Lloyds Banking Group Q1 2025 Earnings Report

Lloyds Banking Group EPS Results

• Actual EPS: $0.11
• Consensus EPS: $0.08
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Lloyds Banking Group Revenue Results

• Actual Revenue: $5.91 billion
• Expected Revenue: $4.78 billion
• Beat/Miss: Beat by +$1.13 billion
• YoY Revenue Growth: N/A

Lloyds Banking Group Announcement Details

• Quarter: Q1 2025
• Date: 5/1/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, May 1, 2025
• Conference Call Time: 4:30AM ET

Lloyds Banking Group (NYSE:LYG), together with its subsidiaries, provides a range of banking and financial services in the United Kingdom and internationally. It operates in three segments: Retail; Commercial Banking; and Insurance, Pensions and Investments. The Retail segment offers a range of financial service products, including current accounts, savings, mortgages, motor finance, unsecured loans, leasing solutions, and credit cards to personal customers. The Commercial Banking segment provides lending, transactional banking, working capital management, risk management, and debt financing services to small and medium-sized entities, corporates, and institutions. The Insurance, Pensions, and Investments segment offers insurance, investment, and pension management products and services. It also provides digital banking services. The company offers its products and services under the Lloyds Bank, Halifax, Bank of Scotland, Scottish Widows, MBNA, Schroders Personal Wealth, Black Horse, Lex Autolease, Birmingham Midshires, LDC, AMC, Embark Group, Citra, IWeb, Cavendish Online, and Tusker brand names. Lloyds Banking Group plc was founded in 1695 and is headquartered in London, the United Kingdom.

Lloyds Banking Group Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1 the Group delivered statutory profit after tax of £1.1 bn, net income up 4% to £4.4 bn, a net interest margin of 3.03% (up 6bps) and RoTE of 12.6%.
• Lending balances grew 2% (£7.1 bn) including mortgages up £4.8 bn, while deposits rose 1% (£5 bn), underpinning a stable structural hedge notional of £242 bn.
• Operating costs were £2.6 bn (up 6% y/y, 3% ex front-loaded severance of £200 m), on track for the £9.7 bn 2025 guidance, with a Q1 cost/income ratio of 58.1%.
• Asset quality remains resilient with a Q1 impairment charge of £309 m (27 bps), including a £35 m MES adjustment, and the CET1 ratio at 13.5% after generating 27 bps of capital.
• Management reaffirmed its 2025 guidance of net interest income around £13.5 bn (including £1.2 bn hedge benefit), RoTE circa 13.5% and ~175 bps of capital generation.

Presentation

[Operator]

Thank you for standing by, and welcome to the Lloyd's Banking Group twenty twenty five interim management statement call. At this time, all participants are in a listen only mode. There will be a presentation from William Chalmers followed by a question and answer session. If you wish to ask a question, please press star one on your telephone. Please note this call is scheduled for one hour and is being recorded.

[Operator]

I will now hand over to William Chalmers. Please go ahead.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thank you, operator. Good morning, everybody, and thank you for joining our q one results call. As usual, I'll run through the group's financial performance before we then open the line for q and a. Let me start with an overview of our key messages on slide two. In q one, we continued to deliver on our purpose driven strategy.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

As you've heard at our full year results presentation, strategic execution underpins our ambition to meet more customer needs and secure higher, more sustainable returns for our shareholders. In the first quarter, the group demonstrated sustained strength in its financial performance. This included further growth in income following the upward trajectory established in the second half of last year. We've also maintained our cost discipline, and asset quality remains strong. In the context of evolving global economic risks, our differentiated business model is resilient.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Tariffs will have a very limited direct impact on our business, but we will, of course, continue to monitor the broader UK economic implications. In this context, our focused strategy, our strong customer base and franchise, and our sustained financial performance all give us confidence in the outlook for our business and underpin our guidance for 2025 and 2026. Let's turn to a financial overview on slide three. As said, Lloyd's banking group demonstrated sustained strength in its financial performance in the first quarter of this year. Statutory profit after tax was 1,100,000,000.0 with a return on tangible equity of 12.6%.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

In q one, net income of 4,400,000,000.0 was up 4% compared with the first quarter of the prior year. This was driven by continued growth in both net interest income and other operating income, partly offset by a higher operating lease depreciation charge. The net interest margin was 3.03%, six basis points higher than the prior quarter. Operating costs were 2,600,000,000.0, up 6% year on year. This includes a planned increase in front loaded severance costs without which it would be 3% year on year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Asset quality remains resilient. First quarter impairment charge of 309,000,000 equates to an asset quality ratio of 27 basis points. This includes a net 35 million multiple economic scenarios impact. CNAV per share is now 54.4p, up 2p from the end of twenty twenty four. This performance resulted in capital generation of 27 basis points, which was a strong underlying performance impacted by the front loaded severance costs and a temporary 14 basis point increase in RWAs, primarily linked to hedging activity.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

The group CET one ratio stands at 13.5%. Let me now turn to slide four to look at developments in the balance sheet. Underpinned by our leading customer franchise, both lending and deposits demonstrated strong growth in q one. Group lending balances of 466,200,000,000.0 were up 7,100,000,000.0 or 2% in the first quarter. Within this, we delivered another strong quarter of mortgage growth, up 4,800,000,000.0.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Lower rates supported customer demand and the prospective stamp duty change accelerated completions. This probably implies a slightly slower pace in mortgages in q two. More broadly in retail, we saw good growth across all of our propositions, including credit cards, loans, motor, and European retail. Commercial lending balances meanwhile increased by 300,000,000.0 in the first three months. Growth in our CIB and BCB franchise more than offset 500,000,000.0 of government backed lending repayments in BCB.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Turning to liability franchise. Again, we saw a strong performance in q one. Deposits grew by 5,000,000,000 or 1% in three months. Within this, we saw an increase of 2,700,000,000.0 quarter on quarter in retail deposits after seasonal impacts from tax payments. Savings accounts were up 1,500,000,000.0 and current accounts were up 1,200,000,000.0.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Within PCAs, churn continues to be offset by wage growth alongside subdued consumer spending. Commercial deposits were up 2,300,000,000.0 in q one. This included some short term inflows in CIB ahead of the tax year end. And alongside these developments, insurance, pensions, and investments saw 800,000,000.0 of net new money in the first quarter, bringing assets under administration to 183,000,000,000. Turning now to our income performance on slide five.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

The group saw continued income momentum in the first three months. Both NII and OOI showed good progress. Net interest income of 3,300,000,000.0 was 1% higher than the prior quarter despite a lower day count and 3% higher than q one last year. This was in part driven by average interest earning assets of 455,500,000,000.0, up point 4,000,000,000 in the quarter. The increase in AIEAs was lower than customer lending growth, largely due to mortgage completions being weighted towards the end of the quarter and lower lending to banks in commercial.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Performance was also driven by the q one net interest margin of 303 basis points, up six basis points quarter on quarter. The margin benefited from the sustained structural hedge tailwind and probably a basis point or so of one off impacts, for example, from the early redemption charges in mortgages. As you know, the structural hedge tailwind is strong. It generated 1,200,000,000.0 of interest income in the first quarter, up 30% year on year. Underpinning this, the hedge notional remains stable at 242,000,000,000, reflecting the continued strength of our deposit base.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

The q one nonbanking NII charge was 112,000,000, mainly driven by in quarter activity flows and refinancing volumes. In 2025, we continue to expect total net interest income of around 13,500,000,000.0. This includes 1,200,000,000.0 year on year growth in structural hedge income, offsetting mortgage refinancing and deposit churn impacts. Note that whilst we expect continued momentum in NII through the year, the quarterly contribution from key components such as the hedge, mortgages, and deposits will not be constant across every period. Now turning to other income progress on slide six.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

OI of 1,500,000,000.0 is up 8% year on year, reflecting broad based momentum across the franchise. In particular, growth versus prior year was driven by strong contributions from the motor business and general insurance. Versus the fourth quarter, CIB also showed showed strength. Driving this growth, as you would expect, we are seeing continued quarterly momentum in our strategic transformation. You can see some of these terrific developments on the slide.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

In the past few months, we've launched several propositions, including Black Horse FlexPay within our consumer business, an embedded finance offering, alongside an intermediary income protection proposition within insurance. In business and commercial banking, we're scaling Lloyd's Bank Connected, our market leading digital services platform for PCP clients. And meanwhile, in equity investments, Lloyd's Living is making continued progress. Operating lease depreciation saw a charge of 355,000,000. This is higher than the prior quarter, primarily driven by continued fleet growth, higher value vehicles, and lower gains on disposal.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We continue to work on ways to tightly manage operating lease depreciation going forward. And as usual, we'll revisit the fleet valuation at q two. Let me now move to cost on slide seven. Cost discipline, as always, remains a key focus for the group. Q one operating costs were 2,600,000,000.0, up 6% on the prior year and consistent with our planning assumptions.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

This was driven by front loaded severance representing a charge of 200,000,000, some 80,000,000 higher than q one of last year. We've deliberately taken this charge early in the year in order to accelerate cost efficiencies. Excluding the increase in severance, operating costs were up 3% year on year. Within this, ongoing investment and business growth alongside the effects of inflation continue to impact the cost base partly mitigated by growing efficiency savings. We remain on track to deliver our 9,700,000,000.0 operating cost guidance for 2025, including the circa 100,000,000,000 impact of employers' NIC changes, which took effect from April.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Pleasingly, there was no net remediation charge for the quarter. At the same time, 200 to 300,000,000 remains our expectation for the full year. Putting all this together, the cost to income ratio for q one was 58.1% influenced by severance costs alongside the annual b a BOE charge as mentioned. Looking forward, we expect the ratio to decline through the course of this year. Let me now turn to asset quality in slide eight.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Asset quality is resilient, reflecting prudent lending and healthy customer behaviors. New term arrears remain low and stable across our portfolios, indeed with continued improvement seen in some areas such as mortgages. Early warning indicators are stable and benign. For example, minimum repayment levels in cards remain low as our working capital utilization levels in commercial. In this context, the q one impairment charge was 309,000,000, equivalent to an asset quality ratio of 27 basis points.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

On a pre MES basis, the asset quality ratio was 24 basis points, a stable underlying charge reflecting our resilient customer base and our prudent approach to risk. The 35,000,000 net MES charge rests upon a base case of modestly lower growth for The UK versus our q four outlook. GDP expectations are for point 8% growth in 2025, HPI of 1.7%, with unemployment peaking at 4.8%. Our q one base case assumptions incorporate a level of increased tariffs. As we close q one, it became apparent that the scale of these, therefore, the potential impact could be more extensive than assumed.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Therefore, based on scenario analysis, we've added an additional 100,000,000 central adjustment to accommodate this risk. We'll monitor up developments and updates at q two. The balance sheet is well positioned to cope with these economic uncertainties. Only very modest and highly rated parts of our commercial business are directly exposed to The US, And the quality of our UK business protects against any second order local impact. As of q one, our stock of ECLs on the balance sheet is 3,700,000,000.0.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

This is about 450,000,000 in excess of our base case. In sum, whilst we remain vigilant, the group is performing well. We continue to expect the asset quality ratio for 2025 to be circa 25 basis points. Let me now move on to slide nine and address RoTE and TNAV. Statutory profit after tax of 1,100,000,000.0 resulted in a robust return on tangible equity of 12.6% for the first quarter.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We continue to expect a return on tangible equity of circa 13.5 for the full year. The volatility charge was 11,000,000. This was driven by the usual fair value unwind and amortization, partly offset by positive market volatility impacts. Tangible net assets per share were 54.4p, up 2p in q one. The increase was driven by profit accumulation alongside the unwind of the cash flow hedge reserve.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And looking ahead, we continue to expect material TNAV per share growth from profits and the cash flow hedge reserve unwind supported by share count reduction from the buyback. Moving on, I'll turn to capital generation on slide 10. Underlying capital generation in q one was strong. Within this, risk weighted assets increased by 5,500,000,000.0 to 230,100,000,000.0. This reflects the impact of strong lending growth in the quarter, but also a temporary RWA increase of circa 2,500,000,000, primarily related to hedging activity.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

This temporary increase is expected to reverse by the end of the third quarter. As you know, we continue to focus on RWA efficiency and optimization to help offset the impact of regulatory pressures and other growth, and we expect this to increase through the year. Capital generation was 27 basis points in the quarter. This is driven by a strong underlying banking build impacted by front loaded severance, and as said, is also after the temporary RWA increase alone worth 14 basis points. Looking ahead, we continue to expect circa 175 basis points of capital generation for the full year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

After 23 basis points of dividend accrual, our closing CET one ratio for the quarter is 13.5%. We continue to expect to pay down to a CET one ratio of 13% by the end of twenty twenty six, with 2025 being a staging post towards that target. I'll now move on to slide 11 to wrap up the presentation. In the first quarter, the group delivered sustained strength in financial performance. Q one again saw income growth alongside continued cost discipline and a resilient asset quality.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

This in turn led to strong underlying capital generation. Looking forward, we're well positioned for the future. We remain confident in our 2025 and 2026 guidance as you've seen before and as laid out on this slide. Our strategic execution and differentiated business model underpins our commitment to generate higher or sustainable returns for our shareholders. That concludes my comments for this morning.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thank you for listening. We'll now open the lines for your questions.

[Operator]

Thank you. If you wish to ask a question, please press 1 on your telephone keypad. To withdraw your question, you may do so by pressing star two to cancel. There will be a brief pause while questions are being registered. Thank you.

[Operator]

The first question is from Guy Stebbings at Exane BNP. Your line is unmuted. Please go ahead.

[Guy Stebbings, Executive Director at Exane]

Hi. Good morning, William. Thanks for taking the questions. The well, just one more question, really, so your net interest income. It's clearly been a good start to the year with NIM up six basis points in the quarter.

[Guy Stebbings, Executive Director at Exane]

Good deposit trends, presumably only increase your conviction on the hedge notion outlook, and interest expense on non banking, course, again, maybe a bit better than expected. So I appreciate it's only one quarter in the year, and I don't think people would expect you to change guidance at this stage. But as you reflect on that 2025 NII guidance of 13.5 in, you becoming more confident or sort of more upside versus downside risk from here? And then linked to that, sort of two supplementaries, can I just check if you're seeing any downward pressure on new mortgage completion application spreads this quarter versus prior quarters? And is that interest expense and non bank book, flatted in any way in q one?

[Guy Stebbings, Executive Director at Exane]

Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks very much for those questions, Guy. Three questions. I'll take them each, step by step. The net interest income and our guidance of 13,500,000,000.0 for the year and what we've achieved in the first quarter of this year. You know, I think we're pleased overall with the performance in net interest income over the course of the first quarter, up 1% on a quarter by quarter basis at $3.02 $9.04, up 3% on a year on year basis versus quarter one twenty twenty four.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So it's a decent start, and it's supported by the usual three elements. That is to say, decent performance in net interest margin, an uptick in AIEAs, and actually an improvement versus the the fourth quarter in nonbanking net interest income. When we look at that going forward, therefore, Guy, off the back of that good start, we feel pretty good about the expectations and indeed our guidance for 13,500,000,000.0, but it is, of course, early in the year. Just a comment on each of those. Net interest margin up, six basis points over the course of the first quarter, '2 '90 '7 to three zero three.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

I mentioned in my comments just there that there was perhaps a basis point or so of basically ERC early redemption charges in connection with the good, very healthy mortgage performance that we saw in the first first quarter. But we do expect that net interest margin to continue to tick up through the course of the year. It'll ebb and flow a little bit in terms of the precise quantum in any given quarter, but we expect it to tick up, and the first quarter was a good start. AIEA is up just about 400,000,000.0 in the course of the first quarter. And as I mentioned, our lending was broad based, but on the other hand, a good chunk of it, 4,800,000,000.0 in mortgages, was back end loaded.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So you should expect to see that AIA count tick up in the course of quarter two and thereafter beyond. And then finally, nonbanking net interest income. That is a, number which has said has come down slightly in the course of q one versus q four. It is essentially funding an activity led, and it will ebb and flow a little bit depending upon what gets refinanced in a given quarter, depending upon levels of, for example, CB activity. And indeed, the course of the first quarter, at least, reflecting the fact that we had a strong quarter in LDC exits in quarter four.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So all of those things added together to answer your first question, Guy, we good feel good about the 13,500,000,000.0 NII guidance for the year. It is early in the year. There are clearly some risks out there. The two that come to mind, there's a lot of discussion right now about precisely where interest rate rates will land and what type of bank base rate cuts we might see. Number one, I'm coming on to your second question in respect of mortgage spreads, which might be a second uncertainty, number two.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

But as said, we feel pretty good about the guidance we've got out there right now. Secondly, mortgage spreads. We saw mortgage spreads of or completion spreads, I should say, of just a shade over 70 basis points in quarter one. That's a very small amount down from what we saw in quarter four, but not really a noticeable difference. In that context, as you know, we were able to secure really a very creditable mortgage performance, up 4,800,000,000 in the quarter, somewhere between 90 to 20% market share.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

But it is safe to say that a bit of that was probably front end loaded, off the back of the anticipation of stamp duty changes, probably prompted also by interest rate reductions in the course of the quarter. And so I wouldn't expect that growth to carry on looking forward. But that's probably relevant to your mortgage spread point, which is to say, as we look forward, we are seeing a little bit more competition in the context of mortgage spreads in the market for quarter two and potentially at least beyond. It's not transformational guy. It's not gonna hugely change the picture, but at the margin, forgive the pun, it is probably slightly more competitive than what we saw in quarter one.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Now bear in mind that swaps are pretty volatile right now, and therefore trying to figure out what the equilibrium landing point is for those mortgage spreads is a little tough. And so, you know, while we're seeing a slightly more competitive market, let's just see how that plays out. And I think the second point there is don't forget that we and other banks are all managing the market or managing the margin, I should say, in a holistic way. Therefore, if you do see mortgage spread pressure, you're probably gonna see some alleviation of that or some offset from that in respect of other balance sheet, particularly potentially on the liability side. Your third question, which I think I've probably largely answered actually, Guy, in terms of NBNII, as said, slightly down in quarter one about a hundred and 12,000,000.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We're not guiding to, the NBNII component. As you know, we're just guiding to net interest income right now. But safe to say the comments that I made in the full year about NBNII expecting to be up over the course of this year versus last, we continue to expect that to be the case. So worth bearing in mind, it won't be up as much as it was '24 versus '23, but it will be up versus the sum total of 24. So, hopefully, that's helpful, Guy, for your three questions.

[Operator]

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

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

Hi, William. Thanks for presentation and taking the questions. I had one on operating lease depreciation, Just wanted to I just wanted to get a sense of how much visibility you've got on our lease depreciation. It feels like there's quite a few moving parts, some on to uncertainty around car value in light of tariffs. And they kinda came in a touch touch ahead of where the street was in q one.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

I don't wanna overdo it, but just interested in how much conviction we can have in modeling that line item from there. And then the second question was around the ECL. Obviously, underlying performance. You've taken $100,000,000 kind of overlay or post balance sheet adjustment. I'm just interested in the thinking and the model that you've put in place to arrive at that number and what the direct impacts on your business may or may not be.

[Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank]

So I guess, I'm specifically thinking about your corporate business, how you thought about how exposed that is to tariffs, please. Thank you so much.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks for those questions, Oman. I'll take them in turn. Oblease depreciation, as you say, $3.05 5,000,000 for quarter one. That's up about 24,000,000 versus quarter four. Couple of points maybe I'll make on that.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

First is just to provide a bit of context. The York lease depreciation charge, as you know, is a necessary part of the transportation leasing business. In turn, we see that business as strategically critical not just to The UK, but, of course, core to Lloyd's Banking Group. And it is, to be clear, a very profitable and indeed growing business within our overall Lloyd's Bank Group setup. We have, as you know, a series of different levers to address the market.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Most importantly, those that are growing fastest amongst those levers are very profitable, very attractive propositions. And in that context, I'll mention Tusker, which as you probably are aware is a salary sacrifice scheme, provider that we bought a couple of years ago now, where other operating income net of op lease depreciation is up 77% year on year and a really attractive ROTE. So it's a relatively small part of our overall setup. It's certainly a lot smaller than Lex, but that's where we're growing, and that's where we're investing because it's attractive, from a profitability point of view as well as most importantly serving an important customer need. So I just thought it's useful to start off with that context.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Now in the in the relation to your question, Aman, q one charge up 24,000,000 quarter on quarter three fifty five. What's driving that growth is three things. Fleet size, number one, higher value vehicles, number two, and then what is a weak quarter for gains and losses on disposal, number three. As you say, we don't we don't guide to a full year number in respect of our lease depreciation. But it is, I think, safe to say that as you look forward across the quarters go coming forward, quarter two, quarter '3, quarter '4, and indeed beyond, it is not going to grow at the same pace as it did from quarter four into quarter one in every quarter.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Now what do I'm what do we mean by that? First of all, the trends that are behind the lease depreciation are in place, and they should be welcomed. And what I mean by that is that this is part of a growing business that should therefore expect some of these depreciation growth and should be welcome as the business grows and it is other operating income generative and indeed profitable. That's the most important point. But then behind that, a couple of supplementary points if you like.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

One is that we will, of course, need to consider used car price behavior at every half, and that is gonna vary. That's part and parcel of the business if you like. But at the same time, on that point, we are working on mitigants. Number one, lease extension. Number two, remarketing.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Number three, auction partnerships. And all of those together will over time dampen growth and the volatility and indeed further enhance the profitability of the transportation business. So just stepping back, it is from our point of view, Iman, a profitable business that is becoming more profitable indeed over time. And over time, likewise, will become more predictable. It is safe to say that for 2025, transportation other operating income will significantly outstrip of lease depreciation growth, and indeed, that business will produce an attractive return on capital.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So we don't give guidance on this topic, Aman. We're not gonna change that, but hopefully some of these comments, both the context and the particularities, give you some sense of direction as we look forward. Second question about ECL, important area, of course. You asked about our thinking in respect of the, tariff charge that we have taken, the central adjustment as we described it. First point to make might be to say, look.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

The right way to look at our multiple economic scenarios is the 35,000,000 net MES, charge that we've taken. What is going on within that charge is that we've got, number one, HPI, which turned out to be better than we had expected, and number two, some wages growth. And all of those give us favor favorability in the context of our economic outlook. And then offsetting against that, we have looked at the tariff situation and taken an incremental 100,000,000 above and beyond what is in our base case assumptions. Essentially, Iman, the right way to think about that is that we are trying to get ahead of the situation.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We're trying to get ahead of the situation. And so to describe that, when we looked at the closing of the books at the March, beginning of April, it was apparent that there was quite a bit more uncertainty than we had initially expected in respect of the tariff situation, which ultimately culminated in so called liberation day. What we looked at as a result is a couple of different scenarios, a benign scenario, and if you like, a less benign scenario. Looked at what that might imply for the usual indicators, GDP, unemployment, HPI, all of those, and then take a view and weight those scenarios in a way that we thought was sensible. We then validated those, back checked them if you like against what would it mean in terms of reweighting upside versus downside, how does it look against our univariate sensitivities that you've seen before, this type of thing just to try to validate the 100,000,000.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

But in sum, it is about getting ahead of the situation and about anticipating how this might turn out if it isn't quite as, friendly, if you like, as we would all hope it to be the case. To be very clear, this is not addressing any impacts that we're seeing today within our book. As we see the situation today, it's clearly a volatile one for sure. It is also driving sentiment, a little bit on the consumer side, certainly on the business side. But so far at least, very limited impact on activity.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Corporates, we see as being in a bit of a wait and see mode, number one. Retail, as you might imagine, basically unaffected. So overall right now, activity. We're not seeing any impact from tariffs on the observed ECL charge, which as you know remains, as I commented in my script earlier on, remains at 24 basis points. No impact there.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

This is about getting ahead of what might develop and making sure that we are suitably provisioned. Now, ultimately, Lloyds Bank Group, by its very purpose of helping Britain prosper, is a UK focused business. And so the direct exposure of the business to, let's say, The US or for that matter, US Exporters is really very modest. To give you some idea on that, Aman, exposure to US Exporters is around 1% of our loans and advances. Only 1% of our loans and advances, really very modest, and that is typically through large investment grade companies who would expect to see this as a bit of an earnings issue, but certainly not more than that.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Beyond that, it's all about the second order impacts on The UK, And most of those absent 100,000,000 are captured in our revised forecasts that we put forward as a base case and indeed the, the MES around that. So I hope that's helpful, Anand.

[Operator]

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

[Benjamin Toms, Director - Equities at RBC Capital Markets]

Good morning, William. Thank you for taking my questions. The first one is on deposits, which continued to grow in Q1. Do you think that this strong growth in deposits can continue for the rest of the year? And how do you think about the outlook the deposit liabilities and how it ties into fees into your structural hedge notional assumptions over the next couple of years?

[Benjamin Toms, Director - Equities at RBC Capital Markets]

And then secondly, on other income, the growth was 8% year over year, which kind of matches the two year CAGR growth rate. Should we think about other income growing at the same pace as seen in the next couple of years as it has done in the the last couple of years? Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Yeah. Thanks for those questions, Ben. First of all, on deposits, we are obviously pleased with the deposit performance in q one. We really think it's a pretty good performance by the business, up 5,000,000,000 or 1% versus q four. Roughly, well, 2,700,000,000.0 of that was in retail, 2,300,000,000.0 of that was in commercial.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Just to comment on each of those, retail, first of all, showed really good growth in terms of savings, 1,900,000,000.0 in turn in terms of total retail savings contribution. And then also PCA is up. PCA is up 1,200,000,000.0 in the quarter, which is again a really pleasing performance. That's coming off the back of higher wage settlements, bank gyro credits from the government, probably also subdued spending to be fair. But overall, that pattern of strong performance in savings up 1,900,000,000.0, strong performance in PCA up 1,200,000,000.0, They're both contributing to the 2,700,000,000.0 of retail growth is pretty healthy, and, you know, we're pretty pleased with it.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Commercial banking up 2,300,000,000.0, but I think there is probably an element of, temporary tax year end related flows within that commercial banking 2,300,000,000.0, so worth bearing in mind. When we look at the deposit performance as we expect over the course of the remainder of this year then, take account of those factors. We certainly expect the deposit performance to continue to be good. We continue to expect deposit performance, to go in the right direction for the remainder of this year. Retail looks like it's a set of pretty solid trends that we've seen there.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Commercial, as said, has that slight timing impact overall, in the particular 2,300,000,000.0 that we've seen there. But on the other hand, we do expect some gathering pace to, take place in the course of BCP, for example, as we go through the course of this year. So stepping back overall within deposits, Ben, we see good picture in q one and continued positive trends for the remainder of this year. It may ebb and flow a little bit within the commercial area. Let's see.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

What does that mean for the structural hedge? Structural hedge balances, as you know, $242,000,000,000. We we had some discussion actually q one about whether or not we should increase that balance off the back of the strength of the deposit performance that we've seen. And we decided for now just to hold back and see how things develop over q two, q '3, q '4. The expectation is that we will indeed increase the structural hedge balance over the course of this year, but not by a huge amount.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We're not we don't have particularly ambitious or aggressive deposit expectations feeding into structural hedge income expectations as I think we discussed at the full year. But we do expect it to tick up modestly, couple of billion, something like that over the course of the year, maybe a bit more towards the end. Your second question, Ben, other operating income, we were up 8% in the course of q one versus q four, sorry, q one year on year versus q one of last year. It's good to see that the breadth of the contribution, that delivered that performance. So retail, number one.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

IP and I, number two. Lloyd's Bank Group investments, number three. All of those contributed to a healthy development in that, ROI pattern over the course of the quarter. If we look at it versus q four, it's also up. It's up around 20 odd million or so.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And there, we've also got a contribution from CIB within the quarter. Looking forward, through the combination of strategic investments that we have made contributing to our greater than 1,500,000,000.0 expectation for revenues from those strategic investments alongside what we expect to see is, you know, meaningfully or, let's say, appropriately robust, activity levels amongst consumers, bearing in mind the tariff point I made earlier on, we expect to see other operating income continuing at roughly the same pace as we've seen over the course of quarter one. The edges around that, whether it'll be better or whether it'll be weaker, Ben, just around the edges of that will depend in turn upon how the macro economy goes and activity levels accordingly.

[Operator]

Thank you. The next question is from Ed Firth at KBW. Your line is unmuted. Please go ahead.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

Yes. Good morning, everybody, and thanks for the questions. I just had two. One was just picking up on, firstly, OII. You mentioned, in the text, think, you talked about 8% growth in OII, but 16% growth in retail, which I think is about half of OII.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

So, I assume either commercial or central or something was a little bit weaker. Just it would be helpful just to give some flavor of how you balance back to the 8%, I guess, by divisions. That's my first question. And then the second question is around sort of inorganic activity. I guess all your peers now pretty much have bought something or other over the last few years or the last eighteen months.

[Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)]

And I'm just wondering how you think about that and how you think about that versus buybacks. Mean, there are obviously a number of potential targets becoming available, and it would just be interesting to get your sense as how you're looking at that, how you're looking at your capital position. I know you talked about going down to 13%, so I guess you've got a reasonably chunk of spec capacity there. Thanks very much.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks, Ed. Taking those in turn, OY has set 8% up q one year on year as per your comment, Ben. Ed, sorry. The performance, as said, is broad based, and that's good to see. Now you commented there upon retail, which as you say has achieved a good healthy growth level over the course of quarter one year on year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

That's being led by two things, Ed. So transportation being one, a little bit of favorability also in cards, which is good to see within retail. But actually, as said, the important point to note, the thing that's good, if you like, about the growth that we've seen is that it is broad based. So IP and I is up some 8%, q one year on year. Lloyds Bank Investments, Lloyds Living, in particular, up 10% collectively over the course of quarter one year on year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So good diversified growth across the retail business, across the insurance business, across the Lloyd's banking investments, I. The equities businesses. Commercial also contributed, but it was principally in in the quarter four versus quarter one time period. And the reason for that actually is is essentially very simple, Ed, which is to say in quarter one of last year, we had a particularly strong performance period within CIB, largely relating to capital markets transactions, which for various different reasons were just particularly strong in the first quarter of last year. So year on year, CB is actually down a little bit year on year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

But, actually, if you look at it quarter on quarter, quarter four versus quarter one, it's up. So, hopefully, that gives you some sense of the divisional contributions. As said, broad based, and I think that's what gives us confidence that as we move forward, even if, let's say, some parts of the, the business slow down, if, for example, CIB issuance or capital markets was slow down in a more volatile environment, that would most likely be compensated by other areas, the retail business, the IP and I business, the Lloyd Central business, or LBGI equities businesses, for example. Yeah. Let's see how things, evolve over the course of this year, but we take a lot of comfort from the fact this is a broad based, set of businesses, which are being, grown off the back of significant strategic investments that we're making.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Your second question, Ed, on inorganic. Couple of points to make there perhaps. First of all, the business or the strategy, if you like, is, as you know, primarily organic. It's not to say that we won't look at m and a or inorganic or inorganic opportunities. Indeed, I would say pretty much every opportunity that we've seen announced in the market is one that has come across our desks, and we've taken a look at and thought whether or not it made sense for us.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And I suppose almost by definition, in each case, we have just decided that it doesn't make sense. And that's in sent in turn, a reflection of the confidence that we have in the organic strategy that we are undertaking and the confidence that we have in terms of deploying the investments internally to deliver our objectives. Now, again, you should never say never, and we will look at m and a opportunities if they come along and if they're sensible. But they will always be assessed against, does it deliver value for the shareholder? Does it do so on a basis that is faster than or at least as fast as the organic alternative?

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And does it do so at a level of risk that is lower than the organic alternative? So those three inputs, value, speed, and risk, will always be the benchmarks against which we assess m and a. As said, we've seen a lot come across our desks in the course of the last year or so, but we have decided that these are not these are not opportunities, if you like, that we will pursue. And instead, we've chosen to focus on the organic strategy, which, you know, as we stand here today, we feel very positive and very confident about.

[Operator]

Thank you. The next question is from Jonathan Pierce at Jefferies. Your line is unmuted. Please go ahead.

[Jonathan Pierce, Equity Analyst at Jefferies]

Good morning, William. I've got two two questions. Sorry. Coming back on non interest income again. You you suggested earlier in the year that non interest income would be up high single digits this year and next year with seemingly recommitting to today.

[Jonathan Pierce, Equity Analyst at Jefferies]

But also, I think that operating lease depreciation would grow no more than that. Even if the charge stays at where we were in q one, I think we're going to be up 10% year on year and, you know, 15%, sixteen % if you ex out the residual value provision last year. The commentary you've given on OLD thus far is helpful, but can I invite you maybe to comment on where you see the net position coming out this year? Do you still think noninterest income net of operating lease depreciation can be up in the high single digits as well? Consensus, I think, is up about 9%.

[Jonathan Pierce, Equity Analyst at Jefferies]

So it'd be helpful if you could comment on that. Just just as a side point, though, before I come on to the second question, I wonder whether it might be helpful given this continued focus on on operating lease depreciation, to either net it, in the broader commentary or or to show us the operating lease rental income, each quarter because clearly that's a big driver of the of the gross non interest income. That that might be helpful to avoid this sort of, examination every quarter. The the second question is is broader, and it's surrounding next year. I mean, I guess, you know, in recent months, we've seen the the swap rate come off a bit.

[Jonathan Pierce, Equity Analyst at Jefferies]

We've obviously got this operating lease depreciation point that I've just mentioned. Can you talk to next year whether you still see the hedge revenue up 2,700,000,000.0 in total versus 2,024? And if you can make that commentary in the context of, you know, the hedge notional remaining, you know, broadly as you thought of full year. So have these reductions in swap rates, got you nervous with regard to next year's hedge revenue? And, you know, bigger picture, perhaps you'd be willing to repeat your confidence on this call in sort of 20,000,000,000 plus revenue guidance, for the one not revenue guidance, but implied revenue for for for next year that was talked about at the full year results.

[Jonathan Pierce, Equity Analyst at Jefferies]

Thank you very much.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Yeah. Thanks, John. Just take each of those two in turn. Other operating income, as your question pointed out, are up 8% year on year quarter one this year versus quarter '1 last year. Looking forward, as per my earlier comments, we do expect other operating income to continue to keep up that type of pace over the course of the year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

As said, you'll see some ebbing and flowing in respect of any given business line, but the diversification gives us considerable protection in that respect. And so the activity levels combined with strategic investments is what gives us the confidence in the 8% other operating income growth, in quarter one being, if you like, more or less repeated over the course of the remainder of this year. You asked about the net, Jonathan, net other operating income expectations after having taken account of our lease depreciation. Now as you know, we don't guide explicitly to either of these two numbers, but the short answer to your question is that, yes, we would expect to see other operating income net of up lease depreciation up something that is roughly the same as our overall expectations for other operating income. Now I mentioned earlier on what are two things that are going on in the business here, One of which is that the used car price behavior needs to be taken into account at every half.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

That's just the way in which the business is run. And so any given quarterly progression may ever flow in that respect. Number two, that we're working on some important mitigants for our lease depreciation. I talked about lease extension remarketing auction partnerships, and I'd also talk about things like RV sharing with, many of the manufacturers that are important, partners for us in business. So, you know, all of these all of these activities are in process.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And it's that combination which is worth bearing in mind, which, as I say, may lead to a bit of quarterly ebbing and flowing on the point. But the bottom line there, Jonathan, is that our expectations for other operating income growth are essentially the same for other operating income and for other operating income net of our police depreciation once you take those timing effects that may vary, into account. Your second question, Jonathan, in respect of hedge, the hedge revenues, yes, we feel very comfortable about the overall, net interest income guidance for 2025, and we feel very comfortable as to the greater than 15% RoTE guidance and greater than 200 basis points capital generation guidance for 2026. In the course of the full year, we gave some guidance in respect of structural hedge growth, if you like. And we talked about an incremental 1,200,000,000.0, revenue growth from structural hedge this year, an incremental 1,500,000,000.0 on top of that for next year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And, again, we feel very comfortable in reiterating that guidance. Why are we so comfortable? Well, it is resting upon to be clear the macroeconomic guidance that we have given you. Our base case macroeconomic inputs are important to that, but there is a certain amount of, cushion, if you like, one side or the other from that. Now what do I mean?

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

I mean by that a couple of things. One is the fact that we are circa 90 to 95% locked in for this year, and we are then 80% plus locked in for our 2026 structural hedge contribution. So that's one of the things I mean. The second thing that I mean is that there is a level of, terminal rates still in the market today even after some of the downdraft that we've seen, which is a little in excess of our overall expectations. And then the third thing that I mean, Jonathan, is I just refer us back to the deposit performance we've enjoyed today, which has been decent and strong even.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And, therefore, we take some comfort, if you like, from all of those two or three points that I've just made. And, again, we feel very good about the expectations for ROT and capital generation consistent with our '26 guidance. If it turns out that all of a sudden, interest rates, let's say, are upended in a way that transcends or goes beyond the comments that I've just made, then I think it's very likely that you're gonna see some offsetting impacts in terms of pricing on other assets, let's say, which in turn compensate for some of what, you might otherwise see. But in essence, Jonathan, for the types of environments that both we forecast and that we see today, we are comfortable as to the guidance we've got out there. Should it turn out to be more adverse than that than I said, a, there's a certain amount of cushion, and b, we'd expect other compensating, events or activities to take.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Final point, Jonathan, is that when we look at the guidance for next year, this is less a net interest income point, more a ROT and capital generation point. Don't lose sight of the fact that much of the guidance rests upon not just net interest income, but also other operating income growth. Coming back to the first of your two questions.

[Operator]

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

[Amit Goel, Managing Director at Mediobanca]

Hi. Thank you. So first question I have is just around the severance charge that was taken in the quarter. So I just wanted to check how much more is left this year? And also, is there something we should kind of anticipate this level of severance kind of every year?

[Amit Goel, Managing Director at Mediobanca]

And or what is kind of baked into the 2026 cost income? And then secondly, I was just curious, you know, having now heard the Supreme Court case, appreciate we've got to wait for the judgment, but I was just kinda curious if there are anything from the arguments that were made from, you know, the judge's response to etcetera that potentially make you more or less confident or any change in kind of sentiment there. And actually, just I mean, maybe a small follow-up, but, obviously, there's been a bit of discussion about ring fencing. I guess it's unlikely to see much change given Barclays are pushing back. But just curious where you would see the opportunity if there were to be some scaling back, you know, whether that's through deployment of liquidity at slightly better yields, etcetera, but just any kind of thoughts there.

[Amit Goel, Managing Director at Mediobanca]

Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Yeah. Thanks, Amit. Three questions there, and I'll take the opportunity on severance to comment a little bit more broadly on costs too. Your first question on severance. Severance, I think I said at the full year is up roughly 30 percent 2025 versus 2024.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

I can't quite remember whether we have put numbers on it out there, but nonetheless, the overall severance bill for this year is somewhere around the kind of two eighty type level to give you some idea. What we've done is very deliberately front load that into the first quarter of twenty twenty five. And the reason for that is because we want to make sure that we get as much of a full year benefit from that severance charge as possible. That in turn is one of the factors amongst others that lead us to confidence for the 9,700,000,000.0, cost guidance that we have given you. When we look at that cost guidance, just to elaborate a little beyond that in terms of giving some insight on costs, stripping out the severance increase this quarter versus quarter one twenty twenty four, first of all.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

If you strip that out, as said, costs are up 3%. Costs being up 3% is roughly what 9.7 is for the full year versus 9.4 for last year. Now in the overall cost makeup, we are seeing BAU costs pretty much flat over the course of the quarter. And the reason for the increasing costs over the course of the quarter is not just severance, but actually also increased investment levels. And it's those increased investment levels which are, again, behind the confidence that we have in delivery of revenues, but also ultimately delivery of further cost efficiencies leading to 9,700,000,000.0 total.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Final point on costs. As you know, cost discipline is a matter of utmost importance here. We have, I think, a good track record of delivering on our cost targets, and this year will be no different. What you've seen today so far is simply timing decisions, if you like, to ensure that we are able to get the full benefits of, in particular, the severance charge for the remainder of this year. Your second question, supreme court.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We were pleased to see that supreme court expedited the hearing. It's, I think, a reflection of the fact they attach quite a lot of importance to the issue as do we and clearly as does the government. As I've discussed before, there are three main components of getting the uncertainties in respect of motor ironed out. One is what are the legal determinations gonna be. Two is what is the FCA gonna do with that in the context of any, remediation scheme that it might see as appropriate?

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And then three is how do our customers respond to that? We've only had part one of those three take place so far, and indeed, we haven't seen the judgment. So at the moment, I mean, I think it's it would be inappropriate for us to comment too much upon, some of the discussion that took place in the supreme court hearing. We'd rather just wait for the judgment as it comes out in July and then respond appropriately. And, again, it will then depend upon a couple further uncertainties, including in particular the FCA, approach to this.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Your final question on ring fencing. Ring fencing has obviously been the topic of some discussion over the course of the last few days. A good place to start is that there have been some reforms to date. Obviously, the ski up reforms have now or in the process of taking place, and we welcome those. They give a bit more flexibility in particular on non UK activities, and a bit more definition around what is de minimis.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

But at the same time in the ring fencing topic, as you know, we're only we are the only jurisdiction in the world to have ring fencing. Since ring fencing was set up, there has been a lot of progression made in respect of capital levels, funding levels, liquidity levels, resolution mechanisms for banks to get themselves into trouble, derivative clearing, reduced market risk, and so forth. All of those things have come a long way since ring fencing was set up. And so it does feel like an appropriate time to take stock of what ring fencing therefore contributes in the context of this much more effectively, regulated sector and a much stronger prudential regime. That's particularly important given the fact that we believe that ring fencing imposes costs upon our ability to serve customers, in particular large customers, where friction is added and where we think in many cases, our lending capacity is somewhat diminished.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So a cost benefit approach, if you like, to what ring fencing now contributes net, we think makes sense. We'll see where it goes, Amit, and whether or not, it gates any, further makes any further progress, I should say, but it does feel like a a discussion around it is appropriate.

[Operator]

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

[Robin Down, Analyst at HSBC]

Good morning, William. Hope you're well. I've got one kind of request and then one question. The request is one that I've kind of made in the past. But with the structural hedge, would it be possible to get the disclosure to one extra decimal point?

[Robin Down, Analyst at HSBC]

And and I'm gonna just kind of explain why that's that's kind of important to us. Because if I annualize 1,200,000,000.0, for q one, then I think you need something like 500,000,000 of of incremental structural hedge benefit to get to your kind of 1,200,000,000.0 uplift target. If we have 1,250,000,000.00, then that drops to 300,000,000. So it does make quite a big difference in terms of trying to forecast where things are gonna be over the next kind of few quarters and and how much you might beat the 13,500,000,000.0 by. So that that's kind of point one, I guess.

[Robin Down, Analyst at HSBC]

Second question, every time we have these calls, you you seem to warn about things not being plain sailing, that there's gonna be a degree of lump in it. What be, the redemption kind of yield on maturing swaps. So can I just ask, is there anything that you would call out that you're worried about for q two? Is there any particular reason why q '2 might might be kind of different than why we shouldn't just kind of model straightforward, you know, kind of playing below us for progress in in NII? Or is there anything else that you would call out that for for q two that maybe

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks. Thanks, Robin. You've dropped out one or two one or two parts of your question, but I think I caught the love of it. And perhaps you can add on any further questions if I haven't quite captured it all. Sure.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

In respect of the structural hedge disclosures, I suspect that we'll stick where we are in terms of the degree of detail simply because, you know, we think it's more or less enough to work out where the bank is going. And then beyond that, you'll have your own assumptions about where markets will go, where rates will go, which will be more important than the second decimal place. From our perspective, at least, we feel very comfortable with the structural hedge forecast, if I can call them that, that we have put forward. The increase of 1,200,000,000.0 this year, the increase of 1,500,000,000 on top of that next year. And as said earlier on in in response to Jonathan's questions, you know, whatever one might think around the edges, bear in mind that deposits performance has been pretty strong, which gives us a bit of comfort in terms of where the quantum might go.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And, actually, today, the last couple of weeks or so, notwithstanding, had been pretty strong, which gives us a bit of comfort in terms of the extent to which we've been able to get locked in on our projections going forward. I mentioned earlier on that if we see a particularly adverse rates environment develop well beyond current mix market expectations, then you might expect to see less churn in deposits, for example. You might expect to see mortgage spreads being a bit less competitive, for example. So, you know, we'll see. But for the types of environments that we're in and we expect, we feel very comfortable with the structural hedge forecast, you know, in a way that goes beyond the second decimal place, I suppose.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

You then asked about lumpiness within hedge forecast going forward, Robin. The hedge will make a, it made a strong contribution to the margin in quarter one, first of all, as you know, some 10 basis points or so. And then as we look forward, that contribution is gonna ebb and flow a little bit over the course of the quarters. I think just to give you some very kind of informal sense of where that is going, it's probably a bit less in the course of quarter two. Actually, if you look right at the back end of the year, it's really strong again.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

So it is gonna come and go a little bit during the course of the quarters. The reason behind that is mainly because maturities vary in terms of quantum in any given quarter. And as importantly, yield in those maturities varies in any given quarter. And so as a result, this hedge was put on over multiple years as you know, but as a result, you're gonna get a contribution from the hedge that is gonna ebb and flow a little bit quarter by quarter. But over the course of the year, in totality, is what gives us confidence, if you like, in the circa 13.5% net interest income guidance that we've given.

[Robin Down, Analyst at HSBC]

Great. I mean, my my my point with regards to the extra decimal places is less about kind of whether you can deliver the 1,200,000,000.0, but more just if we take that 1,200,000,000.0 as red, which I I think we should given the kind of the amount you've already got locked in, how much more there is to go for in q two to q four? Because if I take your NII for q one and and align for your kind of basis point, you're analyzing at 13,300,000,000. You're only 200,000,000 away from kind of hitting the 13.5 target for for the year. So you don't need to do a great deal incrementally in q two to q four.

[Robin Down, Analyst at HSBC]

And if we've got, you know, 500,000,000 structural hedge benefits still to kind of crystallize, then that that makes quite a big difference versus a 300,000,000 benefit for structural hedge still to crystallize. So it's it's more about, you know, give give me

[Robin Down, Analyst at HSBC]

a pull up put on

[Robin Down, Analyst at HSBC]

this a bit of help here. And I I can't see any reason why you wouldn't add one decimal point.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Well, let us take that away, Robin. I I suspect we may come back with the same point, but we'll we'll certainly take it away. The, yeah, the overall point that I think you're making, which we would concur with, is that we've made a good start to this year, that we feel pretty good as said about the 13,500,000,000.0. It is a good start to the year. Quarter one went well.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

There are some positive. We talked about deposits. We talked about rates. Clearly, there's some risks, bank base rate cuts, mortgages, as mentioned earlier on. It is early in the year.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

There is a way to go. But as said, we feel very confident about the guidance we've given you.

[Robin Down, Analyst at HSBC]

Yep. Great. Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thank you, Robert.

[Operator]

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

[Andrew Coombs, Analyst at Citigroup]

Good morning. I'm gonna ask a couple of questions with regards to actually your q two results and just conceptually how you're thinking about things in terms of the timing of when you book charges or reversals. So starting with Motive Finance, we should get the Supreme Court judgment in July, but then the FCA redress scheme probably isn't going be announced until up to six weeks after that in your Q2 results, so probably going be smack bang in the middle of those two events. So is it a case of you take two adjustments through your provisioning line based upon those outcomes? Or do you just wait and take one?

[Andrew Coombs, Analyst at Citigroup]

And then secondly, with regards to tariffs, I was interested in the line that states you've taken $100,000,000 central adjustment for what was announced in the first few days of April, but subsequent developments through the rest of April were off the balance sheet date and will be reflected in the second quarter reporting period. So is it a case that the delay introducing a number of those tariffs is not factored in, but might be factored in next time? Likewise, if The UK Ten Percent gets negotiated down, you'd adjust accordingly as well. Is that the case?

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Yeah. Yeah. Thanks, Andrew, for the questions. First of all, in relation to the supreme court situation and judgment therefrom, it is just briefly worth saying that in the context of both your question, Andrew, and also the prior one, the the 1,150,000,000.00 remains our best estimate for the, motor issue. We'll see when supreme court judgment, gets to most probably towards the July as you highlighted, Andrew.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And your point around timing has not escaped our attention as well. It is very likely that what the supreme court hands down is then subject to significant interpretation by the FCA in the context of their address scheme. And therefore, it's gonna be, I suspect, quite difficult. No matter what the timing of the supreme court judgment is, it's gonna be quite difficult for us to form a terribly much more refined opinion of where this lands absent having seen where the FCA comes out. Now that is that is a point that is, if you like, that has a perimeter attached to it.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

That is to say there are some supreme court rulings which either completely overturn court of appeals ruling or some supreme court rulings which completely endorse every aspect of the court of appeals ruling that might not survive the comment that I have just made. That is to say you might take a look at those and think, that's interesting. Am I gonna respond to that? But by and large, the majority, if you like, of outcomes that may come out of the Supreme Court, I think, are covered by the point that you'd wanna see what the FCA interpretation is for those outcomes before you started to adjust provisions. And that in turn means that it is likely to be, let's say, q three, but even then you have a question mark, Andrew, about what exactly it is the FCA does at that point in time.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Does it launch a consultation period, And do you have to wait for the close of that consultation period to really figure out where this might go? So there's a bit of time, I think, to play out before it is really sensible to respond. But, again, I come back to my first point, which is to say based upon everything that we see out there today, 1,150,000,000.00 very much remains our best estimate of the potential provision associated with the motor situation, and we'll see how things unfold. Your second question, Andrew, is actually quite a welcome one in the context of the tariffs because the NES, charge that we've taken of net 35,000,000, and in particular, the 100,000,000 tariff charge in that, in that context, couple of points to make there. One is it's basically temporary.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We'll take account of it as your question applied in q two. And what I mean by that is that we will integrate that 100,000,000 into our base case assumptions in q two. And the second point, which is really important to bear in mind there, is that we took this charge at a time when there was kind of maximum volatility, if you like, in the context of the tariffs. And there was a a lot of fairly adverse cases coming out, which is what caused us to to have the debate, what prompted the discussion, if you like. If it turns out the tariff debate goes into a bay and saw something similar as is being talked about a little bit since then, then I suspect a good part of that 100,000,000 may not be necessary.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

But, of course, it's quite difficult to make that judgment today when the situation is quite so volatile. It comes back to the point I was trying to make earlier on, Andrew, which is to say, we're trying to get ahead of the situation. We're trying to get ahead of situation in a way that, you know, as you'd expect from us is kinda suitably prudent in order to avoid having bumps in the road in the future. That's the philosophy behind it. If it turns out that, you know, some of the trends that we've seen since liberation day in terms of quieting down of the tariff debates do in fact get hold, then as said, that 100,000,000 is probably gonna be reconsidered in that context.

[Andrew Coombs, Analyst at Citigroup]

Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks, Andrew.

[Operator]

Thank you. The next question is from Chris Can't at Autonomous. Your line is unmuted. Please go ahead.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

Good morning. Thanks for taking my questions. I had one very quick request on something you said about fleet revaluation, just point of clarification, And then two others. On fleet reval, you mentioned that in your remarks. I don't know whether you're trying to flag to us, William, that you're expecting some kind of adverse adjustment there when you next revisit that.

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

I appreciate you do it half yearly, but presumably you have a bit of line of sight on how used car prices are trending on your view. Just wondering whether you are trying to flag a potential 2Q residual value top up there. And then on the CIB and Stage three, there's a bit of a tick up in your Stage three in the CIB in the first quarter. I appreciate that you've made changes to your maths, but I thought that, that would just impact stage two migration, not migration into stage three. So is there anything to call out in terms of book trends with flows into stage three, please, on the corporate book?

[Christopher Cant, Head of Banks Strategy at Autonomous Research]

And then completely unrelated on mortgage spreads, just thinking longer term, appreciate your commentary about a little bit of additional competition coming through 2Q thus far. As you look out to the future, if I think back to the last strategic plan, I think you were talking about 80 to 100 bps, assuming 2% base rate or something of that order of magnitude. We're now expecting still meaningfully higher base rate levels than that, meaningfully higher levels of deposit profitability than that. How much lower than the sort of 70% would you be happy going in light of the fact that you're expecting much better overall liability and and sort of hedged income dynamics? Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Yeah. Thank you for those questions, Chris. Just to take them one by one. First of all, on q two, revaluation, as said, we need to consider used car price behavior at every half. You know, that that, as I said earlier on, is the business model.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Looking at the half year and we look at the full year. When we look at it, we will take account of performance of used car prices to date. To give you some idea on that, q one so far, we've seen electric vehicles down about 1.7%. We've seen internal combustion engines actually up 2.4. So that's probably a little bit weaker than our expectations.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Internal combustion engine is probably at least as good as our expectations. We are expecting in the context of our depreciation schedules, electric vehicles actually to be down year on year, somewhere between four to 5% in totality year on year, so we have to see how that goes. But, at the moment, at least, you can see how that's tracking. And then we expect internal combustion engines to be more or less flat over the course of the year. So that's probably tracking a bit better than we expected.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

We just have to see where we end up at the half year. Safe to say that as said, we'll be doing the regular exercise. Now at the same time, as mentioned earlier on, we're working hard. The business is working hard on mitigants for op lease depreciation and indeed in the spirit of, increasing levels of profitability for our motor business as a whole. So those lease extension remarketing auction partnership points that I made earlier on together with RV sharing are all, if you like, factors that will push against any revaluation requirements that might be there.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

What the net of that is, I think we just have to see at the quarter, Chris. It's just too early to say right now. They are important strategic measurements not just for that, however, but if we can get them right, if we can get that lease extension remarketing activity in the right place, then they will contribute to the overall profitability of the business on a look forward basis. You mentioned CIB, and in particular stage three charges on oh, sorry. Not stage three charges, but rather stage three numbers on, CIB or CB, Chris.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

The as you say, CB stage three has gone up a little bit over the course of the, over the course of the third quarter. It's pretty modest, but it relates to two particular cases in the context of, fiber, which is a sector which has had a little bit of trouble lately. We lend a little bit into that, not a great deal, but that's, that's what's behind the side increase in stage three CB. You'll look at the coverage levels there also, Chris, and hopefully draw a bit of comfort from the fact that they're basically the same quarter on quarter. And, actually, if you look at the balance sheet as a whole, it's gone up from a coverage level quarter on quarter.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Finally, mortgage spreads. We are currently just a shade above 70 basis points in terms of completion spreads at quarter one. As we look forward, as I highlighted earlier on, probably a little bit of, pressure on that in the course of quarter two and maybe beyond, but not terribly much, Chris. I mean, I really wouldn't wanna overstate the point. How much further would we go there?

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

I think it's an interesting comment because it obviously depends upon the holistic margin that we look out for the balance sheet as a whole. And as said, that is going, you know, meaningfully in the right direction, two ninety seven to three zero three, up six basis points. But for us, it also depends upon the successful completion of our strategy. So what do I mean by that? We've managed to significantly increase protection volumes in the context of mortgages, for example.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And that's important because it means that a mortgage relationship transcends the 70 basis point spread that you might get. It's much more of a holistic Lloyd's banking group relationship that has attractive and profitable earnings streams from other products in addition to the mortgage when you secure that, mortgage relationship. Related to that, we put an awful lot of our strategic investments money into something called the home ecosystem, which is intended to improve the direct relationships, the direct, sales, one for better word, mortgages to our customers, which in turn are more profitable. They also offer offer the opportunity to get into a broader dialogue with our customers across our product range, whether that is banking products or insurance products. And so, Chris, it's about much more than 70 basis points.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

It's about the holistic spread on the balance sheet, number one. It's also about the successful completion of our strategy, which as you know is about broadening and deepening our relationships, which then materially augment the mortgage spread that we might get on any given product.

[Operator]

We have now reached the end of the allotted time, So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. Please go ahead. Ben Cavan Roberts at Goldman Sachs.

[Benjamin Caven-Roberts, Vice President at Goldman Sachs]

Morning. Thanks very much for taking my questions. Just two, please. First, on capital. Could you please provide some more details on the FX hedging impact this quarter and just how that works mechanically?

[Benjamin Caven-Roberts, Vice President at Goldman Sachs]

And if there's a scenario where that 14 basis points could effectively change in the course of its reversal? And then just a follow-up a bit on the mortgages. Obviously, you mentioned the fact that there is a stamp duty effect to be expected in q two. But just wondering how you're thinking about the longer term factors driving demand in that channel and how much releveraging effectively could be reasonable in The UK over the longer term? Thanks.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks, Ben. In relation to, the FX hedging and temporary RWAs, I mean, in essence, temporary RWAs of some 2,500,000,000 on an RWA increase of 5,500,000,000, That number is, you know, pretty much in place and gonna stay in place. So you should expect that 2,500,000,000.0 to come off primarily as a result of that hedging coming off over the course of quarter two and then into quarter three, and it'll be done by the end of quarter three. That number of 14 basis points, Ben, it's not just the hedging. It's a couple of other pretty minor pieces, but the hedging is by far the bulk of it.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And as said, the 14 basis points in totality is a is pretty much a done number. And therefore, the lending, and other factors that are going on beneath that suggest RWA increases of about 3,000,000,000, and that is all good, healthy, profitable income generating lending growth, which in turn helps in terms of the income build and indeed capital generation for the business in the periods hereafter. On mortgages, as said, I think there was some pull forward in the course of quarter one versus what we might expect to see in quarter two in mortgages. That will affect quarter two most likely. It may affect a little bit quarters thereafter.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

You know, we'll see. I think behind all of this is, I suppose, cyclical and structural factors, cyclical factors which yeah. Let's see how the year plays out. But based upon our expectations of falling interest rates, number one, HPI growth, I think we've now got it at 1.7%, number two. And, you know, not exactly fast, but nonetheless, at least a growth proposition in the context of GDP, that is overall a supportive environment for further growth in mortgages.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

And as a 20% lender, market share wise, we would expect to be a big part of that. There is then a structural point, which is that as you know, we have a situation in The UK of basically a housing shortage. We also have a situation where the government is committed to growing, the housing stock in the country and is taking several measures to ensure that is achieved in practice. Both of those two factors together with demographic growth, I. E.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Population growth, are supportive of sustained growth in mortgages going forward. So the cyclical factors, the structural factors probably more or less point in the same direction, which is supportive of growth, Ben. The very short term kind of, you know, puts and takes if you like, stamp duty being one of them, may paint a slightly different picture, let's say, quarter two versus quarter one at least.

[Benjamin Caven-Roberts, Vice President at Goldman Sachs]

Very clear. Thank you.

[William Chalmers, Executive Director & CFO at Lloyds Banking Group]

Thanks, Ben.

[Operator]

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

Participants

Executives

• William Chalmers, Executive Director & CFO

Analysts

• Guy Stebbings, Executive Director at Exane
• Aman Rakkar, Director - Banks Equity Research at Barclays Investment Bank
• Benjamin Toms, Director - Equities at RBC Capital Markets
• Ed Firth, Managing Director at Keefe, Bruyette & Woods (KBW)
• Jonathan Pierce, Equity Analyst at Jefferies
• Amit Goel, Managing Director at Mediobanca
• Robin Down, Analyst at HSBC
• Andrew Coombs, Analyst at Citigroup
• Christopher Cant, Head of Banks Strategy at Autonomous Research
• Benjamin Caven-Roberts, Vice President at Goldman Sachs