Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group 2024 half-year results call. At this time, all participants are in a listen-only mode. There will be presentations from Charlie Nunn and William Chalmers, followed by a question and answer session. If you wish to ask a question, please press star 1 on your telephone. Please note this call is scheduled for 90 minutes and is being recorded. I will now hand over to Charlie Nunn. Please go ahead.

Thank you, operator, and good morning, everyone, and thank you for joining our 2024 half-year results presentation. As usual, I'll start by providing a short overview of the group's financial and strategic performance. William will then run through the financials in detail. Following a brief summary, we'll have plenty of time to take your questions. Let me begin on slide three. I'm pleased to say that we're continuing to make strong progress on delivering in line with our purpose driving positive outcomes for customers, colleagues, and shareholders. I'll cover this in more detail on the following pages, but to start, I'd like to highlight the following three key messages. Firstly, we're now halfway through our five-year strategic transformation. We remain on track to deliver our interim 2024 targeted outcomes, delivering meaningful change for our customers, and creating value for the group. Secondly, we've delivered a robust financial performance in the first half. in line with the expectations we laid out at the full year. This is driving strong capital generation and enabling consistent growth in shareholder distribution. And finally, we are reaffirming our guidance for 2024 and remain confident of delivering higher, more sustainable returns in 2026. Turning now to our purpose on slide four. Delivering in line with our clear, long-standing purpose of helping Britain prosper ensures that we drive outcomes that benefit all stakeholders. During the first half, we've continued to provide extensive support to our customers to help them meet their lifecycle financial needs, such as supporting their savings goals through our strong ISA propositions. Our 19% share of cash ISA flows has enabled an additional £6 billion of tax-free savings for our customers. We also help more than 50,000 small businesses and charities start a new banking relationship with us. We remain focused on contributing to an inclusive society and supporting the transition to a low carbon economy, with these also representing new opportunities for growth. Since the beginning of 2022, we've provided around 38 billion pounds of sustainable financing. Looking ahead, we welcome the emphasis that has been placed on sustainable economic growth by the new government. Businesses like ours have a vital role to play in working in partnership with the government to address national priorities and help communities across the UK prosper. We are positioned in this regard and believe we can make a meaningful contribution across key focus areas such as sustainable infrastructure, housing and financial planning. On slide five, I'll provide a brief overview of our financial performance. Our robust financial performance in the second quarter and across the first half was consistent with our expectations and guidance. Our QGNIM has remained resilient, whilst we continue to deliver strong momentum in the other income, with our strategic initiatives supporting this growth. Net income was lower, reflecting an increase in operating lease depreciation, an area that William will cover in more detail shortly. Elsewhere on the P&L, costs are tracking in line with guidance, and asset quality remains strong. We've also grown the balance sheet in the quarter, with broad-based lending growth of £5 billion, excluding a Q2 securitisation, whilst deposits were up £6 billion, with growth in both retail and commercial banking. Our return on tangible equity was 13.5% for the first half. This translates into strong capital generation of 87 basis points, with 47 basis points in Q2. In line with our intention to deliver attractive shareholder distributions today announced a 15 increase in the interim ordinary dividend to 1.06 pence per share our financial performance is supported by our strategic progress as we realize the benefits of our investments i'll provide an update on this over the coming slides starting with slide six we're now halfway through our five-year strategic transformation and nearing the end of the first phase For our investor seminars, we've provided you with increased detail on our plans and progress across our main business areas. To reiterate, the key messages from those sessions were, we're building upon the strong foundations, including our significant scale, digital leadership, and broad offerings. We've increased investment in business with circa 3 billion pounds incremental investment out to 2024. We're building momentum across our businesses, delivering growth in priority areas whilst investing in our enablers to improve operating leverage and enhance capabilities. And finally, we remain on track to meet our financial targets for both 2024 and 2026. To bring this to life, on slide seven, I'll provide some examples of our progress in the first half. We're addressing a variety of growth opportunities, meeting more of our customers' needs, focusing on higher value segments and leveraging the unique breadth of the group's businesses. Building upon our existing scale, we're focused on deepening relationships right across the group. We're extending our digital leadership position with new features and propositions that increase engagement. For example, we launched InvestWise, a new mobile-first investment proposition for 18 to 25-year-olds, which has supported a doubling of customers in this segment. Additionally, we're delivering strong growth in our CIB market business, deepening our share of wallet and diversifying revenues, with CIB other income up 30% compared to the first half of 2021. Our strategy is also focused on building our offering with high-value customer groups that have a greater number of needs. The development of our mass affluent proposition is a key example of this. We've scaled the number of customers with access to Lloyds Bank 360 10 times since launch, with early benefits, such as higher investment portfolio sizes for these customers. We expect these benefits to grow as we scale further with a larger addressable customer base. Finally, we're better connecting our businesses to address our customers' financial needs. This includes increasing the penetration of our IP and iProducts within our consumer and commercial franchises. For example, we've seen a marked improvement in protection uptake rate and have reclaimed the number one share in new home insurance policies. Importantly, these outcomes are translating into financial benefits. We remain on track to deliver circa 0.7 billion pounds of additional revenue from strategic initiatives by the end of the year, and it's growing to 1.5 billion pounds per annum by 2026. Let me now cover our enablers on slide eight. Complementary to our growth focus, we're investing in our enablers to enhance our capabilities and drive operating leverage. By digitizing end-to-end and modernizing our technology estate, we're increasing efficiency benefits as we scale. For example, we've now digitized around 45% of servicing journeys within BCB. By digitizing a journey to change a business address, for example, we've reduced unit costs in this area by 60%. We're also transforming our physical footprint. Our new Leeds offices are the most energy efficient in the region. and later this year we'll be moving to our new head office in London as we improve and consolidate our estate. Since the end of 2021, we've reduced our office footprint by more than 20%. These activities have contributed to the delivery of circa £0.9 billion of gross cost savings to date, leaving us on track to deliver circa £1.2 billion by the end of the year. At the same time, we've continued to demonstrate discipline with regards to capital efficiency, growing in capital light areas, and undertaking securitization activities. We've now relied around 15 billion pounds of our WA savings from optimization since the end of 2021. Finally, our people remain critical to our future success, and we're taking action to build capability in key areas. For example, we've recruited another 1,500 technology and data specialists in the first half, taking the total to more than 4,000 over the past two and a half years. Turning now to slide nine, where I will close with our financial outlook. As you've heard, we're making strong strategic progress in all areas and are on track to deliver our targeted outcomes. We're also on track to deliver our interim 2024 financial targets and remain confident in the outlook for 2026. This includes a return on tangible equity of greater than 15% and capital generation in excess of 200 basis points. These higher, more sustainable returns and capital generation represent a highly attractive proposition for shareholders. Thanks for listening. I'll now hand over to William for the financials.

Thank you, Charlie. Good morning, everyone, and thanks again for joining. Let me start with an overview of the financials on slide 11. As you heard, Lloyds Bank and Group delivered a robust financial performance in H1 and in Q2. Tax for the first half was 2.4 billion, with a return on tangible equity at 13.5%. In H1, net income of 8.4 billion was down 9% year-on-year. This was built upon a resilient banking net interest margin of 2.94%, including a Q2 net interest margin of 2.93%, two basis points lower than in Q1. Operating costs of 4.7 million were up 7% year on year, in line with our expectations. Including the impact of the sector-wide Bank of England levy in Q1, H1 operating costs were up 4% on the prior year. We continue to see strong asset quality. The H1 impairment charge of 101 million equates to an asset quality ratio of five basis points, including MES benefits, totaling 324 million, The asset quality ratio was a still low 19 basis points. After the impact of shareholder distributions, TNF per share is now 49.6 pence, down 1.2 pence in H1 given distributions and rate developments. Our performance resulted in strong capital generation of 87 basis points in the first half after the impact of regulatory headwinds. This supports our 15% increase in the interim dividends. I'll now turn to slide 12 to look at the customer franchise. Our business grew in the first six months of the year across the lending and deposit franchise. Groove lending balances of 452 billion were up 3.9 billion or 1% in Q2. This is led by growth across the retail business. In the mortgage book, balances were up 3.2 billion in Q2, excluding the 0.9 billion legacy mortgage securitization, or 2.3 billion after that transaction. Higher mortgage balances reflect the increase in application volumes observed at the start of the year, as we mentioned at Q1. Elsewhere in the retail business, we saw continued growth across cards, motor finance, and unsecured loans. Commercial lending balances were also up slightly in Q2, by 0.3 billion. Within this, we saw modest growth in corporate institutional, partly offset by net repayments in small and medium businesses, including 0.4 billion for government-backed lending balances. Let's look at the liability franchise. It's also been a good performance in deposits, which now stand at 475 billion, up 5.5 billion, or 1% in Q2. We saw growth of 3.6 billion in retail, with savings accounts up 5 billion, driven by inflows, limited withdrawal, and fixed-term products in a successful ISA season. Current accounts were 1.4 billion lower in the quarter, given the reversal of the bank holiday timing impact we saw at the end of Q1. This is probably a touch better than our expectations, driven by salary increases and lower spend. Commercial deposits were also up in Q2 by 1.9 billion. In particular, we saw some stabilization of non-interest bearing accounts and growth in targeted sectors within small and medium businesses. Alongside deposit developments, we continue to see steady liability growth in insurance, pensions and investments with circa 2.7 billion of net new money in H1. Turning to net interest income on slide 13. The group delivered a resilient performance in net interest income in the first six months of the year. Net interest income of 3.2 billion in Q2 was down 1% quarter-on-quarter, alongside AIEAs of 449 billion were stable on Q1, driven by the weighting of customer lending growth towards the end of the quarter. As mentioned, the Q2 net interest margin of 293 basis points was down two basis points from the first quarter, resulting in a first-half net interest margin of 294 basis points. This gentle decline in the margins through the first half is consistent with our expectations, as we outlined previously. The H1 non-banking NII charge of £229 million was driven by increased funding costs in the current rate environment and strategic growth in the group's non-banking businesses. The charge is tracking in line with the indication we gave previously for the full year of between 450 and 500 million. Looking ahead, we continue to expect AIEAs for 2024 to be greater than 450 billion, driven by current lending activity and expected further lending growth in the second half of the year. We also continue to expect the interest margin to be in excess of 290 basis points for 2024, Indeed, our confidence in this guidance is further reinforced by our performance in H1. Within the margin, mortgage refinancing and deposit churn developments continue to evolve in line with our expectations. Forecasted bank base rate cuts will add to the deposit headwind in the second half. However, the structural hedge refinancing will also play a greater role as we progress through the year, helping offset these pressures. Putting all this together, and as we said at year end and at Q1, we continue to expect net interest margin to be on a positive trajectory before the end of the year. Looking at the mortgage portfolio on slide 14. The mortgage book now stands at 307 billion. This is up 1.6 billion in H1 and up 3.2 billion in Q2. That's excluding the 0.9 billion legacy portfolio securitization. In Q2, completion margins increased to around 70 basis points, albeit maturities in the book were around 110 basis points. As said, the impact of the mortgage book refinancing on the group's margin is playing out more or less in line with our expectations. As Charlie mentioned, a key element of our strategy is to increase connectivity between businesses, meeting more of our customers' financial needs. As an example of this, we've now enhanced the integration of our protection insurance offering into the mortgage journey. This drove a 3% increase in protection take-up in H1, albeit this is still below where we think it should be. The financial benefits gained by this partnering across divisions reinforced the attractiveness of new mortgage lending from both a strategic and an economic value perspective. Looking ahead, we expect the mortgage book to continue to grow through the remainder of this year. Let me now look at the other lending books on slide 15. Consumer balances are performing well. Credit cards, loans, and motor were collectively up 2.7 billion in the first half of the year, including 1.4 billion in Q2. We continue to see credit card spend recovering. The balance is up 0.5 billion in H1. Likewise, loan balances grew by 1.3 billion, partly driven by lower repayments following a securitization in Q4 last year. Meanwhile, motor finance was also up 0.9 billion. In commercial, lending was down 0.5 billion in the first half. Within this, corporate institutional lending was up 1 billion, including growth in strategic areas such as working capital and securitized products. In small and medium businesses, balances were down 1.5 billion, with slow customer demand continuing to impact performance, alongside 0.8 billion of government-backed lending repayments. Moving on to deposits on slide 16. Our deposit franchise grew strongly in the first half of the year. Total deposits are up by 3.3 billion, or 1% to 475 billion. Within this, retail deposits were up 4.9 billion. Continued growth in savings balances more than offset expected current account reductions. Retail savings balances were up 6.7 billion in H1, supported by net new money inflows and strong retention activity. Two points stand out. First, as Charlie mentioned, we had a strong ISA season, attracting significant cash ISA savings from new and existing customers in the heart. Second, our limited withdrawal product continues to see strong demand, enabling us to retain a high proportion rate-sensitive money within our own savings proposition. Current account balance is reduced in the half by 1 billion. Our flows were driven by seasonal tax payments and movements to savings products, partly offset by wage inflation. Commercial deposits decreased by 1.6 billion in H1, Within this, small and medium business balances increased due to growth in targeted sectors, particularly in Q2. Not interest-bearing balances, meanwhile, showed early signs of stabilization. Elsewhere, outflows in corporate institutional balances reflected the group managing deposits for value. As you're aware, the performance of our deposit franchise supports the structural hedge, which I'll now update on. Our structural hedge is a significant tailwind to income. The hedge notional currently stands at 242 billion, down 5 billion in H1, including 2 billion in Q2. This is in line with our expectations for a modest notional reduction during 2024, linked to the deposit trend. In H1, we saw gross hedge income of 1.9 billion, 0.3 billion higher than last year. The average earnings rate on the hedge is now circa 1.6%, with the reinvestment rates continuing to be significantly higher than this. The weighted average life of the hedge remains stable at around three and a half years. Market rates over H1 have been slightly stronger than our expectations at the start of the year. Accordingly, looking ahead, we now expect the growth in 2024 hedge income to be slightly higher than the 0.7 billion that we mentioned in February. Moving on to other income on slide 18. We continue to build momentum in other income across the franchise and link to the successful execution of our strategic initiatives. Other income of 1.4 billion in Q2 was 9% higher than Q2 last year, with H1 up 8% year on year. Pleasingly, this income is driven by growth across all of our business divisions. Within retail, we saw a growing contribution from our motor business, driven by an increased fleet size, and alongside, we saw quarter-and-quarter growth in banking fee activity. In commercial, the team drove a strong H1 performance in our markets business, with growth supported by strategic investments, as well as higher client activity. Insurance pensions and investments delivered increased income within general insurance, as well as workplace pensions. Looking forward, continue to expect strategic initiatives across our business to drive further growth in other income turning to operating lease appreciation the h1 charge of 679 million included 396 million in q2 the increased depreciation in q2 incorporates a circa 100 million additional charge This is caused by the half-yearly fleet revaluation exercise recognizing used car price developments, particularly in electric vehicles. These are a material part of our leasing business. Looking forward, this charge will revert to something slightly higher than the Q1 run rate because of the revised appreciation schedules alongside business growth. Taking a step back, today's charge comes after a period of significant net benefits from used car price movements. Overall, we continue to see this business as an attractive and profitable growth opportunity. Moving on to costs on slide 19. We remain on track to deliver our cost guidance in 2024. Operating costs of 2.3 billion in Q2 were stable on the prior quarter, excluding the circa 0.1 billion Bank of England levy in Q1. H1 operating costs were £4.7 billion, up 7% on the prior year, or up 4% excluding the levy. Costs include expected elevated and front-loaded severance charges taken to facilitate cost efficiencies. Excluding the levy and the component of severance in excess of last year, costs were up 2%, with inflationary pressures partially mitigated by continued cost efficiency. The cost-to-income ratio was 57%, or 56%, excluding remediation. The group continues to maintain strong cost discipline in the context of inflationary pressures and strategic investments. As Chuck mentioned earlier, we remain on track to deliver 1.2 billion of gross cost savings this year. Excluding the Bank of England levy, costs will be up in total by 7% over the three years from 2022-2024. in the context of what was much higher CPI growth during that same period. As said, we continue to expect operating costs of circa $9.4 billion in 2024, including the $0.1 billion Bank of England debt. The remediation charge was $95 million in H1, substantially in relation to pre-existing programs. There have been no further charges relating to the FCA investigation into historical motor fans commission arrangements. Let me move to asset quality on slide 20. Asset quality remains very strong. Credit quality continues to improve in the quarter, with either stable or reduced neutral arrears seen across our portfolios. This reflects the resilience of our prime customer base and our prudent approach to risk. Strong credit performance alongside MEF adjustments resulted in a low Q2 impairment charge of 44 million, equivalent to an asset quality ratio of five basis points. On a pre-MEF basis, the asset quality ratio was a still low 16 basis points in the quarter. This benefited from a modest underlying charge, as well as the release of inflationary judgments in retail, given the strong portfolio performance despite the environment. The 132 million MES released in Q2 was primarily driven by a revised approach to our severe downside scenario. This now incorporates the more evenly balanced risks of supply-side and demand-side shocks, with attendant CPI and bank base rate impacts. Our stock of ETLs on the balance sheet is now 3.8 billion. This remains circa 500 million above our base case, and like the like, higher than pre-pandemic levels, driving strong coverage across our portfolio. We feel confident in our asset quality. Considering the strength of the portfolio and performance year to date in the context of an improved economic outlook, we now expect the asset quality ratio to be less than 20 basis points for 2024. Let me briefly update on our latest economic assumptions. We've made modest changes to our forecast since Q1. We now forecast GDP to be slightly stronger than our previous expectations, 0.8% growth in 2024. Given sticky pay rises and inflation, we now assume two rather than three base rate cuts in 2024, starting in the third quarter. This higher rate environment leads us to expect unemployment to rise a little earlier, peaking at 4.9% in 2025. Our assumptions for health prices, meanwhile, are broadly unchanged. Let me now move on to slide 22 and address the below-the-line items in TNAV. The return on tangible equity of 13.5% in H1 represents a robust performance. Looking ahead to the full year, we continue to expect the ROTE for 2024 to be circa 13%. Restructuring costs remain low at 15 million for the first half. Volatility and other impacts of 158 million in H1 is essentially driven by negative insurance volatility, given the increase in long-term rates. Charge also includes the usual fair value unwind. Total net assets per share at 49.6 pence were down 1.2 pence in H1, 1.6 pence in Q2. The decrease was driven by shareholder distributions, including the four-year ordinary dividend payments in April. and also by movements in the rate curve impacting the cash flow hedge reserve in Q1. As usual at this time, TNAV is also temporarily suppressed by an accrual for the share buyback over the H1 close period with no corresponding share count reduction. This 0.9 pence per share accrual impact will mechanically reverse in Q3. Looking ahead, we continue to expect TNAV per share to grow this year and indeed over the medium term, from lending growth to buybacks and the unwind of headwinds. Inevitably, the growth trajectory may be influenced in the short term by rate volatility, just as we saw in the first quarter of this year. Moving now to capital generation on slide 23. We have delivered strong capital generation in the first half. In H1, RWAs were up 2.9 billion, ending at 222 billion. Lending growth was offset by securitization and other capital optimization activities. In quarter, RWA developments were further impacted by the reversal of the temporary increase in market risk RWAs related to hedging, which we mentioned at Q1. We continue to expect risk-weighted assets to be between 220 and 225 billion at the end of the year. This is led by expected lending growth in H2 with continued active balance sheet management to offset regulatory pressures. Capital generation of 87 basis points in the first half was, as said, a strong result. In this context, we continue to expect full-year 2024 capital generation with circa 175 basis points. This represents a healthy level of capital generation and what is a robust business performance. The closing CET1 ratio of 14.1% is after 48 basis points of ordinary dividend accrual. This is inclusive of the announced interim dividend increase of 15%. I'll now move on to talk further on capital distributions on slide 24. The Group's strong capital generation and CET1 position continues to support growth in shareholder distributions. Today, the Board announces an increased interim dividend of 1.06 pence per share, 15% growth on last year. As usual, we'll consider further capital distributions at the year end. Both the interim and final dividend per share have grown consistently over our strategic plan. The 2024 interim dividend per share announced today is around 60% higher than in 2021. This strong distribution growth is consistent with our guidance for a progressive and sustainable dividend. Alongside this growth, we have undertaken consecutive and significant share buyback programs. These have reduced this group's share count by around 12% since the end of 2021, supporting growth in value for our shareholders. We remain committed to growth and distributions and returning excess capital to shareholders alongside delivery of our strategy for the benefit of all stakeholders. I'll now move on to slide 25 to wrap up the financials. In sum, the group is delivering in line with expectations. As Charlie said, our strategy is progressing well towards our ambition of generating higher more sustainable returns for our shareholders. As part of this, we saw a robust financial performance over the first six months of the year, with solid profitability, strong capital generation, and an increased interim dividend. Looking forward, we reaffirm our 2024 guidance as set out in full on the slide, and we remain confident in our 2026 commitments. We remain very well positioned for the future. That concludes my comments this morning. Thank you for listening. I'll now hand back to Charlie for his closing remarks. Thank you, William.