Barclays PLC (BARC) Earnings Call Transcript & Summary

Welcome to Barclays structural hedge teaching. I will now hand over to Marina Shchukina, Head of Investor Relations.

Good afternoon, everyone, and welcome to this teaching session on structural hedging. We know that structural hedging programs have become a key focus area for the market. So I'm delighted to introduce Daniel Fairclough, our Group Treasurer, who will explain what Barclays structural hedge program is and how it is managed. Please note all the information presented is either illustrative or existing Barclays disclosure where we hope that this will provide helpful conceptual background as well as transparency to this important topic. Without further ado, I'll hand over to Dan now.

Thank you, Marina, and good afternoon. The agenda today is to cover how this interest rate risk arise in the bank's balance sheet, while some products subject to structural hedge rather than hedge directly. What is the purpose of structural hedging? How these hedges are executed? What are the factors that drive the income contribution? What is the process for determining the size and life of the hedge, and I'll conclude with a reminder of our existing disclosure. Let's begin on Slide 3 with the stylized Bank balance sheet. We can split the balance sheet into a trading book and a banking book. The trading book contains broadly matched assets and liabilities that are held with trading intent, such as derivatives and repos. Generally, a set level of interest rate risk will be committed to trading desks, all governed under a bank's market risk management framework. The trading book is accounted for at fair value. Earnings are recognized as trading income and any interest rate risk is capitalized under the bar framework. Let me turn to the banking book, which is the focus for today's presentation. Banking book assets and liabilities consist of a mix of fixed and floating rate products with varying durations. Some example products are shown on the slide. This matches between the profile of assets and liabilities to create interest rate risk. This whole topic is referred to as interest rate risk in the banking book or IRRBB as it's [indiscernible] known. This is a subject to considerable regulatory interest, particularly post SBB, which at its heart was an interest rate stress first and a liquidity stress second. The banking book is mostly accounted for our amortized cost. Its earnings recognized as net interest income, or NII, and its interest rate risk, net of hedging activity is generally capitalized in the U.K. under Pillar 2. Turning to Slide 4, where we'll cover a high level how Barclays Treasury proactively manages banking book interest rate risk. As a broad principle, the bank will seek to manage interest rate risk back to the floating rate. But Barclays treasury performs this role by extracting interest rate risks and undertaking hedging activities centrally. The financial results of which has been passed back to the business. To do this, we refer to 2 types of hedging programs, a product edge, as shown on the right of the slide and a structural hedge, as shown on the left. Let me cover off the product hedge first. It's relatively simple and involves products with a fixed rate and fixed maturity dates. Example products include fixed rate mortgages and consumer loans on the asset side or a fixed rate term deposit on the liability side. The interest rate risk can be hedged with an interest rate swap with the received fixed cash flows from assets or pay fixed flows from liabilities are swapped to floating rate. This is simple to do, given contractual rates and maturities, although additional complexity might arise from product features such as prepayment options. Such risks can then be managed to a portfolio level. Let me turn to the structural hedge. The liabilities to be eligible for structural hedging, they must meet 3 criteria. Firstly, they are fixed rate or if not fixed rate then expected to be insensitive to rates. Secondly, they have no contractual maturity date. And thirdly, they are expected to remain on the balance sheet. Some examples include equity and certain products such as rate insensitive current accounts and a portion of instant access savings accounts. Interest rate risk on these products is managed on a portfolio approach based on a view of their tenor or stability, which requires an expectation of customer behavior. We will go into more detail on structural hedge eligibility in later slides. To affect the hedge, we use interest rate swaps. These swaps are received fixed rate pay floating rates and they produce cash flows that match against pay-fixed liabilities we're seeking to hedge and the received floating assets on the balance sheet, either from customer assets or cash held at central banks in the liquidity pool. As a consequence, they will smooth income through the interest rate cycle and protect NII from a sharp or unexpected fall in rates. More on this to come later. Let me talk through an illustrative scenario on Slide 5. It demonstrates in more detail how interest rate risk arises in the world without hedging. For reference, we've put a diagram map on the top right of the page to show you where we zoomed in on the diagram from Slide 4. As Mark step 1 on the slide, the customer deposits cash in a rate-insensitive current account. In step 2, Barclays pays a 0% fixed rate on this account. In Step 3, the business places the cash with treasury with intern places it with the Bank of England as an overnight floating rate. And finally, in step 4, treasury reflects this floating rate income earned back to the business. Together, the pay is fixed and received [indiscernible] generate an interest rate risk exposure, and this exposure will be fully reflected in changes to product margin. As you can see illustrated in the table on the bottom right, this will be positive for financial performance when rates are rising and negative when rates are falling. Now on Slide 6, we show how the picture has changed through structural hedging and set out the resulting stabilization of margins over time. In step 5, as marked on the slide, the business passes the interest rate risk to treasury and treasury executes a term received fixed and pay floating swap. In step 6, the floating rate income from the Central Bank cash and the pay leg on the swap offset, resulting in a fixed rate interest income for the business at that point in time. The margin remains stable and will remain there for some time even as the bank rate moves. In step 7, treasury then hedges the group's net position across all these portfolios as transferring the interest rate risk to the market. This scenario is stylized and in reality, there are many businesses with different products and different behavioral profiles. Some commentators have pointed out that although the hedge is often referred to as a tailwind and as it increases income when rates are rising, it has actually had the effect of dampening income compared to having no hedge in place. This is indeed the case. It is a hedge after all. The real benefit of the hedge arises when rates are falling or are stable after a period of rising. Effectively, the structural hedge has the effect of partially deferring the benefit of rising rates to later periods when this income is expected to be more valuable. Before I continue, it's also worth a comment on how these hedges are accounted for and capitalized. These received fixed swaps are entered into a hedge accounting relationship with floating rate assets on the balance sheet, either business loans or balances at central banks. The match of these cash flows means movements are taken to the cash flow hedge reserve and not taken to P&L. U.K. regulators use Pillar 2 to assess whether any unhedged risk remains in the banking book. And if that is, will require capital to be held against it. [indiscernible], this is assessed by using the VAR model to simulate exposures and apply capital to a tail scenario. If the hedge is operated and governed as a hedge and the swaps will be taken into account for this purpose, removing the need to hold as much capital against the banking book exposures. Another regulatory tool to be aware of is the supervisory outlined [indiscernible]. This is a set of shops that banks must apply to their banking books, including certain hedges. And net capital at risk in these scenarios is not allowed to exceed 15% of Tier 1 capital. Both of these regulatory overlays give additional insight into why, in addition to income smoothing, U.K. banks hedge in this way. As an aside, the Supervisory outlie test is also a reason why an SVB type prices is far less likely in Europe. The exposures involved in the event would have been well beyond regulatory appetite. The previous example showed a structural hedge at one point in time. In reality, structural hedge will contain numerous swaps executed over time. On Slide 7, this example structural hedge includes 6 5-year swaps, each with GBP 100 notional value, one swap has been executed each year at the prevailing swap rate. At T0 on that chart, the annual income in year 1 generated from this hedge with total GBP 12, resulting in an average yield of 2.4% and an average duration of 2.5 years. This income is what is referred to as gross structural hedge income, the income from the structural hedge. Turning to Slide 8. The structural hedge is often called a caterpillar hedge. This is because each month, as shown in step 2, as if the hedge matures. In step 3, the new traders then enter into to maintain the overall duration. This hedge will result in a received fixed position contributing to a fixed income with certainty for each of the next periods, T+1, T+2, T+3 and so on. This causes the hedge profile to creep forward a bit like a Caterpillar. I'd like to think of the most recent received fixed cash flows running through the hedge program over time by the angulation of a Caterpillar. In the illustrative example, each swap is of the same duration. In practice, each period is maturing swaps may be a combination of different historic duration swaps. At Barclays, whilst that average duration is 2.5 years, and most of our hedging is the 5-year tenure, we do hedge at a variety of points across the yield curve, including the 3-year and 7-year tenors again, to manage the duration profile of various portfolios. The maturity of these swaps will be rolled more frequently, for example, monthly, creating a very granular reinvestment profile. The average maturing yields are, therefore, a blend of various duration swaps and the forward hedge yield will be an average reinvestment rate over time. In Barclays, these swaps will be across a number of different currencies, reflecting where we have equity and deposit balances and will also be across different legal entities depending upon where the exposure sits, although clearly sterling is dominant. The use of swaps enables granular profiling for expected behavior and provides us flexibility to manage balance sheet changes through the monthly roll. This is a key differentiator to many U.S. banks, which more typically structurally hedged through investment in fixed rate securities, which, in my mind, co-mingles liquidity risk management and interest rate risk management. It can be more difficult to adjust over time for balance sheet changes and can be less transparent. On Slide 9, this example helps illustrate some of the points we've been making about the momentum nature of the hedge. Once it gets going on a trajectory, it has some resilience to marginal changes in rates and notionals. We start with the previous example we provided. From a rates perspective, in example one at the top right of the slide, we show that with a 100 basis points drop in rates, we still see a material increase in income from GBP 12 to GBP 15. This is because of 2 factors. Firstly, the recent year of interest income continues to pay at a higher level, and the new rates are still at a maturity higher level than the low rates that are maturing. From a notional perspective, there is also resilience. An example to, on the bottom right of the slide, despite a 10% reduction in total notional to GBP 450, NII would still increase over 10%. And even here, NII would be maturity higher again in the following year as we would expect to roll the full GBP 100 unless we had a further reduction in the total notional. From a maturing notional or hedge roll perspective, only 20% of the maturing notional would need to be rolled to maintain GBP 12 annual income. As above, if there was stability in the following year, the prior trend of increased income would be restored. I will add again that all of this is illustrative, but hopefully, it's useful to understand the basic dynamics apply. Regulators across various jurisdictions provide guidance on the interest rate risk in the banking book and what they look for in a structural hedge to ensure it's treated as a hedge for capital purposes. They generally expect that the hedge should be programmatic and with an objective of income smoothing. Whilst changes can be made to the hedge, they should be made within a framework appropriately governed and generally infrequent. In that context, when building a structural hedge, there are 2 key considerations that we'll briefly touch on. The size of the notional hedge and the duration, starting with the notion on Slide 10. Banks structurally hedged a stable portion of balances that are expected to remain on the balance sheet. In general, there are 3 principles underpinning whether a balance is hedgeable or not. These are, firstly, we exclude floating rate and contractual balances. Secondly, we undertake behavioral modeling to remove volatile and concentrated balances. The analysis focuses on concentration by customer type, business segment and balance. This determines the total hedgeable capacity. And finally, additional outflow buffers can be used to provide protection from short-term unexpected or uncertain attrition. We've also listed out 3 key products included in the structural hedge. Firstly, current accounts, which follow the principles just mentioned; secondly, managed grade deposits, which are instant access savings accounts are hedged based on the expected pass-through, meaning that we only hedge the expected fixed rate portion. And finally, with equity, only the tangible cash portion is hedged. As at Q3 2023, Barclays total deposits in equity was GBP 617 million. After factoring in all of the considerations just mentioned, the total structural hedge notional was GBP 252 billion. There's been some discussion about how deposit dynamics might impact the size of the hedge and economic impacts. A consideration is that the frequent role of hedge provides an effective lever to adjust hedge size if needed. The size of the U.K. structural hedges have declined modestly given market deposit dynamics and potentially there's more of this to come. Whilst there will be an income impact to this, as I noted earlier, there is some resilience built into the hedge at current rates and there is also some symmetry in how the dynamic between rates and balances play out. By this, I mean that if rates decline, we may expect to see less deposit movement. The impact will also depend on where the customer migrates to. And whether this is to another deposit type, not eligible to structural hedging within the bank or external to the bank. Turning to the duration of the hedge on Slide 11. The first input into hedge duration is the expected behavioral life of the underlying balance being hedged. This is determined using historical customer behavior data and effectively provides an upper band to hedge life. Generally stickier deposits will have a longer tenure. For example, current accounts will generally be our longest tenure. In addition, though, we will also consider within deposit behavior parameters accepting that these cannot be perfectly calculated, the optimal duration for the hedge. Generally, this is within a reasonably tight range as is a natural trade-off between the level of income protection that the hedge provides and how quickly it will respond to changes in rates. The hedge duration is evaluated on an ongoing basis to ensure it provides a profile that fits with our product characteristics and provides the best trade-off from an income smoothing perspective. Generally, the shorter the hedge and more quickly, it will reprice at current rates -- in a rising rate environment. Barclays structural hedge average duration is circa 2.5 years, and this has ranged between 2.5 years and 3 years in recent times. Turning to Slide 12. The outcome of all of these actions is that the structural hedge smooth income and protects against sharp downward movements in interest rates. During 2008 to 2009, all in interest rates from 5% to 0.5% could have reduced the income on our noninterest-bearing current accounts by 90% without a structural hedge program. In fact, our income decreased less than 5% over this period, which was supported by having hedges in place. Onto Slide 13, we arrived back at the structural hedge disclosure of the Barclays provided in Q3 showing the hedge notional, average yield and the gross hedge income since 2019, including the amounts that are locked in for 2024 and 2025, based on hedges we have already executed. But we hope this presentation has provided some useful background to this slide. Turning finally to Slide 14, to summarize our key messages today on the structural hedge. Firstly, banks generally seek to hedge balances back to floating rates. Structural hedging is undertaken on fixed rate or rate insensitive balances that are challenging to product hedge as they have no fixed maturity. The largest balances are current accounts, managed rate savings accounts and equity. Hedging reduces the income volatility that businesses would otherwise experience given mismatches between their assets and liabilities, and it also manages capital add-ons that would otherwise apply in Pillar 2. In practice, the hedge consists of a granular set of received fixed swaps that offset the pay fixed nature of structural hedge balances. These swaps enrolled on an ongoing basis, providing a smooth interest rate profile. We talk about the income from the structural hedge as the gross income given the offset between pay float and floating rate assets. And at this point in the cycle, if income growth is relatively robust to changes in rates and balances, given its momentum properties, the hedge effectively defers some of the margin benefit from recent sharp rises in interest rates for future periods and is expected to be more valuable. The hedge provided major support to income in 2008 to 2009 as the bank rate reduced and the hedge should continue to support Barclays NII going forward. Thank you for listening, and I hope you find this presentation helpful. I will ask the operator in a moment to open up the call for questions. Before I do, I want to make clear that this event is what it says on the [ tin ]. It's an education session on the structural hedge. And so I'll be taking questions solely related to this conference. You will, I now understand that there is no intention here to go beyond the disclosure than we established at our Q3 results. Operator, over to you.

[Operator Instructions] Our first question today comes from Rohith Chandra-Rajan from Bank of America.

Thank you very much for doing this. It's a really helpful session on a key topic. I was wondering if you could help me just understand a little bit more on 2 aspects, please. One is how you think about the notional. And the second is just to help us model the yield going forward. So on the notional, I guess, we're all aware as the deposit mix changes, so the hedgeability of those deposits changes. But I thought Slide 10 was interesting, particularly the behavioral analysis, which I guess is -- if you think about current accounts, for example, you may or may not think now that current accounts might be a bit less sticky than you thought they were 2 or 3 years ago. So I was just wondering if you could help us understand the impact of the behavioral analysis as well as the deposit mix when we think about the hedge notional and how sort of forward-looking you are when you're thinking about sizing the hedge? That would be the first one. I can give you the second 1 now if that's helpful.

Well, why don't we take in turn. So look, the first thing I'd say is we do take into account a range of different factors when we consider the behavioral analysis. I've quoted some of those in my earlier comments. But clearly, we try and make this dynamic. And clearly, there's a lot of new data that we're now getting. And so we're factoring those into our analysis as well. And then I think you had another comment on the current account stability. Probably the first thing I'll say is that we were pretty conservative and prudent in terms of reacting to the increase in current account and other balances during the COVID period. So we consider that very, very carefully, and we manage buffers on that basis. But obviously, we'll be making sure that we feed in to that analysis, the learnings that we've got over the past 18 months or so. But we're broadly comfortable with that analysis as it is now.

And how forward looking, are you on the hedge? So when you're thinking about behavior, how -- it's obviously not just based on deposit base today, it's based on what you think is going to happen. But how forward-looking are you in that?

The analysis is an attempt to be forward-looking. So it is designed to be a view of which balances do we think are going to be there for the foreseeable future, and you can see that in the life that we hedge to. So it is a forward-looking assessment of what balances do we think are going to be there over that period. Having said that, as I sort of mentioned in my comments, we've obviously got significant levers available should we need to adjust the size of the hedge in response to deposit moves. Do you have a second question?

Yes, that links in very nicely to the second question. So the previous slide, I guess, Slide 9, exhibit where you showed the example of the reduction in hedge notional. I guess there are a number -- so the way that, that example is set up where you just don't -- you don't roll all of the maturities, so you don't reinvest all the maturities. If you continue to do that over a period of time, you'd obviously shorten the duration of the hedge. So if you think of the hedges -- so question 1 is that what happens? And if it's not, if you want to maintain the duration, do you do that through a series of offsetting swaps along the life of the hedge? Or how does that work? And then I guess what I'm going to get to is as the notional declines, how should we, from the outside, think about modeling the hedge yield?

Yes. Yes. No, you're absolutely right. If you don't reinvest, then over time, you'll see a fairly slow and small, but definitely a crib shorter in the hedge. Generally, what we'll look to do is take action to just maintain the overall duration. So you could obviously put on offsetting swaps. But from our perspective, the first thing we would do in the waterfall of actions is to pause the reinvestments. And then we'd adjust for that at the appropriate time to maintain broadly the same tenure.

Okay. So when -- sorry, just -- so when we try and model that, we think about the maturities in the period in what you may or may not put on. Is that the best way to think about it from an external perspective? So what's maturing, and how much of that you're reinvesting at 5 years?

Correct. Correct. Yes. And the effect of the non roles reducing duration of the tenure is a factor, but it's going to -- it's a relatively modest impact.

The next question comes from Guy Stebbings from BNP Paribas.

Appreciated. A couple of questions similar to Rohith, building on some on here. So in terms of the hedge notional and customer behavior, I just wondered if you could talk at all about the rate backdrop when you think about whether deposits are rate insensitive. What I mean by that is -- and clearly, that's -- something that's rate intensive might depend on exactly what sort of rate assumptions that you're making there, presumably, if you say rates are going from 1 to 3, you'd have a much larger problem saying rates going from 1 to 7 or 8. I don't know if you're able to frame that at all for us. And then the second question, if you want me to give it now as well sort of on that notion, how it might evolve? I mean in a hypothetical scenario, that you had to reduce the hedge down in a given period more than the maturities in that period. Can you just talk us through that process? I know you -- that certainly would not be your central expectation. You've got lots of flexibility, but just in that hypothetical scenario, how you would go about doing that?

Yes. I mean, I probably don't have too much more to add on the first question. As I said, we look at a range of that will determine whether we think the balances are going to be around or not for the foreseeable future. That's obviously the basis on which we would structurally hedge. We will take into account in that analysis, the sensitivity to rates. And as you said, that may vary -- that may vary as rates move higher. On the second question, which I think was kind of what levers would we have available if we saw a very material drop in deposits. I mean I think the first thing I'd say is just to reiterate, we obviously have significant levers available in terms of the role of the hedge balances. So we've said that's sort of GBP 50 billion to GBP 60 billion over the course of 2024. So it's quite a powerful lever. If we move beyond that, then obviously, we could decide whether we wanted to run that risk and take the capital consequences of that or put in place offsetting swaps to neutralize the position. And the effect of that would obviously be to then have that income change run through the life of the swaps over time. So they would probably be the 2 levers that we would consider. And obviously, we're near that, but we consider the circumstances at that time. Thanks very much. Next Question, please?

The next question comes from Harry Bartlett from Redburn Atlantic.

Just a couple of mechanical questions. I guess, would you be able to say what the kind of ramifications are if you were to the honor the hedge -- on the structural hedge and what are the kind of key risks? And I guess, again, another mechanical one. The floating rate portion of the hedge always net out -- that's it.

Yes. Thank you. So I think we covered some of this on the previous question. If we ended up in an overhedged position, obviously, the first thing that we would look to do was just manage that through the monthly roles of which that there's considerable quantum to do that. And as we said in the comments, there's quite a bit of resilience built in an overall NII from doing so given where we are in the late cycle. As I said in the answer to the previous question, clearly, there are other levers available to us in the event that we would be on that point. And we could put in place offsetting swaps to neutralize the hedge. And clearly, that would result in an impact in NII sort of over time through the life of those swaps. So that will be the 2 main levers I would call out. And I think your second question was, have we got an offset to the floating leg and the answer to that is absolutely yes. There are obviously significant floating rate assets on balance sheet. So in effect, you could view that as being part of what we're hedging, the mismatch between the floating rate assets and the fixed rate liability. So yes, there's another side to the swap leg. Thanks for your question, Harry. Next question, please, operator.

The next question comes from Robin Down from HSBC.

Can I ask the same question I asked you at breakfast a couple of weeks ago, and see if I can get a bit more kind of detail in the answer. And that's around the yield on maturing swaps in 2024 and 2025. I mean if I look at you kind of Slide 12 sort of chart that I think we -- all the others kind of draw. If we look at where 5-year swaps were kind of back in 2019, they were kind of 70, 80 basis points. And yet you've got -- you're telling us that maturing swaps in 2024 are going to be kind of something like 125. I accept there's probably a small element of the equity structural hedge that was kind of perhaps invested out at 10 years that will have a slightly higher yield. But I'm still kind of struggling to work out why you're maturing swap yield is so high. And 1 of your competitors is talking about an 80 basis point maturing stock yield in 2024, which feels kind of far more logical. So where is the gap? Why is it so high in 2024?

Yes. I think it's -- obviously, I can't comment on the hedging profile for other peers. But from our perspective, as I said, the 5-year is a weighted average, and we will hedge to other maturities. And the reason we do that is driven by the behavioral analysis and where we feel comfortable that we've got stability of those balances. So there is a range. It's not just 5. So as I said, there's an element of 3 years. There's an element of 7 years. So that will explain differences from peers. Obviously, I don't know exactly what their behavioral analysis is. But from a Barclays perspective, that's the reason you can't just look back to the historic 5-year rate. And clearly, how that will play out will depend on sort of the shape of the curve going forward at a time.

Okay. I think you also said previously that there were -- the swap wasn't entirely sterling. I don't know if you could give us a mix between sterling and kind of dollar. I assume the rest of it is dollar.

Yes, there'll be a little bit of dollars and a little bit of euros. And really, this is linked to partly where we have equity invested in subsidiaries for the equity structural hedge, but it will also be partly to do whether we have structural balances, other currencies -- in other currencies and geographies. And obviously, we do have a corp business in Europe. So I don't think I can give any additional disclosure on the breakdown here, but if you sort of look through the mix of the group, that will give you a pretty good sense. And as I said in the comments, it is predominantly sterling. Thank you, Robin.

The next question comes from Simon Poncet from JPMorgan.

Can you hear me properly?

Yes.

I have a question on the degree of involvement of the regulator in your hedging policy. I presume you have to explain in quite a lot of detail what you are planning to do and it seems to be extremely mechanical. The way you explained it, it seems to be extremely mechanical. And I was wondering what level of flexibility do you still have in regards to the control of the regulator. And point #2, some banks are claiming they don't have a structural hedge in other countries. And I was wondering -- I'm surprised that it's okay with the regulator actually because the regulator doesn't like variable net interest income. So there are 2 questions to my angle. Is it encouraged by the regulator. And as a result, what's the level of flexibility do you still have once you expose your hedge policy. Explain your hedge policy to the regulator?

Yes. Thanks, Simon. Good questions. So from a regulatory framework perspective, there's a couple of constraints that are applied here. Firstly, there is the Pillar 2A regime. So to the extent that we've got unhedged banking book balances or unhedged risk that will be taken into account for the Pillar 2A calculation. So there is a capital consequence of hedging. The second element, which is a little bit newer, which is right away across Europe is a supervisory outlier test. So this is where the regulator takes the banking book balance sheet, and it subjects it to a number of shocks, and then it computes the earnings at risk against Tier 1 capital. And that really does provide sort of an absolute constraint to the amount of risk that can be taken or the amount of risk that may be left unhedged. So there is quite a bit of regulatory regime around this area. And then obviously, on an ongoing basis, we will have strong discussions with the regulator about the framework that we've got and the modeling we do. So there is quite a bit of regulatory backdrop to it. Obviously, I can't comment on other banks specifically. I mean I'd be surprised if any bank in Europe doesn't do some form of structural hedging because otherwise, their supervisory outlier test would become a material constraint for them. So maybe there's mixing up of different terms, but I would imagine banks in Europe generally will need to do hedging on their balance sheet. Thanks for your questions, Simon.

The next question comes from Jonathan Pierce from Numis.

I've got a couple of questions. The first is a broader question on how active you are or could be in the management of the hedge because I understand everybody want to mess around with the mechanics of it too much. But right now, you've effectively got GBP 252 billion of swaps or pay floating leg of 5.2, certainly the sterling benefits receive of [ 1.5 ] is costing about GBP 9 billion a year. And I suppose that's probably a much larger delta than you'd ordinarily expect at any point in a normal rate cycle. So I don't know, are you looking at it -- you're looking at maybe putting forward some of the future unwind about hedge costs through -- I know you could take out pay 5-year fixes and received 2-year fixes given the shape of the curve at the moment. I really -- it's a philosophical question about how wedded you are to this idea that the hedge is purely there to smooth the rate cycle? Are you willing to manage a bit more aggressively to smooth, not just NII but also earnings. That's the first question. The second one is on the illustration of the hedge tailwind because I think sometimes the extent of the tailwind can get a bit lost because an assumption that the notion itself is going to reduce. But at a group level, the size of the notion in this rate environment should be broadly NII neutral. And one of your peers last week put a chart in their full year results presentation showing what the hedge income would be if the hedge notional was static moving forward to give a much better sense of the tailwind from a group perspective. Is that something you would consider? And if not, why not?

Okay. Thanks for the question, Jonathan. I mean, as I said in my comments, we do continue to reassess the duration of the hedge. Obviously, we do this in line with the behavior assessment of the balance sheet. But we do consider the duration, and we're trying to balance the trade-off between sensitivity to rates and income stability over time. And I think it's important that you've got both of those 2 factors in mind. Obviously, you can increase income in period 1 that you might well be less protected for future periods. So we do consider it on a commercial basis, but it is a hedge. And we think it's important that it operates on a programmatic basis. As I said sort of earlier on in the answer to the last question, there is also a regulatory environment backdrop regarding interest rate risk in the banking book. So we're unlikely to manage the hedge solely for profit reasons. It needs to be a hedge that is focused on profitability over time. In terms of the second question, I mean, hopefully, this has been helpful, Jonathan, in terms of sort of making it clear exactly what the hedge is and exactly what the factors that go into it. And hopefully, it gives people the building blocks to sort of think about it and express it in the way that they find most useful. We will obviously continually evaluate the disclosure that we've got and just make sure that we're doing it in the most helpful and constructive way. Thanks, Jonathan.

The next question comes from Adam Terelak from Mediobanca.

I just wanted to ask about product dynamics a little bit more. Clearly, you're talking about the duration of the hedge at the global level. But are there differences in how we should be thinking about the deposit bases in the U.K. business versus the international business? And does that kind of come to different durations on the hedges at opposite those 2? Or is that a combination and then manage to this 2.5 years? So just trying to understand whether we should be thinking about the hedge dynamics differently in some of your CIB or CCMP deposits versus the U.K. And then how that would look on a forward look if there was a difference in duration? And then secondly was on the managed rate deposit book. Any more color there about how we should be thinking about volumes and how we should be thinking about how that dictates or is the input into the hedge volume outlook from here? Clearly, that's been an interesting product that you've seen some growth in. So I'm just trying to understand the shift between current accounts and those other deposits and what that means in terms of the outlook on the hedge.

Yes. Okay. So in response to the first question, I mean, we do think about it at a deposit class level, and therefore, we would think about it at an entity or a division level. So you might find that there are different durations in the different businesses, and that will be influenced by our assessment of the stability of the deposits in the respective areas. So the 2.5 year, the 2.5 year has quite a significant degree of bottoms-up building in terms of the behavioral analysis. But as I said, overall, we'll then also consider whether we think it's the best trade-off between sensitivity to rates and income stability. Your second question was the managed rate deposit. Yes. So obviously, in the managed rate deposit book, we will hedge the portion of that, that we think is fixed rate. So we'll take an assessment of that sort of through the cycle over time. We're comfortable with the assumptions that we've made there. Clearly, there is a bit of -- there can be a bit of shift within the deposit portfolio is underlying. So we've certainly seen some shifts from current accounts into the managed rate deposit book. That won't affect actually the overall structural hedge size necessarily, and it won't affect the structural hedge income, but it obviously may affect other elements of the walk in terms of the price that we pay on those individual deposits.

Okay. Great. And to come to the first question, you mentioned 3, 5, 7-year hedges kind of underlying that average hedge, I mean, does the corporate book look materially shorter than the U.K. book?

Yes. I mean I won't get too much into detail here. But look, generally, we would normally view current accounts to be more stable and have a longer tenor in equity probably longer still. So broadly, your view is probably about correct there but.

The next question comes from Perley Long from Stifel.

Just 1 question on the [ notional ]. I mean it's always a bit hard to figure out what the sort of noninterest-bearing balances are because you only do it once in 20 years. But based on last 20 years and based on NIM reduction, et cetera, I would have thought that this year, the movement probably for you are not so different from your -- it looks like your notional is larger than your peers as a proportion of noninterest-bearing balances. So is that fair? Do you think that you're hedging more of the proportion of your monetary deposits versus your peers? And if so, is there a reason why you're inserting asset savings? Is it something to do with the product or the client segment that makes it sort of more eligible for hedging?

Yes. Probably difficult to get into the detail of that because it's obviously comparing us versus peers. What I would say is that these comparisons on the amount of balance that is hedged can get quite confusing. When people look at the U.K. versus group and often they'll get confused with the fact that our ring-fence can be quite -- is quite different in size and scope to others. So when you look at the U.K. position, for example, you would sort of probably conclude that there is a higher hedgeable proportion. But I think that's as much a comment on business mix, anything else and it's got obviously a much, much smaller corporate book in it, and it's mainly retail book. I think our hedgeable balances overall probably broadly similar to peers when you look at sort of group comparison. But happy to take that offline, Perley. We'll try and make sure we've specifically got you what you need on that question. But I wouldn't call out sort of material differences at group level.

The next question comes from Andrew Coombs from Citi Group.

I have 2 questions. The first to follow-up on Perley was asking. If you look at your Q3 slides, I think you said your GBP 561 billion of deposits, 36% was transactional, if you described as current accounts and household and operational accounting corporate and that's GBP 202 billion. And I think by coincidence, that also happens to be the size of the hedge that you outlined on Slide 10. And I don't think it's necessarily supposed to be a one-for-one relationship. It just happens to be coincidental that after you've done your behavior analysis and your outflow buffers, effectively you end up with a hedge notional that's identical to your transactional account balance. So effectively on that basis, it appears that you're almost not hedging any of the managed rate deposits as it were. And I know that's not an accurate statement, but that's optically what it looks like. Whereas when we look at your peers, the actual seem to be hedging or have hedge balances that are larger than the noninterest-bearing deposit total, whereas yours is obviously in line if I use that disclosure. So almost the flip side question. I guess my question would be, if I look at the behavior analysis and outflow buffers, that's on Slide 10. Are they meaningfully bigger than they would have been historically presumably? And that's perhaps why your notional band is now only in line with your noninterest bearing?

Yes. Okay. I mean, certainly, those 2 numbers being the same is a coincidence. That's not to say we're not hedging any of the MRD book. It will just be a coincidence. Obviously, as I said in my comments, we will go through each of the deposit types will do analysis to determine what exclusions are we going to make in terms of the hedgeable balance. And we'll do that both for the current accounts and the other transactional balances, and then we'll also do it for the MRD book, that will add all of that up. So I wouldn't be too much into that. In terms of buffers, we obviously have been running significant buffers as particularly as we saw deposits increase over the cover period. As you would expect, as you would expect, we've used some of those as deposit balances have reduced, but probably not too much more I'd say on buffers. And obviously, very difficult for me to comment on what we may have done versus our peers.

That's helpful. And my second question was if I could just take you back to 4Q of last year. And there was this situation with some active treasury management that led to a decline in the net interest margin but then expected to reverse out through this year. I mean, given that we have you presented to us, perhaps you could just give us your take on exactly what drove that during Q4 of last year.

Yes. Okay. Not really a hedge question, but I'll try and be helpful. So we called out in Q4, a reduction in the quarter-on-quarter treasury contribution to the U.K. NIM treasury undertake a range of activities that sensitive to market funding costs and these spike materially in Q3 following the mini budget, and these included some fixed rate exposures that were managed over time. I think we said at the time that these were short-term in nature and that has indeed been the case. And we have seen positive contributions in subsequent quarters, which is what we flagged at the time. So I probably don't have too much more to say on that topic. But hopefully, that's a very useful context.

The next question comes from Alvaro Serrano from Morgan Stanley.

A couple of questions for me, hopefully pretty simple. Does it make any difference to have the hedge and as some people call it a natural hedge, i.e. just not swapping your mortgages versus having sort of facing the market with right swaps. Does it mean -- is there any changes in terms of flexibility rabies you can take, et cetera? And the second if -- I think, which hopefully is a bit more interesting. The second question is, look, if we look at the rate curve, it probably by historical standards or certainly recent history, it looks pretty high. And if someone is going to present a 3-year plan, there's a temptation to lock in that rate curve to -- which will make budgeting easier, I guess. How much flexibility do you have to actually sort of lock in those rates through forwards? Is there -- can you do it in practice? Can you take some interest rate view? Can you lock it up, which is -- makes budgeting easier over a longer time period? How much flexibility is there to do that?

Yes. On the first question, I mean, we could look to offset with fixed rate mortgages. That's obviously less flexible. What we tend to do is take the fixed rate mortgages swapping back to floating and then consider the liability hedged separately. I think you get to broadly the same output, but I think doing it separately means you've got a more perfect hedge on the asset side, of which there's obviously more certainty in terms of the product characteristics and you've got more flexibility to tailor on the liability side. Your second question, which I think probably had sort of shapes of throughout the session was really sort of how much appetite do we have to take risk. I probably covered that as we've been through. So fundamentally, it's a hedge. Fundamentally, it's driven by the deposit balances and our analysis of stability over time. But clearly, we will have a view on both notional and on and on duration to make sure that we're positioned for the sort of the right balance between sensitivity to the changes in rates and locking in those rates for long so we constantly evaluate...

Will you do forward swaps?

No.

Buying anticipation at, I don't know, 2025 sort of 5-year swap that could make sure you've got the reinvestment of the hedge locked in.

Yes. Look, probably that's a slightly too specific question, but generally, as I have said...

I mean, I don't mean, '25 as a strategy, do you do those things?

So as a strategy, we try and be very programmatic with the way the way that we manage the overall hedge. I think that's in line with sort of the regulatory regime that we operate in.

Our final question today comes from Jeremy Hoskin from Hoskin Partners.

Most interesting presentation. I had 3 conceptual questions. The first is, how does your smoothing ecosystem cope with the consequences of every bank doing what you're doing compared with you being the only bank, presumably the economics of it would deteriorate. My second question goes to regular hedge capital, but can I ask the question in a specific way, the other way around. If there was no structural hedging, how much would the bank gross balance sheet shrink by? Is it more or less than 20%? And thirdly, does your smoothing world take into account the valuation or should I say, the extreme undervaluation of your share price. And would you change your behavior if instead of Barclays selling at a 70% discount to book, the equity sold at a 90% discount to book?

Okay. Let me try and take those in turn. So the first question, I think, was one about market liquidity. You were talking about whether we thought we would get a different outcome with other banks looking to have the same position versus just us alone, I think obviously...

How would the returns deteriorate if all the banks are doing the same thing?

Yes. I think that's almost an impossible question to try and answer. Clearly, it's an extremely deep fixed income swap market. And clearly, there are very significant coming the other way. So it's pretty hard to disassociate what the consequence would be if 1 bank doing structural hedging versus others, but it's obviously an extremely deep market. Your second question was a question around the amount of regulatory capital that we would hold if we were doing -- undertaking no structural hedging. I mean I think that one is a bit of a mute point. We would be prohibited under the supervise outlier test from running a completely unhedged balance sheet. So at that point, I think we'd be in breach of regulatory requirements given that -- given that regime.

So the answer to the asset question, they were shrink by much more than 20% if you weren't doing any structural hedge?

Okay. Could we go on to the third question, which I think was a comment about the impact of structural hedging on valuation of the bank.

Is the effects of valuation of the share on structural hedging.

I don't think there is any impact or connection between the 2...

The valuation of the shares has gone down.

The structural hedging is a hedging program that is designed to close out interest rate risk on the bank's balance sheet. It's got a regulatory underpinning to it, and it's designed to ensure that we've got a smoother income over time. So I think you've got to look at it on a long-range basis, that's what it's designed to do. Thank you for your questions. Any other questions, operator?

We have no further questions, so I'll hand back over to you for closing remarks.

Okay. Thank you very much for all of your participation in the call. I hope that you've hope you found it useful. Thank you very much for your time, and we look forward to speaking again next year. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.