybacks, which now appear less likely by year-end, versus investing capital in market-based activities, an area where you haven't typically focused. I wonder if this represents a new opportunity for you and if that's the type of trade-off you are considering in your capital allocation. Thank you.
Paul Thwaite, CEO
Thanks, Ed. I'll take the second point and be very clear. It doesn't represent any change in strategy around our markets business at all. All that is a normalization in quarter three, given there were some significant reductions in quarter two. So it's really the comparison point. It has gone up, as Katie rightly said, but it's more a normalization of where that business was earlier in the year. Absolutely no change. We see markets as an important part of our C&I franchise, but we're not proposing to allocate materially more capital to it at this stage.
Ed Firth, Analyst
Would you expect it to go down in Q4 like I mean traditionally it's quite a low activity, is that correct?
Paul Thwaite, CEO
Correct. Yes, that would be our expectation.
Katie Murray, CFO
Lovely. Thanks very much, Ed. So I think, first of all, just to clarify is, I don't think that competition will ease. We think that the transition into fix will start to ease and stabilize. So I do expect the deposit market to remain to be highly competitive as we move forward from here. And I think the impact of TFSME, as we've seen with some of our competitors over the summer will cause people to do very short-term offers to enable them to make repayments on their TFSME. I think we'll continue to see that as we go through. I would probably just quickly remind you that the hedge is there to help smooth out our income over a number of years. It's not there to make short-term gains and losses on the interest rate levels. I think that's really important to remember. We did show you on Slide 9 that we're paying customers on average 2.7% on interest-bearing deposits and 1.8% on all deposits. I think I would remind you that we're not earning the difference between 1.8% and the average base rate of 5.2% because of how we hedge that and how that all kind of interacts. But as I look forward from here, I think we've taken some very strategic action in this quarter to make sure that we retain and build our deposit base for the long-term so that we're able to withstand what I do think will be very competitive next 9 months to 12 months as people deal with the repayments and things on their TFSME. But we're comfortable with where we are and that we've got the right product out in the market to deal with that. Thanks, Ed.
Ed Firth, Analyst
Katie, can I just come back on that?
Katie Murray, CFO
Sure.
Ed Firth, Analyst
As we look at Q4, we can all do the math about where the Q4 margin will end up, but I guess it's somewhere in the 2.80, 2.90 level. But I guess more importantly, what happens next year, because the question is certainly talking to your peers, that they're generally talking about margins going down from there into next year, which is obviously a huge difference to where the market thought early this morning your margin was going to be next year. So is that analysis correct for you that that margin we should expect to continue to deteriorate next year because deposit pricing is only getting tougher, not easier, and obviously the roll-off of the hedge is going to take five years?
Katie Murray, CFO
Yes. I think there's a couple of things going on within there. So as I look, Ed, I'm not a big fan of forecasting NIM as you know.
Ed Firth, Analyst
None of us are now.
Katie Murray, CFO
A lot of moving parts within it. But if you think you kind of lift up a little bit to kind of the income story. So if I think of 2024 income, so full-year this year we've guided you to £14.3 billion, which is implying that £3.4 billion in the fourth quarter. So that is the expectation that NIM will be above 3% for the full-year. And Ed, I do mean above when I've said above. So I'm not trying to guide you there, but I think you've kind of clicked on that. We do not expect the fallen NIM in the fourth quarter to be as severe as it has been in the third quarter. So I do expect to see NIM stabilizing as we go through 2024. I think there's a couple of things that will impact the timing of that stabilization. So I don't think it will be instant. We've talked about the headwinds of deposit migration and mortgages. They do moderate over the coming quarters, but they do not end at the end of 2023. The hedge tailwind, which I talked about already, it does become stronger as we move through 2024, and that will eventually offset the headwinds of that deposit by greater than the timing on stabilization. So this gives us confidence on the medium-term income. I would urge you not to annualize the fourth quarter for those various reasons around the stabilization.
Moving on to costs, CFO
Other operating expenses were £1.8 billion for the third quarter, down £82 million or 4.4% on the second. This was driven by lower staff costs due to our ongoing exit from Ulster Bank, where we have incurred £206 million of direct costs in the first nine months and continue to guide to around £300 million for the full-year. We expect other operating costs of around £7.6 billion for the full-year in line with our guidance. This delivers a cost income ratio of 49.9% for the first nine months benefiting from foreign exchange gains. Excluding these, the cost income ratio is 51.4%. I'd like to turn now to impairments on Slide 12. We booked a net impairment charge of £229 million in the third quarter, equivalent to 24 basis points of loans on an annualized basis. This reflects a normalization of trends and the absence of releases made in the second quarter when we revised our economic assumptions. These assumptions remain appropriate and are unchanged. Our impairment loss rate for the first nine months is 16 basis points, and we now expect to be below our through the cycle range of 20 basis points to 30 basis points for the full-year. Our balance sheet provision for expected credit loss is broadly stable at £3.6 billion, equivalent to coverage of 94 basis points of loans. This includes £453 million of post-model adjustments for economic uncertainty, which are also broadly stable in the quarter. We remain comfortable with coverage of the book, which continues to perform well.
Paul Thwaite, CEO
Thanks, Ed.
Katie Murray, CFO
Thanks very much.
Paul Thwaite, CEO
Thanks, Ed.
Rahul Sinha, Analyst
Hi, good morning. Hi, Paul. Hi, Katie.
Operator, Operator
No.
Paul Thwaite, CEO
We move on to the next question.
Katie Murray, CFO
Thank you. Thanks, Ed.
Paul Thwaite, CEO
Thanks, Ed.
Operator, Operator
Just one more time, if you have a question, please raise your hand.
Katie Murray, CFO
Thanks so much, Paul. And so full-year guidance for total income ex-notable items of around £14.3 billion. We don't give you specific NII guidance.