Lloyds Banking Group plc

Morning, everyone, and thank you for joining our 2022 full year results presentation. I'll begin today with an overview of our performance in 2022, including an update on the good start we've made one year into our strategic transformation, as well as outlining what you can expect over the next 12 months. William will then provide the usual detail on our numbers, and we'll have plenty of time for Q&A at the end. So let me begin on slide three. Similar to my update at the half year, I'll start with five key messages I'd like you to take away from today. First, our purpose of helping Britain prosper is core to everything we do. With this in mind, we've taken significant action to provide support to our customers and colleagues through a period of increased uncertainty. We delivered a robust financial performance in 2022 with increased capital returns supported by strong income growth. Although the macroeconomic environment has changed significantly, we remain confident that our strategy is the right one, delivering positive outcomes for all our stakeholders. We've made a good start to our strategic transformation, with 2022 largely focused on mobilizing the businesses and laying the foundations for our future success. Our investment is fundamental to the prospects of the group, and we are already seeing early evidence of delivery. And finally, our confidence in our strategy is reflected in an enhanced financial outlook, particularly as we build through the plan. This includes upgrading our medium term return on tangible equity and capital generation targets. So with that, I'll now turn to slide four to briefly outline how we've delivered for our stakeholders in 2022. Customers and clients are at the heart of our business. In a year where the environment has proven more challenging due to increases in the cost of living, I'm extremely proud of the support we have provided. We've leveraged our digital strengths to provide our customers with the ability to take greater control of their finances. Over 5,000 customers access our digital financial resilience tools every day, and over 5 million have accessed our new credit worthiness app. We've also invested in deep capabilities to help customers build financial resilience and support them with tailored products and plans if they're unable to make ends meet. This includes training more than 4,600 colleagues to provide financial assistance where it's needed. As a result, we've put in place around 250,000 personalized plans, helping individuals and businesses with their finances. Despite the more challenging economic environment, we've not seen a meaningful increase in the total number of customers needing this enhanced support. This highlights the resilience of our customer base as we enter 2023. Our colleagues are critical to providing the support, and we've also made significant efforts to help our people through changes to pay and working practices. In 2022, we provided early cost of living support for colleagues through a one-off payment, whilst many colleagues received a further payment in December. Towards the end of the year, we also made an early announcement on the 2023 pay deal, providing certainty for our people. Core to our purpose is our focus on building an inclusive society. To that end, we've provided over £2 billion of funding to the social housing sector and lent over £14 billion to first-time buyers in 2022, helping more than 60,000 customers get on the housing ladder. At the same time, I'm proud of the fact that we provide around 30% of basic bank accounts in the UK. Alongside this, we've delivered race education training to all colleagues, provided focused support for black entrepreneurs, financed high-speed internet in less privileged communities, and supported agricultural clients in their efforts to build financial resilience. We've also made progress in supporting the transition to net zero. This includes our commitment to responsible investment with Scottish Widows, launching a carbon calculator for SMEs and our innovative new partnership with Octopus Energy, which will enable customers to make their homes more energy efficient. We've also provided over £13 billion of green and sustainable lending in 2022 and developed our first group climate transition plan. The latter includes important industry firsts, such as our commitment to not directly finance any new oil or gas fields. So there's a lot going on. And as ever, we're targeting our efforts in areas we can make the biggest difference whilst creating opportunities for profitable growth. We've published our environmental and social sustainability reports this morning, and you'll find a lot more information in there. Turning now to a brief overview of our financial and business performance on slide five. The group delivered a robust financial performance during 2022. Net income was up 14% compared to the prior year, whilst operating costs increased by 6%, in line with expectations. Stable BAU costs highlight our ongoing cost discipline, which is particularly important in an inflationary environment. We delivered a return on tangible equity of 13.5% and generated 245 basis points of capital. This enabled an increased ordinary dividend of 2.4 pence per share alongside a share buyback of up to £2 billion. As you'll hear in my remarks on our strategic progress, we're delivering continued business momentum and seeing real franchise growth. This is alongside improving levels of employee engagement and progress on our diversity goals. Turning to our strategy on slide six. Our purpose-driven strategy has three distinct pillars. First, driving revenue growth and diversification across four key areas that cover our consumer and commercial franchises. Second, strengthening the group's cost and capital efficiency, building on our strong foundations. And third, building a powerful enabling platform that combines people, technology, and data to support our ambitions. The combination of these priorities will enable the group to deliver on our purpose, attract and retain the best talent, and grow profitably with our customers. In turn, this will enable us to deliver higher, more sustainable returns and capital generation across both the short and long term. Now, turning to slide seven to look at how the changing environment reinforces our strategy. It is a year since William and I set out the group's new strategy. The operating environment has changed significantly over the last year. And as I mentioned earlier, our customers are facing a more challenging outlook than we had anticipated. This also presented challenges for us as we have focused on supporting our customers and ensuring they remain financially resilient. We've also continued to see shifts in our customer behavior to be more digital. Given the Group's financial strength, it is more important now than ever to deliver the purpose-driven strategy we set out last year. It will enable us to further differentiate how we serve our customers as they start to recover from these economic challenges, whilst we can also strengthen and diversify the Group's earnings. In some cases, we've stretched our ambition even further, such as adding an additional £0.2 billion of cost-saving targets for 2024. Our ongoing commitment to our strategy is reflected in the scale of the investment. £3 billion of incremental strategic spend over the first three years of the plan, or £4 billion over five. In 2022, we delivered £0.9 billion of this incremental investment. Turning to our strategic progress on slide eight. As we set out a year ago, we have a purpose-driven strategy focused on driving revenue growth and diversification, strengthening cost and capital efficiency, and maximizing the potential of our people, technology, and data. We have an ambitious strategy for a five-year transformation of the group, with clear deliverables and the financial benefits increasing as we move through the plan. 2022 was a foundational year and we've taken significant action as we've invested for growth and accelerated our efficiency initiatives. We've also reorganized the group to accelerate the pace of transformation and have seen good early evidence of delivery across our initiatives. So I'm confident we are well-placed to deliver our strategy going forward. I'll set out some highlights of our progress shortly, but first on slide nine, I'll highlight some of the initial financial benefits. You'll recall that when we presented our strategy, we highlighted an expectation that the growth initiatives will provide £0.7 billion of additional revenues per annum by 2024 and £1.5 billion by 2026, split 50-50 between interest and other income. As I'll highlight on the coming slides, we've made good initial progress. And as we deepen our customer relationships further over the coming years, we expect to build momentum that will support higher, more sustainable revenues that extend beyond the current rate cycle. In addition, we achieved 0.3 billion pounds of gross cost savings in the year, which supported a stable BAU cost base. As mentioned, we've identified further cost savings in 2024 that will partially mitigate the impact from inflation and create investment capacity. We expect an inflection point in 2024 where the benefits from our strategic initiatives will positively contribute to the bottom line in 2025 and beyond, as reflected in our financial guidance. I'll now briefly highlight progress across our four priority growth areas, and I'll start with consumer on slide 10. We've made good progress on building deeper customer relationships, as well as innovating and broadening our product offerings, whilst improving the ease with which our customers can access them. We've invested in driving improved levels of personalization and digitization, resulting in a 15% increase in daily log-ons, as well as reaching 20 million digitally active customers, two years ahead of schedule. This enables the group to reduce costs and drive deeper customer engagement. In 2023, we will continue to personalize and digitize our consumer offering, supporting our ambition to meet more of our existing customers' needs. This morning, we announced the acquisition of Tusca, a vehicle management and leasing company focused on electric and low emission vehicles. This will further develop our motor business in a way that is clearly aligned with our purpose and sustainability ambitions and supports our growth ambition in SME. In 2022, our mass affluent business, supported by targeted campaigns, increased banking balances by over 5%. We've also launched new tailored banking products, including credit card and package bank accounts. Our direct consumer investment capability has been enhanced, aided by the completion of the Embark acquisition. This was previously a gap in our product capabilities, and we expect both D2C and ready-made investment options to launch in 2023. Our mass affluent offering will be launched in earnest this year with customers experiencing a differentiated digital first model. We also expect an expansion of our banking offering, providing value-added products, services, and benefits for customers. Looking now at progress on commercial on slide 11. Our ambition in SME is to build a diversified digital first business. This is a multi-year journey, and in 2022, we've laid strong foundations and shown positive growth, including more than 20% growth in new merchant services clients. We're also broadening our product capabilities through strategic FinTech partnerships where appropriate. For example, our invoice discounting partnership provides a solution that allows clients to better manage cash flows. In 2023, we'll take further steps to improve our digital offering with new onboarding propositions, enhanced functionality, and insights for clients. Our corporate and institutional offering has made good progress within the targeted parameters that were outlined in February last year. We are also investing in product capabilities that support our clear cash, debt, and risk management offering. This includes upgrading our rates digital product offering and delivering the first phase of our new FX platform. And finally, we've strengthened our originate to distribute capabilities, delivering our milestone-first strategic co-investment partnership. These strengthened capabilities further improve the group's capital efficiency. In 2023, we expect to extend the scale of our originate to distribute offering alongside maintaining our clear sector focus and further improving product capabilities. Having highlighted just some of the progress in our growth businesses, I'll now look at our clear commitment to the enablers on slide 12. Maintaining discipline with regards to cost and capital efficiency is critical to our strategy. In 2022, we increased customer engagement and service options through our digital channels, enabling us to optimize our cost to serve by, for example, closing around 200 branches and increasing automation of operational processes. With regards to capital efficiency, we continue to demonstrate RWA discipline whilst pursuing growth in capital light, fee generating businesses, and enhancing our originate to distribute capabilities. In 2023, we will also conclude the triennial pension review, which is expected to demonstrate the significant advances we've made. Our people efforts in 2022 have included refreshing the leadership team, establishing our new operating model to deliver the strategy, and driving greater efficiency, for example, by reducing our office footprint by 12% as we adapt to new ways of working. We've continued to invest in future data capabilities, as well as decommissioning 5% of legacy applications and reducing our data center footprint by 10%. This brings new capabilities to supplement our strategy, as well as greater team efficiency. I'll now finish these remarks on slide 13. So I hope that was a helpful update. I'm pleased with our strategic progress, particularly in the face of a changing external backdrop. Looking forward, it is our intention to provide you with regular deep dive sessions over the course of this year and into the first half of 2024. You'll find more detail on these sessions in the appendix. As you know, our strategy is underpinned by a robust financial framework and a clear link to how strategic initiatives contribute to the delivery of higher, more sustainable returns and capital generation. Based on our strategic progress, future plans and the changes to the macroeconomic forecasts, we are today enhancing our financial guidance. William will provide you with more detail shortly, but at a headline level, we're now targeting a return on tangible equity of 13% in 2024 and greater than 15% by 2026. Both are around three percentage points higher than last year. This in turn drives higher capital generation, and we're now targeting circa 175 basis points in 2024, increasing to greater than 200 basis points by 2026. I believe that these targets reflect a compelling proposition for our shareholders, and they demonstrate our confidence in the future. Thank you for listening. I'll now hand over to William for the financials. Thank you, Charlie.

Thank you, Charlie, and good morning everyone again, and thanks again for joining. As Charlie said, the group delivered a robust financial performance in 2022, based on continued strength in the customer franchise. Net income of 18 billion is up 14% versus 2021, supported by a higher net interest margin of 294 basis points, 4% growth in other income, and a low operating lease depreciation charge. We remain committed to efficiency. Operating costs of 8.8 billion are in line with our guidance. This includes stable BAU costs alongside higher planned strategic investment and the costs of the new businesses. Asset quality meanwhile is strong. The observed impairment story has not materially changed in the quarter. The full year impairment charge of 1.5 billion includes the impact of the revised economic outlook emerging during the year. Together, their strong performance delivered statutory profit after tax of 5.6 billion and a return on tangible equity of 13.5%. Tangible net assets per share at 51.9 pence, around 5.6 pence in the year, although up 2.9 pence in Q4. Robust earnings alongside a modest reduction in risk-weighted assets and significant insurance dividends have driven strong capital build of 245 basis points in 2022. Let me now turn to slide 16 to look at the ongoing development of our customer franchise during the year. Our mortgage portfolio continued to grow in 2022. Balances are up 3.7 billion in the year, including 1.2 billion open book growth in the fourth quarter. Credit cards are up 0.5 billion in the year, although flat in the fourth quarter. Motor finance is up 0.3 billion in 2022, including 0.1 billion in Q4. The order book is strong, albeit the business remains impacted by the ongoing global supply chain issues affecting the industry. Commercial banking balances, meanwhile, are up 1.2 billion during the year. This continues to be led by attractive growth opportunities within corporate and institutional and FX. FX partly being offset by repayments of government support scheme loans, predominantly in our small and medium businesses franchise. On the other side of the balance sheet, retail deposits are up 2.4 billion in the year. This includes current accounts up 2.5 billion in 2022, although down 1.7 billion in Q4, given some customers switching balances and seasonality. Commercial deposits are down 3.7 billion in the year, including 6.4 billion in the fourth quarter. We saw some short-term placements from Q3 and CIB reverse in the final quarter, as we had expected, alongside the impact of management pricing actions and seasonal effects. Here in the year, we've also seen assets under management growth within insurance of over 8 billion of net new money. I'll now turn to slide 17 and the strong net interest income performance in a little more detail. NII of $13.2 billion is up 18% on the prior year. AIEAs at $452 billion are up $7 billion or 2%, largely due to the $6 billion growth in average mortgage balances. The full year margin of 294 basis points is up 40 basis points on 2021. This benefited significantly from the base rate changes through the year and structural hedge reinvestment, outweighing mortgage pricing pressures. The Q4 margin of 322 basis points is up 24 basis points in the quarter. The margin is driven by base rate movements, but bear in mind that deposit pricing has lagged base rate changes, and therefore some of this will unwind in H1. The mortgage rollover pressure increased to eight basis points in Q4, and this indeed will continue across 2023. Looking forward, we now expect average interest-earning assets to be broadly stable in 2023. We should see low single-digit growth in the core businesses being largely offset by reductions in the closed mortgage book and government support scheme loans within commercial. I should also note that Q1 will see a modest reduction in customer lending given our exit from a legacy mortgage book in January. So putting all this together, we now expect the net interest margin to be greater than 305 basis points in 2023. This is below Q4's exit rate given the impact of the mortgage book refinancing, deposit repricing actions, and higher funding costs. These will more than offset the expected higher hedge earnings Within 2023, the headwinds will impact our numbers more in the first half, while the hedge benefit is back-ended. While this suggests the margin is likely to dip in H1 before stabilising for the rest of the year, we do expect the margin to be above 300 basis points at all times. Let me now turn to slide 18 and look at our interest rate sensitivity in a little more detail. The group remains positively exposed to rising rates. We expect a 25 basis point parallel shift to benefit interest income by about 150 million in year one. As ever, this is illustrative and based on the same assumptions as before, notably the 50% deposit pass-through. As you know, pass-through could differ from the 50% illustration and that makes a meaningful difference to our sensitivity. As always, published sensitivity does not assume asset spread compression, for example, in mortgages. With that, let me move on to look at the individual asset portfolios, starting with mortgages on slide 19. The open mortgage book grew 6.3 billion during the year, including 1.2 billion during the fourth quarter. The back book is now around 47 billion, down 25% over the year. Customers are refinancing their mortgages in the context of a higher rate environment, and indeed, we are actively supporting them in this process. As you know, mortgage pricing has been competitive over the course of 2022. Completion margins were around 60 basis points for the year and around 50 basis points in Q4. The mortgage margin picture is now better and more stable than a few months ago. However, the effects of the remaining low margin October business still awaiting completion will continue to impact Q1. More broadly, we're forecasting mortgage new business margins in the year to be below the 75 to 100 basis points that we talked about last February. With that said, we do still see mortgages as attractive from returns and from an economic value perspective. Let me now turn to our other asset books on slide 20. Consumer finance balances are 1.4 billion higher than 2021 and essentially flat in the fourth quarter. We've seen a recovery in credit card spend resulting in balances up 0.5 billion in the year, largely in the first half. As mentioned, motor finance growth remains impacted by the issues affecting the whole sector. Commercial banking lending is up 1.2 billion in the year. As discussed earlier, attractive growth opportunities within the corporate institutional business alongside FX impacts have been partly offset by clients repaying their COVID loans. Let's move to the other side of the balance sheet on slide 21. Total customer deposits of 475 billion are down 1 billion in the year due to lower commercial balances. Retail current accounts are up 2.5 billion in 2022, further supporting our hedge capacity. The Q4 reduction of 1.7 billion in part reflected a movement to savings offers, both internal and external. Retail relationship accounts are at 1.8 billion in the year, including 0.6 billion in Q4, as customers have begun to seek higher returns on their deposits. Commercial deposits, meanwhile, are down 3.7 billion. This includes 6.4 billion in Q4, partly reflecting the outflows of short-term CIB deposits that we flagged at Q3. Aggregate deposits are around 65 billion higher than at the end of 2019. This deposit growth, of course, increases hedgeable balances. We'll turn to this on the next slide. Structural hedge capacity has built in recent periods based on deposit growth alongside increased eligibility of our existing deposits. This includes a further 5 billion addition in the fourth quarter to 255 billion. The nominal hedge balance is now fully invested. The weighted average duration of the hedge remains around three and a half years, in line with the last few quarters, a little below the neutral position of around four years. We have around 35 billion of maturities in 2023, weighted to the second half. This gives us significant flexibility looking forward. We saw gross hedge income of 2.6 billion in 2022. Again, as we look forward, we expect this to be around 0.8 billion higher in 2023 and a similar increase again in 2024. This roll of the hedge into a higher rate environment is an increasingly powerful income driver for us as we go forward. Now, moving to other income on slide 23. Other income of 5.2 billion is 4% higher than in 2021. We are building confidence in our growth potential across the franchise. 2022, including Q4, retail saw improved current account and credit card performance in the context of recovering activity. Likewise, commercial OI saw improving transaction banking and financial markets activity. Meanwhile, insurance, pensions and investments benefited from assumption and methodology changes in the year, most notably as product persistency beat our expectations. After adjusting for this in GI weather events, insurance other income was slightly up in 2022 from increased new business income in workplace pensions, bulk annuities and protection. The fourth quarter result of 1.4 billion was largely supported by those same trends as well as the net benefit from assumption changes and weather claims in insurance. Looking forward, leaving aside IFRS 17, we continue to expect other income to develop depending upon customer activity levels supported by our ongoing investments in the business. To touch briefly on IFRS 17. As you know, IFRS 17 is an accounting change, which impacts the phasing of profit recognition for insurance contracts, but not the cash flows. Under IFRS 17, new business income and associated costs, alongside most one-off assumption changes and some volatility, will now be deferred to a new contractual service margin liability, termed the CSM. That's going to be on the balance sheet, and these items, the CSM, will then be recognized over the period the service is provided through the unwind of that liability. This will have a neutral longer-term impact on the group's financial results, although near-term reported other income is expected to be lower. If we applied this standard to 2022, other income would have been circa 500 million lower, although this impact includes lower than or rather larger than usual in-year assumptions charges or change benefits. The run rate impact is likely to be closer to 300 to 400 million as we've set out previously. There will also be impacts on the below the line volatility items and TNAV from IFRS 17. I'll touch on TNAV shortly. Moving on, the group has maintained its focus on efficiency during 2022. Let me talk more about this on slide 24. Operating costs of 8.8 billion are in line with guidance. This is up 6% on the prior year, driven by planned investment and the costs associated with new businesses. Alongside, BAU costs were stable in the context of material inflationary pressures. Remediation costs of £255 billion are significantly lower than prior year and reflect a number of pre-existing programmes. The charge of £166 million in Q4 includes £50 million for HPOS Reading. Our cost-income ratio for 2022, including remediation, was 50.4%. Looking forward, we now expect 2023 operating costs to be around £9.1 billion. We are not immune from inflation, but we maintain our rigorous approach to efficiency. Consequently, we will absorb a significant part of incremental inflationary pressures in 2023 through increasing the targeted savings that we announced last year, as Charlie discussed. Looking now at impairment on slide 25. Asset quality remains strong. We are seeing stable observed asset performance across the portfolios. The impairment charge for the year of 1.5 billion is equivalent to an asset quality ratio of 32 basis points, in line with guidance. This includes a 595 million net MES charge for the updated macroeconomic assumptions alongside a 915 million underlying charge. The full year charge pre-MES is equivalent to 20 basis points. The charge in the fourth quarter of 465 million includes 82 million for updated MES driven by HPI reductions and a slightly weaker GDP outlook at Q4. Pre-MES, the quarterly charge of 383 million includes a long-standing single-name commercial charge. Excluding this would leave a quarterly asset quality ratio of 26 basis points. This includes the roll-forward of the Stage 1 provision into a more adverse economic environment, which of course does not represent actual defaults. As a result of the provision billed in the year, largely in the third quarter, our stock of ECLs has increased to 5.3 billion. It's worth noting in this context that our stage three balances have remained flat during H2 and 93% of our stage two balances are up to date. Based on the group's Q4 macroeconomic scenarios, we now expect the net asset quality ratio for 2023 to be around 30 basis points. As part of this discussion, I'll now look briefly at the group's Q4 economic assumptions on slide 26. Our outlook, as Charlie said, is for a mild recession and continued low unemployment in the UK. We now assume base rate has peaked at 4% and starts to fall early 2024. That settles then at 3% as inflation is brought under control. Unemployment is expected to peak at 5.3% in 2025, while we assume an HPI decline of around 7% this year. That implies a peak to trough fall of circa 12%. As usual, we present the full set of economics and associated ECL provisions in our appendix. As we progress into 2023, it may be that things are looking a little better versus where we were at Q4. We'll obviously keep an eye on that. Moving on, I'll now turn to slide 27 to look at our retail portfolio. Our retail customers are resilient. Portfolio benefits from our low-risk approach and conservative underwriting standards. Early warning indicators remain benign. While arrears trends in some areas have increased very slightly, they are doing so from a low base and they remain modest. Almost 70% of our lending book is mortgages. Within this book, customer household incomes average 75,000 and the average loan-to-value is 41.6%. Only 1.4% of balances have an LTV above 90%. Customers have a lot of equity in their homes, protecting both the customers and the group. Fixed rate mortgage maturities in 2023 have attracted a lot of attention. Over 85% of our maturing customers have been affordability tested to rates of at least 6.6%, well above current levels. Only around 1% of our refinancing customers are on LTV above 85%. Let me now turn to slide 28 in commercial. We're seeing significant resilience within our commercial portfolio. We see stable SME overdraft and corporate revolving credit facility utilization in the year. Average debtor days in our invoice financing business remain below historical levels. Commercial portfolio has evolved in line with the group's conservative risk appetite. Around 90% of SME lending is secured while around 75% of commercial exposure is to investment grade clients. Our commercial real estate exposure has been significantly de-risked in recent years. The portfolio has an average LTV of 41% and 89% have an LTV of 60 or below. Moving on, I'll turn to slide 29 to look briefly at the below the line items. Following the reporting changes of a year ago, restructuring now reflects only M&A and integration costs. The volatility line includes 148 million of negative insurance volatility, largely driven by the higher interest rates. This line also includes the usual fair value unwind and amortization of purchase intangibles. Taken together, the statutory profit after tax of 5.6 billion and the return on tangible equity of 13.5% represent, as said, a robust performance. Looking forward, and based on the guidance we've given, we expect the ROTE to be around 13% in 2023. I'm now going to pause for a moment on tangible book value. As you can see, TNAV per share of 51.9 pence is down 5.6 pence in the year, although up 2.9 pence in Q4. In line with what we said at Q3 2021, the IFRS 17 accounting change is expected to result in a mid single digit pence per share reduction in TNAV on implementation at the start of this year. Looking forward, the direction of tangible book value should be positive and should have momentum. The IFRS 17 impact will unwind into TNAV as the CSM unwinds. The negative movements in 2022 driven by interest rates reducing the cash flow hedge reserve are expected to unwind in line with structural hedge maturities and rates movements. Furthermore, as we grow the business and the pension asset builds, TNAV will also benefit. And alongside, our practice of distributing any excess capital via buybacks will further support tangible book value per share. So taken together, you can see that post IFRS 17, we anticipate material structural headwinds to the TNAV to be realized over the coming years. Now, turning to slide 30 and looking at risk-weighted assets and capital developments during the year. Capital generation in 2022 of 245 basis points was strong. Underpinning this, RWAs of £211 billion were down £1 billion in the year, excluding the regulatory changes on 1 January 2022. Lending growth has been more than offset by model reductions reflecting underlying credit performance and ongoing portfolio optimisation. Healthy banking profitability led the capital generation, supplemented by £400 million in dividends from the insurance business. We also benefited from impairment transitional relief and a lower than usual effective tax rate. Importantly, our strong capital generation enabled the group to make significant pension contributions, including an additional 400 million at the end of Q4. Added together, the total of 2.2 billion of pension contributions this year puts us in a very good position for the latest actuarial valuation process. The group's capital position enables the board to announce a final ordinary dividend of 1.6 pence per share, making a total of 2.4 pence, up 20% on 2021. Alongside, a buyback programme of 2 billion means the group will distribute a total of up to 3.6 billion, equivalent to greater than 10% of our market cap. The closing seed T1 ratio of 14.1% is also very strong and ahead of our ongoing target of 13.5%. Looking forward, we expect capital generation of around 175 basis points in both 2023 and 2024. This is below the outcome in 2022, reflecting the exceptional benefits in that year that I just mentioned. Nevertheless, it still represents a very healthy level of capital generation going forward. As shown today, the board is fully committed to shareholder returns. We will maintain our progressive and sustainable ordinary dividend policy while considering excess capital distributions at each year end just as we normally do. Let me now bring this together on slide 31 where I'll summarize our guidance. The group faces the future with confidence. For 2023, we now expect the margin to be greater than 305 basis points. Operating costs to be around 9.1 billion. The asset quality ratio to be circa 30 basis points. And the return on tangible equity to be circa 13%. As mentioned, we also now expect capital generation of around 175 basis points in each of 2023 and 2024. As Charlie mentioned, we're also today enhancing our medium-term targets. Based on both profit developments and expectations of a rising TNAV, as I've mentioned, we expect the return on tangible equity to be circa 13% in 2024 and greater than 15% by 2026. We've also enhanced our 2026 capital generation guidance to greater than 200 basis points. Our revised guidance reflects the changing shape of the environment, the development of our plan, and our financials. We expect to deliver higher levels of capital generation alongside ensuring lower other claims on our capital, including pensions. While staying focused on our purpose and our customer objectives, our updated guidance is positive news for shareholders. That concludes my comments for today. Thank you very much indeed for listening. I'll now hand back to Charlie to wrap up before Q&A. Thanks, Ray.

Thanks, William. So, as you've heard, the group delivered a strong performance in 2022. Our purpose-driven business and financial strength enabled the group to provide significant support to customers and colleagues. Alongside, the group's robust financial performance underpins our increased capital returns. Our strategy is reaffirmed as the best way to serve our purpose and support our stakeholders, as well as put the group on a higher, more diversified growth trajectory. We've made a good start. Finally, we're enhancing our guidance over the short and medium term as we progress towards delivering higher and more sustainable returns for our shareholders. That wraps up our comments for this morning. Thank you very much for listening. We now have plenty of time for Q&A, so let me hand over to Douglas, who will coordinate the Q&A. Douglas.

Thank you Charlie. We've set aside about 45 minutes for Q&A and in line with normal practice if people could mention their name and indeed their company. Please could you also wait for the microphone to actually arrive so that everyone online can also hear your question. Why don't we start with Guy.

Morning. Thanks for the presentation and thanks for taking my questions. A couple on net interest margin. Firstly, in terms of the net interest margin trajectory over the course of 2023, thanks for the helpful comments in terms of stabilization and never below 300 basis points. But if we think about the different building blocks, it does feel like the second half of the year should be fairly constructive. I say that because the hit you get from liability spreads compression maybe is more front-end loaded, given when rate hikes came through. Mortgage spread churn, I think you talked about eight basis points in the final quarter. I would assume that starts to get less over the course of the year. whereas the structural hedge tailwind starts, you know, it continues for the year and actually given the maturity profile you talked to, suggests it could be quite back-end loaded. So I just wondered whether it could be even slightly better than stable once we've re-based over the first half of the year as we think about Q3 and Q4, or am I getting too optimistic in some of my assumptions around that? And then secondly, still on margin, just in terms of how we think about deposit moves and the structural hedge notional, there was quite a big deposit reduction in the fourth quarter, but it was driven by commercial deposits, unhedged deposits. So in terms of what you're seeing today, in terms of what you expect to see in the next few months, how are you thinking about the hedgeable deposit component and the experience today? Is there anything there that's surprising you in terms of customer behavior? Thank you.

Thanks, Guy. Should I kick off on those, shall I? Thank you, Guy, for the questions. In terms of the margin, first of all, and then I'll come to structural hedge, a couple of points. First of all, bear in mind that our margin guidance is built upon our macroeconomic assumptions. So that's a start point, and I think that's an important point perhaps to make. Secondly, just to lead into your building blocks, Guy, as we see the margin over the course of the year, we move from a 294 margin for the whole of 2022, an exit margin of 322 in the course of Q4, to margin guidance of greater than 305 for 2023. What's going on there? It's essentially about a series of headwinds, a series of tailwinds that we have built into that margin guidance. If I take each one in turn... The headwinds that we see are we see fewer base rate increases per my macro comment just now over the course of the year. That in turn leads us to have lesser lag benefits versus what we have seen particularly at the back half of 2022. Likewise, we do expect to see a certain amount of turnover in terms of PCAs rebalancing into savings accounts as effectively depositors seek higher yielding returns. We plan for that in the context of our margin. Alongside of that, you mentioned the mortgage headwind. The mortgage headwind is quite significant during the course of this year. It's also quite significant during the course of next year, 2023 and 2024. We do think that once we've passed that, we've gotten past the mortgage headwind. And at that point, you start to see the effects of that. But for 2023 and 2024, that mortgage headwind is quite considerable off the back of the very attractive rate business that we wrote in 2019, 2020, now coming to the end of two-year fixes and therefore evolving into mortgage margin and mortgage spreads, which, as you know, are much lower now than they were then. There are one or two other factors going on, including increased costs of funding on the wholesale side in particular, that also act as, I suppose, marginal headwinds. But then the main tailwind that we see during the course of 23 is, as you identified, the structural hedge. But most of that, we've got about 35 billion of maturities this year, most of that is back-end loaded. It goes on in quarter three and quarter four of the year. What that means for the margin is that we expect the margin to be actually pretty healthy in Q1, but we expect these headwinds and tailwinds to play out very much in the course of quarter two and therefore to land in a pretty sustainable place actually for quarter two, quarter three, quarter four through the course of 23 in line with my comments earlier on about not falling below the 300 mark. That's how we see it playing out. What do we see as the dynamics within that? Again, I would just stress the macro assumptions that we're making in that context. I would also, just before moving on, make the point that I think your dynamics as you see them unfolding, Guy, are right. But I think they're possibly playing themselves out over a slightly longer timeframe versus the way that you're articulating it. So that's hopefully helpful. Structural hedge is interesting. Deposits and outflows are part of that question. I suppose just to put a bit of high-level context on this, when we look at the deposit book, we've got $475 billion of deposits and we saw $1 billion of outflows during the year. I realize this is about a Q4 discussion rather than a full-year discussion, but nonetheless, it's important, I think, just to bear that context in mind. $1 billion of outflows off the back of a $475 billion book. But the story, as you rightly identify, is about what happened within Q4 and how much should we be troubled by that or challenged by that. We saw deposit outflows of 9 billion in Q4. That was split between commercial banking of about 6.5 billion and retail outflows of about 1.7 billion. What went on there, first of all, commercial outflows, which is the big number within that 9 billion. Three things, essentially. One is we flagged at Q3 that we expected to see short-term placements come out of the system during the course of Q4. And indeed, that is what we saw. It was pretty much in line with our expectations. The second is that we manage the commercial book, just as we do all books, really, but the commercial book in a commercial way. That is to say, management pricing actions are part of the story, and so we saw some particularly rate-sensitive deposits that were less valuable to us leave the book during that time. And then finally, we saw an element of seasonality, to an extent, clients managing year-end balances. Now, relating that to the structural hedge, None of that commercial balance outflow was really structural hedge eligible. From a structural hedge point of view, we don't see that as terribly much of a challenge. The retail side of the equation, overall, we saw a slight outflow in Q4 from PCAs, about 1.7 billion or so. Notionally, that should be structural hedge eligible, but the vast majority of outflows, as you can tell during that Q4 period, are not related to the structural hedge. Looking forward, as you know, the structural hedge currently stands at 255. We felt very comfortable about our 30 billion buffer in Q4. We decided actually to take 5 billion out of that and put that into the structural hedge. So it's now 255. As we look forward, we see deposit flows, again, a little movement from PCAs into savings as savers seek better returns. But equally, we think our offers will attract both new and existing money within the savings accounts. So I think we see deposits being kind of flat to modestly up during the year. And again, that gives us some comfort about where we are with the structural hedge. Thanks, Guy.

Omar, why don't you take the next question for yourself?

Hi, good morning everybody. Thank you for taking the questions. I just had a question about how you're thinking about deposit costs going up. You mentioned that the lagged impact from the Bank of England rate changes and we saw the start of deposit migration in October and November. And I guess we're trying to model something that we haven't really scene really play out yet and it took us a couple of years to to get to to where we are but then rates have never gone up so quickly so i was wondering if you could help us think about how you have thought about deposit migration how you know quickly you think that will happen to what extent And is it colored by polling customers? I just wonder how you arrive at those assumptions. So I'd love to know what you're assuming and how you've assumed it. And then just secondly, sorry if I missed it somewhere in the material, but is it possible to give us a year-end position on the pension deficit if it's been updated or you have a rough estimate? Thank you.

Thanks, Emery. Let me take the first one. And it's a great question because, as you say, this economy in the last 20 years hasn't been through this kind of a rate cycle. We talked last year about our view on this, which was partly informed by, obviously, the UK, but also what I've seen in other rate cycles. At this stage, we think it's playing out very in line with what we discussed last year, but let me just give you the outline and then you can see if there's a follow-up. The first thing we talked about is normally you see, certainly on individuals, commercials and businesses are slightly different, but the core of our balance sheet and our structural hedges, you know, is underpinned by our retail customers. they become more price sensitive in a rate rising environment around the 2.5%, 3%. And actually that's exactly what we saw. And we talked about last year that the vast majority of our customers by number, not by value, have actually really quite small deposits and savings balances. And so the real sensitivity doesn't kick in until about a 3% base rate. And that's what we saw happening in Q4 last year. There was more sensitivity in customers looking for value on their savings with us, but also switching between different financial services providers. The second thing we said was we would recommend, and this is certainly how we think about it, that as we get deeper into the rate cycle, we'd be thinking about a 50% pass-through. Now, I know that's a very blended set of assumptions. That includes churn out of current accounts at almost 0% rates, as well as customers putting money into time deposits and various saving building products that for us, as you know, will pay 3% to 5%. So there's a set of assumptions around churn, where customers are putting their money and what the rates are. But we still think actually that's the right way of thinking about this. Our experience is that takes a few years. And if you think that in our baseline assumptions, rates are peaking now at 4%. And we're stabilizing at about 3% in 2024. That 50% pass-through, the rebalancing, customers placing their money in the right place, will happen with that kind of 3% target. So when we think about a 50% pass-through, that's where we're looking at. And we think that'll continue to play out through 2023 and 2024. And certainly that's what's the foundation of our assumptions. Obviously, it's incredibly dynamic market. It's competitive, as you know, in the UK, as in other markets. And we don't have recent history. But actually, at this stage, we feel really confident it's playing out as we expected. And we have the tools to be able to compete for retail and commercial deposits as we go through this next period of time.

If I just took that right, it's a cumulative 50% pass-through playing out over two years.

With a landing point of 3% base rates, which is our assumption at the moment.

Yeah, understood. Thank you.

Omar, you asked about pensions as well, just before we move on. In short, the expectation for the pension deficit at the end of 2022, which, as you know, is the final year of the triennial when we negotiate. We do not have a certain number for that right now. It's being finalized. But our expectation is that that comes in south of $2 billion, below $2 billion. That's off the back of considerable contributions, as you know, over the course of the last two or three years, including 2.25 in 2022. It's off the back of asset performance, off the back of the rate changes that we've seen. But again, we are very confident it comes in below $2 billion. What does that mean? That means that while we expect to continue to pay about an $800 million fixed contribution during the course of 23, just as we did in 22 and the years before that, we are very hopeful that we will not have to pay any further variable contributions, including in 2023.

Okay, thank you.

Thanks, Omar.

Hi, good morning. It's Ralph Suner from J.P. Morgan. Thanks very much. Can I have two questions as well, please? The first one, obviously, when we look at the net interest margin progression in Q4, the structural hedge tailwind rate basis points was completely offset by the mortgage margin compression. And in looking at the asset side of the balance sheet, I can't help being worried about the pace at which you're seeing some of these trends play through. So if you look at your mortgage book, the back book churn is 25% on the SVR book. Can you talk to us a little bit about what you expect there going forward? When we look at your completion margin, it was only averaging 50 basis points. And if you look at some of the pricing trends so far in Q1, I mean, there's a Halifax product which is only 20 basis points above the five-year swap rate. So it looks like the asset spread compression might actually get worse. So if you can talk to us a little bit about how you expect the pressure from the asset side to evolve this year, that would be really helpful. I guess the second question is around what you expect your deposit balances to be this year in terms of outflows. So I appreciate they're only down a billion last year, and obviously some of that outflow in Q4 on the PCA side was surprising. But in terms of the decision not to guide to a change in the hedge balances going forward, which one of your competitors did, what assumption are you making about your deposit balances? Sure.

Shall I kick off on that? Yeah. Rahul, thanks very much indeed for the question. First of all, The way the mortgage book is playing out, the refinancing of the mortgage book is not really a surprise. I think we flagged it quite well last year and indeed through the course of 2022. The way that's playing out is not a surprise in the sense that we took a lot of products that was ad margins of anywhere between 150 to 200 basis points written during the course of, again, 1920 to 2021. which is now evolving or rather refinancing in the context of spreads that are, as we discussed today, 50 basis points on average. Q4, I'll come back to that in a little more detail. But nonetheless, the thematic of that unwind is not a surprise. I think what is slightly accentuated versus when we sat here last February is completion margins are below our 75 to 100 basis points range. It's refinancing into a slightly tougher yield environment on mortgages. That's true. We talked last year about a mortgage headwind of somewhere between one to two billion playing out over the course of a couple of years. That number now looks a shade above the 2 billion as we play out in 2023 and in 2024. You can see circa a billion a year by way of illustration. Having said that, that is all firmly embedded in the margin guidance that we have given, including the fact that we are assuming working on an assumption of less than the 75 to 100 basis points in our mortgage completion margin expectations for the remainder of this year and going into next. That's baked into the greater than 305 margin guidance that we've given. You asked about back book churn within that. Yes, we have seen back book churn starting to accelerate, but two points to bear in mind. One is it's very natural to expect some of that in the context of a rising rate environment. You do indeed get some customers who want to refinance onto new fixed rate deals and indeed we are playing our part in encouraging that via communications to those customers and indeed facilitating product transfers. So we're very much staying in that relationship and we see it as part of our customer duty to ensure that customers are aware of and able to switch where they see it as appropriate. So that back book churn has increased as a percentage. The second point I was going to make there, Raoul, is part of the reason why it's increased as a percentage, in some cases, is the balances being refinanced are not changing that much. What you're getting is a lower and lower denominator. The back book is shrinking in size, so a given chunk of refinancing represents a bigger percentage of that size. As a result, you're seeing a little bit of an uptick in terms of refinancing loads, but not as much as the percentage numbers might sometimes suggest. So that's going on. Again, that's expected. In some respects, it's welcome. We seek to remain in those customer relationships. And more importantly, it's built into the margin guidance we've given you. You asked about completion margins, 50 basis points in Q4. There's quite a dynamic going on there that's worth spending a moment on. During the course of October, we as the biggest UK mortgage lender stayed in the market. We stayed in the market at a time when many of our competitors came out of the market. We felt that it was our duty to still be there. As a result, we were operating in an environment of highly volatile and elevated swaps levels, compressing mortgage margins. Because of our competitors coming out of the market, we also took quite significant volumes during that time. What that meant was that if you look at the overall completion margin within Q4, you've got an outsized contribution from that October event, But the spread of new business margins in particular in November and December were much more favorable. The trouble was, as you know, that volumes were much lower during that time. So our overall 50 basis points for Q4 includes an outsized contribution from October, but then lower contributions and much more favorable margins in November and December. And as we see that dynamic evolve into the first part of this year, Raoul, we're seeing new business application margins in the 80 basis point type levels that have been talked about in the market. So we are seeing a favorable development of new business application margins in the course of A, last couple of months of Q4, and B, first month of this year. Final point that I'll add on there is that at the same time we have, because we've got a big fixed rate book maturing, quite a lot of product transfer opportunities coming along. We see those product transfer customers, customers that we know, decent asset quality, opportunity to extend the relationship. We are prepared to take a slightly lower margin off the back of that customer product transfer opportunity because of those factors. And that will influence our margin a little bit over the course of the year. And again, that's partly responsible for our margin expectation being below that 75 to 100 basis points corridor. We want to stay in with those customers that are product transferring because we think they're good customers. And so we will. Overall, that's what completes the kind of mortgage margin picture. The other point, you mentioned more broadly asset side, Raoul. The other point I'd add to that is we do expect some growth in unsecured balances this year. We do expect some growth in unsecured balances next year too. And that starts to play into the margin, less so this year, to be clear, more so in 2024. But that does start to have an effect that completes your kind of asset side picture. Deposit balances, I'll make one very brief comment Charlie may wish to add. You asked essentially what are the background assumptions on deposit balances? Essentially, flat to modestly up. That's if you net off PCAs migrating somewhat to savings, rate benefits being sought after by customers, offset by savings offers. And then within commercial business, probably a little bit of tracking down within BCB SME, but equally as we build transaction banking and other areas within CIB, a bit of tracking up. So again, flat to modestly up within deposits, which then informs the structural hedge stance.

So the only thing I will build is an optimistic strategic view, which you've got used to listening to from me. But hopefully what you can see through these tailwinds and headwinds and then the question on asset pricing is, you know, 23-24, I know it's complex. We've got... a set of legacy and higher-priced mortgage businesses repricing, which I think has been a nervousness in the market for a long time around how does Lloyd's weather through that. We think we'll be largely through that through this period of time. We think we're competing and showing we can compete and be resilient around the liability side of the business, which enables us to build the structural hedge, which becomes this engine of growth, as William talked, into 24, 25 and 26. So that gives us real resilience and a cleaning up on the legacy mortgage business, if I can use that language. We then have the strategic initiative that we're remaining committed to layering on additional income growth for Lloyds Banking Group, which is why we're generating stronger capital and cash distribution. And then at the same time, The £7 billion pension deficit we had in 2019, we think will be largely through this period as well, subject to the triennial discussion with our trustees, which means the capital we do generate is more available for our board to talk about distributions. And if you look at that dynamic collectively, we're really building a strong engine of strong cash and potential for cash distributions to shareholders that is very resilient when you then look forward on the balance sheet in the economic conditions we're looking at.

Thank you.

Thanks. Good morning. It's Rohith Chandra Rajan, Bank of America. A couple of quick follow-ups, please, if I could. Just quickly to follow up on the mortgage discussion. On that back book attrition, so that was 17... Check my numbers now. Sorry, it was 10 billion in the second half of 2022. How do you expect that to evolve going forward? And then the second one was just on the pension contribution. So, William, I think you said you expect the 0.8 billion fixed contribution to continue and you've got nothing in for the variable contribution. Does that include the final distributions for 2022? 2022, which will be paid in 2023. And is all of that reflected in your 175 basis points council generation?

Yeah, thanks. Thanks, Rahul. First of all, on the SVR book, we've got about 48 billion or so of SVR book left now. We are seeing refinancing of between 4 to 5 billion per quarter. I mentioned to Raoul that although the percentage of 25% may be ticking up, that's because the 4 to 5 billion is staying steady and the denominator is declining in size. So that's what's going on there. I think, Rahul, as we look forward, I don't think we see terribly many changes in that. I think we expect to see a similar kind of pattern as we roll forward into 2023 of about the same rate in absolute terms, which might mean a slightly higher rate in percentage terms. As I say, fair enough, because we see those customers as In some cases, having very low balances, happy to stick with where they are, value the ease with which they can give and take with respect to an SVR. Other customers want to switch into fixed and we'll be there to help them where they do. So hopefully that addresses that point. On the pension contribution, as you say, 0.8 billion, 800 million fixed contributions we're expecting this year. That is... before you get to our circa 175 basis points guidance. That is already assumed in our run rate P&L, if you like. 175 basis points is on top of that. As you say, zero variable rate is our expectation. Now, as Charlie has pointed out, and we must not forget this, we have yet to finalise negotiations with the trustees. But we have fairly frequent conversations with the trustees, and we hope that that will result in the outcome that I've described. So that is our expectation. In terms of what effect, if any, are there any other impacts on the 175 basis points capital from the pensions issue? No. The 425 million that we put in at the tail end of last year was out of the capital that we generated in 22, not out of the capital that we will be generating in 23. So the circa 175 is after all of what we've done in terms of the 2.25 billion that we put in in 2022. And we start again. And as I say, the 800 million is already deducted before you get to that 175. Thank you.

Thank you. Just before I take any more questions from the room, there are a couple of questions that have come in online. The first one is from Jonathan Pierce. He says, obviously, lots of sizable TNAV tailwinds this year. Can you comment on whether, in aggregate, you think consensus TNAV of 52p at December 2023 is about right, or whether your ROTI guidance is struck on a different denominator to the market?

Yeah, thanks. Thanks, Jonathan. We deliberately spent a bit of time on TNAV in the comments that I made, as you can tell. What did we see during the course of 2022? A number of factors. The build-up from attributable profit, of course, which was welcome, but at the same time, pension surplus slightly changing shape, hit it. The cash flow hedge reserve declining, i.e. going into negative territory off the back of rising rates, again, hit it. When you add to that the impact of dividends and other distributions, there was a further impact again on TNAV. You then get the start point being adjusted by RFS 17. So that's the start point, which we haven't given precise numbers on the RFS 17 today, but you get the direction, I think, from the appendices to the presentation that we put out. You're looking at a start point around a 46, 47p type territory. We then see significant build from the factors that I mentioned earlier on. The adjustment in rates starts to lift the cash flow hedge reserve. The business growth that we expect to see starts to build capital within the business, again, lifting the cash flow hedge reserve. The pension surplus builds. Likewise, the buyback when we distribute excess capital will build the TNAV per share. Those factors are going to lead, as I said in my comments, to positive and material developments within TNAV. And although I'm not going to comment on consensus in quite the way that Jonathan would like, we are putting the comments into my script on TNAV for a reason. It is not necessarily going to make up all the difference between what some people see as consensus ROT and what we're projecting for 2023, to be clear. But nonetheless, it closes some of the gap. And so we're putting the TNAV comments in for a reason.

Thank you. Another question came in from Andrew Coombs. You guide to the ROTI improving from 13% in 2024 to greater than 15% in 2026, even though rates are widely expected to decline during this period. How do you rationalise this and what are your base rate assumptions?

Shall I kick off? Yeah, either of us, but yeah, go. Thank you for the question, first of all. What do we see as happening as we go forward into 2026? A couple of points. One is our assumptions on the macro are as laid out. Some will have a different view of rates to us in particular. That's probably the one that I would draw attention to. Having said that, as I said in my comments earlier on, compared to the data that we had when we struck the economic assumptions at Q4, the data that we've had in since then during the course of January has been a little bit more positive at a general macro level. Let's see how that plays out, but that's probably been the trend of things so far. Going into 2026, specifically what happens, again, we've given our macro assumptions. What is going on there at an income level is that some of the headwinds that we see, particularly to net interest income, are exhausting themselves. We talked a lot today about the mortgage margin, for example, or the mortgage pressure on the refinancing of the mortgage book. That plays itself out by the time we get to the back end of 2024. The second big factor that is happening through the course of the next couple of years and continues to build is the refinancing of the structural hedge. We have 35 billion of maturities of the structural hedge in 23. We have 41 billion of maturities of the structural hedge in 2024. We then have ongoing maturities of the structural hedge well into the 40s in the years thereafter. The cumulative impact of that on our interest income is considerable. And it doesn't much matter whether rates are 2.75 or 3.25, whatever they might be at that year, it is still considerable because the current yield that we get on the structural hedge is 1.13%. So it does not take much to build in considerable tailwinds to your income developments in the years thereafter. And as you get closer to 2026, they become increasingly powerful. What else is playing itself out? Again, we get headwinds in the next couple of years, like operating lease depreciation, for example. The way in which the Lex fleet builds, the way in which used car prices come a little lower than what they've been in the last couple of years, provides an operating lease depreciation this year and indeed next year. That plays itself out by the time we get to 24, 25, 26. And then we see the cost base developing in a similar sort of way to the way that we've described to you before. That is to say, we get past our investment peak, number one. We see the benefit of some of the strategic investments cost saves playing themselves through, number two. And allied to the BAU cost saves that we see, we see operating leverage within the business rise, by which I mean those positive income trends, allied to some of the savings that we're continuing to make on an ongoing basis within the cost base, starts to build significant operating leverage within the business. That gives us high conviction in the expectation that ROTE in 2025 starts to build to the excess of 15% that we portrayed by 26. So hopefully that answers the question.

The only build, because it's exactly the right question, it's what I was trying to get to when you look at the underlying engines playing through the balance sheet and then the business, is obviously if you look back at Lloyds Banking Group in 2018 when there were zero percent rates basically with the Bank of England, we were near 300 basis points of return on NIM at that stage. we really do have a balance sheet and a customer franchise that can sustain healthy returns. Then when you overlay the dynamics that William just looked on, that's why we have the confidence about the 2026 go forward position.

Thank you. Aman. Thank you very much. Sorry to labor the discussion around NIM. Your color around the mortgage margins is really, really helpful in terms of what took place in Q4. But presumably, that's going to play out in the NIM that you'll print in Q1. Your suggestion in some of your comments was that the Q1 NIM is going to be pretty firm, which makes sense given you've got the residual effect of base rate hikes. So I think your guidance probably suggests something like a 20 basis points step off in Q2, maybe 15 to 20 basis points to kind of sustain the full year guidance that you're pointing to. Can you confirm that kind of quantum step off? And can you help us just apportion exactly what's coming from mortgages versus... I think we need some more detail about exactly what you're assuming in Q2 in terms of mortgage maturities, in terms of a catch-up on deposit cost and mix, because it's really quite a remarkable step off in the NIMH.

I'm going to be able to partly answer that question for you and partly not answer it for you, I'm afraid. What do we see rather going on during that time? I've portrayed the main factors, the puts and takes over the course of the year. It is the case that we have made already some pricing decisions in terms of pass on to depositors. that have been, if you like, announced, but not yet impacting the margin. They will play their way through during the course of Q1, but particularly during the course of Q2, as you start to get full quarterly effects as opposed to partial effects. That's a big part of it playing out. Second part, when you look at the mortgage roll, the impact of the mortgage roll depends upon the particular cohort that is being refinanced at any given moment. So if you look at the mortgage roll in quarter four, it was around 155, 1.55% yield for that cohort. If you look at it in Q1 and Q2 of next year, it's looking more like 1.8%. So the particular cohort that you're refinancing at any given time makes quite a big difference on the margin dynamic within that quarter. What else is going on? It really just is, again, the macroeconomics that we have portrayed there. If you don't get the base rate changes in quite the way that we played them out, or rather put it another way, you get base rate changes that exceed those that we played out. You're going to see that make a difference on the NIM. That will reintroduce some of the factors that we saw during the tail end of last year. Overall, I'm not going to give you a precise number for how it's going to roll off from Q1 into Q2, but you get the inputs, if you like, to that point. Pricing changes, mortgage cohort refinancing, macroeconomic changes. They play their way through, and yes, there is a solid step-off, for want of a better word, between Q1 to Q2. Precisely what that will be depends upon how things play out including current pricing in the market. What will mortgage spreads be as we refinance a large part of the book? As said, new business applications, they're looking pretty good, but we also want to maintain product transfer share. So there's a lot of variables at play here, but a solid drop-off between Q1 and Q2 I think is a fair expectation.

And William, just because I know you said it earlier, and then the fact that the structural hedge is delayed until the second half in terms of the positive impact that'll have. So that's why we think there's stability and resilience in the back end of the year, as William had said previously.

Thank you so much. Could I just get a second on the legacy book exit, £2.5 billion? Two questions. What kind of impact should that have on things like NIMH, for example, that we should be thinking about? The second is that looks like a de-risking strategy around risk-weight inflation under stress. Why are you doing that? Are you worried about the impact of the stress test on the PRA buffer or your target cap ratio? Why are you doing it?

It's a good question, Aman. It's worth putting in the context of the overall way in which we manage capital within business. When we look at what assets we finance on the balance sheet versus what assets we finance off the balance sheet, there are occasionally opportunities to grab value, if you like, from taking assets off the balance sheet and refinancing them into the capital markets. That is a practice which, as you know, we've long undertaken within the commercial business as we sought to manage what we described before as the tail of the commercial business. Are there ways in which we can enhance value for the business and ultimately shareholders by taking business into the capital markets versus financing it with all of the regulatory capital charges that we get on balance sheet? Same analysis applies to the mortgage book. Where we see a piece of the mortgage book that is, if you like, unduly penalized by regulatory capital charges, there are going to be cheaper ways of financing that mortgage book by taking it off the market. And that's essentially what we did with the legacy book of 2.5 billion that you described. We were very pleased with it because essentially it is an NPV positive transaction from our perspective. It creates value for our shareholders. It also has the side benefit of lightening up on our ACS charges next year. It's not a huge book, so it's not going to be huge in its impact, but this is a book that soaks up quite a lot of stress capital in the context of the PRA ACS exercise. Getting it off our balance sheets at the margin is helpful.

Ed? Ed? Hi, it's Ed Firth here from KBW. I just have two questions. One was a detailed question. I noticed your stage three balances in the SME, but we're down a lot in the quarter. I just wondered if you could just highlight what was driving that, I guess would be the first question. And the second question is, it seems sort of strange, I guess, at the moment, but I'd like to ask about costs. And in particular, flat BAU costs. And I'm just wondering how comfortable you are that that is good enough. And I guess the background is we've rather lost sight of the digital new entrance, I guess, over the last year as everybody's made a fortune on NII. You know, they're still banging away in the background, and they're talking 30%, 40% returns on equity. They're all massively deposit long. They're all now producing some pretty extraordinary offers and delivering off margins that I suspect you would really struggle to compete with. So I'm just wondering, how comfortable are you that over the next three to four years, one of the problems we're having on deposit pricing is actually the massive new entrance with cost bases that are way lower than yours? Sure. Thank you, Ed.

Shall I take the first couple of those and hand over to you for the third? Stage three balances, first of all, Ed, and then I'll talk briefly about the cost base before handing over to Charlie on the competition point. Stage three balances, as you know, have been very consistent, actually, through the course of the year. So stage three balances, we had 10.75 billion at the end of the year. That's versus 11.4 thereabouts in September. Interestingly enough, stage three balances, therefore, going down during this time. And actually, if you look back at them after the 1st of January 2022 adjustments, they've been stable right the way through the year. If anything, they've been coming down through the course of the year in its totality across all the businesses. So we're pleased with the performance of the book and Stage 3 balances are testimony to that point. There is a broader point around performance of the book as a whole, which is we took about a 1.5 billion charge during the year. About 500 million of that was a net MES charge. About 915 million was underlying, and that underlying also being influenced by things like stage one roles, as I mentioned in my comments earlier on. The reason I say that is just to reinforce the point that the underlying performance of the book across all of the retail and commercial aspects of it has been very benign during the course of the year, and we've been very pleased with it so far, albeit we clearly have to remain vigilant in the context of a toughening economic environment. On SME in particular, That's been subject to those same trends, Ed. There has been a similar pattern within overall SME performance. So far, it's been pretty good. I mentioned in my comments that things like invoice financing, debtor days, for example, have been very stable. Use of overdrafts, revolving credit facilities, likewise. It's all been pretty benign. The other bit of noise, if you like, that we get within the SME business when you look at stage one, stage two, stage three, is bounce-back loans. Those are sometimes responsible for slightly different numbers than you might first expect. It's still categorised according to the accounting stages, albeit we don't incur the loss. Clearly, if a bounce-back loan does go bad, so that may be behind your question. On the cost point, just very briefly, when we look at the cost base for 2023, we put forward 9.1, 2024, 9.2. As you know, that's about 400 million in excess of what we said in February of last year, which was 8.8. What have we seen there? We built into our budgets cost increase expectations of around 300 million over that time. We think we're going to get closer to 900 million to a billion somewhere. That's about 600 million in excess of what we expected, i.e. the difference between 900 million and 300 million. We're going to be offsetting that, about 200 million of that. We're going to be taking and absorbing about 200 million of that. That's the 1.2 billion that Charlie referred to in his comments. but we're going to let about 400 million flow through. We actually think that's pretty good. In the context of the inflationary pressures that we absorbed in 22, we're going to up our savings again a further 200 million to offset a material amount of the inflation that we expect to see. I think it is testimony to the discipline within the group and the efforts of the cost savings that we see in PAU and the strategic initiatives.

Great. Let me come to the strategic question. First of all, thank you for a non-NIM rate cycle question. It's great to get it. I think it's good to point us back to that. And so just a couple of thoughts, because I think this is a discussion we're going to continue to have all the way through the next few years together. But I think it's right. The fintechs and the neobanks do have that lower cost point. A couple of thoughts from my side. Firstly, interestingly, through the last six months and then as we look forward, There's always been smaller players, actually the building societies and smaller banks, and now some of the fintechs that have been, they've needed to look at higher rates to attract the funding. That's not the biggest area we see our customers going, actually. They're still choosing between the big high street banks when we look at the big volumes. That's not to be complacent, but just when you look at the competitive dynamic, if customers were really chasing with their money higher rates, they'd have already been going to an alternative provider even in the last 12 or 18 months. And as you know, the vast majority of our customers only have 1,000 to 5,000 pounds. So that's the first thing I think is important, which is in terms of savings and rates. They aren't our biggest competitor today, but we certainly need to continue to stay focused on them. I think the second thing is you just need to unpack our businesses a bit and where we make money. And I think there are two businesses where I think what you're laying out, we agree, is where there's a really strong focus around building more digital engagement and efficiency. And I'll give you that in a second. But there's other businesses that are quite different. Let me give you two examples. Our asset businesses, so mortgages, cards, loans and the transport business. Today, when you look at, which is where over the last decade, the majority of the economic profit in the industry has been, 80% plus up to 100% of those products are distributed through third parties. They're not to relationship bank customers. The basis for competition there isn't about the FinTech game. And in fact, the FinTechs actually don't really participate in that. And interestingly, when the rate cycle comes back the other way, which we all need to be thinking about, with my £800 billion balance sheet, I'm worrying as much about the next rate cycle as I am this one. That's how you build sustainability of returns. Similarly, in our corporate and institutional banking business, which we think we're seeing good early momentum around and we think can be very accretive, again, it's not really a cost-income game that they can compete in. I think the two businesses, which is why the strategic focus there has been very focused in our strategy, is around our core relationship brands and then our SME business. And that's really where the fintechs, the kind of ones you're talking about, have been focused. The great news is we have the biggest digital bank in the UK. Our digital engagement is growing faster than anyone else's. And today we have a breadth of products and an ability to serve customers at scale that no one else does. The challenge is the one you've laid out, which is the fintechs are coming with a different operating cost and model. How that plays out over the next few years, we're very, very focused on it. From my perspective, the efficiency and where we really build propositions for parts of the market that want a digital only service, we absolutely have within our strategy building out those service models. It doesn't fully answer your question because we could spend the rest of the morning talking about it, but I don't know if that helps. I certainly, though, think you need to unbundle the big asset businesses on the retail side from the relationship banking, transactional banking businesses, and then the other parts of our business model that really generate through cycle returns and think of the other side of the rate cycle for those businesses. But thanks for the question. That was nice.

Excellent. There's a couple more questions I want to take before concluding. So, Chris, I know you've had your hand up for a while.

Good morning. Good morning. It's Chris Kent from Autonomous. Thanks for taking the questions. One quick point of detail and then another one thinking about your 2026 ROTI, please. So could you just give us a sense of, within your non-SVR mortgage book, how much is two-year versus five-year, just so we can think a little bit more about how that book churn progresses from a volume perspective? Obviously, you made a comment about the variable NIM, but just in terms of volumes, that would be helpful. And then on the 2026, I guess you're future-gazing a little bit there in terms of how the broad deposit trends play out in a higher-rate environment. If I think back to pre-financial crisis, about 4% or 5% of system deposits would have been non-interest-bearing, and it's now about 19%, 20%. What are you assuming there in terms of where that might get back down to with a structurally 3% to 4% base rate environment? I'm just trying to think about how much hedge attrition you might be baking into your 2026. And on a related point, you talked about sub-75 mortgage spreads for 2023. Again, if I think back to pre-financial crisis when we would have had a similar liability margin environment, spreads would have been 20 to 25 basis points. And I appreciate the years immediately pre-financial crisis were quite competitive. But why wouldn't we get back down to those kinds of levels if yourselves and other large institutions are expecting to deliver well into the teens' returns? Thanks.

Can you take the first one and I take the second?

Sure, yeah. Just very briefly on the five-year versus two-year fixed. Chris, it's about 50-50, roughly. It'll be a bit off that. I'll get back to you with a more precise number about that level.

Great, let me have a go at the second one, and William, you can backfill when I don't fully answer it, because it's a great question again, and also there's a bit of crystal ball gazing, as you say, as you think about it. And I think the data is helpful, the 4% to 5% of current accounts or site deposits versus where we are now in the industry, around 20%. It's one of the things we've been looking at. I think the first thing is that'll play out over time, that kind of change, and that's what we saw pre-crisis and in other markets where they've been through interest cycles. The second thing that's interesting, I'm not going to give you the exact percentages we've built within the plan, if that's all right, Chris, but I'll tell you how we think about it. The second thing is typically what I see is how sharp people get around only retaining the minimum in a current account versus using alternative savings is partly linked to inflation, and of course, What you've seen in our base rate assumptions is we do get back down to a 2% inflation level, which means that people with meaningful savings aren't seeing a level of deterioration that they felt at the moment or last quarter. And that's really important when you look at consumer behavior, where the vast majority of consumers, not by value but by number, are operating in pretty thin transactional accounts relative to their spending. So whether we get exactly back down to the 4% or 5%, I don't know. because we can't crystal ball gaze. Our assertion would be, I think it would take a number of years and it would really depend on how inflation played out and how people thought about their savings and or investments being affected by inflation. When you get to that stage, by the way, the maturity around then how you can help customers around getting a return that does defend their savings and or investments, and also our strategic investment in our investments capability becomes really important. And I'll smile because you'll get this immediately, many of you, because you cover my old organization. There's an interesting dynamic where investments returns, which are in the 50 basis points level, start to become attractive to encourage people to put money into simple investments relative to deposits. So there's a whole broader spectrum of a way of competing. But I think it's a good way of looking at a market, but I think it's a few years out. And based on the economics, I would be surprised if we get to that place. On your question on mortgage margins, my guess is we all spent a lot of time in that 2005 to 2007 period. The dynamics were really very different, as you know, and I think structurally there are some differences post the financial crisis, not least the model of originating to distribute the mortgage portfolios, not worrying about the capital costs. and then the regulatory implications around how you have to manage funding and the duration mismatch on interest rates is all very, very different today. So I think there's a structurally different set of economics around the mortgage businesses. As you know, one of the consequences of that is the customer base along with the growing house price market has really changed. I know it's an average and I hate averages. I always tell you I hate averages, but I'm going to give you an average. The fact that the average mortgage customer at Lloyds Banking Group in the industry has an income of £75,000. And obviously the LTV is now down at 41%. And you can see in the appendix, the LTV, we give you the 2010 data around the LTVs in the mortgage portfolio versus our 1.3% above 90% today. It's a radically, radically different market. We have a clear view and as will the other providers in the UK around what level you can sustainably provide through cycle returns for mortgage customers. I think the 2005 to 2007 period is materially different and would be hard to repeat going forward. However, the question around how does competition play out and how do we compete is absolutely, William's talked about how we're thinking about it in this period. The other dynamic is, if you're there, if you're in 2026, if you have a view that rates are now coming down, You then start to have a really important discussion around which balance sheets and which organizations are best placed to deal with a lowering rates environment. And as you know, to really deal with that, you need balance between assets and liabilities. You need a good mix of assets. You need to participate meaningfully in consumer finance. Otherwise, you're not going to be able to generate the spreads in a lower income environment. And you need to have strong risk management and capital management disciplines. You'll have a view around that between the different institutions in the UK, but that's why we have confidence when we look at 2026 and beyond.

Chris, just one point to add to Charlie's comment there and then just to give you some further guidance on the five-year, two-year point that you mentioned. One of the factors that we are looking at closely right now is to what extent inflation has an impact upon the overall balances that we have within the bank, both on the current account and also on the savings side. So to what extent does that come through in terms of payments? Salary checks, for example, what is the lasting effect of that upon the balances? Alongside of that, in a higher interest rate environment, you obviously get the benefit of that building into balances too. And then finally, post-COVID in particular, what is the nature of people's precautionary balances in the banks? We do think that is systemically higher than it used to be, but it is at the moment, if you like, a question that we're trying to figure out within the business as to what does that actually mean and how does it play through? Just separately, Chris, you asked about five-year, two-year. I gave you 50-50. I think it's more like 60% five-year and then about 40% two- and three-year. So that's a better way of characterising the balance, albeit not terribly different, but those are the numbers.

Thank you. OK, just final question, just in the front row. Oh.

Good morning. It's Ben Toms from RBC. Firstly, on other income, if I take your Q4 number, deduct out the one-off, deduct out a quarter of the IFRS 17 headwind that you flagged, and then put that into future years, grinding kind of 2%, 3% higher as you go through the years, is that the right way to think about other income growth from here? And then secondly, on the pension, you've talked about the triennial coming up this year. Your P2A came down in half two, presumably partly because of pension risk. Is there something to play for here when we get the triennial? Is there more pension risk sitting in the pillar 2A? I know you won't be able to quantify it, but is there something material that could develop there? It's important, I guess, for an institution where you've talked before about potentially re-evaluating management's capital target. Thanks.

Yeah, thank you. Shall I kick off on those, Charlie? I think, first of all, on IOI, when you look at the underlyings that went on during both Q4 and during the year as a whole, as said in the slides, that gave us reason to build confidence in the performance of the underlying OOI businesses. And as you know, it's taken some time to get there. I mean, I've been quite cautious in terms of our overall OOI trends within the last couple of years. But I think what we saw in Q4 to agree what we saw in 2022 as a whole is encouraging in the sense that if you strip out the effect of assumptions, if you strip out the things like GI weather and you look at the underlying within retail, within commercial, within insurance, you see signs of progress. Within retail, it's customer activity and things like PCA, the Lex business, the Cars business. Within commercial, it's things like the market's performance. within insurances, things like workplace pensions, bulks, two degree protection. These are developing a little bit of momentum and we see year on year improvements, both 22 over 21 and also Q4 over Q3, even on a relatively micro basis like that. When we look forward, Ben, you're right to strip out the IFRS 17 effects that we see. If you took those kind of literally, you would go from the performance that we've seen, stripping out the IFRS 17, you get down to about 4.7. When you look at the underlying performance that we expect for 2022, we expect to outperform the 4.7. So a little bit of growth that we will follow through on and deliver during the course of 2023 will be our expectation, Ben. I don't want to get too excited. It's linked into the achievement of our strategic initiatives, which are big OI drivers for us in the years going ahead. 23 is just the foothills of that, but we do expect to build into it over the course of the year. On the capital point, yes, you're right. We had a benefit from pensions liabilities coming down, which helped our Pillar 2A charge come down to 1.5% during the course of the year. Looking forward, there is more to go for there from a pensions side. So if we continue to reduce the pension deficit, we should see some benefit from that in Pillar 2A. Having said that, we've pointed out in the past one or two regulatory uncertainties out there, and the regulatory playing field, if you like, is still being played out as we speak. Things like CRD4, all the issues that you'll be aware of. So overall, that leads us to be comfortable with where we are in terms of our capital guidance of 13.5%, recognising, final point, Ben, that we do intend to distribute down to that over the course of 23 and 24, as we've indicated previously.

Okay, thank you very much. I think we've actually taken most of the questions, but if indeed there are any further questions, as normal, please do give us a call in the investor relations team. Okay, just briefly before finishing, let me just finally hand over to Charlie just for a couple of closing comments.

Well, just to say thank you very, very much for attending. I know we are the last UK financial that's been announcing. My guess is a number of you were up at 4 a.m. yesterday for HSBC. So thank you very much for joining today. And as Douglas said, any questions, we're going to hang around a little bit now for those in the room. Any questions, please follow up, and we're looking forward to the next results in Q1. So thanks very much.