Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group Q3 2020 interim management statement 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 one on your telephone. 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.

Good morning, everyone, and thank you for joining our 2020 third quarter interim management statement presentation. I will give a brief overview of our encouraging business recovery in Q3 with a return to profitability in the quarter. followed by how our digital transformation is creating new opportunities for the group and being recognized as market leading by our customers. All this while we continue to strive for a more inclusive and sustainable future. I will then hand over to William to run through the financials and we'll have time for questions at the end. I will turn first to our business recovery in the quarter on slide two. Despite a challenging operating environment and while significant uncertainties remain, we have seen the open mortgage book grow by £3.5 billion in the quarter and with a 22% share of approvals. This represents the highest volume of growth in approvals in a quarter since 2008. We have also continued to see retail current accounts growing ahead of the markets through the third quarter, and group deposits are now £35 billion higher than at the end of the year. We have seen a significant change in financial performance in Q3 with a return to profitability. This is largely due to impairments, but also to an increase in business volumes, and has enabled the group to deliver a return on tangible equity of 7.4% in Q3. Given the better-than-expected macroeconomic conditions over the quarter and our ongoing optimization of the commercial book, we are able to enhance our 2020 guidance for both impairments and risk-weighted assets. William will go through this in detail shortly. The group is also benefiting from our long-run investment in the business and continues to focus on strategic execution. The benefits of our £2.6 billion of strategic investment can be seen in our record digital engagement and satisfaction scores, as I shall outline on the next slide. So turning to slide three and how our recognised digital leadership position is creating new opportunities for the group. We are the largest digital bank in the UK with 17.1 million digital active users, of which 12.1 million use our mobile apps, up 1.4 million in the last nine months. We are very pleased with this continued customer growth, and this is a clear strategic advantage as those customers log on to their app 25 times per month, That is a total of 3.1 billion logons so far this year. This has enabled us to serve more customer needs digitally throughout a challenging period, and we have seen an 18% increase in products originated digitally this year. Importantly, this is not at the expense of quality, and our digital net promoter score is up 8% over the same period. As you have heard me say many times before, our unique single customer view capability enables the group to leverage our deep retail banking relationships in order to support customers' long-term savings needs. We now have over 6 million customers who are able to use this unique functionality. Those customers view 16 million of their insurance and investment products alongside a bank account every month, including pensions, home insurance, protection, and shared building. This is at 8% in the quarter, and over 70% of those views came through our mobile apps. Our long-run investment and digital transformation positioned the group well to continue to serve our customers through the pandemic. I have great confidence in the future of the group and in its competitive position. we will maintain our relentless focus on supporting our customers and the UK economy, while we will continue investing for the future and developing our competitive advantages further. I will now turn to slide four and outline how the group is continuing to strive towards an inclusive and more sustainable future. We have adopted a proactive response to the coronavirus pandemic, and we are working closely with the government, our regulators and other stakeholders to support customers and businesses up and down the country as we help Britain recover, which is at the heart of the group's purpose. We have particularly focused on mental health and wellbeing while also committing 25.5 million pounds of funding to our independent charitable foundations for 2021, which will enable them to continue their vital work. We have all been deeply moved by recent events around the world which have highlighted the vital importance of diversity and how much we still have to do. We have announced our Race Action Plan, which will drive cultural change across the organization, while ensuring diversity of recruitment and progression. We have quantified our target to increase black representation in senior roles, and this is in addition to our existing diversity targets. This is clearly the right thing to do for our colleagues and for the benefit of the group, but it is also important to note that Moody's Red recognized the Race Action Plan as a credit positive, given improved diversity and reduced social risk. Finally, on sustainability, we have announced an ambitious goal to reduce the carbon emissions we finance by over 50% by 2030. At the same time, we have already met our internal carbon reduction target for 2030, so we are working on developing new targets. These actions and more are the right things to do as supporting diversity and sustainability will directly aid the recovery of the UK economy from which we will benefit. This is fully aligned with the group's long-term strategic objectives, the position of the franchise and the interests of our shareholders. That concludes my opening remarks and I will now hand over to William to run through the financials in more detail.

Thank you, Antonio, and good morning, everyone. I'm planning to give a run-through of the group's financial performance. As usual, we'll then open up for Q&A at the end. Turning first to slide six with an overview of the financials. The group's resilient business model and the reduced impairment charge in the quarter has driven a return to profitability in Q3 with a statutory profit before tax of $1 billion. Net income of $3.4 billion in Q3 is down 2% on the second quarter, largely due to the performance in other income, which I'll come back to in more detail later on. NII is supported by a net interest margin of 242 basis points and a small increase in average interest-earning assets to $436 billion. Costs remain an area of intense focus for the group. The 4% reduction in total costs is largely derived from 5% lower VAU costs. The group's cost-income ratio performance, meanwhile, has clearly been impacted by the challenging revenue environment. Pre-provision operating profit of $5 billion year-to-date includes $1.5 billion in the quarter, and while this is down 6% on Q2, it still gives very substantial loss-absorbing capacity. The impairment environment in the third quarter has been benign relative to expectations. The charge of $301 million reflects a relatively stable macroeconomic environment and the significant reserving undertaken in Q2. I'll come on to this in more detail in a few minutes. TNAV is up 0.6 pence in the quarter at 52.2 pence per share. CT1 ratio has increased to 15.2% or 14% excluding transitionals, both comfortably ahead of our target and regulatory capital requirements. I'll now turn to slide seven and look at how the group's customer franchise performed in Q3. As Antonio mentioned, we've seen strong growth in the mortgage book in the quarter. The open book is up 3.5 billion with a 22% share of approvals, building a strong pipeline looking into Q4. Based on that, we expect the open book performance in Q4 to be stronger than in the third quarter. Consumer finance has performed at the better end of expectations. I mentioned at the half year that we expected balances to be down around 5% to 10% in the second half. Given the performance in Q3, we now expect balances to be closer to 5% down in H2. In commercial, we continue to see SME lending driven by the government support schemes. We've now delivered about $8 billion of guaranteed lending, with a market share of 18%. Going the other way, corporate and institutional balances are down $4.8 billion in the quarter, as we continue to see clients pay down their RCFs, while we've also continued our work on low returning relationships. Commercial RCF drawings are now back at February's level, having seen significant drawdowns early on in the crisis. Average interest-owning assets are up $1 billion on Q2, and as mentioned, looking forward to the fourth quarter, I would expect continued support for AIEAs from the strong growth in the open mortgage book. As you've heard from Antonio, in total deposits are now up over $35 billion in the year, a very strong performance. This growth has continued in Q3, indeed ahead of the market in retail current accounts. Meanwhile, commercial is benefiting from around 50% of support scheme lending remaining on deposit. Turning now to net interest income on slide eight. NII is 8.1 billion year-to-date, or 2.6 billion in the quarter. The Q3 margin of 242 basis points is in line with half-year guidance and up a couple of basis points on Q2. In addition to better consumer finance balances versus expectations, we've also seen a full quarter's benefit of deposit repricing and the benefit of significant low-cost deposit growth, as well as overdraft charging starting to come back into the margin, consistent with the outline that I gave at the half-year. I've already mentioned the strong mortgage performance. New business mortgage margins are attractive and higher than maturing front-book business. That attractive asset growth will continue to support AIEAs in the fourth quarter and is thereby supportive of group interest income, albeit slightly dilutive to the group margin. The current low rate environment is also impacting the structural hedge. With the five-year swap only around seven basis points above three-month LIBOR, we've been replacing maturities with shorter-dated hedges. This strategy allows us to achieve income protection while preserving flexibility. You see the consequence of that approach in the now roughly two-year weighted average life of the hedge. In that context, hedge earnings of 1.1 billion, or 0.8%, over average life all year to date will likely continue to reduce gradually over time if the curve remains flat. Taken together, the better-than-expected real economy lending is currently offsetting the fatter yield curve and is supportive of interest income. Based on this mix, we expect AIEAs to be asked and expect the margin to remain broadly stable at around 240 basis points in Q4, resulting in a full-year margin of around 250 basis points. Turning now to slide nine, another income. OI of $3.4 billion for nine months includes approximately $1 billion in Q3. This is clearly below our aspirations and is due to the continued relatively low levels of activity across our key markets. We've also seen an $80 million charge in respect to the asset management market review following the FCA's review of pricing across the investment industry. With respect to the divisions, retail has benefited from a pickup in card spend and Q3 OI is in line with Q2 in an environment of relatively subdued levels of customer activity. Commercial saw lower markets income versus Q2 given our UK focus and transaction banking activity remains subdued. Insurance continues to be impacted by reduced levels of new business, the AMR charge, and the non-repeat of the illiquidity premium benefit of Q2. Overall, I expect other incomes to remain subject to similar pressures in the fourth quarter, less the AMMR charge, but potentially impacted by the annual review of insurance persistency assumptions. However, we're now around the base level from which we would expect activity to start to recover in 2021. We are investing in both resilience and in diversification in other income, including, for example, in our markets platforms and payments propositions in commercial, as well as our products platforms and the Schroeders Personal Wealth Joint Venture within insurance and wealth. Now, moving on to slide 10 in costs. You've heard about our intense focus on costs many times before, and this remains as important as ever. Total costs have come down by 4% year-on-year, including a 5% reduction in BAU costs. This has been achieved despite deferring all role-based restructuring activity for a number of months this year, resulting in higher than expected average headcount, albeit with lower bonus accruals. Remediation of 254 million for nine months has increased by 28 million year-on-year. This reflects charges across a number of existing programs. I expect this to be higher in Q4, given various small historic conduct programs coming to an end. Overall, the cost in 2020 is likely to end up above our ongoing expectation of 200 to 300 million per annum. Our track record of ongoing sustainable cost savings has enabled continued investment in the business. We've invested a total of 1.6 billion so far in 2020 and made a strategic investment of 2.6 billion over the life of the GSR3 program to date. Investment spend has been adapted to the pandemic situation, but we remain absolutely committed to investing in the long-term success of the Group, especially in our digital capabilities. The benefit of this investment has been particularly evident during a pandemic, as you've heard from Antonio earlier on. While investment will remain a priority for the Group, we continue to expect operating costs to be below $7.6 billion for the year. I'll now move on to impairment on slide 11. The impairment experience in Q3 has been benign, given the better-than-expected macroeconomic environment and the continued presence of government and bank customer support schemes. The impairment charge of $301 million for Q3 recognizes this benign picture and overall holds the expected credit loss steady. This is consistent with our updated economic outlook and the front-loading of our reserving taken in Q2. The retail charge of 398 million in the quarter is only a little above the pre-pandemic run rate, and in commercial, we've not seen any significant charges this quarter. Importantly, the retail charge includes a management overlay of 205 million. This is taken to offset provision releases that our model generates as a result of benign arrears experience in Q3. We have taken the judgment that arrears and losses have been kept low by the range of customer support measures available, and hence it would not have been appropriate to recognize larger provision releases at this point. As mentioned, we've also updated our forward-looking economic assumptions. Forecasts are reprofiled but unchanged in the longer term, essentially maintaining our view of a significant slowdown in activity but delaying much of it by about a quarter into 2021. It also recognizes some of the better performance that we've seen in Q3. This update results in a modest release of 105 million, largely reflecting the benefits from a higher HPI in 2020. It's also worth adding that we've slightly refined our triggers for staging in cards, leading to 1.4 billion of up-to-date balances, moving to stage two, and an associated increase in provision of 40 million. Given all of this, our stock of ECLs remains broadly stable at 7.1 billion, a pickup of 0.5 billion on our base case ECL and providing significant protection against potential future credit impairments. The ECL continues to reflect a range of economic scenarios, including our severe downside weighted at 10% and incorporating peak unemployment of 12.5% in Q2 2021. Assuming no further changes to our economic scenarios, the front loading of our provision under IFRS 9 in H1 means that we now expect the full year impairment charge to be at the lower end of our 4.5 to 5.5 billion range. The caveat of no material change to our economic scenarios is important, given the obvious uncertainties. Now, moving to slide 12, I'll touch on how we've maintained our reserving across business lines. As I mentioned, the $3 billion increase in expected credit loss provisions in the first nine months means that we now have an ECL provision stock of $7.1 billion. This provides significant balance sheet resilience, while currently write-offs remain in line with pre-crisis levels. Overall balance sheet coverage of 1.4% is in line with the half-year. Within that, mortgages are 0.6%, and we've increased coverage on the cards book from 6.3% to 6.7%, including 44% on Stage 3. We maintain our proactive charge of policy on cards at four months in arrears. Indeed, if we charged off after an additional 12 months, in line with some of our peers, our pro forma overall cards coverage would be closer to 9.1%, with Stage 3 at 69%. I'm now going to look briefly at the group's exposure to certain commercial sectors on slide 13. The commercial portfolio has been subject to careful risk management in recent years. Around 70% of total medium and large corporate exposure is to investment-grade clients, while around 90% of SME lending is secured. Within this, our exposure to the sectors most impacted by coronavirus is modest in the context of the group. It's only around 2% of group lending, or around 12% of commercial lending. There's been a full reduction in the exposure to these impacted sectors during the quarter. As mentioned, commercial RCF drawings have fallen by around 2 billion in Q3. This means that the full 8 billion, which was drawn down at the beginning of the crisis, has now been repaid, and RCFs are back to pre-crisis levels, further reducing our balance sheet risk. Finally, on commercial, our commercial real estate portfolio has reduced by 0.4 billion since the half year, whilst maintaining its average LTV at 49%, with over two-thirds below 60% LTV. I'll now move on to payment holidays on slide 14. The vast majority of first payment holidays have now matured, with around 82% of customers now repaying, up from around 70% at the half year. In total, payment holidays have been granted around 69 billion of retail lending. with today less than $15 billion outstanding, including $2.4 billion having missed a payment. Our market share of mortgage payment holidays is now below our natural market share. Around 30% of extended mortgage payment holidays have also now expired, with around 90% resuming payment. As mentioned at the half-year, the cohort of extensions across products is of lower credit quality. with higher balances, but it's also worth noting that around 35% of outstanding payment holidays are already in Stage 2. Indeed, moving the remaining population of extensions across all assets to Stage 2 would generate an incremental ECL of less than 100 million. Early arrears are low at just under 4% of mature payment holidays. This includes missed first payments, and notably around half of the mortgage and motor finance arrears were already in arrears at the start of their payment holiday. Briefly on SME capital repayment holidays, over 90% of secured lending, and while maturities remain at low levels, we're seeing a similar picture to retail. Now moving down to P&L to look at the below the line items on slide 15. Restructuring is broadly in line with prior year to date, but up significantly on Q2 as the group resumed previously halted severance plans and property rationalization work in Q3. This will continue, and we expect another quarter of relatively high restructuring charges in Q4. Volatility and other items in the quarter include positive banking and insurance volatility, partially offset by the normal fair value unwind charge. PPI provisions are again zero in the quarter, and we remain happy with the circa 10% model conversion rate and with the unutilized provision of $328 million. The year-to-date tax credit of $273 million reflects the DTA remeasurement benefit in Q1 and taxable losses thereafter. As a result of all of this, we end with a statutory profit after tax of $707 million for the year to date and $688 million in Q3. The return on tangible equity, as Antonio said, is 7.4% in the third quarter. Now, moving on to capital on slide 16. Our CET1 ratio of 15.2% is comfortably above both our internal capital target and our regulatory capital requirements of around 11%. It acts as a substantial protection against potential credit impairment. CET1 continues to benefit from the temporary addition of 121 basis points of RFS9 transitionals. We have previously expected up to half of the in-year increase to unwind with staging movements in H2, but this is now looking unlikely. We still expect to see this unwind as assets move into Stage 3, but this is now likely to be more of a 2021 story. We've also had a 16 basis point benefit in Q3 from lower RWAs, partly because we've managed RWAs better and partly because we've not seen expected credit migration. Again, while we still expect to see this migration take place, we now expect this to be a largely next year event. Therefore, on the basis of our macro forecast for 2020, we now expect RWAs at year end to be broadly stable on Q3. In total, CET1 is up 64 basis points in the quarter, which is strong, albeit this is clearly helped by the RWA reduction and further transitional benefit in quarter. Looking forward and subject to regulatory approval, we see a circa 50 basis point benefit from the potential change in treatment of software intangibles in Q4. This is higher than our previous expectation given the change in prudential amortization for over three years. On capital requirements, we will hold to our ongoing CT1 target of around 12.5% with a management buffer of around 1%. This means that we're comfortably above both our internal target and regulatory capital requirements. As usual, the Board will consider any capital return at year-end when they look at all available information, including, in particular, the economic outlook, as well as capital levels and regulatory requirements. Finally, turning to slide 17. Strong growth on both sides of the balance sheet has enabled us to offset the impacts of the challenging rate environment. Together with a stable economic environment, this has contributed to a return to profitability in Q3. The group's solid pre-provision profitability, prudent reserving, and enhanced capital strength give significant loss-absorbing capacity. It also means that we're in a strong position to support our customers, despite the ongoing uncertainty. As mentioned in the relevant areas and based upon our economic assumptions, we've updated guidance for 2020 impairment and risk-weighted assets. You can see a summary of our guidance on the slide in front of you. In conclusion, we have great confidence in the future of the group. We will emerge from this crisis having learned a great deal about the organisation, our customers and new ways of working. Whatever the future brings, we will maintain our focus on supporting our customers and the UK economy. This is the right thing to do and is in the best interests of the group and our shareholders. We remain well positioned to deliver long-term, superior and sustainable returns. That concludes the presentation for this morning and we're happy to take your questions. Thank you for listening.