Lloyds Banking Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 12 speakers on the call.

Operator

Good morning, everyone, and thanks very much for joining us at our 2023 full year results presentation. In line with prior results, I'll begin with a short overview of the group's financial and strategic performance. William will then provide the usual detail on our financials. Following a brief summary, we'll then take your questions. Let me begin on Slide 3.

Operator

I'm really pleased with the progress we've made on implementing our customer focused strategy whilst, at the same time, delivering strong outcomes for our shareholders. Now there are lots of moving parts in Q4 that William will talk through shortly. But underlying that, the business has performed strongly. With that in mind, I'd like to highlight the following three things. Firstly, we've now completed the 2nd year of our strategic transformation and are generating real business momentum.

Operator

We remain on track to meet our strategic targeted outcomes. Secondly, we've met or exceeded the guidance that we laid out during the year whilst taking proactive action to address a number of headwinds. Our financial performance has enabled increased capital returns of £3,800,000,000 in the year. And finally, we're confident of delivering higher, more sustainable returns for shareholders. Importantly, we are reiterating both our returns and capital generation for 20242026.

Operator

Turning now to Slide 4, where I will highlight how we've delivered for all stakeholders in 2023. We have provided proactive and targeted support during a period of ongoing uncertainty for our customers. For example, we've contacted more than 15,000,000 customers in 2023 to increase awareness regarding savings options and enhance propositions. Off the back of this, more customers trusted us with their savings, with balances actually growing in the year. We've also used our data insights to contact around 7,500,000 customers offering support where required.

Operator

Alongside this, our purpose driven strategy is focused on building a more inclusive society. To this end, we've provided further support to first time buyers and the social housing sector. Those are both part of a multiyear commitment that combined totals nearly £100,000,000,000 of support since 2018. Finally, supporting the transition to a low carbon economy and creating a more sustainable future remains of great importance. Linked to this, we are increasing our Commercial Banking sustainable financing target to £45,000,000,000 by 2026.

Operator

Combined, these actions are representative of the strength of our purpose, helping Britain prosper, which enables us to successfully deliver for all stakeholders and deliver profitable growth for the business. On Slide 5, let me now address how we delivered for our shareholders with a brief overview of some of the key financial and non financial metrics. William will take you through the detail later, we have delivered a robust financial performance, in line with both our expectations and the guidance we provided. This is despite some difficult unexpected headwinds combined with an uncertain external environment. Net income growth of 3% was supported by growth in both net interest income and other operating income.

Operator

Combined with disciplined operating costs and strong asset quality, the group delivered a return on tangible equity of £0.158 for the year. This translated into strong capital generation of 173 basis points, even after the impacts of regulatory headwinds and a provision relating to the FCA review of Motor Finance Commission arrangements. Excluding these exceptional items, our underlying capital generation was significantly stronger, in excess of 200 basis points. This enabled total capital return of £3,800,000,000 equivalent to around 14% of the group's market capitalization. This includes a 15% increase in the ordinary dividend as well as a share buyback of up to £2,000,000,000 To pause briefly on the FCA Motor Finance review.

Operator

As you will have seen, we have taken a charge of GBP 450,000,000 However, the extent of misconduct and customer loss, if any, remains unclear. We therefore welcome the independent intervention from the regulator to help ensure clarity for the industry and our customers on these issues. Finally, with regards to non financial performance, we continue to see strong business momentum, including a further increase in our leading levels of digital engagement with 21,500,000 users now digitally active, comfortably surpassing our 2024 targets. To build on this, I'll provide more detail on our strategic progress, starting with Slide 6. We've now completed the 2nd year out of our 5 year transformation, with just 1 year to go to deliver the interim 2024 actions.

Operator

Our progress has been made possible by an ongoing commitment to investment. We've now delivered more than £2,000,000,000 of incremental strategic investment with £1,300,000,000 invested in 2023. We're delivering continued momentum across our strategic initiatives. We remain on track to deliver the majority of our 2024 strategic objectives, with 20% currently tracking ahead of plan. Whilst we have a small proportion that are currently behind schedule, in part due to changes in the external environment, that is to be expected in a strategic transformation as significant as ours.

Operator

Encouragingly, our strategic delivery is translating into positive financial benefits. We've now realized around £500,000,000 of additional strategic revenues and £700,000,000 of gross cost savings. These provide us with the confidence we will deliver the targeted financial benefits in both 2024 and 2026. This includes a return on tangible equity of greater than 15% and capital generation of more than 200 basis points in 2026. On Slide 7, I'll provide a few examples of strategic delivery in 2023.

Operator

Our Consumer business is the largest contributor to our additional revenues from Strategic Initiatives. As you heard in our first investor seminar in October, this is an area where we're making great progress. In addition to the growing levels of digital engagement I highlighted previously, we've grown in areas that we see as attractive, including sustainable mortgages and financing and leasing for electric and hybrid electric vehicles. The latter has been supported by the highly complementary and successful acquisition of Tuscar, which is delivering benefits well ahead of our expectations. We also have several exciting consumer proposition developments in the pipeline for 2024.

Operator

This includes our innovative embedded finance e commerce proposition, which we are currently putting in place agreements with key merchants. Our mass affluent business is growing both customer numbers and banking balances. We're also improving our investment offering for this customer group through a new service called Ready Made Investments. You'll hear more about our progress and plans in this space in our next strategy seminar, which takes place in March. Now turning to our progress on the commercial initiatives on Slide 8.

Operator

Our commercial priorities are split across our SME and CIB businesses. In SME, we remain focused on digitizing our offering and growing in underrepresented areas. For example, we were the 1st to launch a combined business current account and merchant services proposition in a new mobile first origination journey for clients. This has driven a reduction in account opening times of up to 15x as well as supporting more than 20% growth in new Merchant Services clients for the 2nd year in a row. In CIB, we are investing for growth across our cash, debt, risk management offering and in 2023 exceeded our strategic target of £15,000,000,000 of sustainable financing.

Operator

We're increasing our focus on our award winning Transaction Banking business and across our uniquely positioned Markets franchise, delivering more than 20% growth in other operating income relative to 2021, in line with our strategic target. This is supporting capital light revenue diversification for the group. I'll now briefly cover our enablers on Slide 9. Our enablers are focused on ensuring that our growth priorities are delivered alongside a business that is more cost efficient and less capital intensive with modern capabilities that are fit for the future. With regard to cost efficiency, we have continued to transform our physical footprint, further improving the efficiency within our distribution network and delivering ongoing reductions in our office spaces.

Operator

At the same time, we're progressively modernizing our technology estate and improving our ways of working to increase the pace and efficiency of change. These activities position us well to deliver the 2024 gross cost savings target of circa £1,200,000,000 We've also taken proactive action to improve capital efficiency, for example, through the optimization initiatives and the elimination of our pension deficit. I'll now close on Slide 10. So as you can see, we continue to make strong strategic and financial progress as we head towards the end of the first phase of our 5 year transformation. We're reinforcing the strength of our franchise by growing and deepening relationships with customers right across the group.

Operator

Our progress to date increases our confidence in delivering our strategic initiatives as well as realizing the associated financial benefits. In turn, this will produce higher, more sustainable returns and capital generation for shareholders. Thanks for listening. I'll now hand over to William for the financials.

Speaker 1

Thank you, Charlie. Good morning, everyone, and thanks again for joining. Let me now provide an overview of the financials, starting on Slide 12. The group delivered a robust financial performance in 2023, meeting our guidance and demonstrating a resilient franchise. Statutory profit after tax was £5,500,000,000 with a return on tangible equity of 15.8%.

Speaker 1

Net income of £17,900,000,000 was up 3%, supported by a high net interest margin of 3 11 basis points, in line with guidance and 10% growth in other income. This was partially offset by a higher operating lease depreciation charge reflecting growth and lower used car prices. We continue to manage costs tightly. Operating costs were £9,100,000,000 in line with guidance and up 5% year on year. This was driven by higher planned strategic investments, including elevated severance charges, new business costs and ongoing inflationary pressures.

Speaker 1

Asset quality is strong. The impairment charge of £308,000,000 includes a significant writeback as well as the impact of an improved economic outlook. Excluding these, the asset quality ratio would have been 29 basis points, still in line with our guidance. Tangible net assets per share at 50.8p were up 4.3p in 2023, including 3.6p in the 4th quarter. This performance resulted in strong capital generation of 173 basis points, again in line with guidance and after significant regulatory headwinds.

Speaker 1

Strong capital generation enabled an increased total capital return of £3,800,000,000 This includes a 2.76p pence per share total dividend, up 15% year on year and a share buyback program of up to £2,000,000,000 Let me now turn to Slide 13 to look at the development of our customer franchise. Our customer franchise is resilient. Total lending balances stood at £450,000,000,000 down 1% on the prior year, including €2,000,000,000 in the 4th quarter. Notably, the year on year movement includes securitizations of over £5,000,000,000 of legacy mortgages and unsecured loans. Excluding these, lending balances were stable on the year.

Speaker 1

Focusing on the 4th quarter. Mortgages were down slightly but with growth in the open book. There was modest growth in Consumer Finance, excluding the GBP 2,700,000,000 securitization. Commercial Banking was down £2,900,000,000 in the quarter. This included £500,000,000 of repayments of government backed lending within the Small and Medium Business Enterprise.

Speaker 1

On the liability side, total deposits were down 1% in 2023 as a whole, however, up more than £1,000,000,000 in Q4. Deposit churn appears to be slowing. In the Q4, Retail current accounts were down £1,900,000,000 compared to £3,200,000,000 in Q3. This was more than offset by savings inflows of almost £4,000,000,000 again with slowing churn evident in the mix. In the Commercial franchise, deposits were down £900,000,000 in Q4, predominantly within small and medium businesses.

Speaker 1

And in Insurance, Pensions and Investments, we saw 8% growth in assets under administration in the 4th quarter. Moving on to Slide 14, net interest income. NII of £13,800,000,000 was up 5% on the prior year. Q4 was down 4% quarter on quarter. Average interest earning assets of €453,000,000,000 were up slightly compared to 2022, with the 4th quarter broadly stable.

Speaker 1

Full year margin was up 17 basis points from 2022 at 3 11 basis points, in line with our guidance for greater than 3 10 basis points. This benefited significantly from the annualized impact of base rate changes as well as continued structural hedge reinvestment. Together, these outweighed pressures from mortgage pricing and deposit mix change. The Q4 margin of 2 98 basis points was down 10 basis points compared to Q3, a touch more than we expected. This reflects lower PCA balances through most of the quarter, a higher than expected reduction in noninterest bearing deposits in the commercial bank and mortgage pressures driven by swaps volatility.

Speaker 1

Non banking net interest income was £311,000,000 including a further £80,000,000 in Q4. This is up significantly compared to the prior year and is likely to continue to grow, albeit at a slower pace in 2024. Looking forward, we now expect average interest earning assets to be above €450,000,000,000 in 2024. This implies a modest reduction year on year, driven by growth in the core business being offset by reductions in the SVR mortgage book and repayments of government support scheme loans in Commercial. Alongside, we now expect the net interest margin to be greater than 2.90 basis points this year.

Speaker 1

Within this, we'll see further pressure from mortgage book refinancing and ongoing deposit churn, albeit both of these headwinds are expected to ease throughout 2024. In the other direction, Structural Hedge provides a continued tailwind. Our assumption of 3 bank base rate reductions in 2024 starting in June is obviously an important input to this guidance. Let me now turn to Slide 15 to look at the mortgage book. The open mortgage book fell by £1,100,000,000 in 2023, growing in the second half, including modestly in the 4th quarter.

Speaker 1

Strong customer retention in fixed rate products was offset by the roll off from the SVR book. Our market share demonstrated resilience

Speaker 2

in

Speaker 1

what was a slow market environment. The group margin continues to be impacted by the difference between new and maturing mortgage spreads. While pricing remained competitive in the Q4, the market has slightly strengthened. Completion margins were around 60 basis points, slightly higher than we saw in Q3. And looking forward, as we move through the year, margins on maturing mortgages will reduce gradually.

Speaker 1

This means the mortgage pricing headwind is abating through 2024 and into 2025. The expectation is for modest growth in the open mortgage book across the year. This is supported by strong customer retention and a slightly improving net lending market. Let me now turn to our other asset books on Slide 16. Excluding the impact of securitizations, we saw a solid performance in our other lending portfolios.

Speaker 1

Combined balances for UK Cards, unsecured loans and motor were up £2,700,000,000 in 2023, again excluding the securitization activity. In Q4, credit cards were flat. Within this, interest bearing balances were up slightly based on growth in low risk customer segments. Motor balances and unsecured lending, likewise, were both up slightly. Commercial balance Commercial Banking Lending was down £5,100,000,000 in 2023.

Speaker 1

In the 4th quarter, balances across small and medium businesses were down £1,200,000,000 including repayments of government backed lending. CIB lending, meanwhile, fell by £1,700,000,000 reflecting a disciplined approach to lending in the context of growing income streams. Let's move to the other side of the balance sheet on Slide 17. Deposit performance was robust over the year. Total customer balances of £471,000,000,000 were down £4,000,000,000 or 1% in 2023 but up £1,000,000,000 in Q4.

Speaker 1

Retail deposits ended the year at £308,000,000,000 Over the year, we recaptured a significant proportion of the current account outflows within our own savings proposition. Indeed, our Retail Savings accounts were up £12,000,000,000 in 2023, including £4,000,000,000 in the 4th quarter. This performance was driven by enhanced propositions and proactive customer communications. As said, we're now seeing deposit churn in the Retail business slow down. The switch into fixed term savings accounts from Instant Access in Q4, for example, was materially less than we saw in Q3.

Speaker 1

Commercial deposits are down £1,000,000,000 in both 2023 and Q4. This was driven by customers reducing balances primarily in the SMB business, partially offset by targeted growth in the CIB franchise. Going forward, based on the current rate outlook, we expect deposit mix shift to continue to slow gradually in 2024. Let me now turn to the Structural Hedge on Slide 18. Structural Hedge notional ended the year at GBP 247,000,000,000.

Speaker 1

Pounds This includes a €4,000,000,000 reduction in Q4, in line with our expectations for a modest notional reduction in the second half. The weighted average duration of the hedge remains around 3.5 years. As you know, we manage the structural hedge prudently. Given the slowing deposit churn we expect in 2024, we're planning for a further modest reduction in the notional balance this year, stabilizing in the second half. We have around €40,000,000,000 of maturities during the year, which gives us significant flexibility in our hedge management.

Speaker 1

In 2023, hedge income was CHF 3,400,000,000, CHF 800,000,000 higher than the prior year. Looking forward, we expect this to be around £700,000,000 higher this year given the continued benefit from rolling the hedge into higher swap rates. Indeed, the refinancing of the hedge remains a powerful driver of income growth for the foreseeable future. Moving to other income on Slide 19. Other income of £5,100,000,000 was 10% higher than 2022, driven by growth across the businesses.

Speaker 1

Retail saw an improved current account and credit card performance in the context of recovering activity as well as a growing Motor contribution. Commercial saw growth in markets and bond financing based on increased market shares. Meanwhile, IP and I Other income was up 26% year on year. This included the benefit from strong new business levels, income releases from a higher contractual service margin and improved General Insurance performance. Looking forward, we expect gradual progress in Other Income driven by higher levels of activity and the realization of our strategic initiatives.

Speaker 1

Turning to operating lease depreciation. GBP 956,000,000 is a significantly higher charge year on year. The increase is driven by 2 factors. Firstly, volumes are continuing to grow in the Motor Leasing business, driven by organic growth and the acquisition of Tuscar. Secondly, after a period of outperformance, used car prices have fallen, including a particular decline in the 4th quarter.

Speaker 1

This has resulted in a normalization of the depreciation expense as well as an additional non run rate charge of around £100,000,000 taken in Q4 to restock our forward looking provision given used car price falls. Looking forward, you should therefore expect the quarterly charge to be roughly the Q4 run rate level plus organic growth but excluding the GBP 100,000,000 provision restock. Moving on. Let me talk about our continued focus on efficiency on Slide 20. Operating costs of GBP 9,100,000,000 are again in line with guidance.

Speaker 1

This was up 5% on the prior year, driven by planned investment, the costs associated with new business and inflation. Q4 was impacted by investment, including additional severance and, as usual, the bank levy. We'll continue to manage the cost base tightly. We now expect 2024 operating costs to be £9,300,000,000 slightly higher than our original expectation. This, in turn, is due partly to higher inflation than expected but mainly due to higher severance payments that will improve efficiency over time.

Speaker 1

The GBP 9,300,000,000 is net of achieving our GBP 1,200,000,000 of cost saves as we continue to successfully absorb material inflationary pressure. It's worth noting here that our operating cost guidance does not include the potential for a net neutral charge of around £100,000,000 This is driven by a sector wide change to the way in which the Bank of England charges for supervisory costs. And if it is enacted, this will result in an equivalent offsetting gain in net interest income. Remediation costs in the year increased to GBP 675,000,000 This is principally due to the GBP 450,000,000 provision for the potential impact of the FCA review into historical motor finance commissions. This provision reflects estimates for operational and legal costs.

Speaker 1

It also reflects an assessment of potential redress based upon a range of scenarios. To be clear, there remains significant uncertainty, and the financial impact could differ materially from the amount that we have provided. We welcome the independent FCA intervention to help ensure that we get to the right outcome. Looking now at asset quality on Slide 21. Asset quality remains strong across the group.

Speaker 1

The impairment charge of £308,000,000 reflects the resilience of our prime customer base and our prudent approach to risk. Alongside, we experienced a significant writeback in Q4. Furthermore, the charge includes an MES release of GBP 257,000,000 from forecast adjustments to reflect a slightly improved economic outlook. Excluding the writeback and the updated economic forecast, the asset quality ratio was 29 basis points, which is still in line with our guidance. The Q4 impairment charge was a net credit of €541,000,000 Again, excluding the writeback and MES release, the charge was stable quarter on quarter.

Speaker 1

The stock of ECL on the balance sheet now stands at £4,300,000,000 This remains above pre pandemic levels, reflecting uncertainties in the economic outlook. Given the ongoing resilience of the portfolio, we expect the asset quality ratio to be less than 30 basis points in 2024. Let me now turn to Slide 22 to look at our economic assumptions in more detail. We have made modestly positive revisions in our updated economic outlook. We believe GDP growth will be subdued this year.

Speaker 1

However, we now expect inflation to fall more sharply. This will allow 3 base rate cuts in 2024 from the current 5.25% level starting in June. Our HPI outlook has improved since our last estimate. We now expect only a slight fall of around 2% this year, helped by a lower rate environment. Meanwhile, unemployment is expected to remain low, peaking at 5.2% in Q4 2024.

Speaker 1

As usual, we present the full set of economics and associated ECL provisions in our appendix. Moving on, let me turn to Slide 23 to look at our credit performance. Performance across our portfolios continues to be resilient. In particular, new to arrears and U. K.

Speaker 1

Mortgages were stable throughout 2023 after increasing slightly at the start of the year. As mentioned before, this trend was largely driven by new arrears in the 2006 to 2008 legacy book. Meanwhile, arrears and defaults in the unsecured book continue to be very stable, remaining similar to or below pre pandemic levels. Alongside, early warning indicators in Retail remain reassuring. Credit quality in the commercial book also remains resilient.

Speaker 1

Likewise, early warning indicators are healthy. Our commercial portfolio is high quality. Around 90% of SME lending is secured and more than 80% CIB exposure is to investment grade clients. Also within the Commercial business, our net CRE exposure continues to reduce. It's now around £10,000,000,000 with an average interest cover ratio of 3.3x and an average indexed LTV of 46%.

Speaker 1

Meanwhile, the portfolio is well diversified across sectors with only 14% of exposures relating to offices. Moving on, I'll turn to Slide 24 to look at the below the line items and TNAV. Consistent with our objectives, there continues to be convergence between underlying and statutory profit. Restructuring costs were GBP 154,000,000 in 2023. This includes integration costs for Embark and TSCA, but it also reflects a significant one off cost to ensure business continuity following the administration of a key supplier.

Speaker 1

Volatility and Other of GBP 152,000,000 includes the usual items for fair value unwind and amortization of intangibles. It also includes modest positive volatility, mostly driven by lower rates in the 4th quarter. Statutory profit after tax of GBP 5,500,000,000 resulted in a return on tangible equity of 15.8 percent for 2023. Tangible net assets per share at 50.8p were up 4.3p in the year, including 3.6p in Q4. The increase was driven by profit accumulation, a lower share count and a reduction in the cash flow hedge reserve as the yield curve fell.

Speaker 1

Based on our current economic expectations, we expect further TNAV growth in 2024 and beyond, driven by much the same factors. Turning now to capital generation on Slide 25. The group remains highly capital generative. RWAs were up £8,200,000,000 during 2023. This includes a £5,000,000,000 increase relating to CRD4, of which £2,000,000,000 was taken in Q4.

Speaker 1

Regulatory pressures were offset by NPV positive balance sheet management, including securitizations. Beyond that, lending and operational impacts increased RWAs. The implementation of CRD4 is ongoing. We expect a further RWA increase of about £5,000,000,000 phased between 2024 and 2026, subject, of course, to further PRA review. And in this context, we continue to expect RWAs to be within guidance of GBP 220,000,000,000 to GBP 225,000,000,000 at the end of this year.

Speaker 1

Lending growth continues alongside active balance sheet management to offset regulatory pressures. Capital generation in the year was 2 23 basis points before 50 basis points of regulatory headwinds. Net of that, capital generation was still strong at 173 basis points, in line with guidance and driven by robust profitability. The impact of the higher remediation charge in Q4 in this context was more than offset by the one off writeback in the same period. The group's strong capital position and capital generation enables the board to announce a final ordinary dividend of 1.84p per share, making a total of 2.76p.

Speaker 1

The dividend is up 15% on 2022. And alongside a buyback program of £2,000,000,000 means the group will distribute a total of up to £3,800,000,000 This, as you know, is around 14% of our current market cap. As shown today, the board is committed to a progressive and sustainable dividend and additional excess capital distributions. It's worth noting that in Q4, we also made a GBP 250,000,000 further pension contribution. This closes off the remainder of the deficit and means there will be no further deficit contributions in the current triennial period to December 2025.

Speaker 1

Our year end pro form a CET1 ratio of 13.7% remains strong. As you know, the board continually reviews the appropriate capital target for the group. Based upon regulatory, economic and business considerations, including our risk profile, we've now determined that 13% CET1 is the right target. As before, our target continues to include a management buffer of 1%. To be clear, this change in target is a positive development, indicating the strength of our group.

Speaker 1

In order to manage risks and distributions in an orderly way, we expect to pay down to circa 13% by the end of 2026. This year, we expect capital generation of around 175 basis points as previously guided. Looking further forward, we continue to expect capital generation to be greater than 200 basis points by 2026. So let me bring this together on Slide 26. We are, as Charlie said, progressing well towards our ambition of generating higher, more sustainable returns for shareholders.

Speaker 1

For 2024, we now expect the margin to be greater than 2.90 basis points operating costs to be around £9,300,000,000 and the asset quality ratio to be less than 30 basis points. We also continue to expect the return on tangible equity to be circa 13%, RWAs to be between £220,000,000,000,000 capital generation to be around 175 basis points and to pay down to a 13.5 percent CET1 ratio. In the medium term, we remain confident in delivering our vision of higher, more sustainable returns by 2026. We are retaining our medium term targets, specifically costincome ratio to be below 50%. Return on tangible equity to be greater than 15% and capital generation to be greater than 200 basis points.

Speaker 1

In addition, and as mentioned, we now expect to pay down to a circa 13% CET1 ratio by the end of 2026. In sum, we look forward to continuing to deliver for our shareholders. That concludes my comments. Thank you very much for listening this morning. I'll now hand back to Charlie to finish up.

Operator

Many thanks, William. So to summarize, the group delivered a strong performance in 2023, in line with expectations that we've laid out. Aligned to our purpose of helping Britain prosper, we have continued to proactively support customers and meet our broader societal objectives whilst successfully executing against our strategic plans. In addition, despite the external headwinds and uncertainty we faced in 2023, we've taken actions to deliver robust financials and increased capital returns. We remain on track to meet our 2024 and 2026 strategic targets, which will support the delivery of higher, more sustainable returns and capital generation.

Operator

Thank you very much for listening. That concludes our presentation, and I'll hand over to Douglas, who will lead the Q and A. Douglas?

Speaker 3

Thank you, Charlie. So moving to questions. As usual, if you could please raise your hand if you would like to ask a question. Okay. So let's begin.

Speaker 3

Let's start with Alvaro.

Speaker 2

Alvaro Serrano from Morgan Stanley. I've got a question on motor finance and one on margins. On motor finance, I realize that there's still a lot of uncertainty, as you pointed out, William. But can you help us reconcile why you think €450,000,000 is enough? I realize some estimates out there point to €1,500,000,000 to €2,000,000,000 And so what's the difference in view there?

Speaker 2

And also how does that fit in with the Board approving the €2,000,000,000 share buyback and basically the lower capital ratio that the bank needs to run with? How can you square that? And then the second question on NIM. How do you see the year progressing? You previously talked about a trough in margins in Q1, Q2.

Speaker 2

Is that still the case? And you pointed out you expect the mix shift in deposits to continue. There's Central Bank data points to more stability. So why use that still expecting that mix to change? Thanks.

Speaker 1

Sure. Thanks, Alvaro. I'll take those. Thanks for the question, Alvaro. I'll take them in turn.

Speaker 1

First of all, on the motor point. As you know, in this context, as acknowledged by the FCA, the extent of misconduct and customer loss, if any, remains unclear. We believe that we have complied with all the relevant regulations in the relevant dates. So that's the backdrop. In the meantime, we've had 1 Financial Ombudsman judgment, and we've had a series of county court cases, most of which have actually decided in our favor.

Speaker 1

When we look at the review, therefore, we welcome it in order to get some clarity on the situation. You asked about the €450,000,000 provision. In that context, there are 2 components to the €450,000,000 provision. 1 is operational and legal expenses and the other is redress. Both of those 2 are encompassed within the €450,000,000 The redress is built upon a variety of scenarios, various scenarios which in turn are built upon various inputs to those scenarios.

Speaker 1

So for example, time periods, how far back does this go? 2,007 being one example, but other time periods could be taken into consideration. Likewise, what are the commission models that are taken into account? Likewise, what is the relevant benchmark for compensation should redress arise? Should it be a 0 commission structure?

Speaker 1

Or should it be a reasonable commission structure? Likewise, what type of redress measure might the FCA want us to consider? Is it proactive or is it reactive? Response rates and uphold rates. These are all variables that feed into various the various scenarios that we've constructed off the back of which we have positioned our GBP 450,000,000 provision.

Speaker 1

There are, as you can see from my comments, quite a few uncertainties, and we'll obviously update on those as the situation develops. But I would note that when you consider it against other numbers that might be out there, there are a number of quite important dependencies. So for example, whether it is a zero commission number that is taken as a benchmark for any potential address or whether it is a reasonable rate of commission makes a big difference to the ultimate provision that might be necessary for address, cutting it by more than 50%, for example. So there are some important dependencies in the numbers that are out there. Secondly, you asked about how that all squares with the board approving the €2,000,000,000 buyback and indeed the capital ratio reduction to 13% by 2026.

Speaker 1

I would say both are an expression of the board's confidence in the business. We'll talk more about it, I'm sure. But when we've looked at both and in particular, when we've looked at capital ratios, we've looked at both the regulatory outlook, we've at the business risk reduction that has been embarked on over the last several years. And indeed, we've looked at retaining our buffer for uncertain economics. And all of that adds up to the 13% CET1 target ambition that we have.

Speaker 1

So both of those 2, the €2,000,000,000 and the target reduction of 13% are expressions of confidence in the business. Moving on, you asked about the margin. The margin, as you know, we have committed to is greater than 290 in the course of 2024. When we look at the performance in 2023, we delivered on guidance greater than 3.10 delivered at 3.11. But the relevant number is the quarter 4 closing rate of around 2.98.

Speaker 1

So when we look at the trajectory going into 2024, we expect what will very likely be a gentle decline in the first half of twenty twenty four, and I'd underline the word gentle, nothing like what we saw in Q4. And then we expect that to gently increase in the second half of Q4, certainly in the second half of twenty twenty four, certainly by the end of the year, certainly by Q4. So what you're seeing, therefore, is a closing rate closing margin of 2.98% in Q4 of 2023, an expectation for 2024 that we will see a gentle decline in the first half, a gentle incline in the second half, as I say, certainly realized by Q4, if not before. What's going on kind of underneath the hood there? A couple of points to make.

Speaker 1

1 is we do expect to see, as your question alluded to, Alvaro, some continued deposit churn over the course of the year. 2 is we do expect the mortgage refinancing headwind to still be there over the course of this year. But in both cases, in deposits and in mortgages, we expect each of those headwinds to gradually abate over the course of the year. And we can talk more about the reasons for that, but they are, at least in the mortgage case, very mechanical and in the deposit case, rely upon the kind of rates trajectory, the rates outlook that we've described to you. And then finally, offset against that is the structural hedge, which cumulatively gathers pace during the course of the year.

Speaker 1

And all of that nets out to greater than 290 for the 2024 margin outlook. Thank you.

Speaker 3

We'll let's take the next question from Joe.

Speaker 4

Hi, thank you. Joe Dickerson from Jefferies. Two things from me. First on the severance costs that you have, could you try to quantify those or express them in materiality terms? And then is this just a present part of your cost base or at some point will this abate and become a tailwind on the cost base?

Speaker 4

That's question number 1. And then number 2, just on the cash flow hedge reserve, I think off the top of my head looking this morning, it's about 3,800,000,000 dollars How do we think about the sensitivity around that and how that comes back? Because obviously, the 15% return on tangible number by 'twenty six is very different if the TNAV is that much higher. And I'm not sure that the Street estimates have that quite right.

Speaker 1

Yes. Thanks, Joe. Just to give you a couple of numbers on each of those. Severance costs, 1st of all, we always have an allowance for severance costs within our overall cost budgets. We had it in 2023.

Speaker 1

We again have it in 2024. What is different is that in the final quarter of 2023, we actually took a bit more severance than we normally would do. And likewise, when we head into 2024, the same is going to be true. Now in 2023, we were able to offset that against various other mitigants within our overall cost profile. In 2024, it's tougher to do so again.

Speaker 1

And that's the reason why we've moved from the €9,200,000,000 that we described to you before as to 2024 cost guidance to €9,300,000,000 that we're describing to you today. So I won't put a precise number on severance, but that is the principal driver between 9.2% through to 9.3%. It's increased severance above and beyond our regular severance budgets. It's worth saying before leaving the severance topic that, as you can imagine, we subject that to pretty severe business case tests. And so any severance that we deploy, we expect to get benefits out of it.

Speaker 1

Now you don't typically realize those full benefits in year. You would expect to see them in the years thereafter. But as you know, a big part of our story is around operating leverage within the business. As the headwinds abate, strategic initiatives come in, we hope to deliver a flatter cost base going forward. And that, in line with lower investment levels, leads us to predict the returns that we're predicting for 2026 and have, as I say, full confidence in.

Speaker 1

So the severance has business cases. The business cases are aligned to the profile of operating leverage that we expect to deliver over the course of 2025 and, in particular, in 2026. Cash flow hedge reserve, you mentioned you're right. Cash flow hedge reserve is around CHF 3,800,000,000 right now. The pace of it or the movement, I should say, in cash flow hedge reserve is, as you know, very interest rate dependent.

Speaker 1

There are 2 things that go on there. 1 is the valuation of the existing stock of derivatives against which structural hedge is positioned. And then second is, as the derivatives mature, I mentioned $40,000,000,000 of structural hedge maturities this year, So you get a repricing on a mark to market basis of new derivatives that come in. Those 2 compress the structural hedge sorry, compress the cash flow hedge reserve and indeed lead to TNAV growth. We saw a bit of that through the course of 2023.

Speaker 1

We saw a good part of it in the course of Q4 of 2023. We do expect to see more of it in the course of 20 24. I think we've given a PVO1 of around £12,000,000 or thereabouts, 1 basis point move, leading to around £12,000,000 cash flow hedge reserve adjustment. That, in turn, leads to expected TNAV growth over the course of the year. We ended up 23, probably a touch higher than we expected to end up on TNAV per share.

Speaker 1

That will carry through into TNAV per share build for cash flow hedge reserve reasons but also for the other reasons I mentioned in my comments over the course of 'twenty four.

Operator

Jo, just one thing on the severance because obviously, William covered it well. We should expect an ongoing baseline severance, as you say. Why an increase this year, which is kind of your question? I think it's because as we've got into the strategy, we've seen additional opportunities for efficiency and to provide reinvestment into areas that are going to try to drive the growth. So it's really a demonstration of our confidence around what we're doing.

Operator

And you should expect a baseline level, but this is really a demonstration of this year. We think we can do a bit more.

Speaker 3

Let's move to the front row now. Rohit.

Speaker 5

Thanks very much. I had a couple, please. The first, actually, just sort of following on from the cash flow hedge section question. But just CET1, the move to 13 percent, if you could give us a little bit more in terms of your thinking behind that? And then how also that factors into the TNAV for 2026?

Speaker 5

Presumably that takes about $1,000,000,000 off. So you've got cash flow hedge build and then you've got $1,000,000,000 less from a lower CET1 ratio. And then how in turn that feeds into you greater than 15% RoTE. My read of your guidance is you haven't changed to 200 more than 200 basis points capital generation. So it's not a comment on earnings.

Speaker 5

It's just a change to the a change to the denominator. That was the first question. And then the second question, just on average interest earning assets. So 4.53 in Q4, 4.50 for 2024 on average. What was the jump off point for 'twenty three?

Speaker 5

And what are the headwinds in 'twenty four, please?

Speaker 1

Yes. Thanks, Rohit. Rohit, there's sort of 3 questions there in a way actually. CET1 reductions, first of all, it's worth me just starting off with the point that the CET1 target ratio from 13.5% to 13% is a very positive sign for the business. It's a positive sign, we believe, for all stakeholders, clearly for shareholders but also for customers.

Speaker 1

It allows us to price product, for example, more efficiently. Why have we gone there? As you know, the board, when it looks at the target CET1 ratio, looks at what capital is required to operate the business, to grow the business and to absorb stresses the business might encounter. When we've looked at the business, we've looked at 3 things. 1 is business risk reduction.

Speaker 1

As you'll be aware, over the course of the last 10 years or so, but particularly in the last 5 years, this business has materially reduced the risks that it's exposed to. You can see that evidenced in the CRE exposure, for example. I made a comment in my earlier script. You can see that evidenced in the runoff of the legacy mortgage portfolios, for example. You can see it evidenced in terms of some of the metrics around the business, whether it's LTVs, interest cover ratios, secured backing for the SME portfolio and so forth.

Speaker 1

And you can also see it manifested in regulatory assessments, e. G, the ACS performance from about a year ago. So significant risk in business a significant reduction in business risk, as evidenced by the statistics that we will give you but also testified to by things like the ACS test. Secondly, the regulatory uncertainties we believe have diminished. As we look forward, we can see more or less the outlines of CRD 4.

Speaker 1

We talked about that in the context of our earlier comments. We can see more or less the outlines of Basel 3.1. We can also see our Pillar 2A coming down, as you've seen. This is a public number. And so therefore, the regulatory uncertainties we think are starting to reduce.

Speaker 1

And certainly, our visibility as to regulatory outcomes is greater than it was a year ago or so. And then finally, of course, macro remains uncertain. We will know about that. But that's why we've kept the 1% buffer in our overall CET1 target even when we move to the 13% outlook. So as a result, as we adopt the 13% target, as said, we see it as a very positive sign for all stakeholders, an expression of confidence in the overall business position, backed up by the evidence of what we think is going on in the regulatory space.

Speaker 1

When you look at 2026, as you say, we do expect the cash flow hedge reserve to further reduce, as it were, to build the TNAV in the business. And that is one of the factors driving TNAV. But driving TNAV are other factors, including profit add ons, for example, including pension build, for example. And driving TNAV per share is also the net of the buyback, which, as you've seen today, is a €2,000,000,000 addition. And as long as we're buying shares below book, that's going to contribute to a constructive TNAV per share outlook.

Speaker 1

So all of that is positive. But as you say, the key point, Rohit, is that our greater than 15% RoTE outlook is not dependent upon the 13% CET1 target shift. Had we stuck with 13.5% CET1 as a target, our guidance for you in terms of greater than 200 basis points, in terms of greater than 15% RoTE outlook in 2026 would have been exactly the same. All this does is add to the extent that we're able to achieve RoTE in excess of 15%. But the greater than 15% would have stood whether we adopted the 13% or not.

Speaker 1

The final point you mentioned, Rohit, is in relation to AIEAs. And just to be clear there, our guidance on AIEAs is greater than €450,000,000,000 That is, as I said in my comments, a touchdown on 2023. There's a couple of things going on there. 1 is organic business growth. So, we do expect the organic business to grow in terms of our core franchise.

Speaker 1

So, on the retail side, on the commercial side, we expect balances to grow. There are 2 mitigants to that. 1 is around the repayment of bounced back loans, in particular, in respect to the commercial business, most obviously in the BCB or SME franchise. And then 2 is, as you've seen over the course of 2023, the back book within mortgages continue to pay off. The SVR book is likely to come down.

Speaker 1

But to be clear, the ongoing look forward business, whether it's the open mortgage book or whether it's corporate institutional balances, for example, those will grow. And I'll make a final comment, which is our guidance is, as I say, greater than €450,000,000,000 AEAs. It is greater than both because that's the way that we saw it as of December 31, but as testified to by slightly stronger markets that we've seen open up during the course of January and so far in February. So it's quite deliberately greater than €450,000,000,000

Speaker 3

All right. Thank you. Next question.

Speaker 6

Hello. It's Parley from KBW. Just the first one is just going back to the motor. I know, obviously there's lots of uncertainty within that, but can I just clarify whether you think that the Land Rover portfolio, the captive book is part of the review? And secondly, again, I know the €450,000,000 will have all sorts of assumptions in it.

Speaker 6

But broadly speaking, how is the split between the redress and the operational cost? Because obviously, the data going back to 2,007, there's a lot of records that may not be around. So just what are you thinking about the split between the 2? And then I guess secondly, going back to deposit, do you have a sense as to what's driving the slowdown in the churn in deposits? In Q4, is it slowing because it's typically a higher spend season, so Christmas and everything?

Speaker 6

Or is it because there was lack of a rate rise effectively and so just less prompts? And in a falling rate environment, would you see that slow more or less? Because if rates were to come down, maybe people want to lock in rates sooner rather than later. Is that a possibility? And I guess since we're talking about assumptions on the NIM, just noticing that you are factoring 3 rate cuts and one of your peers is factoring 5.

Speaker 6

So if that were to happen, just how would that greater than 2.90 evolve?

Speaker 1

Sure. Do you want

Operator

to take the first one? I'll give you a rest on part of the second one, and then you can talk about the €290,000,000 Sure.

Speaker 1

Thank you, Kelly, for the question. First one on Motor. A couple of points that you raised there. 1 is Land Rover exposure. The second is the split between redress and operational costs.

Speaker 1

You're right, Land Rover has been a significant part of our portfolio for a while. The I shan't comment on any kind of numerical aspect of that, but it is probably fair to say that Land Rover, both because it's new cars and because you might imagine, therefore, there's less scope for discretionary movements with any pricing, perhaps has lower redress consequences if that is the direction that the FCA review goes in than other aspects. But I would be just careful about how much you read into that for the €450,000,000 provision because as I mentioned earlier on, we've taken a variety of scenarios in the context of our GBP 450,000,000 2nd, you asked about redress versus operational costs. We are not specifying exactly how that $450,000,000 is split. The only comment I'll make, Kelly, is that there is a decent chunk of each within that overall GBP 450,000,000 Charlie, do you want to Great.

Operator

Let me have a go at Deposit General, and you can talk about the impact on NIM of rate rises. So first of all, as you say, this is obviously a hugely important part of the development through Q4 and into this year. What you saw, as you recall, is a lower change in our retail customer deposits, which is obviously the most important deposit base for the bank. So we saw a slowdown in Q4. And as you saw across the year, actually, relative to other High Street banks, we performed materially better on that churn.

Operator

And we were winning in the savings market, which is exactly what we wanted to try and do with our broader propositions around our mass affluent base. So it was on a relative basis, good performance. We think what we saw in Q4 is what we would expect. There were 2 dynamics going on. First of all, we'd obviously seen the shifts out of PCAs at the higher pipe part of the yield curve or the increase in where time deposits were priced up above 6% in the middle of last summer, which is where the biggest gap was, we'd seen a significant amount of moves.

Operator

And so you expect that to slow down as you get further into the rate cycle, number 1. Number 2, obviously, the gap between time deposits and then instant access deposits has narrowed. And so people can actually get the value from liquidity, which we know they value, without having to lock up their deposits for 12 months or 24 months. And so we think those are the dynamics that we saw happening through Q4. And obviously, as William said, we do expect that still as the rate cycle continues to mature.

Operator

So you'll still see people making choices to put money into savings accounts. But the choice now between putting it into instant access versus time deposits, we think, will continue to narrow because of the yield curve and what you can price at 12 24 months out, which is where most people were choosing to put their deposits. So we think this is a good development. I think importantly for us, we want to make sure, given the nature of our customer base and how we can engage customers on a relative basis, we say, performing strongly in this context. Where does this end up?

Operator

I've talked about this a lot with you in the last couple of years. When you look at the longer term yield curve still being above 300 basis points, we always said as you get further into the cycle, people would have rebalanced their portfolios into the liquidity deposits that they want in PCAs and Instant Access. But as you see time deposits come down in the returns, people will be more comfortable with not growing that further. So we think there will be stabilization through the back end of this year. But it will depend on where rates go, obviously.

Operator

William, just want to talk about if the sensitivity beyond free base rates? Yes.

Speaker 1

Yes. No, I will be joining. Perhaps actually, Kenny, just to add a couple of numbers to the analysis as well on deposits that you might find helpful. One is, as you've seen, PCA reductions have gone down from a €3,200,000,000 level at Q3 to a €1,900,000,000 level in Q4. Now to be clear, a lot of that was back end loaded in the quarter, but nonetheless, that's quite a significant reduction in PCA outflows.

Speaker 1

Secondly, the non what we describe as a non maturity churn within our overall savings book, I. E, savings moving from instant access to fixed term for the first time, if you like, has gone down from around £10,000,000,000 to around £7,000,000,000 between quarter 3 to quarter 4, so quite a material reduction. That appears to be continuing during the course of January, February of this year. And then thirdly, we retained the vast majority of fixed term deposits that mature, the vast majority. Of those, we reckon about 60%, six-zero percent are going back onto fixed term versus the rest, which are basically staying within Instant Access.

Speaker 1

So you've got that effect as well going on in the overall mix. I think together, those three factors that we witnessed in Q4 and we're continuing to witness in Q1 of this year support the thesis at least that deposit churn does appear to be slowing. Now again, it's early days, and we have to see how things transpire, driven by all the points that Charlie mentioned. But the data certainly supports the supposition. Bank base rate cuts and what impact that might have.

Speaker 1

As you know, our guidance is greater than 2.90% for this year. That is predicated upon 3 bank base rate cuts. So we start out now at 5.25%. We end the year at 4.5%. We are also starting those in June.

Speaker 1

And both the quantum and the timing of those bank base rate cuts makes a difference. But to answer your question, we've given some guidance in the disclosures around the impact of a 25 basis points parallel shift reduction, just like we did on the way up. We're giving the same guidance on the way down. Now that is both base rate in Spire, but also it assumes a parallel shift in all associated curves of 25 basis points. And that gives you about CHF 150,000,000 hit to income off the back of that 25 basis points reduction.

Speaker 1

But it's worth making a couple of points. One is in that lower rate environment, just as Charlie's comments were indicating, you would expect deposit churn to slow even further. Why bother churning in the context of lower rates? Likewise, you might expect offsetting steps, if you like, in the context of other prices, including in particular asset markets. You certainly saw that in the way up.

Speaker 1

It's hard for me to believe that you don't also see it on the way down and, therefore, compensating effects or adjustments, if you like, in other Asset Markets. And possibly, who knows, you might see stronger levels of activity in that type of market too. Overall, what that means is that while the €150,000,000 number is a kind of crude estimate, if you like, of the effect of a 25 basis points parallel shift, the net number is likely to be lower than that because it is offset by the 2 or 3 factors that I just mentioned. As to the ultimate outcome, I suspect rate reductions above and beyond what we have given in our forecast. They are negative from an income point of view for sure.

Speaker 1

But as said, they are less negative than that €150,000,000 sensitivity might point out. And the extent of that, I think, will depend upon not just the quantum, but also the timing. These are late in the year, they don't make much difference to 2024. If they're earlier in the year, they clearly make more.

Speaker 3

So next question from Alastair.

Speaker 7

Yes, thank you. 2 then, please. 1, so your Britain's mortgage bank, and nobody's really asking about what seems to be a very significant improvement in the outlook for the mortgage market. I wonder if that's because you're not charging enough for mortgages, about 60 basis points. It doesn't seem like very much, right?

Speaker 7

So the value added for mortgage growth feels pretty low. So is there any reason to hope that as the largest lender, you can influence that to a level that's more competitive so that we're more interested, frankly? And then secondly, insurance. I mean, you don't seem to make any money in insurance anymore or you certainly didn't. In theory, you should, right?

Speaker 7

You sound like you've fairly grown the business and you've got all the CSM there. Can that be a driver of earnings because it wasn't in 2023? Thank you.

Operator

Shall I go to that, William? And then you can come in. So yes, you are right. We are the leading mortgage bank. And as William said, and you know the data, the start of the year has been a good start.

Operator

I always say to the teams, 1 month doesn't make a quarter, let alone a year. But it's been good to see the confidence coming back into market, and the margins have stabilized, as you say, just north of 60 basis points. I think the first point is both 50 basis points, which we wrote business out last year and 60 basis points is very accretive business. And it's important to recognize that. You're shaking your head, but I can assure you when you look at the numbers, it's accretive.

Operator

The other point, which just goes back to the last discussion, which I think is really important, I said to you before, on the way up in rate cycles, we've lived through them a long way. What you want is both sides of the balance sheet. You want a balance sheet which is kind of 100% loan to deposit ratio. You want a good mix of secured and unsecured assets. And you want stable deposit bases, which are really grounded in strong relationships in the Retail business.

Operator

And what you've seen on the way up is we're differentiated in the stability of our deposit base and still competing effectively on assets. And on the way down, is what you're alluding to, we've got the best leverage and the best mix of assets to compete on the way down. And so we do think there will be upside on the way down. You need both sides of the balance sheet to be able to really win relative to our competitors in that context. And of course, underpinning all of this is still the structural hedge, which, as you know, has significant upside for us in each of the following 3 years and actually beyond, but obviously, relative to our guidance.

Operator

And we do still think that the longer term yield curve is going to give us confidence in investing in the structural hedge as it rolls off that underpins both sides of the balance sheet. Now how you assign the transfer price capital and cost of funding to both sides of the balance sheet, I don't know. You were shaking your head about returns. But I can assure you that even if you take a very competitive market priced 3rd party way of pricing mortgages, 50 to 60 basis points is good. And as you say, there is positive momentum in that market.

Operator

In Insurance, let me just deal with that one on Insurance. What we've laid out is a strategy for growth around capital light parts of the Insurance business where we know we have leading franchises and also the broader investments businesses, so the workplace pensions, home insurance and protection. They are businesses where we make money going forward. We're also growing market share, and we are winning in those markets. And what we committed to in the strategy, and we'll talk again more about this in the next few years, but again, now what we're starting to see is the benefits of having 26,000,000 customers through the broader relationships of the bank being brought together with those very distinctive capabilities in our insurance business.

Operator

We talked about our growth in annuities market share. You've seen the data, not the full data, but the underlying growth in our home insurance business. And you've seen the growth in our workplace pensions business. And what's, let's say, great about those businesses is they're all capital light and more predictable. And yes, the CSM does become a significant tailwind as we build that business going forward.

Operator

So we're both excited about what we're starting to see as the growth, which we committed to, and the proof points that we're starting to see our ability to bring those to our 26,000,000 customers and differentiate our distribution. But you're right. What we need to do is prove that to you in terms of underlying returns over the next few years. There was we didn't disclose the insurance dividends, did we? Yes.

Operator

Yes. There were strong dividends this year, which obviously is ultimately how you get, as a shareholder, the returns from that business. They were strong actually for all of the period of time I've been here. But this year, we increased dividend well in the last quarter of the year.

Speaker 1

Al, just to give you one or two numbers on that as well to back up Charlie's points. The we saw insurance income of CHF 1,200,000,000 this year. That is up 26 percent on last year, number 1. Number 2, to Charlie's point, we've seen the dividend be, frankly, extremely helpful from a capital generation point of view for the group. We had CHF 250,000,000 Insurance dividend this year.

Speaker 1

We had GBP 400,000,000 last year. And as Cheah over there knows, who runs the Insurance business, I'll always take that as Group CFO. So we've seen really strong performance in terms of profit growth for Insurance. We've also seen very strong capital contributions to the group from it. And then as Charlie said, we've got a strategic commitment to it in the context of the transformation that we launched in 2022, which should grow that further.

Speaker 3

Okay. Can you just take the next question from Val?

Speaker 8

Thank you. It's Ralph Suneuf from JPMorgan. Obviously, lots of detailed questions already on NII. Perhaps if I can invite you to comment on total income in terms of consensus and kind of what people are expecting for Lloyd. So when I think about margin, I think consensus going for 296,000,000.

Speaker 8

You've made it very clear, gentle decline in the first half, gentle upwards. Second half, that's greater than 2.90. Sounds like that might be a bit high. Then you've got the average interest earning assets number. I think consensus is up on at 4.55%.

Speaker 8

You haven't commented specifically on OI, and I think you've given us some help on operating lease depreciation. So I was just wondering whether or not you think sort of the $17,700,000,000 in consensus is broadly corrected, Maybe NII is too high, other income offsets that or perhaps there might be some optimism there. And then I guess the second one, just broader on the agenda of consumer duty. 1, how long do you think it takes to get to the other end in terms of clarity that you need for not just the motor finance issue, which I guess is going to be a live issue, and I guess you're waiting like everybody else till the end of this year. But also, there's a broader suite of changes that are coming in for the industry.

Speaker 8

How long do you think this process takes? And when do you think you'll have clarity to maybe 1, give us some clarity on overall provisioning but 2, perhaps make some changes to how you might compete in businesses where there might be opportunities for you against competitors?

Operator

Let me take the second question. Sure.

Speaker 1

Yes. Thanks, Raul. I guess, on your first question, I should start out by saying I'm not going to comment overtly on consensus. What I will do is give you the kind of building blocks, if you like, to allow you to build the income profile for the business. As you say, we have got guidance for Creighton, 2.90 basis points.

Speaker 1

We feel very comfortable in that guidance. It is driven by the 3 or 4 factors that I mentioned earlier on. That is to say, deposit churn continuing but slowing, number 1. The mortgage refinancing headwind continuing through the year, albeit abating through the year, number 2. That being somewhat augmented by an expected degree, touch more retail asset margin pressure, which you'll have seen from our slides we saw in 2023, probably a little bit more of that in 2024.

Speaker 1

But then all of that offset by the principal tailwind of the structural hedge, which builds momentum. And that's what gives us comfort in really two things. 1 is the margin guidance of greater than 2.90%. The second is the kind of shape that we discussed earlier on, which is to say a gentle decline during the first half, gentle incline in the second half, certainly confirmed by the time we get to quarter 4. That's our expectation.

Speaker 1

Things could change. Things could change like activity. Things could change like bank base rate expectations and the like. But at the moment, that's based upon our GDP outlook, and it's based upon our rate expectations, which look pretty much like the market as far as I can tell today. The AIA expectation, as said earlier on, is deliberately greater than GBP 450 billion, and that is partly because of the uncertainties.

Speaker 1

It's partly, obviously, the call that we make based on how we see the business. I should add, and I didn't say this in my earlier comments, that we had a bit of an overhang from open mortgage book refinancings in quarter 4. They did not refinance in quarter 4. We expect to happen in quarter 1. So if you see some slight nuance to my comments around AIA's in respect to the open mortgage book in quarter 1, that's why we're expecting some a reasonable flow of refinancings in the open mortgage book, which will probably attenuate the growth that you might see in that book in quarter 1.

Speaker 1

So I say that just for context and ahead, I guess, of reporting to you at the end of the quarter. The OOI, as you say, we haven't commented on. I guess I'll make a couple of comments there. One is, as you know, OOI was up 10% in 2023. I think that was probably a little bit ahead of where the market expected us to be.

Speaker 1

We do expect OOI to continue to grow during the course of 2024. Now whether it will be ahead of or in line with or below market expectations, I shan't comment, but we are confident in a reasonable pace, if you like, of OOI growth. Whether it will be 10% or not, let's see. That may be a little bit south of that, but it should be reasonably healthy growth. And it should be, in turn, achieved all across all of our business areas, that is to say, retail, commercial, IP and I and also central as well, which include primarily our Equity businesses, as you know, Lloyd's Development Capital is an illustration of that.

Speaker 1

So, I would expect that to grow over the course of the year. Again, I shan't comment on it versus the market. But overall, it leads us to feel comfortable with the overall income profile when set against the cost guidance that we've given you and the below 30 basis points impairment guidance, and that below is worth underlining to get to our 13% RoTE target as a whole. So perhaps I'll pause there, Charlie, and hand over to you. Yes.

Operator

In Consumer Duty, so it's obviously a really important question. A couple of thoughts in reaction to it. The first is, obviously, we implemented the first phase of this last July. We worked very closely with the FCO on that. We had strong feedback that the capabilities we bring and the experience that Lloyds Banking Group has had around thinking about good customer outcomes and then dealing with remediations and supporting vulnerable customers means that we were right at the front of the pack around how we were thinking about consumer duty.

Operator

And then we've got another implementation this summer for the next phase of implementation. So it's early days. And I said when I joined Lloyds Banking Group, it was one of the areas I really saw the depth of competence, capability and proactive thinking in the bank. It's a really important capability for me as the CEO of this group to think we have product, channel and then broader operational teams that really do think about customer outcomes and then put in place effective controls across all of our people and our 26,000,000 customers. Your question around the go forward and when this becomes clear and what the opportunities are, I think the pragmatic answer is it's going to take a couple of years to bed in, both for the industry and us is the major biggest participant to really demonstrate how we're now measuring outcomes from customers and taking actions and for the regulator to determine how they think about that in the context of their business.

Operator

You know me well enough by now, I sat down with my team, some of whom are here, on day 1 and said, what are the opportunities to serve customers better? And there are. There are opportunities. Because if you think simply in the last 15 years, what's happened in the UK is we've put lots of constraints on how you interact with customers at the point at which you sell a product to them. And Wealth is probably the best example.

Operator

But if you can then move to certainty around looking at how people use our services and products, most of our customers are with us for 10, 20, 30, 40 years, and you can get confidence around how they use them, can actually make it easier for them to upfront get access to them if they're still well designed products. So I think there are and that's conceptual, but it's really important. I think there will be opportunities the industry, but that won't emerge for a few years, I think. One other thought, which I think is important in this context, I'll let William take all of the detailed questions on motor finance, but having a strong relationship with your regulator is really important. Actually, I think the way you've seen the FCA intervene, we have said we welcomed their intervention.

Operator

It's different, right? It's different from prior examples. They've stepped in quickly. They understand what the implications could be for customers, for the industry. You know, actually, the biggest participant in this industry is the car manufacturing industry, not actually the banks.

Operator

We're not the biggest financers. We are the biggest individual financer, but it's a much broader industry. And the FCA is very proactively leaning into consumer duty to make sure they get the balance right, and I think that's important. And it's different from if you go back 15 years ago, what I saw at the start of this journey between the conduct regulator and the banks.

Speaker 3

Thank you. We'll take the next question from Jonathan.

Speaker 9

Hello, good morning. It's Jonathan Pierce from Deutsche and Numis. Can I ask you two questions? Sorry, I'm back on motor. The market has obviously moved to take circa €3,000,000,000 out the market cap in no small part I think because of this.

Speaker 9

The analysts naturally are going to think about worst case scenarios and many figures out there, but £2,000,000,000, £3,000,000,000 higher than that in some cases. I don't expect you to give us your worst case scenario that's feeding into that £450,000,000,000 but it would be helpful to get a little bit more color on how you're thinking about the worst case scenarios relative to the market. I mean, naturally, we're going to assume that $42,000,000,000 of originations in Blackhall since 2007 to 2020, All of it was discretionary commission arrangement linked, which probably isn't the case, but it'd be helpful if you could give us some color on that. And I think also if you could just confirm, and this is a matter of fact as much as anything else, the trust documents from Cardiff in the late 2010s suggest that 2 thirds of the business was written an APR below 7%. Is that representative of the business that was written more broadly?

Speaker 9

I mean, it's a good sample size. It's CHF 4,000,000,000 of loans in those securitizations. So that's that will be the first question. The second question is more simple really about the trajectory to this 15% RoTE in 2026. I mean the market will go away this morning and worry a bit about near term NIM operating lease depreciation, those sorts of things.

Speaker 9

But you're still targeting an RoTE above consensus couple of years out on a probably a T now that's at least as high as consensus probably higher than consensus rather. Is the bottom line here that the deposit margin, one of the most striking numbers this morning I found actually was Slide 17 where the deposit margin in the second half was 100 and 22 basis points, which against the backdrop of base rates of 5% plus is very low and it's clearly a function of the structural hedge cost. If we stand back from deposit betas and mix and hedge unwinds and all that sort of good stuff, is the simple message here that in a rate environment when base rate is, I don't know, 3%, 3.5% a few years forward, you should be making quite a lot more than 122 basis points on your deposit book. And that's how we get to 15% RoTE.

Speaker 1

Yes. Thanks. Thanks, John. Should I take those, John?

Operator

Yes. And I might be able to take one because it's a great question.

Speaker 1

Thanks, John. On the motor question, first of all, we won't comment on models that are out there right now. The GBP 450,000,000 provision, as you know, is both operational and legal expenses on the one hand and a variety of redress scenarios on the other hand, which in turn build into the GBP 450,000,000. Within that, I mentioned some of the variables that are put into those scenarios. Again, time periods, commission model, 0 versus reasonable commission, proactive versus reactive redress campaigns, response and uphold rates, these types of things.

Speaker 1

Within that, I think there are some variables that are particularly sensitive, and I would highlight the 0 rate versus reasonable rate as an example. I said that could lead to a circa greater than 50% reduction in any redress provision that might be necessary here. Likewise, the behavioral versus contractual life is an important one. Likewise, is this a proactive redress campaign, if that is what it gets to? Or is it a reactive one?

Speaker 1

That's another big one. And these things make a very big difference to the overall provision that might be necessary. And when we observe the outside market and the assessments that it makes without commenting on them, we note the absence of that type of sensitivity, if you like, in those numbers. The you asked a question about the proportion of financings that are linked to discretionary commission models. The reason why we're not giving further detailed information at this point is because we see the big judgments that will make a massive difference to whatever the redress might come out of this are basically in the hands of the regulator of the issues that I just mentioned as examples.

Speaker 1

There's also an awful lot of kind of intricacies in the detail that we might give you. So if we start to give you a piece of detail around, let's say, discretionary proportions, there is a whole load more detail behind that about when they were applied, about the extent to which there's flexibility in the model, about the type of discretionary model and all of these types of things. And so, I think at the moment at least, recognizing that the big judgments that will make a material difference to the provision are in the hands of the regulator. And then any detail that we will give you or any kind of nuance around the edges in comparison with that, That's the reason why we're sort of sticking with where we're at. There is, as you say, some publicly available information.

Speaker 1

And you mentioned the trust documents there in the context of Black Horse. I shan't comment on that, safe to say that there's quite I think as you have been doing, if you kind of stretch beneath the surface, there's quite a lot of public information out there that enables you to get to views on these things. But bear in mind that, again, the key judgment is not so much that. The key judgment is where does regulator go in respect to some of these big calls that we highlighted. On the 15%, first of all, I can't resist, but it's worth just underlining we expect greater than 15%.

Speaker 1

I mentioned earlier on that, that is not contingent upon 13.5% moving to 13%. We would still be saying greater than 15% even if we had stuck with 13.5% as a CET1 target. So with that in mind, I guess, a couple of building blocks. One is we do expect the business as usual, which, in my parlance, I suppose, includes structural hedge, to significantly ramp up in the period between now to 20 16 2016, 2026. The primary reasons for that are the headwinds, as I say, go into abeyance.

Speaker 1

The mortgage one is very mechanical. As long as you don't think the completion margin is going to completely collapse, the fact that our maturity margins are coming down over this time period means that the mortgage refinancing headwind kind of moving out of the picture, that's a pretty mechanical outcome. The deposit 1 is a bit more of a judgment call based upon where rates will go, based upon how many people move from Instant Access into fixed term and so forth. But as Charlie said, the incentives for that type of move seem to be kind of disappearing during this time frame. And then the 3rd big driver, the big tailwind, of course, the structural hedge, again, is a relatively mechanical input predicated upon a certain interest rate assumption, base rates, forward curves and the like.

Speaker 1

And as long as you believe that base rates and forward curves are more or less as we have depicted them, and it is more or less, it doesn't need to be precisely clearly, then again, you've got a very mechanical building in terms of the structural hedge profile over time within the business as usual earnings profile. And I'll make one more comment there, which is that at the moment within the structural hedge, we have because of the legacy of when it was built up in a low rate environment, quite a lot of low yielding hedges. Those come through at various different points in time. They come through a little bit less in 2025, a little bit more in 2026. So you get more of the low yielding hedges out in 2026 you did in 2025, which leads, in turn, to a bit of a ramp up in structural hedge earnings in that time period.

Speaker 1

So that's the business as usual picture. It is then supported by the strategic initiatives where we expect to gather pace. We talked a bit about insurance and the interaction between insurance and retail is one example. As you know, there are many more across the Retail, Commercial and Insurance spaces that we expect to build to the $1,500,000,000 incremental revenues over the 2026 time period. Alongside of that, we I hope people will acknowledge, we try to keep very tight grip on costs.

Speaker 1

Now as you've seen today, we've upped our cost guidance from 9.2 to 9.3, but that is in the interests of securing some severance benefits. Those in turn and other cost savings metrics allow us to plan for a flatter cost outcome in the 2025 to 2026 period. I won't be more precise than that because we'll come back to you at the end of the year on it. But that, together with an ebbing of the overall investment program, we're going to continue to invest heavily in the business. We should do and we will do.

Speaker 1

But nonetheless, the type of boost that we've had in the last few years, that will at least plateau out and potentially at least come down a little. So that gives us a relatively faster cost picture. Resting upon a macro environment of the type that we portrayed in our forecasts, that's what gives us confidence in the context of the greater than 15% RoTE expectation for 26%. And specifically on your question, Jonathan, therefore, a big part of it, as you say, is a normalization of the deposit margin off the back of the structural hedge maturing. So in short, the answer to your question is yes.

Operator

Can I just jump in? Because it's a really important strategic question. The answer is yes. And we have worked and you do analysis across banking markets across the whole world. One of the consequences of a decade or more of very low interest rates, And when we started this journey together, Wim and I are with you, we had a few things that we inherited.

Operator

We had over £250,000,000,000 of structural hedge, which was returning 1%. We had a £7,300,000,000 pension deficit. We had a very large legacy mortgage portfolio at margins that you all looked at and said we knew we couldn't return. We hadn't been able to invest in some of the modern technology that we knew we needed to do to compete. And if you think through what's happening here, if you have a well positioned customer centred balance sheet, which is deleveraged on both sides of the balance sheet with good diversity across secured and unsecured, which we do have, with a loan deposit ratio of 96%, 97%, Through cycle and as base rates go up, you will get a rise in the base return on that balance sheet.

Operator

That is what's happened in every banking market and the U. K. Over history. So your simple thesis, I think, is the right one. Now there's a lot you need to have to be able to do that successfully.

Operator

And I think Lloyds Banking Group does have those things. And the tenant that we've always said is, by 2026, we will have got out of most of those problems. We've already dealt with the pension deficit, which I thought was a horrible drag on us and you. You've heard the other things we've talked about that we're doing. And then on top of that, we're layering on £1,500,000,000 of additional revenue growth.

Operator

So we look at the targets, and we think we're very glad with the strategy we laid out. And it enables us to compete whether rates go up or down. But as the base rate environment increases, it really strengthens our business model.

Speaker 3

Okay. I'll just take a couple more questions. Chris, why don't you get there?

Speaker 10

Good morning. Thanks. It's Chris Kent from Autonomous. If I could just come back to your CET1 target, please, in the 13%. So I know in your fixed income deck, you show a 10.3% MDA, but you do have the ring fenced buffer as well.

Speaker 10

So just in terms of how credit markets are going to price your debt, are you happy to run with a headroom to MDA at the very lower end of what we observe across European banks. I appreciate that there is a countercyclical component to your MDA, which isn't the case for some peers. But you are going to screen pretty badly on those charts that some of my credit colleagues run. So how do you think that's going to impact the pricing of your debt, please? And then on a sort of related capital point, you've said now €5,000,000,000 of further RWA inflation from regulatory change across 2024 to 2026.

Speaker 10

I'm just curious if you can give us a little bit of a pointer as to where you expect RWAs to be by 2025, say, so you've had that 220 to 225 kicking around for a little while. I get the impression that some of the reg inflation is maybe going to come a bit later now than you expect. I don't know. But obviously, we've got Basel 3.1 in 2025. Just curious as to how your thinking is developing around 2025 RWAs, please.

Speaker 1

Yes. Thanks, Chris. Perhaps I'll deal with those 2, shall I tell you? The CET1 point, first of all, as I said in my comments, we think this reduction from 13.5% to 13% is good news actually for all stakeholders. And I think, Chris, the reason why is because you have to look behind the reasons as to why we're doing this.

Speaker 1

We're doing this because we significantly reduced risk in the business. As I mentioned earlier on, you can look at various different portfolios that we have to testify to that. But perhaps, most objectively, you can look at the ACS results to testify to that. So, I would hope that debt holders very much welcome the risk reduction measures that we've been taking in the portfolio, particularly in the last 5 years, as I mentioned, but also you witnessed it in 2023. Securitizations are an example of that.

Speaker 1

There are many others. That's point number 1. Point number 2 is that you'll be aware because of CRD4, we are seeing an increase in RWA density over this time. That RWA density means that actually, a reduction from 13.5% to 13% is not as much of an equity reduction as you might at first think. Because we are expecting CRD IV to continue to give us EUR 5,000,000,000 of RWAs over the course of the period between now to mid-twenty 26, That CRD IV add on continues.

Speaker 1

So I think, Chris, debt holders will look at not so much the equity Tier 1 ratio, but what is the total quantum of equity that we are holding in the business. And what they'll see is that against a reduced risk profile for the reasons that I mentioned, we are holding an equity base that isn't terribly different over this time period. I would expect, therefore, the type of spreads that we trade out within debt markets, which are typically better than anybody else's, at least in the local markets, will stay that way. The RWAs point you mentioned is a very fair question. We've given guidance of 220,000,000 to 225,000,000 and that's over the course of 2024.

Speaker 1

We've stuck with that guidance despite some material headwinds within the context of regulatory measures, in particular, again, CRD4. We thought a lot about that, Chris. We thought about should we be sticking with it in the context of CRD4 headwinds, and we determined that we would do because we had opportunities in part to offset those regulatory headwinds with NPV positive securitizations and other forms of optimization. And as you know from our numbers, we developed those over the course of 2023 and expect to continue that in 2024. That then enables us to stick with the guidance, which I hope from a shareholder point of view is good news.

Speaker 1

We remain very committed to controlling RWA growth. When we look towards 2026, there are a couple of things going on. One is the organic growth in the business. Charlie mentioned some of the lending ambitions, for example, in that context, and that will clearly add on RWAs. 2 is CRD 4.

Speaker 1

We've hopefully given guidance around that the incremental €5,000,000,000 subject to PRA confirmation, but that's where we expect it to land there or thereabouts. 3 is the expectation for Bol 3.1, which at the moment, as you know, from our perspective at least, we do not expect it to make any difference in the near term. That might be give or take a few €100,000,000 but it isn't necessarily much more than that. So Basel 3.1, we see as net neutral over this time period. And then finally, as I said earlier on, we remain committed to optimization, which is a good thing to do because it's NPV positive.

Speaker 1

And therefore, you ought to do it anyway, no matter what the regulatory situation is. But nonetheless, it also gives us a tool, if you like, or a lever to assess any RWA increases that might be beyond our initial expectations with optimization in mind. So Chris, I'm not answering your question directly. I'm not giving 2020 6 RWA expectations. But you can see that effectively, we'd expect regulatory measures to be either neutral or neutralized by our RWA optimization.

Speaker 1

But then at the same time, perhaps some lending growth beyond what we see in 2024, so an increased pattern of RWAs in the period thereafter. We'll update you on what that means over the course of the next periods.

Operator

And the only other is, of course, we're front end loaded actually the CRD4 impact in 2023.

Speaker 11

It's Armin from Barclays. I've got two questions, 1 on deposit pricing and the second on strategic revenues. Deposit pricing, interested in how confident you are in being able to react to base rate cuts in a timely fashion. I do note that the FCA seemingly externally took a keen interest in pass throughs, particularly towards the end of the cycle. I think you also passed through ultimately less than some of your peers, which is obviously a reflection of your franchise strength, but also arguably gives you a little bit less room to kind of cut on that part of the book on the way down.

Speaker 11

So interested in your thoughts on your reaction function without giving away your commercial secrets. Relatedly, could I ask about term deposit pricing? So I think about a year ago, you were originating term deposit comfortably below the relevant swap, materially below. So should we be thinking about this kind of repricing headwind on term deposits? So you're retaining the stock but at narrow spreads.

Speaker 11

Is that a material consideration that we should be thinking about this year? So that's one question, believe it or not. The second, I have to take the chance while Charlie's here around strategic revenue. So interested for your observation about your progress there. It's remarkable that you're onethree of the way through your €1,500,000,000 target.

Speaker 11

I would say it doesn't feel like you're onethree of the way through because we can't see it in terms of the kind of net impact on revenue. So could you kind of give us a view on what you think is going kind of better or worse than your expectations? And any color on that residual $1,000,000,000 How much of it is OOI versus NII from here?

Operator

Do we have to go both?

Speaker 1

Please.

Operator

So obviously, good questions. Just on deposit pricing, your two points. Just in terms of can we respond in a timely way, the answer is yes. And obviously, that's something that we worked on last year. Again, the issue on deposit pricing, unlike mortgage pricing, is mortgage pricing, obviously, it's just a new price for front book customers.

Operator

You can do that very quickly. Deposit pricing, we normally have to inform 15,000,000 to 20,000,000 customers and give the appropriate level of warning and set that up. So we have the ability to do that quickly, but actually need to give appropriate warning. The one thing I'd say is, I think the regulators will be less concerned about timely passing of rate cuts than they were around increases. So we're in a good place operationally.

Operator

Let's see how the competitive dynamic plays out around that, which I think is important. And then on time deposits, yes, I even said at this stage last year, I'm never worried when the rate when there's a high yield curve around time deposits because you can price at a good place for margin. The interesting time, which is the one that's going to come in this year, is when if the yield curve is now lower than your instant access or base rates and you've got existing time deposits that are coming off, what happens to the competitive pricing to retain those? And I have seen at other taste stages in the UK and in other markets, people that want to retain those deposits start pricing either at the cost of funding those TDs or even negatively. That obviously hasn't happened yet.

Operator

That's in front of us. As you know, if the time deposits are if our deposits are in time deposits, that doesn't benefit the structural hedge. So there's no issue around that from a structural hedge perspective. And I think what we're seeing so far is we're able as we've seen the yield curve come down and our time deposit curves rates come down, we're still competing and winning. So we'll give you more update as we go into this, but it's definitely one to watch.

Operator

I'm not worried about it from our fundamental economics. And our starting point is strong. Strategic revenues. So if I can disagree with you a little bit, I think you have seen the benefits of some of the things we're doing. Other operating income is, as I said, up 10% year on year.

Operator

We saw growth last year. I think we said last year, it was about 7% to 8% underlying growth. The numbers were a bit noisy last year because of some of the one offs, especially in the Insurance business. So that's the most that's the easiest way for you to see some of the growth. And I'll talk about where we're doing well and where there's some challenges relative to what we set out historically.

Operator

As you'll recall, today, we've said we've delivered €500,000,000 of revenue growth, net new from the investments and $700,000,000 of cost efficiencies. That's relative to the €700,000,000 in €24,000,000,000 and €1,500,000,000 of revenue growth in 2026,000,000. So that's a good place, and it's actually ahead of where I thought we'd be when I talk to you in February 2022. Starting from new and back building these businesses, it's always slightly back end loaded. We're actually ahead of the game on revenues, which is good.

Operator

Where do I see the progress? It's across the pitch. And then there's 2 areas probably that have been more challenging, which is largely linked to the external environment. So in our Corporate and Institutional business, you've seen the growth in OI. You can also, though, go and look at the market shares.

Operator

Go look at UK DCM, look at our share of FX, look at the awards and our growth in Transaction Banking. We've learned there were 5 big university mandates last year. We won all 5. That's never happened in our history. So there's great evidence in that business.

Operator

In Business and Commercial Banking, that's been one of the areas that's been most negatively impacted by the market environment. When we started this strategy, we thought we'd see underlying growth in SMEs on both sides of the balance sheet. What we've actually seen is both sides deleveraging, cash flows reducing and lending levels reducing. Underpinning that, we pulled out some key growth areas and we are seeing progress. So for example, our merchant acquiring business, which again is a nice fee based business and is really linked to some of our broader relationships into the large corporate side.

Operator

We've seen good year on year growth. That needs to get to scale to deliver the underlying profitability that we want. And we focus on trading businesses because this business historically had been largely a secured lending business, which is great. So it's not an or strategy, but it's an and. And we're building out this digital transactional banking working capital proposition and we're growing customers in that space.

Operator

It's tiny relative to the net changes in that balance sheet. So it's hard for you to see. So that's an area which is more difficult because of the trading environment. Insurance Protection and Investments, we talked about the annuity business market share is up. After the difficulty around pricing in Home Insurance, we saw a really strong year.

Operator

Our ability to start bringing protection products to our mortgage customers, We'll give you more evidence of that later in the year, but we're seeing good upticks in that. And our workplace pensions business is the number 2 business in the UK. And you know we have strong ambitions. We want to be number 1. So we're seeing the growth in that business.

Operator

On the relationship bank, I won't go through everything. Mass affluent, we gave you some of the stats. We're seeing growth in Mass affluent, growth in Mass affluent balances. We've launched a new investment service. That's small and that's slightly slower than we thought it would be, partly because interest rates have been so strong on savings.

Operator

But we're now alive with a ready made investments product. And I mentioned earlier that one of the things we're really interested is we start to bring that back to UK Banking, the investments as part of UK Banking. More than 50% of the customers that engage with that service are below 35%, and they're doing monthly contributions. So that's going to take some time to scale, but that's really important for lots of reasons. And then finally, on our customer lending consumer lending business, you've seen the growth in the transport business.

Operator

We've over delivered on our Tuscar franchise. We're seeing underlying growth in the consumer finance business. And we've announced this embedded finance business. It's going to take some time for that to become material from an economics perspective. But strategically, it's really important.

Operator

The other area that's been more challenging than we originally laid out is mortgages, and we've had the discussion around. I remember, we were the first institution to say we thought mortgage margins would go down to about 75 to 100 basis points. And we said that in February 2022, there was kind of deep intake in the room around that. Obviously, both the scale of the mortgage market and the margins have been significantly tighter than we thought originally. The resilience of the business model has more than offset that because we increased our margins guidance for 2026 by 300 basis points at the start of 2023.

Operator

But that's a more challenging market. Now the good news is we haven't been standing still and we'll continue to give you updates. I can see the CEO of the business over there around where we've been investing to engage customers, be better at remortgaging and then compete in parts of the mortgage market. And there's some really good stories within that. But obviously, as you've seen, our growth in mortgages has been behind where we wanted to be.

Operator

So yes, we have real confidence around the €1,500,000,000 by €26,000,000 to €700,000,000 by the end of this year. For me, the more important thing is to look at the underlying growth in market shares and then the resilience and stability of these franchises, recognizing, as you know, that the majority of Lloyds Banking Group's businesses have been losing market share for the previous decade. So we've all you can really look at the data and see that stabilized, and we've turned the corner. And these strategic areas are growing well.

Speaker 3

Excellent. We're nearly 15 minutes over, so I think that, that feels like a great place to stop. I am conscious that there are a couple of other questions which we'll deal with either after this formal conference or indeed directly. But otherwise, let me just hand back briefly to Charlie just for final

Operator

Thanks, Douglas. Well, look, just very briefly, thank you so much for coming today, and thank you very much for your attention. 15 minutes over, this is the end of a very long season for you. I'm guessing you started with the American banks in January, and we're near the end of the Europeans and the UK. So really appreciate the time.

Operator

One kind of sales pitch, if that's all right. We have our mass affluent and IP and I seminar on the 20th March. It will be part of Chira's insurance business, not the whole thing, the investments piece, but that's going to be another example where we can unpick the covers of what we are doing and we're making progress. So if you're interested in that, please join us for that. And again, thank you very, very much for joining today.

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Earnings Conference Call
Lloyds Banking Group Q4 2023
00:00 / 00:00