Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group 2025 Half Year Results Call. At this time, all participants are in a listen-only mode. There will be presentations from Charlie Nunn and William Chalmers, followed by a question and answer session. If you whisk to ask a question, please press star 1 on your telephone. Please note this call is scheduled for 90 minutes and is being recorded. I will now hand over to Charlie Nunn. Please go ahead.

Thank you operator and good morning everyone and thank you for joining our 2025 half year results presentation. I'll begin today with an overview of our financial and strategic performance where we've continued to make strong progress, having moved into the second phase of our transformation at the beginning of the year. I'll then hand over to William will run through the financials in detail before we take your questions. Let me begin on slide three. I'd like to start by highlighting the following key messages. Firstly, we're continuing to deliver strong outcomes for all stakeholders. Our strategy is providing our customers with leading propositions and supporting the real economy, creating attractive growth opportunities and improved operating leverage across the group. We're on track to meet our 2026 targeted strategic outcomes. Secondly, we continue to demonstrate broad-based and sustained strength in financial performance. This has enabled continued improvement in shareholder distributions, with the ordinary dividend up 15% at the interim stage. And finally, we remain confident of delivering higher, more sustainable returns. We are reaffirming our guidance for 2025 and remain confident in our 2026 commitments. On slide four, I'll provide a few examples of how we're successfully delivering for all stakeholders. We continue to build a highly differentiated franchise. Our purpose is embedded throughout our business and is driving sustainable and profitable growth. For example, we continue to take a leading role in supporting the critically important housing sector, lending more than £8 billion to first-time buyers and supporting over £1 billion of funding to the social housing sector in the first half. At the same time, we're delivering growth through our strategic initiatives in a number of areas. This includes significantly increasing our penetration of protection products for mortgage customers and gaining share in sterling interest rate swaps. This business momentum is underpinning our sustained strength in financial performance. We delivered growth across both sides of the balance sheet and a 6% increase in net income, including ongoing OOI strength, up 9% in the first half. This supported a return on tangible equity of 14.1% for the half and 86 basis points of capital generation. Our highly capital-generative business model is a key enabler to increasing shareholder distributions. Before covering our strategic progress in the first half in more detail, I'll briefly highlight on slide five why we believe the external environment provides a supportive backdrop to our plans over the coming years. Our current forecast for the UK remains one of a resilient but slower growth economy. William will provide more detail on our latest estimates shortly. The economic environment and uncertainty remains difficult for some of our customers. However, the underlying fundamentals continue to strengthen, and alongside new policy measures, we see the opportunity for the economy to move to a higher growth trajectory than is forecast today over the medium term. To elaborate on this, I'd highlight the following key points. Firstly, the underlying health of the economy remains robust, households and businesses' finances have further strengthened in the first half, and business confidence remains above the long-term average. There is scope for increased activity as confidence further improves and rates fall. Secondly, the government has placed a clear focus on growth. The recently launched industrial strategy will provide significant investment into faster-growing and high-potential sectors, and we welcome the ambition of the announced financial services reforms we are well positioned to be an important partner to both sets of plans. And finally, despite significant geopolitical uncertainty in recent months, the UK is well placed to navigate any headwinds relative to other economies and remains an attractive destination for foreign direct investment. Taken together, we are constructive on the outlook for the UK economy with our strategy focused on faster growing areas such as housing, transition finance, infrastructure and pensions. As such, we see the potential for the group to continue to grow faster than the wider economy over the coming years. Let me now cover some examples of the growth we are driving for our strategic initiatives on slide six. In February, we provided more details on how we're accelerating our transformation in the second phase over 2025 and 26. We've delivered strong progress in the first half of the year and are on track to achieve our 26 targeted strategic outcomes. We're delivering on our growth priorities with meaningful contributions from all divisions and increasing synergies between them. In retail, we're winning market share and lending, deepening relationships, and growing high-value areas, such as through our new Lloyds Premier offering, following a successful launch in May. In commercial banking, we're digitising and driving OOI creative diversification, gaining share in priority areas. And in IP&I, we're transforming engagement and increasing group connectivity. We now have more than half a million users of our Scottish Widows app, and are expanding our product set for retail customers, proving our bank assurance model. We continue to expect to deliver more than £1.5 billion of additional revenues from strategic initiatives by 2026, with over £1 billion delivered to date on an annualised basis. Now, turning to cost and capital efficiency on slide 7. Alongside growing revenues, our commitment to efficiency is paramount to driving sustained operating leverage. We continue to focus on increasing productivity as our customers shift to mobile first, as well as decreasing costs associated with our reducing legacy technology estate. Having surpassed our original target in the first phase, we realized another £300 million of gross cost savings in the first half, taking the total to circa £1.5 billion since 2021. At the same time, we're continuing to improve capital efficiency through growth in fee-generating capital light areas and further scaling of SRTs and new origination capabilities. This supported more than £2 billion of additional RWA optimisation in the first half, taking the total to circa £20 billion since 2021. Our continued strong progress in these areas underpins our confidence in delivering a cost to income ratio of below 50% and more than 200 basis points of capital generation in 2026. Moving on to our enablers on slide 8. Our track record of digital, AI, and data investment is unlocking a competitive advantage, with leadership in this area being critical to long-term success. Significantly rationalizing and modernizing our state in the first phase of our plan has created the capacity to increasingly shift our focus to driving revenue growth and further efficiency savings across three areas. Firstly, we're delivering leading experiences to our nearly 21 million mobile app users to drive increased engagement and build deeper relationships. Secondly, we're broadening our addressable revenue base by growing beyond financial services, such as through home and travel ecosystems and our marked intelligence data propositions. And thirdly, we're digitizing front to back through improved journeys and increased automation, reducing unit costs and the cost of change. Looking ahead, our multi-year investment in leading engineering talent is helping us to increase adoption of our new technologies that will drive the next stage of our transformation. To this end, we're building upon our existing AI leadership position with more than 800 AI models live today by developing and scaling a significant number of exciting generative and agentic AI use cases across the group. For example, over 10,000 frontline colleagues are currently using our GenAI knowledge management tool to help them support customers better and more effectively. We will share more details on these and our broader technology and data strategy in an investor seminar later this year. Let me now close on slide 9. We continue to successfully execute against our strategy and are on track to deliver our 2026 targeted outcomes. This reinforces our confidence in meeting our 2026 financial commitments, with significant operating leverage supporting a return on tangible equity of greater than 15% and greater than 200 basis points of capital generation. Thank you for listening. I'll now hand over to William to talk you through the financials in more detail.

Thank you, Charlie. Good morning, everyone, and thanks again for joining. As usual, let me start with an overview of the financials on slide 11. Lloyds Banking Group demonstrated sustained strength in financial performance during the first six months of the year. Statutory profit after tax in the first half was $2.5 billion, with a return on tangible equity of 14.1%. Net income of $8.9 billion was 6% higher than the prior year. This was driven by continued momentum in net interest income, alongside 9% year-on-year growth in other operating income. We remain committed to efficiency. H1 operating costs of 4.9 billion were up 4% year on year in line with our expectations for this stage. Asset quality meanwhile remains robust. H1 impairment charge of 442 million equates to an asset quality ratio of 19 basis points. Our performance resulted in strong capital generation of 86 basis points in the first half. This supports our 15% increase in the interim dividend alongside our closing pro forma TET1 ratio of 13.8%. I'll now turn to slide 12 to look at developments in our customer franchise. Our customer balances showed good growth in the first six months across both the lending and the deposit franchise. Focusing on Q2, group lending balances of £471 billion were up £4.8 billion, or 1% versus Q1. We saw broad base growth across all of our lending activities. Within retail, loans and advances were up £3.1 billion. Mortgage book is up £0.8 billion since March, reflecting accelerated growth in the first quarter driven by stamp duty changes. In this context, it's good to see volumes picking up again in June. Elsewhere in retail business, we saw continued and broad-based growth across each of our cards, loans, and motor businesses, as well as European retail. Commercial lending balances were also up in Q2 by 0.9 billion. Within this, we saw growth in CIB, particularly infrastructure and SPG lending. In BCV, net repayments were driven by government-backed lending balances. Excluding these, it's good to see the private lending business growing in the first six months, including in Q2. Turning to the liability franchise, again, we saw a good performance in deposits, up 6.2 billion, or 1% in Q2, now standing at 494 billion. Retail increased by 1 billion, notably savings accounts were up 2.9 billion, following significant inflows to ISA products in what was a very strong season, offset by current accounts down 1.9 billion, largely reflecting the same flows. Post-tax year end, ISA-driven migration is now of course slowing. Commercial deposits were up in Q2 by 5.3 billion, This was driven by growth in targeted sectors across both CIB and BCB. Alongside the deposit developments in banking, we continue to see steady AUM growth in insurance, pensions, and investments, with circa 2 billion of net new money in Q2. Turning to net interest income on slide 13. Net interest income grew 5% in the first half to 6.7 billion. This included 3.4 billion in Q2, growth of 2% versus the prior quarter. Income growth continues to be supported by positive momentum in the net interest margin, with the Q2 margin of 304 basis points up slightly on Q1. The mortgage refinancing and deposit churn headwinds continue to be more than offset by a growing structural hedge contribution. NII was further supported by AIEAs of £460 billion in Q2, up £4.5 billion versus Q1. The increase was driven by the impact of strong mortgage growth towards the end of the first quarter. The Q2 non-banking NII charge was £124 million, slightly up quarter on quarter, in line with our expectations for an upward trajectory across the year. As usual, this is driven by business growth in AOI and associated funding repricing. Looking ahead, we continue to expect net interest income for 2025 to be circa $13.5 billion. H2 growth will be driven by gradual margin improvements and AIEA growth from franchise expansion. Let's turn to the mortgage portfolio on slide 14. The mortgage book now stands at 318 billion. This is up 5.6 billion in H1 and 0.8 billion in Q2. Increased mortgage balances are a result of healthy underlying market demand, as well as our strategic initiatives in this area, helping to support a 19% market share of net new lending in the first half. In Q2, completion margins averaged around 70 basis points, slightly tighter than the prior quarter. Maturities in the book, meanwhile, remain higher at just over 90 basis points. Based on current applications, we expect the market to remain competitive and completion margins to be at or around Q2 levels in the second half. Needless to say, this will depend on short-rate volatility, competitive dynamics, and no doubt product margins elsewhere. As Charlie mentioned, we continue to enhance our depth of customer relationships in mortgages, including across business areas. 20% of new mortgage customers now take up protection insurance, an increase of 7 percentage points versus last year. We also recently launched a new digital remortgage journey, delivering an increased share of direct-to-bank applications, up 4 percentage points to 25% in H1. Together, these initiatives help offset margin pressure. Now looking at the other lending books on slide 15. Consumer lending balances are performing well. Within both cards and loans, our strategic investment in tools such as Your Credit Score, used by 4.8 million customers in the last three months alone, is enabling us to drive growth by leveraging data to enhance decision-making and personalisation. Accompanied by an improved risk scorecard, this has supported growth in our personal loans business, with balances up £0.8 billion since year-end. Alongside, cards balances were up £0.7 billion, and motor finance lending by the same. In the commercial book, lending balances increased by 1.2 billion in the first half. This was driven by growth of 1.8 billion in the CIB business, particularly institutional balances alongside securitized products. In BCB, balances were down 0.6 billion, but as said earlier, up 0.2 billion when adding back government-backed lending repayments. Delivery of the initiatives highlighted in Charlie's section earlier, such as mobile onboarding for SME clients, is clearly having an impact here. Moving on to deposits on slide 16. Our deposit franchise grew strongly in the first half of the year. Total deposits are up by 11.2 billion, or 2%, to 494 billion. Within this, retail deposits increased by 3.7 billion. Continued growth in savings balance is more than offset current account reductions. Retail savings were up 4.9 billion, supported by net new money inflows and strong retention activity. This included a strong performance throughout what was a busy ISA season, up 30% on last year. Notably, our existing and new ISA customers are valuable to us, with average product holdings of almost two times the group average. Current account balances, meanwhile, fell slightly in the first half, by 0.7 billion. Flows were driven by switches to savings, including ISAs, whilst wage growth and spend remained broadly stable. Pleasingly, commercial deposits increased in H1 by $7.6 billion, driven by growth in targeted sectors across both BCB and CIB. As you are aware, our deposit franchise supports a structural hedge, which I will now update on. Our structural hedge continues to provide a significant and growing tailwind to income. The hedge notional currently stands at $244 billion, up $2 billion in Q2. This follows strong deposit performance in the first half. In H1, we saw gross hedge income of $2.6 billion, around $0.7 billion higher than last year. The average earnings rate on the hedge was circa 2.2%. The reinvestment rate for maturities, meanwhile, continues to be significantly higher than this. At around three and a half years, the weighted average life of the hedge provides strong support for income going forward. Looking ahead, we continue to expect 2025 hedge income to be around £1.2 billion higher versus 2024. We also continue to expect 2026 hedge income to be around £1.5 billion higher than 2025. Moving on to other income on slide 18. We continue to build momentum in other income across the franchise. Other income of 3 billion in the first half was up 9% on H1 last year. This included 1.5 billion in the second quarter, also 9% higher year on year. Pleasingly, this growth is driven by broad-based momentum across the business linked to our strategic initiatives as well as BAU growth. Within retail, 11% growth versus the prior year was supported by higher income from personal current accounts and continued strength in our motor leasing business. In commercial, year-on-year strength in transaction banking income was offset by lower loan markets activity. Having said that, more recently we've seen a healthy rebound in client activity levels. Insurance pensions and investments delivered a strong performance in the first half, up 6% year-on-year. General insurance did particularly well, with income net of claims up 35%. Member contributions in workplace pensions, meanwhile, also saw good momentum. In equity investments, Lloyds Living is developing well, with income up 19% year-on-year, alongside LDC growth. Looking forward, we continue to expect strategic investment and BAU activity to drive ongoing growth in other income. Turning to operating lease appreciation. The first half charge of $710 million included $355 million in Q2, flat on Q1. This is a good result in the context of further adverse movements in used car prices, particularly electric vehicles, over the second quarter. As mentioned at Q1, we implemented a number of significant strategic actions which have improved business performance and helped offset the impact of both asset growth and car price movements. These include enhanced used car leasing, remarketing agreements and risk sharing with OEMs, Together, these should meaningfully reduce volatility in operating lease appreciation going forward. Moving to costs on slide 19. The group continues to maintain strong cost discipline. H1 operating costs were 4.9 billion, up 4% on the prior year, or 2% excluding the previously disclosed front-loaded severance charges in Q1. Second quarter costs of 2.3 billion are down on quarter one, partly helped by investment timing, including lower severance charges. Overall operating costs are tracking in line with full year expectations, with business growth and inflationary impacts, including national insurance, partially mitigated by savings driven by our strategic investments. The continued pace of these investment-driven savings, including reduced cost of change, as Charlie highlighted, alongside income growth, gives us confidence in operational leverage and our medium-term cost-of-income ambitions. Looking ahead, we continue to expect operating costs of circa £9.7 billion for the full year. Remediation remains low at £37 million in the quarter. There was no further charge for motor finance. Let me move to asset quality on slide 20. Asset quality remains robust. Credit quality was stable in the period, with either stable or improving new to arrears seen across our portfolios. Similarly, early warning indicators remain low and stable. For example, minimum repayment levels in cards remain modest, as do RCF utilisation levels in commercial. The first half impairment charge was $442 million, equating to an asset quality ratio of 19 basis points. Indeed, the second quarter continued the benign trends of the first, with a pre-NES asset quality ratio of 15 basis points. In Q2, there was an NES release of $44 million. This consisted of the removal and integration of the Q1 $100 million charge to cover tariff risks into our base case assumptions. Alongside, we saw a benefit from improvements to the HPI outlook in retail. Together, the observed performance in MES outcome resulted in a low Q2 impairment charge of $133 million, with an asset quality ratio of 11 basis points. Our stock of ECLs on the balance sheet is now $3.5 billion, remaining circa $400 million above our base case. We are very confident in the balance sheet, given our prime customer base and a prudent approach to risk. We continue to expect the asset quality ratio to be circa 25 basis points for the full year. Let me briefly update on our latest economic assumptions. We have made minor changes to our macroeconomic forecast since Q1. We now expect 1% growth in GDP in 2025 and a similar level in 2026, slightly lower than previously forecast. We now expect unemployment to rise a little further, peaking at 5% in 2026. Given this context, we now assume two further rate cuts in 2025 and one in 2026 to a terminal rate of 3.5%. Our assumptions for house prices, meanwhile, have improved, largely reflecting SCA affordability changes. Let me now address returns in QNAV on slide 22. The return on tangible equity of 14.1% in the first half is a strong performance, turning 15.5% in Q2. Within the H1 performance, the volatility in other items charge of 48 million was driven by negative insurance volatility and the usual fair value unwind, partly offset by gains on the sale of our bulk annuities business, which completed in the second quarter. Tangible net assets per share at 54.5 pence are up 2.1 pence since year end. The increase was driven by profit build and the unwind of the cash flow hedge reserve offset by shareholder distributions including the full year ordinary dividend payment in April. As usual at this time, TNAV is also temporarily suppressed by an accrual for the share buyback over the H1 close period with no corresponding share count reduction. This is worth one pence per share and will mechanically reverse in Q3. Looking ahead, we continue to expect further material TNAF for share growth this year, and indeed over the medium term. Alongside, we continue to expect the return on tangible equity for 2025 to be around 13.5%. Turning now to capital generation on slide 23. Capital generation was strong in the first half of the year, including in the second quarter. Within this, total RWAs ended the first half at 231 billion, up 6.8 billion in H1 and up 1.3 billion in Q2. The increase was driven by lending growth, partly offset by optimization activities and credit calibrations. Q2 also saw a partial reversal of the 2.5 billion temporary RWAs that we mentioned at Q1. The remaining balance of around 1.2 billion will reverse in the third quarter. Just a note that no new additions for CRD4 secured risk ratings were taken in the first half. We will revisit the position later this year. Given healthy banking profitability and the interim insurance dividend, capital generation of 86 basis points in the first half was, as said, a strong result. Looking ahead, we continue to expect full-year 2025 capital generation to be circa 175 basis points. Capital ratios are strong. Closing pro forma CT1 ratio after 50 basis points of ordinary dividend accrual is 13.8%. And now we move on to capital distributions on slide 24. The group's strong capital generation continues to support sustained growth in shareholder distributions. Today, the Board announces an increased interim dividend of 1.22 pence per share, 15% growth on last year. As usual, we'll consider further capital distributions at the year end. Dividends per share have grown consistently over our strategic plan, now up more than 80% versus 2021. Alongside this, we have undertaken consecutive and significant share buyback programs. These have reduced the group share count by circa 16% since the end of 2021, supporting growth in value for our shareholders. By executing on our strategy for the benefit of all stakeholders, we expect this growth in distributions to continue, returning material excess capital to our shareholders. As before, we remain committed to paying down to a circa 13% CT1 ratio in 2026, with the end of 2025 being a staging post towards that target. Let me now wrap up the financials on slide 25. To summarise, Group is showing sustained strength and delivering in line with expectations. In the first six months of the year, we saw continued growth in net income, cost discipline, and robust asset quality, driving strong capital generation and increased interim dividend. Looking forward, and based on this sustained strength, we feel very comfortable with our 2025 guidance and remain confident in our 2026 commitments. Both, as you can see, are set out in full on the slide. Finally, and as you may have seen in the R&S, building on our transformation and consistent with our ambition to move at pace into next year, we intend to move to preliminary reporting at this year end. Accordingly, we will announce our full year 2025 results on 29th January 2026, with our full annual report and accounts following on the 18th February. So I conclude my comments for this morning. Thank you for listening. Let me now hand back to Charlie for closing remarks.