Lloyds Banking Group plc

Good morning, everybody, and welcome to today's presentation. You'll be glad to hear that I don't intend to be a regular participant at these events, but I did want to say a few words today. Firstly, I wanted to say how privileged I feel to be chair of Lloyds Banking Group. It is a great organization with wonderful people and a vital purpose given today's environment. And secondly, given the importance of maintaining momentum through chief executive transition, I wanted to say a few words about strategic review 2021 before handing over to Antonio and William. This is an important time for the group. Our primary role in line with our purpose this year must be to support the UK's recovery from the pandemic. But given the continued acceleration of change in our external environment, We must also be active in evolving our own strategy. So in order to maintain momentum, strategic review 2021 combined specific short term no regrets action with an agreed long term direction based on the transformation of the business over many years under Antonio's leadership. It will also allow Charlie Nunn to continue to shape the future of the business when he arrives in August. The Board is confident that this is the right approach. In order to achieve these objectives, the team has taken the six key elements of our agreed longer-term direction, and for each of these has identified clear areas for investment focus this year. In turn, these areas of investment focus have a set of specific underlying deliverables. due this year and, where appropriate, over the medium term. This will allow us to make demonstrable progress on our journey this year and lay solid foundations for the future. The Board and the management team are excited about Strategic Review 2021. By enhancing our businesses and our capabilities in this way, we will be able to make real progress towards our aim of building the UK's preferred financial partner. whilst also playing an active role in helping Britain recover. So now I'd like to hand over to Antonio and William. Thank you.

Good morning, everybody. Thank you for joining our 2020 full year results presentation. And thank you, Robin, for your words. I will begin by providing a brief overview of results and our recent strategic progress. William will then discuss financials in more detail before updating you on the strategic review 2021. Turning to slide three of the presentation. 2020 was a challenging year. given the significant impact coronavirus has had on our customers, colleagues and communities across the UK. I am deeply proud of the vital work that has been done by the group to support the UK economy and to help Britain recover throughout 2020. Our colleagues across the group continue to demonstrate extraordinary resilience and dedication supporting our customers and communities in very difficult circumstances. Our long-run transformation and investment has enabled continued delivery and positioned us well through the pandemic. We have continued to serve customers through their channel of preference and testament to this customer focus we have delivered record customer satisfaction levels during 2020 across multiple channels. We have also seen the strength of our franchise further reinforced with deposit growth across our trusted brands of £39 billion in the year. In addition, despite the pandemic changing the way in which the majority of colleagues worked in 2020, we saw record employee engagement scores above the UK high-performing norm. As we look ahead, we remain absolutely focused on working with all of our stakeholders to ensure a sustainable national recovery. As a result, our core, long-standing purpose of helping Britain prosper has never been more important. Turning to Helping Britain Prosper in slide four of the presentation. We launched our Helping Britain Prosper plan in 2014, the first UK bank to launch such a plan. Over the years, it has served to unite the group behind an inspiring set of evolving environmental and societal initiatives. which have enabled us to deliver significant impact in key areas where we believe we can make the biggest difference as the UK's largest financial services provider. This includes championing diversity as the first FTSE 100 company to set public gender and race targets, as well as being one of the largest corporate donors in the UK. Recognizing that societal demands are evolving, we must continue to strive for further progress in delivering a more responsible, sustainable, and inclusive organization. To support this, we have today announced a number of new exciting actions that will complement our existing ESG ambitions and support our purpose. Turning now to our financial performance on slide five. The Group's financial performance in 2020 was inevitably impacted by the low rate environment as well as depressed customer activity and a significant deterioration in the economic outlook in the first half. As a result, net income of £14.4 billion was 16% lower than 2019. We maintained our rigorous approach to cost management with total costs down 4%, although this did not fully offset the more challenging revenue environment, with pre-provisioning operating profits down 27%. The impairment charge of 4.2 billion pounds was largely taken in the first half. The economic outlook has improved slightly since Q3, and our actual credit experiences continue to remain stable. Our balance sheet remains strong, and we delivered stable hourly rates of £10.3 billion in the year, growing in selected areas, such as mortgages, especially in the second half of the year. Given our strong capital position at the year end, the Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the PRA guidelines. Turning to slide six of the economy. We have seen unprecedented levels of contraction in the UK economy in 2020 as a result of the lockdown measures. The economy has, however, benefited from significant levels of government support, which has been fundamental in limiting the impacts from the crisis. HPI has performed well in 2020, as customers took advantage of the stamp-dute holiday and additional savings to adapt their home preferences to the changing environment. In addition, while customer spending fell sharply in March and April, we have seen some recovery throughout the year, although some sectors are still well below pre-crisis levels. We have started to see the unemployment rate gradually pick up, but this continues to be supported by the Coronavirus Job Retention Scheme, which has been extended to at least the end of April. Finally, while UK consumer credit fell sharply as spending was constrained, growth in household deposits increased to over 10% as consumers reduced spending and increased savings. This has been the right approach. given the very significant uncertainties the pandemic has produced. As an integrated provider of banking, insurance, and wealth needs, we believe this higher savings trend offers attractive opportunities for future growth. Turning now to slide seven. Ahead of William taking you through the latest evolution of the group strategy, I would like to briefly reflect on our business transformation since 2011. In this period, we have successfully shifted our focus from one of restructuring to one of selective growth and investment. Successful execution in this period has created clear competitive advantages. In addition to significant improvements for customers and colleagues, we have delivered for shareholders across a number of areas. Moving now to look at the most recent stage of this journey, GSR3, on slide 8. In 2018, we launched GSR3 with the aim of transforming the group for success in a digital world. Despite our external environment changing significantly during this period, We achieved the majority of our targeted outcomes without performance in a number of areas underpinned by record investments. Over the last three years, we delivered for our customers with innovative products and services. We continue to expand the reach of our digital franchise and created a comprehensive insurance and wealth offering, two areas that I will talk about in more detail shortly. And finally, we continue to equip our people with the skills and capabilities to deliver our transformation while creating a group that everybody can be proud of. These successes during GSR3 have laid the foundations for the Strategic Review 2021. Turning now to slide nine. We have the largest digital bank in the UK with 17.4 million digitally active users and 12.5 million mobile app users. Both of these have grown at pace over the course of the last three years. Importantly, as you have heard, growth in these channels has been matched by continued increase in customer satisfaction. We have been able to effectively respond to changing customer preferences and we believe that a key component of our competitive advantage is our differentiated multi-brand, multi-channel model supporting our segmentation strategy alongside the largest branch network in the UK. The growth in our digital channel also provides the group with capabilities to effectively compete with new digital-only challengers with a marginal cost to serve or just £15 per customer for those customers who opt for a digital-only offering. This value that we can create through digital for our customers is the result of continued targeted investment, and we see further opportunities here. Turning now to our insurance and wealth business on slide 10. Our priorities in insurance and wealth during GSR3 were to drive momentum in the business and create the capabilities for future growth. This has resulted in market share gains across multiple insurance markets, such as five percentage point increases in both home insurance and corporate pensions. In addition, Our strategic actions have enabled an enhanced wealth offering that will allow us to meet the various financial needs of our customers. At the end of 2018, we announced a strategic partnership with Schroders, combining our significant customer base with the extensive distribution capabilities of Schroders' investment and wealth management expertise. While the pandemic has inevitably caused some delays, our ambition to become a top three financial planning business remains unchanged. We now expect to achieve this by the end of 2025, two years later than originally planned. This partnership not only enhances our customer offering, but will also provide greater income diversification in a low-rate environment. turning now to summarize on slide 11. Our successful transformation across GSR 1 to 3 positions the group well for the future. We have built clear competitive advantages, including our leading focus on efficiency, which has created the capacity for increasing levels of investment. In turn, this has enabled ongoing improvements to our customer offering and internal processes, as well as providing the optionality to unlock new investment opportunities while producing sustainable and superior returns for our shareholders. This, combined with our other core capabilities, creates the strong foundations for Strategic Review 2021. Thank you. I would now like to hand over to William, who will discuss our 2020 financial performance. before presenting the Strategic Review 2021.

Thank you, Antonio, and good morning, everyone. I'll now run through the 2020 results before discussing the Strategic Review 2021 and then opening up the panel. 21st, slide 13, an overview of the financials. Net income of £14.4 billion is down 16% year-on-year. As you know, this was largely driven by bank-based rate reductions, change in asset mix, and lower levels of activity. In the context of this challenging environment, the group continued to demonstrate cross-discipline, with costs down 4%. Meanwhile, the cost-to-income ratio has clearly been impacted by the revenue environment, but remains low compared to peers. Pre-provisioning operating profit of £6.4 billion included £1.4 billion profit in Q4, broadly in line with Q3. The impairment experience in the fourth quarter has been better than expected at Q3, reflecting a somewhat improved macroeconomic outlook and stable credit experience in the quarter. Tax-free profit before tax of £1.2 billion was down 72% year-on-year due to the income developments and, of course, the impairment charge taken in the first half. TNAV was stable at 52.3 pence per share. Meanwhile, a CET1 ratio increased to 16.2% post the full-year dividend of 0.57 pence per share. I'll now turn to slide 14 and look at how the group's customer franchise performed across 2020. Total mortgage balances were up 5.2 billion in the year, and in line with our expectations, the open book was up 6.7 billion in the fourth quarter. We expect open book mortgage balances to continue to grow in the first quarter of 2021 and expect net open book mortgage growth over the full year. Credit card balances were significantly impacted by the pandemic, reducing levels of activity with balances down 19% of the year. Motor finance and unsecured loans were also lower, a 6% and 5% reduction respectively. Given the continued activity restrictions, we expect consumer finance balances to be lower in the first half of 2021 before we start to recover in H2. In commercial, SME balances are up £8.5 billion, predominantly driven by bounce-back loan lending. We've now delivered more than £12 billion of government-guaranteed lending, with a market share of 17%. Corporate institutional balances were down 8.6 billion in 2020 as corporates reduced RCF usage and as we continue to work on low returning relationships. In totality, this resulted in flat AIEAs over the year. Based on our current macroeconomic expectations, we expect AIEAs to be flat to modestly up in 2021. Retail deposits were up nearly 31 billion over the year with current account growth of more than 20 billion. This was ahead of the market. Commercial balances were up around $8 billion, and here the increase in SME deposits, partially driven by government-backed lending held on deposit, more than offset the corporate and institutional reduction, the latter again significantly a function of our pricing activity. Turning to net interest income on slide 15. Net interest income for the year was $10.8 billion, a decrease of 13% on 2019. Given the stable AIAs, this was largely driven by rate and yield curve headwinds, and also partly a function of customer assistance measures, for example in overdrafts, together resulting in a NIM of 252 basis points. Our Q4 margin of 246 basis points was slightly better than the guidance given at Q3. This benefited from a number of tailwinds, including lower funding costs, better mortgage margins, RCF repayment, and a small benefit from deposit repricing. The principal headwind was reduced earnings from the structural hedge. Looking forward, we expect the net interest margin to be in excess of 240 basis points for 2021. Mortgage margins are expected to continue to be attractive for the time being, alongside further optimisation in commercial. This will be offset by lower unsecured lending balances and pressure from the structural hedge, the latter particularly in H2. I'll turn to slide 16 to look at the margin dynamics in more detail. Now, I've already mentioned the strong mortgage performance that we've seen. We've built higher balances at attractive new business mortgage margins, with completions in Q4 at circa 190 basis points. This is a maturing front book business and helped offset the structural hedge drag in Q4. Consumer finance, meanwhile, continues to be impacted by the change in asset mix in H2, particularly the reduction in car balances. The margin dilution in commercial banking in the second half was partly driven by the volume of bounce-back loans and T-bills. Although the margin is lower than lending on our standard terms, we, of course, benefit from the government guarantee. Now, turning to slide 17 to look at deposits. The deposit story in 2020 has been little short of remarkable, an increase of nearly 40 billion. In retail, we've seen inflows from new customers, while also increasing current account average balances increasing given reduced spending. Commercial balance increases were largely driven by cash reserves, partly through balance back conceivable loans being placed on deposits, as well as lower outgoings. Deposit margin was broadly in line with H1 and continues to be lower than 2019, given the lower rate environment. Growing deposit balances, in turn, provide an opportunity to build on wealth and financial planning propositions to better support customers, as you've heard from Antonia. Now turning to look at the structural hedge on slide 18. Total structural hedge earnings in 2020 were $2.4 billion. The hedge balance has increased by $7 billion in 2020 to $186 billion, up $1 billion in Q4. The top rate began to recover in the fourth quarter, and we've seen that recovery continue this year. We've taken advantage of this to reinvest maturities to a longer term, with the weighted average life of the hedge increasing accordingly to 2.5 years at the year end. Furthermore, hedge activity has also increased, providing additional flexibility going forward. The $25 billion increase in capacity is significantly driven by balance sheet mix alongside deposit growth. For example, 11 billion of the increase in capacity is a result of moving a portfolio of commercial deposit balances from base rate linked to managed rate during the year, and hence a proportion are now eligible to be included in the hedge. Looking forward into 2021, given the circa 60 billion of maturities and current yield curve expectations, we expect the hedge earnings to reduce by circa 400 million compared to 2020. Thereafter, in 2022 and 2023, we expect the annual income headwind from hedge maturities to be materially lower. Now, turning to slide 19 to look at other income. Other income of £4.5 billion was down 21% from 2019, with OI in Q4 of £1.1 billion. Over the year, retail other income was impacted by lower interchange fees and lex fleet volumes. Commercial was impacted by reduced levels of current client activity, specifically within transaction banking. Insurance and wealth was impacted by lower new business volumes, negative assumption changes, and a reduction in non-recurring items. And central items, income was impacted by reduced guilt gains. We also saw some impact during the year on our equity business. Looking forward, as we begin to see the easing of restrictions and increased customer activity, we will expect other incomes to gradually recover. We also continue to invest in income diversification opportunities over the medium term. Now, moving to slide 20 and costs. In 2020, we further reduced both operating costs and BAU costs by 4%, with delivery of our enhanced cost target of below 7.6 billion. This equates to circa 300 million reduction in absolute costs in 2020 and circa 600 million across the last two years. In a year, we balanced headwinds from COVID costs with tailwinds from reduced variable remuneration. In relation to investment spending, consistent with the last two years, we capitalized 63% of the above-the-line cash trend. Remediation of 379 million, 15% lower year-on-year, reflects charges across a number of existing programs. Looking forward into 2021, we expect COVID-related costs to remain elevated as we continue with hygiene expenses and potentially increasing customer financial assistance issues. We're also planning to increase variable remuneration costs in 2021. We expect to be able to fully absorb these headwinds for our ongoing cost reduction activity and for our operating costs to continue to fall to circa 7.5 billion this year. Opportunities remain to continue our cost trajectory over the medium term, which I'll briefly touch upon in the next slide. Our focus on efficiency and cost reduction is fundamental to our business model. We've reduced BAU costs by 24% since the start of GSR2. This, in turn, has created room for significant business investment in recent years, and it continues to do so. Today, we continue to look at our strategy for cost reduction across the group. We look at a cost framework involving three parts. Number one, our BAU cost management is outstanding. continues to offer opportunity, for example, third party suppliers, organisational design and automation. Second, COVID related opportunities. Whilst the pandemic has brought additional cost pressures in the near term, we do believe there are both ways to manage this carefully and also medium term structural opportunities, for example, in workplace and in travel. And thirdly, there are emerging strategic opportunities presented by technology, both in our operations and in our interactions with our customers and colleagues. These require investment. Indeed, as we continue to adapt our business to changing environment, we will maintain high levels of strategic investment, with 0.9 billion committed this year, including technology R&D. I'll talk more about this later on. Now, turning to slide 22 to look at impairments. The observed credit experience in Q4 has been very stable. The Q4 impairment charge is 128 million. Within this, the retail charge of 383 million in the quarter is only a little above the pre-pandemic run rate and in line with Q3. Commercial charges in Q4 remain low, and coronavirus-impacted restructuring cases have performed better than expected, generating a small release in the quarter. Macroeconomic outlook has improved slightly since Q3, despite the current national lockdown, given vaccine rollout and the extension of government support. We now expect peak unemployment to be 8% in Q3 2021, lower than the previous expectation of 9% in Q1. HPI performance has also been better than expected in 2020, as I mentioned earlier on. This improved macroeconomic forecast generates releases in our models. However, given the unusually wide range of uncertainties in the current environment, such as virus mutations and extended lockdown, we've taken an additional 400 million management overlay to partially offset these. Our Q4 impairment charge of 128 million is net of this additional overlay. Based on our current macroeconomic assumptions, we expect the 2021 impairment charge to return closer to pre-pandemic levels, and the net asset quality ratio to be below 40 basis points. Now, turning to slide 23 to look at coverage. Our total stock of ECL of 6.9 billion is 2.7 billion higher than December 2019. 4.3 billion of that relates to stage one and stage two exposures, which provide significant resilience to absorb headwinds as and when losses begin to emerge. Meanwhile, coverage levels have increased across all products, and write-offs continue to be at pre-crisis levels across the book. Going to the next page. The balance sheet remains strong, with circa 85% of group lending secured. In mortgages, the quality of our book continues to improve, with loan-to-value ratio now 43.5%, down 1.4 percentage points compared with 2019. More than 91% of the mortgage book now has an LTV of 80% or less. Looking at our retail credit experience, we continue to see low new-to-areas levels across the portfolio at or below pre-crisis levels, despite the majority of payment holidays ending. Let's take a look at payment holidays. Payment holidays have been effective in managing customers through the crisis. 98% of first payment holidays now matured, with 89% of customers resuming payments. Of the remaining 11%, half are on extended payment holidays and half are in arrears. Probably a third of those in arrears were in arrears before the payment holiday was granted. New payment holidays granted remain very low compared to H1 levels, with only 28,000 initiated during the latest national lockdown. And in commercial, the vast majority of commercial repayment holidays have now matured with more than 85% repaying. Now I'll look briefly at the group's exposure to certain commercial sectors on slide 26. Within the commercial portfolio, our exposure to the sectors most impacted by coronavirus remains modest. It's around 2% of group lending. We've seen some deterioration in the credit ratings of these vulnerable sectors during the year, as we expected, with a percentage of investment grade reducing 8 points to 38%. As context, however, our new-to-business support unit levels in H2 were in line with pre-crisis levels. SME credit performance, meanwhile, remained stable, with less than 20 million of write-offs in 2020. Our commercial real estate portfolio continues to be managed with average LTV at 50% and through significant risk transfers. I'll now move to slide 27 to look at below the line items. Total below the line items in 2020 was significantly lower than in 2019 given the reduction in the PPI charge. Restructuring costs were however up 11% year on year. I'll talk briefly on these in the next slide. Volatility and other items included negative insurance volatility, the usual fair value unwind, and a loss of £106 million relating to our liability management exercises, largely in the fourth quarter. This was partially offset by positive banking volatility. As you can see, we've taken a PPI charge of £85 million in Q4. This was principally driven by the financial impact of delays in operational activities given coronavirus. and the final stages of work ahead of an orderly closure of the program. Today, more than 99% of pre-deadline queries have been processed. Moving down, the in-year tax credit of $161 million reflects the DTA measurement benefit in Q1. Statutory return on tangible equity was 3.7% in 2020. Looking forward, and in order to aid comparability across the sector, the group will report its statutory ROTE without adding back the post-tax amortization of intangible assets. On this new basis, and given improving profitability, the group is targeting a return on tangible equity of between 5% and 7% in 2021, on a path to our medium-term target of earning higher than cost of equity returns. Now, moving on to slide 28 to look at restructuring charges in more detail. Restructuring charges of £521 million included £233 million in Q4. Following the resumption of role reduction activities, severance charges of £156 million in 2020 were accelerated in Q4. Property transformation costs of £146 million were largely in the second half as branch and office rationalisation activities picked up. Technology R&D charges relate to costs associated with our initial investigation of new technology capabilities. I'll provide more detail on the initiatives here later on in the presentation, but these activities are at an exploratory stage, and they represent a series of opportunities that we're looking at to deliver and to accelerate transformation. Looking forward, we expect to continue to increase investment in technology R&D, and therefore expect restructuring charges to be somewhat higher in 2021. Moving on to look at risk-weighted assets. Risk-weighted assets were flat in 2020, supported by strong RWA management. 2021, we expect RWAs to be broadly stable on 2020, with continued optimisation within commercial, offsetting some expected credit migration and asset growth. As we look forward into 2022, we do expect RWA inflation from regulatory change, Further out, we did not expect the impact from BAL 3.1 output floor to be material until the latter part of the implementation phase towards 2028. Now, turning to capital. Our CET1 ratio ended the year at 16.2%, following the announced dividend of 0.57 pence per share. This strong capital base remains significantly above both our ongoing internal capital target of circa 13.5% and our regulatory capital requirement of around 11%. CET1 ratio included 51 basis points from the change in treatment of software intangibles during the final quarter. CET1 also continues to benefit from the 115 basis points of IFRS 9 transitional release. We expect slightly more than half of the 83 basis points in-year benefit to unwind in 2021, with the remainder in 2022. Therefore, in 2021, we expect capital build to be impacted both by profitability and by the expected IFRS 9 transitional unwind. Terms have now been agreed in principle in respect to the valuations of the group's three main defined benefit pension schemes. Future deficit contributions will equate to circa 800 million per annum plus 30% of in-year capital distributions up to a limit of 2 billion per annum until a deficit of 7.3 billion has been removed. As Antonio mentioned earlier, we've today announced a dividend of 0.57 pence per share. This is the maximum allowable under PRA guidelines. The Board remains committed to future capital returns In 2021, the board also intends to accrue dividends and resume its progressive and sustainable ordinary dividend policy at a dividend higher than the 2020 level. As normal, the board will consider the size of the final dividend payment and the further return of any surplus capital based on circumstances at the year end. That concludes the review of the financials and we'll now move to a short video from the executive team outlining strategic review 2021. Before I go on to discuss that in more detail, I do hope you enjoy it.

Over the past few years, we have achieved a significant transformation of the group and built the largest digital bank in the UK, backed by substantial investments in our future. Today, we are launching Strategic Review 2021, the next step of our journey. Throughout 2020, we have been developing customer-centric plans to build further on our competitive advantages, strong customer relationships, and tremendous franchise growth, while enabling the group to capture new areas of growth and support the wider UK economy. This video will outline what we hope to achieve in 2021 and beyond in the words of some of the great teams who will be delivering.

Together as a team, we really look forward to accelerating the group's transformation and to building the UK's preferred financial partner. Strategic Review 2021 continues the work of previous plans and reinforces our customer focus. We will deliver coordinated growth in our two main customer segments underpinned by enhancement of four core capabilities. In achieving this, we have clear value-added execution priorities for 2021 that are fully aligned with our long-term strategic vision for each of these areas. We're excited about the opportunities in Strategic Review 2021 and committed to delivering our priorities. Let us talk you through our ambitions.

Our purpose in helping Britain prosper is central to our strategy and underpins everything we do. Building on our robust response to the pandemic over the coming year and beyond, we will focus on helping Britain recover sustainably and inclusively, providing practical financial We will do this across five primary areas of focus, which are embedded in the business and where we believe that as a group, we can make a real difference.

We are the only UK financial group with a full banking, insurance and wealth offering and believe we can be the preferred financial partner for all our customers' needs. We operate the UK's leading digital bank with a multi-brand, multi-channel strategy and are making significant progress in delivering more personalised propositions. As a result of the investment of previous years, we've been able to respond swiftly to customers' changing needs during the pandemic and to grow our franchise. And there remains a significant opportunity ahead to help customers and build the business.

During the last three years, we have built a comprehensive insurance and wealth customer offering. We are now going further, leveraging the strengths of our franchise and our capabilities. This will enable us to meet more of our customers' combined banking insurance and wealth needs. This will not only add extra value to those customers, but also attract people whose additional needs are currently met as well. All this supports our goal to become the preferred financial partner for our personal customers.

We have a strong track record of being by the side of UK businesses, from the smallest enterprises to some of the biggest household names. We've been supporting them through the crisis and are committed to helping them back on their feet. We're also looking to help our clients grow back stronger and greener by supporting their transition to a low-carbon economy. And more broadly, we're increasing our digital offering and improving our product portfolio to deepen our client relationships through the economic cycle with the aspiration of becoming the best bank for business. Technology has been and will be at the heart of our innovation.

It enables us to deliver efficiencies, which in turn create investment capacity, which we can then use to deliver more customer service improvements. We want to be more agile by building a cloud-based and machine learning-enabled architecture that's efficient, scalable, and resilient to help drive the next phase of our business transformation. We are continuing to test and learn new technologies with partners, and these are helping lay the foundations for our future platforms. This is going to enable us to become a truly technology and data-enabled organization and help deploy smarter solutions deliver better customer experiences.

As part of our ongoing transformation, we will continue to modernise our payments infrastructure to ensure we can meet all our customers' evolving payment needs in their channel of choice. Leveraging our strong participation across the payments ecosystem and on our parallel market position, we're responding to the recent acceleration of change in people shopping behaviours and opportunities we see.

Our people are the foundation of our success. I'm so proud of the flexibility and determination our people have shown during the pandemic. In our last strategic plan, we committed to enhancing skills and transforming how we work. We will now integrate everything we have learned in the past year as we create new ways of working. We will keep adapting and driving towards a purposeful, future-ready, inclusive workforce in a transformed workspace.

This is our vision for Strategic Review 2021, the next stage on our journey. Together as a team, we look forward to continuing the transformation of the business, to building the UK's preferred financial partner and to helping Britain recover.

Welcome back, everybody. I hope our short video helped give you a flavour of our vision for Strategic Review 2021 and the work that the entire board and executive management team has put into it over the last few months. I'll take you through a few of the highlights now. Firstly, turning to slide 32 on the opportunities and the challenges ahead of us. As you well know, 2020 was a year of significant change for both society and the economy as a result of the pandemic. We've also seen a significant acceleration in longer-term strategic trends in our sector, including the move to digital. While change of this scale undoubtedly creates challenges and the path to recovery for the UK will not be linear, Strong foundations we have at Lloyds position as well to rise to these challenges. We want to take a leading and transformational role in many of the opportunities that change creates. I'll now provide an overview of how we plan to do this with an overview of Strategic Review 2021 on the next slide. Strategic Review 2021 will deliver meaningful improvement for our customers and colleagues. It will also support the creation of sustainable shareholder value through revenue generation and diversification. further efficiency gains and disciplined growth. In Strategic Review 2021, we will accelerate our transformation to build the UK's preferred financial partner. Following points are key. First, as you heard earlier, our purpose of helping Britain prosper is more important than ever. In Strategic Review 2021, we will centre this effort on helping Britain recover, supporting our customers' financial health and resilience through areas of focus that are fully embedded in the business. Second, across our core business areas of retail, insurance and wealth and commercial banking, we will bring further alignment and improvement to unlock coordinated growth opportunities. This will be supported by further enhancing our core capabilities that enable sustainable success in the new environment, specifically technology, payments, data and our people. Third, Strategic Review 2021 includes clear execution outcomes for the year. underpinned by long-term strategic vision in each area. Our business and capability priorities, as outlined here, are built on our transformation to date. They were and will continue to be the foundations of our success long into the future. All of these aims will be supported by significant levels of strategic investment. Together with our execution credibility, Strategic Review 2021 will thereby ensure that the group continues to build momentum during a period of management and environmental change. To begin, I'd like to turn to Helping Britain Recover on the next slide. The impact of the pandemic has been felt by everyone. Its social and economic effects on the UK are likely to be long-lasting. As a result, consistent with our purpose to help Britain prosper in 2021, we will focus on helping Britain recover with objectives that, again, are fully embedded in our business. Our response takes action in five key areas where we believe we can make a difference. Measures include supporting our personal and business customers through the recovery with dedicated financial and wellbeing support, expanding the availability of affordable and quality housing, and delivering on our broader environmental and societal objectives. Through our actions in these areas, we will play our role in creating an environmentally sustainable and inclusive future for the UK. In doing so, we will build a successful and enduring business of which we can all be proud. Turning to our business-facing initiatives on slide 35. To give you a framework in each of our two customer segments and four capabilities, we lay out our opportunity, our ideas for investment in 2021, and some examples of how you can expect us to measure our success in 2021 and beyond. Looking first at personal customers. Our personal customer franchise has truly unique foundations. We hold a relationship with around half of the UK adult population and operate the largest digital bank in the UK as part of our multi-brand, multi-channel strategy. As we look ahead, we see scope to grow our franchise by significantly deepening our relationships with priority segment customers. Meeting more of our customers' broader financial needs, particularly where a number of these are currently met by other providers, is a priority. This will be achieved by increasing personalisation and by leveraging our unique capabilities as an integrated provider of both banking and insurance and wealth services. We will also look to reduce our cost to serve across segments through further digitalisation. Here, for measures of success in 2021, we expect to grow the open mortgage book. We will also maintain our all-channel NPS, which hit record high levels in 2020. And looking beyond this, in line with our focus on meeting more of our customers' financial needs, we intend to deliver 25 billion net new money growth in insurance and wealth by 2023. The latter represents wholly organic growth and further progression from the open book growth delivered in GSR3. Giving now to Best Bank for Business on slide 36. Our vision for Strategic Review 2021 in commercial banking is to be the best bank for business. Our commercial business has outstanding reach. This is supported by our brand and scale, our above-market growth in SME, and a strong presence amongst large corporate clients, including active relationships with more than 60% of the FTSE 100. Our actions here center on enhancing our capabilities to better serve the financial needs across our client base while maintaining our strong returns discipline, a disciplined and strengthened business. In SME, we are investing in opportunities to add value to our client offering, including a digital proposition. This will build greater origination and self-service capabilities for simple working capital products alongside improved client-driven solutions such as online financial management services The combination of these will result in more than 50% growth in digital link origination in 2021, as well as supporting a five-point increase in MPS over the next three years. We will strengthen our corporate institutional offering by increasing product and delivery capabilities across core market areas, such as FX and GBP rates. Our investment here is in re-platforming and in digitizing to deliver more competitive capabilities and a more efficient model. This is intended to improve share and client returns in our existing relationships, where we're underrepresented and where we have a right to win. Turning now to our investment in technology on slide 37. Here on GSR3, we significantly increased our investment in technology. This enhanced the scale and speed at which we could deliver transformation initiatives, improved our offering for customers. However, with the pace of change accelerating, we must, of course, take the next step. We need to further modernize our technology architecture to deliver better customer propositions and to structurally improve operational efficiency and agility. In 2021, as previously mentioned, we will continue to improve our digital offerings for both personal customers and commercial clients, increasing self-service capability. This includes doubling the volume of releases on our mobile app in 2021. while investment in cloud will allow us to create new features for customers more quickly and more efficiently. Improvements at scale are necessary for continued customer satisfaction to allow us to maintain our record mobile app, NPS. As a further component of our technology modernization, in 2021, we are investing in the foundations for transformation by further improving and leveraging our public cloud capabilities. This is a precursor to simplifying our legacy estate. But I must stress, we're currently at an early stage. Significant opportunities exist. Around 60% of our technology estate is currently targeted for migration over the longer term, with a significant proportion of this to be achieved over the next three years. I'd now like to spend a few moments discussing our technology R&D investment in more detail in slide 38. As highlighted on the previous slide, our investment technology over GSR3 allowed us to significantly improve our customer offering while contributing meaningfully to ongoing reductions in the operating cost base. We're now looking at the significant impact that next generation technologies could have on our organization by delivering a step change in customer propositions and efficiency. Consequently, we are increasing our R&D investment in this area. This is supported by a number of our strategic partnerships the specialist providers. An example of what we expect to achieve with this investment, in 2021 we're undertaking a pilot to safely migrate around 400,000 back-booked customer accounts to a new bank architecture to test these capabilities. We expect this to deliver around a 40% reduction in the applications associated with the legacy architecture of this portfolio, giving us insight into possible broader benefits. Our experience in 2021 will determine the pace and scale of further rollout. We will update you on our progress accordingly. These new technologies have the potential to deliver meaningful enhancements to customer propositions and experiences and to deliver a simpler, more efficient and more agile organization. Quite apart from other benefits, this is required to unlock the next generation of cost opportunities over the long term. Success is, of course, not guaranteed, but we believe it is right to make an investment of this kind. Indeed, it's our efficiency that improves the ability to consider investments such as these, which in turn are in part aimed at further enhancing our efficiency. Funds relating to this R&D investment are included in our strategic investment spend and will be taken within restructuring. Turning now to payments on 539. In line with the nationwide scale of our franchise, the foundations for our payments business are outstanding. We are a leading player in this market as the largest card issuer in the UK and the fourth largest acquirer. It is also a subsector in the midst of significant change where we have a very strong position both to defend and to grow. Our brand, our reach, and our issuer-acquirer strength provides opportunities to build a business and was an attractive market delivering additional revenues and greater diversification. For example, in retail, e-commerce represented nearly 50% of all debit spend in 2020. We aim to preserve and build our leading share. In commercial, our share of customer relationships is significant, but we're nowhere near matching that share in merchant acquiring. Accordingly, in 2021, we will invest in enhancements to our consumer payments experience for increased functionality, such as click-to-pay and rewards-based products and offers. This will support the maintenance of our leading spend market share in 2021 and allow growth in credit card spend market share from 2022. In commercial, we will build on our GSR3 investment by further improving our cash management and payments platform. This will foster an ecosystem of services across payments, cash management, and liquidity needs, allowing share gains among our corporate clients. In parallel, to seize the significant and critical opportunity in merchant acquiring, we aim to enhance the distribution capabilities of our merchant services proposition. This will deliver 15-20% new client growth per annum starting in 2021. Now moving to data on the next slide. We operate one of the largest databases within the UK. We see this as a unique asset that should allow us to deliver huge value-add to our customers. Our investment date significantly improved our use of data. Today, 20% of customer needs are met with data-led marketing, where we're able to more effectively communicate with our customers and to deliver solutions that matter to them. This number is a start but it also offers significant upside. In Strategic Review 2021, we're therefore prioritizing investment in data capabilities to deliver more effective outcomes for our customers and for our colleagues. Through better integration of and access to data, we will be able to meet customer needs more rapidly and more effectively and enable more personalized propositions. This will unlock opportunities in identifying and meeting more existing personal customer banking and insurance needs. As part of this, we're investing in materially extending machine learning and advanced analytics capabilities across the organization to support customer and business outcomes. For example, by widening the use of machine learning, we will deliver at least a 10% reduction in fraud. In advanced analytics, we have a number of use cases underway across multiple products. For example, we're targeting a 20% increase in home insurance needs met through our direct channels. There's then obvious scope to extend these capabilities to a broader fleet of products across the group over time. Advanced analytics will also be used to deliver early insights into financial vulnerabilities, particularly important as our personal customers and business clients recover from the effects of the pandemic. Our investment in advanced analytics is expected to deliver a 50% return on investment in the first year, creating capacity for further investment thereafter. And finally, but critically, let's look at reimagined ways of working on 541. As you heard in Antonio's earlier remarks, colleague engagement is at an all-time high of 81% and above the UK high-performing norm. Our colleagues have been nothing short of outstanding in the way in which they have responded to the environment and the changes in their ways of working over the last 12 months. The pandemic has accelerated many of the trends previously evident in the workplace. These require a reduced office footprint, but also enhance workspaces to foster collaboration and creativity. It's very important that we respond to this opportunity to best serve our colleagues and also to enhance efficiency. In Strategic Review 2021, our areas of focus for investment include refreshed values and behaviours to build on our purpose-led culture and further embed helping Britain recover into the organisation. We will also invest in reducing our office footprint with a cumulative reduction of around 20% over the next three years, including 8% in 2021. Combined with the 23% reduction in GSR3, this reflects a significant change in our footprint. Alongside these steps, we will develop our workspaces and ways of working to best reflect changing colleague expectations, while we further invest in our talent through upskilling and career pathways. This is intended to deliver a more diverse, skilled and future-ready workforce that will support progress towards our gender and race targets, which reflect the society we serve. Turning now to slide 42. With our focus on execution, we're also providing guidance for 2021 financials consistent with the objectives that I've outlined. Clearly, all guidance is based on our current macroeconomic assumptions. We expect the net interest margin to be in excess of 240 basis points. We continue to see further opportunities on costs and expect operating costs to reduce further to circa 7.5 billion. On credit quality, we expect a net AQR of below 40 basis points for the year. A combination of these should support improved profitability in 2021, and we expect a statutory ROTE of between 5% and 7% for the year. On capital, we expect to see broadly stable RWAs in 2021. In respect of capital distribution, we're very pleased to have been able to resume dividends, given their importance to our shareholders. In 2021, the Board intends to accrue dividends and resume its progressive and sustainable ordinary dividend policy at a dividend higher than the 2020 level. As normal, the Board will consider the interim dividend at half year and the size of the final dividend payment and further return of any surplus capital based on the circumstances at year end. On our strategy in a time of management change, we hope today we've portrayed to you a continued strong focus on execution, underpinned by strategic vision for sustainable success in the new environment. We believe these factors will enable delivery of a medium-term statutory ROTE in excess of our cost of equity. Finally, to summarize on slide 43, I appreciate that we've covered a lot of ground across a number of topics this morning. Before closing, I want to take a moment to reiterate the building blocks of Strategic Review 2021. As a group, we have a very clear strategy that is fully aligned to our purpose and represents a further evolution of our long-run transformation. In Strategic Review 2021, we will intensify our focus on helping Britain recover with key objectives aimed at this outcome, fully embedded in the business. Strategic Review 2021 will unlock coordinated growth opportunities across our core business areas of retail, insurance and wealth, and commercial banking. These objectives will be enabled by four enhanced capabilities that cover the breadth of our organization. And finally, and as just highlighted, to deliver Strategic Review 2021, we have clear execution outcomes for the coming year across all of these pillars. with each of these underpinned by long-term strategic vision and supported by significant strategic investment. This combination will enable the team to effectively deliver Strategic Review 2021 and to build the UK's preferred financial partner. Thank you for listening. That concludes today's presentation. We'd be happy to take questions. I'm aware that we only have around 30 minutes or so scheduled for Q&A, but we can run a little longer if necessary. So we'll take questions from here.

Thank you. If you'd like to ask a question on the telephone, please press star then one. If you wish to withdraw your question, simply key star two. You will be advised when to ask your question and all other lines will remain on listen only. So just to remind you to ask a question on the telephone, it is star then one. Your first question comes from Raoul Sinner of JP Morgan.

Good morning, everybody. Good morning, everybody. Thanks very much for taking my questions. I've got one on strategy and a couple of follow-ups on numbers, if that's okay. On the strategy, obviously, the delay in terms of hitting the top three financial planning business target to 2025 is quite understandable, but I was wondering if you could maybe give us a little bit more color on where you've managed to reach currently with the JV in terms of your numbers. And what do you think changes from here that will actually accelerate customer acquisition or, let's say, market share gains to enable you to achieve that target? And then on the numbers, I was wondering if you could maybe comment a little bit more on the name trajectory. and specifically whether you expect NIM to be down in the first half of the year, especially in the first quarter of the year, given weakness and unsecured and the sort of back-end loaded recovery there. And then on numbers as well, just very quickly on RWAs, I was wondering if you could, it looks like there are quite a few capital headwinds heading towards us in 2022 for the pension contributions which you've outlined, and you've got the 51 basis points of intangibles rolling off. I guess the third part that I was looking for was really any quantification on the RWA headwinds that we have to factor in 2022. Thanks so much.

Thanks very much, Rahul, for the questions. Dealing with the, well, I guess each of them in order, on SPW, The last couple of years, as you know, has been primarily involved in setting up SPW so that it is in a position of strength to ensure the offering to our customer base. In that respect, we've had the asset migration to the new platform. We've set up 11 regional hubs. We now have increased referral volumes coming through, and we also have a new CEO in place to deliver the plan. So as your question points out, we have had a delay in meeting our ambitions, primarily because of the coronavirus crisis, but we think the business is now very well set up to deliver the plans going forward and indeed to be a big part of that 25 billion AUM target as laid out earlier on. So hopefully that answers what's changing from here and why we expect the business to succeed going forward. On your second question, NIM trajectory, I actually suspect it will be the other way around. That is to say, we've come out of the Q4 at 2.46 as you know. Our guidance is in excess of 2.40. During the first quarter, we expect to see the NIN be relatively solid. The principal source of pressure is structural hedge in the second half. And in that context, it's just worth pointing out that some of the rate activity that we've seen lately, including the somewhat sleeping of the curve, has been very helpful in mitigating that pressure on the structural hedge in the second half of the year. But the balance is, as I say, somewhat along the lines that I've just portrayed. On RWA's, for 2022. The picture, as I outlined in my comments earlier on, is one of some certain regulatory headwinds. And so we're seeing those from a combination of CRR2, number one, mortgage scores, number two, CRD4, number three. That is also supplemented by asset growth, and that is clearly part of achieving our ROTE targets in excess of cost of equity. So that's clearly very welcome. And it's also complemented by our usual disciplined RWA management approach, which is both using the market, but also addressing suboptimal returns in the commercial portfolio where appropriate. And so those are all factors that play into it. By the time of 2022, we think that credit migration will be relatively limited. But if we take all of those in some role, we are aware of consensus, circa $2.15 billion or thereabouts, and we're pretty much comfortable with there or thereabouts.

Thanks so much, Rene.

Thanks, Rahul.

Thank you. Your next question is from Guy Stebbings of Exane BNP Paribas. Please go ahead.

Morning. Thanks for taking my questions. Can I firstly come back to NIMH, and thanks for the call so far. I just wanted to check what your assumptions are in terms of mix on the asset growth, and in particular on the consumer side. I think you hinted at a drop in the first half and a recovery in the second half. I'm just wondering where you think you'll end up and what's baked into your NIMH guidance. Is it for car balances to still be fractionally lower by the end of this year? versus where they started the year? And are you assuming any more deposit repricing over the course of 2021? Also sort of linked to that on NIR, I just want to check the average interest earning asset guidance to be up or flat to slightly up this year. Is that versus the FY20 average number of 435 or the Q4 number of 437 or where you exited 2020 just to know where we're sort of starting from? And then just on other operating income, in particular insurance, which has obviously seen quite a big drop in the second half of 2020. If we ignore the volatile life and pension experience and the volatilisms and just focus on the new business income, I think it dropped from £394 million for the full year and dropped to just 150 in H2 driven by workplace planning, retirement income and annuities. I'm just wondering how much of a rebound in some of these lines you expect to see in 2021 and what sort of timeframe you expect to see them pick back up to what we saw in five years. Thank you.

Thanks, Guy. I guess, again, to address them in order, let's look at the NIM first. As we look forward into 2021, We have a couple of tailwinds and we have a couple of headwinds in the margin. So addressing each of those, the tailwinds that we see are clearly in the mortgage book. We're seeing much higher front book mortgages margin, which in turn is replacing lower margin. And so there's a positive effect on the margin from that mortgages margin differential. Secondly, I mentioned earlier on commercial banking optimization, which again is intended to address the lower returning relationships. There's also a certain amount of commercial banking activities, such as the reduction in RCFs, for example, which lend support to the margin. And then I mentioned in my script earlier on some certain liability management actions that we've been taking, which again reduce our cost of funding and therefore lend strength to the margin. In terms of the flip side of that, one of the headwinds, two or three back books running off is clearly one of them, although that clearly gets less as the back book gets smaller. Secondly, mortgage volumes. Mortgages at the current pricing are very welcome, and as you've seen, we wrote 6.7 billion of the open book in Q4, and we'll continue to write at these very attractive prices. But as an average margin matter, they weigh the margin down a little bit, given the overall spread for the average. And then finally, the structural hedge, which I mentioned earlier on, which again is a dynamic that has been changing a fair bit over the course of the last few weeks by virtue of the rates rally that we've seen, number one, and by virtue of the fact that we deliberately held back from investing when the curve was very flat last year, number two, which has created capacity for us to invest in now as we see the curve start to sharpen up a bit. Structural hedge dynamic, again, was and to a degree remains a source of pressure in the second half, but the extent of that source of pressure is mitigating by virtue of the rates movements that we have seen. So hopefully that addresses some of the questions on NIM. You did ask about deposit repricing and AIEAs. On deposit repricing, I will leave it up to the retail and commercial team to take the right business decisions in the best interests of customers, obviously. But I would say that our average deposit margin now is pretty low off the back of the base rate changes that we saw. And there isn't terribly much room within the liability margin left. So it's with that caveat, if you like. And then finally, AIAA is that first of the Q4 number that we have given to you. Insurance, as you say, has been subject to certain headwinds during the course of 2020. A lot of that is to do with both the non-recurrence of some of the one-offs that we saw in the first half of 2019, as well as one or two non-recurring headwinds that were negative during the course of 2020. And I'll point you out there in particular to the assumptions review in Q4 for insurance, which was about $151 million. And you'll have seen that in our numbers, a combination essentially of expenses and So, persistency and expenses led to 151 negative in insurance in that quarter. Overall, I think as we look at insurance, the year... of looking forward into 2021, we hope will be marked by a recovery in levels of activity, which should allow the insurance business to perform more strongly. I don't want to put a number on it too much, but certainly as we look to OI as a general matter in 2021, we do expect resuming levels of activity, particularly obviously when the lockdowns are lifted, to contribute to the OI growth during the course of the year.

Okay, thank you very much. Can I just very quickly come back to your comments on balance growth? And I think just to check, you talked about the mortgage growth this year still being return positive but negative in terms of mix from a margin point of view. So can I infer from that you're expecting mortgages to continue to grow well above consumer balances for this year?

Yes. I think... Let me address that, Guy. You mentioned it in your question. The overall outlook for unsecured balances this year is a relatively weak first half, strengthening into the second half. What that adds up to in terms of net, I would expect not terribly much movement on the year. It might be a small positive, it might be a small negative, but obviously that predominantly depends upon activity. I think some of the news from the government, as announced on Monday, is somewhat more positive than we had expected in that respect. It's a slightly earlier opening up of the national lockdown, which hopefully will lend itself to consumer activity, which hopefully will help build unsecured. But our background assumption, you'll see this in the conditioning assumptions for our for our ECL and MEF cases was a bit more conservative than what the government announced. So we might see a little bit better performance in unsecured than we had initially expected. We'll see. But I think, Guy, on the particular point of your question, the open book mortgage growth is very much expected. And so if you take things, if you like, on that like-to-like basis, it is likely that the mortgage balance outperforms the unsecured balance.

And, Guy, if I can give you some more color to what William just said there. As we said, by the way, in Q3, the mortgage market continues to be very strong since the first half of last year. It is not only pent-up demands relating to the stamp duty incentives, which, by the way, will likely be extended to ensure a smooth transition and no breaks on the chain, but also because many home movers are moving houses based on their preferences, given they now mostly work at home and they are moving to bigger houses outside cities, and we clearly see a big increase in both first-time buyers and in home movers. And to give you an idea in terms of numbers which might be helpful for you in anticipating what William said in relation to 2021. We have grown our open book of mortgages by £7.2 billion last year, out of which £6.7 billion was the growth in Q4. And to give you a second number, we came into the end of the year with approved mortgages that will complete in Q1 or have already completed in Q1 of around £14 billion, which is 50% above the level of the previous December, of December 19. So with a very good momentum into Q1 and into 2021, and I really believe that this market is driven by several factors and will continue to perform well over the next one, two quarters, which is normally the degree of assurance and the degree of visibility that we normally have when we speak with you about guidance and what we see on volumes and margins.

Very helpful. Thank you.

Thank you. Your next question is from Alvaro Serrano of Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for taking my questions. A follow-up on the structural hedge and then one on capital returns, please. On the structural hedge, William, you've made it clear that there's more capacity to grow the structural hedge. I think it's to $210 billion. Obviously, there's 60 billion rollovers this year. You've already flagged that the real sort of drag is more the second half. I'm just wondering that 400 million, which you said it's kind of mark to mark to the curbs. How much of a growth in the structural hedge and reinvestment are you factoring in? Because with a bit of steepening, Based on historically how Lloyds has behaved, I would guess that that could grow significantly. And the second question is on capital returns. You continue to target $13.5. Should we continue to expect all of the excess capital to be paid out? And I realize there's transition elements to factor in. The question I'm asking is more related to the change of CEO and chairman. And is there going to be ongoing focus on capital return? Is that still going to be predominant? or do you anticipate sort of bolt-on acquisitions or M&A or some kind of growth initiatives that could sort of temper that maybe? Thank you.

Thanks very much, Alvaro. To give a bit of context on the structural hedge, Essentially during the second half of last year, last quarter of last year, we were looking at around 2.4 billion of income in the structural hedge on a hedge that lasted around five to six years. And so that's kind of how we broke it down. The numbers are not precise, but they give you a kind of a sense as to what we were looking at. When we look at the hedge today, we've got 60 billion of maturities in 2021. And by virtue of the hedge management strategy that we have, we're able to take advantage of the rate curve when it steepens, as well as step back from the rate curve when it's flat. As we look at that today, the 400 that we've given is an indication of the recent status for those balances that we have locked in. If the rate curve stays in the shape that it is currently at, and if we're able to lock in fully the benefits of that rate curve, then we would expect some benefit from that above and beyond the 400 million that I have indicated. There is also then on top of that the unutilized capacity of 25 billion, as you highlighted in your total of 210 there, i.e. the difference between 185 and 210. And that would give us further upside as well, but obviously all of this depends on the rate curve staying where it is, or conceivably increasing. But let's see, as I say, if it does stay where it is, we should be able to lock in more benefits. That in turn should give us a little upside from the 400 million that we've indicated. The capital returns question. 13.5% is and remains our capital target. We are not changing that capital target today. In terms of what the board will choose to distribute at the end of the year, that will be very much a matter for the board at the time, and it will be clearly based on the regulatory situation, the macroeconomic situation, the outlook for capital generation over the course of the coming years, and all of these factors just as it normally is. So I think the core point here, Alvaro, is that we're not changing our capital target. As to what Charlie chooses to come in when he's CEO, obviously that'll be a matter for discussion with Charlie at the time. And I don't want to second guess that or preempt it in any sense. I'll leave that for the day. But I do think it's safe to say that the board has historically recognized, and I've no doubt will continue to recognize, the importance of income and capital return as a key part of our investor story. I'd be very surprised if that fundamental tenet changes. You asked briefly about M&A. The only comment I'll make there is that our strategy is an organic strategy. Having said that, if M&A opportunities come along that actually add strategic value or shareholder value in a way that is consistent with some of the tenants that I've set out in Strategic Review 2021, then, of course, we'll look at it. But we don't expect anything major in the near term. But things that make sense, we'll look at.

Thank you very much.

Thank you for that. The next question is from Edward Firth of KBW. Please go ahead.

Good morning, everybody. I just had two detailed questions and a slightly more fundamental one. In terms of the detail, William, if I heard you correctly, if you look at the hedge runoff, the next three years sounds like substantially less than half of it is running off. Is that right? And is that just because it's a very long tail or is it because of the way you structured it that it then comes quite lumpy after that? Could you just It doesn't seem quite square with a total of 2.4 and then the 400 and then materially less. So that was just one question. The other one was you mentioned restructuring charges. Could you give us some sort of idea of what you mean by higher? I mean, obviously, looking back over the years, there's a huge gap that higher could refer to. So just be helpful to get some idea of that. And then the final question is a sort of. I guess slightly more longer term one. I mean, if we look at 2021, it sounds to me like that's a reasonably normal year now. I mean, your provision charges sound like they're going to be pretty normal. I guess capital will be a little bit higher, but I guess you still got a bit of a hedge to run off. So net-net, it's pretty normal. And yet you're targeting, what is it, a 5% to 7% return. So I guess you're not happy with a 5%, 7% return as people think of that as normal. But What are the big drivers that could make that materially different over the next two or three years, assuming the interest rate environment stays roughly where it is? Thanks very much.

Yeah, thanks, Ed. Right, on each of those questions, on the hedge profile, it's a very fair question. Essentially, the pressure is reduced in 2022 simply because 2022 has a large number of short maturities maturing. And so the income pressure in 2022 in particular is relatively modest. As a result, you see the profile that we've kind of pulled out here, which is 2021, as I've just discussed. We then have a significantly lower tailwind, or sorry, headwind in the course of 2022 because it's predominantly short-term maturities that come up during that year. That number is likely to increase a little bit further in 2023 as some of the longer-dated stuff comes up for maturity at that point. So hopefully that gives you an idea, Ed, of that point. Other points to bear in mind here is that over the course of the last year or so, we have typically avoided investing at the short end of the curve, where frankly returns have just not been worth investing in, and invested a little bit more in the long end of the curve, particularly in the second half of 2020. And so that's what's given rise to a slightly longer weighted average life in the context of the hedge, and a shape that is a little bit less even, if you like, or more elongated than we would have discussed before. That's point one. Point two, restructuring charges. I won't put a precise number on it, but somewhat higher typically means 10 to 20% in our Parliament. Okay, perfect, thanks. Third, 2021 normal year. I hope not. I think if you describe a normal year as being one where we have half the year in lockdown, I really hope that isn't a normal year. I think there's a couple of points that I would make there. One is just that. Therefore, when we don't have 50% of the year in lockdown, we would expect activity levels to benefit each of our three main business lines in a way that is proportionate, if you like, to much higher levels of activity. Second, cost. Cost remains an imperative on a BAU basis. We think there are also coronavirus-related opportunities And then finally, it's also a strategic matter, as our technology R&D describes. And so the cost focus is pretty relentless at Lloyds, and it will continue to be so over the course of the coming years. And then finally, impairment, through the cycle impairment charge, is typically 30, 35 basis points. In fact, I think it's struggled to make those levels, actually, in the recent historical past. It's typically been lower. And so all of those factors, I think, mean that 2021 I would see as a transitional year, and definitely not a normal year.

Great, thanks very much.

Thank you. The next question is from Andrew Coombs of Citi. Please go ahead.

Good morning. Firstly, returning to to return, it's noticeable there's no mention of buybacks at any point in your report today. If you could just remind us of your thought process on buybacks versus dividends and where you stand on that debate. And attached to that question, The new pension contributions, there's a link to 30% of capital return. Can you confirm that's 30% of dividends or that's 30% of dividends and buybacks? And then my second question would be on the 400 million management overlay. What would you need to see to be comfortable in beginning to release some of that overlay?

Thank you. Thanks, Andrew. Again, I'll take those in order. On buybacks, as you know, Lloyd's has historically done buybacks, and they remain an interesting tool, I think, at the disposal of the board in situations where there is surplus capital. The point that I would make there is that the capital position of the bank, as we've discussed, is exceptionally strong, with and without, frankly, regulatory assistance in the form of software or transitionals. There is also, alongside of that, a commitment to capital return at the board level, which, as I've mentioned before, I think is enduring. It's clear what the stock price is today, and off the back of that, it's also clear what the benefits of buyback might be. But then I think at that point, I have to say it's really up to the board at the end of the year to take a look at the situation with respect to the final part of the ordinary dividend and with respect to any surplus capital return above and beyond that that it might think appropriate. As I said, that will depend upon macro, upon regulatory, upon business performance, clearly, and the outlook at that point. The underlying point, though, is that the Board is committed to capital return. Buybacks are an interesting tool in the context of the valuations that we're seeing today. You asked about pensions. The pension commitment is to 30% of in-year capital return. And if we did a buyback, that would include buybacks as well as dividends. It's worth just adding a couple of comments, perhaps, on the pensions point. Why do we think this is an attractive structure? First of all, we think it's fair. It's a fair distribution of excess capital between the company's various stakeholders. Second is it gives us the benefit of less stress capital, and that's because essentially we have got now downside flexibility, where essentially our pension contributions have de-risked. So as you've seen, we effectively will pay out $800 million, if the business does not perform, we will only pay out in excess of that as a function of in-year capital contributions. And the final point which I'll make there is that bear in mind that term in-year. And so think about the 2021 capital distribution based on in-year 2021 capital distributions to shareholders as opposed to necessarily the final year dividend and do your numbers if you like on that basis. The overlay, it's an important topic, Andrew, and one that obviously we have spent a lot of time debating and considering and governing within the firm. The 400 million overlay, as said, it's an offset to model releases that are otherwise generated by the experience that we have seen. The reason why we have done it is because essentially the IFRS 9 model that we take has a set of conditioning assumptions, which are basically the input assumptions around progress of vaccination, around end of national lockdown, around government policy support, that sort of thing. And it takes those set of assumptions and then shocks those and creates a distribution of outcomes around that central outcome, around the central base case. That's a powerful model that produces outcomes that are reliable and something by which we set great store. Having said that, it doesn't accommodate a change in those input assumptions. Now, if the virus mutates or if the vaccine program is exceptionally slow, it doesn't appear to be the case, at least the latter, but if those happen, then that constitutes change in condition assumptions, which is what we're trying to capture with this 400 million uncertainty overlay that I've described. What that means is, in answer to your question, If and as those uncertainties recede, either the vaccination program is clearly successful today, let's hope it carries on that way, or the virus mutations appear to be under control, or to a degree lockdown experience differs from our expectations, then we are able to look at that 400 million again and figure out whether that uncertainty overlay is still appropriate at that point. But that's the timing, that's the evidence that we'll need before we take it off.

Andrew, just to add a little bit to what William just said, I mean, you should put this into the context of what we have been doing over the years in terms of building a low-risk bank. And we have discussed this over the years several times. So we want to build, and I think we have built, a low-risk, simple bank based on the real economy of the UK. And you have seen the track record that we have in that regard relating to write-offs when you can go backwards a series of years. And you have seen sustainably that we have had write-backs after those provisions have been made. You see our coverage level. You see the level of asset growth. So you should include this management overlay, as William described, but you should include it in the broader context that we want to build a prudent bank. IFRS 9 expects you to have an average case, and we think, given the huge uncertainties, we should be on the prudent side as we have been building this low-risk simple bank.

Thank you. I assume we'll still get your company on the first quarter results from the 28th of April as well.

Yes, and was that a question as to whether Antonio will be at the quarter results?

Antonio?

Yes, I will be at the quarter one results, so you still have to bear with me one more question.

Very good. We'll say farewell until then then. Thank you both.

Thank you. Thank you. Your next question is from Chris Cant of Autonomous. Please go ahead. Good morning. Thank you for taking my questions. I have two on numbers and one on capgen, please. So other income in the fourth quarter, you flagged this negative one-off from the insurance changes, but I think LDC in previous years has been about $300 million a year. you had 122 million there in the fourth quarter in isolation so it looks to me like the sort of clean 4q annualized run rate for other income is about 4.3 billion um is that a fair assessment of where you're at at the moment as we look into 2021 and think about the normalization effects of activity and then on costs your seven and a half billion guidance The slide seems to say 150 million allowance for COVID and variable remuneration effects. I think your variable remuneration pool in 2019 was north of 300 million. So are you expecting a further normalization of variable remuneration to be a headwind to cost again into 2022? and then finally on cap gen um the seven and a half sorry 7.2 billion actuarial deficit is obviously going to be taking ongoing bites out of your capital generation flag the headwind you expect to come from the ifs9 transitional unwind you flag the rwa inflationary effects coming in 2022 um You used to talk about CapGen. You used to give guidance on that. What is your expectation for the level of CapGen in base points going forward relative to the 170 to 200 you used to guide us to expect? Thank you.

Yeah. Thanks, Chris. I'll go through them in order. First of all, OI 2021. You mentioned a couple of moving pieces in Q4, and you're absolutely right. We got a bit of benefit from LDC. We got a headwind from the assumptions review within insurance. On balance, I think the assumptions review within insurance was larger than the benefit from LDC, and so that's the way I'd look at it. I won't put precise numbers on that, but in essence, I think the assumptions review headwind was bigger than the LDC benefits. Looking at 2021, it's one of the few areas of our P&L actually that we do not give guidance on. So I'm going to stay away from changing that. But I will give you a sense as to the run rate as we look at it. If you take a look at Q4, as we just discussed, you might look at a run rate, not just Q4, but also Q3 once you take account of asset management market review charges and one or two other things. It's around 1.1 billion or at that level. Now, that's in a coronavirus lockdown situation. And as I said a number of times, in the course of our calls, we do expect to see activity recover and benefit LOI. How much? I think it's safe to say that in 2020, we think we lost somewhere around 350 to 400 million by virtue of three quarters of lockdown. Now, if we see 2021 experience two quarters of lockdown, we'd expect to get a lot of that 350 to 400 million back. So I think the way that I would look at the run rate for OI is, as said, activity dependent and also investment dependent, as we've outlined in our SR21 pieces here. But importantly, look at it as 1.1 plus, as I say, the circa 350 to 400 million of activity that we lost in a year that hopefully has a bit more activity in it than we saw in 2020. Costs, 7.5 billion guidance that we have given. As you say, that does look at the costs, taking account of the headwinds that we'll be seeing from both variable remuneration and also coronavirus-related costs. The reason why your maths are not quite right is because variable remuneration is built in over a period of time, even though it delivers better outcomes in the first year. And obviously that then leads to a lagging effect in terms of the building of that variable remuneration. variable remuneration build taking place in the successive years. Now, at one level, I do hope the variable remuneration does go up because it's linked to profitability within the firm. So if we see improved ROT and profitability in the firm, that'll be a good thing and it will benefit our employees. Third, Capital generation. There are a number of moving pieces within capital generation, and that's part of the reason why we've stayed away from being too categorical. You'll be familiar that the experiences in 2020 around this topic were prone to error, not just from ourselves, frankly, but every bank that reported, really. As we look into 2021, there's a couple of pieces that I think are worth looking at. Historically, as your question points out, we've seen 170 to 200 basis points of capital generation in the past, clearly pre-pandemic days. And that was associated with a kind of low to mid-teens ROTE. This year, our ROTE, as articulated, is roughly half that. And then, as we've discussed also, we have about half of our dynamic transitionals rolling off. Now, there are one or two other moving pieces that are going on that are kind of gives and takes in that equation. But nonetheless, if you take account of those two things, you'll be at least in the right ballpark for 2021. For 2022, I'm not going to go into, we have given guidance for 21 and not beyond, but I think the building blocks that you've identified, Chris, in your question around RWA movements, for example, around the remainder of the transitionals, for example, are the correct building blocks. And then you might also add into that both asset growth and also our continued RWA management.

Thanks for that. That's really helpful. If I could just ask a question. clarification on your remarks on other incomes. The 350 to 400 million, are you saying that's activity loss per quarter relative to pre-COVID levels? Because when I look back at 3Q and 4Q of 2019, both pre-COVID, quite clean quarters, you were 1.2, 1.3 billion. So if you're 1.1 in the second half of 2018, Was the 350 to 400 a quarterly comment, an annual comment, or a quarterly comment? I just wanted to clarify.

Yeah, sorry, Chris, I should have been clearer. It's an annual comment, but bear in mind that there were only three quarters of lockdown. So essentially what I'm trying to say is 350 to 400 that was lost over the three quarters during which we had lockdown.

Got you. Okay, that's helpful. Thanks very much. Thanks. Thank you. The next question is from Aman Rakhar of Barclays.

Please go ahead. Morning, gents. A few questions, please, if I may. A couple of points of clarification on NIM. Could I press you just for one additional bit of detail on your mortgage application experience? I think you called out 190 basis points completion experience in Q4, which was in line with your prior kind of applications comments. I was wondering, where is your current... applications experience. Where's that completing? And if you're able to give us some sense of what you've assumed in your NIM guide in 2021, that'd be great. Second one was on Hedge. I was just thinking a bit longer term. I mean, In terms of your hedge capacity, from what the Bank of England is talking about, the historic excess savings inflow that we're seeing is set to take a big step higher in the first half of the year, albeit maybe we're opening up a bit sooner than the Bank of England was talking about. You may very well see a significant deposit inflow. I mean, how should we think about that affecting your business? Does that free up some additional hedge capacity for you? Or is it a pain in terms of what it might mean in terms of some of your asset markets? I had a question on ROTE as well. Just, you know, the five to seven cent guidance that you're giving for 2021. I guess that's a reasonable enough range, you know. I think it implies a kind of 800 million net profit kind of range. I was kind of interested in what you see that kind of uncertainty as. Is that around the impairment charge, other operating income, or kind of that would be helpful? That'll do. Thanks very much.

Okay. Thank you, Alan. First of all, on NIM and mortgage applications, I mentioned earlier on that we have seen mortgage pricing very favorable, and hence the activity that we've undertaken in that market. The completed mortgage margins that we've been doing, circa 190, as mentioned in my comments earlier on. There's been a little bit of softness in that recently. I wouldn't want to overstate it, but essentially what's been happening is that five-year swap rates have been going up, and pricing has not been keeping pace with that five-year swap rates, and so you've been seeing a little bit of compression. in that mortgage margin. But still, the important point is very attractive levels from both a historic and a return on equity perspective. That gives you a bit of guidance there. In terms of what we assumed, we've assumed a gradual softening in mortgage margins over the course of the year, both as a function of some of the cyclical factors, e.g. the stamp duty ending. And to a degree, we expect that demand, if you like, to be predominantly or rather significantly in the first half and still there, but dampening down in the course of the second half. And that then is aligned with our pricing assumptions for mortgages. On hedge capacity, it's a good point. We increased our hedge capacity this year, as I mentioned in my comments earlier on. But importantly, of the 25 billion increase that we took, 11 billion of that was from effectively reclassification of our commercial deposits, which is essentially just trying to manage the existing business that we have in a smarter way and make those deposits more stable and therefore more eligible for the hedge. So of that 25 billion increase, 11 billion of that was commercial and not related to the deposit inflows that we saw. 14 billion was, but contrast that to 40 billion of deposit inflows that we saw during the year. So there's still, as you can see from that, quite a bit of gap that we have not taken into account for our hedge capacity. And at the moment, while we just try to figure out how that develops over the course of 2021, we're essentially just keeping it on short-dated investment, so that if there is a customer reaction, then we're able to respond to that. We don't necessarily expect it. We think many of those balances are here with us to stay, but we are not banking it at the moment. Turnaround for that is clearly if they do end up staying, and if we do end up in this environment where, frankly, customers have greater precautionary balances in the past, then that does have, or rather will have, implications for our overall hedge capacity. And we'll look at that as we gather more evidence over the course of 2021. ROTE, as you say, it's a 200 basis point gap between 5% to 7%. And that is deliberate. It is deliberate because we're clearly still in a highly uncertain environment. What are the moving pieces that might take us, move us around within that gap? I think I would highlight two. One is activity. And we don't yet know whether the government plan will be held to target the vaccine program is testimony to the potential success there. But there's a degree of caution, if you like, around the speed with which customer activity resumes. If we get more customer activity, we'll be at the upper end. If we get less, we'll be at the lower end. And the second is clearly impairments. As we've discussed, we are very well provisioned for the uncertainties that lie ahead. We have our ECL modeling. We have where we think the ECL modeling has come up short because of the unusual circumstances that we're in. We have put in place management judgments on top of that, as you can see in our disclosures. That puts us in a very strong provisioning position. If it turns out that the macroeconomics do not unfold in the way that we have predicted, then you would expect to see some implications for our impairments line and releases associated with that. Thank you. Thanks, William. Thanks. Thanks a lot, Amy.

Thank you for that. We have provided additional time today for Q&A, but still have questions left over. So the investor relations team will be happy to pick up any remaining questions. The final question we have time for today comes from Jonathan Pierce of Numis. Please go ahead.

Hello, good morning. Thanks for taking the questions. One for the models, please. The share count, it was up £786 million last year, but obviously some changes last year on the staff bonus plan, as you pointed out. Can you give the sense as to what you expect the share count to go up by this year, please, as you see it today? Second question, I was wondering if you could give us a little bit more help on the RWA inflation in 2022, because It sounds from what you're saying that we're looking at 10 to 12 billion possibly coming in in 2022. I missed whether you said some of that was credit migration or whether you weren't expecting much credit migration, but maybe you could give us a slightly better sense of the components, things like best estimate of expected loss, mortgage risk weight, those sorts of things. And then finally, could you maybe give us a sense as to why the pension deficit hasn't budged at all? I understand the comments on RPI, but there's been some quite big contributions going in over that period, and asset performance would have expected to have taken the deficit down as well. So what's happened there, please?

Sure. Yeah, happy to deal with each of those, Jonathan. I might slightly defer your first one for fear of getting too precise, but the share count might increase a nudge more in 21 versus 2020 off the back of employee compensation schemes, but I will defer that to the IR team to give you a more precise answer than I will do today. Second, RWA's There's a number of moving pieces in 2022, as I mentioned. The bottom line is, as said, we note consensus is around 2015, and roughly speaking, we are okay with that, pending resolution of a number of regulatory uncertainties that are out there today. In terms of the moving pieces, I won't be too precise. It's safe to say that we have a chunk of headwinds from a combination, as said, of CRR2 mortgage floors, in particular the individual mortgage floors, and then finally CRD4, things mortgage model, definition of default, for example, hybrid model being introduced, one to other retail bits and pieces. Those in total are leading to regulatory headwinds, which you know, are there and are worth pointing out. Then we have, on the other hand, RWA management and we have asset growth. And those two factors, roughly speaking, cancel each other out. So it gives you kind of some idea, if you like, Credit migration is, as we see it right now, predominantly a 2021 phenomenon. So by the time we get to 2022, there's not an awful lot of credit migration left. But obviously, we have to see how all of that fares. And so one of the reasons we're not being too precise today is because there are not only regulatory uncertainties in the outcome for 2022, but also macroeconomic uncertainties too. And as those diminish, then we'll be able to give you more precise guidance. One further point I'll make on RWAs, which is sometimes asked of us, is what the impact of BAL 3.1 might be in the near term. And again, I'm not going to be precise on this, but I will say that when we get to 2023, we do not see much impact from BAL 3.1 in the near term. In fact, it's relatively benign for us. And the reason for that is because we're on foundation IRB approach within commercial, from which we get a significant benefit. So I point that out because it's a feature, if you like, of the position that we're in. Finally, you mentioned pension deficit, Jonathan. The pension deficit, as its core, if you like, has gone down since the last triennial. What's gone up is the RPI-CPI convergence, which has added about $1.7 billion to the overall pension deficit. So you're not seeing there a reduction in the total number because you have the core benefit that is reducing and has reduced to about 5.6%. offset by the RPI convergence with CPI, which for us matters because we have a mismatch in assets and liabilities on RPI and CPI. And as RPI converges, that costs the pension deficit. So hopefully that gives you some of the detail that you need, Jonathan.

Yeah, that's really helpful. Thanks for all that.

I think that was the last question. So I just want to say thank you to everybody for joining today. We'll look forward to the conversations over the coming days. So thank you for joining. Thank you, everyone.

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