Lloyds Banking Group plc

Thank you for standing by and welcome to the Lloyds Banking Group 2026 Q3 Interim Management Statement call. At this time, all participants are in a listen-only mode. There'll be a presentation from William Chalmers, followed by a question and answer session. If you wish to ask a question, please press star 1 on your phone. Please note this call is scheduled for one hour and is being recorded. I'll now hand over to William Chalmers. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining our Q3 results call. As usual, I'll run through the group's financial performance before we then open the line for Q&A. Let me start with an overview on slide two. In the third quarter, the group again delivered sustained strength in financial performance. We demonstrated continued income growth, improving operating leverage and strong and stable credit quality. We are on track to meet our 2026 guidance. The Group is continuing its strategic delivery, focusing on supporting UK households and businesses, while laying firm foundations for Accelerate 2030. The business is performing well and we are excited to execute on the opportunity ahead. Let me now talk to our financials on slide three. As said, Lloyds Banking Group again demonstrated sustained strength in financial performance during the first nine months of the year. Statutory profit after tax was 4.8 billion. Within this, we delivered net income of 14.8 billion, up 9% on the previous year, driven by broad-based growth across our businesses. Q3 net income was 2% higher than Q2. We remain disciplined on costs. Year-to-date operating costs of £7.2 billion were up 1% year-on-year, supporting a cost-income ratio for the first nine months of 49.3%. The cost-income ratio for the third quarter was 47.2%. Credit performance remains strong and stable. The year-to-date impairment charge of £930 million equates to an asset quality ratio of 25 basis points. Together, this delivered underlying profit of 6.6 billion for the first nine months, 2.4 billion in Q3. Our performance year to date has resulted in a return on tangible equity of 17.9%, strong capital generation of 153 basis points, and a CET1 ratio of 13.3%. Let me now turn to slide four to look at developments in our customer franchise. We have seen solid growth across both the lending and deposit franchises so far this year. Focusing on the third quarter, Group lending balances of £495.5 billion were up £4 billion, or £5 billion, excluding movements in hedge accounting. We saw growth across all business lines. Within retail, mortgages increased £0.3 billion in Q3. We realised slightly higher mortgage completion margins quarter on quarter at circa 75 basis points, although this remains below maturity margins. The market remains highly competitive. Elsewhere in retail lending, we saw continued growth in each of our cards, loans and motor businesses, as well as European retail, again in competitive markets. Commercial lending balances meanwhile were up again in the quarter by 3.3 billion or 3%. As has been the case throughout the year, this reflects strong broad-based growth in CIB across sectors. PCB also continued to grow, with balances increasing 0.2 billion after the impact of government-backed lending repayments. As we look forward across lending businesses, we believe higher rates, if sustained, may start to slow asset growth. As always, our strategy will be to balance volume and returns. Turning to the liability franchise, we saw a solid performance in deposits, up 1.9 billion in the quarter. Total retail deposits were broadly stable, with growth of 0.2 billion in UK deposits and a decline of 0.5 billion in Europe. We were pleased to see PCA growth of 0.6 billion in the quarter, again increasing our market share of balances in this core product and helping deepen customer relationships. This more than offset a small decline in UK savings of 0.3 billion. Commercial deposits increased by 2.1 billion, reflecting growth in targeted sectors across both CIB and BCB and continuing recent strength in this area. As called out throughout the year, we have again seen a competitive quarter in the deposit market. For now, these conditions look set to persist. and we continue to manage for both franchise enhancement and sustainable value. Let me now turn to net interest income on slide five. Net interest income continues to grow robustly. Year-to-date NII was up 10% year-on-year to 11.1 billion. This included 3% growth in Q3, helped a little by day count. Income growth continues to be supported by positive but slowing momentum in the net interest margin at 325 basis points in Q3, up three basis points on the second quarter. Driving this in Q3, the growing structural hedge contribution continued to more than offset mortgage refinancing and deposit churn headwinds. Structural hedge earnings were 1.9 billion, with an average yield of 3%, still well below current market refinancing rates. Within this, the notional of £246 billion and the weighted average life of around 3.75 years were stable in the quarter. We continue to expect hedge income to grow to greater than £7 billion in 2026 and greater than £8 billion in 2027, based on our economic assumptions. NRI strength was also supported by the growth in our franchise, with average interest earning assets of £481 billion in Q3, up over £3 billion on Q2. Based on these developments, we are on track to meet our 2026 NII guidance of greater than 14.9 billion. In the current competitive market conditions, we expect to deliver modestly above 14.9 billion. Looking further forward, these same conditions will likely impact 2027 NII growth, partly offsetting benefits from higher volumes and hedge income. While still healthy, the pace of NII growth in 2027 is likely to be lower than in 2026. Let me now turn to other income on slide six. We continue to deliver strong momentum in other income across our franchise. Year to date, other income was 5.0 billion, up 10% in the prior year. Q3 OOI is up 8% year-on-year at 1.7 billion. Within this, Q3 was very slightly lower than Q2. This reflects continued strength in transport, current accounts and Lloyds living. These factors were offset by increased subsidence claims within general insurance, lower markets income within commercial banking and the non-repeat of certain second quarter gains as we flagged in July. Excluding weather claims, third quarter underlying OOI growth was over 10% year on year, continuing the strong performance that we've seen in recent periods. Income diversification remains a strategic focus and indeed our base case expectation. We continue to see good progress in our strategic initiatives as laid out on the slide. These include strong momentum within Tusker, as well as the successful launch of new propositions, for example Lloyd's Accept within BCB. Such developments and upcoming plans will maintain our forward momentum. Briefly turning to operating lease appreciation. The Q3 charge of 420 million has decreased from Q2, largely due to the non-repeat of the revaluation charge for used car price adversity that we recognised at the half year. This is partly offset by the quarterly run rate, which is increasing in line with fleet growth. Moving to costs on slide seven. Cost discipline continues to be an imperative. Operating costs for the first nine months were 7.2 billion, up 1% year on year. Our robust performance reflects business cost growth, inflationary pressures and costs related to Lloyd's wealth, largely offset by continued cost savings and lower investment at this stage of our current strategic cycle. Third quarter costs of 2.4 billion were down 1% versus Q2. As we look forward, Q4 will see higher costs due to the usual seasonal factors, including bank levy as well as investment timing. The remediation charge was £22 million in the quarter, taking the year to date charge to £61 million. Taken together, this resulted in a cost to income ratio of 47.2% in Q3 and 49.3% for the first nine months. Importantly, we remain on track to deliver a full year cost to income ratio below 50% and operating costs of less than £9.9 billion in 2026. Let me turn to credit performance on slide eight. Credit performance remains strong and stable. This reflects our prudent approach to lending and resilient customer base. Arrears and early warning indicators across our portfolios remain benign. The year-to-date impairment charge is 930 million, equivalent to an asset quality ratio of 25 basis points. Compared to the prior year, the increased charge is driven by retail model updates, both last year and this year, and a more normalised level of impairment in 2026, as well as lower one-off releases within commercial. The charge of 313 million in the third quarter also represents an asset quality ratio of 25 basis points and reflects stable underlying development alongside model updates. It incorporates a small MES charge of 8 million in the quarter. Our performance year to date means that we are on track to meet our guidance for a full year asset quality ratio of around 25 basis points. Let me now address returns and TNAV on slide nine. The group delivered a strong return on tangible equity of 17.9% for the first nine months and 19.5% in Q3. Below the line, the third quarter restructuring charge and volatility and other items were modest. Tangible net assets per share ended the quarter at 55.4p, down by 1.6p per share both year to date and in the quarter. Growth from attributable profits and the reduction in share count from the buyback were offset by shareholder distributions, and in particular, the temporary impact of higher rates on the cash flow hedge reserve. Looking ahead, we continue to expect material TNAV per share growth over the medium term. We remain on track to deliver a return on tangible equity of greater than 16% in 2026. Indeed, given our current TNAV, we expect to comfortably exceed this. Turning now to capital generation on slide 10. Our business performance has driven strong capital generation. Within this, total RWAs ended the quarter at 247.4 billion, up 11.9 billion from the year end. This increase reflects strength in lending and market and other movements, partly offset by optimisation activities. Turning to Q3, RWAs increased 5.6 billion, again driven by customer and bank lending growth, but with limited optimisation in the quarter. Q4 should be more active in this respect. Looking forward, we continue to expect a six to eight billion positive day one impact from BAL 3.1 on the 1st of January 27. Note that we're also awaiting finalisation of CRD4 secured model weightings. Year to date, strong banking profitability has driven capital generation of 153 basis points. including 45 basis points in the third quarter. We remain on track to deliver our capital generation guidance of more than 200 basis points in 26. The Group CET1 ratio ended the quarter at 13.3%. We continue to expect to pay down to a CET1 ratio of 13% by the end of the year. I'll now turn to our updated macroeconomic outlook on slide 11. As usual, we've updated our economic outlook for the performance of the UK economy. We now expect inflation to average 3.1% this year, before peaking in the first quarter of 27. Our bank rate forecast now incorporates a 25 basis point increase in November, although our terminal rate assumption remains unchanged at 3.5%, reaching that level in mid-28. I refer to the potential impact of higher market rates versus our own forecast in my earlier comments. We expect GDP growth to be 1.3% this year, falling to 1.1% next. Unemployment is forecast to peak at 5.3% in the middle of 2027 and house price growth to be 0.7% in 2026, rising to 1.7% next year. While these forecasts represent a modest uplift, our diversified and resilient business model remains well placed to withstand various economic outcomes. In this context, the budget yesterday does little to change our views. Stepping back, let me now remind us of our 2026 guidance on slide 12. We remain on track to meet our 2026 guidance. We continue to expect net interest income of more than 14.9 billion, a cost to income ratio below 50%, with operating costs below 9.9 billion, and an asset quality ratio of around 25 basis points. Alongside, we expect return on tangible equity of more than 16% and capital generation of more than 200 basis points, paying down to a CET1 ratio of around 13%. As always, we remain committed to a progressive and sustainable ordinary dividend. As we have said many times, delivery of our current strategy and financial commitments lays the foundations for the next stage. Let me briefly turn to this to finish up on slide 13. The successful delivery of the current strategy has been all about building new strategic revenue streams, diversifying income growth and continuing our focus on cost and efficiency. These are the foundations for Accelerate 2030. We are now mobilizing the business at all levels. We've established a new business unit to unlock connected growth opportunities across the group. We have allocated over 95% of our 2027 strategic investment spend which is now built into delivery plans. Our core franchise will remain a key contributor to value creation as we deliver new products and build distribution in critical markets. We will innovate to further grow and diversify our revenue streams with many new propositions in the coming months such as Lloyd's Smart Wallet. Growth will be led by investment in technology and skills We are continuing to extend our AI use cases across the group and are on track to deliver over 100 million of AI benefits in 2026. We were pleased to see our continued progress was recognized in the latest evident AI report. Our strategic ambitions are underpinned by the robust financial framework that we outlined in July. As you know, the expectation is continued income growth, improving operating leverage, strong sustainable returns, and growing capital generation. Stepping back and as said in my opening comments, the Group is delivering in full on the current strategy. Looking ahead, we are more convinced than ever that the opportunity for the Group is compelling and Accelerate 2030 is the right way to seize it. That concludes my comments for this morning. Thank you for listening. We'll now open the line for your questions.

Thank you. If you wish to ask a question, please press star 1 on your phone keypad. To withdraw your question, you may do so by pressing star 2 to cancel. There will now be a brief pause while questions are being registered. Thank you. Our first caller is Benjamin Toms from RBC. Your line is now unmuted. Please go ahead.