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.

Hi, morning, William. Thanks for taking the questions. Well, it's just one broad question, really, actually, on net interest income. It's clearly been a good start the year with NIM up six basis points in the quarter, good deposit trends, presumably only increasing your conviction on the hedge notion outlook and interest expense of the non-banking, but of course, again, maybe a bit better than expected. So I appreciate it's only one quarter into the year, and I don't think people would expect you to change guidance at this stage. But as you reflect on that 2025 NI guidance of 13.5 in, are you becoming more confident or sort of more upside versus downside risk from here? And then linked to that are two supplementaries. Can I just check if you're seeing any downward pressure on new mortgage completion application spreads this quarter versus prior quarters? And is that interest expense for non-banking book flattered in any way in Q1? Thank you.

Thanks, Rosh, for those questions, Guy. Three questions. I'll take them each step by step. Net interest income and our guidance of 13.5 billion for the year and what we've achieved in the first quarter of this year. You know, I think we're pleased overall with the performance in net interest income over the course of the first quarter, up 1% on a quarter by quarter basis at 3294, up 3% on a year on year basis versus quarter one 2024. So it's a decent start, and it's supported by the usual three elements. That is to say, decent performance in net interest margin, an uptick in AIAs, and actually an improvement versus the fourth quarter in non-banking net interest income. When we look at that going forward, therefore, Guy, off the back of that good start, we feel pretty good about the expectations and indeed our guidance for 13.5 billion. But it is, of course, early in the year. Just a comment on each of those. Net interest margin up six basis points over the course of the first quarter, 297 to 303. I mentioned in my comments just there that there was perhaps a basis point or so of basically ERC early redemption charges in connection with the good, very healthy mortgage performance that we saw in the first quarter. but we do expect that net interest margin to continue to tick up through the course of the year. It'll ebb and flow a little bit in terms of the precise quantum in any given quarter, but we expect it to tick up, and the first quarter was a good start. AIA is up just about 0.4 billion in the course of the first quarter, and as I mentioned, our lending was broad-based, but on the other hand, a good chunk of it, 4.8 billion in mortgages, was back-end loaded. So you should expect to see that AIA count tick up in the course of quarter two and thereafter beyond. And finally, non-banking debt interest income. That is a number which, as said, has come down slightly in the course of Q1 versus Q4. It is essentially funding an activity, and it will ebb and flow a little bit depending upon what gets refinanced in a given quarter, depending upon levels of, for example, CB activity. And indeed, in the course of the first quarter, at least, reflecting the fact that we had a strong quarter in LDC exits in quarter four. So all of those things added together, to answer your first question, Guy, we feel good about the 13.5 billion NI guidance for the year. It is early in the year. There are clearly some risks out there. The two that come to mind are there's a lot of discussion right now about precisely where interest rates will land and what type of bank base rate cuts we might see. Number one, I'm coming on to your second question in respect of mortgage spreads, which might be a second uncertainty. Number two, but as said, we feel pretty good about the guidance we've got out there right now. Secondly, mortgage spreads. We saw completion spreads of just a shade over 70 basis points in quarter one. That's a very small amount down from what we saw in quarter four, but not really a noticeable difference. In that context, as you know, we were able to secure really a very creditable mortgage performance, up 4.8 billion in the quarter, somewhere between 90% to 20% market share. But it is safe to say that a bit of that was probably front end loaded off the back of the anticipation of stamp duty changes, probably prompted also by interest rate reductions in the course of the quarter. And so I wouldn't expect that growth to carry on looking forward. Now, that's probably relevant to your mortgage spread point, which is to say, as we look forward, we are seeing a little bit more competition in the context of mortgage spreads in the market for quarter two and potentially at least beyond. It's not a transformational guy. It's not going to hugely change the picture. But at the margin, forgive the pun, it is probably slightly more competitive than what we saw in quarter one. Now, bear in mind that swaps are pretty volatile right now. And therefore, trying to figure out what the equilibrium landing point is for those mortgage spreads is a little tough. And so while we're seeing a slightly more competitive market, let's just see how that plays out. And I think the second point there is don't forget that we and other banks are all managing the market or managing the margin, I should say, a holistic way therefore if you do see mortgage spread pressure you're probably going to see some alleviation of that or some offset from that in respect of other balance sheet particularly potentially on the liability side your third question which i think i've probably largely answered actually guy in terms of nbnii as said slightly down in quarter one about 112 million we're not guiding to uh the mbni component as you know we're just going to net interest income right now but safe to say the comments that i made at the full year about NBNII expecting to be up over the course of this year versus last, we continue to expect that to be the case. So worth bearing in mind, it won't be up as much as it was 24 versus 23, but it will be up versus the sum total of 24. So hopefully that's helpful Guy for your three questions.

Thank you. The next caller is Arman Rakhar from Barclays Capital. Your line is unmuted. Please go ahead.

Hi, William. Thanks for the presentation and taking the questions. I had one on operating lease depreciation, please. I just wanted to get a sense of how much visibility you've got on lease depreciation. It feels like there's quite a few moving parts, some uncertainty around car value in light of tariffs and obviously It kind of came in a touch, touch ahead of where the street was in Q1. I don't want to overdo it, but just interested in how much conviction we can have in modeling that line item from here. And then the second question was around the ECL. Obviously, stable underlying performance. You've taken 100 million kind of overlay or post-balance sheet adjustment. I'm just interested in the thinking and the model that you've put in place to arrive at that number and what the direct impact on your business may or may not be. So I guess I'm specifically thinking about your corporate business, how you thought about how exposed that is to tariffs, please. Thank you so much.

Thanks for those questions, Aman. I'll take them in turn. Op lease depreciation, as you say, 355 million for quarter one. That's up about 24 million versus quarter four. A couple of points maybe I'll make on that. First is just to provide a bit of context. The op lease depreciation charge, as you know, is a necessary part of the transportation leasing business. In turn, we see that business is strategically critical, not just to the UK, but of course core to Lloyds Banking Group. And it is, to be clear, a very profitable and indeed growing business within our overall Lloyds Bank Group setup. We have, as you know, a series of different levers to address the market. Most importantly, those that are growing fastest amongst those levers are very profitable, very attractive propositions. And in that context, I'll mention Tusca, which, as you probably are aware, is a salary sacrifice scheme provider that we bought a couple of years ago now. where other operating income net of least appreciation is up 77 year on year and a really attractive rot so it's a relatively small part of our overall setup it's certainly a lot smaller than lex but that's where we're growing and that's where we're investing because it's attractive from a profitability point of view as well as most importantly serving an important customer need so i just thought it was useful to start off with that context now in the in the In relation to your question, Aman, Q1 charge up 24 million, quarter on quarter, 355. What's driving that growth is three things. Fleet size, number one. Higher value vehicles, number two. And then what is a weak quarter for gains and losses on disposal, number three. As you say, we don't guide to a full year number in respect of our police depreciation. But it is, I think, safe to say that as you look forward across the quarters coming forward, quarter two, quarter three, quarter four, and indeed beyond, it is not going to grow at the same pace as it did from quarter four into quarter one in every quarter. Now, what do we mean by that? First of all, the trends that are behind operating depreciation are in place and they should be welcomed. And what I mean by that is that this is part of a growing business that should therefore expect some operating depreciation growth and should be welcome as the business grows and it is other operating income generative and indeed profitable. That's the most important point. But then behind that, a couple of supplementary points, if you like. One is that we will, of course, need to consider used car price behavior at every half. And that is going to vary. That's part and parcel of the business, if you like. But at the same time, on that point, we are working on mitigants. Number one, lease extension. Number two, remarketing. Number three, auction partnerships. And all of those together will over time dampen growth and the volatility and indeed further enhance the profitability of the transportation business. So just stepping back, it is, from our point of view, a profitable business that is becoming more profitable indeed over time. And over time, likewise, will become more predictable. It is safe to say that for 2025, transportation operating income will significantly outstrip of these depreciation growth. And indeed, that business will produce an attractive return on capital. so we don't give guidance on this topic aman we're not going to change that but hopefully some of these comments both the context and particularities give you some sense of direction as we look forward second question about ecl important area of course you asked about our thinking in respect of the uh tariff charge that we have taken the central adjustment as we described it The first point to make might be to say, look, the right way to look at our multiple economic scenarios is the 35 million net MES charge that we've taken. What is going on within that charge is that we've got, number one, HPI, which turned out to be better than we'd expected, and number two, some wages growth. And all of those give us favorability in the context of our economic outlook. And then offsetting against that, we have looked at the tariff situation and taken an incremental 100 million above and beyond what is in our base case assumptions. Essentially, Aman, the right way to think about that is that we are trying to get ahead of the situation. trying to get ahead of the situation and so to describe that when we looked at the closing of the books at the end of march beginning of april it was apparent that there was quite a bit more uncertainty than we had initially expected in respect of the terrorist situation which ultimately culminated in so-called liberation day what we looked at as a result is a couple of different scenarios a benign scenario and if you like a less abundant benign scenario uh looked at what that might imply for the usual indicators gdp unemployment hpi all of those, and then take a view and weight those scenarios in a way that we thought was sensible. We then validated those, back-checked them, if you like, against what would it mean in terms of re-weighting upside versus downside, how does it look against our univariate sensitivities that you've seen before, this type of thing, just to try to validate the 100 million. But in sum, it is about getting ahead of the situation and about anticipating how this might turn out if it isn't quite as friendly, if you like, as we would all hope to be the case. To be very clear, this is not addressing any impacts that we're seeing today within our book. As we see the situation today, it's clearly a volatile one for sure. It is also driving sentiment, a little bit on the consumer side, certainly on the business side. But so far, at least, very limited impact on activity. Corporates, we see as being in a bit of a wait-and-see mode, number one. Retail, as you might imagine, basically unaffected. So overall, right now, we're not seeing any impact on activity. We're not seeing any impact from tariffs on the observed DCL charge, which, as you know, remains, as I commented in my script earlier on, remains at 24 basis points. No impact there. This is about getting ahead of what might develop and making sure that we are suitably provisioned. Now, ultimately, Lloyds Bank Group, by its very purpose of helping Britain prosper, is a UK-focused business. And so the direct exposure of the business to, let's say, the US, or for that matter, US exporters, is really very modest. To give you some idea on that, Iman, exposure to US exporters is around 1% of our loans and advances. Only 1% of our loans and advances. Really very modest. And that is typically to large investment-grade companies, who we would expect to see this as a bit of an earnings issue, but certainly not more than that. Beyond that, it's all about the second order impacts on the UK. And most of those, absent 100 million, are captured in our revised forecasts that we put forward as a base case and indeed the MES around that. So I hope that's helpful, Aman.

Thank you. The next question is from Ben Toms at RBC. Your line is unmuted. Please go ahead.

morning william thank you for taking my questions the first ones on deposits which continue to grow in q1 do you think that this strong growth in deposits can continue for the rest of the year and how do you think about the outlook the deposit liabilities and how it ties into fees into your structural hedge notional assumptions over the next couple of years and so secondly on other income the growth was eight percent year of year which kind of matches the two-year CAGR growth rate. Should we think about other income growing at the same pace as seen in the next couple of years as it has done in the last couple of years? Thank you.

Yeah. Thanks for those questions, Ben. First of all, on deposits, we are obviously pleased with the deposit performance in Q1. We really think it's a pretty good performance by the business, up 5 billion or 1% versus Q4. Roughly, well, 2.7 billion of that was in retail, 2.3 billion of that was in commercial. Just a comment on each of those. Retail, first of all, showed really good growth in terms of savings, 1.9 billion in terms of total retail savings contribution, and then also PCAs up, PCAs up 1.2 billion in the quarter, which is, again, a really pleasing performance. That's coming off the back of higher wage settlements, bank gyro credits from the government probably also subdued spending to be fair but overall that pattern of strong performance in savings up 1.9 billion strong performance in pca at 1.2 billion they're both contributing to the 2.7 billion of retail growth is pretty healthy and you know we're pretty pleased with it Commercial banking up 2.3 billion, but I think there is probably an element of temporary tax year end related flows within that commercial banking 2.3 billion. So worth bearing in mind. When we look at the deposit performance as we expect over the course of the remainder of this year, then take account of those factors. We certainly expect the deposit performance to continue to be good. We continue to expect deposit performance to go in the right direction for the remainder of this year. Retail looks like it's a set of pretty solid trends that we've seen there. Commercial, as said, has that slight timing impact overall in the particular 2.3 billion that we've seen there. But on the other hand, we do expect some gathering pace to take place in the course of BCB, for example. as we go through the course of this year. So stepping back overall within deposits, Ben, we see good picture in Q1 and continued positive trends for the remainder of this year. It may ebb and flow a little bit within the commercial area. Let's see. What does that mean for the structural hedge? Structural hedge balances, as you know, 242 billion. We had some discussion actually in Q1 about whether or not we should increase that balance off the back of the strength of the deposit performance that we've seen. And we decided for now just to hold back and see how things develop over Q2, Q3, Q4. The expectation is that we will indeed increase the structural hedge balance over the course of this year, but not by a huge amount. We don't have particularly ambitious or aggressive deposit expectations feeding into structural hedge income expectations, as I think we discussed at the full year. But we do expect it to tick up modestly, a couple of billion, something like that over the course of the year, maybe a bit more towards the end. Your second question, Ben, other operating income, We were up 8% in the course of Q1 versus Q4. Sorry, Q1 year-on-year versus Q1 of last year. It's good to see the breadth of the contribution that delivered that performance. So retail, number one, IP&I, number two, Lloyds Bank Group investments, number three, all of those contributed to a healthy development in that ROI pattern over the course of the quarter. If you look at it versus Q4, it's also up. It's up around 20 odd million or so. And there we've also got a contribution from CIB within the quarter. Looking forward through the combination of strategic investments that we have made, contributing to our greater than 1.5 billion expectation for revenues from those strategic investments, alongside what we expect to see is meaningfully, or let's say, appropriately robust activity levels amongst consumers, bearing in mind the tariff point I made earlier on, we expect to see other operating income continuing at roughly the same pace as we've seen over the course of quarter one. The edges around that, whether it'll be better or whether it'll be weaker, Ben, just around the edges of that will depend in turn upon how the macroeconomy goes and activity levels accordingly.

thank you the next question is from ed firth at abw your line is unmuted please go ahead yeah morning everybody and thanks for the questions um i just had two one was just picking up on on um firstly oii um you you mention uh in the text i think you talk about eight percent growth in oii but 16 growth in retail which i think is about half of oii so i assume either commercial or central or something was a little bit weaker. It would be helpful to have some flavor of how you balance back to the 8%, I guess, by divisions. That's my first question. And then the second question is about sort of inorganic activity. I guess all your peers now pretty much have bought something or other over the last few years or the last 18 months. And I'm just wondering how you think about that and how you think about that versus buybacks. I mean, there are obviously a number of potential buyers targets becoming available. And it would just be interesting to get your sense as to how you're looking at that, how you're looking at your capital position. I know you talked about going down to 13%. So I guess you've got a reasonably chunk of spec capacity there. Thanks very much.

Thanks, Ed. Taking those in turn, OI is set 8% up Q1 year on year, as per your comment, Ben. Ed, sorry. The Performance, as said, is broad-based, and that's good to see. Now, you commented there upon retail, which, as you say, has achieved a good, healthy growth level over the course of quarter one year on year. That's being led by two things, Ed. So, transportation being one, a little bit of favourability also in cards, which is good to see within retail. But actually, as said, the important point to note, the thing that's good, if you like, about the growth that we've seen is that it is broad-based. So IP&I is up some 8% Q1 year on year. Lloyds Bank Investments, Lloyds Living in particular, up 10% collectively over the course of quarter one year on year. So good diversified growth across the retail business, across the insurance business, across the Lloyds Banking investments, i.e. the equities businesses. Commercial also contributed, but it was principally in the quarter four versus quarter one time period. And the reason for that actually is essentially very simple, which is to say in quarter one of last year, we had a particularly strong performance period within CIB, largely relating to capital markets transactions, which for various different reasons were just particularly strong in the first quarter of last year. So year on year, CB is actually down a little bit year on year. But actually, if you look at it quarter on quarter, quarter four versus quarter one, it's up. so hopefully that gives you some sense of the divisional contributions as said broad based and i think that's what gives us confidence that as we move forward even if let's say some parts of the uh the business slow down if for example cib issuance or capital markets to slow down in a more volatile environment that would most likely be compensated by other areas the retail business the ipni business the lloyd central business or lbgi equities businesses for example Let's see how things evolve over the course of this year, but we take a lot of comfort from the fact that this is a broad-based, diversified set of businesses which are being grown off the back of significant strategic investments that we're making. Your second question, Ed, on inorganic. A couple of points to make there, perhaps. First of all, the business or the strategy, if you like, is, as you know, primarily organic. It's not to say that we won't look at M&A or inorganic opportunities. Indeed, I would say pretty much every opportunity that we've seen announced in the market is one that has come across our desks. And we've taken a look at and thought whether or not it made sense for us. And I suppose almost by definition, in each case, we have... decided that it doesn't make sense. And that's, in turn, a reflection of the confidence that we have in the organic strategy that we are undertaking and the confidence that we have in terms of deploying the investments internally to deliver our objectives. Now, again, you should never say never. And we will look at M&A opportunities if they come along and if they're sensible. But they will always be assessed against, does it deliver value for the shareholder? Does it do so on a basis that is faster than or at least as fast as the organic alternative? And does it do so at a level of risk that is lower than the organic alternative? So those three inputs, value, speed and risk, will always be the benchmarks against which we assess M&A. As said, we've seen a lot come across our desks in the course of the last year or so, but we have decided that these are not these are not opportunities if you like that we would pursue and instead we've chosen to focus on the organic strategy which you know as we stand here today we feel very positive and very confident about thank you the next question is from jonathan pierce at jeffries your line is unmuted please go ahead morning william um i've got two

Two questions. Sorry, coming back on interest income again. You suggested earlier in the year that non-interest income would be up high single digits this year and next year. We're seemingly recommitting to today. But also, I think that operating these depreciation would grow no more than that. Even if the charge stays at where we were in Q1, I think we're going to be up 10% year on year. 15-16% if you excel the residual value provision last year. The commentary you've given on OLD thus far is helpful, but can I invite you maybe to comment on where you see the net position coming out this year? Do you still think non-interest income net of operating lease depreciation can be up in the high single digits as well? Consensus, I think, is up about 9%, so it'd be helpful if you could comment on that. Just as a side point, though, before I come on to the second question, I wonder whether it might be helpful, given this continued focus on operating lease depreciation, to either net it in the broader commentary or to show us the operating lease rental income each quarter, because clearly that's a big driver of the gross non-interest income. That might be helpful to avoid this sort of examination every quarter. The second question is broader and it's surrounding next year. I mean, I guess, you know, in recent months, we've seen the swap rate come off a bit. We've obviously got this raising these depreciation point that I've just mentioned. Can you talk to next year, whether you still see the hedge revenue up 2.7 billion in total versus 2020? 24. um and if you can make that commentary in the context of you know the hedge notion or remaining you know broadly as you thought it but yeah so have these reductions in swap rates uh got you nervous with regards to next year's hedge revenue uh and you know bigger picture perhaps you'd be willing to repeat your confidence on this call in that sort of 20 billion plus revenue guidance for the one more revenue guidance, but implied revenue for the next year that was talked about at the full year results. Thank you very much.

Yeah, thanks, Jonathan. Just take each of those two in turn. Other operating income, as your question pointed out, up 8% year on year, quarter one this year versus quarter one last year. Looking forward, as per my earlier comments, we do expect other operating income to continue to keep up that type of pace over the course of the year. As said, you'll see some ebbing and flowing in respect of any given business line, but the diversification gives us considerable protection in that respect. And so the activity levels combined with strategic investments is what gives us the confidence in the 8% of operating income growth in quarter one being, if you like, more or less repeated over the course of the remainder of this year. You asked about the net, Jonathan, net other operating income expectations after having taken account of least appreciation. Now, as you know, we don't guide explicitly to either of these two numbers, but the short answer to your question is that, yes, we would expect to see other operating income net above least depreciation up, something that is roughly the same as our overall expectations for other operating income. Now, I mentioned earlier on what are two things that are going on in the business here, one of which is that the Use car price behavior if it needs to be taken into account at every half. That's just the way in which the business is run. And so any given quarterly progression may ever flow in that respect. Number two, that we're working on some important mitigants for least depreciation. I talked about lease extension, remarketing, auction partnerships. And I'd also talk about things like RV sharing with many of the manufacturers that are important partners for us in business. So, you know, all of these activities are in process. And it's that combination which is worth bearing in mind, which, as I say, may lead to a bit of quarterly ebbing and flowing on the point. But the bottom line there, Jonathan, is that our expectations for other operating income growth are essentially the same for other operating income and for other operating income net of operating depreciation. Once you take those timing effects that may vary into account. Your second question, Jonathan, in respect of hedge revenues, yes, we feel very comfortable about the overall net interest income guidance for 2025, and we feel very comfortable as to the greater than 15% RETE guidance and greater than 200 basis points capital generation guidance for 2026. In the course of the full year, we gave some guidance in respect to structural hedge growth, if you like. And we talked about an incremental 1.2 billion revenue growth from structural hedge this year, an incremental 1.5 billion on top of that for next year. And again, we feel very comfortable in reiterating that guidance. Why are we so comfortable? Well, it is resting upon, to be clear, the macroeconomic guidance that we have given you. Our base case macroeconomic inputs are important to that. but there is a certain amount of cushion, if you like, one side or the other from that. Now, what do I mean? I mean by that a couple of things. One is the fact that we are circa 90 to 95% locked in for this year, and we are then 80% plus locked in for our 2026 structural hedge contribution. So that's one of the things I mean. The second thing that I mean is that there is a level of terminal rates still in the market today, even after some of the downdraft that we've seen, which is a little in excess of our overall expectations. And then the third thing that I mean, Jonathan, is I just refer us back to the deposit performance we've enjoyed to date, which has been decent and strong even. And therefore, we take some comfort, if you like, from all of those two or three points that I've just made. And again, we feel very good about the expectations for ROT and capital generation consistent with our 26 guidance. If it turns out that all of a sudden interest rates, let's say, are upended in a way that transcends or goes beyond the comments that I've just made, then I think it's very likely that you're going to see some offsetting impacts in terms of pricing on other assets, let's say, which in turn compensate for some of what you might otherwise see. But in essence, Jonathan, for the types of environments that both we forecast and that we see today, we are comfortable as to the guidance we've got out there. Should it turn out to be more adverse than that, then as said, A, there's a certain amount of cushion, and B, we'd expect other compensating events or activities to take. Final point, Jonathan, is that when we look at the guidance for next year, this is less a net interest income point, more a ROT and capital generation point. Don't lose sight of the fact that much of the guidance rests upon not just net interest income, but also other operating income growth. Coming back to the first of your two questions.

Thank you. The next question is from Amit Goel at Mediobanker. Your line is unmuted. Please go ahead.

Hi, thank you. So first question I have is just around the severance charge that was taken in the quarter. So I just wanted to check how much more is left this year. And also, is there something we should kind of anticipate this level of severance kind of every year and what is kind of baked into the 2026 cost income. And then secondly, I was just curious, having now heard the Supreme Court case, appreciate we've got to wait for the judgment, but I was just kind of curious if there are anything from the arguments that were made Um, from, you know, the judges' responses, et cetera, that potentially make you, um, more or less confident or, or any change in, um, uh, kind of sentiment there. Um, and actually just, I mean, maybe small follow up, but, um, obviously there's been a bit of discussion about ring fencing. Um, I guess it's unlikely to see much change given Barclays are pushing back. Um, but just curious where you would see the opportunity. you know, if there were to be some scaling back, you know, whether that's through deployment of liquidity, it's slightly better yields, et cetera, but just any kind of thoughts there. Thank you.

Yeah, thanks, Hamid. Three questions there, and I'll take the opportunity on severance to comment a little bit more broadly on costs too. Your first question on severance. Severance, I think I said at the full year, is up roughly 30% 2025 versus 2024. I can't quite remember whether we have put numbers on it out there, but nonetheless, the overall severance bill for this year is somewhere around a kind of 280 type level, to give you some idea. What we've done is very deliberately front load that into the first quarter of 2025. And the reason for that is because we want to make sure that we get as much of a full year benefit from that severance charge as possible. That, in turn, is one of the factors, amongst others, that lead us to confidence for the 9.7 billion cost guidance that we have given you. When we look at that cost guidance, just to elaborate a little beyond that in terms of giving some insight on costs, stripping out the severance increase this quarter versus quarter one of 2024, first of all, if you strip that out, as said, costs are up 3%. Costs being up 3% is roughly what 9.7 is for the full year versus 9.4 for last year. Now in the overall cost makeup, we are seeing BAU costs pretty much flat over the course of the quarter. And the reason for the increasing costs over the course of the quarter is not just severance, but actually also increased investment levels. And it's those increased investment levels, which are again behind the confidence that we have in delivery of revenues but also ultimately delivery of further cost efficiencies leading to the 9.7 billion total. Final point on costs. As you know, cost discipline is a matter of utmost importance here. We have, I think, a good track record of delivering on our cost targets, and this year will be no different. What you've seen today so far is simply timing decisions, if you like, to ensure that we are able to get the full benefits of, in particular, the severance charge for the remainder of this year. Your second question, Supreme Court. We're pleased to see that Supreme Court expedited the hearing. It's, I think, a reflection of the fact they attach quite a lot of importance to the issue, as do we, and clearly as does the government. As I've discussed before, there are three main components of getting the uncertainties in respect of motor ironed out. One is, what are the legal determinations going to be? Two is, what is the FCA going to do with that in the context of any remediation scheme that it might see as appropriate? And then three is how do our customers respond to that? We've only had part one of those three take place so far. And indeed, we haven't seen the judgment. So at the moment, I mean, I think it would be inappropriate for us to comment too much upon some of the discussion that took place at the Supreme Court hearing. We'd rather just wait for the judgment as it comes out in July and then respond appropriately. And again, it will then depend upon a couple of further uncertainties, including in particular the FCA approach to this. Your final question on ring fencing. Ring fencing has obviously been the topic of some discussion over the course of the last few days. A good place to start is that there have been some reforms to date. Obviously the ski-up reforms have now or are in the process of taking place and we welcome those. They give a bit more flexibility in particular on non-UK activities and a bit more definition around what is de minimis. But at the same time, the ring fencing topic, as you know, we are the only jurisdiction in the world to have ring fencing. Since ring fencing was set up, there has been a lot of progression made in respect of capital levels, funding levels, liquidity levels, resolution mechanisms for banks that get themselves into trouble, derivative clearing, reduced market risk and so forth. All of those things have come a long way since ring fencing was set up. And so it does feel like an appropriate time to take stock of what ring fencing therefore contributes in the context of this much more effectively regulated sector and a much stronger prudential regime that's particularly important given the fact that we believe that ring fencing imposes costs upon our ability to serve customers in particular large customers where friction is added and where we think in many cases our lending capacity is somewhat diminished so a cost benefit approach if you like to what ring fencing now contributes net we think makes sense we'll see where it goes amid and where whether or not it makes any further progress, I should say, but it does feel like a discussion around it is appropriate.

Thank you. The next question is from Robin Downe at HSBC. The line is unmuted. Please go ahead.

Good morning, William. Hope you're well. I've got one One kind of request and then one question. The request is one that I've kind of made in the past, but with the structural hedge, would it be possible to get the disclosure to one extra decimal point? And I'm going to just kind of explain why that's kind of important to us, because if I annualize 1.2 billion for Q1, then I think you need something like 500 million of incremental structural hedge benefit to get to your kind of 1.2 billion uplift target. If we have 1.25 billion, then that drops to 300 million. So it does make quite a big difference in terms of trying to forecast where things are going to be over the next kind of few quarters and how much you might beat the 13.5 billion by. So that's kind of point one, I guess. Second question, Every time we have these calls, you seem to warn about things not being plain sailing, that there's going to be a degree of lumpiness. Or be the redemption kind of yield on maturing swaps. So can I just ask, is there anything that you would call out that you're worried about for Q2? Is there any particular reason why Q2 might be kind of different, why we shouldn't just kind of model straightforward

um you know kind of playing vanilla sort of progress in in nri um or is there anything else that you would call out that for q2 that maybe thanks uh thanks robin you dropped out one or two on one or two parts of your question but i think i caught the nub of it and perhaps you can um add on any further questions if i haven't quite captured it all In respect of the structural hedge disclosures, I suspect that we'll stick where we are in terms of the degree of detail, simply because we think it's more or less enough to work out where the bank is going. And then beyond that, you'll have your own assumptions about where markets will go, where rates will go, which will be more important than the second decimal place. From our perspective, at least, we feel very comfortable with the structural hedge forecast, if I can call them that, that we have put forward. The increase of 1.2 billion this year, the increase of 1.5 billion on top of that next year. And as said earlier on in response to Jonathan's questions, you know, whatever one might think around the edges, bear in mind that deposits performance has been pretty strong, which gives us a bit of comfort in terms of where the quantum might go. And actually, to date, the last couple of weeks or so, notwithstanding, have been pretty strong, which gives us a bit of comfort in terms of the extent to which we've been able to get locked in on our projections going forward. I mentioned earlier on that if we see a particularly adverse rates environment develop well beyond current market expectations, then you might expect to see less churn in deposits, for example. You might expect to see mortgage spreads being a bit less competitive, for example. So we'll see. But for the types of environments that we're we're in than we expect, we feel very comfortable with the structural hedge forecasts, you know, in a way that goes beyond the second decimal place, I suppose. You then asked about lumpiness within hedge forecasts going forward, Robin. The hedge will make a, it made a strong contribution to the margin in quarter one, first of all, as you know, some 10 basis points or so. And then as we look forward, that contribution is going to even flow a little bit over the course of the quarters. I think just to give you some very kind of informal sense of where that is going. It's probably a bit less in the course of quarter two. Actually, if you look right at the back end of the year, it's really strong again. So it is going to come and go a little bit during the course of the quarters. The reason behind that is mainly because maturities vary in terms of quantum in any given quarter. And as importantly, yield in those maturities varies in any given quarter. And so as a result, this hedge was put on over multiple years, as you know. But as a result, you're going to get a contribution from the hedge that is going to ebb and flow in the a little bit quarter by quarter, but over the course of the year in totality is what gives us confidence, if you like, in the circa 13.5% net interest income guidance that we've given.

Great. I mean, my point with regards to the extra decimal place is less about kind of whether you can deliver the 1.2 billion, but more just if we take that 1.2 billion as read, which I think we should given the amount you've already got locked in. how much more there is to go for in Q2 to Q4. Because if I take your NRI for Q1 and align for your kind of basis point, you're analyzing at 13.3 billion, you're only 200 million away from kind of hitting the 13.5 target for the year. So you don't need to do a great deal incrementally in Q2 to Q4. And if we've got, you know, 500 million structural hedge benefits still to kind of crystallize, then that makes quite a big difference versus a 300 million benefit for structural hedge still to crystallize. It's more about giving us a bit of a help here. I can't see any reason why you wouldn't add one decimal point.

RAOUL PALMIDELLA- Well, let us take that away, Robin. I suspect we may come back with the same point, but we'll certainly take it away. The overall point that I think you're making, which we would concur with, is that we've made a good start to this year. that we feel pretty good, as said, about the 13.5 billion. It is a good start to the year. Quarter one went well. There are some positives. We talked about deposits. We talked about rates. Clearly, there's some risks, bank base rate cuts, mortgages, as mentioned earlier on. It is early in the year. There is a way to go. But as said, we feel very confident about the guidance we've given you.

Yeah, great. Thank you.

Thank you, Robin.

Thank you. The next caller is Andrew Coombs from Citi. The line is unmuted. Please go ahead.

Morning, I'm going to ask a couple of questions, but with regards to actually your Q2 results and just conceptually how you're thinking about things in terms of the timing of when you book charges or reversals. So starting with motor finance, we should get the Supreme Court judgment in July. But then the FCA redress scheme probably isn't going to be announced until up to six weeks after that. And your Q2 results are probably going to be smack bang in the middle of those two events. So is it a case of you take two adjustments through your provisioning line based upon those outcomes or do you just wait and take one? And then secondly, with regards to tariffs, I was interested in the line that states you've taken 100 million central adjustment. from what was announced in the first few days of April, but subsequent developments through the rest of April were after the balance sheet date and will be reflected in the second quarter reporting period. So is it a case that the delay in introducing a number of those tariffs is not factored in but might be factored in next time? Likewise, if the UK 10% gets negotiated down, you'd adjust accordingly as well. Is that the case?

Yeah. Yeah. Thanks, Andrew, for the questions. First of all, in relation to the Supreme Court situation and judgment therefrom, it is just briefly worth saying that in the context of both your question, Andrew, and also the prior one, the 1.15 billion remains our best estimate for the motor issue. We'll see where the Supreme Court judgment gets to most probably towards the end of July, as you highlighted, Andrew, and your point around timing has not escaped our attention as well. It is very likely that what the Supreme Court hands down is then subject to significant interpretation by the FCA in the context of their address scheme. And therefore it's going to be, I suspect, quite difficult, no matter what the timing of the Supreme Court judgment is, it's going to be quite difficult for us to form a terribly much more refined opinion of where this lands, absent having seen where the FCA comes out. Now, that is a point that is, if you like, that has a perimeter attached to it. That is to say, there are some Supreme Court rulings which either completely overturn the Court of Appeals ruling or some Supreme Court rulings which completely endorse every aspect of the Court of Appeals ruling that might not survive the comment that I have just made. That is to say, you might take a look at those and think, hmm, that's interesting. Am I going to respond to that? But by and large, the majority, if you like, of outcomes that may come out of the Supreme Court, I think, are covered by the point that you'd want to see what the FCA interpretation is for those outcomes before you started to adjust provisions. And that, in turn, means that it is likely to be, let's say, Q3. But even then, you have a question mark, Andrew, about what exactly it is the FCA does at that point in time. Does it launch a consultation period? And do you have to wait for the close of that consultation period to really figure out where this might go? So there's a bit of time, I think, to play out before it is really sensible to respond. But again, I come back to my first point, which is to say, based upon everything that we see out there today, 1.15 billion very much remains our best estimate of the potential provision associated with the motor situation. And we'll see how things unfold. Your second question, Andrew, is actually quite a welcome one in the context of the tariffs, because The NES charge that we've taken of net 35 million, and in particular, the 100 million tariff charge in that context, a couple of points to make there. One is it's basically temporary. We'll take account of it as your question applied in Q2. And what I mean by that is that we will integrate that 100 million into our base case assumptions in Q2. And the second point, which is really important to bear in mind there, is that We took this charge at a time when there was kind of maximum volatility, if you like, in the context of the tariffs. And there was a lot of fairly adverse cases coming out, which is what caused us to have the debate, what prompted the discussion, if you like. If it turns out the tariff debate goes into abeyance or something similar, as has been talked about a little bit since then, then I suspect a good part of that 100 million may not be necessary. But of course, it's quite difficult to make that judgment today when the situation is quite so volatile. It comes back to the point I was trying to make earlier on, Andrew, which is to say we're trying to get ahead of the situation. We're trying to get ahead of the situation in a way that, as you'd expect from us, is kind of suitably prudent in order to avoid having bumps in the road in the future. That's the philosophy behind it. If it turns out that some of the trends that we've seen since Liberation Day in terms of quieting down the tariff debates do in fact get hold, then, as said, that 100 million is probably going to be reconsidered in that context.

Thank you. Thanks, Andrew. Thank you. The next question is from Chris Kant at Autonomous. If your line is unmuted, please go ahead.

Good morning. Thanks for taking my questions. I'd want a very quick request on something you said about fleet revaluation, just a point of clarification, and then two others on fleet. You mentioned that in your remarks. I don't know whether you're trying to flag to us, William, that you're expecting some kind of adverse adjustment there when you next revisit that. I appreciate you do it half yearly, but presumably you have a bit of line of sight on how used car prices are trending on your view. Just wondering whether you are trying to flag a potential 2Q residual value top up there. And then on the CIB and stage three. There's a bit of a pick up in your stage three in the CIB in the first quarter. I appreciate that you've made changes to your maps, but I thought that that would just impact stage two migration, not migration into stage three. So is there anything to call out in terms of book trends with with flows into stage three, please, on the corporate book and then completely unrelated on mortgage spreads? Just thinking longer term. I appreciate your commentary about a little bit of additional competition coming through 2Q thus far. As you look out to the future, if I think back to the last strategic plan, I think you were talking about 80 to 100 bits, assuming 2% base rate or something of that order of magnitude. We're now expecting still meaningfully higher base rate levels than that, meaningfully higher levels of deposit profitability than that. How much lower than the sort of 70 would you be happy going in light of the fact that you're expecting much better overall liability and sort of hedged income dynamics? Thank you.

Yeah, thank you for those questions, Chris. Just to take them one by one. First of all, on Q2 revaluation, as said, We need to consider used car price behavior at every half. That, as I said earlier on, is the business model. Look at the half year, and we look at the full year. when we look at it we will take account of performance of used car prices today to give you some idea on that q1 so far we've seen electric vehicles down about 1.7 percent uh we've seen internal combustion engines actually up 2.4 percent um so bev's probably a little bit weaker than our expectations internal combustion engines probably at least as good as our expectations We are expecting in the context of our depreciation schedules, electric vehicles actually to be down year on year, somewhere between four to 5% in totality year on year. So we have to see how that goes. But at the moment, at least you can see how that's tracking. And then we expect internal combustion engines to be more or less flat over the course of the year. So that's probably tracking a bit better than we expected. We just have to see where we end up at the half year. Safe to say that, as said, we'll be doing the regular exercise. Now, at the same time, as mentioned earlier on, we're working hard, the business is working hard on mitigants for our police depreciation and indeed in the spirit of increasing levels of profitability for our motor business as a whole. So those lease extension, remarketing, auction partnership points that I made earlier on, together with RV sharing, are all, if you like, factors that will push against any revaluation requirements that might be there. What the net of that is, I think we just have to see at the quarter, Chris. It's just too early to say right now. They are important strategic measurements, not just for that, however, but if we can get them right, if we can get that lease extension remarketing activity in the right place, then they will contribute to the overall profitability of the business on a look-forward basis. You mentioned CIB and in particular stage three charges on, sorry, not stage three charges, but rather stage three numbers on CIB or CB. Chris, as you say, CB stage three has gone up a little bit over the course of the third quarter. It's pretty modest, but it relates to two particular cases in the context of fibre, which is a sector which has had a little bit of trouble lately. We lend a little bit into that, not a great deal, but that's what's behind the slight increase in Stage 3 CB. You'll look at the coverage levels there also, Chris, and hopefully draw a bit of comfort from the fact that they're basically the same quarter on quarter. And actually, if you look at the balance sheet as a whole, it's gone up from a coverage level quarter on quarter. Finally, mortgage spreads. We are currently just a shade above 70 basis points in terms of completion spreads at quarter one. As we look forward, as I highlighted earlier on, probably a little bit of pressure on that in the course of quarter two and maybe beyond, but not terribly much, Chris. I mean, I really wouldn't want to overstate the point. How much further would we go there? I think it's an interesting comment because it obviously depends upon the holistic margin that we look at for the balance sheet as a whole. And as I said, that is going meaningfully in the right direction, 297 to 303, up six basis points. But for us, it also depends upon the successful completion of our strategy. So what do I mean by that? We've managed It's a significantly increased protection volumes in the context of mortgages, for example. And that's important because it means that a mortgage relationship transcends the 70 basis point spread that you might get. It's much more of a holistic Lloyds Banking Group relationship that has attractive and profitable earning streams from other products in addition to the mortgage when you secure that mortgage relationship. Related to that, we put an awful lot of our strategic investments money into something called the home ecosystem, which is intended to improve the direct relationships, the direct sales, for want of a better word, of mortgages to our customers, which in turn are more profitable. They also offer the opportunity to get into a broader dialogue with our customers across our product range, whether that is banking products or insurance products. And so, Chris, it's about much more than the 70 basis points. It's about the holistic spread on the balance sheet number one. It's also about the successful completion of our strategy, which, as you know, is about broadening and deepening our relationships, which then materially augment the mortgage spread that you might get on any given product.

We have now reached the end of the allotted time. So this is 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, Ben Cavan-Roberts at Goldman Sachs.

Morning, and thanks very much for taking my questions. Just two, please. First on capital, could you please provide some more details on the FX hedging impact this quarter and just how that works mechanically? And if there's a scenario where that 14 basis points could effectively change in the course of its reversal? And then just a follow-up a bit on the mortgages. Obviously, you mentioned the fact that there is a stamp duty effect to be expected in Q2, but just wondering how you're thinking about the longer-term factors driving demand in that channel and how much re-leveraging effectively could be reasonable in the UK over the longer term. Thanks.

Thanks, Ben. In relation to the FX hedging and temporary RWAs, I mean, in essence, temporary RWA is of some 2.5 billion or an RWA increase of 5.5 billion. That number is pretty much in place and going to stay in place. So you should expect that 2.5 billion to come off primarily as a result of that hedging coming off over the course of quarter two and then into quarter three. And it'll be done by the end of quarter three. That number of 14 basis points, Ben, it's not just the hedging. It's a couple of other pretty minor pieces, but the hedging is by far the bulk of it. And as I said, the 14 basis points in totality is pretty much a done number. And therefore, the lending and other factors that are going on beneath that suggest RWA increases of about 3 billion. And that is all good, healthy, profitable income generating lending growth. which in turn helps in terms of the income build and indeed capital generation for the business in the periods hereafter. On mortgages, as said, I think there was some pull forward in the course of quarter one versus what we might expect to see in quarter two in mortgages. That will affect quarter two most likely. It may affect a little bit quarters thereafter. You know, we'll see. I think behind all of this is, I suppose... cyclical and structural factors, cyclical factors, which, you know, let's see how the year plays out. But based upon our expectations of falling interest rates, number one, HPI growth, I think we've now got it at 1.7%, number two. And, you know, not exactly fast, but nonetheless, at least a growth proposition in the context of GDP. That is overall a supportive environment for further growth in mortgages. And as a 19%, 20% lender, market share-wise, we would expect to be a big part of that. There is then a structural point, which is that, as you know, we have a situation in the UK of basically a housing shortage. We also have a situation where the government is committed to growing the housing stock in the country and is taking several measures to ensure that is achieved in practice. Both of those two factors, together with demographic growth, i.e. population growth, are supportive of sustained growth in mortgages going forward. So the cyclical factors, the structural factors, probably more or less point in the same direction, which is supportive of growth, Ben. The very short-term kind of, you know, puts and takes, if you like, stamp duty being one of them, may paint a slightly different picture, let's say quarter two versus quarter one at least.

Very clear. Thank you.

Thanks, Ben.

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