Lloyds Banking Group plc

Thank you. Good morning, everyone, and thank you for joining our 2020 half-year results presentation. It is a shame that we can't gather in person today, but I am pleased that we are still able to hold this virtual event. I will give an overview of our response to the coronavirus crisis and how our strategic transformation to date has positioned the group well to face the evolving environment. I will then hand over to William to run through the financials and we will have time for questions at the end. Before I start, I would like to again thank my colleagues from all across the room. They have maintained their exemplary dedication and professionalism in the face of significant personal and professional challenges, whilst remaining absolutely focused on supporting our customers. As you will have seen, I recently announced my intention to step down as Group Chief Executive by the end of June next year. Until then, I remain wholly focused on my responsibilities, and I am committed to delivering the remainder of GSR3. I will present the full year results in February, while my success will update the markets on the next stage of the group strategy in due course. I will turn first to our response to the crisis on slide two. We are now several months into the pandemic and while progress has been made on reducing the immediate threat of the virus within the UK, the crisis is still having a significant impact on people and businesses across the UK. As a result, our core purpose of helping Britain prosper and our strategic aim of being the best bank for customers, colleagues and shareholders are now more important than ever before. I am proud to say that we have offered unwavering support to our customers over this period and have been quick to respond to their evolving needs, including through the facilitation of more than £9 billion of government-backed lending for businesses and granting more than £1.1 million payment holidays for our retail customers. The efforts of our colleagues to enable this support have been enormous, and in March, we enhanced our support for colleagues by providing job security during the most uncertain of times and also made a range of awards for frontline colleagues in June. In line with the easing of some lockdown restrictions, we have started to see the UK economy return to growth with some signs of recovery in the group's core markets. This recovery has largely been driven by consumers as opposed to the slower recovery we are seeing in commercial sectors. As a group which has around 75% of its lending to prime UK retail customers, we are well positioned to benefit from this recovery. Having said that, we are conscious that longer-term uncertainty over the pace and extent of the UK's economic recovery remains. and we have seen a deterioration in the outlook since we last presented to you in April. This has had a meaningful impact on our internment charge in the second quarter, as William will explain shortly. Despite this uncertainty, the group is well positioned to meet future challenges and seize further opportunities, benefiting from our existing competitive advantages, our positioning, ongoing investment in digital and our overall strategic transformation. We were the first bank to recognize the power of digital by creating a standalone division across the whole bank in 2013 with an executive director reporting to the chief executive. Our digital offering continues to go from strength to strength with customer trends that were using this channel accelerating and further recognition for our market-leading digital options. From a financial perspective, the actions that we have taken over the last nine years to strengthen our balance sheets, such as the sale of non-products, the removal of net wholesale debt, the more even matching of our loans and deposits, position us well to weather the inevitable impact of the crisis. Our strong balance sheet and capital position will enable us to continue supporting customers in times of need, while also remaining focused on the future and reinforcing our competitive advantages. Turning to our strategic progress on slide three. While the crisis has required decisive action in response to short-term challenges, we are now approaching the end of TSR3, and remain committed to delivering against our longer-term conditions. I would like to highlight some of the benefits of our investment, which have been evident during the last few months. We remain the largest digital bank in the UK and have now reached 17 million digitally active users, and this growth is supported by record levels of customer satisfaction, even in a period of increased demand. Our digital NPS increased by 8% in the first half of the year, and both this and our mobile app NPS reached all-time high scores. Despite this, our multi-channel model has remained invaluable for those customers who require face-to-face interaction, and around 90% of our branches have remained open through the lockdown. We also remain committed to delivering cost efficiencies and continually creating capacity to invest in the business. This level of investment has enabled us to respond quickly to new challenges, such as using robotics to process around 98% of bounce-back loan applications, with money credited into customers' accounts, mostly within 24 hours, and significantly improving colleague capacity when it was needed most. Finally, we continue to serve a wider range of our customer financial needs than ever before. We have delivered significant market share gains in a number of our insurance and wealth business lines since we updated you on our progress this time last year. We continue to see significant new opportunities in financial planning and retirement, with a significant increase in customer deposits in the first half, providing opportunities to further support these customers with their varying financial needs. Our ambitious wealth joint venture, Schroeder's Personal Wealth, also continues to make good progress. In the first half of the year, Schroeder's Personal Wealth launched 11 regional hub offices that support its decentralized model, allowing clients to receive a more personal and local experience. The business retains the ambition of becoming a top-three financial planning business by the end of 2023. While the crisis has resulted in some delays to the rollout of our unique single customer view capability due to the deferral of some discretionary strategic steps, we have added another 1 million customers in the first quarter and this will continue to grow. We continue to see our ability to offer our customers all of their financial needs in one place as a distinct competitive advantage. Moving to slide four, and looking beyond GSR3, the organization is mindful of the longer-term impact of the crisis and is well-positioned to respond to them. We are starting to see the emergence of new trends and the acceleration of others, as you can see on the slide. While some of these are likely to prove challenging for the whole of our industry, others represent great opportunities for a business that is as engaged and customer-focused as ours. As a result of our long-run transformation, the group is built upon strong foundations which will support our response. These include our strong financial position, our unique business model which harnesses the strength of multi-channels and multi-brands, a willingness to adopt new ways of working to the use of technology and greater collaboration with external technology partners, and a truly differentiated franchise. I have spoken about our virtuous circle in the past and continue to see that as a cornerstone of our competitive position. These foundations lead the group well equipped to provide a compelling offering for our customers and colleagues in the future, while also enabling long-term superior and sustainable returns. While I will not be leading the next phase of our development, the timing of the arrival of the new Chairman and of my retirement will ensure no loss in momentum in driving forward our strategic transformation to which the Board is fully committed.

Turning now to the Group's financial performance on slide 5.

The group's financial performance in the first half of 2020 has been impacted by the low rate environment, as well as depressed customer activity and a significant deterioration in the economic outlook. We have maintained our rigorous approach to cost management, and total costs are down 4%, including BAU costs down 6%. However, despite the continued cost reduction, pre-provision operating profit is down 26% as a result of the challenging revenue environment. We took an impairment charge of 3.8 billion pounds in the first half, largely due to the worsening of our forward-looking economic assumptions, and this is despite our current experience, which remains relatively benign. Statutory profit after tax of only 19 million pounds has clearly been significantly impacted by this impairment charge. The group's balance sheet remains very strong, and CET1 at 14.6% on a transitional basis is very comfortably above our capital requirements. As I have mentioned, the economy has deteriorated since Q1, and although we are seeing some recent signs of recovery, uncertainty remains. As you can see on slide six, Customer spending fell sharply in March and April, but has gradually picked up and is now broadly in line with pre-crisis levels. Similarly, loan demand fell at the start of the lockdown period, and while personal loan applications remain at about 70% of normalized levels, we have seen more of a recovery in mortgages and motor finance, which have reached pre-COVID levels. The UK consumer is being prudent, and rightly so. William will go through the balance sheet in detail shortly, but we have seen customers paying down unsecured debts while building savings balances. All of this is within an environment of low rates, low inflation, and only modestly falling house prices. The recovery has been slower in commercial sectors, particularly in the key impacted sectors, such as hotels, leisure, and transport. Our SME and business banking clients have seen credit turnover increasing since the low point in May, although in total they remain 10% below pre-crisis levels, while the impacted sectors are still 27% below. I will now turn to slide seven to look at how we are helping Britain recover and how supporting our key stakeholders is clearly in the best interest of sustainable shareholder value creation. We have an opportunity to build a stronger bank while supporting a resilient economy with a more sustainable future. We will do this by working with our key stakeholders in order to develop cultural financial resilience, and help businesses recover from the challenging operating environment, while also helping to finance the UK's green recovery. We will also accelerate the work already underway to transform our ways of work with a strong focus on talent and diversity, and thereby retain and attract the best talent within the group. All of these actions, and many more, will mean that we are able to help Britain recover while simultaneously building a stronger bank. This is clearly aligned with the best interest of the group and our shareholders. In conclusion, going to slide eight, the group has strong foundation, and as you have heard me say many times before, our unique competitive strength positioned the group well for the future. Our business model superior efficiency, and track record of consistent and sustainable delivery will continue to drive ever lower costs with increased and sustained investment in the business and a better customer experience as a continuous outcome. It is this virtuous circle that you have heard me talk about before, which means that we are well-positioned to deliver long-term, superior, and sustainable returns. Our updated 2020 guidance reflects the group's proactive response to the challenging economic environment and is based on our current macroeconomic assumptions. Activity in the group's core markets has begun to recover, but the impact of lower rates and economic fragility will continue for at least the rest of the year. We therefore expect the margin in the second half to be broadly stable on the Q2 level at circa 240 basis points, resulting in a full year margin of circa 250 basis points. Operating costs will be below $7.6 billion, and impairment to be between $4.5 and $5.5 billion. We expect risk-weighted assets in 2020 to be flat to modestly up versus H1. While the economic outlook remains highly uncertain, the Group's financial strength and business model will ensure that we can continue to support our customers and the wider UK economy through the crisis and beyond. This is fully aligned with the Group's long-term strategic goals and in the best interest of our shareholders. I will now hand over to William, who will run through the financial in detail.

Thank you, Antonio, and good morning, everyone.

I'm going to give an overview of the group's financial performance in the first half of this year. I'll also spend some time discussing our balance sheet strength, French dry for S9, and the impairment charge that we took in Q2. As usual, we will then open up to Q&A at the end. Turning first to slide 10 with a summary of the financials. As you've heard, the group's financial performance has been impacted by a challenging revenue environment and a significant deterioration in the economic outlook for the quarter. Net income of $7.4 billion is down 16%, driven by a lower margin of 259 basis points from stable average interest-only assets and other income of $2.5 billion. As I mentioned, our focus on costs remains strong, and the 4% reduction in operating costs includes 6% lower BAU costs. The cost-income ratio, meanwhile, has been impacted by the pressure we've seen on the income line. Moving down to P&L, pre-provision operation profit of 3.5 billion is down 26%, which is lower than we'd like, but it still gives us a significant loss-absorbing capacity. The impairment charge of 3.8 billion and a half reflects our prudent reserving based upon the updated economic outlook, and we'll discuss this in more detail shortly. Despite the significant impact that the impairment charge has had on profits and returns in the first half, TNAV remains strong at 51.6 pence. Our CET1 ratio has increased by 81 basis points, 14.6%, including transitionals, or 13.4% excluding transitionals. Both levels are comfortably ahead of our reduced frequency requirements of around 11%. We'll look at individual lines in more detail shortly, but first let's look at customer activity on slide 11. As Antonio mentioned, retail customers are being cautious on borrowing and are building savings balances. This is clearly positive from a risk perspective, if not for our revenues in the current rates environment. Nonetheless, the deposit inflows demonstrate the strength of our trusted brand in what is an uncertain environment. Our S&E clients have increased borrowings, largely through the government-backed schemes, although we estimate around two-thirds of those balances currently remain on deposit. Large corporate and financial institutions clients, meanwhile, have reduced their borrowings in Q2, largely through repaying some of the $8 billion in RTFs which were drawn in March. We've also seen a reduction in deposits in large corporates as we've repriced in this area. Looking forward, I expect unsecured lending to continue to reduce, although at a slower rate than we have seen in H1. I also expect the open mortgage book to grow modestly in line with market growth. Commercial banking, meanwhile, will continue to focus on SME lending, while I expect large corporate lending to fall slightly as clients are now accessing capital markets. The net at all of this is that we expect average interest earning assets to be broadly stable on H1's level through the second half. With that said, I'll now turn to net interest income in a bit more detail on slide 12. The Q2 net interest margin of 240 basis points is down 39 basis points in the quarter, in line with guidance given at Q1. Also, as expected, the rate impact at 21 basis points is around half of the reduction, with the rest due to product mix and the actions we've taken to support customers. Looking forward on the margin, I'd expect the rate impact to continue through into the second half of the year as the structural hedge rolls over into a lower rate environment. Furthermore, while the mix impact should gradually reverse as activity normalises, we expect the effect of lower balances in our higher margin areas to persist into H2, reflecting economic activity and customer behaviour. Offering this somewhat, there should be some benefits come in Q3 from tailwinds, such as the end of free overdraft periods and deposit repricing. And in this context, and as mentioned earlier, average interest-earning assets should be broadly stable in H1 through the second half. So based on all of this, and as Antonio mentioned, we expect the margin to remain essentially stable at the Q2 level throughout the rest of this year. And this in turn means we expect the full-year margin to be around 250 basis points. Now turning to asset margins on slide 13. Individual asset margins have remained robust in H1, while overall NII has been impacted by the reduction in higher margin activity. Consumer finance margin for the period is 6.81%, although lower in Q2. This has been particularly impacted by lower card balances compared to other products within consumer finance. Meanwhile, the mortgage market is now recovering to pre-tricer levels. Mortgage-brook margins remain resilient, supported by a new business margin of around 1.7%, retention of around 70% of our customers at the end of their fixed-rate term, and a slight reduction in the SBR attrition rate to around 12%. The mortgage-brook margin has also benefited in the half by a couple of basis points from temporary timing differences associated with base rate movements. Commercial banking has seen an increase in balances in the first half, given the take-up of government schemes. Commercial margin is up slightly due to the ongoing optimization work, while the low risk new government lending is priced below the wider SME book. And the outside of the balance sheet, slide 14 on deposits. As mentioned, we saw a significant increase in customer deposits in the first half, up 29 billion on year end and ahead of the market. This, in turn, reflects the strength of our brand in uncertain times. We see a 2% increase in retail current account customer numbers in recent periods to 17.2 million, while those customers are now holding higher balances, on average, £1,000 per customer more. Some of this will inevitably unwind as customers start spending more, but nonetheless, we expect overall balances to stabilize at higher levels. Indeed, the group remains well-positioned to address these customers' broader financial needs within its portfolio of trusted brands. It's worth noting here that although the full benefit of the pricing changes made after the base rate cuts will come through in Q3, beyond this we'll have limited room to further reprice deposits. Now let's turn to structural hedging on slide 15. Our hedgeable capacity has increased slightly to 190 billion. Within this, the hedge notional balance of 180 billion is up slightly on year end. Given the significant increase in deposits this half as shown on the previous slide, there may ultimately be more capacity The group benefited from hedge earnings of 0.6 billion or 0.7% over average LIBOR in H1. Subject to rates, hedge earnings will likely reduce in H2 as the 15 billion of maturities that we expect in the second half are reinvested at lower levels.

Beyond that, the hedge has a pretty straight line maturity profile. Now looking at other income on slide 16.

OI of 2.5 billion for the first half is down 22% year on year. This is due to a slowdown across our key markets, as well as the one-off items in Vocalink and insurance that we saw last year. We also had $135 million of guild gains in H1, which I did not expect to repeat in the second half, and which were almost entirely offset by the $110 million revaluation adjustment in Lloyds Development Capital, again in H1 of this year. Going the other way, Q2 included a $90 million benefit relating to an illiquidity premium methodology change within insurance, and this is not going to repeat in H2. Looking forward, we expect a charge in H2 within insurance related to the asset management market review. We'll also consider our persistency and longevity assumptions in the second half, the former focusing on the possible impact of higher unemployment levels.

In retail, ongoing low levels of activity across products will likely have a marginal negative effect in H2.

Overall, other income is likely to be tough in the short term, although we're now getting towards the base level. We're investing in growth areas such as our financial planning and retirement proposition, as Antonio mentioned, within the insurance and wealth provision, and also in our payments areas. In addition, we would expect activity to pick up in 2021. Now, moving on to cost on side 17. You've heard many times about our relentless focus on costs. Lower compensation has contributed in H1 and will continue into H2. Although to be clear, we have also continued to realise sustainable cost savings. It is this track record that enabled us to enhance our operating cost guidance for 2020 for less than £7.6 billion. We're finding that while coronavirus has increased some cost areas, the lockdown has also accelerated certain more benign trends around the use of technology, home working, travel and cross-training colleagues. We'll be adopting these learnings and exploring opportunities for longer-term cost savings in due course. Moving on to investment. In response to the challenging revenue environment, we've carefully managed discretionary investment spend down by 15%, as you can see on slide 18. We've reduced investment in our brand transformation, as well as third-party consultancy spend, while prioritizing investment in digital and technology projects. Digital spend remains around 80% of the group's total investment commitment, important given digital development is so vital to the long-term success of our group. We will continue to invest through the cycle in the strength of our business. I'll now spend some time looking at the impairment charge in the second quarter, starting on slide 19. As you can see, the charge in H1 of 3.8 billion includes 2.4 billion in Q2, of which 1.8 billion reflect a model charge but a significant deterioration in the economic outlook. Including the Q1 impact, the total forward-looking economic impact in the half is 2.6 billion, almost 70% of the H1 impairment charge. Excluding the update to the economic outlook, divisional charges have increased by 22 million in retail and 141 million in commercial from H1 2019, the latter from a very low base. The coronavirus-impacted restructuring cases reflect clients where the pandemic has directly hampered their recovery strategy. The charge of $432 million predominantly reflects historic debt on two individual names. In sum, the AQ after the first half of the year is 173 basis points. Within this, the charge per economic assumption changes is equivalent to 36 basis points. Infirmity, of course, remains, and the final impairment charge will depend upon the severity and the duration of the shock. However, based on our current prudent economic assumptions, I would expect the full-year impairment charge to be between 4.5 and 5.5 billion. This gives an idea of the front-loading of the charge under IFRS 9 requirements, and as said, assumed current macro forecasts don't change. Let's now look at the updated economic assumptions on slide 26. The main drivers of impairment charges for us are GDP, unemployment, and house prices. Our base case assumed GDP down 10% in 2020, and unemployment at around 7% in 2020 and 2021. Peak unemployment in our base case is 9% in Q4 2020. We've also adjusted our severe scenarios, which would give a 10% weighting to add prudent overlays, including, for example, peak unemployment of 12.5% in Q2 2021, GDP down 17.2% in 2020, and HPI down 29% over three years. The issue is in response to these unprecedented times and a desire to properly recognize this risk. The overall impact of our multiple economic scenarios is a currently provided ECL of $7.2 billion, a pickup of $0.5 billion on our base case, and an increase of $3.1 billion since December 2019. Now, coverage levels on slide 21. The increase in ECL provisions across the business lines has naturally resulted in higher coverage levels across stages and across products. The 3.1 billion increase in the ECL in the half and 7.2 billion total ECL give additional balance sheet resilience and buffers to absorb losses as they may arise. Coverage has increased to 1.4% of total lending and almost 30% of Stage 3 assets. This includes 6.3% coverage of the card portfolio and 44% of card Stage 3 balances. It's worth noting that the card business I've mentioned employs a proactive charge-off policy at four months in arrears. If we instead adopted a slower approach to charging-off, let's say an additional 12 months, our Stage 3 cards would have coverage of around 70% and the overall card book of almost 9%. So slide 22. The group has a very robust balance sheet which benefits from a prudent approach to lending, around 85% of lending secured. Meanwhile, we have more than 75% of group lending within our primary telco portfolio. The remaining 25% of loan book is within commercial banking, of which 40% is to SMEs and mid-corporates, which in turn is over 80% secured. This gives us a high level of confidence that our balance sheet is robust and our customer makes it appropriate to go into a period of uncertainty. We've also halved recorded assets over the last decade, meaning we entered this period with significantly lower RWAs than during the last financial crisis. Let's now look at each of the main portfolios, starting with mortgages on slide 23. As you know, two-thirds of the group's lending is in high-quality UK mortgages, with an average LTV of 44%, and around 90% of the book having an LTV below 80%. The portfolio is performing well, including the 2006-2008 heritage book. The interest now has LTVs in line with the wider portfolio, and is continuing to run down at about 12% each year. Extra mortgage assets have increased by $17.2 billion and a half to $44 billion. However, it's important to note that 37.6 billion, or over 85% of Stage 2 lending, is up to date and has largely migrated due to the forward-looking economic assumptions. The movement in Stage 2 and our modeling of PVs capture the risks inherent in the current level of payment holidays. We granted 472,000 mortgage holidays during the crisis, and of these, 193,000 have reached the end of their holiday, 72% of which are resumed paying, 23% are sought in extensions and 5% have entered early arrears. We've increased coverage in our Stage 2 portfolio at 2.1% overall, including 1.5% on the up-to-date Stage 2 assets. Now, looking at our consumer finance portfolio on slide 24. As you've heard many times, our high-quality growth and prudent risk appetite are hallmarks of the class process. Customer credit card spend is still down circa 20% compared to February, and customers, including high-risk customers, have deleveraged over the last few months. Card assets within Stage 2 have increased to $2.1 billion, 13% of the book, largely due to forward-looking economic assumptions. Indeed, 96% of Stage 2 is currently up-to-date lending. As you can see on slide 25, the cards book has been managed carefully in recent years, We've selectively tightened our risk appetite in order to reduce exposure to more indebted customers. External data, as illustrated on the page, evidence this, albeit there are some differences in charge of policies between different providers. Spend levels have reduced across risk bands, and this has resulted in customer balances falling across the board, including a 5% reduction within the higher risk segment.

So let's move to our commercial portfolio on slide 26.

Commercial portfolio has been subject also to careful risk management. Less than 3% of group lending, around 13% of commercial lending, is to the key sectors impacted by COVID-19. We continue to work closely with these clients, around a third of whom are investment grade. As with the retail books, we've increased stage two assets in commercial by 10.8 billion in the first half to 16.7 billion, or around 17% of the portfolio. £16.2 billion of this, or over 95% of Stage 2 balances, are for us to date. It's also worth noting that commercial RCF drawings have fallen by around £6 billion in Q2, further reducing risk. Meanwhile, we continue to be active participants in all of the government-guaranteed lending schemes, including £7.3 billion of bounce-back loans and £1.8 billion of fee bills. Now looking briefly at our SME and commercial real estate portfolios on slide 27. Our SME portfolio has seen average write-offs of less than 0.25% over the last three years and is around 90% secure. I'd say our e-book has been significantly de-risked, including through 6.5 billion of significant risk transfer transactions and is also very largely secure. The average LTV is 49% and around 70% has an LTV below 60%. CRA portfolio is also highly diversified, with only 15% of the growth in retail sectors, while the office portfolio is focused on prime locations and clients.

Let's turn to slide 28 on payment holidays.

To continue to offer payment holidays to customers in order to help them manage temporary financial pressures, across products, over 1.1 million holidays have been granted to date, of which around 750,000 are still in force. A significant number of holidays ended in July, and we're now seeing 72% of mortgage customers and 74% of card customers resume paying. This data is improving as more holidays mature, and importantly, we're also seeing low levels of early delinquencies across the product. It's also worth noting that some of these early delinquencies are very likely to cure. To be clear, customers who have sought to extend payment to holidays are typically of a lower credit quality than the average. They tend to have higher average balances and lower risk scores. However, it's also worth noting that in mortgages, for example, the average LTV is still around 52%, and in cards so far, only around 70 million of balances have been extended. As mentioned, we're confident the payment holiday risk is captured within our modelling and the significant increase in ECL that we took in Q1 and in Q2. So, on slide 29, I'll talk briefly about how we account for impairments under IFRS 9 and its relevance to H1 and H2. Item 9 requires us to recognise lifetime expected credit losses for loans in stage 2 and 3. As mentioned, stage 2 includes a significant proportion of up-to-date customers who have only been moved because of modelled economic triggers. Indeed, the stage 2 movement in the half has been predominantly within high-quality segments. Assuming a stable macroeconomic forecast, stages 2 and 3 are therefore already provided for within our ECL. You should expect the P&L charge in the second half of 2020 to reflect any unexpected single name moves within commercial. Future losses on Stage 1 assets as the 12-month window rolls forward, including a charge for new business and experience variances. Absent a change in macro assumptions, you should not expect to see a repeat of a significant uplift in Stage 2 assets that we saw in Q2. Any change in the group's economic assumptions could, of course, result in additional impairment charges, and our sensitivities on the slide give you an idea of the potential quantum of this. For example, a 1% increase in unemployment would increase impairment by 294 million, while a 10% further fall in HPI would be 185 million. I should also stress that the group Cypher S9 models produce the outcomes that derive the final P&L charge. We have confidence in the outputs from the models, but to be clear, we'll be targeting something better than the predicted ECLs. Now, moving down to P&L to look at the below-the-line items on slide 30. Restructuring is down 27% on the prior year, largely due to our deliberate pause on severance and property rationalisation work the duration of lockdown. This will pick up in H2. Volatility and other items of negative 188 million is 60% lower than last year. This is largely due to 308 million positive banking volatility and the charge in 2019 but was incurred for changing asset management provider. We've again not taken anything to PPI in the second quarter. We remain happy with the circa 10% model conversion rate, although note that processing activity has been impacted by the lockdown. Overall, we're comfortable that the unused provision, 745 million, remains appropriate. The tax credit of 621 million reflects the DTA remanagement benefit from Q1, and taxable losses in the second quarter. Going forward, I would continue to expect a normalized tax rate of around 25%. The result of all of this, we end with statutory profit after tax of 19 million.

Turning now to slide 31 to look at refurbished assets.

Loans and advances are flat in H1. IWA's are up 4 billion and a half, but down 1.6 billion in Q2. The H1 as a whole, we've seen an increase of around $4 billion from credit migration and retail model calibrations, $1 billion from regulatory changes, and $3 billion from market and other movements. This has been partly offset by the lower retail unsecured lending volumes and continued optimization activity within commercial banking. As we look forward, given deteriorating economics, some ratings migration is likely. We expect optimization activity to largely offset this, and net RWAs be flat and modestly up in the second half. Beyond that, in 2021, we may see some further inflation as delayed prototypicality impacts, which again, we will do our best to manage.

Now moving to capital on slide 32.

Our CEC1 ratio of 14.6% gives significant headroom over our lower regulatory requirements of around 11%, which cushion against potential credit impairment. CEC1 is benefiting in the half from the temporary addition of 79 basis points of IFRS 9 transitional to a total stock of 116 basis points. Potentially, up to half of that H1 increase will unwind in line with the movement in staging in H2. We also have 83 basis points in CT1 back from canceling the 2019 final dividend. The RWA and other category includes several items including negative 15 basis points for RWAs offset by 11 basis points for excess expected loss and 17 basis points from positive banking volatility. We've seen a 39 basis point capital hit from pensions in the first half, although it should be noted that this is partly because we made the full 2020 defined benefit pension scheme contribution in April in order to help with Pillar 2A management. One final point worth noting, which is not in the numbers, is that if intangible policies are changed in line with current discussions, we'd also expect a benefit in the second half of around 25 basis points. Looking at CT1 requirements, we've seen a circa 25 basis points reduction in the Pillar 2A, partly because of the pensions contributions I mentioned earlier. We'll for now hold on to our ongoing CT1 target of around 12.5% with a management buffer of around 1%. We're clearly comfortably above both our internal and regulatory target capital levels. As usual, the Board will consider dividends and buybacks at year end when they look at all available information, including in particular the economic outlook. as well as regulatory requirements. Turning to funding and liquidity on 5.33. As with capital, our funding and liquidity position remains strong. The completed $8.5 billion of funding to date costs a range of products and currencies. We now expect a minimal funding requirement in the second half, given the group's access to around $40 billion of key FSME funding. As you know, the group's liquid assets exceed wholesale funding, and we have no net wholesale debt. We also now have a loan-to-deposit ratio of 100%, which in turn means that our loan book is entirely funded by our deposit. It also means we'll have plenty of opportunity to lend into recovery as and when appropriate. Now, wrapping up and turning to slide 34. The group has very strong foundations and unique competitive strengths. Together, these mean we're well-placed for the evolving environments. As Antonio mentioned, the strength of our franchise, our efficiency advantage, and our excellent track record of execution give us significant and enduring competitive advantage and will enable the group to deliver long-term superior and sustainable returns. So now the outlook remains highly uncertain, and I'd expect the impact of lower rates and economic fragility to persist for at least the rest of this year. In that context, our guidance reflects our proactive response to crisis, and it's set out in the slides before you. In conclusion, I believe that we'll emerge from this crisis having learned a lot about how our customers want to interact with us and the types of products and services they'll need in the future. We're learning a lot about ourselves and new ways of working. These emerging trends will challenge the whole sector, but I have great confidence in the strength of the group and the resourcefulness of my colleagues to help our customers and other stakeholders manage and succeed through the crisis. Throughout everything, we'll maintain our focus on supporting our customers in the UK economy. That is in the best interest of our group, and therefore our shareholders. That concludes the presentations for this morning, and Terry and I will be very happy to take your questions. Thank you.

Thank you. To ask a question, please key star 1 on your telephone keypad. Please stand by for your first question. Your first question comes from the line of Rahul Sinha. Please go ahead. From J.P. Morgan, you're live on the call.

Hi. Good morning, Antonio. Good morning, Rene. I've got a couple, both on NIR, if you don't mind. I just want to be clear, you know, the reasoning of the drivers behind the step-down in the NIM guide and NIR versus Q1. And within that, I was wondering if you could expand on two things in particular. One, why do you assume the unsecured balances would be going flat, given the card book was down 9% in the second quarter? And then secondly, if I look at divisional trends, and this is hard to judge on a quarterly basis, but on a half-yearly basis, It looks to me that commercial NIR is down 16% year-over-year, whereas UK NIR is only down 7%. So if you could shed some light on what's driving those two trends, that would be really helpful. Thank you.

Sure. Thanks, Raoul, for the question. You'll have to let me know whether I missed anything in answering your questions, but I'll do my best. The H2 margin guidance that we've given, first of all, I think it's just important to say that our Q2 margin guidance came out pretty much exactly as expected when we gave you the guidance of Q1. At that point, we wanted to give you guidance for how the business would operate in a challenging economic period through lockdown, but we did not want to give you guidance for the period beyond that, and so we were quite deliberate in that. What we're giving you today is the guidance for the margin in Q2, which is predicated upon the macroeconomic outlook that we've got, and the balanced development across the business in response to that. So if I just spend a bit of time on that, the margin guidance is mentioned in one or two comments in the presentation just given. So H2 is driven really by four factors, two positives, two negatives, and they more or less offset off the back of the Q2 margin of 240 that we've seen. The two positive factors are the evolution beyond interest-free overdraft, which is obviously helpful from an unsecured perspective, and indeed the tailwind for deposit repricing, which we expect to see across Q3 and to agree into Q4. The headwinds to the margin are around rates and structural hedge. We expect about $15 billion of the structural hedge to roll off in H2. And then secondly, mixed contributions, which in turn are coming from cards, from loans, to a degree from overdrafts, these are all in higher margin products, which we expect to have sustainably lower balances going into H2. Now, when we look at that, it's important to make the comment that it's very much tied to our view of activity in H2. And so if you look at our macro assumptions, we think they're relatively prudent in the H2 context. They're spelled out, as you know, in the presentation itself, and also quarter by quarter in the R&S statement. But they're relatively, we think, relatively prudent macroeconomic assumptions, which then leads to the development of the balance sheet that underlies it. When we look at that balance sheet, we're looking at around 5% to 10% down from June levels for the development of the unsecured assets, so cars, loans, motor, on average 5% to 10% down by virtue of new business being slower to pick up and repayments continuing pretty much as they were before. Now, You know, one can take varying different views on that. That's our view. If one takes a more benign view of economic activity, then you would expect that to feed through into balances, which in turn you would expect to feed through into margins. We're trying to put everything together in a consistent manner and give you what we believe is a reasonable picture, but also a prudent picture of things as they develop over the course of H2O. The sort of picture on OI, when we look at OI, there's a couple of points that are worth drawing out. We have one item within the H1 numbers, as I mentioned in the commentary, which is the illiquidity premium methodology change. That's about 90 million in the OI number. That isn't going to repeat in H2. We also have an asset management market review charge, which I won't put a number on, but it's somewhere between 50 to 100 million, depending on how it works out. And again, you know, that's a of the headwind going through OI in H2. There's probably overall relatively subdued activity, again, in line with our overall macro forecast, which then leads to the OI picture being probably off a little bit as we go forward into H2, although we're not giving explicit guidance on that, because again, it is so activity dependent. I hope that answers the first couple of your questions there, Raoul. You also mentioned a question around commercial NRI versus retail NRI. There's nothing special, really, to call out there. It's just the margin development off the back of the different products written.

Is there no impact from the guarantee schemes on the NIM in commercial, or is that not material?

Well, there is an impact from guarantee schemes or the government-responsive lending activities. within commercial, and it comes through in and it comes through in BBLs in particular. But I think the overall impact of that and commercial margin in H1 is pretty modest on the whole. So I wouldn't want to overwhelm you at that point. Got it. Thanks.

Thanks so much. Thanks, Ron. Thank you. Next question comes from . Please go ahead. You're live on the call.

Morning, gents. I just had a couple of questions. Just on the NIM, I know you've commented on mortgage margins. It does look like they've widened pretty handsomely. Thanks for that data point on the 170 basis points. Does any of your NIM guidance basically factor in for the asset margins? I mean, are you basically assuming that it's not sustainable, or is there any way left to think about that potentially being a source of support for NIM if these levels can sustain themselves?

And if so, could you I don't know, if the current dynamic prevails, so 170 basis points, could you quantify what that benefit could be perhaps on a full year basis if the current levels sustain themselves?

Just a second question on other income. It's basically pointing to something like a billion pound run rate in each of Q3 and Q4. So if you go to clarify that and just get a view on

What is the underlying run rate for other income now? I mean, it seems that that's quite a noisy line.

And I appreciate it's activity-based. But, you know, based on your view of a recovery in 2021, what might be a kind of normalized underlying run rate for other income that we should think about kind of modeling next year?

So just a final one on capital.

I mean, there's quite a big gap between fully loaded and transitional. It sounds like you're going to basically close about half of that gap towards the year end, given stage migration. But I guess in the context of potential distributions that you may or may not be able to take in free, you typically tied that to your CET1 ratio. I mean, should we be thinking about your capital, when you think about how much capital you have, should we be thinking about the fully loaded CET1 ratios or versus

you know, what might be 40, 50 basis points higher, including the transitional relief. Thank you.

Thanks, Ron. There's a few questions there. So, again, I'll hopefully address all of them, but let me know if I don't. First of the questions was on the mortgage new business margin. As you say, that has been pretty favourable over the course of the last few months, and that continues today. I think over recent quarters, we'd say that the mortgage margin has been around 160 to 170 basis points. It's a blend of new business, but also product transfers, i.e. retention. And it is greater than the maturing front book, which is an important point, because essentially what it's saying is that the price at which we are putting on new intensive-based business, you know, i.e. two-year, three-year, five-year fix, whatever it might be, is better than the same intensive businesses dropping off the book from previously written years. So that overall mortgage margin is evolving in a positive way. The extent to which it impacts on the overall group margin will very much depend upon volumes. Volumes have been positive, certainly over the course of the last few weeks. We don't know, to be fair, whether that is pent-up demand or whether that is an ongoing sustainable flow. We very much hope the latter, but it's early days to make that call. To the extent that it is a sustainable flow that goes on into H2s, and again, off the back of better activity, one would expect that to feed through into the business. The other point in the mortgage margin that's very worth making is that the SDR attrition has come down a little bit, and that obviously helps as well. We've seen SDR attrition in previous years, as you know, circa 15% or so. That's coming down to levels of around 11%, 12%, depending on a particular time. But it's coming down, I suspect, as a function, again, of lower levels of activity. But that seems to be settling in over the course of the first half of this year. Moving on to ROI, I'm not going to give kind of tramlines, if you like, for ROI, because, again, as we've discussed before, it is very activity-based. And we do see ROI trends, you know, very much according to the macroeconomics that we put forward. The ROI points that I would call out again, making a point in Raoul's question, is when you look at the first half in particular, you have to knock out the ILP methodology change. That would bring us down from about 1.25 to about 1.15 or 1.16 or thereabouts. We'll get a one-off headwind from an ANR charge, most likely in in H2, probably within Q3, but we'll see. And then I think beyond that, we'll have to see how markets develop. At the moment, for example, in the commercial space, we're seeing very strong market activity, just like most banks. We would hope in Q2 that we'll see some return of transactional banking activity in line with economic activity as a general matter. At the moment, we're not banking on it, but one would hope that there may be a positive development in that context. In retail, it very much depends on payment flows. You've seen, as Antonio mentioned, some positive developments in payment flows lately, but credit card is still a little bit behind debit card, and it's really the former that would be helpful in terms of our overall payment streams. And then finally in insurance, we're seeing relatively subdued core product markets. There are some comparison points there, as I mentioned in my speech with H1. But we're seeing low interest rates, for example, are putting a bit of a dampener on annuity markets, albeit our individual annuity market is actually doing very well. Our bulk annuity markets, on the other hand, like most aspects of our business across the sector, are relatively slow. And that's kind of echoing its way across. So, again, I'm not going to put tramlines on the ROI number, but I think we'll see a bit of a slowdown in markets. the course of H2 versus what we've seen in the course of H1. But I wouldn't want to overplay it too much. CT1, third of your questions. CT1, we have a fully loaded ratio of 13.4. We have a ratio including transitional to 14.6. That's 120 basis point difference, which, as you say, is bigger than we've seen it for some time, obviously, because of the change in transitional regime in the first half of this year. You said close half of it. It's not going to close that much. We're looking at around 40 basis points in the second half of transitionals running off. So in my earlier comments, the piece that runs off, if you like, is roughly half of the increase in transitionals that we've seen in H1. The increase in transitionals is 80 basis points. We expect about 40 of that to run off in the course of H2. Now, importantly, that depends on the evolution of assets. through stage one and two and into stage three, which is the point at which they drop transitional relief, as you know. So based on our macroeconomic forecast, the 40 basis points gives you an indication of how that will play out. If developments are slower than we expect, so the transitionals runoff will also be slower. The final part of your question, Aman, was do we look at fully loaded or do we look at transitionals? We look at transitional ratios when we look at the CT1 ratio and discuss it as to where we stand. But to be fair, we also look at the economic outlook and we also look at the pattern and pace of regulatory change, expected regulatory change. So in some sense, at least, we're looking at both numbers in terms of how they move. The headline number that we look at is the transitional ratios. but we are also conscious of the economic outlook that we go into and also conscious of regulatory change in both directions, positive and negative, as it plays out over the course of the coming period.

Perfect. Thank you very much.

Thanks, Ron. Thank you. Next question comes from the line of Andrew Coombe, City. Please go ahead. You're live on the call.

Morning. One clarification on slides and then a second question. Capital return. On the slide, thank you very much for the coverage ratios that you provided, and a particular thank you for your adjusted coverage ratio on credit cards, adjusting for the charge of policy. I think you said that stage three would go from 44% to 67% after adjusting for that. Can you just clarify the 21% on stage two, what would that equivalent number be if you adjusted for charge-off policy, say, the four months, the 12 months? It would just be useful for us for comp analysis. Second question on capital return. I appreciate it's early days, but I want your opinion on two trains of thought. The first of which is historically you've always had quite a large dividend, and then you've supplemented that with a smaller buyback. Going forward, would you consider doing the other way around, a bigger buyback and a smaller dividend? both given where your share price is trading at a discounted book, but also the flexibility that would give you. And then the second attached question to that would be, how do you think about your payout policy overall? Is it as a function of earnings, or is it as a function of the excess cash above the MBA? Thank you.

Yeah, thanks, Andrew. Just to address each of those, the Stage two, as you know, is not in default. So as a result, we don't adjust it and we don't provide the kind of pro forma number that you have seen on stage three. And stage three, as you pointed out in your question, that's really all about taking account of assets that actually have defaulted and saying, well, if they were still on our balance sheet and 100% covered because they have defaulted and we have written them off, then what would our stage three look like? So that kind of pro forma comparison really only made sense at stage three where we've effectively written it off, therefore taken 100% coverage, and we adjust it back into the numbers for a comparison purpose. The second one, capital return, is the important point. The capital strength of the business is clear for all to see really today. We've got 14.6 transitional. We've got 13.4 fully loaded, if you like. It doesn't matter which way you look at it. It's a very strong capital ratio relative to our internal targets and relative to our regulatory requirements. As we look forward, the capital policy for now as we stand here in late July remains the same as it was. It will be for the board to consider what the capital and indeed the distribution policy should be at the end of the year. And I'm sure that, you know, one of the factors they'll take into account there is where we stand, both upon the expected developments that we thought we would see in H2 and what we might see in 2021 looking forward. I'm sure they will also take into account dividends and buybacks as alternatives, as you say, but really that is a matter for the board at the end of the year. And today our capital policy remains kind of as it was, if you like. Now, Andrew, I think I didn't quite catch the tail end of your final question, which if you could repeat it, I'd be happy to try to address.

Yeah, so there's a capital return question with the split, A, the split between buyback and dividend, and B, how do you think about the capital return? Is there a function of the excess capital above MDA, or is it a function of a payout ratio of earnings? I see.

Yeah, okay. It's that last part, then, that maybe I'll cover. As said, I think this is all in the context of what are today and what we frankly expect to continue to be very solid capital ratios going forward. But the Master of Distribution, again, is ready for the board at the end of the year. They'll look at a variety of different parameters, and we look at capital metrics, including the MDA and the buffer above MDA that we choose to have. It's certainly one of them. We look at one or two other metrics as well, including external and our internal stress tests. The other ingredient to all of this is, not surprisingly, the outlook that we see. And so as we progress towards the end of this year, again, we'll take into account both what we've seen based upon what we believe are relatively prudent economic assumptions, and also what we expect to see going forward in 2021. And then I think the Board will be positioned to decide on capital distribution at that point.

Thank you. And I guess just coming back to the first question on cards in that case, I appreciate your point on Stage 2 and Stage 3, and Stage 3 is where you're taking the charge off through. I guess the issue is when we look at your – Stage three coverage, it does look comparable to tiers. Stage two coverage looks a little light. So any thoughts on why your stage two coverage should be a little lower in some of your tier groups?

Yeah, happy to answer that, Andrew. It's worth bearing in mind that the car portfolio that we have is a prime portfolio and, frankly, has been increasingly prime over the years. It is lower risk versus others, and we show you some delinquency data in the presentation that we think lend testimony to that. There are different charge-off policies in that, fair enough, but nonetheless, even after you adjust for those, we think the delinquency point stands. We're also, based on externally available data, see ourselves as having lower balances and higher credit scores versus others, and again, that's based off of external data rather than our own internal observations. And then we have that charge-off policy, but as you rightly say, that's a stage three point, as mentioned earlier on. So I think the overall portfolio strength that we see, combined with some of the deleveraging that we've seen in the first half of this year, including amongst high-risk customers who have been around 5% deleveraging on that card portfolio, makes us feel very comfortable in terms of, A, our prudent macroeconomic assumptions, and, B, our coverage levels within that. Thank you for answering my question.

Thanks, Andrew. Thank you. Next question comes from the line of Robert Noble, Deutsche Bank. Please go ahead. You're live in the call.

Morning, all. Thanks for the questions. Just a clarification on NIMH on the part of 2021. Is 240 the level that we should be thinking of going forward, or do you expect that to improve in forward years? So if you look at the kind of returns or normalized impairments that you're getting given the low margins and low activity, in the case of things should rebound a little bit, but it's going to be much lower, what are you going to do about it in the long run to kind of get your returns to sustainably premiums, cost and equity? And is it worth looking at collapsing the multi-brand strategy now, given the low returns amount? just just my own clarity the second part of your question was on returns on the business as a whole was it yes yeah okay thank you thanks for the question um on the no interest margin point as you know we're not giving 2021 guidance today so i want to kind of steer off of that um It is fair to say, without giving that guidance, it is fair to say that we're going to have an interplay in 2021 on the interest margin line between what are the levels of activity and how fast do those return, what are the product margins, how does the structural hedge play out in the course of that year. So all of those things, as you can imagine, are going to be interplayed into the margin. I do think that it is worth calling out there is a very unusual dependency right now between activity levels and the margin, and that is simply because it's activity levels that are driving relatively subdued levels in H2 are unsecured in particular. As those activity levels start to get back to normality, so it tilts balances and tilts the margins. So that dependency is particularly acute right now, and we'll hopefully see that play out in a more benign way during the course of 2021. Same is true, as we said earlier on, of other income. And so if you see the activity levels turn, if you see a stronger macro, we're geared into it. So The guidance that we have given is and remains for 2020. We're comfortable with that within the given macro context that we are describing there. Now, moving on to your second question, the terms on the business. Again, I don't want to give guidance on anything beyond 2020 at this stage. And as I said, the strategic review work that we're doing very much carries on its business as usual in that respect and will be launched in the strategic review in the course of 2021 in line with the new CEO. The points that I would make, though, is that historically this business has yielded returns on equity that are systematically in excess of the cost of equity. I don't over the long term expect that to change. As we look at our own internal dynamics of the business, we look at the business model, we look at our outlook, even in a flat rates environment, and with stable margins, and with the initiatives that we have across the business, then we see ourselves being back to ROE and excessive cost of equity within two to three years, recognizing that 21 is likely to be a transitional year. So without going into further detail, Robert, I mean, that gives you hopefully a bit of a shape to answer your question.

Antonio, is there anything you'd like to add? Robert, to add and build on what William just told you, I think there are two important points to add on your question. The first one is our multi-brand is a core part of our positioning and our strategy in the UK. If you look at Halifax brand, which we position as a brand across the whole of the UK, while White and Bank of Scotland are basically the high street brands in both Scotland and England and Wales, Halifax goes across the whole of the nation and has a completely different customer base. So Halifax, when you look at segmentation by attitudes and by what customers want, they are very different from Deloitte and Bank of Scotland customers, which are similar in terms of attitudes and segmentation, although geographically separate. And as a result, we have a very low overlap of the two brands. And one of the key points which I thought enabled us to have a much lower cost to income than others, is this capacity of segmenting through the brand. And at the same time, we have centralized everything that the customers did not see. So a single finance function, a single HR function, a single risk function. And that, in my opinion, although we have slightly higher costs, given that the brands are different and have different offerings, we have, as a whole, better segmentation, so higher income and a much lower cost to income. So that is a key part of our proposition. And the second point I would like to make relating to your question is that the reason why William and I are very confident that his business has all the capacity to pay and to have a return on equity above the cost of equity is exactly as well because of the cost to income, because we have a very significant advantage in cost to income, versus the average of the sector and any of the other peers. I have mentioned before and on my presentation that this is a fundamental competitive advantage when you think that it enables us to create capacity to invest more in the business, which through automation and other mechanisms lowers costs continuously and through a better customer experience improves NPS scores and therefore revenues over time. that makes the cost of income over time also go down and creates a virtuous circle, as I mentioned, which also enables us to pay over time superior returns to investors. When you look at the cost of income in the current pandemic environment, you see an additional advantage of this cost of income, which is that it enables us to withstand much higher and excessive shock in terms of provision, given that a low cost of income means a much higher pre-provision profit as percentage of revenue. So I think this is a really important thing. And in the end, as you know, positive discipline is key in several dimensions. And it is really the only lever which is totally within management controls. And our track record actually is clear in this area.

All right, thanks very much. Thank you, Robert. Next question comes from Martin Liggett, Goldman Sachs. Please go ahead. You're live in the call. Yes, good morning.

I just wanted to follow up on earlier comments in terms of how to think about margin. I was just wondering, looking at your base scenario of a roughly 6% decline in house price index, what kind of offsetting factor could there be from the FDR book? Could there be a scenario where the attrition in the FDR book could slow down significantly or even come to a halt if house prices were to fall according to your scenario? And just given the sheer quantum of contraction in card debt year-to-date, I was wondering, it seems to be a very unusual recession in terms of the speed of economic impact. Could there be a scenario that it could be an equally fast speed in terms of recovery, and would that build up in terms of credit card book again from the end of 2021? And the next question, I was just wondering what your hopes are with regards to the discussion around negative rates in the UK. Number one, is the bank prepared for it? And maybe if you can help us with the sensitivity in terms of how much of an impact in terms of revenue had to include the introduction of negative rates in the UK. And finally, on Brexit, I was just wondering, I mean, given where discussions are going in and just the European Union, what potential impact do you see for your business going forward in terms of activity levels and so forth? Thank you.

Yeah. I think there's four questions there, which I'll work my way through. The first one on the NIM and the SDR position in particular there, As you know, on the net interest margin for the second half of this year, we called out four factors, two positive and two negative. I won't rehearse those again. But in addition to those four factors, there are, as you rightly point out, one or two other pieces going on. The higher mortgage rates we discussed earlier on, the SDR churn is a further one of those. Four things about modeling is a sort of, you know, very kind of historic path-dependent view on the SDR attrition, which isn't awfully different to what we've seen over the course of the last year or so, but it does not take into account the SBR tradition, sorry, the SBR attrition at levels as low as we have recently seen them. And I think the SBR attrition recently has come down, partly because activity is lower in the mortgage market. And I suspect that if we see that play out, and maybe augmented, as you say, by HPI falls, one would naturally expect that to have some relationship with SBR attrition, i.e., if HPI does fall, you would expect SBR attrition to perhaps be a little bit slower off the back of that. We saw that a little bit in the course of the last cycle. So we might see it in the course of this one, albeit in the last cycle, as you know, the HPI hit was not particularly significant. So there could be a relationship there. We're not banking on it. It's not built into our expectations, but it is possible. Second point, carpet, could we see recovery fast? But in a sense, this point goes the other way. I think the answer to your question is yes. One could see a very fast recovery. And, you know, we saw some of the early call-outs from the United States in particular when some of that recovery was evident. But that may be backing up a little bit recently in the U.S. But nonetheless, it does illustrate the point that actually this is something that could turn around relatively quickly. I hesitate to be kind of too anecdotal about it, but you look at the holiday experience over the course of this summer. If that ever gets going in earnest, then you would expect payment volumes, and in particular credit card payment volumes, to accelerate off the back of that. And those transactional revenues are important to the business. Likewise, you would expect expenditure on consumer durables for which credit cards are normally used to start to increase. And so we could see a relatively fast recovery in the card book. As said, we've seen that in debit. We haven't seen it in credit. Our economic assumptions are what they are and are set out in the presentation materials. They are not banking on that recovery. To the extent that it occurs, it could be fast, and if it does, one would expect that to reflect itself in the business.

Yeah, and we'll insist by the point on what you just said, which might be helpful to Martin in terms of the overall tick chain and security, because you're right, Martin, that could happen. Something that would go into the direction of your question is that if you look at consumers' behavior so far during the pandemic, as both William and I mentioned, the consumers are absolutely doing the right thing in the sense that they are decreasing leverage and they are increasing savings. So from the risk point of view, they are taking the time of the furlough scheme to adjust their behavior in a prudent way. And if you look more broadly, macroeconomically, you can see that the total unsecured debt as a percentage of disposable income is now more than a third lower than pre-crisis level. So when you go to 2006, unsecured lending as a whole was around 22% of disposable income, and the latest numbers are only 14%. And I should remind you that 14% includes 2% of guarantees through the PCP contract. So it is more than a third down, and in that sense, consumers would have room if the economy is quicker, as you say, than expected to put on more consumer debt, even they have the leverage very significantly, and rightly so. And they are using, as I said, the support measures from government in order to continue to be leveraged, which puts them in a more prudent and stronger position.

So, to answer your questions, Martin, negative rates. Negative rates is a difficult call, actually. There are many different forms of negative rates introduction, as you know. I mean, first of all, the debate is not there yet. It seems that the Bank of England, that is, is committed to trying out other forms of stimulation, including a particular QE, before we get into negative rates territory. And that stance is one that I think has been pretty clear. If it gets into a negative rates discussion... then I think there are very different forms in which negative rates can play themselves out or be introduced into the economy. There are also a number of different offsets that the government could put in place, or the Bank of England, rather, could put in place to offset against the effect of negative rates as it plays out in the banking sector. And so TFSME is one example of that, or TFS more generally is one example of that, and whether or not there would be any compensating effects Negative funding benefits for the bank to draw upon from the Bank of England would obviously be a question in terms of the negative rate impact on the overall business. And then for the pricing strategies, you know, we know the pricing strategies that have been adopted in Europe, particularly for commercial and large corporate accounts, for charging for balances. We have not taken any view on what our pricing strategies will be in a negative rate environment. But the point is, it is noted, if you like, that there are pricing strategies that could offset against the impact of negative rates, depending on how they're introduced. I think there's no doubt, you know, overall, negative rates are, for the banking sector as a whole, not especially good news. They haven't been particularly in Europe. They haven't been particularly in Japan. But I think there are a number of questions and, indeed, offset to prices. in the negative rates debate, which in turn could considerably soften the impact if it ever got there. But I think my consulting point on that would be to say we're not there today and there's nothing that we're hearing at least that suggests that we're going to be there tomorrow. But it is a risk, as you're right to point out. It's a risk out there. And finally, Brexit. The multiple economic scenarios that we have taken, as you know, encompass a range of different outcomes. We've taken a base a downside and a severe downside, and actually an upside, which if you look at it closely is not terribly different to a base, and therefore we think relatively conservative. But the severe is really, as the name suggests, quite a severe downside, for which we take a 10% weighting. That includes things like HPI down 30% over the forecast period. It includes things like 12.5% peak unemployment. It includes things in 2020, actually, 17 cents GDP, and thereafter a relatively slow improvement in the succeeding year. So severe is deliberately and self-consciously quite a severe downside. Now, I don't know what Brexit will throw at us, but I very much hope that our severe downside encompasses more than what Brexit will throw at us. And so, you know, again, we don't have a Brexit overlay. We don't have a Brexit output plan. But we do have a set of MES assumptions that we think are pretty prudent and we believe should encompass some, if not all, of what Brexit was for.

Thank you very much. Thank you. Next question comes from the line of Guy Stabings, Exane. Please go ahead. You're live in the call, Guy.

Morning. Thanks for taking the question. Firstly, I just wanted to talk about RWA growth and your guidance there for flat commodities. Given some of the comments you made around functions on unsecured shrinkage and growth coming from lower risk rate dense assets, should we assume that that is building in quite a reasonable amount of negative credit migration or is there anything else going on that you'd point to? And then secondly, I just wanted to ask on the insurance business and the solvency position that's dropped. would be helpful. Thank you. Yeah, thanks very much, Greg.

Given the first of those two questions so far, the RWA point, so far it is worth saying credit migration has been inevitable in the overall business. I mean, if you look at the developments here in the course of H1, the contribution of credit migration in the RWA development has so far been very, very limited. True for both corporate and retail. In fact, retail, to the extent there has been any increase in RWAs, is actually because of counter-cyclical models off the back of benign arrears development in Q1 of this year, not because of the worsening of the situation. Commercial has been more traditional credit migration, but in H1 of this year, it's been less than a billion. And so I think so far we've seen very little. As we go forward, the RWA picture we've described, as you know, is flat and modestly up, and we've deliberately left ourselves a little bit of room there just to reflect certain gradient uncertainties and perhaps a little bit of temporal volatility around RWA. That is to say, you might see a few ups and downs around the RWA picture. Now, within that, what do we see? We see, obviously, some linkage to volumes. So, to the extent that we see unsecured coming off, there's some some impact or benefit from that in terms of the higher RWAs associated with it. It's not huge, but it's there. There's also a question around regulatory forbearance and how that will play out. To the extent that interest-free overdrafts, for example, are continued, which we don't have any particular reason to believe they will be, but if they are, then it will be contingent upon us asking a customer if they need that overdraft. If they do need that overdraft, then that in turn would have a RWA impact upon us as it would be treated as forbearance. It also depends on default development. We've obviously got a view in our base case of how defaults will develop over the course of H2. That, in turn, drives RWA impact. And then we're carrying on with our optimization activity in the commercial book, through which we expect that we will offset a loss of RWA development that might otherwise take place. And then, you know, somewhat deliberately last on the list, the credit migration. Credit migration is obviously quite uncertain. We don't anticipate it to be huge. We do anticipate it to be offset by optimization, as said in commercial, over the course of H2. But we are deliberately leaving ourselves just a little bit of maneuverability, if you like, in the RWA numbers by saying flat to modestly up. And that is simply because of those uncertainties that I've just described. A good outcome for us would be flat. I think an outcome that would be slightly less than we would hope for would be modestly up. And that's the kind of range guidance that we're trying to give. Insurance, Guy, second of your two questions. The insurance solvency level, as you rightly point out, is 140%. That is pretty much in line with what we would ideally seek to run the business by. Occasionally we'll have a little bit of a cushion above that. Occasionally we'll have a little bit of a drawdown below that. But 140% is not far off what we'd like to see the insurance business run itself on on an ongoing basis. As we look at that going forward, there's kind of a number of points there. I mean, obviously, there's the ongoing business, which will build up the solvency through earnings contributions, if you like, over time. Secondly, there are kind of risks in terms of the development of the economy and potential downgrade risks going to the second half, and those are going the other way. So the contribution to that insurance solvency ratio goes both ways. I think overall, when we look at the portfolio of credit exposures within the insurance business, We see them as being generally a very high-quality set of portfolios. If you look at the annuity backing portfolio, for example, of $17 billion, 40% of that is AAA or AA rated. If you include single A's, it's 75%, and it's only 1% to start investment grade. In the half year to date, we've seen $87 billion downgrade, so really very modest downgrade at the back of that portfolio. And again, we look at it as a high-quality portfolio going forward. So, When we look at the insurance company, as I said, 140% solvency feels about right. As to your question as to dividends out of that business, again, we'll have to take a view as to what the economic outlook is like, how the business is performing. And that will be a massive note to the Insurance Board and to the Group Board at the back end of the year.

Okay. Thank you. Thank you. We have time for two more questions. Your next question comes from the line of... Manhat Kunwar, Redburn, please go ahead. You're live in the call.

Hi. Good morning. Thanks for taking my questions. I just had a couple of questions, all on margin, I'm afraid. One of your peers talked about deposit cuts coming in at the back end of the quarter in the UK and potentially more cuts coming through in this quarter. Are there any deposit cuts that have come through and how much headroom do you have on the liability side of the balance sheet? The other question I had was just on back book, front book, mortgage. I appreciate you said yes to your question. It's glowing. Can you give us numbers on what the back book versus the front book is on your mortgage portfolio? My third question kind of ties it together. I appreciate... there are kind of pluses and minuses on margins. As it stands right now, your hedge is annualizing at 1.2 billion net. That's 25 bps that is going to disappear under the yield curve season. I'm assuming your back book front book is negative as well. So there's quite a lot of just botanical pressure on your margin, probably kind of in the region of 8 to 9 bps per annum, just before we even start to think about activity levels. So Am I right in thinking you need to assume quite a lot of positive things to think the margin doesn't keep deteriorating from here, or am I getting something wrong on my map?

Thanks. Yeah, thanks for the question. I may repeat a little bit of what I've said here, but I'll do my best to be a bit more specific on the question, probably without going quite as far as you might like me to. When we look at the margin, As said, we've got a number of factors going on in it. You asked specifically about the deposit repricing so far and the headroom left for liability repricing looking forward. There's been a little bit, a modest bit of deposit repricing so far in the business, and we've seen a bit of that in the course of Q2. But as said earlier on, there's more of that to play out in the course of Q3 and Q4, particularly in the commercial business, which in turn will feed its way through into the numbers. I won't put a precise number on either what's been taken or what is to come, but just say there have been a little taken and there is more to come in the course of Q3, Q4. That's all absorbed in our overall margin guidance for the remainder of H2. In terms of headroom left on the retail and commercial liability portfolio, The answer is there's not terribly much. You know, we are close to soaring out on the liability margin. That probably doesn't surprise you very much in terms of where base rates are and where, as you know, most of the products are. There is some, I mean, you could probably point to individual products, which I won't list by name, but there's probably some in certain product areas within retail and commercial that you could draw from if you chose to. But at the same time, we'd be conscious of, you know, the longer-term picture in doing so and the desire to maintain products the strength of the franchise in doing so. So a little bit more to play for there, but frankly not an awful lot. So the mortgage portfolio, I mean, I think it's an interesting development because there's a lot of dynamics going on there, as we mentioned earlier on. We've seen recent quarters between 160 to 170 basis points on front-end mortgage margins. That is better than the product that they're replacing on an incentive-based structure. So the blend of new business and product transfers, i.e. retention, is a better picture versus what is retained. That is supported to the margin, not negative to the margin. And I would suspect, just as we saw in the last crisis, when people's capital bases start to get hit, as they are doing in this crisis, many of your competitors tend to withdraw products from the market. And that withdrawal of products, in turn, tends to be supportive of margins, not just in mortgages, frankly, but across the board. And so, you know, that's what we saw in the last crisis. It may be that that's what we see in this crisis. It may already be feeding through into some of the mortgage comments that I just made. But I think, you know, one should be very careful before drawing the conclusion that we're on a kind of relentless downward path on margins. Actually, the experience of most banking crises is that when capital gets hit, margins actually tend to go up in compensation for that. And, you know, let's see whether that happens here. But I think that wouldn't necessarily be an unreasonable outlook to have.

If I can just add two points on what William said, which might be helpful. I mean, the first one on mortgages is that you have to bear in mind as well that given that the market has been shut for two or three months, activity is now resuming, and customers are now doing transactions again, there could be more time than usually in terms of new business application margins translating into completion margins. because of this, the absence of the coronavirus. So normally, you have 90 days between applications converting into completions, and this could take a bit longer, and so going to next year, to the point William was saying and has mentioned in a question before. And the second point is about the mix. I mean, we are forecasting a recovery next year, so GDP could go down on this case 10% this year, but up 6% next year. That could bring activity up to, and that should bring the mix again into the normal direction. And through mix, with the credit cards, for example, recovering, motor has already recovered. You also will have an impact back on margin through mix, as we now have had it negatively in the second quarter. As we were explaining, this should reverse next year.

Perfect.

Thank you.

Thank you.

Thanks very much. Thank you. Given the time, the final question comes from the line of Jonathan Pierce-Numis. Please go ahead.

Yeah, good morning, both. Quick questions. You'll be pleased to hear. Just to check my math on the structural hedge, all in yields 1.4% in the five-year swap today at about 15 basis points. You've mentioned Williams, straight line, rolled off over the next few years. So are we looking from that component within margin at sort of 10 basis points headwind the year 2021 2022 that would be the first question the second question on capital um and also the capital numbers looking good at the moment there are some headwinds building the one i wanted to ask about though was pensions now you may just say look we're not telling you yet um but be interested in how those discussions are going given the fairly sizable contributions currently planned for for the next few years there thank you Yeah, thanks, Simon.

On the structural hedge, just to take the first of those two questions, the wall-off, as I mentioned in the comments earlier on, is pretty much in a straight line. The weighted average life is now 2.5 years. The hedge itself has a life of about five years. So pretty much straight line within that five-year profile. I would be a little bit careful before necessarily saying directly correlating that to the income streams in a very precise way because there are different securities that have different yields attached to them. So it might be a little bit bumpy. But I think in the absence of us giving you more precise guidance, I think, you know, just take that as an assumption, but just be aware of the fact that there may be a few bumps along the road. I do think that, you know, when we look at the structural hedge, as you know, we take a view that is around protecting shareholder value and we take a view that is around protecting the consistency of earnings. And when we look for structural hedges, we seek to deploy it over the coming years. Obviously, we'll be subject to whatever it is the rates environment throws at us, but we'll also be judicious about what we do with the structural hedge and when to ensure that we both achieve income consistency and also shareholder returns. So the profile of it will depend upon how we reinvest the structural hedge over what time and, you know, in that context, what opportunities the rates market may give us and what the trends in the rates market may be. The capital point, as you said, and I would endorse, the capital position remained and will remain very strong. The contribution of pensions to that, it's worth just noting that our financial aid has come down by 30 basis points in the second quarter, and that is because we accelerated our 2020 pension contributions by around $600 million. which in turn led to our financial aid to come down off the back of that and lead to our regulatory capital requirements, if you like, coming down off the back of that. So that's helpful. As we look forward, and as you pointed out, we are also in a renegotiation with the trustees, which takes place out of a balance sheet drawn at the end of 2019. That balance sheet is drawn at the end of 2019. That's kind of close in place, the negotiations, if you like. We are in the process of discussing with the trustees about how we – how we make contributions to the scheme going forward, taking into account all of their objectives, but also taking into account our objectives. I'm sure that we will end up at a kind of a reasonable spot, if you like, that considers each of those two in a way that's mutually satisfactory. But I'm not going to go beyond that, Jonathan, just because it's the middle or even the start, really, of a negotiation.

Yeah, understood. It's interesting that the Pillar 2A has come down you know, almost, well, have come down in the same half year as those accelerated contributions. Is that what you would expect going forward, an almost instant decline in the Pillar 2A as these contributions are made?

There's a couple of capital points worth pointing out as we go forward. I mean, we talked about transitional effects, and, you know, we'll see exactly the timing of how that plays out. But the other couple of capital points that we're making are we have – the developments within the counter-cyclical buffer, and we'll see how they play out during the course of the year. But at the moment, it looks like there may be a 25 basis points equity relief, if you like, in the context of the counter-cyclical buffer. There are discussions exactly how that will play out, particularly in the context of this reintroduction in the year subsequently, and that's up in the air, clearly. The other point is intangibles. Intangibles, we get around a 25 basis point benefit from, if that comes through in the form that is being discussed for the end of this year. So, it doesn't answer your point too precisely, Jonathan, but hopefully that gives you some guidance. Okay, brilliant. Thanks a lot. I'm sorry, but we've now, we've run out of time. So, I just want to thank everybody for dialing in. We will contact all of those who are unable to ask questions. and make sure that anybody who asks questions are able to do so to the IR team. So straight after this call and during the course of today and tomorrow, we'll make sure that any questions that were not answered do indeed get picked up. But I hope it's been a useful call. We've been going for now over an hour and a half, which hopefully has given everybody an opportunity to both hear the speeches and to address some questions. Thanks very much indeed for dialing in.

Thank you, everyone. Ladies and gentlemen, this concludes the Lloyds Banking Group 2020 Half Year Results event. For those of you wishing to review this event, information for the replay is available on the Lloyds Banking Group website. Thank you for listening.