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.