Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group Q1 2020 interim management statement conference call. At this time, all participants are in listen-only mode. There will be a presentation by Antonio Horta Osorio and William Chalmers, followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone keypad. Please note this call is scheduled for one hour. I must advise you that this conference is being recorded today. I will now hand the conference over to Antonio Horta Osorio. Please go ahead.

Thank you. And good morning, everyone, and thank you for joining our Q1 presentation. In light of the coronavirus outbreak and the exceptional circumstances that we find ourselves in, I thought I would give a brief overview of how we are supporting our customers and colleagues in these difficult times, supported by our balance sheet strength and multi-channel distribution model. But first, I would like to express my gratitude to my colleagues across the group who have shown exemplary dedication and professionalism, often in response to near impossible demands. I know that many of my colleagues will be anxious about the health of loved ones and the impact of coronavirus on their communities. but they remain focused on serving our customers every day. I therefore want to thank each of them for the remarkable contributions they are making to this national effort at work, at home, and in their communities. With their support, we are also committed to helping our customers manage through this crisis. None of us can be certain how long and how severe the impact of this pandemic will be, but we must recognize that our support for customers is already and will continue to impact our profitability and capital build. I will outline some of these measures in a moment, but as a responsible business, we recognize that it is the right thing to do in supporting our customers and helping Britain return to prosperity. However, I am confident that the strength of our balance sheets and our resilient business model mean we are well placed to underwrite these commitments and play our part in helping Britain recover from this crisis. I will summarize some of the measures we are implementing, and I will then hand over to William, who will run through the financials before we open up for questions at the end. I will start in slide two by looking at how we are supporting customers and colleagues through this unprecedented social and economic challenge. Coronavirus is having a significant impact on people and businesses in the UK and around the world. Our core purpose is to help Britain prosper, and this is now more important than ever before. We fully recognize that shareholders, as well as our customers, will judge us by how we live up to that mission. We are treating our retail customers flexibly and sensitively, including granting around 880,000 payment holidays to date. while implementing dedicated support channels within just two weeks of the start of the lockdown for our elderly customers and those customers who are doing such a wonderful job for the NHS. We also remain focused on how we can support our colleagues and communities. This includes suspending all headcount reduction programs while committing to pay all of our staff in full regardless of how their work has been impacted. This is important as it removes uncertainty for our colleagues and leaves them free to focus on supporting our customers and serving their communities. We have also enhanced our financial support for our charitable partners and the group's independent charitable foundations. I believe it is vital to further increase the support we give to mental health charities in these challenging times. As mentioned, we remain fully focused on supporting our customers, and our operational resilience is a key element of our ability to do this. Around 90% of our branch network remains open and Importantly, our digital banking proposition has remained fully operational throughout the lockdown, despite the significant increased registrations and daily logins we have seen. We also have around 45,000 colleagues working from home, having increased it from around 15,000 within just three weeks. I will now turn to slide three and look at how we are actively supporting our customers. We have further enhanced our support for customers, including through the various government initiatives which have been put into place over the last few weeks. We have granted around 400,000 mortgage holidays to date, helping customers through short-term financial difficulties. We have also granted payment holidays across our other retail lines while increasing the limit for contactless card spend to £45 and giving our customers interest-free overdrafts of up to £500. Insurance and Wealth has also adopted payment holidays whilst implementing a simplified claims process. ensuring that customers have their claims paid sooner and reducing the strain the process places on the NHS. Our commercial businesses have supported clients with around 37,000 overdrafts, capital repayment holidays, and deferred payments, all backed by our £2 billion COVID-19 fund for SMEs and mid-corporates. As I mentioned previously, we are fully behind the government's various schemes and have worked closely with the government to make them work. Landing under these schemes will involve extending our risk appetite during the crisis, and despite the protection offered by government guarantees, there will inevitably be some additional losses in due course. At the end of last week, we had approved over 400 million pounds in civil loans, and this has already increased to over 500 million pounds at the close of business yesterday. Our CL built proposition is also now fully operational, and we have registered as a commercial paper dealer so we can support our larger clients to access the CCFF. The government and the Bank of England have both acted swiftly and decisively in their actions will help to mitigate the impact of the crisis. However, there is also an important role for all of the banks to play and we are committed to putting the group's full strength to work in support of the UK economy. By doing this, we will help to reduce the negative impact on the UK economy and speed the recovery. I will now turn to slide four and look briefly at the economy. As I said in my introduction, there is significant uncertainty ahead, and the outlook is challenging, although the final impact on the economy will depend on the severity and duration of the economic shock. Economic forecasts have recently turned sharply negative. In finalizing our results at the end of March, we assumed a base case for GDP of minus 5% in 2020, with a recovery beginning in 2021, although we have to recognize that the outlook may deteriorate over the coming quarter. We have also seen customer activity fall significantly since the end of February, and William will talk about the impact that this has had on our financials. As William will explain, alongside our central assumptions, we are, as previously, also providing our current estimates of how we might be impacted in a more adverse scenario. Clearly, given the lower activity levels and the significant change in the rate environment among other factors, the operating environment is now very different to when we reported in February, and our previous guidance is no longer appropriate. The outlook is likely to remain uncertain for some time, and we will update the market once there is greater clarity. However, as I have said, despite the challenging outlook, we are well-placed to play our part, and I will now turn to slide five and look at how our strengths and capabilities will enable us to support the UK's recovery. The group benefits from several core competitive strengths, including, as you have heard me explain many times, our prudent approach to risk, our capital strength, our market-leading efficiency, and our multi-channel distribution model. Together, these strengths mean that we face into this period of uncertainty with continued confidence in our financial resilience. Our prudent approach to lending supports our low-risk balance sheet, which has seen no net loan growth over the last 10 years, and over 80% of the group's total lending is now secured. Although the economic outlook is uncertain and impairment will inevitably be impacted, our strong balance sheet is benefiting from our prudent approach to lending. We have a clear strategic focus on prime UK retail business, which includes over 75% of our loan portfolio. Our commercial portfolio includes around 35% exposure to SMEs and mid-corporate clients, which is over 80% secured. Importantly, we have limited exposure to the most at-risk sectors of the economy at this stage, and William will give you more details on this shortly. Our liquidity and funding position remains strong, including no net wholesale debts. The loan to deposit ratio has reduced further as a result of strong deposit inflows across both individual and corporate customers to our trusted brands, more than offsetting the increase in our loan book over the quarter. On capital, our CTUN ratio of 14.2% means that we have significant resources available to support our customers especially after the reduction in the UK countercyclical capital buffer. I have talked to you many times about our relentless focus on efficiency, and this will now give us even greater capacity to support our customers and to absorb additional costs associated with the coronavirus outbreak, such as enhancing home working capabilities. Finally, our multi-channel distribution model includes the UK's leading digital bank, and this is playing a vital role in continuing to serve customers throughout the lockdown. We have gained 217,000 additional digital users since the end of March alone. including 33% of new registrations from customers over 60 years old, up from around 13% previously. It is this strength that will form the core of our response to this crisis. Coronavirus represents an unprecedented challenge for the group and the whole of the UK, and we will be tested over the weeks and months ahead. However, I have great confidence in the resilience of our business model, the strength of our balance sheets, and most importantly, the professionalism of our staff. I will now hand over to William, who will run through the financials in more detail.

Thank you, Antonio, and good morning, everyone. I'm going to give an overview of the group's financial performance in Q1. After a decent beginning, in the first quarter, we've started to see the emerging economic impact of the coronavirus crisis. We are well-placed to face an uncertain future, but this will, of course, impact our performance going forward. Turning first to slide seven, I have a summary of the financials. Pre-provision operating profit of 2 billion is down 19% on the prior year. Supported by a net interest margin of 279 basis points and a continued focus on costs, Pre-provision operating profits were solid. However, statutory profit before tax of $74 million and the return on tangible equity of 5% were both heavily impacted by the impairment charge of $1.4 billion in the quarter. The results also include $387 million of negative below-the-line insurance volatility relating to the exceptional market movements we saw in the quarter. This stems predominantly from falling exchange prices and rising credit spreads. It's worth noting that this volatility is market-led, and we've seen some of it reversed in April, but it's clearly too soon to make a call on Q2. CNERF per share of 57.4 pence is up 6.6 pence in the quarter, including 4.9 pence of support from the increased net surplus in the group's defined benefit pension schemes. This is again driven by widening credit spreads, and we've also seen some initial reversal in April. As you've heard, the balance sheet remains strong. The loans deposit ratio has reduced to 103%, as strong corporate loan growth has been more than offset by deposit inflows, largely from those same corporate clients. We've also completed 6.9 billion of wholesale funding year-to-date. Alongside the term funding scheme, this means we now have only a small residual funding requirement in 2020. Our capital build has clearly been impacted by the statutory performance in the quarter and the limited RWA increase. However, benefiting from the 83 basis points from cancelling the 2019 dividend, the CT1 ratio is now very strong, having increased to 14.2%. I'll now turn to pre-provision profit on slide eight. Net income is down 11% impacted by the exceptionally low rate environment and a slowdown across all of our key markets, both of which we expect to continue in Q2. The net interest margin is down 12 basis points from prior year at 279 basis points. We expect to see the full impact of these lower base rates, changes in the balance sheet mix, and fee forbearance landing in Q2. Other income in the quarter was 1.2 billion. Post the coronavirus outbreak, this was impacted by lower activity levels across the group, as well as a market-led write-down in the assets of Lloyd's Development Capital and the Business Growth Fund of approximately 100 million. We'll maintain our focus on costs and indeed will absorb additional coronavirus-related expenses in 2020, while continuing to see absolute costs reduced. That said, I should stress that this benefit will of course be significantly outweighed by the revenue headwinds that we're anticipating. Turning now to slide nine and the impairment charge in a little more detail. Total impairment charge of 1.4 billion reflects our updated economic assumptions, as well as the impact of coronavirus-related disruption on existing restructuring cases. As you can see, the underlying impairment charge of 368 million in the first quarter is higher than last year, but this comparison is impacted by the very low commercial net charge in Q1 2019. Indeed, underlying credit quality we're actually seeing in the first quarter remains robust. Well, IFRS 9 economic scenarios, they have deteriorated significantly, and they drive the 844 million forward-looking model charge you can see on the slide. As you know, we run multiple economic scenarios around a base case and have maintained the probability weightings on our four cases. The severe downside, to which we attribute a 10% weighting, now generates an expected credit loss of over $7 billion, a pickup of $2.1 billion compared to the base case. Although consensus is expecting a V-shaped recession, in our base case we prudently assume that GDP grows by only 3% in 2021. We've also assumed that house prices fall 5% in 2020 and unemployment stays above 5% in both 2020 and 2021 and rises much higher in Q2 2020 in particular. These are all important points to consider when you look at the expected losses that we model under IFRS 9. Together this means that our stock of ECLs now stands at 5.2 billion, a cushion that is over 1 billion higher than at the year end. John has taken in Q1 based on our analysis at the quarter end and our view of the economic situation at that point as we look forward. Clearly, the economic situation remains very fluid and uncertain, and it's possible that there will be changes to our outlook in the coming quarters. As Antonio mentioned, in the current economic situation, it is inevitable that both the existing book and our new lending will be impacted, though this will be partially offset by government guarantees. The extent of the final impact, however, will depend upon the severity and the duration of the shock and how economic data and behaviours evolve. Looking at slide 10, the group's balance sheet is well positioned for the current environment, given the group's prudent approach to lending and the clear strategic focus on prime UK secured lending. Secured lending, as Antonio said, makes up over 80% of the group's balance sheet, with $310 billion in retail and $30 billion in SME and mid-corporates. The rest of the loan book comprises our prime UK consumer portfolio and our prudent exposure to UK large corporates. Looking at the AQRs by division, they have increased significantly in the prior year, although as with the total P&L charge, this is predominantly driven by the forward-looking ECL uplift associated with the worsening economic outlook. At an underlying level, the total AQR of 33 basis points and a write-off of £393 million are both in line with our through-the-cycle expectations and evidence the group's underlying credit quality. Again, we will not be immune from loan losses in the coming cycle, but we do start from a good place. Let me now turn to the strength of the portfolios, starting with the retail book on slide 11. Retail, as you know, has a deliberate focus on high-quality mortgages with an average loan-to-value of 44%, and nine-tenths of the book with an LTV below 80%. As you'll be aware, our 2006 to 2008 vintage mortgage book drives outsized losses in the Bank of England's annual stress testing exercise, but this portfolio is reducing at around 12% per year. In addition, much of this portfolio originally had LTVs over 100%, but the average is now slightly below the rest of the mortgage book at 43%, while over nine-tenths of these loans have an LTV below 80%. More generally, we've seen a significant interest in repayment holidays for mortgage customers and have granted around 400,000 to date. The average LTV of these customers is about 50% and there is no particular correlation to vintage. Our prime credit card book has seen limited drawdowns with balances down 6% since the year end, largely driven by the over 20% reduction in customer credit card spending levels in March. We currently have around 220,000 customers benefiting from payment holidays, having introduced them in April. And finally, our motor finance book is predominantly secured and subject to risk-based pricing assumptions and residual value provisioning. Having said that, there are uncertainties given the used car market is effectively closed right now. So to turn to commercial banking on slide 12. The commercial portfolio benefits from a diverse client base and sector caps and limits across the book. The significant de-risking undertaken in recent years means that around 75% of exposure is to investment grade clients. We have limited exposure to riskier sectors, including only 2 billion to leverage finance and low average LTVs in our commercial real estate book. Less than 3% of group lending is to the sectors seeing the greatest impact from coronavirus. the associated lockdown and we're working closely with those affected clients we saw around 8 billion being drawn on revolving credit facilities and other corporate institutional facilities in march this drawdown was more than matched by commercial deposits as clients sought to preserve liquidity we will continue to work with clients to understand their needs though it's interesting to note that rcf drawings have slowed significantly in april Alongside this, while lending balances in commercial banking have increased by 5.3 billion in the quarter, RWAs have increased by much less. This is because undrawn facilities are already risk-weighted at 75% of the level of the drawn balance. As Antonio mentioned, we're enthusiastic participants in the government-sponsored lending schemes, as we believe that the schemes are of the utmost importance to large sections of society. There will inevitably be some losses from these schemes in coming periods, although the final amount will depend upon the severity and duration of the economic shock. Let me move on to slide 13 to look at liquidity, funding and capital in a little more detail. The loans deposit ratio reduced to 103% as a result of the flight to safety we have seen within commercial deposits, as I mentioned earlier. We've also taken an opportunistic approach to wholesale funding as the markets have remained open for us. We've completed nearly £7 billion of funding to date across the whole co and opcos since the year end. Given our funding to date and our access to the new term funding scheme for SMEs, which we estimate to be up to £39 billion, we will now have only a small residual funding requirement for 2020. On capital, our CET1 ratio of 14.2% is comfortably above our requirements, particularly since the reduction in the UK counter cyclical buffer to zero. The headroom over the current requirements of 11.3% of nearly 300 basis points, or six billion, plus our solid pre-provision profitability that I mentioned earlier on, gives us significant capacity to absorb potential credit risk while continuing to lend in support of the real economy. As I mentioned a moment ago, we've seen limited risk-weighted asset expansion in the quarter. RWAs are up $6 billion, of which $2.3 billion is due to the previously flagged securitization rule changes in January of Q1, while a further $2 billion relates to currency and CVA. Our stance on large corporate lending means that we have so far seen very limited ratings migration, although clearly there may be some further impact in future quarters. And finally, to turn to slide 14. In conclusion, the UK faces an uncertain outlook. However, we remain absolutely focused on supporting our customers, protecting our colleagues, and remaining present in communities across the UK. Our multi-channel distribution model with the UK's leading digital bank is enabling the group to continue to serve customers throughout the lockdown. Our efficient low-risk business model and enhanced capital strength give us even greater capacity to absorb potential impairments while continuing to support our customers. Looking forward, we will come through this crisis together. In the meantime, we're learning a lot. During and after the crisis, we will further build on our connectivity with customers, adapt our product range, and continue to build the group's strategic cost advantage through new ways of working. We will, of course, be tested. but I have every confidence in the strength of our business and dedication of our colleagues. And with this, we will maintain our focus on supporting customers and the UK economy. That concludes the presentations for this morning. Thank you for listening. Antonio and I are now ready to take your questions, so I'll hand back to the operator. Thank you.

Thank you. A reminder to ask a question, star then one on your telephone. Please stand by for your first question. Your first question comes from the line of Joe Dickerson. Jefferies, please go ahead. You're live in the call.

Thank you for taking my question. Is there a way to dimension the downside on impairments to take kind of the severe scenario and then add a remaining kind of quarterly run rate, call it a couple hundred to a couple hundred and fifty million a quarter over three quarters and think about that as kind of the downside? of a range, assuming that we don't have, assuming some sort of recovery in the back end of the year. That's the first question. And then secondly, on the roughly 2 billion credit allowance on other retail, can you give us some color on how much of that is allocated towards the card book versus other portfolios? Thanks.

Thank you, Joe. I'll take your questions in turn. Maybe just to start off and to give you some context on the IFRS 9 charge that we've taken. The IFRS 9 charge is by design a forward-looking charge. The charge of $1.43 billion that we've taken this quarter is predicated upon three inputs. One is the underlying charge, which as you know is $368 million. Second is for restructuring cases that have been blown somewhat off course by coronavirus-related difficulties, which is 218 million. And then the third is the model forward-looking charge, which is 844 million. So the total charge is a combination of those three, and the last of which is forward-looking. By definition and by design, as I said earlier on, it's a front-loaded charge. So as we look forward, there's two factors that we need to pay attention to. One is whether the economics change and whether our base case changes with it. And clearly, if it does, then you'll see that forward-looking charge be modified accordingly. And the second is the absence of perfect foresight. When we look forward, we don't have perfect foresight about what will happen to our restructuring cases, for example, about what will happen to our Stage 1 cases, for example, including the payment holidays, and about the success or otherwise of government schemes that we see. So as we look forward to Q2, Q3, Q4, I'm not going to give you a precise number, but I will say that the IFRS 9 charge, again, is by design front-loaded. I would not suggest that you annualise that charge. And then as we look forward to Q2, Q3, Q4, we'll have to take both the economic factors and the absence of perfect foresight points that I mentioned just now into account. On your second question, as to unsecured... The charge today, perhaps this is the best way of addressing your question, the charge today has, as you know, a component that is related to retail, which is close to $900 million, and a component that is related to commercial banking, which is about $550 million. If you look at that spread in the retail charge today, much of that, probably two-thirds to three-quarters of that, is around the unsecured book. And that's not surprising, because the unsecured book is likely to be first hit by unemployment. Whereas a secured business, as long as we see some sort of recovery in the context of 2021, should be proportionately less hit. So it hopefully gives you a sense as to the elements of unsecured and secured in our overall retail component, Joe.

Thank you. Your next question comes from the line of Amin Raka Barclays. Please go ahead, Amin. You're live in the call.

Morning, guys. Thanks for taking my questions. I had three, please. First was on capital, 14.2% CET1 ratio. I was just interested in how much IFRS 9 transitional relief you may have benefited from in Q1. And to that effect, are you able to disclose a kind of fully loaded, a proper fully loaded for IFRS 9 CET1 ratio? That'd be the first one. Secondly, thanks for the disclosure on ECL coverage. Forgive me if I've looked in the wrong place, but I I haven't been able to find it. I was wondering, have you told anywhere what your coverage is on stage two loans? That would be really helpful. And I guess the third is a kind of follow on to the prior question about the ECL charge. Just about how likely you think you are to take that additional 2.1 billion charge that you've laid out on slide nine if the severe So if the downside scenario were to manifest, I totally appreciate the comments regarding that you're not thinking about a V-shaped recovery in 2021. But I guess when you do look at things like your assumption around unemployment, you could argue that it looks a little bit less conservative than perhaps what we've seen at some of the other banks. There was a bank that reported a base case which looks fairly similar to what your downside scenario is for unemployment, which would suggest that there's a pretty decent chance that perhaps we could get that charge in Q2. I mean, do you think that's a fair observation? I'd be interested in your thoughts on that. Thank you.

Okay, thank you. Maybe I'll address your first point last because it's an important point. When we look at our economic, or rather when you look at our economic assumptions and when we look at them, it's important to bear, to take into account both the assumptions in year 2020 but also the assumptions in year 2021 because both are very important drivers of the IFRS 9 impairment charge that we take. And if you compare them to the outside world, I'm obviously not going to comment on other banks, but if you compare them to the outside world, it is very important to take each of those two years into account, both the deterioration in 2020 and the pace of the recovery in 2021, and look at that on a net basis. I'd also add that if you look at our base case, while we've got a 5% GDP down year-on-year average in 2020, Within the year, there are significantly worse outcomes. So quarter two GDP, for example, is 7.4% down. HPI and unemployment, similarly, are down below the averages that are stated in the numbers that we have given you today. So look within the year, if you like, again, for comparative purposes. Then I would also add to that the weightings. We have weightings in our MES which are 30% for base case, 30% for downside case, and 10% for severe downside case. And each of that downside case and severe downside case have some, frankly, pretty pessimistic assumptions built into them. So severe, for example, has 7.8% down year-on-year 2020 GDP, and within that has 11% down within Q2. We're taking a weighting for that within our overall MES charge. So it's important when you look at our charge, and when you look at the assumptions on which it is based, that you take into account not just the base case projections, but also the downside and the severe downside, because that's what's informing our charge. So there's a couple of points there which hopefully are helpful. And again, maybe just to finish off on that, don't just look at GDP, look at HPI as well, and look at unemployment as well. And again, build that into your comparison. Let's come back on one or two of your other points there. The capital, the first of your questions, capital. The IFRS 9 incremental benefit that we took in the first quarter was about three to five basis points or so. The RFS9 component of our overall CT1 element is not terribly much. It's about 20 to 30 basis points, but as you know, it's diminished in 2020 down to 70%, and it's expected to diminish further in 2021 down to 50% in accordance with the regulatory guidance to phase out reliance upon transitionals. And finally, your third question, actually your second of your list, on stage two coverage. The way in which we construct the MES modeling is we do it from a bottom-up basis at all times with an overlay approach. That overlay approach during the quarters does not change stage 2, does not change stage 3, rather the progression or deterioration, I should say, of loans into stage 1, stage 2, stage 3 is assumed within our overall 1.43 billion impairment charge. So we don't, as a result, disclose to you the stage 2 and the stage 3 numbers. It is assumed and built up, the deterioration of the asset is assumed and built up within our overall 1.3 charge.

Okay. All right. Thanks, Sat. Just one quick follow-up. So if you've If you were to take the £2 billion top-up in Q2 from the macroeconomic assumptions, would you expect significant IFRS 9 transitional benefit with regards to capital on that £2 billion?

Yeah, I mean, again, I think the first thing to say is when you look at our assumptions within IFRS 9, please pay attention to the earlier points around the base case, the downside case, the severe case. please pay attention to the fact that the IFRS 9 charge is deliberately front-loaded by design. So again, do not annualize it on an annual basis, on a quarterly basis, I should say. And so when you're reflecting on that point, I would just draw a bit of caution to the way in which you reflect upon it. As of Q2, if we see a deterioration in our economic base case, and if we see any kind of impairment change to that, then needless to say, that will impact upon our ability to take advantage of transitionals But as said, we're only very modestly reliant on them right now, and it will be phased out according to the plans that are currently applicable, as of, partly phased out, as of 2020, moving into 2021. So I hope that answers your questions.

Thank you. Your next question comes from the line of Raoul Sinner. J.P. Morgan, please go ahead. You're live in the call.

Good morning, Antonio. Good morning, William. Maybe if I can have a few questions first. maybe starting on the guidance, I do appreciate there's a lot that's unknown in terms of the outlook. But I was wondering if you might be able to help us on the drivers for both the NII, as you see it, and other income as we head into the second quarter. And in particular, if you could draw upon within NII, you know, is the sensitivity to interest rates going to increase as rates have sort of hit the low bound. And so is there any change? Could you update your sensitivity if there's any change in terms of what you've talked to us about previously? And then on the other income line, if you could address the impact of the high cost of credit review, as well as the sort of impact of the measures, you know, the relief you're providing to your customers, such as free overdrafts, you know, how much of that is going to impact the other income in the second quarter and perhaps a run rate that will be really helpful.

Thank you. Well, there's a lot of questions there, but I'll do my best to answer each of them. The first point on guidance. Our approach on guidance is that we can give you a picture as to how the business operates in a lockdown environment, but we can't give you a picture as to how long this crisis is going to last. And so we deliberately stepped away from giving you full year guidance, but we're happy to comment on how the business is operating in the current lockdown scenario. And hopefully that can allow you then to make a judgment as to how long you think the crisis is going to last and plug in whatever numbers you would like to from that basis. So just to give some context to your questions there, Raoul, the NII point, first of all. NII, as you know, ended up in Q1 at 2.79%. That did not include much of an impact from all of the various coronavirus-related disruption that we've seen, including the base rate change. It was in evidence, if you like, in the last couple of weeks in March, but obviously the weighting of that in the overall Q1 results was not significant. As we look forward, there's a couple of different things going on in NRI. First of all, the rates change. We've moved down from 75 basis points to 10 basis points. In doing so, we've experienced liability-related flaws. We've also reduced the ability for the structural hedge reinvestment to make us money. That, in turn, is sensitized in the annual report, as you're aware. So we see in the annual report parallel shift of 25 basis points costing us $150 million, parallel shift of 100 basis points costing us $700 million. I would stress that that is not a linear relationship. And so by the time you get to a 65 basis point cut, you've already absorbed most of that hit. So that's one piece going on. The second piece going on is mix change. You've got mixed change here whereby retail unsecured balances are lower. You've got mixed change here whereby the new mortgage market is largely closed. And as you know from the year-end discussion, we were experiencing new mortgages coming on at more favorable prices relative to the old mortgages that they were replacing. And then finally, we've got a mixed change going on which is around the commercial bank and the drawing down of RCF portfolios, which is diluted to margin. That's the second area. The third area, interest-free overdrafts. Interest-free overdrafts, as you know, we are giving interest-free overdrafts to the extent of 500 pounds to help tide people through this crisis, which is an important job that we can play or role that we can play to help this crisis be easier for many of our customers. So that's the third area. And then the fourth area is that we've also got natural progression of the book. And we talked about that a bit at year end, the natural way in which the book churns over time. So there's a lot of things going on there, four points that I've made in relation to what's going on within that interest income. To give you some sense, In a lockdown context, what does that mean for our Q2 margin? It means around 30 to 40 basis points. Now, we're not going to give you an annualized margin off the back of that because, again, that would imply that we have a knowledge of how long this crisis is going to last. But we can tell you that in Q2, the impact on the margin is around 30 to 40 basis points coming off that starting point of 279 that I mentioned earlier on. And it's a function of those four inputs that I just commented on. Okay. OOI. OOI, a couple of points to make. One is there is a core stability to OOI. And then the second is that there is some variability around the margins. So if you look at OOI in Q1, first of all, if you took away the market volatility that we saw, in particular in relation to LDC, then that OOI would have been about 100 million higher, which is pretty much what we told you at the year-end results just a couple of months ago. Challenges that we see in OI in Q2, and again, these are lockdown comments, so this is what we may see in Q2 rather than necessarily what we'll see for the full year. But the challenges that we see within OI for Q2 are at the margins, on top of that core stability, we're going to see less payment revenues within retail, so less interchange fees. We're going to see less car sales, so less LEX-related fees, which, as you know, comes in our other income line. Moving down, commercial banking revenues. We're going to see fewer transactions, so some of that market softness that, frankly, we've been talking about for a little while now, unfortunately, that's going to continue. We're also going to see less transaction mandates. Global transaction banking was one of our growth areas as a business. We're not going to see so much movement within Q2 as long as the lockdown persists. And the third area, insurance. Insurance has a few gives and takes in it, but just to give you some context, We're going to see in a very low interest rate environment, we're going to see less bulk activity than we had expected to see. Trustees, not surprisingly, are going to be reluctant to place bulks in what is a low reward environment for them. Workplace, another growth area of ours. We're going to see less transfers of schemes and therefore less opportunity. However, there are some areas in insurance that are core products and they don't go away. Home insurance is a good example. And by the way, we are seeing and hope to see further mitigation of some of the claims experienced within that area. Protection is another example. Again, these are products that don't change. People need them. And most of them are inaccessible even in a lockdown environment. So in other income, the way I would look at it is to say there is a core stability to it, but we are going to enjoy a degree of pressure in the margins beyond that. So we're going to see less growth than we might have hoped within ROI. We may see some pressure at the margin around it, but it shouldn't be particularly significant versus where we start today. So again, these are lockdown comments, and they're not comments that persist once the lockdown is lifted.

Sorry, go ahead.

Well, I was just going to move to your impact of HTC high cost of credit question, Raoul, as the final point you raised. I'm not going to comment too explicitly on that. What I will say is that overdrafts, roughly speaking, are down 15% by quantum. But I would also add to that that the chargeable balance by virtue of that £500 interest-free component, chargeable balance of overdraft is down about 50%, 5-0. So you can see that chargeable balance again in the lockdown period for the three month duration of those things last has a significant impact, which is coming back to the NII guidance I gave earlier on, for the NII sensitivity rather, that I gave earlier on. Gives you an idea as to where we get to and why we do.

Thank you. Your next question comes from the line of Andrew Coombs, City. Please go ahead, you're live in the call.

Yes, good morning. Perhaps a couple of follow-ups. Firstly, just coming back to the previous question on NII, obviously some of the four points you made in terms of the hedge rollover and the rate sensitivity, the mix effect, the interest-free overdraft, and then the churn on the book, some of it is obviously very temporary in nature during the lockdown. Other parts are you can extrapolate to a greater extent. So perhaps you could just provide us with some idea of how much overdraft income that was contributing to the NII previously. I thought it was in the low single digits, but that would be helpful for a start. Secondly, on the OOI, there's this $100 million charge that you've also drawn out on LDC from a private equity mark. Can you just give us a feel there for the size of that portfolio and any additional risk that you see there? And then finally on the economic measures, I think you've alluded to this already, but I just wanted to clarify. Obviously, the majority of the charge you've taken thus far has been on cards and commercial. When you do look at the difference between your probability weighted and your severe, that $1.8 billion increase, a billion of that's on mortgages. And I think you alluded to it earlier, but I'm assuming that's because of your 2021 assumptions in the severe downside more so than your 2020 assumptions. Is that fair?

Yeah.

Thanks, Andrew. I'll take each of those in turn. The first one, I'm not going to disclose much more than what I've already said. The only point that may be useful to you as you think about this is to give you one indication within that overall sensitivity on NII, and as I said before, it is subject to many uncertainties. I hope I gave you that impression earlier in my comments. But subject to those uncertainties, the rates component is probably around half of that overall 30 to 40 basis points that I mentioned earlier on. Then the incremental points that I mentioned, mixed change, interest-free overdraft, national progression of the book, that's kind of the other half, if you like. So that's on that point. On the LDC point, LDC experienced, as said in my script, around $100 million charge that came in through the other income line. I would also add that there is a further cushion for LDC within the PVA charge that we have taken. And so we have undergone a revaluation of the assets that LDC has, and that enters into the other income line. We also have a further cushion within the PVA charge, which takes it to the 90th percentile of certainty, as you know. And that provides a further capital cushion, if you like, against further potential adverse experience in that area. The point on LDC that you asked is around the size of the portfolio and the risk. Size of the portfolio, it varies, obviously, but it's typically between 1.5 to 2 billion pounds. The point that I would like to stress with the LDC is that clearly the decline in equity values presented some challenges. The lockdown environment may present some challenges to some businesses, but we hope we've embodied that in the 100 million charge that we've taken, because again, we did it on a look-forward basis. But equally, LDC is presented with many opportunities in this environment. It is an environment which we would hope the LDC is able to take advantage of going forward, and we have no doubt that they will. Finally, your question on the charge and the problems awaiting severe and why does it gravitate towards secured. Your observation is exactly right. When you move from the base case to the severe case, what you're looking at is a continued negative GDP environment and, indeed, HPI environment in the course of 2021. If that happens, and obviously we very much hope it won't, then what it does is it pulls down asset charges. And as asset values come down, so the ability to restore asset values in the context of secured assets gets worse. Now, again, we are on an average LTV within the portfolio of 44%, so we have a very considerable cushion before we have to worry about that, but us, in line with every other mortgage provider, does get impacted if HPI comes down, and in our adverse case, or our severe case, I should say, you do get a longer, more protracted downside, which in turn drives asset values down through the HPI change.

And just to complement what William just said, so we have 90% of our mortgage portfolio with an LTV lower than 80%, and this is the outcome of many years, as you know, of having underplayed on the mortgage market because we were concerned especially in London and the Southeast about high value properties. And that's why we have 90% still with LTV below 80%. On the downside scenario, we are assuming over the two years that 20% decrease on house prices. So as William was saying, you would have an impact on the margin and those properties, if repossessed, would increase the losses that we'll have to incur. So you were absolutely right on your point.

Thank you. Next question comes from Jonathan Pierce, Numis. Please go ahead. You're live in the call.

Hello there. I've got two questions, please. The first, sorry to come back on this transitional relief point. The Pillar 3 shows that your IFRS 9 ad back went up by only about £71 million in the quarter. Now, I guess it would have fallen £100 million, all else equal, but in the context of what looks to be about an £800, £850 million Stage 1, 2 charge, it does suggest that you had very little transitional relief in the first quarter on the EL build. So just to confirm that's right, and again, to come back to what would happen if there were to be further Stage 1, 2 builds in the second quarter and beyond, have we rebuilt the IFRS stock now to level where any additional Stage 1 and 2 would get? the full 70% relief. So that would be question one. Question two is on car finance. I mean, 85,000 holidays strikes me as quite a lot, given these were only launched a few weeks ago. And I don't know what the average balance is, but the securitization data suggests maybe in the order of £27,000 per customer, which would suggest maybe over £2 billion of the car finance book is already under some form of payment holiday. Is that correct? And if not, could you give us the number by balance, please?

Thanks, Robin. Maybe I'll take the last or the second of your two questions first. On the motor finance book, it's an important business to us, and it's one that we have targeted effectively over the last few years in a cautious and prudent way, but nonetheless, it's an important business to us. In terms of the numbers that you mentioned, the motor business that has taken payment holidays by a number of customers, I'm not going to give you balances, but I'll give you a number of customers, is about 8%. So it's considerably lower than the type of number that you were talking about, and hopefully that gives you some basis for figuring out the answer to your question. In terms of risk there, a couple of points I would make. One is that it is a secured asset. Two is that the pricing assumptions for the motor business have been and continue to be very much through the cycle and risk adjusted pricing assumptions that we're making. And third is before we came into this situation, and certainly again in the 1.43 billion charge that we have taken, we have increased the provisioning level within the residual value component of the motor business that we have. So we had some coming in. It is also a component of our forward-looking model charge, and that hopefully gives us a further cushion to work with on the motor book. So we feel comfortable with where we are on that. On the IFRS 9 charge, sorry, IFRS 9 transitionals, as you know, it's complex and something which deserves a more detailed conversation in due course. But to give you some idea, if we take out IFRS 9 relief, and it's disclosed, I think, in the PL3 document, and we're looking at a CT1 ratio of about 13.9%, that's about 30 basis points lower than the 14.2% that I just mentioned earlier on, which is consistent with my earlier number. Hopefully that gives you an idea. And then as we look forward into the context of 2020, the change to provisioning that we may take if we have course or recourse to change stage one and stage two should come into the transitional relief, but we'll see how that progresses at that time.

Next question comes from the line of Martin Ledgeb, Goldman Sachs. Please go ahead. You're live in the call.

Good morning. I just wanted to touch on the payment holidays, and it seems like one of the industry bodies is suggesting that as many as one out of nine mortgages have been impacted by those payment holidays. And I was just wondering if you could shed a bit of color. Were you surprised by the quantum of take-up? And what is the expectation from here in terms of how many of those clients might potentially struggle going forward with their mortgage payments? And the second question is just related to the government guarantee schemes, so the various government loan guarantee schemes. if you could give us a sense in what portion of the loan book going forward might potentially be covered by those schemes. Looking at the volumes we have so far, it seems like that a comparatively small proportion of them might be covered. So I just wanted to check whether that is right. And related to that, how much an impact, though, can those schemes have in terms of the NBL cycle? And I was just wondering, looking at USVV, a downside scenario with the $7 billion expected credit loss, that seems compared to Bank of England stress test losses comparatively mild. Is the reason for that those guarantee schemes? Thank you.

Thank you, Martin. I'm going to take your first question and William will take the second and third. Look, just to start by saying we are very comfortable with our mortgage portfolio as a whole. As I just mentioned in a previous question, we have an average loan-to-value of 44%, and we have 90% of the portfolio with an LTV of less than 80%, which, as I said, results from our prudent stance in the last several years in terms of participation in the mortgage market and its different segments. So this is the first point I wanted to raise. The second point I wanted to raise is if you think about the customers on the retail side, as customers, which is the way we look at them, and not as customers per product, you will realize that mortgages is no doubt the best product on average. I mean, each case is obviously a case, but on average, mortgage will be the best product to help customers go through short-term financial needs. Why is that so? Because, as I just said, we have an LTV of 45% on average. That means that our customers have more than 300 billion pounds of wealth on their homes and encumbered. So if they have a short-term financial need, either be in credit cards or a personal loan or the mortgage itself, the best way, and in our advice to them, is mortgage is, on average, I repeat, the best product for them to consider in terms of addressing a short-term financial need. Third point, we have on our portfolio of the $880,000 payment, repayment holidays that I mentioned to you, on the mortgage side, the percentage of our book in terms of customers, as William was saying in relation to motor finance, is 17% of the customers. So 17% of the customers have asked us to do this. We think this is, as I said, the right product to help them with the most security as well for the bank in terms of facing potential short-term financial needs.

Martin, on your second and third questions as to the potential emergence or evolution of payment holidays, it's just too early to say, really, with any conviction as to how this fares. What I would say is to reiterate some of Antonio's comments there, that the stance that we're taking is to facilitate customers through what we see as a temporary income interruption, that clearly some customers who have asked for payment holidays are those that are affected or those that are worried, but also many customers are doing so out of precautionary concern. And likewise, some of the government policies that are being adopted in turn will help address any payment holidays issues that may occur in the context of mortgages. So there's a number of offsetting factors. It's also fair to say that the income split and the vintage split of payments holidays within mortgages shows no particular bias or skew, and so we feel pretty comfortable about that, combined with the fact that the LTV of those payments holidays is at 50%. So as we look forward, it's clearly early days, Martin, and everything is going to depend on the severity and the duration of this situation. But the mortgage payment holidays are an area where we feel comfortable doing what we're doing and we believe that it's the right thing to do. Your final question was around the stress test. There are, I think it's important to note, there are some quite big differences between the ACS stress test and the Bank of England and what we're experiencing right now. And just to draw a couple of those out, first of all, the Bank of England stress test was a high-rate stress test, and that had very different consequences for much of the customer base and the borrowing that we have in our portfolio. This is clearly a low-rate stress, and as a result, again, we expect to see different asset price performance off the back of it. Two, the government activity is now very significant. We've just been talking about one aspect of it. But that really should lower the consequences for unemployment, lower the consequences for corporate defaults, and accelerate the recovery that we would hope to see in 2021. And that's the third point, that the longevity of this stress we hope will be shorter. As you can see in our cases, it is shorter versus the Bank of England stress, which is a multi-year stress that are in the assumptions. And then finally, conduct. Conduct in the ACS was a big part of the stress. That in turn, you know where we are on PPI, we hope is substantially at least behind us. And so that's another difference between the ACS stress test and the stress we're experiencing right now. The final point I would make is that the Bank of England stress test is predicated upon perfect foresight. We don't have perfect foresight, and so there's a methodological difference and difference in approach that is there. But I think the substantive differences between the Bank of England stress test versus what we're going through right now are really very considerable and worth taking account of.

Thank you. Next question comes from Claire Kane, Credit Suisse. Please go ahead. You're live in the call.

Good morning. Two questions, please. The first on the NIM guidance you've given on the call, Of the 30 to 40 basis points impact, which suggests a low point in Q2 of about 240 to 250 basis points for NIM, the 15 to 20 basis points from rates, do you see that improving as you reprice deposits later in the year so that that should ease up? And then regarding the other 15 to 20 basis points, Could we also see that the majority of that ease up if you do then start to charge customers on overdrafts, providing that doesn't get extended by the government? That's the first question, please. Then the second question, just to follow up on the ECL around credit cards, of the 889 retail charge you took, and 729 for other retail. Could you split out the 729, please, for credit cards and explain to us really the overall drive that you think credit cards will be for the ongoing outlook for ECL charge going forward, please? Sure. And can you just clarify that all your payment holiday customers are still in Stage 1?

Yeah, thanks, Claire. Just dealing with each of those questions, first of all on the net interest income. The 30 to 40 basis points that I mentioned earlier on, whether or not the component of it that is relating to the rates pressure is alleviated by repricing of deposits later in the year. It may be, is the answer. I think it's just too early to call exactly how that will come out. The two factors that I think would be important there, one is the competitive environment and clearly how does that evolve, number one. And number two, you've seen our loan to deposit ratios today and they've come down and so we feel very comfortable from a loan to deposit funding perspective, which in turn gives us the ability just to think carefully about how we might price the liability side of the balance sheet going forward. As we do that, it may create opportunities, we'll see, but I think we'll just have to see how the market evolves. The second part, how will the other pieces of that interest income, that interest margin comment that I mentioned earlier on evolve? Again, it's early to say, and as I said, what we've tried to do is give you a picture of how the business in lockdown works and therefore in Q2, but not do too much work about estimating how long that lockdown and the associated social distancing measures will last. What I think it is fair to say is that the reason why we're experiencing that pressure in retail, less spending, for example, the reason why the mortgage market is closed, for example, largely closed, the reason why corporates are drawing on RCFs is all because of the lockdown. As you see the lockdown ease, and provided that the social distancing is not too aggressive, if you like, then one should expect to see some alleviation in that pressure. How substantial that is and how quick it is I think is very much going to depend upon what the government allows the economy to do and allows people to do. The further point I would make on that interest income comment is I talk very much around the 30-40 basis points in terms of the margin effect. Just bear in mind there's another piece of the puzzle here which is around average interest earning assets and what they do in quarter two. And we've seen some expansion in that regard off the back of the drawing from corporates in particular. We just have to see how that fares in the context of quarter two. That is an outstanding balance right now. You can see it in the numbers. Whether there is further corporate drawing or not, it's uncertain. I guess it will depend in part upon how the economy fares. That corporate drawing has slowed down in April. I think we have to see whether or not it picks up again at the quarter end in Q2. It may or may not do. So just bear in mind the average interest only assets at the moment are a little ahead of where they were because of that change in activity. The ECL in cards. I think the one point that I would make on cards without going into too much precision is as you see the ECL play out over the course of the year, the ECL in respect of the unsecured balances has a relatively linear relationship. to the variables that are within the MES. So you would expect to see that has a relatively linear relationship to unemployment, for example. It also has a relatively short life, which means in turn that if you have a more protracted economic scenario in respect to this recession, i.e. if the recession is more protracted, then you should start to see unsecure play a relatively lesser role in the overall ECL charge, partly because it has a short life. So hopefully that gives you some context, if you like, as to how it plays out in the context of the charge. Claire, forgive me, but your third question I didn't note properly, or at least I can't read my own handwriting.

Apologies.

Oh, yes, is the answer, Claire. There is, as you know, a general practice amongst all of the banks that the taking out of a payment holiday in and of itself does not cause a stage deterioration in respect of that asset. Now, I should say, before being too categorical, if there are other signs that do indeed suggest that there is an impairment in the asset, then that is treated just as we would normally treat it. It doesn't matter whether it's a payment holiday or not. That is treated just as we would ordinarily treat it and take it from stage one into stage two in the ordinary course of business. And that isn't changed by payment holidays.

Next question comes from Guy Stebbings, XM. Please go ahead, Guy. You're live in the call.

Morning. Thanks for taking my questions. I'd add two, please. Firstly, on risk-weighted assets, we haven't really seen too much negative credit migration as yet. So I'm just trying to understand how much of a headwind that could be for the rest of the year. I know your mortgage book is quite through the cycle in terms of modelling, so hopefully that helps. You've pulled out the fairly high risk-weight density on your undrawn commercial balances. But if, say, the base case or the downside scenario were to hold true to what will expectations are for our DOVAs over the course of this year. And the second question on costs, just trying to understand the balance between the headwind from COVID-19 actions like lower headcount reductions, et cetera, with potential flexing in the investment spend. I think you had about a billion of discretionary investment spend last year, of which around about 40% of that was expensed. So can we assume a large chunk of that is pulled on? And then there was a quite sizable non-cash spend for regulatory issues last year as well, you know, with some of the regulatory announcements in terms of delays on various model changes, et cetera. Does that help much this year? That would be very helpful. Thank you.

Yeah. Thanks, Gary. To take each of those questions in turn, RWA's, The RWA experience that we have seen in Q1 is nothing to do with pro-cyclicality really so far. We've seen securitization changes which are regulatory inspired as of January. That's about 2.3 out of the 5.3 billion that we have seen in terms of RWA increase. We've also seen counterparty credit risk and CVA risk. That is market determined and has impacted every bank, obviously including ourselves, but because we're a smaller market player, it's probably lesser from a proportional point of view. And then we've seen one or two things like the threshold deduction in respect of insurance assets has moved to a risk-weighted asset basis because our CT1 base has expanded. So I guess that's a good thing, but it does increase our RWAs. So that's the RWA picture to date so far in this quarter. Moving forward, how do we see it? It obviously depends upon the extent of the downturn. We don't know how long it will be, and we don't know how severe it will be. But having said that, we've got a range of models within the business. Those go from through the cycle to hybrid to point in time. As you pointed out, the main mortgage model is through the cycle. Some of the other retail businesses, other retail models are point in time, but importantly, all of those retail models are set to a regulatory calibration of downturn on the loss given default, which in turn makes them less procyclical than they might otherwise be. The commercial business is, as you probably know, built upon a foundation IRB. And that means typically less sensitivity versus other advanced models. And if you look at it in the context, as you just said, of the RCFs, it means that we have a waiting for undrawn facilities. And so we're proportionately less impacted by that. Moving on from the model, the other piece of the question in RWA as we look to the year looking forward is what happens with client demand? So far we've seen retail contract a little bit. We've seen commercial banking build a little bit. We're very much planning to be there for our clients in the context of this downturn. And so we'll just have to see how client demand fares. But you've got a bit of a picture of it, I think, as of the close of Q1. So if you wrap all of that up in terms of the range of models, the client demand, what happens with the downturn. We may see some modest movement in RWAs, but we really don't expect to see it be significant. We don't expect it to be particularly material in the context of the balance sheet as a whole.

Right, and I will take the question on costs. So to let you know, as you mentioned several of the drivers, So what do we have versus the previous situation? And again, as William said, assuming the lockdown situation continues. We have, on the positive side, we have been supporting customers through the lockdown, as we said on our speeches. in terms of addressing the needs that they have, evolving needs at pace as they need it. So we have been putting more people to have and processing civil loans. People have been working extra time in terms of designing and implementing the proper products and supporting customers at pace. So that has obviously a cost to us, as we mentioned. And on the other side, we have, as I mentioned in my speech as well, we have stopped any job losses, which we thought was absolutely the right thing to do in these circumstances and which we will keep. So both of them versus our previous guidance to you have additional costs for the right reasons to the benefit of our customers and our colleagues. What do you have on the other side? As I had mentioned before, and you alluded to it, we have the discretionary investment spend, very significant, one billion pounds a year. Again, we are assuming that this lockdown is temporary, and therefore we have taken action in terms of decreasing the discretionary investment spend, and we are assuming at the moment a two, three month lockdown. So we have decreased the investment spending accordingly, and also given the less capacity that we have of implementing change working from home. So that has a positive impact on costs. And I would remind you that has a full impact on capital because all of the investment spent either cash or either through P&L goes out of capital immediately given its most intangibles. The second positive point on costs is travel costs, which, by definition, are decreasing very significantly, and they are important. And the third one is variable pay, because as our results, as we showed, go down, obviously variable pay adjusts accordingly. So all of this will, in my opinion, reasonably balance out each other, so you should not have any significant difference to our previous guidance. And a final point I would add is that you know very well our culture of full attention to costs and our track record in this dimension. This will absolutely continue. And I would also add that this is very helpful in the sense that it allows us to have a £2 billion pre-provision profit as a consequence. of the low cost to income that we have, which is an additional buffer in terms of the support we are giving to customers, and in case other scenarios, not our base case scenarios, indeed materialize.

And Guy, just to pick up on your final question, you asked about regulatory delays in terms of, I think it was in terms of RWA changes and so forth. We don't expect any regulatory impact on RWAs during the course of this year. We had our initial 2.3 billion in respect of securitization in January, But on a look forward basis, we don't expect impact from any regulatory RWA inspired changes this year. If we look forward beyond 2021, it obviously gets less certain, but I would note the commitment to delay the phasing in of some of the so-called bottle four changes in the years thereafter. So, you know, let's see precisely what comes out of that. But that suggests a slightly more benign regulatory view on the RWA environment and a determination on behalf of regulators to ensure that that banks do not feel under pressure on an RWA basis going forward. And as I say, certainly for this year, we don't see any pressure. For the years ahead, I think we just have to see how things evolve.

Thank you. Next question comes from Edward Firth, KBW. Please go ahead. You're live in the call.

Good morning, everybody. Yeah, I've just got a very quick one. And apologies if it's a slightly dumb question, but just to be clear on the impairments and the ECL charge. So if your assumptions are correct, your base case is correct, then for the rest of the year, we should assume a quarterly charge of around $300 million to $400 million a year. Is that correct?

Okay, I don't want to put precise numbers on it, Ed, so I'm going to be a bit careful in terms of what I say. I mentioned that the Charge was subject to two factors. One is any change in base case economics, and the second is the absence of perfect foresight that we have. Your question says, let's assume that the first of those two is stable, i.e. no change in base case economics. And then what are the perfect foresight issues that come about? And I mentioned three. One is any change in restructuring cases that we have. Two is progression out of stage one and into stage two and three of assets, both corporate and retail. And then three is the extent to which government schemes and our assumptions around government schemes as to their success in mitigating the economic outcome is correct. Those assumptions are correct. I'm not going to put precise numbers on what we'll see in Q2, Q3, Q4. All I will say is, again, you should not annualize the 1.4, that the 1.4 billion is closer to 50% of the overall charge than it is to 25%. somewhere in between those two, with the point being closer to 50% than it is to 25%. And hopefully that gives you some idea.

Yeah, that's very helpful. Thanks so much indeed.

Thank you. Next question comes from the line of Chris Kant, Autonomous. Please go ahead, Chris. You're live in the call.

Good morning. Thank you for taking my questions too, please. I understand your reluctance. to guide on 2020, given the uncertainty around the duration of the lockdown, but perhaps I could invite some comments on the shape of the business longer term, given the shift to low rates and the pretty dramatic impact on NIM that you've talked about in 2Q just from the rates piece. So on ROTI, I know you've dropped the guidance, but for 2020, you've talked about 12% to 13%. That included about 1.1% add-back from So basically you were looking for an 11 to 12% apples to apples roti versus peer definitions, but with a far more bullish rate outlook than we now see. If we're now stuck in a lower rate environment for the foreseeable future, what do you think the median term, say 2022 roti looks like for this business? It feels like it could be dipping below 10% as the structural hedge rolls over the coming years. And second question related to that, just trying to think about the NIM development. Throughout 2019, you talked to us about the structural hedge, and you told us that about $30 billion of the structural hedge would roll in 2020. Now that we're in 2020, could you please give us a number for how much will roll in 2021? Thank you.

As you say, we're not giving guidance on 2020 because it would imply that we know exactly when this crisis and the lockdown and any social distancing associated with it change or end. Your question is to the shape of the business longer term. 2022 is obviously quite a long way away. I would, without giving guidance, if you like, as to the expected ROT at that point, I would say that the business has never been satisfied with sub-cost of equity returns, has never been satisfied and has never delivered on a consistent basis sub-cost of equity returns absent market aberrations. And I really can't see a scenario where we're in 2022 and that assumption changes. So, you know, I think that's probably all I can say in terms of the outlook. The business will adapt to the circumstances that it finds itself in to produce a consistently superior return and certainly one that is above the cost of equity. The NIM development point that you mentioned in the structural hedge question there, We've actually taken advantage of some upturn in the markets earlier on in the year to take account of some of that structural hedge roll-off within 2020. So within 2020, as you can see from the slides, we're about $173 billion invested. We have about $16.16 billion roll-off during the course of 2020, having done the action that we took in the course of the first couple of months of this year. So it's down from that $30 that you mentioned. It's looking more like $16. I'm not going to give you a roll-off assumption for I think you have a sense of the profile of both the invested structural hedge and the weighted average life of just shy of three years. And I'll kind of leave you to work it out from there.

If I could just check on the numbers then. Could you remind us, How much of the structural hedge rolled last year? Because I think it was relatively modest in the context of the 170, 180 billion notional and obviously a relatively small number is rolling this year in the context of the notional given the three year duration. So just remind us how much rolled last year and maybe that can help us. fill in the gap. It feels to me like quite a large chunk of your hedge rolls next year, noting that it's the first year beyond the GSR3 planning period for which you gave us that resilient NIM guidance. So I do wonder how much the three year hedge you put on sort of 2017 is coming off next year.

as to how much exactly rolled off last year i don't have a number in front of me but we can certainly get back to you on that yeah and chris i think you should bear in mind that as you know and we have been very open with you over every quarter when we discuss this we do this in a dynamic way and therefore for example as william just said of the 30 billion that we're going to mature this year we have already rolled in the first two months of the year 16 billion of those And we rolled them to maturities that we thought were the most appropriate given the interest rate environment. And this is just an example. This is a dynamic process. So what needs to mature next year is not necessarily the difference in terms of your three years from what matured last year and this year, because we are doing this dynamically according to circumstances. We are a very big bank operating in the retail and commercial banking space in the UK, and we think we have an advantage in terms of sterling, and that's why we believe we provide and we can provide our shareholders with a sustainable advantage by the way we manage the structural heads over time instead of just doing it mechanically.

Next question comes from Robin Down, HSBC.

Hi, I guess it's one of the different answers coming on late that most of my questions have been answered, but Can I just ask you a couple of quick ones? Firstly, in terms of the margin guidance, what are you assuming there in terms of CFSB drawdown? Are you planning on drawing down the full kind of $39 billion? Is the benefit of that kind of almost free money included in that 30 to 40 basis points? And the second question, probably a slightly cheeky one, and I appreciate you probably won't answer this, but if I look at your... slide 18, the economic scenarios that you've got. The base case assumption for 2020 is minus 5% GDP and unemployment at 5.9%. That seems to be the same numbers that you've got in your upside case. And my understanding was that your base case is built on a sort of, you know, effectively you're kind of looking at sort of probability weighted

uh versions here but your base case does seem to be the same as the upside case for two of the most important numbers i don't really quite understand why that should be yeah thank you thank you robin uh on the first question uh tfm tfsme drawdown assumptions The point that I would make there is that, as you've seen, the loans deposit ratio for the bank is now very healthy at around 103%. So we are seeing a high level of deposits in the current environment come into the bank. That's both from retail, where we've seen current accounts go up by 3 billion during the quarter, and it is also in the context of commercial, where we've seen them come up by about 15 billion in the quarter. So we're seeing a very healthy deposit inflow into the business which in turn means that our desire or our need, if you like, for further money from TFMSE or any other source really is quite limited. We will be asset-led. That is to say, if our customer needs are such that we need to build upon the balance sheet in retail or in commercial, then we know that we have the TFSME there and available to fund that at, as you say, relatively low cost. We also will take that into account in terms of our overall wholesale funding strategy, where we have typically annually around a 15, 20 billion need. As I mentioned in my earlier comments, we've taken care of a decent chunk of that in the course of the first quarter. With TFSME there, you would expect us just to be judicious about how much we use the wholesale markets versus how much we use TFSME to fund the balance sheet and ultimately client demand, client and customer demand. So we'll take a view on TF-SME based on each of those two points, Robin. Your second point, the question is to the upside versus the base case. You're right to point that out, and we have had a discussion with our economists on that particular point and any particular reason why that. I think the key point to bear in mind there, Robin, is that GDP is only one of a number of factors in the overall economy. forecast. And the scenario takes account of severity across all of the impairment drivers, whether that is unemployment, whether that is the bank rate, whether that is CRE prices. GDP in isolation is just not the most important driver in every case. And so when you look at the discrepancy between the upside and the base case, it is at least as important to look at some of the other drivers in the context of the comparison as it is at the GDP number.

Yeah, I totally agree with that. But the unemployment rate is one of the key drivers, particularly as you said earlier for consumer credit. So I'm just slightly surprised that the base case, if you like, isn't worse than the upside case.

Yeah, but I think that's because you're looking at it on the year average basis, Robin. So if you actually take the quarterly numbers within the year average... you'll see that there is a significant difference within quarter between the base case and the upside case. I mentioned earlier on, for example, in 2020 base, we've got Q2 GDP of down 7.4% in Q2. We've got unemployment of 7% plus in Q2. That is not the case in the upside. And so I don't have the courting upside in front of me to quote you now. I'm not sure that I would do if I had them, but there is a difference there within the year, which is hard to see in the current scenarios for the year averages that you have here. I think the second point that I would make is you also need to look across the years. So don't just look at 2020. One of the points that we've been trying to emphasize in this discussion is when you look at our IFRS 9 impairment charge, you have to look at 21 as well as 20. And there, when you look at base case versus upside, you'll start to see some of the differences. GDP, unemployment, for example, in 21, base case versus upside are different. But more importantly, the point at the beginning of the call, when you look at RFS 9 assumption, again, look at it versus others for the macro forecasts, not just as to 2020, but as to 2021 as well. Brilliant.

Thanks. Final question comes from the line of Rohit Chandra Rajan, Bank of America. Please go ahead. We have no questions.

Okay. Well, it's time, 11 o'clock.

Thank you very much to everybody for joining the call.

Thank you. Thank you. Ladies and gentlemen, that concludes the Lloyds Banking Group Q1 2020 Interim Management Statement Conference call. For those of you wishing to review this conference, the replay facility can be accessed by dialing 0800 032 within the UK, 1-877-482-6144 within the US, or alternatively, use the standard international on 0044-20-7136-9233. The access code is 532-91055. Thank you for participating. Have a good day.