Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group 2025 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 one 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 good morning everybody and thank you for joining our q1 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 of our key messages on flight two in q1 we continue to deliver on our purpose-driven strategy as you've heard at our full year results presentation Strategic execution underpins our ambition to meet more customer needs and secure higher, more sustainable returns for our shareholders. In the first quarter, the group demonstrated sustained strength in its financial performance. This included further growth in income following the upward trajectory established in the second half of last year. We've also maintained our cost discipline and asset quality remains strong. In the context of evolving global economic risks, our differentiated business model is resilient. Tariffs will have a very limited direct impact on our business, but we will of course continue to monitor the broader UK economic implications. In this context, our focused strategy, our strong customer base and franchise, and our sustained financial performance all give us confidence in the outlook for our business and underpin our guidance for 2025 and 2026. Let's turn to a financial overview on slide three. As said, Lloyds Banking Group demonstrated sustained strength in its financial performance in the first quarter of this year. Statutory profit after tax was 1.1 billion with a return on tangible equity of 12.6%. In Q1, net income of 4.4 billion was up 4% compared with the first quarter of the prior year. This was driven by continued growth in both net interest income and other operating income, partly offset by a higher operating lease depreciation charge. The net interest margin was 3.03%, six basis points higher than the prior quarter. Operating costs were 2.6 billion, up 6% year on year. This includes a planned increase in front-loaded severance costs, without which it would be 3% year on year. Asset quality remains resilient. First quarter impairment charge of 309 million equates to an asset quality ratio of 27 basis points. This includes a net 35 million multiple economic scenarios impact. CNF per share is now 54.4 pence, up two pence from the end of 2024. This performance resulted in capital generation of 27 basis points, which was a strong underlying performance impacted by the front-loaded severance costs and a temporary 14 basis point increase in RWAs primarily linked to hedging activity. The Group CET1 ratio stands at 13.5%. Let me now turn to slide four to look at developments in the balance sheet. Underpinned by our leading customer franchise, both lending and deposits demonstrated strong growth in Q1. Group lending balances of $466.2 billion were up $7.1 billion or 2% in the first quarter. Within this, we delivered another strong quarter of mortgage growth, up $4.8 billion. Lower rates supported customer demand and the prospective stamp duty change accelerated completions. This probably implies a slightly slower pace in mortgages in Q2. More broadly in retail, we saw good growth across all of our propositions, including credit cards, loans, motor and European retail. Commercial lending balances, meanwhile, increased by 0.3 billion in the first three months. Growth in our CIB and BCB franchise more than offset 0.5 billion of government-backed lending repayments in BCB. Turning to the liability franchise, again, we saw strong performance in Q1. Deposits grew by 5 billion or 1% in three months. Within this, we saw an increase of 2.7 billion quarter on quarter in retail deposits after seasonal impacts from tax payments. Savings accounts were up 1.5 billion and current accounts were up 1.2 billion. Within PCAs, churn continues to be offset by wage growth alongside subdued consumer spending. Commercial deposits were up 2.3 billion in Q1. This included some short-term inflows in CIB ahead of the tax year end. And alongside these developments, insurance, pensions and investments saw 0.8 billion of net new money in the first quarter, bringing assets under administration to 183 billion. Turning now to our income performance on slide five. The group saw continued income momentum in the first three months. Both NII and OOI showed good progress. Net interest income of 3.3 billion was 1% higher than the prior quarter, despite a lower day count and 3% higher than Q1 last year. This was in part driven by average interest-earning assets of 455.5 billion, up 0.4 billion in the quarter. The increase in AIEAs was lower than customer lending growth, largely due to mortgage completions being weighted towards the end of the quarter and lower lending to banks in commercial. Performance was also driven by the Q1 net interest margin of 303 basis points, up six basis points quarter on quarter. The margin benefited from the sustained structural hedge tailwind and probably a basis point or so of one-off impacts, for example, from the early redemption charges in mortgages. As you know, the structural hedge tailwind is strong. It generated 1.2 billion of interest income in the first quarter, up 30% year on year. Underpinning this, the hedge notional remains stable at 242 billion, reflecting the continued strength of our deposit base. The Q1 non-banking NII charge was 112 million, mainly driven by in-quarter activity flows and refinancing volumes. In 2025, we continue to expect total net interest income of around 13.5 billion. This includes 1.2 billion year-on-year growth in structural hedge income, offsetting mortgage refinancing and deposit churn impacts. Note that whilst we expect continued momentum in NII through the year, the quarterly contribution from key components such as the hedge, mortgages and deposits will not be constant across every period. Now turning to other income progress on slide six. OI of 1.5 billion is up 8% year on year, reflecting broad-based momentum across the franchise. In particular, growth versus prior year was driven by strong contributions from the motor business and general insurance. Versus the fourth quarter, CIB also showed strength. Driving this growth, as you would expect, we are seeing continued quarterly momentum in our strategic transformation. You can see some of these terrific developments on the slide. In the past few months, we've launched several propositions, including Blackhorse Flex Pay within our consumer business, embedded finance offering alongside an intermediary income protection proposition with an insurance in business and commercial banking we're scaling lloyd's bank connected our market leading digital services platform for bcp clients and meanwhile in equity investments lloyd's living is making continued progress operating lease depreciations are a charge of 355 million This is higher than the prior quarter, primarily driven by continued fleet growth, higher value vehicles and lower gains on disposal. We continue to work on ways to tightly manage operating lease depreciation going forward. And as usual, we'll revisit the fleet valuation at Q2. Let me now move to cost on slide seven. Cost discipline, as always, remains a key focus for the group. Q1 operating costs were 2.6 billion, up 6% on the prior year, and consistent with our planning assumptions. This was driven by front-loaded severance representing a charge of 200 million, some 80 million higher than Q1 of last year. We've deliberately taken this charge early in the year in order to accelerate cost efficiencies. Excluding the increase in severance, operating costs were up 3% year-on-year. Within this, ongoing investment and business growth, alongside the effects of inflation, continue to impact the cost base, partly mitigated by growing efficiency savings. We remain on track to deliver our 9.7 billion operating cost guidance for 2025, including the circa 100 billion impact of employers' NIC changes, which took effect from April. Pleasingly, there was no net remediation charge for the quarter. At the same time, 200 to 300 million remains our expectation for the full year. Putting all this together, the cost-to-income ratio for Q1 was 58.1%, influenced by severance costs alongside the annual BOE charge, as mentioned. Looking forward, we expect the ratio to decline through the course of this year. Let me now turn to asset quality in slide eight. Asset quality is resilient, reflecting prudent lending and healthy customer behaviours. Neutral areas remain low and stable across our portfolios, indeed with continued improvement seen in some areas such as mortgages. Early warning indicators are stable and benign, For example, minimum repayment levels in cards remain low, as are working capital utilization levels in commercial. In this context, the Q1 impairment charge was 309 million, equivalent to an asset quality ratio of 27 basis points. On a pre-MES basis, the asset quality ratio was 24 basis points, a stable underlying charge reflecting our resilient customer base and our prudent approach to risk. The 35 million net MES charge rests upon a base case of modestly lower growth for the UK versus our Q4 outlook. GDP expectations are for 0.8% growth in 2025, HPI of 1.7%, with unemployment peaking at 4.8%. Our Q1 base case assumptions incorporate a level of increased tariffs. As we closed Q1, it became apparent that the scale of these Therefore, the potential impact could be more extensive than assumed. Therefore, based on scenario analysis, we've added an additional 100 million central adjustment to accommodate this risk. We'll monitor developments and updates at Q2. The balance sheet is well positioned to cope with these economic uncertainties. Only very modest and highly rated parts of our commercial business are directly exposed to the U.S., And the quality of our UK business protects against any second order local impacts. As of Q1, our stock of ECLs on the balance sheet is 3.7 billion. This is about 450 million in excess of our base case. In sum, whilst we remain vigilant, the group is performing well. We continue to expect the asset quality ratio for 2025 to be circa 25 basis points. Let me now move on to slide nine and address ROTE and TNAV. Statutory profit after tax of 1.1 billion resulted in a robust return on tangible equity of 12.6% for the first quarter. We continue to expect a return on tangible equity of circa 13.5% for the full year. The volatility charge was 11 million. This was driven by the usual fair value unwind and amortization, partly offset by positive market volatility impacts. Tangible net assets per share were 54.4 pence, up two pence in Q1. The increase was driven by profit accumulation alongside the unwind of the cash flow hedge reserve. And looking ahead, we continue to expect material TNAV per share growth from profits and the cash flow hedge reserve unwind, supported by share count reduction from the buyback. Moving on, I'll turn to capital generation on slide 10. Underlying capital generation in Q1 was strong. Within this, risk-weighted assets increased by 5.5 billion to 230.1 billion. This reflects the impact of strong lending growth in the quarter, but also a temporary RWA increase of circa 2.5 billion, primarily related to hedging activity. This temporary increase is expected to reverse by the end of the third quarter. As you know, we continue to focus on RWA efficiency and optimization to help offset the impact of regulatory pressures and other growth, and we expect this to increase through the year. Capital generation was 27 basis points in the quarter. This is driven by a strong underlying banking build impacted by front-loaded severance and, as said, is also after the temporary RWA increase alone worth 14 basis points. Looking ahead, we continue to expect circa 175 basis points of capital generation for the full year. After 23 basis points of dividend accrual, our closing CET1 ratio for the quarter is 13.5%. We continue to expect pay down to a CET1 ratio of 13% by the end of 2026, with 2025 being a staging post towards that target. I'll now move on to slide 11 to wrap up the presentation. In the first quarter, the group delivered sustained strength in financial performance. Q1 again saw income growth alongside continued cost discipline and a resilient asset quality. This, in turn, led to strong underlying capital generation. Looking forward, we're well positioned for the future. We remain confident in our 2025 and 2026 guidance, as you've seen before and as laid out on this slide. Our strategic execution and differentiated business model underpins 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 be a brief pause while questions are being registered. Thank you. The first question is from Guy Stebbings at Exane BNP. Your line is unmuted. Please go ahead.