Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group 2024 Interim Management Statement call. At this time all participants are in a listen only mode. There will be a presentation from William Chalmers followed by a question and answer session. If you wish to ask a question please press star 1 on your telephone. Please note this call is scheduled for one hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you for joining our Q3 results call. As usual, I'll run through the group's financial performance before we then open the line for Q&A. Let me start with an overview on slide two. In Q3, we continue to make good progress on our strategic transformation to the benefit of all stakeholders. We are building momentum across our business, delivering for customers and driving higher, more sustainable returns. In the third quarter, the group again delivered a robust financial performance in line with our expectations. This includes income growth alongside cost discipline and strong asset quality. Our performance, as well as the strength of the group's franchise, allows us to reaffirm our 2024 guidance and gives us increasing confidence in our 2026 commitments. Let me turn to a summary of the financials on slide three. As mentioned, Lloyds Banking Group delivered a robust financial performance, both in Q3 and in the year to date. Statutory profit after tax for the first nine months of the year was 3.8 billion. The return on tangible equity of 14%. Net income was 12.7 billion year to date. Pleasingly, Q3 has seen growth in income versus the prior quarter, including net interest income up 2%. This was supported by a quarterly net interest margin of 2.95% up two basis points on Q2. Operating costs of $7 billion in the first nine months of the year were up 5% year-on-year in line with our expectations. Asset quality, meanwhile, remained strong. The year-to-date impairment charge of $273 million equates to an asset quality ratio of nine basis points. The Q3 impairment charge was $172 million, or an AQR of 15 basis points. CNERV per share increased to 52.5 pence. up 2.9 pence in Q3, driven by profits and the unwind of the cash flow hedge reserve given the falling rates. Our performance delivered strong capital generation, 132 basis points in the year to date, in line with our guidance of 175 basis points for the full year. I'll now turn to slide four to talk through the balance sheet growth that we saw during the third quarter. Our customer franchise continues to grow across the balance sheet. Lending balances of 457 billion up 4.6 billion in Q3. This was primarily driven by strong mortgage book growth with balances up 3.2 billion. Higher mortgage completions reflect both a strengthening market throughout 2024 and the market share of new business that is in excess of our share of stock. Notably, our customer proposition in mortgages is being supported by improvements off the back of our strategic investments. Elsewhere in the retail business, we saw continued growth across cards and unsecured loans of 0.1 billion and 0.6 billion, respectively. Motor finance balances were down by 0.6 billion, although this was impacted by a 0.3 billion securitization in the quarter, and dealers holding lower stock levels than seen in the first half. Commercial lending balances were down slightly in Q3 by 0.2 billion. Within this, we saw similar trends to recent quarters with targeted growth in corporate institutional more than offset by net repayments in small and medium businesses, including 0.4 billion of government-backed lending balances. It's been another positive quarter for our deposit franchise. Deposits now stand at £476 billion, up £1 billion in Q3. Within this, we saw growth of £1.7 billion in retail, with savings accounts up £2.8 billion. Current accounts were £1.1 billion lower in the quarter, an outcome which was a little better than we expected. Deposit churn overall eased slightly, as anticipated, in a declining rates environment. Commercial deposits were down 0.5 billion quarter on quarter. Growth in targeted sectors within small and medium businesses was offset by an expected outflow in CIB. Alongside these deposit developments, insurance, pensions and investments saw 3.5 billion of net new money year to date. Turning to income on slide five. Group delivered income growth across both net interest income and other operating income in Q3. Net interest income of 3.2 billion in Q3 was up 2% quarter on quarter. This includes a net interest margin of 2.95% up two basis points on Q2. The significant contributions from the structural hedge more than offset the ongoing headwinds from deposit churn and mortgage refinancing. Overall, the margin is a touch stronger than expected, given the favourable deposit dynamics mentioned earlier, together with yield curve developments. The structural hedge notional balance remained unchanged at £242 billion in the third quarter, after reducing £5 billion in the first half of the year. This reflects increasing stability in our rate-intensive deposit balances and generated hedge earnings of £1.1 billion for the quarter. Looking forward, we continue to expect the 2024 net interest margin to be greater than 290 basis points. Alongside year-to-date AIEAs are 450 billion with healthy growth in Q3 led by the mortgage book. We continue to expect AIEAs to be greater than 450 billion for the year as a whole. Also within NII, the non-banking interest charge was 118 million, broadly stable on Q2 and consistent with our expectations. Note that this will tick up a bit in Q4, given expected refinancing and activity growth in the businesses. Overall, the NII performance has improved in Q3. Looking forward, Q4 will be more stable given structural factors, but we expect the improvement seen in Q3 to be the beginning of a gradual trend. In other income, we saw continued momentum in the third quarter. Year-to-date OOI of 4.2 billion is up 9% year on year, with Q3 OOI up 3% quarter on quarter. Our performance this year continues to be driven by stronger activity and our strategic initiatives across the franchise. As you know, we'll give a full update on our strategic progress at the year end. That said, we're continuing to execute at pace and are on track to deliver the 0.7 billion of additional strategic income in 2024. Operating lead depreciation was 315 million in Q3. This is consistent with our expectations of the half year, based on business momentum and revised depreciation schedules. Let me now turn to costs on slide six. We remain on track to deliver our cost guidance of £9.4 billion in 2024. Q3 operating costs were £2.3 billion stable quarter on quarter. Over the first nine months of the year, operating costs of £7 billion were up 5% year on year or 4% excluding the Bank of England levy. As noted at the half year, this also includes accelerated severance charges versus 2023 taken to facilitate cost efficiencies. Excluding both the levy and the component of severance, which is an excess of last year, costs were up just 2%. Inflationary pressures are being significantly offset by continued cost discipline and investment in savings. The Q3 cost-to-income ratio is 53.4%, or 52.7%, excluding remediation. As said, we continue to expect operating costs of circa £9.4 billion in 2024, including the £0.1 billion Bank of England levy. The remediation charge is £29 million in the quarter and £124 million year-to-date. There have been no further charges relating to the FCA investigation into historical motor finance commission arrangements. Stepping back for the full year run rate remediation charge, we still see circa 200 to 300 million as an appropriate guide. Let me move to asset quality on slide seven. Asset quality remains strong and reflects resilient group credit performance. The Q3 impairment charge is 172 million, equivalent to an asset quality ratio of 15 basis points. This benefited from strong portfolio performance, but also a debt sale of unsecured assets, providing a circa 80 million credit worth about seven basis points in the quarter. Yesterday, the impairment charge is 273 million. This reflects a low underlying charge held by someone else, and an improving economic outlook in the first half of the year. On a pre-MES basis year-to-date, the impairment charge is a still low, £597 million, or an AQR of 18 basis points. Our stock of ECLs on the balance sheet remains £3.8 billion. This is about £500 million in excess of our base case, and like for like, higher than pre-pandemic levels. Looking forward, we continue to expect the asset quality ratio to be less than 20 basis points for 2024. Let me move on to slide 8 and address the below-the-line items and TNAV. Return on tangible equity in Q3 was 15.2%, contributing to a robust year-to-date performance of 14%. Within this, restructuring costs remain low at six million in the third quarter and 21 million the first nine months of the year. The volatility and other items charge was 24 million in Q3. This was driven by the usual fair value unwind, offset by positive banking and insurance volatility given recent rate movements. This contributes to a year to date charge of 182 million. Tangible net assets per share at 52.5 pence are up 1.7 pence year to date and up 2.9 pence in Q3. The increase over both periods was driven by profits and the unwind of the cash flow hedge reserve offset by shareholder distributions. In Q3, the TNAV also benefited from the mechanical reversal of the 0.9 pence per share accrual for the share buyback that we flagged at Q2. Looking ahead, we continue to expect TNAV for share to grow as headwinds unwind and the reduced share count from the buyback continues to provide support. We also continue to expect the group's return on tangible equity to be circa 13% for 2024. This incorporates ongoing TNAV growth alongside slightly lower fourth quarter earnings given the usual seasonal factors such as the bank levy and a more normalized impairment charge. Turning now to capital generation on slide nine. The group delivered strong capital generation in the first nine months of the year of 132 basis points. This is in line with our expectations and keeps us on track for our target of circa 175 basis points for the full year. Within this, risk-weighted assets were 223 billion, up 4.2 billion in the first nine months. This continues to be largely driven by lending growth, partially offset by securitizations and other capital optimization activity. We remain confident that RWAs will end the year consistent with guidance of between 220 and 225 billion. Further lending growth and regulatory inflation will be partially offset by continued active balance sheet management. Our closing CET1 ratio for the quarter is 14.3% after 71 basis points of ordinary dividend accrual. We continue to expect to pay down to a 13.5% CET1 ratio by the end of 2024. Looking further forward, since we last met, the PRA has published its policy statement on bar 3.1. We now expect the impact to be modestly positive when introduced on the 1st of January 2026. I'll now move on to slide 10 to wrap up the presentation. Overall, the group delivered an encouraging performance in the third quarter. This includes strong progress on our strategic transformation. In that respect, we look forward to updating you on this at our full year results, which will represent the closing of the first chapter of our strategic plan. Q3 also represented another robust financial performance, reflecting income growth, continued cost discipline and strong asset quality, leading in turn to strong capital generation. Our continued strategic execution and consistent financial performance allows us to reaffirm our 2024 guidance. It also gives us increasing confidence in our commitment to generate higher, more sustainable returns for our shareholders. That concludes my comments for this morning. Thank you for listening. We'll now open the lines for your questions.

Thank you. If you wish to ask a question, please press star one on your telephone keypad. To withdraw your question, you may do so by pressing star two to cancel. There will now be a brief pause while questions are being registered. Thank you. Our first caller today is Aman Rekhar from Barclays. Your line is now unmuted. Please go ahead.