Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group 2023 Q1 Interim Management Statement Call. At this time, all participants are in a listen-only mode. There will be a presentation from William Chalmers, followed by a question and answer session. If you are joining by phone and wish to ask a question, please press star 11. This call is scheduled for an hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

Thank you, operator. Good morning, everybody, and thank you for joining our Q1 results call. Let me start with an overview of our key messages on slide two. The group has continued to deliver in Q1. As ever, and particularly in the current environment, our purpose of helping Britain prosper is central to how we operate. Our purpose-driven business model enables the group to offer significant support to customers and colleagues. as they navigate the increased cost of living. We've also continued to deliver against our strategic ambitions for the group. You'll hear more about this at the half year and in our deep dive sessions in H2. Underpinning this, we delivered a solid financial performance in Q1, including strong income growth and capital generation. Our confidence in the group's business model, strategy, and continued financial performance are reflected in our maintained guidance for 2023. In an environment of change, our commitments have remained constant. Let's turn to the financials on slide three. Lloyds Banking Group delivered a solid financial performance in the first quarter of the year. Net income of £4.7 billion is up 15% on the prior year, supported by a net interest margin of 322 basis points, growth in other income, and a continued low operating lease depreciation charge. Operating costs of 2.2 billion are up 5% on the first quarter of 2022. This reflects our continued strategic investment alongside inflationary effects on the cost base. We remain committed to maintaining our market leading efficiency position and are on target to achieve our guidance of circa 9.1 billion for 2023. Asset quality is resilient. The impairment charge of 243 million is equivalent to an asset quality ratio of 22 basis points, supported by a small release relating to the improved macroeconomic outlook versus Q4. Consistent with recent periods, given the reporting changes we implemented a year ago, underlying and statutory profit before tax are now largely aligned. Statutory profit after tax for Q1 was 1.6 billion, and the return on tangible equity was 19.1%. This drove strong capital generation of 52 basis points, even after taking the full 800 million fixed pension contribution. Alongside, TNAV is up 3.1 pence per share after the IFRS 17 restatement. I'll now turn to slide four to look at our resilient customer franchise. Mortgage balances stand at 307.5 billion. This is down 3.7 billion in the quarter, largely driven by the 2.5 billion legacy portfolio exit that we mentioned at the full year. Excluding this, the open mortgage book was down 0.6 billion in the quarter, reflecting lower activity levels across the market. Alongside, we continue to see modest growth in our other retail businesses, with credit cards, loans and motor finance all showing progress. Likewise, we continue to take advantage of strategic growth opportunities within the corporate and institutional business, delivering growth of 0.7 billion in balances in Q1. As in previous quarters, this is offset by repayments of government support scheme loans within SME and some lower underlying balances. Turning to the deposit side of the balance sheet. Total deposits are down 2.2 billion in the first quarter, or roughly half a percent. This includes a reduction of 4.3 billion in retail and growth of 2.7 billion in commercial banking. The retail balance development includes an outflow of 3.5 billion in current accounts. This reflects unusually high seasonal outflows, mainly tax payments, higher spend given inflation and rates, and a more competitive market, including government NS&I offers and our own savings rates. Looking forward, it is likely that the higher customer spend levels, internal churn, and market competition continue, but we do not expect to see the circa 2 billion of tax payments repeating this year. Savings balances in Q1 were essentially flat, albeit with some expected movement from variable to fixed rate. In commercial banking, we saw modest SMB outflows due to spend increasing and corporate and institutional inflows. Some of these inflows were strategic. some likely short-term quarter imbalances. Across deposits as a whole and acknowledging uncertainties, we expect balances in 2023 to be broadly flat on 2022. Alongside, we continue to see good organic growth in insurance with circa 2 billion of net new money in the quarter. Moving on to slide five and the group's strong income performance. Net income of 4.7 billion is up 15% year-on-year, with higher NII and other income. Net interest income of 3.5 billion is 20% higher than the prior year, benefiting from a stronger net interest margin and higher average interest earning assets. The Q1 margin of 322 basis points is up 54 basis points year-on-year, but stable on Q4, as we had expected. As set out at the full year, we've seen continued pressure on asset margins, broadly offset by tailwinds from base rates, and benefits from the reinvestment of the structural hedge. Mortgage completion margins were around 50 basis points in the quarter. This average included slightly higher new business margins and slightly lower product transfer margins. As you can see, the nominal balance of the structural hedge remained at $255 billion, The weighted average life also remains around 3.5 years. Given an average yield of around 1.2% and currently prevailing swap rates, reinvestment of hedge maturities is expected to continue providing a healthy tailwind in the coming quarters. Looking forward, and as outlined in February, we continue to expect the net interest margin to reduce in Q2 before stabilising in the second half of the year. Overall, a base rate rise beyond our initial expectations has been offset by tighter product margins. We therefore continue to expect a full year margin in excess of 305 basis points. And alongside, we continue to expect broadly stable AIEAs in 2023. Turning briefly to other income. OI of 1.3 billion and a quarter is up 6% year-on-year and up 11% on Q4. We've continued to see activity build and benefits from investment, providing underlying growth. In addition, Q1 also benefited from benign weather and insurance compared to Q4 and a profit on sale of the legacy mortgage book. We continue to expect other income to build gradually, supported by customer activity, are ongoing strategic investments and releasing the store of insurance earnings within our CSM liability. A brief word on operating lease appreciation. The charge of £140 million in the quarter is higher than previous periods. The Lex car fleet grew and we recognise lower gains on sales in Q1 as new vehicle supply constraints eased. Augmented by Tusker, we expect this trend to continue through 2023-2021. and therefore to see the operating lease depreciation charge grow through the year. Now looking at costs on slide six. Operating costs of 2.2 billion are up 5% year on year. As you know, the increase is driven by our planned strategic investments, the costs associated with our new businesses, and inflationary effects on the cost base. The cost income ratio of 47.1% or 46.6% excluding remediation continues to be competitive. Looking forward, we will maintain our rigorous cost discipline and remain on track to deliver operating costs of circa 9.1 billion in 2023. Remediation was very low in Q1 at 19 million. There is no charge in respect of HBOS threading, although, as ever, uncertainties on this remain. We continue to have a base case for mediation charges of around 200 to 300 million per year. Let me now move on to asset quality on slide seven. Asset quality continues to show resilience across the group. Our retail businesses are performing well, with arrears at or below pre-pandemic levels. Meanwhile, commercial performance is strong, with the Q1 charges largely relating to cases that were already in Stage 3. The net impairment charge for Q1 was $243 million, equivalent to an asset quality ratio of 22 basis points. This includes a $322 million charge for the updated economic scenarios, roughly consistent with Q4, and equivalent to an AQR of 28 basis points. As you can see, there's a small release in respect of the updated macroeconomic scenarios. Stemming from reduced energy prices and a looser fiscal constraint, the base case represents a modestly improved outlook. As usual, the detail of our scenarios is in the appendix. The stock of the ECL on the balance sheet is marginally lower in the quarter, at 5.2 billion, with coverage levels remaining very strong. And given everything we can see, we continue to expect the net asset quality ratio to be around 30 basis points for 2023. Turning to slide eight and looking across our portfolios. Retail performance is resilient. We're seeing a modest increase in neutral arrears in some portfolios, but from a very low base. Movements are within, or in some cases better than, our expectations. The mortgage book is very high quality. The average loan-to-value is 42%, and 93% of the book is below 80%. We have seen a small uptick in arrears in the variable rate legacy books from 2006 to 2008, but the rest of the portfolio shows no noticeable movement. The unsecured book, meanwhile, is performing better than we had expected. In the commercial business, we continue to see stable SME overdraft and RCS utilization trends. Watch list and business support unit levels are stable to modestly down on year end. Our commercial portfolio is very high quality. Around 90% of SME lending is secured. whilst more than 75% of commercial exposure is to investment-grade clients. Within the commercial business, our net real estate exposure after significant risk transfers is 11 billion and has been significantly de-risked in recent years. Lending is focused on cash flows, with 84% having an interest cover of two times or more. The average LTV of the portfolio is 44%, while 95% have an LTV below 70%. The portfolio is also well diversified and subject to sector caps and limits. Our exposure to offices is around 14% of the portfolio, 10% to retail, and 11% to industrial assets. Across our businesses, we feel very comfortable on asset quality. Let me now move on to slide nine on the group's liquidity position. Given recent events, it would be remiss not to spend a moment on deposits and liquidity. The group continues to have a very well diversified deposit base and a very strong liquidity position. The net stable funding ratio at 129% and loans deposit ratio at 96% demonstrate the strength of the group's funding. We benefit from a predominantly retail-focused deposit base with around three-quarters of deposits coming from retail and a well-diversified portfolio of SMEs Over 90% of the deposit increase of circa $60 billion since the end of 2019 has been in the retail franchise. A very significant proportion of our customer deposits are insured, with over 80% of retail customer balances and 57% total deposits protected by insurance schemes such as the FSCS. The liquidity coverage ratio of 143% is stable and is well above both regulatory requirements and our internal risk appetite. Group liquidity remained robust throughout the recent volatility, with all liquidity measures well above internal thresholds at all times. Our liquidity pool of around $140 billion is held in high-quality liquid assets, with the majority held in cash and government bonds. The entire portfolio is hedged for interest rate risk, with only credit risk driving limited movements in fair value through other comprehensive income. And this was negligible both in 2022 and in Q1. Together with central bank facilities, this provides over 210 billion of available liquidity, a very strong position. Now, moving on, let's look at TNAV and capital on slide 10. Tangible net assets per share are 49.6 pence, up 3.1 pence in the quarter after the IFRS 17 restatement. This is largely driven by attributable profit, but also benefits from the cash flow hedge reserve movement and pension surface bill. Risk-weighted assets at $211 billion are flat in Q1 as we continue to benefit from portfolio optimization. We saw no impact from credit migration. We expect to receive an update on CRD4 models later this year and for this to result in an increase in risk-weighted assets. Having said that, this will still be consistent with our 2024 RWA guidance of 220 to 225 billion. Capital build remains strong at 52 basis points. Within this, we've now taken the full 800 million fixed pension contribution for the year. The CET1 capital ratio is stable in the quarter at 14.1%. This is after the impact of regulatory change, the acquisition of TSCA, and accruing for the dividend. we remain comfortably ahead of the Board's ongoing target of circa 12.5% plus a management buffer of circa 1%. Looking forward and including the strong performance in Q1, we continue to expect 2023 capital generation to be circa 175 basis points. Turning to slide 11 to wrap up. In sum, the group has delivered a solid financial performance in the first quarter, supporting strong income growth and capital generation. We are committed to supporting our customers. Our franchise and portfolios are demonstrating resilience. Looking forward, we're maintaining our guidance for 2023. We continue to expect net interest margin for 2023 to be greater than 305 basis points. Operating costs to be circa 9.1 billion. The asset quality ratio to be about 30 basis points. Return on tangible equity to be circa 13%. And capital generation to be about 175 basis points. You can see that in an environment of change, groups' commitments have remained constant. We remain well positioned for the future. That concludes my remarks for this morning, so thank you very much for listening. I'll now hand back to the operator for Q&A.

Thank you. If you wish to ask a question, please press star 11 on your telephone keypad. To withdraw your question, you may do so by pressing star 11 to cancel. There will be a brief pause while questions are being registered. The first question comes from the line of Raoul Sinner from JP Morgan. Please go ahead.

Thanks very much. Good morning, William. Maybe two questions from my side to start with. Given the margin seems to be behaving exactly as you predicted last quarter, I was wondering if I could ask you about the extent of the margin decline in the second quarter. And in particular, I guess, if we were to assume a base rate hike for the May MPC, would should we still expect it to be down or would you then expect it to be flattish? And then my second question is around the other income line, which obviously was a very good outcome this quarter. I'm just trying to get a sense of the new underlying run rate, if there is one. I mean, how big were the mortgage loan book sale gains? And it looks to me like the annualized run rate might be closer to 4.9, 5 billion almost. Would you agree with that? Thanks very much.

Yeah, thanks, Rahul, for those questions. First of all, in terms of the margin developments in Q2, you saw in Q1 that our margin was 322, which, as you say, was pretty much as we had expected when we gave our full year results announcement. There are a combination of factors at play there, including the benefit of base rate changes somewhat offset by the mortgage headwind. Those are the two main factors, together with some run-through of the hedge maturities in Q4. When we look forward into Q2, we do continue to expect a step down in the margin, just as we highlighted at the full year results. That is going to be driven by a variety of factors, but the principal factor in terms of the headwinds into the margin in Q2 is are around the bank base rate changes combined with the churn and pricing impact on the deposit side. So it's really around the evolution of the deposit base and the pass-through of some of the pricing changes that we've seen into the deposits into Q2. And that has a preponderant effect in terms of the evolution of the margin going into the quarter. We do not have any structural hedge maturities into Q2, so that's an absence, if you like, of a tailwind that we'd expect to see playing through later on in the year. And then further as we go into the year, the mortgage headwind starts to evolve. So in Q3, Q4, you see more or less the offsetting impact of the structural hedge maturities on the one hand against a kind of maturation, if you like, of the mortgage refinancing headwind on the other. But for Q2, it's largely around that churn and deposit pricing impact. You asked about the effect of the bank base rate on that in Q2. And if we do see, rather, a further bank base rate change, what effect might that have? It is, as you know, normally the case that bank base rate changes will help our margin. That is off the back of leads and lags and to an extent any deposit widening, liability widening that you might see. Having said that, we are seeing a competitive deposit market. And so the question will be in Q2, Raoul, if we do see a bank-based rate change, how much of that feeds through into deposit pricing in the market as a whole? And how much do we see it as appropriate to ensure that our deposit base is as resilient and robust and competitive as we've seen it in Q1? So those are the dynamics. I think overall, even if we do see a base rate change, and even if that does benefit the margin slightly in Q2, I would still expect to see a step down in the Q2 margin. That is not going to change. Your second question, Raoul, on OI. OI, as you say, was a pleasing performance in Q1, 1.257 billion. That was up, as said, 11% or about 130 million off the back of Q4, 1.128 or thereabouts. What's going on there? There's a couple of different factors going on. In each of our business areas, we've seen some positive developments. So in retail, for example, we've seen some positive underlying developments in Lex business growing, likewise in terms of cards-related activity. Within commercial, we've had a strong first quarter, as we normally do, but it's been particularly marked this quarter, which is good to see. And then in insurance, pensions and investments, we've seen two benefits really. One is the absence of weather that we saw in Q4, so the absence of a negative there. But then more importantly, we've also seen the roll-up in the contractual service margin off the back of the RFRS 17 changes in 2022 start to then roll out off the liability into Q1 of this year. When we look forward, there are, as you say, a couple of one-off benefits. We talked about the legacy mortgage book. I've just talked about weather or the absence of weather, let's say, in insurance. Those two will clearly ebb away, but their place will start to be taken by kind of activity-led growth, by some of our strategic investments, both organic and inorganic, and they will play into the ROI looking forward. So I think off the back of this kind of 1.25 number that we produced at Q1, You should expect to see that consolidate over the course of the remainder of this year. As you know, we don't predict OI, so I won't go into that precisely now, but I think that 1.25 number is likely to be a kind of roughly consistent type of run rate that we'd expect to see for the remainder of the year.

That's very helpful, William. Thank you. Thanks, John.

One moment, please, for the next question. The next question comes from the line of Benjamin Toms from RBC. Please go ahead.

Good morning, William. Thank you for taking my questions. The first one's on cost. If I take the Q1 and multiply it by four and then add in something like $150 million to the bank levy, I think I'm a bit below your guidance for the full year. So is it fair to say that costs will step up slightly in the coming quarters? And then secondly, a question just in response to news flow around pre-funding a deposit guarantee scheme in the UK. Have you had any discussions with the regulator in respect of this, and do you have any thoughts you can share with us on it? Thank you.

Yeah, thanks, Ben. In relation to costs, I think the most important point in costs is that we're sticking with our guidance of £9.1 billion for the full year. That is going to be the bottom line for the full year. We will deliver on that guidance just as we always do. In respect of Q1, as you say, we got 2.17 for operating costs in Q1. There are some factors that play themselves out in the later part of the year. Bank levy you mentioned, there's a bit of a pattern to the overall investment spend and associated charges with that. There's a bit of a pattern to inflationary pressures over the course of the year. including things like pay settlements and so forth. And so that combination, Ben, is going to produce a pattern of costs which will vary a little bit quarter by quarter. But again, I would focus on the bottom line of the 9.1 guidance that we'll deliver. In terms of the protection schemes that may or may not come to pass as a result of the recent volatility we've seen in the banking sector, we have not had any discussions so far with the regulator about what may happen there, whether that's a focus on deposit insurance, whether it's a focus on liquidity, and indeed, to the extent that it's a former, how would it be funded? It is, in its current form at least... going to be a funding mechanism which should have a relatively modest impact on our overall earnings going forward simply because of the way in which the funding mechanism feeds through into our P&L. So, you know, absent some very significant change in the way, in the quantum of insurance or alternatively the way in which it's funded, we see this as, if it does change, having a relatively modest impact on the P&L, if that gives you some indication of the bottom line expectations.

One moment, please, for the next question. The next question comes from the line of Martin Lightgate from Goldman Sachs. Please go ahead.

Good morning. Thank you for taking my question. I just have two questions, please, relating to NI and the margin outlook. In the first one, I was just wondering if you could comment on the evolution of product margins. You have called out product margins earlier, obviously having an impact in one queue. Completion margins at 50 basis points in mortgages. Could you just highlight what you have seen recently and whether application margins have started to edge higher? And secondly, I was just wondering in terms of deposit composition going forward, How should we think about the shift from current accounts, particularly in retail, to other pockets of deposits going forward? There's, I believe, a 3% decline, quarterly decline, in current accounts in retail. Would you expect this space to continue, or do that really change from here? Thank you.

Yeah, thank you, Manu, for those questions. First question on product margins. What have we seen? As said, we've seen product margins tighten slightly over the course of the quarter. It's been relatively competitive markets. both in deposits and in mortgages. Taking each of those, there are two effects, really, within the deposit market. One is the pricing offers that you make to customers. Obviously, some of that attracts new money. Some of that also generates internal movements. And as you have that internal movement, that increases your deposit costs by virtue of deposits moving from interest-free in the context of PCAs into interest-bearing in the context of, let's say, fixed-term deposits, for example. So some tightening up. We have some good offers out there in the market, just as others do, and that overall is leading to deposit costs which are increasing on a quarterly basis. Within mortgages, we highlighted a completion margin of 50 basis points. As said in my comments earlier on, that 50 basis points is composed of two elements. One is the product transfer or retention part of the market, which is actually marginally below 50 basis points. Why are we comfortable with that? It's because we know the customer. It's because we're building the relationship. And so we see an attractive return profile for that type of mortgage, even if the headline pricing or spread is slightly lower. The other component is new business margins. New business margins are, in fact, higher than the 50 basis points that we give. We haven't put a number on it, but we've seen new business margins anywhere between 60 to 80 basis points through the duration of the quarter, depending upon the particular point in time that you look at. So those are higher. The challenge is that the volumes of new business in the current market is relatively modest. And so that overall produces a blended margin of the 50 basis points that we've given you. That's the completion margin for Q1. As we look forward, our expectation is that the mortgage market will continue to be relatively muted, and therefore retention will continue to be a significant component of our overall completion margin within the mortgage business. That in turn, I don't want to be too kind of predictive at this point, but that in turn leads us to think that completion margins in Q2 will probably not be terribly different to what we've seen in Q1. We'll see how that evolves, but that's our base case right now. It's worth saying at the margin as well, sorry, forgive the pun, it's worth saying in other products as well, unsecured, for example, we've seen slightly higher funding costs there, while pricing has stayed more or less stable. So there's a little bit of margin compression going on there. But all of these developments, deposits, mortgages, unsecured, and indeed the commercial book, are all contained in our greater than 305 margin guidance. And as per the comments that I made to Raoul's question earlier on, if we see base rate changes and not all those base rate changes get competed away, then indeed one might expect to see a little bit of upside in our margin develop over the course of Q2 and indeed into the remainder of this year. I think we just have to see how that plays through. But, you know, again, if we do see more base rate changes, perhaps that's where it ends up, but it does depend upon how the liability markets move. In terms of movement in the overall book, we have seen some movement from PCAs into fixed rate and also a product that we call limited withdrawal, which gives customers slightly better rates in turn for sacrificing instant access on a, as the name implies, slightly more limited basis. We've seen money flow out of PCAs. About 25% of that 3.5 billion outflow of PCAs has actually been recaptured in our fixed rate and limited withdrawal products. We've also seen within the savings book a little bit of movement from variable rate into fixed rate and likewise limited withdrawal. And then we've also seen new money from outside of the bank come into that fixed rate and limited withdrawal product. So that overall is leading to the types of changes in composition of the book. You look at it on a quarterly basis, and the overall changes are pretty modest on a quarter-by-quarter basis. But of course, you know, that's what we saw in Q1. I would expect a little bit more of that to continue going into Q2. And again, that's all contained in our overall margin guidance of greater than 305 for the year.

Thank you very much.

Thanks, man.

One moment, please, for the next question. The next question comes from the line of Jonathan Pierce from Numis. Please, go ahead.

JONATHAN PIERCE- Yeah, morning, everybody. I've got a couple of questions, please. The first is on net interest income. The margin was slightly better than people thought in the interest-earning assets, likewise, but the headline NII was a touch lower. And it's this non-banking interest expense that has moved up quite sharply in the quarter. But just understand what that is. Is this the equivalent to what some other banks call trading book funding costs? And is there an offset there going through non-interest income? And if so, should we be looking at that sort of run rate, 75 million or so a quarter now, so long as base rate stays up where we are? The second question is on the scale of the risk-weighted asset increase you might be looking at later this year on the CRD4. Could you give us a sense as to how large that is and which particular area it's coming from? And just, sorry, an additional in relation to that. I think when CRD4 changes came through early last year, there was not only some increase in RWAs, but there was an increase in some capital deductions as well. So can you just tell us whether this clarification may affect both the numerator and the denominator, or it's just a risk-weighted asset issue? Thanks very much. Yeah, thanks. Thanks, Jonathan.

First of all, on the net interest income and impact on the net interest margin of non-banking interest income, when you look at the progression of net interest income quarter four into quarter one, and as you point out, Jonathan, you look at the margin, it's basically the same. You look at the AIEA, and it's basically the same. To your point, what's going on there? Two things. One is there is a day count issue. There are fewer days in quarter one than there are in quarter four. That's about half of the impact. And then the second one, as you point out, is the non-banking interest income, for want of a better word, which actually, if you look at our disclosures at the back of the interim statement, is an expense. And it's an expense of about 76 million in quarter one. That is up a little from quarter four, and on a year-on-year basis, it's up about 55 million or thereabouts, 56 million, I think, to be precise. As you look forward, that is a run rate number, and the reason to explain kind of what's behind it is that it is basically funding the non-banking businesses, the non-interest income-driven businesses, for want of a better word. You described it as kind of trading expense in other institutions. There's a bit of that with us, for sure. There's also things like NECS, for example. These are businesses which are not driven by virtue of interest-bearing balances, and that in turn drives the non-banking interest income expense, which is essentially a funding expense for those businesses. Now, to a degree, as those businesses grow, you would expect to see some benefit from that coming through other operating income. A lex business increasing in size, for example, benefits other operating income. Likewise, some of the trading activities. But actually, the main factor driving it, alongside of that, let's say, is the increased funding cost, the increased interest rate environment that we're in. And that's what you see playing through into Q1. And as I said, you should expect a run rate not dissimilar, really, to what you saw in Q1 for the remainder of this year. When we calculate our interest margin of 3.22%, we exclude that component. And that's how you can reconcile that plus the new days point to the run rate net interest income from Q4 going into Q1. You also have CRD4, Jonathan. CRD4, as said in my script, we do expect to receive further news on from the PRA over the course of this year. And it is likely we think that that will lead to a modest increase in RWAs. Just to sort of track back and give some history on that, when we set out our CRD4 expectations on January 1st of 22, which you referred to in your question, we saw at that point about $16 billion increase in RWAs. $14.5 billion of that was in relation to mortgages. We said at the time the CRD4 component for mortgages was at best estimate, if you like. It was a place marker based upon the fact that the discussions of the PRA and the models were not totally finished business. As we've rolled forward since that time, we've learned more on the PRA technical requirements in this area. We've learned more about their approach to historical data and, to a degree, their approach to cyclical sensitivity. And so off the back of that, we expect a modest increase in RWAs to be informed to us, if you like, by the PRA later on in the year. I think the most important point there, Jonathan, is that that increase, I won't put a number on it precisely, but that increase is within our circa 175 basis points capital guidance and also within our 2024 RWA guidance of 220 to 225, which tracking back at the year end, I said it was, you know, broadly speaking, a kind of linear trajectory, 23 going through into 24. So that's how that CRD4 expectation from the PRA is factored into our numbers, if you like. Specifically on your point about is this a numerator and a denominator issue? No, is the answer. This is likely just to be RWAs, which in turn is a denominator issue for purposes of our capital calculations.

Okay, brilliant. Thanks a lot, Matt.

Thanks, John.

One moment, please, for the next question. The next question comes from the line of Chris Kan from Autonomous. Please go ahead.

Good morning. Thanks for taking my questions. I think we've come to quite a lot of ground already, but just a couple of follow-ups around NII and your thinking there going forward. In terms of the mortgage piece, could you give us an update on where the back book mortgage spreads are on the non-SVR component of the book just so we can understand the sort of degree of Edwin that kind of 50 best level likely to present. And then thinking about structural hedge, obviously you've seen some current account outflows. You expect the deposit market competition to expect and some of those trends outside of the tax impacts to persist. So how are you thinking now about your structural hedge size, prospectively? You previously said you were very, very comfortable maintaining it given offers, et cetera. But if you're now expecting to see some persistent current account outflows, even if they're relatively modest, how does that then feed into your thinking on the size of the bank towards. Thank you.

Yeah, thank you, Chris. Just taking each of those. On the mortgage book, first of all, I won't give you quite the split that you want, but I'll give you a few numbers that hopefully will help you reconcile some analysis. When we look at mortgages in terms of the yield this year, the yield on the mortgage book this year, we expect to be about 135%. To give you some idea as to the effect of refinancing this year, we've probably got about 65, 66 billion rolling off from the fixed rate book during the course of this year. That stock of refinancing fixed rate mortgages is at around 1.8%. And as you know from our comments around completions, that is rolling back on, or that part of which we retain is rolling back on, an average completion margin of around 50 basis points. So quite a significant headwind this year. I know it's not the split SVR versus fixed that you're asking for, but it hopefully gives you some idea that will allow you to get to that answer. Having said that, the headwind from that refinancing next year starts to dampen down because the maturities or the price of the maturities at which they are rolling off starts to get significantly less. So it's well below the 180 that we're going to see this year. I won't put a number on it, but it's well below the 180, and therefore is much less of a squeeze in terms of the headwind that it causes. That means, in turn, as we said before, that the bulk of the mortgage headwind is addressed and dealt with by the time we get to the back end of 2024. You asked about structural hedge size. The structural hedge size is currently $255 billion. That's the size that we feel very comfortable with today. We have a buffer, which is about 19 billion. In the past, we've always operated with a buffer, which is around 5% of the structural hedge. 19 billion is more like around 7.5% of the 255 that we've got in the structural hedge today. So the buffer of 19 billion is probably in excess of the types of levels that we would seek to carry going forward. Now, having said that, as you say, deposit churn we believe will continue. We think that we will continue to see a little bit of outflows within the PCA. Why is that? Well, it's because spend is clearly greater in an inflationary environment than it was before. People are paying higher interest bills for various financing and other products than they did before. We will not clearly see a repeat of the tax issue within January that we and other banks saw, having said all of that. But that means we may see a little bit more PCA flow. Likewise, PCAs will also be attracted into the savings book, including, as I mentioned earlier on, our own. Within the savings book, we would expect to see a little bit more out-of-variable rate and into fixed-term deposits and limited withdrawal. As I said, people are prepared to give up access for a bit more income in a higher-rate environment. So I think we expect to see that continue to a degree going into Q2. That clearly has an impact on the structural hedge in terms of the balances that are available to be put within there. But at the same time, we have two or three tools to manage that. We have the size of the buffer, as said, 19 billion, probably in excess of what we choose to run with. We also have upcoming maturities. Can you play, if you like, a slightly lower buffer off the back of a significant volume of upcoming maturities? Yes, they're tools that interact with each other. Thirdly, you have the weighted average life. Can you slightly shorten elements of a structural hedge, bring the weighted average life in, again, as a further tool to manage? And then finally, we have very conservative pass-on assumptions within the structural hedge. So, you know, those in turn give us a further degree of security, if you like, as we look at the overall structural hedge. So I think in sum, Chris, where we are with that is the size is currently 255. We feel comfortable with where it is today. We are also conscious of the fact or aware of the fact that we're in a evolving environment. We have not been in a rate cycle for, let's say, 15 years. And it's not entirely clear how that plays out and the pace at which it plays out. And so we are where we are today. We feel comfortable with it. But we monitor the position, and we'll keep an eye on it going forward.

Thank you.

Thanks, Chris.

One moment, please, for the next question. The next question comes from the line of from Barclays. Please go ahead.

Good morning, William. I just wanted to touch upon deposits again, if I could. I'm sure we can kind of piece it together, the various bits of disclosure that you do give us. But could you just confirm what proportion of your deposit base is a non-interest-bearing current account currently, and also what proportion of your deposit base term deposit as things stand and then secondly could you maybe just give us some indication of what deposit mix you've assumed in your in your nim guide um alternatively could you help us kind of understand some kind of sensitivity that might pose a risk to your outlook for nim or nii so if you know there's actually more migration of current accounts to term deposits. What's that threshold in your mind where we should be thinking about? Thank you very much.

Yeah, thanks for that, Aman. A couple of questions there. One is the split between interest-bearing and non-interest-bearing within a deposit book, and then the second around sensitivity to the margin from deposit movements. We do not formally disclose the split between interest bearing and non-interest bearing within the deposit book, but I'm going to give you a couple of numbers that will enable you to make some assumptions and get there. First of all, you can see the PCA volume in our retail book. That's disclosed on our balance sheet, every IMS, so I'll leave you to look at that. Second of all, the commercial book is roughly speaking 28% or thereabouts non-interest bearing. So that's giving you a very precise number, but 25% to 30%, it'll go up and down by quarter basis. But if you combine that with the PCAs, you've got a pretty good idea, I think, as to the non-interest-bearing component of our overall deposit book. The second question is around how do we see the flows within our deposit book and to what extent might those cause sensitivity to the interest margin? In short, in quarter one, we saw within our deposit book overall combination of variable rate to fixed rate, PCA into fixed rate term and limited withdrawal, and indeed our wealth deposits into limited withdrawal and fixed rate. That number in total was about $8 or $9 billion, thereabouts. That type of movement. That type of movement is probably not totally unrealistic to project forward into Q2, but then as we see bank base rates start to steady off, i.e. fewer bank base rates thereafter, we think you're going to see less movement thereafter because there's less reason to move, if you like. You've got less change in rates. You'll still see some playing out of a higher interest rate picture, to be clear, but less movement. So those are the types of flows that we've seen in Q1. Those are the types of flows that we might expect to see in Q2. But as you can imagine, we built a degree of cushion, if you like, within our overall interest rate expectations to ensure that we're able to give you guidance that we can achieve and beat. And I would add to that, if we see the bank-based rate environment play out in the way that was being discussed earlier on in the call, to the extent that is not fully passed on or competed away in the deposit market, that probably causes a degree of upside to our overall margin expectations. Again, still expect that to step down into Q2 and leveling off in the remainder of the year, but at all points, greater than 300 basis points. And again, there may be that benefit, depending upon how the bank-based rate and deposit margins play out.

Thanks very much, William. That's really helpful. Can I just clarify the amount of term deposits that you have as part of your overall mix? I think you refer to it in some places in the disclosure, but I'm never quite sure if you're exactly referring to... fixed rate term deposits. Could you confirm that number for us, please?

I don't think we do disclose that, Aman. I mean, you can see on our slides, page nine, I think it is, the retail savings and wealth components. You can see in my comments earlier on the amount of flows that we saw in the context of Q1. And the splits that we've given on the balance sheet analysis and the IMS is probably about as far as we go, I think, in terms of disclosures.

uh so sorry we're not going to get back to you precisely on that okay thank you very much really appreciate it thanks thanks one moment please for the next question the next question comes from the line of andrew coombs at city please go ahead uh morning one numbers question and one more big question i guess

Numbers question, just on the AT1, you did a large issuance in March. I think you said you're going to call another at the end of June. Just any thoughts on the AT1 balance and hold and the coupon cost over the remaining quarters of the year? And then on the strategic question, wealth, obviously an area you've focused on, an area you've thought about growing as part of your non-NII growth initiatives. I was just interested in wealth. You've seen a 10% decline in deposits at the year end. That would be partly due to the tax issues that you mentioned, but also it's a 15% year-on-year decline. So what's causing the decline in wealth deposits through the time that you're trying to grow that business?

Yeah, thanks, Andrew. Thanks for that. We did do an AT1 issue earlier on in the year. As you say, that was deliberately done in order to take advantage of market opportunities in the context of the year and to a degree at least pre-fund any upcoming activity that we might have in AT1. As you'll be aware, we've got a call out there for a small AT1 instrument right now. We are currently operating in excess of our regular AT1 guidelines, if you like. We've got more AT1 than we would necessarily have on a run rate basis on the balance sheet. That's fine. We feel comfortable with that position. We have 81 developments over the course of actually next year. And it's worth mentioning, actually, that we got our issuance away before the disturbance within Switzerland. And in turn, that allowed us to deal with any 81 requirements that we might have for the remainder of this year. So we're done effectively for 81. there is an AT1 instrument up for call next year. We'll obviously have a look at economic circumstances and other factors as we approach that, but we're done for this year. You asked about wealth and what's going on within the deposit base there. In short, very similar things to what's going on elsewhere in the deposit base. So if I look at that, what's been factoring into the deposit base over the course of this year so far is As said, we've seen spend trends off the back of inflationary environment. We've seen higher tax outtakes, if you like, in January. And we've seen some migration within instant access into savings books across the book and including wealth. And so in particular, if you look at that wealth number, a fair bit of that wealth output, if you like, outflow, was actually captured in our savings products. I mentioned earlier on the overall $9 billion that we'd seen move around the deposit book At least $1 billion of that, perhaps a touch more, was coming out of wealth and into those savings products. So we would see that as significantly a kind of build on that wealth relationship. You know, you are offering a wealth customer who has an instant access transaction-based account additional products to, if you like, benefit and tailor to their needs. As we look forward in 2023, that mass affluent, that wealth offering, is going to build on asset products and liability products and indeed on the interaction with investment products. So the ambitions there, Andrew, are very much in the process of being achieved. There's nothing that we are stepping away from. It's very much business as usual.

Thank you. And on the aggregate coupon costs on the AT1s,

I don't think we disclosed the aggregate coupon costs. We were, I mean, in short, Andrew, we were pleased with the aggregate coupon costs relative to either our historical issuance or alternatively market benchmarks. I think we felt like we got a good issue away.

Thank you. One moment, please, for the next question. The next question comes from the line of Guy Stebbings at Exxon BNP Paribas. Please go ahead.

Hi, morning, William. Thanks for taking the question. I had one on interest earning assets and one on capital or buyback. So on interest earning assets, £454 billion in the quarter and ended the quarter, I think, at £455. I appreciate you have flat year-over-year guidance. Just think about that sort of exit rate and should we therefore be assuming some small reduction to get to the guidance? Yes. If so, is that just the sort of closed mortgage book and slightly softer volume trends more broadly? Or am I reading sort of being too specific, thinking about the guidance? And really, it's just a flattish outlook from here. And then on capital, I mean, historically, you've talked to excess capital decisions being a decision for the full year, but you're sat at 14.1. You sound as confident as ever on delivery of the capital generation targets, even with the CRD4 changes. to RWAs, and some of the concerns around asset quality have maybe receded. So I recognise you're still progressing a large buyback, but you are in a good position. So might a further buyback be announced before four-year results and also with the Bank of England stress test results in hand, which aren't too far away now, or should we just expect to wait until later in the year? Thanks.

Yeah. Thanks, Guy. On AIAs, The simple answer is just a flat outlook for the year as a whole. So that's a simple answer. I mean, within that, there's two or three dynamics that are going on. One is, as you'll have seen from the Q1 results, the continued runoff of the closed mortgage book. We expect that to continue a little bit, although I suspect what will happen is it will flatten off as the year goes on just because you'll get to a stub of customers who are happy with what they've got. Number one. Number two, government lending. We've indicated bounce-back loans getting repaid over the course of quarter one. I think that will continue over the course of quarter two and beyond. And then number three, as you'll be aware, we've had a sale of a legacy mortgage book, which in turn is actually in AIAs but not in lending. So you've got a slight discrepancy going on there. Those are the factors that play into AIAs. And then alongside of that, clearly, there's the regular asset growth patterns. Now, you know, what we've seen so far this year is relatively muted asset growth in many of our major markets. Broadly speaking, we've seen a little bit of outflow, for want of a better word, in the open mortgage book. If you exclude the legacy sale, that's about negative 0.6 billion. So it's kind of negligible, but it's modest in terms of the outlook for that business. We'd expect it to grow a little, but not very much. We've actually seen some growth in our unsecured books and motor within the retail business still, which is pleasing to see. I think that will flatten off during the remainder of this year. And then maybe CNI continues to grow a little bit and SME impacted by the points that I just made. So overall, I think a flat AIA picture over the year with those component parts moving in the way that I've just described them. Capital, your second question is, said, we had a very strong performance on capital in Q1, 52 basis points. We stand, as you pointed out, in a 14.1% CET1 level, which feels pretty robust, particularly in the context of us having front-loaded the pension payments of $800 million. There are one or two factors at play for the remainder of the year. We talked a little bit about the CRD4 increase, if you like, from mortgages expected later on in this year. That asset growth that I indicated, it'll be modest, but on the other hand, it'll grow RWAs a little bit with it. And so overall, the capital growth for the remainder of this year, it's probably not going to be as strong as 52 basis points. And I'll just point you to the 175 annual guidance or circa 175 annual guidance for capital growth for the year as a whole. Coming to your question, Guy, what does that mean in terms of our statements around buybacks, capital distribution for the remainder of this year? As you know, we put in place a progressive and sustainable dividend off the back of 2022 that hopefully will get confirmed by the AGM and therefore allow us to pay that out. I'm sure that we'll look at the interim dividend at the half year and recommit, if you like, to our progressive and sustainable dividend in that context. Our buyback is underway right now. The number that we've produced at Q1 has been supplemented by ongoing progress in the buyback, and I think it's publicly available. but we've probably bought back about 700, 750 million pounds worth of stock right now, which will help us in terms of building TNAV per share and indeed EPS per share looking forward. So there's a lot of capital activity and distribution going on right now, dividends and buyback included. I don't think, Guy, that with all of that going on, we're going to move from our standard practice of looking at capital in the form of buyback and final year dividend at the year end. My guidance to you would be to say that'll be a year-end board decision this year, just as it always has been. Okay, thank you. Thanks, Guy.

One moment, please, for the next question. The next question comes from the line of Rohit Chandra Rajan from Bank of America. Please go ahead.

Hi, good morning, William. Thank you. I've got a couple, please, also on margin. Apologies, you probably thought you were done with that, but hopefully they're relatively quick. So the first one is on the mortgage completion spread, the 50 basis points in Q1. It sounds from your earlier comments like you thought that was probably around the number that we'll see in Q2 as well. So, firstly, I wanted to check that, and then I guess as we progress through the year in terms of looking at where spreads are in new offers in the market today that would probably not complete till Q3, they're starting to look a little bit better. So, I was wondering if those, in terms of either pricing or mix, how you think that would progress, particularly through the second half of the year in terms of the new mortgage spreads? And then the second one, just on deposits, you talked a lot about mix, which is helpful. Thank you. Can I ask what the pass-through is on the latest rate hike that will impact the NII in Q2, please, so the most recent 25 basis point hike? Thank you.

Yeah. Yeah, thanks, Rohit. In terms of mortgages overall, as I said, we saw 50 basis points completion in Q1 and It's a little early to comment on Q2, but our expectation is that it will not be significantly different, let's say, in the context of Q2. And as we saw in Q1, I would expect that to be composed of two inputs. That is to say, product transfer below 50, new business above 50. We have seen new business, you know, materially above 50 at times during the course of quarter one, Rohit. So your point around new business margins, I think, is a fair one. But a couple of points to add to that. One is that we've also seen quite significant swap volatility, and that hasn't really gone away. And so at any moment in time, our new business margins are impacted by where swaps stand. And with them going up and down so much on a kind of daily, weekly basis, that is driving quite a lot of volatility in new business spreads with it. It's not clear to me whether that will go away or not, but I think you'll only really get a sense as to equilibrium new business spreads in an environment where you have more swap stability than we've seen for the last quarter. I would be hopeful that over time that equilibrium new business pricing steers itself back towards the kind of traditional 75 to 100 basis points guidance that we've given you before. But I think as a composite based upon retention plus new business, even if it does, I would expect our completion margins to be south of that 75 to 100 basis points for the remainder of this year. And indeed, that is what is in our planning assumptions. That is what is in our greater than 305 net interest margin guidance, i.e., the number being less on a composite basis than the 75 to 100 corridor. So as your second question wrote on mix and pass-through, The pass-through that we saw off the back of the February and March interest rate rises was around the 40% mark. So that gives you some idea. And what you're seeing there is effectively the pass-through moving up over time. And, you know, we're not done yet. I think as we go through the remainder of this year and into next, we'll see that pass-through continue to gravitate towards slightly higher levels. So 40% is the most recent experience off the back of a combined February and March rate rises. You also see, to be clear, some further effective pass-through, although it's not often described as such, because of the overall churn within the book. That is to say, every time a deposit migrates from PCA into fixed-term deposit, that, in a sense, is another form of pass-through whereby the customer gets the benefit of the rate increase. But 40% is your headline number for the February and the March interest rate rises. I would expect our pass-through or at least our interest rates for depositors to continue to mature second half of 2023 and into 2024. And again, all of that is contained within the interest rate guidance or, sorry, margin guidance that we've given you.

Thank you. Could I just come back very quickly on the mortgage spread? Are you seeing any initial signs of

change in mix between internal transfers and and new to bankers there seems to be some green shoots at least in terms of the mortgage and housing market yeah i mean there are some green shoots it's looking a little bit stronger than we have previously thought i think as a general comment actually rohit and this applies not just to mortgages but more broadly across the business The economics are looking a little bit more favorable than we described them at the end of Q1. And, you know, there's all the factors you're aware of going into that. But that's leading perhaps to a slightly more robust activity picture than we have previously thought that in turn may play through over the course of the year. We have to see it. It's too early to call that. But, you know, that's the direction of things, I suppose, since we struck yesterday. In terms of competition of the mortgage market, a little bit, slightly better picture, perhaps fed by some of the points that I've just made. But again, Rohit, I would be a bit cautious about over-interpreting at this stage. You know, we have to see how the remainder of the coming weeks fare before really making a call on it.

Okay. Thank you.

Thanks, Rohit.

As you know, the call is scheduled for one hour, and we have now reached the end of the allotted time. So this is the last question we have time for this morning. If you have any further questions, please contact the lawyers and rest of the relations team. One moment, please, for the last question. Last question comes from the line of Joe, the speaker, then from Jeffrey. Please, go ahead.

Hi, good morning, gentlemen. Can you just clarify, I think this needs to be clarified, your comment on your non-banking NII of annualizing this 76 million headwind. Does this reflect the other side, as we've seen at pretty much every other bank, higher non-interest income? So is this a more of a broadly neutral matter, if you will, for total income. If you could just address that, if this is like the kind of trading book funding cost and so forth, where there's a corresponding benefit to the non-interest income line. Thanks.

Yeah. Thanks, Jeff. Let me take another stab at that. The non-banking net interest income is really driven by two things. One is interest rate rises because it is effectively a funding cost for non-banking activities. I mentioned Lex earlier on, but you also mentioned trading activities there. Same sort of thing. You're funding those activities as interest rates go up, so the cost of funding those activities go up, and that is a factor in non-banking net interest income or non-banking net interest expense as it is at the moment. The second thing that's going on is that as the size and scale of those activities increase, whether it's in commercial banking, consistent with some of our objectives within corporate institutional, for example, or whether it's in LEX, e.g., we've now got the LEX car fleet size growing once again, that will also increase non-banking net interest expense. And again, that's simply because the volume of what you're funding is going up. And so the twin effects of rate increases, number one, Joe, and activity increases, number two, or scale of activity increases, number two, is what is driving that non-banking net interest expense. I think if you're annualizing what we saw in Q1, you're not going to be far off for the year. And it's a reflection of those two underlying activities. And finally, Joe, to the point you were making, therefore... a component part of that non-banking interest expense is playing itself through in terms of the benefits that you see in other operating income. Commercial, LEX being good examples. So you do see a part of that playing through and benefiting other operating income. And part of that was at play in our 1.257. Part of it will continue to be at play in that line through the year.

So the short answer is there is, because it's increased activity, there is some corresponding benefit to other income?

That's right, Joe. Yeah, that's the short answer.

OK, because you know what the market's going to do. I mean, you've already been asked if you just take your costs and annualize them and add the bank levy. You know, I think what the concern of investors is, is are you annualizing the 76 million and taking it off of your revenue estimate? And it sounds like that would be the wrong conclusion to draw here.

I think on a total basis, that's right. There's a netting off in terms of OOI that you expect to see. But I'll just refer you back to the OOI comments that I gave earlier on on the question there, and that gives you a good sense as to where we expect OOI to be.

Fantastic. Thank you.

Thanks, Joe. I think we are concluding on the call for today. So I just want to say thank you very much indeed to everybody for taking the time, for your interest in the story, and we'll look forward to a continued dialogue. Thanks very much indeed.

This concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website. Thank you for participating. You may now disconnect your lines.