Barclays - Q4 2023 Fixed Income

Transcript

Operator (participant)

Welcome to Barclays' full-year 2023 Results Fixed Income Conference Call. I will now hand you over to Anna Cross, Group Finance Director, and Dan Fairclough, Group Treasurer.

Anna Cross (Group Finance Director)

Good afternoon, everyone, and welcome to the Fixed Income Investor Call for our full-year 2023 results and investor updates. I'm joined today by Dan Fairclough, our Group Treasurer. Let me begin with a brief overview of our performance over 2023 before speaking to a few slides that summarize the investor update from this morning from a fixed income investor perspective. I'll then hand over to Dan for his overview of the balance sheet. We delivered on our targets in 2023. Return on tangible equity was 10.6% for 2023, in line with our target of above 10%, and we've achieved that in each of the past three years. Our cost-income ratio was 63%, in line with our low 60s% guidance for the full year. Both of these metrics exclude fourth-quarter structural cost actions that we indicated at the time of the Q3 results.

The full-year RoTE was 9% when including the actions. These are directly linked to our revised financial targets that were announced this morning, and I'll set that out in a moment. Our CET1 ratio ended the year at 13.8%, towards the top end of our target range, and the loan loss rate for the year was 46 basis points, below our through-the-cycle guidance of 50-60 basis points, continuing to see the benefits of our long-standing prudent approach to lending and provisioning. Overall, we view this performance as a strong foundation on which to build towards our revised financial targets over the next three years. Let me now turn to a very brief summary of the investor update from this morning. Here we laid out our journey since our last strategy update 10 years ago.

In that time, we have become leaner, having exited non-priority businesses, and we now operate with fewer people in fewer countries. We are better capitalized with our 13.8% CET1 ratio, 450 basis points higher than a decade ago, and RWAs reduced by over 20%. We are creating a simpler, better, more balanced bank dedicated to higher and more stable returns. So let me begin with a summary of our financial goals and supporting targets. First, we target a RoTE of above 12% in 2026, up from 9% statutory in 2023. Second, we expect this improved profitability to enable us to distribute at least GBP 10 billion to shareholders between 2024 and 2026. And finally, the proportion of RWAs in our investment bank will reduce from 58% to around 50% by 2026. On the next slide, we show our clear hierarchy for capital allocation.

Our first priority is to hold a prudent level of capital, and our 13%-14% CET1 ratio target is unchanged and includes a prudent buffer to our requirement. With our capital generation capacity, this allows flexibility and the ability to absorb headwinds. Our next priority, after maintaining our target regulatory capital, is distribution to shareholders. Third, we will balance this thoughtfully as we invest selectively in our higher-returning divisions, resulting in a more profitable RWA mix over time and a better bank for all our stakeholders. We believe the plan set out this morning is constructive for fixed income investors, and slide 7 provides the highlight. We will be disciplined in how we allocate capital both across the bank and within each business.

By 2026, we plan to allocate around GBP 30 billion of the GBP 50 billion growth in our RWAs to our highest-returning divisions, Barclays U.K., the U.K. Corporate Bank, and Private Bank and Wealth Management by growing their lending and gaining market share. This includes the GBP 8 billion day-one RWAs from the acquisition of Tesco's consumer finance business, where the risk profile is consistent with our own portfolios. Turning to the bottom left of the slide, the investment bank is now both competitive and at scale. As noted, it accounts for 58% of RWAs today and will be circa 50% of group RWAs by 2026. These changes include the absorption by the investment bank of the impact of Basel 3.1. We will increase RWA productivity by allocating capital to the higher-returning international Corporate Bank and to high-returning secured lending and financing activities in markets.

Moving to the top right-hand quadrant, the RWA allocation underpins our ambition for better quality income as we grow to circa GBP 30 billion by 2026. We consider retail and corporate and financing to be more stable income streams, and we plan for these to account for more than 70% of the bank's income by 2026. While there is significant growth in lending in our plan, we do this whilst maintaining our through-the-cycle loan loss rate guidance of 50 to 60 basis points. We can achieve this given we have the capacity to grow lending within our existing risk appetite as we de-risk our overall lending profile through recent macroeconomic crises. As a result, our lending portfolios have either stepped back in market share or have run with lower risk versus peers. We see an opportunity to re-establish our position in lending in the U.K. and unsecured in particular.

For market risk, whilst not on the slide, the investment bank presentation this morning demonstrated our controlled approach with a broadly flat bar profile despite increased volumes. Let me conclude with a summary on slide 8. We have a high-returning U.K. retail and corporate franchise that complements our top-tier global investment bank with scale in our core U.K. and U.S. markets, and we deploy capital between those businesses in a disciplined way. We plan to deliver above 12% RoTE by 2026, reflecting both ambition and realism. We are well capitalized, have deep liquidity, and sound risk management, which, combined with consistent and improved profitability, will enable higher return of capital. As I said, this is a plan that delivers for all of our stakeholders. Hopefully, that has given you a helpful summary. I'll now hand over to Dan for the balance sheet highlights.

Dan Fairclough (Group Treasurer)

Thanks, Anna. We ended the year with a strong balance sheet, as evidenced by the metrics on the slide. The CET1 ratio of 13.8% places us at the upper end of the target range, and the MREL ratio of 33.6% provides GBP 12 billion of headroom above our requirements. A liquidity coverage ratio of 161% and low loan-to-deposit ratio of 74% demonstrates a robust balance sheet position. Let me begin with capital. The CET1 ratio for the year-end reflected the resilience of our capital generation despite absorbing one-off items in Q4. Structural cost actions and underlying growth in RWAs had a total impact of 45 basis points, and this was partially offset by profits, allowing us to end the quarter 23 basis points below the Q3 position.

Our underlying RoTE for the year of 10.6% generated 146 basis points of capital for the year-end, and our 2026 RoTE target of greater than 12% is expected to generate greater than 200 basis points. With the continued strength of our capital position, we announced a GBP 1 billion share buyback this morning. This would rebase the ratio to 13.5% in the middle of our target range. In Q1, we expect the usual seasonal effects as we lean into market opportunities and the associated RWA growth. The MDA increased 15 basis points to 12% in Q4, reflecting the PRA's annual recalibration of our Pillar 2A requirement. As you heard this morning, having a sufficient headroom above our regulatory requirements is the foremost priority in our capital management framework, and we remain comfortable with the GBP 6 billion of capital headroom we have.

The announced acquisition of Tesco's consumer banking portfolios is circa 30 basis points impact of CET1 in 2024 and will be accommodated within our flight path management. You've already heard Anna's comments on our RWA plans over the next three years, and I want to address two main regulatory headwinds over the following slides. The first is a move of our U.S. cards portfolio to an internal ratings-based, or IRB, model. We continue to make significant progress towards the at least 85% of credit risk RWAs being IRB, which is the level required by the PRA for IRB banks. This move results in an expected increase in RWAs of circa GBP 16 billion from H2 2024. We don't expect any further material impact from model migrations from current portfolios beyond U.S. cards. The second headwind is Basel 3.1, which we've quantified publicly for some time.

PRA's recent policy paper was constructive, and we have also worked through some further refinements and mitigations. Furthermore, our previous Basel 3.1 guidance included an element for U.S. cards RWAs, which has been superseded by the IRB migration. The aggregate impact of these factors means a materially lower expected impact from Basel 3.1 on implementation. Given the lower Basel 3.1 impact estimate, the total effect of the two headwinds is broadly aligned to the previously guided day-one impact of Basel towards the lower end of 5%-10% of group RWAs. In the PRA's update, they reaffirmed they would avoid double-counting risks in Pillar 1 that are in Pillar 2A. We expect this offset to be formalized by the PRA prior to Basel 3.1 implementation. The effect of this will be to reduce our minimum requirements, including our MDA hurdle.

On the next slide, we illustrate the drivers of the increase from implementing IRB for U.S. cards. Our IRB models, when applied to U.S. cards, generate a greater risk weight density versus standardized models. The key drivers are the IRB model captures unused credit lines more conservatively, and it includes 2009 financial crisis stress loss assumptions, despite current and expected experience being materially less adverse. Under the U.S. Basel 3 endgame treatment, we expect our peers in the U.S. to also experience a capital increase, although noting that these are yet to be finalized. We therefore do not believe the IRB introduction will materially affect our competitive position in the U.S. credit card market, although there is clearly work to do to mitigate the RoTE impact of the higher capital charges.

On slide 14, we show our total capital requirements as a proportion of RWAs, split out by Tier 1 and total capital, respectively. We continue to target a prudent buffer against each of these requirements, and this is visible on the slide. Taking each tier in turn, on a Tier 1 basis, we currently have a 17.7% ratio with a healthy headroom over our 14.3% regulatory requirement. Within this ratio, you can see that we had a robust AT1 component of 3.9%. During 2023, we maintained strong levels of AT1 over a challenging year for the asset class. As the AT1 market has normalised, coupled with the prudent position we're at, we expect to be a net negative issuer in 2024, noting we have GBP 2.8 billion equivalent of AT1 instruments with first call dates due this year.

Of course, this remains subject to our economic assessment of these calls and regulatory permission at the appropriate time, but does demonstrate the responsive and dynamic way we are able to manage this tier of capital through our issuance and regular call profile. As mentioned before, we value our AT1 component and the many regulatory benefits it provides, namely on Tier 1, total capital, MREL, and leverage, and it will continue to be a deliberate strategy of ours to operate with robust levels through the cycle. This reflects attractive opportunities for liquid leverage balance sheet in our businesses. Moving on to total capital, our buffer over our regulatory minimum remains healthy at 260 basis points, the strength of our Tier 1 level continues to support this position. As a result, our Tier 2 requirements have remained modest over recent years, largely replacing our existing call and amortization profile.

In line with previous years, we do expect to be active with issuance in Tier 2 as we seek to maintain current prudent levels. Turning now to MREL, which also continues to be managed well in excess of regulatory requirements. At year-end 2023, we had an MREL ratio of 33.6%, which was comfortably above our requirements of 30.1%. This was supported with GBP 14 billion equivalent of issuance in 2023 as we successfully navigated through a challenging set of market conditions. For 2024, we expect to issue around GBP 12 billion equivalent across AT1, Tier 2, and senior. Our MREL issuance plan continues to be dynamic and is driven by a combination of factors such as balance sheet needs, regulatory requirements, and the impact of FX and rates on our MREL stock.

Moving on to deposits, we have maintained a stable deposit base throughout the course of the year and demonstrated the resilience of having a diverse deposit franchise across consumer, SME, and corporate sectors. As you can see on the slide, the mix of the deposit base has shifted over the year, with consumer deposits down reflecting market conditions and almost fully offset by the increase in SME and corporate deposits. Given continued quantitative tapering and upcoming TFSME repayments, the outlook for overall money supply growth remains muted, and we expect this to be reflected in a broadly stable deposit base subject to normal seasonal variations over the year. We expect GBP 7 billion of deposits from the Tesco consumer portfolio acquisition to transfer in the second half of the year.

Onto the next slide on liquidity, our average LCR at 161% provided GBP 118 billion in excess of the regulatory requirement, and our liquidity position remained robust throughout the year. This liquidity position also provides ample coverage for our TFSME drawings of GBP 21.9 billion, and you can see the repayment profile is spread through to 2027. We will watch for any impact on TFSME redemptions across the industry, but it's not a material impact for Barclays. Moving on to the structural hedge. Given we are at a point in the cycle where rates may have peaked and a market expectation of rate cuts from here, the hedge acts as an important stabilizer to income. The expected NII tailwind is significant and relatively predictable. To illustrate this, even with swap rates lower in Q4, we have already locked in GBP 8.6 billion aggregate hedge income over the next three years.

Of this, £3.8 billion is locked in this year, higher than in 2023, and this will continue to build due to the impact of rolls this year onto higher rates. We also anticipate income from the expected reinvestment of approximately 75% of the maturing £170 billion of positions over the next three years at an average yield of 1.5%, significantly lower than current swap rates. These maturities reinvested at current swap rates would expect to compound over the next three years to increase structural hedge income in 2026 by circa £2 billion, based on these assumptions and rates. Turning finally to credit ratings, improving our credit ratings has been a key strategic priority, and we're pleased to have secured two upgrades in 2023. Our medium-term aim for Barclays PLC senior to qualify as single A composite across all indices remains an important target. Let me conclude.

We have demonstrated once again the strength and resilience of our diversified business model and balance sheet over a challenging year of volatility for the sector. Our robust capital and liquidity positions are an important underpinning for the strategy and targets that we've updated on today, and we're well positioned to support our businesses in the journey to 2026. With that, I'll hand back to Anna.

Anna Cross (Group Finance Director)

Thank you, Dan. We would now like to open the call for questions, and I hope you have found this call helpful. Operator, please go ahead.

Operator (participant)

If you wish to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by 2. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by 1 to ask the question. Our first question today comes from Lee Street from Citigroup. Please go ahead, Lee. Your line is now open.

Lee Street (Fixed Income Analyst)

Hello, good afternoon, and thank you for taking my questions. I have three, please. Firstly, on the investment bank, and I know it was discussed a lot this morning, but I'm just trying to get my head around why 50% capital allocation is the right number and just to delve a little bit more into why allocating half your capital to what still looks like will be one of your lowest-returning businesses makes sense. Just a little bit on that would be helpful. Secondly, on the ratings, thank you for your comments there. I know you say you're targeting a composite A rating at the holdco. Are you targeting ratings at both S&P and Moody's, and have you held any discussions with them to see if the new 12% ROTE target and associated targets might be sufficient in the medium term?

Then finally, just to point of clarification, do you think the MDA threshold has peaked at 12% now? Those would be my questions. Thank you.

Anna Cross (Group Finance Director)

Good afternoon, Lee, and thank you for joining us. It's Anna. I'll take the first question, and then I'll hand over to Dan for the other two. So in terms of the 50% to, or broadly 50% to, the IB, clearly within that, there is a real reduction because we are asking the IB to absorb the changes associated with Basel 3.1. And whilst it's returning a fairly low ROTE right now and below the overall group average, that is not our ambition for this business, and we set out some clear targets today for it to be earning in line with the group by 2026. On the other side of the percentage, the GBP 30 billion we think is the right level of scale of growth for those businesses to absorb over the period for that three-year journey. And I would say that the 50% is a point in time.

It's purely where we believe we'll be in 2026. It's not supposed to be any indication of a sort of perfect balance between investment banking and the rest of the bank. So hopefully, that's a bit clearer. Dan?

Dan Fairclough (Group Treasurer)

Yeah, hey, Lee. So getting to a single A composite, it would require a ratings upgrade with either Moody's or S&P. Clearly, we have ongoing dialogues with the agencies, and clearly, as you would expect, we've discussed the investor update with them. We think that what we've got here is really positive from a credit perspective. Clearly, the returns target is helpful. We think it provides further diversification, and we think it fits within the existing risk appetite. And clearly, we've been very firm on our commitment to the capital ratio target. So we think there is lots to like in here from a credit perspective and from a rating agency perspective, and working with them will be a key management focus for us. And then I think your last question was just on the MDA level and where it might go from here.

Obviously, we go through an annual review with the PRA. I think our expectation is that there are good reasons to think that the MDA may go down with the implementation of Basel 3.1. I think the PRA has been reasonably clear that they wouldn't expect to double up in capital items. We'll have to see how that goes. I think there'll be a consultation paper out on it, but I think there's good reason to think that that may reduce, and obviously, that would reduce our minimum requirements at that point.

Lee Street (Fixed Income Analyst)

All right. Thank you very much, both, for your comments.

Dan Fairclough (Group Treasurer)

Thank you.

Anna Cross (Group Finance Director)

Thank you. Can we have the next question, please?

Operator (participant)

The next question comes from Daniel David from Autonomous. Please go ahead, Daniel. Your line is now open.

Daniel David (Fixed Income Analyst)

Hi, all. Congratulations on the results, and thanks for taking my questions. I just want to focus on capital for a moment. Looking at the MDA buffer and CT1 target, this remains a bit low compared to EU peers, and I guess with GBP 10 billion of payouts coming, this could scare investors that you're prioritizing equity over credit. So just to drill in on that a bit more, if you were running at the lower end of your CT1 guidance range for a prolonged period, would you consider reducing the equity payout to boost the MDA headroom? And following on from that, do you think the low CT1 target and headroom impacts your spreads and hence cost of funding? And then finally, just on the 81 stack, I note your comments on being a net negative issuer.

If I look back over the last few years, I think you've always maintained 3.5%-4% AT1s on an RWA basis. Is this a range we should think of longer term, or is there a chance that that could fall away and reduce that over time? Thanks.

Dan Fairclough (Group Treasurer)

Yeah, okay. Hey, just happy to take those questions. So in terms of the capital ratio position, look, I think I covered some of it in my speech. I think firstly, the capital generation is really important here. So 10% ROTE is 150 basis points of CT1 generation, and we think that that clearly gives us a lot of flexibility. The second point I'd probably make is that we have a lot of flexibility in the velocity of our RWAs. That allows us to manage our capital base in a very nimble way and in a more nimble way than if we were purely a banking book balance sheet. So for both of those reasons, we think that the capital ratio target is appropriate. As I said to my earlier answer, there may be reasons why the MDA will reduce over time, but we'll have to keep that under review.

And then your sort of question about—I think it was really a question about relative priority. I think it's really, really important, and Anna said it in her comments, that the number one priority for us is to maintain a prudent regulatory capital position in the target range, and we've been quite clear that that is our number one priority. So hopefully, that helps with that question. The second question was about the AT1 stack. So you're right. We've said we will be a net negative issuer in 2024, so we think we can do with slightly less AT1 than the core schedule. I won't give you a guide on exactly where we're going to be, but we're comfortable issuing less in 2024. And there'll be an element here on RWA density.

So there's reasons to think both with the switch to IRB model and Basel 3.1, RWA density will be slightly higher. So all other things being equal, that will create a bit more leverage capacity.

Daniel David (Fixed Income Analyst)

Okay. Thank you.

Anna Cross (Group Finance Director)

Thank you. Can we have the next question, please?

Operator (participant)

The next question comes from Paul Fenner from Société Générale. Please go ahead, Paul. Your line is now open.

Paul Fenner (Managing Director and Head of Financials Credit Research)

Hi, Dan. Hi, Anna. Thanks again to the call. So a number of my questions have been answered, so let me just run through those that haven't. The first, I guess, is a two-parter and really comes back to this investment bank versus U.K. kind of refocus. I guess you've been reticent to do that for a number of years, right? I mean, it's been all over the papers. It's been a constant source of discussion on these kind of calls. I guess my question is, and I'm sorry if it's a repeat from this morning, but what's changed from this point last year to this year in terms of your outlook for investment banking or your investment banking or the pocket of fees, just so we understand and put that into context? And likewise, what's changed about your outlook in the U.K.?

What is it that has either fundamentally changed in terms of the outlook, or what is it that you have misunderstood in terms of risk return? And in particular, within the U.K., you're obviously now going to be taking market share in some of the riskier parts of that spectrum, including high LTV mortgages and consumer credit, which kind of feels a little bit opposite direction to traffic. So a bit of commentary around that would be super helpful. Second question, commercial real estate. I don't think it's been mentioned in any of these calls. Could you just give us your two cents on where your book is and what you think about the noise out there around that asset class? Third, bond supply. Thank you very much for the very clear comments around 2024.

Given your refocus towards the U.K. and consumer in particular, does this mean that we should expect, looking out 2025, 2026, that you will be a smaller issuer than you have been hitherto? I think that's it. Thank you.

Anna Cross (Group Finance Director)

Okay. Thank you, Paul. That's a bit of a marathon. We'll try and remember them all as we go. So Dan, why don't you start off with the first question, and then I can add?

Dan Fairclough (Group Treasurer)

Yeah. So obviously, we spent a lot of time with investors as we worked through the investor update. So probably the first point is here that we've listened to what investors have told us and their views and preferences on shape. In terms of the investment bank specifically, we view that we are at scale, and we need to be at this scale to really ensure that we're relevant for all of our clients. So it's not that we've radically changed approach here, but we think it's important to put a cap on the total size. In relation to the other areas of the bank that we're going to be growing, which obviously do have a U.K. focus, I think a lot of this is also consistent with some of the things that we've discussed before.

We certainly took a prudent risk view post-Brexit, and we were particularly prudent on the U.K. consumer. I think the U.K. consumer has been very resilient since that point, and I think the U.K. macro environment has actually been pretty resilient as well. And we have reduced our presence in a number of those key markets. So we've reduced market share in both the U.K. cards and in unsecured. Quite materially over that period. So we look at the situation now, and with the relative stabilization we've got, we feel there is an opportunity to step back into those spaces. Clearly, we've started some of this with the Kensington acquisition, and I think we flagged already that we were rebuilding our U.K. cards presence. And Tesco's is really a continuation of that journey.

We don't really view it as a material increase in credit risk appetite, but really reaffirming some of the appetite that we had historically.

Anna Cross (Group Finance Director)

Thanks, Dan. I think the only things I'd add, Paul, would be we are starting from a very different place here. So if you look at our U.K. cards book, it's 35% lower than it was. The Arrears performance is consistently below 1%, and it has been for multiple quarters now, much, much lower than we would regard as a normal amount. Similarly, on U.K.. mortgages, the Arreas rates are extremely low. And actually, our starting position for the book as a whole, just a touch above 50% for the LTV of the book, and we're acquiring typically at around 63%. And there's only 1.6% of our book that's over 90% LTV. So these are extremely low-risk portfolios as we have them now. And we're talking about well-controlled, well-defined steps using capabilities that we've acquired or have in-house. I think the Kensington piece is very interesting.

Clearly, when we bought that business, we said very clearly at that point in time that we were buying it for its risk capability. And actually, the other thing that we've done since then is we've demonstrated that we can do high loan-to-value risk transfer in the U.K. in order to dynamically manage the risk on the balance sheet. So we think it's the right time, and we have the right opportunities to take advantage of it. Dan, do you want to pick up, CRE?

Dan Fairclough (Group Treasurer)

Yeah. So we've long had a very conservative approach to commercial real estate. So our exposure is GBP 15.8 billion, so it's relatively modest. So we're really not at the front line of the evolving situation in this market, given that small lending footprint. The LTVs are low, so 49% LTV with no subsector greater than 57%. And about 11% of it is in offices. So again, relatively modest. The other point I'd probably make is we do have SRT protection on a portion of this book as well, which further helps the prudence on it.

Anna Cross (Group Finance Director)

Thanks, Dan. I think the only other thing I'd highlight is about 40% of the book is in the U.S. and about 60% outside. Obviously, the U.S. and offices are the points of greater investor focus at the moment, but we feel both as an LTV matter, but also in terms of being just very diversified across counterparties and sectors that we're in a good risk position. As I highlighted this morning, as we grow more in U.K. corporates, we will not be undoing this positioning on commercial real estate. It stays firmly in place. Thank you. I think you had one more on supply.

Paul Fenner (Managing Director and Head of Financials Credit Research)

Thank you. Yeah.

Just on longer-term supply.

Dan Fairclough (Group Treasurer)

Yeah, longer-term supply. Yeah. I mean, look, most of the public market issuance that we do is for capital and MREL purposes. And so we would expect that to be actually broadly similar going forward. Although the investment bank will be growing or will be shrinking as a proportion, it will be relatively stable overall. So I don't think that should materially impact the funding position. Clearly, we would expect to see a bit of funding consumption in the U.K., but clearly, they start with a very strong liquidity position and a very high level of deposits.

Anna Cross (Group Finance Director)

Okay. Thank you. Next question, please.

Operator (participant)

Thank you. Just as a reminder, if you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. The next question comes from Robert Smalley from UBS. Please go ahead, Robert. Your line is now open.

Robert Smalley (Managing Director)

Hi. Good morning. Thanks for taking my question. Before I start with questions, two things. First, thank you very much for the structural hedge chalk talk a little while ago. It was very informative. Secondly, my line was a little garbled when you talked about Tier 2 issuance. If you could repeat those comments, that would be great. In terms of questions, and I guess I'm following up on Paul with my first, if we're going to see a prolonged period of stagflation in the U.K., where do you think it manifests itself in the economy, and how is that reflected in your portfolio and your loan loss provisioning and migration from stage one, stage two, two to three as we go? Secondly, on slide 17, you talked about the LCR, 78% cash.

Is this an opportunity to increase profitability by investing at higher rates, or is there a reason why you want to keep this in cash for longer? And then third, with respect to U.S. card portfolio, this morning or last night, Capital One announced it was acquiring Discover, making a very big competitor to your business. Can you talk about how you see that competitively? Does it make it harder, or are there pieces you think are going to come off of the combined company that you could pick up? Does it leave some other gaps where you see some opportunity? Thank you.

Anna Cross (Group Finance Director)

Okay. Thank you so much, Robert. Why don't I start the first question, then I'll hand to Dan for any further comments and to pick up the LCR, and then I'll pick up the Capital One point. And perhaps, Dan, you could reiterate your points on Tier 2 along the way. Sounds like Robert's line cut out. So just to give you some headlines in the macro assumptions that we have for the U.K., we are expecting that base rates will fall to around 4% by the end of this year and about 3.25% by the end of next. And we're expecting that unemployment will peak at around 4.8% in early 2025. I think that probably doesn't coincide with what we would describe as a stagflation environment, probably more stable than we've seen actually across the U.K.

Given where we start from in our asset books, as I said before, both in terms of their risk positioning and the quantum of lending that we have, it gives us confidence that we can stay within the loan loss ratios that we've called out for BUK on a longer-term basis, which is around 35 basis points. Dan, would you like to pick up the LCR?

Dan Fairclough (Group Treasurer)

Yeah. Actually, this cash position is quite consistent with where we've been in the past, Robert. We run a deliberately conservative and prudent position here, and we look at the portfolio particularly through a stress test lens. Clearly, if we're running either assets at risk or outright rate risk in the liquidity pool, that will have an impact on our capital consumption through a stress test. I think it's prudent to maintain a high cash balance in the liquidity pool. Your question on Tier 2, I think really the message we were trying to give there was that we will be active in Tier 2, but relatively modest. But we're not guiding to a specific number.

Anna Cross (Group Finance Director)

Just your final question, Robert. Yes, we noted that sort of late U.K. time and overnight. I mean, the way we see it is it really sort of highlights to us the commercial attractiveness, not just of the cards business in the U.S., but also the ability to sort of control payments and control payment rails. And we've got more to hear about this deal, but that's how we interpret it from the outside. And we feel the same. We think we've got an attractive opportunity both in the U.K. and in the U.S. As relates to your particular point on relative competitiveness in the U.S., we're very focused on improving the returns of the business that we already have. It performs extremely well. It's very focused. It's only a partner asset business. And so for those partners, it's not just about pricing.

It's about the relationship and the service that you can provide to what is ultimately their customers. You carry their brand, and that's very important. So we think we're quite uniquely placed within the U.S. market in that we don't compete with our partners in the customer's wallet, and we think that's important to them. So we'll remain interested in what will come out over the next few days, but confident in the decisions that we've made around the U.S. and indeed the U.K. business.

Robert Smalley (Managing Director)

Thanks very much. Thanks again for doing the call.

Anna Cross (Group Finance Director)

Thank you. We will go, I think, to what looks like our final question, please.

Operator (participant)

The next question comes from Daniel Crowe from Goldman Sachs. Please go ahead, Daniel. Your line is now open.

Daniel Crowe (Credit Analyst)

Hi there both, and thanks for taking the calls. Just coming back on the Tier 2 issuance, obviously, you haven't fully filled your bucket that you could fill, and you have excess AT1, which helps on leverage. I'm just wondering through time, I know you don't want to give out an exact figure, but would you assume that you will head back towards filling the Tier 2 bucket completely as you reduce your AT1 requirement? And then this morning, I also appear to have Rob's problem just as you're answering on the U.K. review on motor. I know it's not a major part, but could you just give me what was roughly your market share before you stopped lending into that pre-2019?

Anna Cross (Group Finance Director)

Yeah, sure. Thank you, Daniel. Dan, why don't you pick up the first question, and then I'll tell you the last one?

Dan Fairclough (Group Treasurer)

Yeah. So Daniel, no radical change in our approach to AT1 or Tier 2 mix. I mean, we still view that there's a lot of value in filling up that total capital bucket with AT1. We think it's cost-effective given the leverage benefit that we get and given the returns that we can earn on liquid deployment of leverage balance sheet. So no material change. We're certainly not going to look to fill up that Tier 2 bucket. But the point on being a negative issuer was we think we can run slightly lower than we have done recently. We've been sort of 3.9% of AT1 as a proportion of RWAs, so really at the upper end of where we'd operated. So we'll run a little bit less than that, but no fundamental change to the strategy.

Anna Cross (Group Finance Director)

Just on your final question, Daniel, I mean, it varied by years, but I would characterize it as consistently low single digits across the years in which we were active in the market. Of course, we fully exited in around the middle of 2019.

Daniel Crowe (Credit Analyst)

Yeah. Okay.

Anna Cross (Group Finance Director)

That's the message you missed this morning. It looks like there are no further questions in the queue. I'm just going to check that with the operator.

Operator (participant)

We have no further questions.

Anna Cross (Group Finance Director)

Okay. Thank you. So everybody, thank you so much for joining us today. Thank you for your continued interest in Barclays. We really look forward to seeing many of you on the road over the next few weeks. Until then, take care. Thank you.

Dan Fairclough (Group Treasurer)

Thank you.

Operator (participant)

Thank you for joining. That concludes today's call.