Lloyds Banking Group plc

Thank you operator.

Good morning, everybody, and thank you for joining our Q3 results call. Let me start with an overview of our key messages on slide two. We continue to focus on supporting customers as they navigate what remains an uncertain economic environment. In this context, our purpose-driven business model remains central to how we operate as we continue to help Britain prosper. We're delivering against our strategic ambitions You saw this in our recent consumer seminar, and we'll hear more about it in the remaining three seminars, including that of the corporate institutional business next month. Strategic execution is key to realizing our ambition of higher, more sustainable returns. In Q3, the group again delivered a robust financial performance with a solid income trajectory and capital generation. This allows us to reaffirm our 2023 guidance and to improve it for the asset quality ratio. Together with our strategic progress, it makes us well positioned to deliver for all of our stakeholders. Let's turn to the financials on slide three. As said, Lloyds Bank and Group delivered a robust financial performance in the first nine months of the year. Statutory profit after tax was 4.3 billion. This is 46% higher than the previous year. However, we should note that the 2022 comparative included an exceptional charge relating to the implementation of IFRS 17. Return on tangible equity, meanwhile, year-to-date is 16.6%. Net income of $13.7 billion is up 7% on the prior year. This was supported by a net interest margin of 315 basis points and growth in other income, partly offset by a higher operating lease appreciation charge. Total costs of $6.8 million were up 6% or 5% excluding remediation. This is in line with expectations and reflects our continued strategic investments as well as the effects of inflation on the cost base. Asset quality remains resilient. The impairment charge of $849 million is equivalent to an asset quality ratio of 25 basis points year to date. Excluding all NES impacts year-to-date, the asset quality ratio is 27 basis points. TNO per share is up 1.5 pence compared to Q2 at 47.2 pence. Alongside, the group delivered strong capital generation of 165 basis points or 129 basis points after regulatory headwinds. We've also substantially agreed to triennial pension valuation, recognising a 250 million remaining deficit. I'll now turn to slide four to look at our customer franchise. The customer franchise remains resilient. Total lending balances stand at $452 billion, at $1.4 billion and a quarter. This was driven by a $1.2 billion increase in retail lending, including growth in the open mortgage book, as well as continued momentum in cards, loans, and motor. The growth in mortgages was driven by strong retention activity as we support customers in refinancing their mortgages in the higher rate environments. The back book, meanwhile, continues to run down and is now $36 billion. We continue to see competitive mortgage pricing. Completion margins are around 50 basis points, and we expect that to remain the case in the short term, exerting margin pressure on refinancing business. That said, mortgage lending remains attractive from a returns and economic value perspective Commercial balances were down slightly by 0.6 billion in the quarter. This includes the effect of FX in the corporate institutional business, offset by ongoing repayments of the government support scheme loans and limited new lending demand in SME. On the liability side, total deposits are up 0.5 billion in the third quarter. This includes an increase of 0.7 billion in retail and stable commercial deposits. The retail deposit performance saw an outflow of 3.2 billion in current accounts, slightly higher than the second quarter. Importantly, the reduction in current accounts was more than offset by the 3.9 billion inflow in retail savings. We continue to recapture a high proportion of current account outflows within our own savings proposition, as well as gaining new customers through our attractive offerings. Overall, retail depository behavior continues to reflect a higher rate in inflationary environments, as well as the evolving competitive situation, including our own savings office. In commercial banking, we saw a small reduction in SME deposits, again focused on non-interest-bearing accounts. This was more than offset by growth in targeted sectors within corporate and institutional sectors. Looking forward, we continue to expect total deposits to be broadly stable for the year. However, the mixed shift from current account to term savings is likely to continue. Whilst difficult to predict with certainty, the rate of this shift is likely to slow over time, albeit remaining a headwind for the margin. Moving on to slide five and group income. The group saw solid income growth in the first nine months of the year. Net income of $13.7 billion is up 7% year-on-year, supported by a net interest income of $10.4 billion, up 10%. The margin for the first nine months of the year is 315 basis points. This includes a Q3 margin of 308 basis points, down six points from Q2. This is playing out in line with our guidance, given the expected headwinds from mortgage and deposit pricing, partly offset by reinvestment of structural hedges. Looking forward, we expect the margin to decline again in Q4, however, again as guided, to remain just above 300 basis points. Based on this, we continue to expect a full year margin in excess of 310 basis points. In the context of the deposit trends that I described earlier, the structural hedge nominal balance reduced to 251 billion. The $4 billion reduction, along with any subsequent reduction in the fourth quarter, is in line with our expectation of a modest reduction in hedge notional balance over the second half of this year. Given an average yield of around 1.4% and the current prevailing swap rates, the hedge refinancing continues to provide a material income tailwind. Looking forward, we continue to expect hedge income to be around $0.8 billion higher in 2023 and 2022. Non-banking NIA was 76 million in Q3, broadly in line with the H1 run rate. From here, we expect non-banking NIA funding costs to increase further, reflecting the impact of refinancing longer-dated funding instruments, as well as increasing levels of activity in a higher-rate environment. Average interest-earning assets of 453.5 billion year-to-date were broadly stable in the quarter. Continue to expect AIEAs for the full year, to be slightly down compared to Q4 2022. Turning briefly to other income, OI of 3.8 billion in the year to date is up 8% year on year, with broad-based growth across all of our divisions. Q3 saw continued improvement quarter on quarter, in line with our expectations for other income to build gradually. This is supported by customer activity, our ongoing strategic investments, and the release of the store of insurance earnings within our CSM liability. Looking forward, we expect the fourth quarter outcome to be much like the third. Operating lease appreciation of £585 million includes £229 million in Q3, up from Q2, reflecting continued normalisations. This is driven by the higher value of new vehicles, lower gains on sale, growth in the motor business, including from Tusca, and an adjustment to take account of recent price declines in electric vehicles. This normalization is an ongoing process, meaning we expect to see a further increase in Q4. Now, looking at costs on slide six. Cost management continues to be a critical discipline. Operating costs of 6.7 billion are up 5%, driven by planned strategic investments, the costs associated with new business, and the impact of inflation. The cost-income ratio of 49.5% for the first nine months of the year continues to be highly competitive. Looking forward, we stay focused, as always, on efficiency and mitigating the impact of persistent inflation. We remain on track to deliver operating costs of circa 9.1 billion in 2023. The remediation charge, meanwhile, remains low at 134 million for the year to date, largely in relation to pre-existing programs. Let me now move on to asset quality on slide seven. Asset quality remains very resilient across the group. The impairment charge of 849 million for the year to date equates to an AQR of 25 basis Pre-economic forecast adjustments for the year to date, the impairment charge was £918 million, or 27 basis points. The Q3 charge was £187 million. This includes a release due to updated economic forecasts of £74 million. Excluding this, the observed charge of £261 million reflects the stable credit trends of our prime customer base and our prudent approach to risk. It also reflects a net calibration benefit of around $70 million from the more resilient than expected performance in the unsecured portfolio. This net benefit in the period should not be seen as part of the underlying run rate. The stock of ECL on the balance sheet stands at $5.4 billion, still close to $700 million above our base case and driving strong coverage levels across the portfolio. Given the ongoing resilience of the portfolio, we now expect the asset quality ratio to be less than 30 basis points in 2023. This represents a slight improvement on previous guidance. Let me now turn to slide 8 to look at the performance across our lending portfolios. The performance across our portfolios continues to be reassuring. Importantly, UK mortgages remain resilient. New-to-areas increased slightly in the first half, largely within the variable rate legacy book, originated between 2006 to 2008. It is a little too early to call a trend, but new-to-areas were then stable in this book in the third quarter. The unsecured and commercial books, meanwhile, continue to exhibit very stable arrears in default rates that are broadly at or below pre-pandemic levels. In both cases, these are inside of our expectations. Customer behaviors are similarly reassuring. In retail cars, minimum payers are stable. In the commercial business, we continue to see stable levels of SME overdrafts, and RCF utilization trends remaining more than 30% below pre-pandemic levels. Our commercial portfolio is high quality. Around 90% of SME lending is secured, while circa 80% of corporate and institutional exposure is to investment-grade clients. Within the commercial business, our net CRE exposure is only 11 billion. The portfolio remains robust and is well diversified with circa 42% of lending relating to residential investment. The average LTV of the portfolio is 43%, while circa 90% have an LTV below 70. Let me briefly look at our updated economic assumptions on slide nine. The macro outlook has improved a little since Q2. Overall, GDP is proving more resilient than expected. We now expect growth in 2023 of 0.4% compared to our forecast of 0.2% at the half year. We've also reduced our base rate forecast with 5.25% now expected to be the peak. Our unemployment expectations continue to assume only a gradual build. peak unemployment rate is revised down to 5.1%. We've also slightly improved our HBI assumptions, now modeling a decline of 5% in 2023 and a peak to trough decline of around 11%. Let me now move on to slide 10 and address the below the line items in T-NEV. Underlying and statutory profit continue to converge. Restructuring costs were 69 million for the year to date. The volatility line of 266 million includes 215 million of negative insurance volatility, largely in the second quarter, given the increase in rates. Statutory profit after tax of 4.3 billion resulted in a return on tangible equity of 16.6% for the first nine months of the year, including 16.9% in Q3. We continue to expect a return on tangible equity greater than 14% for the full year 2023. Tangible net assets per share at 47.2 pence are up 1.5 pence in the quarter. The increase in the quarter was due to profit accumulation, the lower share count, and a reduction in the cash flow hedge reserve, partially offset by the impact of higher long-term guilt yields on the pension accounting surplus. Turning now to capital generation on slide 11. We delivered strong capital generation in the first nine months of 2023. Within this, risk-weighted assets at 218 billion are 6.8 billion higher, including 2.4 billion in Q3. The increase year-to-date includes an adjustment for part of the anticipated impact of CRD4 model updates taken in Q2. Excluding this, lending increases and credit and model calibrations were partly offset by our continued optimization efforts. Capital generation was 129 basis points after regulatory headwinds, or 165 basis points before these. This results in a CET1 capital ratio of 14.6%, which includes 65 basis points of dividend accrual and remains well ahead of our ongoing target of around 13.5%. Going forward, we continue to expect 2023 capital generation post-regulatory headwinds to be circa 175 basis points. I'm pleased to update that we've now substantially agreed to triennial pensions review. After around $5 billion of contributions alongside asset performance and rate changes, the funding deficit stands at circa $250 million. Following a closing contribution of this amount by March 2024, there will be no further contributions in this triennial period. This represents a considerable achievement from the 2019 deficit position of 7.3 billion. Let me finish on slide 12. In summary, the group delivered a robust financial performance over the first nine months of the year. with income growth, disciplined cost management, and resilient asset quality, together driving strong capital generation. Looking forward, we're maintaining our 2023 guidance and slightly improving it for the asset quality ratio. We continue to expect net interest margin of greater than 310 basis points. Operating costs of circa 9.1 billion. The asset quality ratio is now expected to be less than 30 basis points, return on tangible equity of greater than 14%, and capital generation of about 175 basis points. The group consistently delivers a robust financial performance, whilst making progress against our strategic ambitions, and most importantly, supporting our customers. That concludes my remarks this morning. Thank you for listening. I'll now hand back to the operator for Q&A.

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