Lloyds Banking Group plc (LLOY) Earnings Call Transcript & Summary

Okay. Awesome. Well, welcome, everybody. Thanks for joining us on the European track of the Barclays Global Financial Services Conference. Really, really pleased this morning to have with us António Horta-Osório, Group Chief Executive Officer of Lloyds Banking Group. First of all, António, good morning. Thank you very much for joining us. Appreciate you must be busy right now, so we do really appreciate your time. Just...

No. Pleasure. Good morning, everyone.

Just before we kick things off, I'd like to -- just like to kind of politely remind everyone that we do have audience response survey questions. Hopefully, you can see a panel to the left. There is a link that you guys should be able to click into and it's a -- a small web browser will open up. It's about 6 questions. It shouldn't take you very long. We really would appreciate if you could participate. It's quite fun, interactive element of the session. Secondly, we would also just like to remind people that you can actually send in questions directly to us if you've got any kind of direct questions. We will collate them and then ask António towards the end. Okay. Cool. All right. Well, we're kind of transitioning to the main event. So again, António, thanks very much for making yourself available. Just to kick things off, really interested in an update on kind of what you're currently seeing in terms of business performance and activity. How are consumers and corporates responding postlockdown?

Sure. With pleasure. So look, trying to go systematically about this. If you look at the retail part of the business, right, the household segment, what you see is that volumes have picked up from a pronounced Q2 dip, although in general, they are slightly below our pre-COVID levels. But you have some differences to what we have discussed in July. So in July, we had discussed that we were watching consumers being prudently -- prudent, and we thought it was the right thing to do. Because given the huge uncertainty at the time, it was -- and also the lockdown, consumers, on one hand, could not spend, for example, on traveling and holidays. On the other hand, they were being prudent in terms of their own spending, which was right to do given the uncertainty, as I said, and they were saving more. So we saw consumer volumes going down, and we saw deposits going significantly up. What have we seen since then? So we have seen some interesting things. First, although the consumer finance part of the business continue to go down since the end of June, it has gone down at a lower rate and has gone down at a lower rate than we had anticipated. Second point, the deposits have continued to grow at very significant pace. And this reflects both the trust in our brands and the overall market. We are growing above the market. And we have now increased more than GBP 30 billion of deposits, both households, so retail, and commercial since the start of the year, which is a massive amount. And thirdly, probably the biggest change we have seen since July, is that mortgage volumes, which were, as you know, stopped with the lockdown, the market has restarted very strongly. Mortgage applications have been very strong and with continued good margins, which was already happening for a few quarters. And that is quite significant. So we do see a very significant pickup on mortgage performance, both in volumes and, I say, with margins continuing to be quite good. And if you think that those mortgages, as they will come into the books over the next 2, 3 months, they will be financed by the very significant increase of deposits at very low rates. That is a positive thing. On the other side, and to be balanced about those aspects, you also know that these very significant increases of deposits on the retail side, they will be the ones that are current-accounts-driven. So on the structural hedge, it will be reinvested at lower rates as the yield curve is slightly lower than what it was in July. When we go to the commercial banking side, so to corporates, what do we see? We see that transaction banking volumes have continued to increase since April, but they are still pre-COVID levels. So the volumes have not yet normalized, although at current trends, we expect them to normalize by year-end. And on markets activity, where we are not very strong but we do some of those, the market activity has gone down as volatility has decreased since the end of H1. In terms of balance sheet, you see a continued increase on lending to SMEs and medium-sized corporates, led by the government schemes, although at a lower pace. So that is in line with what we thought. And the deposits, as I said, have continued to increase above what we thought. And companies have continued to hold to cash, which in light of the very significant uncertainty, I would think it is the rational thing to have that and to continue to do. So I hope this gives you an idea of what's happening on both sides of the balance sheets and both on the household sector and the corporate sector.

Yes. I mean that's really, really useful color and level of detail on the key operating conditions. I guess just to drill into the revenue environment then. I mean it's difficult with the rates cuts, its mix effects that you're highlighting and activity that are weighing on revenues as you see things right now. I mean when you think about revenue performance into year-end and I guess more so into 2021, a lot of it's going to be activity-dependent. But can you see scope for revenues to materially pick up from here? Or do we actually just need higher interest rates?

Well, for a retail-commercial banking -- bank like us, obviously the level of rates is quite relevant. And I would say that more the level of the yield curve than base rates increasing because we have been performing very well, as we were just discussing, on the increase on current account balances, above the market now for close to 5 years, which shows the trust on our brand, especially in moments of uncertainty as this year. And those balances provide a big opportunity for investors in terms of call option on the shape of the yield curve. Those balances are convenient balances, balances that are there on trusts, and they basically are -- yield very close to 0. So that is quite an important option, I would say, and that is very relevant. Nevertheless, relating to the other points of the revenue structure, I think that you have positives and negatives. And taking the base of July discussion, just to position ourselves in the same starting point, so we have a negative mix impact from what we just discussed, Aman, in terms of consumer balances decreasing versus mortgage balances holding up. This is now -- will now be less pronounced until year-end than we thought because the decrease in consumer balances, as I just said, is continuing to happen with much less rates at much, much less speed than we thought. So that is within the mix, the negative impact of mix that is less negative. Then mortgages, as we just discussed, that is more activity-driven. Activity is much more significant. Mortgage margins are less than our overall margin because it's a much less risky product and it has much less RWA consumption. But mortgage margins are better than they used to be, and they are higher than what -- than the business margins that mature on average. So that is the positive thing, and that should continue to happen because we now have clear line of sight given between applications and completions, you have around a 2-, 3-month time span, so that is positive for revenues. On -- in terms of the -- in terms of OOI, OOI activity, as I just alluded to in the previous questions, continues to be tough and we see some decrease in markets activity with less volatility. And also, we see less bulks activity at decent prices. So OOI activity in terms of revenues, as William also said in July, will continue to be tough. And therefore, these are the trade-offs that I would probably highlight to you. So rents are really clearly important. We see some changes since we discussed in July. On the negative side, you have the reinvestment of higher current account balances in a slightly lower yield curve. But on the positive side, we have seen a pickup, that we did not anticipate to this extent, in mortgages at very decent margins. And in a sense, that corrects something that was happening over the last 2 years in the mortgage market in the U.K., whereby, I said many times publicly, I thought the pricing was probably not the pricing I would have thought would be the most logical one. And now you are seeing the offering of mortgage products in the markets being less and being, I would say, more rational and in line with the uncertainties that we face, and that is positive in terms of revenues.

Perfect. Just another gentle reminder to the audience members that may be dialed in. Please, if you do get a moment, please do respond to the ARS questions in the side panel, and of course, feel free to submit any questions to us that you'd like to run by António. Just if I follow-up on that point then, regarding mortgage market. I mean you're kind of confirming pretty positive operating environment at the moment. Kind of you enjoy a really privileged position in the U.K. mortgage market as a market leader. Interested in basically how sustainable do you think the current conditions are in terms of the volumes that you're seeing coming through, in terms of the pricing. And did it cause you to rethink at all the way that you're approaching that market, maybe moving away from prioritizing margin to pursuing volume?

Right. So those are all good questions. I mean I think that's something that is important to understand and discuss with the pandemic is that given the uncertainty that still exists, I think your ability to forecast and speaking to the future obviously has decreased because you have much more uncertainty on several dimensions. But what I think is clear is you clearly have much more activity on mortgages. That's clear. It's public. And also on HPI, by the way. So HPI has been more positive than what was expected, although I want to wait for the end of the furlough scheme, see what happens in unemployment to be able to see if this is continuing or not. And in terms of the activity, to your question, Aman, there are several, several reasons. So on one hand, you had pent-up demand as the market close and that has resumed. On the other hand, you have the stamp-duty incentives, which obviously moved some demand for the future into the present. But I think there is also some normalization of the mortgage market. And that is also connected up to the moment to the better behavior of HPI. So we have these 3 broad reasons. I think we'll have to wait over the next few months to see how that unfolds. But again, I would like to emphasize the fact that given that applications lead completions by 3 to 4 months, and we have seen already since Q2, a very significant ramp-up of activity, we already know what our completions are going to be. And those have been significantly better than we thought in July. So we'll see how quarter 4 unfolds, how the furlough scheme ends and its implications on unemployment, also what happens as a consequence in terms of HPI. But at this moment in time, the market is better than what we would have think -- thought. We are gaining volumes more than we thought and also HPI numbers are better and employment numbers are better. But those I want to hold and see what happens after the end of the furlough scheme.

Perfect. Just switching focus, I guess. It would be remiss of me not to acknowledge your announcement earlier this year. You will be leaving Lloyds after 10 years with the firm. And this obviously comes alongside the announcement around Robin taking over from Norman as the Chairman later this year. And it's quite a lot of senior management change. I appreciate that you won't be -- it's very unlikely that you will be presenting the next strategic update, but I think we would have been expecting in the early half of next year. And I was kind of interested in any kind of key strategic decisions that you may be able to take in the next 6 months, which might not sit at odds with where the new CEO is.

Sure. I mean just a few comments on that. I mean as you will know, Robin Budenberg is an excellent appointment as the group's next Chairman, and I am sure he will be able to appoint an extremely competent CEO as well. So that is very important. The second one is that in the meantime, the strategic work continues and the management team and the Board and Robin as well are very supportive of the direction that we have been taking. And you saw that in Robin's RNS and his early comments as he was appointed. So that is good in terms of your question because the direction is the direction that the Board has continuously endorsed and will continue to endorse. As we already heard, we had the Board off-site in June. We have had the appointment of Robin. So the direction is completely supported by the Board and the new Chairman. Obviously, as you said, Aman, the content needs to be aligned with the thoughts of both the new CEO and the Chairman, which means that the timing will have to be aligned with the Chairman and the new CEO starting. That is obvious. But in the meantime, given the direction is the direction that we have been following, we'll continue to work and developing and grow our insurance and wealth businesses, where we have a major opportunity both in terms of our financial planning and retirement proposition and our wealth joint venture together with Schroders. The market is very fragmented. People need even more to consider their planning options for the future in the light of the level of interest rates now and the alternatives for investment. The market is very fragmented. It's a bit opaque, so we see a major opportunity there. And we will also continue to remain absolutely focused on keeping our cost-to-income advantage, our culture of efficiency, of superior investments, which, as you know, originates a virtuous circle. But given that we have this significant cost-to-income advantage, this advantage enables us, for a given return to our shareholders, to invest more than our peers. Investing more than our peers will -- is increasing our NPS experience with customers, will lead to additional revenues and market share in the future. And the additional investment targeted at nominal costs through automation and systems architecture, et cetera, will low -- will lead to lower cost as well. That will improve the cost-to-income again and becomes a virtuous circle, which I think is an even more critical competitive advantage these days given that with the uncertainty that you see with the pandemic and with the very low level of interest rates, costs are one of the few levers where you have complete control and that, even more important, as margins are under pressure. So we already have a leading competitive position there. We have the largest digital bank in the U.K. And again, the pandemic is increasing those trends towards digital even more. And we are already the largest digital bank, the only one integrated between insurance and banking products. So I think we are well-aligned now there, and we will continue to develop those plans given the direction is very clear.

Okay. I mean you -- I think you touched on a really interesting theme there around costs. To me, the revenue outlook is more challenging. And I think it's reasonable for us to expect banks to try and respond to a more challenging revenue outlook. And one of those levers is indeed costs. You guys have a very strong track record there. I guess more specifically interested in the learnings that you found as a result of COVID, behavioral, structural changes, the way in which people work. How is this affecting your thinking around costs as things stand? Perhaps you need less real estate? Could you need less people working full time? Really interested in how this year has basically affected your thinking and your ability to realize additional cost savings.

Sure, sure, absolutely. And it has been a quite interesting learning experience. I mean we were already very focused on being flexible in terms of the ways of working and in terms of experimenting new ways of working. But obviously, the pandemic opened a new -- a total new range of options. So what I would say is the following: it is clear to me that the way we'll work in the future will be much more balanced between working from the office and working from home. Obviously, the intensity of those 2 ways of working and the trade-off, if you want, will obviously depend on the sector. It will depend on your function. For example, if you are working in finance or accounting, you can obviously do much more work remotely than if you are working with customers or in innovation because innovation needs people also to be together to bring up new ideas, and that is why universities also work in terms of innovation. So it will depend. But trying to see through what happened this year, it is clear that we will have a midterm in terms of people being able to work in a much more balanced way. And that is good in terms of people's lives. So apart from safety impact until we have the pandemic controls and the vaccine and treatments, you will have -- the fact that you will have a more balanced way of working, which was proven with the pandemic, I mean, we went from 15,000 people working effectively from home in the beginning of March to 45,000 people by the end of March and 50,000 by the end of June, which was basically full capacity, given we have around 15,000 people working in branches, call centers and key work positions where they have to be present. So in 3 weeks in March, and buying 30,000 additional laptops, we were able to work effectively from home; 45,000 people out of around 65,000. So a massive, a massive shift. So I think that will enable, on the colleague point of view, a better work-life balance, Aman. Lots of things you can do effectively from home. From the bank's perspective, apart from retention and motivation of colleagues, you obviously will, as you said, need less premises. So even if for the future, we keep more distance between workstations, our evolving plans are that premises will not be needed to the same extent they were before. So the net impact is you will need less premises. So that is clear. But the main impact, in my point of view, is the additional possibilities, retention motivation that this gives to our colleagues and to attracting new people that want to work in these new ways. So that is quite important. Through this year, specifically, you see that -- obviously, you don't change property costs immediately. What you see is that you have less traveling costs by definition. On the other hand, you have more costs of cleaning. And cleaning premises, branches in general, those costs are higher. You have more costs of helping customers in financial difficulties, and we are ramping up and training more people in order to do those jobs and hiring more people and redeploying more people to do those jobs. On the other hand, costs, and this is the second major point I wanted to focus on, apart from the pandemic, and you mentioned that, costs are, in my opinion, costs will matter. It is absolutely essential that you have it as a priority from the top of the organization because you have good costs and you have bad costs. For example, investment costs are good if you have proper NPV projects because, as we just discussed before, they will provide additional benefits in the future for customers or less cost in the future. And you have bad costs, and the bad costs are the ones that you don't really need in order to do your work efficiently. And to have a culture of cost attention and relentlessly focus on costs through the years, as we are doing through many years now, brings a huge difference over time. I mean if you look at our nominal costs, they have decreased maybe 3%, 4% nominally every year over the last 8 years. And after 8 years, it provides a huge difference in terms of cost-to-income versus peers. And that is a cultural matter which we continue to develop every day. So you have this balance of positives and negatives. We also have less variable remuneration this year, given obviously the state of the P&L. But all in all, and we also moved some investments to the right because our discretionary investments, given COVID, some of the projects did not have the same payouts or given people were working from home, it was not appropriate, and with the uncertainty ahead of us, to keep all those projects. So we moved some discretionary investments to later on in the year and to the future. And the overall netting of all those impacts this year, to address your question, is that we will do better on nominal costs. We have improved our guidance by GBP 100 million. We'll be lower than GBP 7.6 billion of costs net at the end of the year, which is better than we thought at the beginning of the year.

That's perfect. I mean just really interested, just as a quick follow-up on that then around the idea that some -- a certain assertion is that a bank like Lloyds, which is more cost-efficient and leaner than elsewhere, without obvious restructuring opportunities across the group, might be a harder place to find some additional efficiencies. Kind of interested in that -- in your thoughts on that. And when you look forwards, can you envisage Lloyds, if you were here in say, 3, 5 years' time, operating with a significantly lower nominal cost base than currently? Or do you think it's actually harder to realize savings?