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.

Thank you. If you wish to ask a question, please press star 1 on your telephone keypad. To withdraw your question, you may do so by pressing star 2 to cancel. There will now be a brief pause while questions are being registered. Thank you. Our first caller is Guy Stebbings from Exane BNP. Your line is now unmuted. Please go ahead.

Good morning, William. Thanks for taking the questions. A couple on deposits and NIM. So for NIM trajectory next year, I appreciate you won't want to guide the number at this stage, but as you sit here today and you weigh up tailwinds from the hedge, the headwind for mortgage spreads, and the headwinds presumably still from deposit mix shifts, How do you think about those factors and extent to which they could net off? Or is it more likely that NIMS declines sequentially next year? And then a question specifically on deposits. You alluded to expecting deposit shift to slow. I appreciate forecasting very challenging on that line. But are you seeing any signs at this stage that it's slowing or are you really talking about 2024 and beyond before we can start to think about things improving there? Thank you.

Thanks very much indeed, Guy, and obviously both important questions. To take each of those in turn, first of all, on the NIM trajectory, as you rightly said, we won't be giving guidance for 2024, but just to step back for a moment in respect of what we have given for 2023. As you know, the guidance for 2023 is in excess of 310 for the year as a whole. We're now operating, or rather, the third quarter was operating at 308, and I mentioned in my comments just now that we expect to see it decline a little, again, similar sort of level, really, for Q4, but to stay above the 300 level, importantly, for that quarter. As we look forward, Guy, I think it's probably safe to say the headwinds in terms of deposit churn and mortgages pressure from the relatively tight mortgage spreads that we're seeing continue to play themselves out perhaps a little bit further. I expect over time those will gradually slow down. And alongside of that, as we get into 2024, the tailwinds in the form of the structural hedge in particular will most probably strengthen a little bit through the course of the year. So that gives you a bit of insight, I hope, Guy, in terms of the picture that we expect to see in specifically 2023, but then in terms of the way in which the headwinds and the tailwinds play themselves out over the course of 2024. All of that, of course, will depend upon rates, upon deposit of behavior, upon mortgage margins and the like. But we'll fill you in more precisely on your end as to how we expect that to develop. On deposits, Guy, we have seen deposits move a little bit during the course of the quarter. Most pleasingly, we have seen deposits go up over the course of the third quarter. So while we've had PCA outflows of 3.2 billion, those have been more than matched by savings inflows of 3.9 billion in retail, for example, leading to an increase of 0.7 billion. and in commercial banking leading to an increase of 0.1 billion so we're really pleased to see that deposit performance looking at the deposit book as a whole having said that as you say there's been some churn within the deposit book and so there has been not surprisingly and very much as we guided i hope through the course of this year but not surprisingly in interest rate environments some movement from current accounts into savings and indeed within the savings book from instant access where customers are prepared to give up access in exchange for a higher rate and locking up the money into fixed-term deposits. That is in the current rate environment. As we've said, likely to continue during the course of quarter four. As just said, I think it may play itself out a little bit further during the part of 2024 looking forward. At the moment, at least, Guy, there are ups and downs within any given quarter. I think it would be premature to call a trend at this point. I think we just have to see how things develop. And, you know, as I said, what we are focused on is making sure the overall deposit picture remains as strong as it has done during the quarter three.

In terms of experience already in Q4, I know we're very early into the quarter, but is it being sort of similar to what you saw in Q3 in terms of those mix on deposits then?

Yeah, I think so, Guy. Again, I I think it's a little, we don't really want to call a trend based on any particular month during the quarter, but you see some months during the quarter perform better. You see some months during the quarter, perhaps because of competitor offers, for example, be a little weaker. It kind of ebbs and flows during the quarter. I do think over time, what are we going to see? We're going to see a combination of fewer bank-based rate changes and therefore fewer prompts for savers. We're going to see the hot money that is going to move already having moved. We're going to see the forward curve dip down and therefore competitor offers, if you like, probably dip down with it and therefore less incentive to move. We're going to see most probably the convergence between instant access rates and those on fixed-term deposit rates, partly for that reason. And so all of these things, Guy, I think lead us to believe that over time, this churn that we're seeing a little bit of right now is likely to slow. Whether it slows in Q4 or whether it slows in 2024, I think it's difficult right now to be overly precise on the point. but you can get a sense as to kind of how you expect things to develop. And then to the extent your question is kind of how that influences the margin going forward, as said, I suspect the headwinds have a little bit to play out in the first half of 2024. I suspect the tailwind gathers strength during the second half of 2024, principally off the back of the structural hedge. So those are the kind of ingredients that I'd look out for, Guy.

That's great. Thank you. Thank you. Thank you. Our next caller is Jason Napier from UBS. Your line is now unmuted. Please go ahead.

Morning, William. Thank you for taking my questions. The first one was just on capital generation that the firm's clearly producing in line with plan and looking like it's going to be strongly distributed. Could you just talk, please, about the ongoing work that you're doing with the PRA on hybrid mortgage models and what the sort of standard deviations there are around capital requirements and how that might impact, I guess, next year's RWAs. And then secondly, other operating income, you know, for a long while, it's been an area of some disappointment and it's looking like it's performing really well. I'm sure you've got it for flat in Q4. I just wondered if there's any color you might add on what sort of natural growth you get into next year from the investments, the acquisitions? or maybe some sense as to at what rate the overall market in which you operate, you know, is growing at the moment and whether we can bank on reasonable sustained momentum into next year in that line item. Thank you. Yeah.

Thanks, Jason. Two questions there, CRD4 and other operating income, Jason. As said, the discussions with the PRA are ongoing in respect of principally the mortgage models and how those are developed looking forward. We are doing currently further analysis and indeed model development. As you know, we took $3 billion of CRD4 RWAs in H1. It is likely, as we said in our public documents today, that that discussion will develop and therefore off the back of that, I think quite likely that further CRD4 RWA impacts come to pass over the course of the future periods. It's also likely those are phased over time. And so as a result, Jason, we will aim to manage them. We will also aim to offset them to the extent that we can. As you know, we've got excellent guidance out there in respect to 2024 RWAs, 2020 to 2025, and I very much hope that we're able to manage CRD4 pressures within that existing timeframe. So, you know, we'll update that more fully at year end, as we always do, but hopefully that gives you an impression as to where we are with the CRD4 dialogue with the PRA, the fact that we hope over time to be able to manage those CRD4 RWA pressures in line with our existing guidance. On the Topic of OI, Jason. As you say, it's pleasing to see some growth in respect of OI. A couple of points ready to make there. One is we are seeing it across all of our different business areas. So, for example, if you look at retail, you'll see it in the context of current account development. You'll see it in the context of cars. You'll see it in the context of transport. If you look at the commercial business, you'll see it in the context of the growth within corporate institutional financing of bond issues and the like, along with market trends as well. And if you look at the insurance business, for example, you'll see some developments in terms of not just net new money, but also propositions like the workplace proposition there too. So really across the board strength in terms of OI, which is good to see. What's driving that? I think it's a combination of organic customer activity, which is still rebuilding to an extent, at least post-pandemic. And some of the propositions that we're putting out there we hope are very competitive, and that's what's being borne out by the numbers, if you like. Alongside of that, Jason, what's driving it is our organic and inorganic investments, the organic ones being very much consistent with the strategy that Charlie and I laid out in 2022, and the inorganic ones you're familiar with. Tuscar is a good example that we did at the beginning of this year, which is performing very well in terms of building that business. As we look forward, Jason, those same trends we believe are going to inform ROI growth over the course of not just this year, 23, but also going into 2024. And so, you know, I don't want to put a number on it clearly for 2024 at the moment, but the growth that we've seen of 8% or 9% in 2023, you know, that feels reasonably solid, and I would expect to make further progress during the course of 2024 looking forward. Final caveat there, Jason, of course, as ever, it's activity dependent. It always is with other operating income. But I think the foundations feel pretty solid.

Thank you.

Thanks, Tristan. Thank you. Our next caller is Jonathan Pierce from Numis. Your line is now unmuted. Please go ahead.

Good morning, William. I'm just taking the questions. I've got two again. The first is on the capital position, because based on your guidance for generation, over the full year, less a little bit of dividend accrual. In the fourth quarter, I think you'll land at about 14.8, 14.9 on the 80 to 0.1 ratio. So we'll see significant excess to the target. So I'm wondering where you feel comfortable operating that in the medium term. We came into this year, I think, pro forma for the buybacks at 14.1, which again is ahead of your target. But I'm also thinking about this in the context of If your target is 13.5%, the low point, if you like, is when you announce the buybacks at the start of the year and then for the remaining 12 months you operate considerably in excess of that target. I suppose the question is how quickly can we expect you to get down to 13.5% at each set of full-year results pro forma for the buybacks? Could it happen in February 2024? The second question is on deposit margin and Clearly, there's a huge debate at the moment, raging on the headwinds and the tailwinds. But if I just step back from it, you produced a disclosure of the interim results, the deposit margin, including the impact of the hedge cost, which is effectively what it is. I think our number at H1 was 1.34%. So, accepting that it's not quite clear whether it goes up a bit, goes down a bit over the next six to 12 months, depending on deposit migration. In the medium term, is it your view that earning 130 basis points on deposits in an environment when base rate is 4% or 5% is too low, and that number will go up? And is it a core part of the ROTE target by the time we get into 2026? Thanks a lot.

Yeah. Thank you, Jonathan. Again, important questions. The capital guidance, first of all, as you commented on, the capital guidance that we have out there is 13.5%. That is the target capital ratio for the bank. When we look at the capital ratio today, as you know, 14.6% is the print coming off of Q3. And as you alluded to, that is likely to lead to a decent capital position at year end. A couple of points on that. One is we are very committed to capital repatriation. The two components of that, as you know, Jonathan, have been a progressive and sustainable dividend. We increased it by 15% at the interim. I would be confident in expecting that to continue at the full year, and I look forward to continued progressive and sustainable dividend growth thereafter. Alongside of that, at the end of every year, we will consider the excess capital position above and beyond our target capital ratios and taking account of, you know, all kind of external and internal factors. And it's really for the board to decide at that point. But you've seen the commitment that we have in the context of buybacks in previous years. And, you know, not wanting to in any sense preempt that board debate, I'm sure we will have a debate about what to do with excess capital at the end of this year. So that's point one. You asked specifically within capital guidance, how do we see if you like, coming down closer to our target of 13.5%. I think it's a relevant point. In short, we've committed to get to 13.5% by the end of 2024. Now, at the beginning of this year, we were 14%. I think we would aim to deliver a relatively smooth capital trajectory down to 13.5% by the end of 2024. which in turn probably means chipping away a little below 14% by the end of this year. We'll see, but that would be my broad expectation. And then arriving in a kind of fairly linear fashion at 13.5% by the end of 2024. So hopefully that gives you some idea of how we think about it. The deposit margin point, it's an important one. As I said, we're seeing a bit of churn in terms of the book over the course of this year. It is entirely consistent with the expectations that we had of this interest rate environment. And indeed, I hope the guidance that we've given to the market through the course of the year Likely, as said, we see that continue a little bit during the course of Q4, and then I expect over time, it's hard to be too precise on when, that comes to slow down, if you like, and at some point, presumably, comes to an end. Now, within that context, as you say, we have the structural hedge refinancing going on, and that remains, no matter what the deposit churn really does, and no matter whether or not there is any modest reductions in the structural hedge, a very strong tailwind for the income profile of the business. You gave a number there in terms of the structural hedge yield as an example of that and how it's strengthening, Jonathan. So what we had within Q3 was a yield on the structural hedge of about 1.35% thereabouts. What we expect to have for the remainder of this year is a building of that yield into the more like 1.4% to 1.5% territory. And then it builds again during the course of 2024 into kind of above 1.6 territory. I won't be more precise beyond that, but it's the kind of, you know, 1.6 plus type territory going forward. That is off the back of some 40 billion of hedge refinancings that come due during the course of 2024, which, you know, as I said earlier on, provides quite a strong tailwind, particularly in the second half of the year for the overall margins of business. So, I'm pretty confident as we sit here today that the strength of that structural hedge refinancing tailwind is likely in due course to outweigh the effects of any headwind that we may get in the meantime from the deposit churn that we're seeing. And that's the balance of things. And I think, Jonathan, over time, and maybe this is the final point, that is going to deliver the type of income and ultimately operating leverage that allows us to deliver a stronger ROT and in turn stronger capital return in the period looking forward, particularly looking forward 25, 26 type timeframes.

Okay, that's really helpful. I'm sorry, just one supplementary. The hedge maturities next year, are they reasonably spread across the four quarters or is there a lumpy profile again?

There's a bit of a back end waiting, Jonathan. It's not terribly acute, but I think there's a bit of a skew towards the back end. So that's partly what's informing my comments around the margins, the questions earlier on.

Okay, perfect. Thanks, William.

Thanks, William. Thank you. Our next caller is Ben Toms from RBC. Your line is now unmuted. Please go ahead.

Good morning, William. Thank you for taking me to answer my question. Firstly, on the structural hedge, have you reiterated your modest single-digit reduction in the hedge notional in half to 2023? Do you believe that you can hold on to your non-interest-bearing deposits best than peers And therefore, should we be modeling less of a reduction in the Lloyds structural hedge notional going forward relative to our views on the sector as a whole? I guess the buff you have over the balance sheet notional might also play a role here. And then secondly, in relation to your pension deficit funding reduction that you announced today, with only a 250 million contribution expected in Q1 2024, will that have a bearing on your capital generation guidance of 175 basis points for FY24? I'm just trying to get a feeling of how baked in this good news is to the existing financial plan. Thank you.

Yeah. Thank you, Ben. Again, both important questions. In terms of the structural hedge, maybe I'll just start with 2023. The structural hedge guidance that we gave at the half year is for a modest reduction, and that continues to be the case, if you like. I don't think there's any change to the guidance that we gave at the half year in respect of that. You've seen the nominal balance come down about $4 billion during the course of quarter three. It might come down by something similar during the course of quarter four. Yeah, let's see. But I think something broadly similar will be expected. And indeed, the combination of those two, I added together, that's what led us to our modest notional reduction that we gave at the half year as guidance. I think looking forward, it won't surprise you in November, and we're not going to be specific today, at least, on guidance for structural hedge going forward. We certainly will be at the tail end of the year, as we always are. But looking forward, what do we expect to see? I think if you see a continuation of the churn, albeit at some point, no doubt, a slowing, then off the back of that, that's what drives the structural hedge behavior. And so it would be reasonable to expect, I guess, some similar type of activity in the context of 2024. But, you know, let's see how rates play out. Let's see how customer behaviors play out. And that, in turn, will inform how we manage structural hedge looking forward. You asked about our performance versus others and how we see the stickiness of the deposit base. I obviously won't comment on a relative basis, but I can comment in terms of how we see the deposit base at Lloyds Banking Group develop. And maybe a couple of points to make there. I think one is we have invested heavily in terms of customer contact strategies, and so we do work hard to identify where customers might move, how they might move, what it is they're looking for in terms of interest versus access trade-off, that sort of thing. A lot of it is digitized, and I hope that that allows us to manage the deposit performance as best we can. Nothing is ever going to be perfect, to be clear, but nonetheless, I think those types of investments are important. Alongside of that, we have a variety of different products with, if you like, hopefully competitive offers out there. Some of them are structural hedge eligible, even though they're savings offers. And so not just instant access, but we've developed other products that are not fixed term, if you like, so-called limited withdrawal products that in turn are structural hedge eligible. that gives customers a choice. If they want to, if you like, go for a compromise between higher rates, number one, but also some degree of access, number two, that type of product allows them to do it. And in turn, that also allows us to keep the balances on structural hedge, in the structural hedge, as it's predictable and so forth. So that's combined with the customer contact strategies that we have, i.e. offers and products that, you know, we hope allow us to manage the deposit base successfully. I think final point, Ben, is, you know, we've got a very broad base customer profile across the UK. It's a very broad franchise, very diversified franchise. In that sense, you know, our deposit base and the behavior of the deposit base is driven by that type of characteristic. So, you know, maybe there's something in that. Hopefully that addresses the structural hedge deposit questions. On the capital question, Ben, it's a good question. When we look at the position on capital, we've given very clear guidance in respect to 2023 and indeed in respect to 2024. I'm not going to comment today specifically on 2024 beyond what I've just said, but I think on capital guidance, as always, in all years, we just try to be clear and consistent. We don't typically disclose all the moving pieces of capital. Indeed, it's quite a complex picture. At the same time, you're aware of the income and the P&L trends that we have given and that we've discussed in part again this morning. It's very clear that the pension deficit reduction is a positive for capital, certainly for the remainder of this year, certainly for next year, and indeed looking forward. At the same time, there are some uncertainties in the context of the capital position, and they will play themselves out. So, for example, we've made an allotment for CRD4 RWA increases next year, but there's some uncertainty about whether the PRA will increase RWAs more than we expect. We don't expect that, clearly, because our base case we've allowed for, but there's some uncertainty there. Likewise, there's some possible capital refinancings that we'll consider over the course of 2024. And then finally, there's share-based payments, where in the past we've been able to issue shares. We're now coming up against some of the limits for those, and those will require purchasing of shares on the market in exchange for compensation plans and the like. And so these are examples, really, of the types of uncertainties that we look into in the capital build. And that's why, then, when we step back, what we want to do is just provide something that is clear and predictable from your perspective of 175 basis points for this year and for next. Final point then that I'll make there is that, you know, having said that, let's not forget that is a very strong capital build, right? That allows us to deliver both a progressive and sustainable dividend, 15% up this year. I'll be very, very hopeful, let's say, of a decent increase in the dividend next year. I'll leave that to the board to decide at that point. And alongside of that, you've seen our performance on buyback. So let's make no mistake about it. 175 basis points, that is a very strong capital performance that allows us to deliver a decent yield to all of our investors. Thank you. Thanks, Ben.

Thank you. Our next caller is Chris Kant from Autonomous. Your line is now unmuted. Please go ahead.

Good morning, thanks for taking my questions. Two on revenue-related issues, please. Just going back to your strategic plan guidance from a couple of years ago and conscious of the comments you were making around the strength of the other income line looking into 2024. At that strategic update, you said there'd be about 0.7 billion of revenues generated incrementally from sort of organic, inorganic initiatives across 22 to 24. How much of that do you think is captured in the run rate that we're seeing today versus how much is still to come into 2024? Please just be interested to get an update on your thinking around that piece that we are towards the end of that three-year window. And then on the NIM, if I could just come back to that, from what you've said, you know, the 4Q NIM, it's just going to be a shade above three. And I guess if we were looking at that NIM ratio, given the trend through the second half, we're looking at the December NIM, or the end of year NIM, I guess implicitly that's going to be a bit below three looking into the first half of 24. And you've indicated then that there's sort of maybe some net pressures through the initial portion of 24 potentially offset little bit towards the back end of 24 so it feels like we should be thinking about and then for 24 at least starting below three is that the right inference to draw at the beginning of the year, and then we can sort of make our own mind up as to whether you managed to sort of pull back from that level, thank you.

Thanks Chris. In respect to OI, as you say, there's been a decent performance in OI. I would say actually quite a strong performance in OI. So 1.299 billion during the course of quarter three. So far, year to date, 3.8 billion. That is an improvement of around 8% year on year. I think if you scratch beneath the surface and say, well, what are the kind of one-offs and so forth that you see in OI, which you sometimes do, for example, whether benefits or, for that matter, whether costs in general insurance, as an example, Likewise, some lumpiness that you see from time to time. Actually, the underlying is looking pretty similar. So the underlying is probably also 8% or 9% year on year, the way that we look at it, once you take out any kind of one-off type effects there. So on the whole, we're pretty comfortable with the OI performance. In fact, I think we see it as reasonable and quite positive. We haven't disclosed exactly what proportion of that OI performance is the strategic initiatives that we have seen. We will clearly give full guidance on that at the delivery point for 2024, and maybe just two comments to make along the way there. One is we feel very comfortable with the £0.7 billion that we have committed to deliver for 2024, so that's perhaps worth underlining. We feel comfortable with the guidance we have given, and we expect to deliver on it when we get to the year-end 2024 results. second is it's not particularly linear and that is to say the reason why we're feeling comfortable with it is because we already see signs of decent delivery but on the other hand because the investments are relatively early and then those investments bear fruit if you like in the period thereafter it's not strictly linear between where we are now to the end of 2024 but again i think the point to take away is that we feel very comfortable about it we've got significant um kind of runs on the board, if you like, in respect of that 0.7 billion. It won't be exactly halfway, Chris, but it won't be terribly far off of that, I guess, is one way to look at it. In respect of NIM, I will probably just repeat the comments that I made earlier on, which is to say we're not going to give guidance for 2024, and it's certainly not kind of quarterly guidance, as it were. And you've seen our run rate NIM, which goes to just above 300, as I said in my script comments, for the final quarter of 2024. And then I think the evolution has said, you know, we'll see the headwinds pay themselves out a little bit during the course of the first half. We'll see the tailwinds strengthen a little bit during the course of the second half. There's one more comment that I might make just to give you some illustration in terms of how those headwinds pay themselves out. At the moment, we have refinancing mortgage business at around 175 basis points. versus mortgage business that we're putting on around 50 basis points completion. That's a gap of some 120, 130 basis points for refinancing of mortgages. By the time we get to the back end of 2024, that mortgage business that is rolling off is rolling off at more like 80 basis points. And let's say that mortgage spreads remain the same as they are today. The gap, therefore, is more like 30 basis points than 130 basis points. So that's just one example as to how we see the headwinds, rather, play themselves out a little bit during the course of the latter half of 2024. And in exchange, I've just made some comments, if you like, on the development of the hedge, which, as said, will play itself in more and more during the course of the year.

Thank you, Chris. Thank you. Our next caller is Edward Firth from KBW. Your line is now unmuted. Please go ahead.

Thanks very much. Good morning, William. I just have two questions, I guess. One was, I think you mentioned in the script something about funding costs for non-interest income going up. And I just wanted to check I understood what that meant. Is that the sort of 70, 80 million a quarter excluded from the NIM. Are you saying that we should expect that to increase from here, or was it something different? Or maybe I misheard. That was the first question. The second question was about mortgage refinancing. Talking to some of the mortgage brokers, they're telling me that a huge theme they're seeing at the moment is extension of the term of mortgages. So people are managing to effectively keep their monthly bills under control by terming out their mortgages. So I guess my question is, firstly, is that right? Can you give me some sort of idea of what proportion of refinancing are thing are terming out? And then finally, does that come through in forbearance data or not? Or do we just see that as a sort of new product and therefore it's not really related to the old one? Thanks very much.

Yeah, thanks. Thanks, Brad. A couple of questions there, NBNI and mortgage refinancing. On the non-bank interest income, the non-banking interest income, as said, we saw in Q3 about 76 million or so. I expect that to tick up a little bit during the course of Q4 and indeed likely to tick up a little bit again during the course of 2024. I won't be overly precise on that. But what's going on there? There's two things really going on there. One is around refinancing of existing activity, Ed. So insurance, pensions and investments, for example, transport, for example, LDC, for example, likewise, commercial banking. These deals, if you like, are put on financing over a period of term, and then when they come up for refinancing, they then reflect the prevailing interest rates. So, for example, we have a mortgage book which has an average life of three years. Some of that stuff is coming up for refinancing during the course of this year and looking forward. Sorry, the motor book, forgive me, with an average life of three years. Excuse me. So that type of thing is an example of renewal of existing facilities into a higher rate environment. The other part of it, and this is circa half of the non-banking net interest income increase, is related to growth within other operating income. So part of it is said related to higher rate environment, but also part of it financing effectively volume growth within other operating income. And again, that'll be across the businesses. That'll be across commercial, insurance, retail, and the like. So think about these non-banking interest income steps, if you like, as two things. One is refinancing the existing business. And the second is about the same proportion, refinancing volume growth in other operating income and therefore driving, if you like, benefits within the other operating income line. And I think it's important, if you like, to see that as a part of the picture here. Mortgage refinancing, Ed, the extension of term, there's been a little bit of that in the market, but for us it's a pretty small, in fact, I'll go further actually, it's a very small part of the overall business. It is not forbearance, to be very clear in response to your question, and it is overall, from our perspective, a very small part of the refinancing part of the business. I would step back actually and say, you know, when we've looked at the mortgage performance in terms of asset quality over the course of quarter three, we've scratched significantly beneath the surface, if you like, and just sought to really have a look at what is going on within the mortgage business. And it's that work that allows us to step back and say, actually, we've seen some really good signs of stability within the mortgage business. Vast bulk of the portfolio was always doing pretty well and continues to do pretty well, despite, you know, economically slightly more challenging times. The area where we were seeing an uptick in new to arrears, which is basically the 06 to 08 originations, and within that relatively small pocket of it, that piece has now been stable during the course of Q3. As I said in my comments, perhaps it's a little early to call a trend, but nonetheless, we're pleased to see that stability in the context of what overall is a very well-performing, very strongly performing mortgage book. Great. Thanks so much. Thanks, Ed.

Thank you. Our next caller is Rohith Chandra Rajan from Bank of America. Your line is now unmuted. Please go ahead.

Thank you. Morning, William. I just have a couple of quick follow-ups on NII, if that's okay, please. The first one was just on deposits. So you've done a good job of retaining deposits in in what's been a very competitive market. I was just wondering if that's any difference in the cost of those deposits when you're anticipating. And then the second one is just on the margin, just to clarify really your previous comments. I think based on what you said to us so far, you're indicating a similar sort of margin decline in Q4 as Q3, and also with a similar mix of the drivers that you show in the NIM bridge on slide five. I just wanted to check if that was the case. Thank you.

Yeah, thanks, Ray. I think on two questions there, obviously. NII, in particular the relationship with deposits, and then Q4, margin performance as a whole, The NII in terms of deposits, you know, when we set out the guidance earlier on this year and then went through the course of quarter two and, well, quarter one and quarter two, I should say, we had certainly anticipated the type of deposit movements that we had seen. I think that concept, if you like, those flows in the context of the rate environment that we saw were themselves not terribly surprising. Your question was, are we seeing a difference in the cost of deposits versus our expectations I'm not so sure we are terribly much, Rohit. What you do see is obviously when a deposit moves from instant access to fixed term, for example, or for that matter from PCA into savings, that itself causes an increase in the cost of holding that deposit. So it's less about the price of new offers that you put out to customers, if you like. It's more about the flows within the book that you see and those driving differences in terms of costs of holding deposits. So that piece is going on. But as said, I think the overall... flows are more or less in line with our expectations i would say within any given quarter as i mentioned earlier on you're going to see ebbs and flows and they will depend upon competitor offers for example at any given point in time um but overall if you like i think the patterns that we're seeing i think the margin effects of those are more or less in line with our overall guidance at the beginning of the year and expectations in the context of the environment that we're in Your second question, Rohit, in terms of Q4, the Q4 margin reduction that we see, as said, by quantum, we think is likely to be similar, give or take a basis point or so, to the type of margin reduction that we saw in Q3. In terms of the sources of that margin reduction, Rohit, to your question, I think broadly similar would be my expectation. I mean, I think if you look at the mortgage yield that we see in Q4, for example, for business that is rolling off, and let's say spreads remain the same for the moment, That looks pretty similar to me. Likewise, you know, I think the deposit churn, I think it's got a little bit to play out. As I mentioned earlier on, we expect to see a bit of that, again, suggesting a similar pattern. And we've got about 12 billion of hedges for the remainder of this year, Rohit. Those will be at varying different yields, but nonetheless, we've got about 12 billion of hedges. So, again, I think a broadly similar pattern we would expect to see, driven by basically similar things, Rohit.

Okay, that's great. Thank you.

Thank you. Thank you. Our next caller is Andrew Coombs from Citi. Your line is now unmuted. Please go ahead.

Good morning. Thank you. If I could have a simple numbers question and then a bigger picture strategic question. The numbers question, you talked about the hedge being 1.4% rate, but presumably the position's rolling off next year will be lower than that 1.4%. So perhaps you could just provide some quantification of that. My bigger picture question is, you talked about your customer contact strategy. Clearly your attention has been very strong in the quarter. You have some other unique models compared to the others. So if I take your instant access saver, you have an advantage saver, which offers up to 4% subject to withdrawal restrictions. But that then reverts after one year onto the standard saver, which offers a max of 1.9%. So to some extent, you're more reliant on customer inertia than perhaps some of your peers. And I appreciate that these are both on-sale products, but given in the consumer duty reviews that have specifically talked about some on-sale products having higher rates due to introduction bonus rates and then reverting to a lower rate and with different product names and they've specifically flagged that. Do you think the business model that you have may come under review in the coming year? Thank you.

Thanks, Henry. Just to take each of those in order, the Q3 yield I mentioned on the structural hedge is about 1.35%. So that gives you an idea of the Q3 yield. I didn't give a precise number on the 2024 yield for the hedge, but I said that it was above 1.6%. It's safe to say that it's around the kind of 1.6%, 1.7% type range. That combined with the fact that we've got about $40 billion of hedges rolling off during the course of next year, Andrew, hopefully gives you enough to kind of work out the answer to your question, albeit I'll leave you to do the math, as it were. But nonetheless, that should give you some insight. Your question on deposits, I feel very comfortable. Sorry, Andrew, go on.

The 1.6 is the blend across the whole portfolio, including the new positions you're putting on now, right?

Yeah, and I would stress above 1.6, Andrew. So, you know, I haven't given you a number, but I've said between 1.6 and 1.7, let's say. And so that is the average yield on the structural hedge portfolio during the year. And then, as you will understand, I'm sure, it then continues to pick up, not just within the year, but also then in subsequent years thereafter, going back to our earlier conversation. Right. That all, you know, as said, Andrew, I'll make one more comment about that, which I guess you'll probably expect from me, but that all delivers a very strong tailwind to income from the structural hedge this year clearly, next year clearly, and indeed the years beyond that. On the deposit front, Andrew, two comments to kick off with, and I'll give you a bit more detail. One is, yes, I feel very comfortable with our deposits model. In fact, you know, the proof is in the numbers. We've attracted 0.5 billion growth in deposits during the course of quarter three. I think that says as much as anything, actually, about whether depositors want to come to us or not, not just within the retail business, but also across the commercial business too. Second, Andrew, before going into detail, I'm pleased to hear that you have such a detailed knowledge of our investment accounts and savings offers. I hope that also means you're a customer, but I'll leave you to answer that if you wish. The reason why I feel comfortable with our model, Andrew, is because we have an incredibly extensive customer contact program, quite a long way, in fact, a very long way from the customer inertia that you suggest there. We've actively contacted over 10 million customers about savings options this year. We've increased rates nine times in our accounts this year. We have had a 192% increase in savings accounts opened this year versus last year. We've had a 375% growth in ISAs opened this year. I could go on, Andrew, but we have a very proactive customer contact strategy in respect of our customers and delivering them with offers that make sense from their perspective for price, for access, and for any other considerations that they may have. So, you know, far from it being a model that relies upon customer inertia, it's a proactive outreach strategy. What it is is a deposit strategy that we've invested in consistently over time with that customer contact in mind. And it does, as I say, the deposit performance at the end of the day reflects the strength of the franchise.

Very clear. Thank you. Thanks, Andrew.

Thank you. As you know, this call is scheduled for 60 minutes, and we are now approaching the end of the allotted time. So this next caller will be the last question we have time for this morning. If you have any further questions, please contact the Lloyds Investor Relations team. Please go ahead, Aman Rakhar from Barclays. Your line is now muted.

Hi, William. I hope you can hear me OK. I have just two questions, please. Firstly on deposits. So thank you very much for the various bits of color. But one thing that is missing is if you could tell us your proportion of deposits that are termed deposit, please. I know that I've previously tried to ask you this question and you've kind of resisted the answering. But I think it's a really, really important input into the analysis going forward. And I think it's an important input in trying to really assess how impressive the deposit performance is in the course. Because at face value, it is a very resilient retail deposit print. But I think we need to know the term deposit mix. Indeed, actually, Lloyds would be the only bank in the UK that's not telling us what the mix of term deposits is. So what is your mix of term deposits? And please could you let us know how that's changed? sequentially is question one. And then the second question is on mortgages, mortgage spreads in particular. And I was interested in your view around the near to medium term outlook for mortgage spreads, front foot mortgage spreads. I guess this is a system that is repricing deposits quite meaningfully across the system and some competitors are pricing quicker than others. You obviously also have some banks that are looking down the barrel of an increase in funding costs. I would have thought that this might be the kind of thing that could nudge asset spreads higher from here and asset pricing higher. So given your unique vantage point, I was interested if, you know, is that a reasonable assertion? Is that something that you'd be looking to kind of do? Thank you.

Yes. Thank you, Aman. Thanks for both of your questions. As you say, we haven't really given the split within our deposit book in the past. It's just not something that we necessarily disclose. Others will do what suits them. We don't necessarily do the same. Having said that, your imploring has slightly got the better of me. So I'll give you some very rough insights, if you like, into the makeup of the book. But then I won't give you any more and you can kind of make of them what you will. But if you look at the fixed part of the fixed term part of the overall retail savings books, just the retail savings component, knock off the PCAs instant access. You're looking at term deposits there somewhere between 20 to 25% of that savings book. Now, when you look at that analysis, Aman, and try to work with it, don't forget that we also have a portion of our savings book which is clearly instant access for sure, but we also have a portion of our savings book which is so-called limited withdrawal, which is a product that I mentioned earlier on. So it may be in contrast to others. I don't know. But there are at least three components to our savings book that you need to think about when you think about the way in which the book is evolving and then the analysis that you do off the back of that. So I'll give you that, Aman. I don't think I'm going to go any further, but hopefully that's helpful. On the mortgage pricing spreads point, I think your point is a very interesting one, actually. In our view, at least, it doesn't necessarily seem to be the case that 50 basis points is the equilibrium state for mortgage pricing. Why do I say that? Because that 50 basis points is driven by market conditions. That is to say, product transfer is well below 50 basis points. New business is well above 50 basis points. So any moment in time where you get a pickup in terms of volumes in the mortgage market, it is quite likely that that will drag the spread upwards in terms of the overall completion margins for the mortgage product as a whole. So I think there is that gravitational pull which will depend upon the status of the market. In lean times like now, you've got product transfers exerting a downward pressure on completion spreads. Clearly, as the mortgage market picks up, and it no doubt will do, that in turn will provide a different impetus. The second point, why I don't think 50 basis points is necessarily the equilibrium, is there are, just as you said, Aman, a lot of things going on, not just in the deposit market, but also in the macro. So what is the effect of QT going to be over time and how does that drive tightness in terms of liabilities in the banking system? And off the back of that, what does that do to mortgage spreads in an environment where, if you like, the cost of funding is going up, reflecting that factor? So I think there are some structural factors there which might drive spreads up over time But having said that, Amman, being too precise as to exactly when that is likely to take place, I think that's challenging. And that's why, in turn, for the margin guidance we've given you for this year of greater than 310, we continue to plan on a 50 basis point spread or thereabouts, Amman. And going forward, when we give you guidance at the year end, again, we'll be cautious about how this develops so that we don't get too far ahead of ourselves.

Thank you so much, William. I really appreciate it. you engaging me in my first question. Is there any chance you could let us just know how that mix, that 20-25% changed eventually? Did that move a lot? Q2 versus Q3?

Oman, you've exhausted my generosity, I'm afraid.

Fair enough.

Thanks very much. Thanks very much indeed.

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