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

Good afternoon, everybody. Before we get started with the Lloyd's discussion, just a quick reminder that you can submit questions online in the ask a question box that you can see on your screen. And so please do feel free to submit those and we'll put them into the Q&A. So with that, I'm very pleased to welcome William Chalmers, CFO of Lloyds Banking Group. Afternoon, William. It's a pleasure to have you back here again this year. Thank you very much for joining us.

Thank you very much for inviting me, Rohith. It's a pleasure to be here.

So thinking back to our conversation actually this time last year, you -- at that point, you were anticipating 5% to 10% RoTE within two to three years. I mean last year feels like a long time ago and the operating environment is now very different, including a better outlook for interest rates, but also more competition. And so I was wondering if that's changed your view on profitability over that sort of time period?

Yes, thank you for the question, Rohith. Our guidance on this topic has been consistent over the last year or so, and we continue to expect RoTE to exceed the cost of equity in the medium term. And we reiterated that guidance earlier on this year and we continue to stand by it pretty much, Rohith. And maybe a couple of points to add to that. This year's picture, as you know, is one of significant RoTE strengths. And that's coming from a couple of different sources. One is the underlying performance of the business, which is clearly improving off the back of the pandemic as we start to exit pandemic conditions. Two is obviously a significantly improved impairments performance, which is resulting in credit, as you saw, GBP 656 million at the half year. And that is obviously a GBP 656 million credit and therefore is ultimately unsustainable as an impairment line, it will normalize at some point. We can talk more about that across the course of this conversation. And then the third is tax benefits from the change in corporate tax rate, which gives us an increase to the DTA. And so if you knock those out, those latter two points out, the impairments credit and the DTA benefit, the business is still steadily improving in what is going to be in '21, at least the year of transition. And looking forward over the medium term, the picture is one of resuming activity, is one of asset growth, is one of increasing operational leverage in the business, which even allowing for normalization of impairments over time, we think puts us on the trajectory for the medium-term ROE in excess of the cost of equity. So we stick with that over the course of the medium term, Rohith. You mentioned mortgage rates in your question. There's no doubt that competitive pressure has been prevailing in the mortgage market, and that's for sure. I think as we look forward, it is just important to kind of bear in mind the whole picture, mortgage price pressure is prevailing in an environment where the rate curve is ticking up a little bit, as your question implied, where we're also seeing a bit of resumption in activity. And that will lead to asset growth in areas like unsecured ultimately. And so looking forward over the course of the medium term, it's just important to put it in the context of a holistic picture and see what the outlook is for the business as a whole in that context. And as I say, for us, that results in continued expectation at ROE is in excess of cost of equity.

Thank you. And just thinking about, I guess, the composition of the business, the Embark acquisition, Citra Living launch, both of those initiatives broadened Lloyd's capability. And I was wondering how you expect their earnings contributions to evolve over the coming years and whether you're seeing scope to grow market shares in existing business lines or whether there's more focus on expanding the scope of the business?

Yes. It's a good question, Rohith. I think as a general point, we look to grow in respect to two areas right now. One is around adding on new capabilities and diversifying. And the second is around established BAU areas where we're seeing a resumption of activity, as mentioned, as we exit the pandemic. And so in the near term, we will be looking to both essentially as engines due to the performance of the business. If I just pause on each of the two initiatives that you mentioned there, Embark, we are really excited actually to announce that acquisition at the half year. For us, it's really a completion of capabilities. First off, in terms of the overall wealth platform that we offer to our customers. As you know, we had an advice platform in the context of SPW. What Embark brings us is [Audio Gap] much more robo advice or self-directed platform, which we think is absolutely key to ensuring that we have a complete waterfront for the customers that we have. Now, in addition to that, it also allows us to integrate modernized HSDL which is important. It adds on a intermediary platform on FNZ technology to really transform our RA retirement account and drawdown proposition for the insurance business. And then as you know, it's also got a separate basically B2B white label business is what the acquisition. But first and foremost, it's about filling out or complementing our overall wealth offering to the customers. We see that as important right now, Rohith, because, as you know, we've had, over the course of '20 so far this year as of the half, some GBP 24 billion increase in customer deposits. You wind that back and see more substantial over the course of 2020 when included. And so there's a tremendous opportunity there in a low interest rate environment to help our customers improve the performance of their savings. As you know, that's also sponsored by the regulatory backdrop right now. And Embark allows us to deliver that in a complete -- and hopefully, that has about GBP 35 billion AuA. It has about GBP 60 billion to GBP 70 billion of revenues, which you'll see in other income. But of course, the bottom line is lower than that because that's before you take costs out. And it has about 410,000 clients, which will obviously be [ adding ] the Lloyds Banking customers. In the very near term, i.e., this year and next, it's a very modest increment to the bottom line, over the course of the next two or three years being return on invested capital. As you know, we've said that we're going to invest about 30 basis points in that initiative. Hopefully, the combination of those two statements gives you a sense as to what the earnings contribution of Embark is and what we expect it to be able over the course the next two or three years. Now, Citra is important to keep in perspective, Rohith. It's an important initiative for us in the context of growth, in the context of diversification, but most importantly in the context of leveraging upon the skills that we have within the group. A couple of points to make. One is, I mentioned, keep getting proportion. This is an exploratory initiative within Citra. That intended to be a pretty poorly served market with a lot of increasing, I guess, exit of private landlords where we believe that we can help customers with their housing needs. We believe that we have significant capability, if you like, in the area of housing risk, and so it's very much adjacent to our areas of greatest expertise. It's also adjacent to other business areas, whether that's generation of long-term assets, whether it's the opportunity for holistic customer offerings through the combination with general insurance, for example, all for that matter, things like rent or buy type initiatives, which we'll look at in the context, et cetera. And so, over time, we would look to build this. But for now, Rohith, it's a very disciplined, it's very proportionate, and as I mentioned before, exploratory way to allow ourselves to build into the sector to learn and then hopefully, over time, even if successful to develop it further into a meaningful income stream. But it's early days as we stand today.

Okay. If we can move on to capital. Lloyd's has reintroduced a progressive ordinary dividend. So I was wondering in terms of the parameters for when -- that the full year dividend, what will you take into consideration? And then also when you think about surplus capital, how do you balance shareholder returns with growth and investment in the business?

Yes. Thank you, Rohith. The starting point for us is that we totally recognize the importance of capital return to investors. So when I sit within the Board, we see capital return to investors is absolutely central for our investment proposition and that has been the case as long as I've been here, and that doesn't go away. Now we stand today in a position, unfortunately, of a very strong cap ratio, as you know, 16.7% at the half year. And even if you remove from that aspects like [ amortization ], for example, you are still sitting on a very strong cap ratio for the group. We put forward an interim dividend, as you know, 0.67p per share in the context of committing to the progressive and sustainable dividend path. It's very important to us in the years ahead that we are able to commit to both of those two words, i.e., progressive and sustainable. And so as we look at our capital and our dividend plans, both of those do resonate and are important for us. When we look at surplus capital, to come to your question, we will look above and beyond the dividend at the end of the year as the Board always does. At the capital position of the group, at the regulatory changes ahead of us, in particular the RWA increase that we expect in the course of January of next year, we'll look at the macroeconomic outlook clearly and what that means for the business. And we'll also look, as your question implied, that investments in the business provided that they are value-adding and ultimately accretive to shareholders. We look at all of these factors when we look at the capital position at the year-end and decide upon distributions above and beyond the dividend. Safe to say two points. One is just to reiterate the importance of capital distribution as a philosophy. And secondly, to say the timing of this, i.e., at the year-end, there's nothing unusual. As you know, Lloyd's has always looked at surplus capital distribution beyond the dividend at year-end. This year is no different and we recognize what other banks have done perhaps for their own reasons. But for us, it's really just business as usual. We'll look at the surplus capital distribution at year-end in the context of the framework just given.

And in terms of that regulatory outlook, you've mentioned that you would consider reducing your 13.5% CET1 target ratio. I was just wondering if you could expand on your thinking -- on the thinking behind that and also on the potential timing of that decision.

Yes. Yes, happy to, Rohith. A couple of things really to bear in mind. We have, at the moment, as you know, a capital target of 13.5%, which is the right capital target for today. So that's a start point. Now having said that, as you also know, our capital target is based upon our regulatory capital needs and a buffer to those regulatory capital needs, and we've expressed that hopefully clearly. Two things within that. One is the regulatory capital needs are changing over time. So for example, we see Pillar 2A falling over time in line with our pension contributions. At the same time, we also see the countercyclical buffer going the other way. So there's a couple of contra flows, but the regulatory capital needs are changing and evolving over time. And the second point is that the buffer that we put in place is based upon stress. Now no matter whether RWA change or not, the stress economics essentially remain the same. And so we recognize that split, if you like. And we'll take a look at that over the course of the second half of this year and discuss it with the Board. Now having said that, #1, it's towards the end of the year, therefore, that we look at the capital targets and the level of capital that we hold against the targets. #2, that it is, as I said, one of many factors. It includes the outlook. It includes regulatory change and so forth. And so again, we'll take a look at it. We are conscious of the fact that even if RWAs change, the economic losses, if you like, associate with any stress will stay the same by definition. And so, we'll look at the target in that context. But it's an end of year things, it's one of many factors that we'll consider, Rohith, and any change thereafter would be gradual.

Thank you. If we could come back to growth, which you touched on earlier on, and particularly in mortgages. So now market is growing again quite nicely, what's more important to you? Is it growth or market share? So, if market's growing, you have to just take some growth and seed some market share or is it maintaining? Or does market share take precedence over that?

Yes. Yes. It's a good question, Rohith. And it's obviously an important question right now as we see pricing trends in the market evolve. The start point perhaps, Rohith, is from a philosophical point of view, we run the business, obviously, based upon customer demand, but we also write business when the pricing suits our risk-adjusted appetite in the interest of creating value for shareholders. And that as your question implies, has historically implied a dynamic approach to markets. And sometimes, we are prepared to see market share where we do not think the writing of profit of a product creates, if you like, long-term shareholder value. Now, when I look across the different areas to answer your question. Within mortgages, as you know, we've seen very strong growth in the course of the first half. So over GBP 12.5 billion in the course of the first half, over GBP 6.5 billion in the course of the second quarter. And that has been accompanied by really very benign pricing conditions. So our completion margins in the course of the second half -- sorry, second quarter were 175% as a completion margin, which is very favorable from an economic value added or an ROE perspective. As we go into the second half, Rohith, we are seeing two things really. One is an inevitable pause for breath in volumes in the mortgage market in the course of Q3. We kind of expected that because June and July -- sorry, May and June were such busy months, but inevitably after the closure of the stamp duty holiday period and after agents and intermediaries caught up with their backlogs, you were always going to see that slow down. And it's picking up a little bit more today, but that was the pattern in the first couple of months of Q3. Looking forward, we think the volumes continue to be supported by structural factors. People's decisions where they want to live for example, alternatively low interest rates, for example. So even though you get some of the cyclical factors, e.g., stamp duty holiday coming out of the equation, the structural factors to the mortgage market remain relatively solid, meaning that you see a volume picture that is slower than H1, but nonetheless there is still meaningful mortgage activity. Now as you say, we've also been in an environment where there has been significant pressure on the front end of pricing and it's certainly the case that we have been seeing pricing rise in business at levels below the 175% that I indicated for Q2. A couple of points within that. At the moment, we are still writing business at a price that is in excess of the business that has been rolling off from the book. Clearly, there's downward pressure on that point. But that generally speaking has been the pattern for the business to date. The second point is that, that new business is also at pretty attractive ROEs. And indeed, the economic value added, however you're going to evaluate the returns, if you like. And so we still see this business as attractive from a stakeholder -- shareholder value point of view. And that -- in answering your question, therefore, Rohith, it means that we are able still to maintain share. It might not always be at the 19%, 20% that we saw during Q1 and Q2 of this year, but still substantially able to maintain share at levels not far below that consistent with our economic value-add aspirations. Now as I say, the dynamic in the market is changing. It is getting more competitive. But at the same time, going back to your earlier point, you need -- one needs to step back and see that in the context of what else is going on, including, for example, the five-year swap curve and the other impacts of that elsewhere in the business. So there is some offsets that are occurring from a holistic business point of view. I think -- sorry, Rohith, I'm just going to briefly say consumer finance and commercial banking. Consumer finance, we have seen, as you know, a kind of effectively plateauing in the course of the first half within consumer finance balances. We have always put forward the argument that actually as activity returns, you will see a resumption of growth in the unsecured asset, in particular in the cards asset. Frankly, that was predicated upon a bit of a returns normality during the course of July, August and thereafter. And I think the Delta variant has somewhat undermined that assumption, Rohith, and slowed down the progress. Now it's still -- our base prognosis remains the same. We still see an improving trajectory for unsecured in the card asset. But we think it's going to take longer to realize. And so it's more of a deferral rather than anything else. In terms of our appetite there, Rohith, it's -- our appetite is limited more by risk appetite and by pricing right now. And as we go into a more benign economic environment, I would expect to see us adjust that risk appetite accordingly and consider the opportunities from a slightly broader risk perspective.

Thank you. And any thoughts, I guess, on the commercial business? And also, you've also flagged some significant RWA optimization over the next 18 months or so, whether that has any bearing on your volume aspirations?

Yes, yes. The H1 performance within commercial banking, as you know, Rohith, was down about GBP 1.8 billion in Q2, down about GBP 2 billion in H1 as a whole. And that was really informed by two things. One is ongoing optimization, in particular of the large corporate portfolio. And two is relatively subdued SME demand, essentially following the government-backed programs. Now as we look forward, a couple of points worth making. One is optimization is going to be a continuing feature of our business. It is frankly incumbent upon us all as large banks, I think, particularly upon our philosophy within Lloyd's to ensure that we manage the balance sheet appropriately in an environment of relatively pressured returns. It's the other half of the equation, and we pay a lot of attention to it. So optimization of the business, whether it's retail, whether it's commercial, it's an ongoing feature of the business of the strategy. That is alongside, if you like, a pretty liquid commercial stroke SME sector. And that, in turn, I think, means that as you get government paydowns, the liquidity within the commercial sector will probably be an alternative to refinancing those government lending propositions. And so all of that -- if you add all of that together, I think it builds the picture of a relatively flat commercial balance sheet over the course of time, but because of the optimization process that is going on, an ongoing efficiency drive from a return point of view that we expect to achieve and deliver them.

Okay. So flat but more profitable commercial balance sheet?

I think that's -- in the context of the loan demand, Rohith, we are, as I say, expecting to see the picture that are just drawn. But at the same time, as I say, optimization is an ongoing feature of the business.

Okay. And you've touched on quite a few parts within margin outlook already. So you mentioned the hedge, you've talked a little bit about some of the price competition, we've also talked about some of the potential changes ahead in terms of balance sheet mix, perhaps add interest rates to that. And so at the half year, you improved the full-year margin guidance. But as we look beyond that and think about some of those factors, what do you think a reasonable expectation is for the margin trajectory beyond this year?

Yes. Yes, it's an important area, obviously. We had a solid H1 performance on the margin. As you know, we printed GBP 250 million and that helped us increase our guidance for H2. So that was because of the yield curve, because of some of the commercial banking trends offsetting unsecured pressure and to a degree mortgage pressure, which mortgages always add to net interest income as you know, but by their nature, they are margin dilutive. And that allowed us to increase the H1 guidance to around GBP 250 million for the year as a whole. The factors in H2 as we see them, in a way, it's an extrapolation of the same. So we see tailwinds from the structural hedge, in particular, a little bit from commercial banking margins. But at the same time, headwinds from mortgage volumes as they infiltrate, if you like, into the average margin on an ongoing basis. And then to a degree, ongoing headwinds from the unsecured book margin, as I say, primarily is a function of the risk appetite point that I mentioned earlier on. So those factors play into the margin guidance of GBP 250 million. And it's fair to say within that context that we anticipated mortgage pricing pressure when we set the GBP 250 million guidance at the half year. So that doesn't change the picture from our perspective. Now if yield curves stay as they are, we would expect the combined impact on NII of the hedge and mortgages, two or three of the factors that I just mentioned, to be positive to the group in 2021 relative to 2020. So that gives you an NII picture. And then finally, looking beyond that, as you know, we're not printing guidance at the moment for '22 and beyond, but I think it's very similar factors that drive that margins. So you will see the ongoing effect of mortgage volumes. NII accretive obviously, but margin dilutive. You will see the ongoing effect of unsecured recoveries. Likewise, commercial banking will be dominated by the macro picture and some of the factors that I mentioned. And overall, the structural hedge will be -- should be a positive contributor. As you know, Rohith, we have about, as of the half year, GBP 30 billion of maturities still waiting for us in a structural hedge. We have about GBP 10 billion of unused capacity in the structural hedge. We are looking closely at the run-up in deposits that we've had to figure out just how much of those should be added into the structural hedge capacity going forward. And then in 2022, we have another GBP 30 billion of maturities in the structural hedge. So if we see yield curves stay in the way it is or alternatively if it steepens a little further, that in turn is net beneficial on our interest income and other interest margin.

And then on other income, there were signs of some improvement in the first half of the year. But retail and life, in particular, were, I think, in the first half, significantly lower versus the 2019 run rate. So how much of that would you consider loss revenue, so things like overdraft fees? And what needs to happen for a stronger recovery in the rest of that, thinking particularly about retail and the life business?

Yes. Sure. Well, Rohith, you started your question with a comment on 2019. So I can't resist going back to 2019 and just reminding everybody I guess that the 2019 run rate for H1 at least was significantly influenced by a couple of one-offs. You'll see in there an asset manager change that was a one-off. You'll see in there an assumption change, it was really significant as a one-off. And I saw -- since I arrived after 2019 H1, I thought to remind the market that there is, as I say, those couple of components of what I would consider to be one-offs in the 2019 H1 performance. And when we look at H1 '21, the run rate, as you know, was about GBP 2.4 billion for H1 '21. And I think that's a result that is produced, as you know, Q2 of about GBP 1.28 billion within that. There's a couple of things going on in there. There's a very modest one-off within insurance and wealth from a slight change in assumptions, but it's pretty modest. But underneath that, more importantly, you have improved performance in retail and you have some improved performance in insurance and wealth, non-assumption based. So things like protection, [ work pace ] et cetera. And then you have pretty static performance in commercial where slightly softer market off the back of lower volatility led to that slightly static picture, as I mentioned. Now, during the course of lockdown -- to give some perspective on it and how we look forward, during the course of lockdown, we think we lost about GBP 300 million to GBP 400 million -- GBP 350 million to GBP400 million of activity-based other income revenues. And we would expect over time that as the activity levels resume post pandemic, that that GBP 350 million to GBP 400 million gradually gets rebuilt back in. So that gives you a sense as to how we might grow over the course of the coming periods. And what it builds upon is what we think of as about a GBP 1.1 billion lockdown OOI run rate. So over three quarters, we lost about GBP 350 million to GBP 400 million of revenues. That put us down to a lockdown run rate on OOI per quarter of about GBP 1.1 billion. We would expect that to pick up over time as activity resumed. And then separately on top of that, we'd expect the investments that we have made in OOI, whether it is some of the wealth [ ones ]that we just have been talking about, whether it is protection product within insurance, whether it is transaction banking within commercial to gradually add to the OOI line on top of that. So I think we're in a transitional phase right now. We're moving from, as I mentioned before, the GBP 1.1 billion kind of lockdown into more like GBP 1.2 billion, GBP 1.28 billion in Q2. Over the course of the coming periods, we'll expect to stabilize from the business as usual that we're seeing in line with the improvement of activity.

Thank you. And on costs, both restructuring and remediation are quite high this year. We're a long way into -- or cost and restructuring remediation have been, I guess, long-running costs at a lot of banks. Should we be starting to think of these as ongoing costs from now on?

Well, it's a very fair question, Rohith. Maybe I'll deal with each separately. Remediation. When we look at remediation for the first half, as you know, it was GBP 425 million. It's worth just unpacking that somewhat. So the composition of that GBP 425 million was about GBP90 million general insurance fine relating to pricing practices around the time of the crisis and just before. It was about GBP 150 million of HBOS Reading related charges, and it was about GBP 185 million of other. When we look forward, the GBP 90 million FCA general insurance charge, obviously, drops out. The GBP 150 million HBOS Reading charge, it's worth just looking at that, half of that was effectively operational, half of that was effectively addressed. And we've tried to front-load operational. Now therefore, as we look forward, operational will drop out over the course of the next couple of quarters because we've front-loaded part of it. At the same time, remediation may slightly increase. And so on balance, it's very difficult to predict the HBOS Reading charge. But on balance, you might look at a charge of that type potentially, at least coming up again, but just a different composition, less operational, more address. But again, that is -- that particular point is just a very high-level illustration because the HBOS Reading situation is so idiosyncratic. And then finally, the GBP 185 million of other, that's essentially legacy conduct type charges, which we are doing as much as we can to effectively front-load. And therefore, we would expect to gradually reduce over time, but it will be gradual. And so we'll do everything we can to get it out of the picture, but it will be a gradual reduction over time. And some element of it, therefore, is likely to stay in place. You add all of that together, Rohith, and again it's a little difficult to predict, but in the past, we said GBP 200 million to GBP 300 million of remediation. Now I think GBP 200 million to GBP 300 million of remediation is not an unreasonable start point, and we will add on to that the HBOS Reading charges on a half yearly basis, more or less, as I've suggested during this comment. Now where should that appear? My predecessor put that above the line in 2018, I think it is. And that is in recognition of the fact that we are seeing some of these charges on an ongoing basis. Albeit, as I said, Rohith, we are doing everything we can to front-load and to get them out of the system so that we can reduce the level of noise on the cost base. Secondary, restructuring. Restructuring as your question highlights is below the line. Why is it below the line? It's a couple of points. One is it tends to be lumpy and irregular. Two is and/or it tends to be one-off. And three, and/or it tends to be a cost of exit in some point. What's in there? Typically, it's things like severance, it's things like property exits, it's things -- as you know, we described technology R&D this year, and it's things like M&A integration. The important point from our perspective is disclosure. So what I've done over the course of this year, as you've seen, is basically just open up that line. And so these are the elements that we see and these are the quantums that we expect to see. We think the sum total of that is likely to increase by about 10%, 20% over what it was in 2020. I think I've made that comment before. So that's not new news, but it gives you an idea as to the quantum for the year as a whole. Its location on the balance sheet, as I say, to me, that is secondary to disclosure. Once we've disclosed, it's kind of up to you to determine where it should be. But we will continue to look at it, Rohith. And as we get a better view on that going forward, we'll consider its position on the P&L. For now, it's below the line, and we'll continue to look at it going forward.

And then thinking about day-to-day operating costs, that's been a very significant area of focus consistently at Lloyd's for some time. How much more is there to go in terms of efficiency improvements?

Yes. It's an important question, Rohith. The commitment to cost management, as you know, is a hallmark of the group, and it's a very important one. Last year, we reduced ongoing operational costs by about GBP 300 million. This year, if you look at it on a pre-comp basis, we were going to reduce them by GBP 100 million. Because the performance of the business -- the income performance of the business was better than expected, we actually decided to accelerate the comp build, which was already built in, we decided to accelerate that by a further GBP 100 million. And that's what led to our commitment this year to the circa GBP 7.6 billion, and we remain very committed to circa GBP 7.6 billion. Philosophy behind that, it's basically three strands to it. One is around the ongoing BAU cost opportunity, which is essentially a matrix-led approach which helps us scrutinize every cost from at least two perspectives, i.e., the functional line and the kind of cost segmental line. It helps us manage third-party supply costs, for example, very effectively. And it also helps us think carefully about the property estate, and you've seen some of the commitments around the property estate and the cost base in that that we have made during the course of this year. So that's strand one. That remains an area of great focus for the group. It's very successfully managed, and it will be the kind of first prong, if you like, of our cost strategy going forward. Second strand is around COVID-related cost opportunities. We saw a run-up in COVID-related costs during the course of 2020, and that was a function of hygiene, for example, it was a function overtime, in some cases, additional equipment. Over time, we'll move towards a more automated way of dealing with coronavirus. And over time, some of the costs one would hope would drop out. But it's -- this is not a huge part of the picture, but it is a source of initial pressure, which over time, will drop out. And then the third strand is around strategic opportunity, Rohith. So there's no question that as we look forward, we see technologies, and this is a lot of what technology R&D discussion that we're having right now is about, the adoption of new technologies, obviously, principally resting on the cloud to give us opportunities to allow a transformational shift in costs. Likewise, customer behavior is changing across the distribution network. And so we see those strategic opportunities as longer term. They also come with an investment cost, Rohith. So inevitably, accessing those opportunities requires investment. And while it's important for the bank to do, we'll need to do it at a measured pace, and we'll need to do it consistent with our investment guidelines to add value to shareholders.

And then credit quality which we've spent a lot of time last year, and it feels like it's pretty benign at the moment. I mean, some recent concerns around energy, supply, et cetera, in the U.K. So #1, I guess, are you seeing anything that causes you concern from a credit quality perspective? #2, you've got GBP1.2 billion of post-model adjustments in addition to your IFRS 9 provisions. And what's the sort of timing or the process for thinking about releasing some of those?

This is perhaps one of your fairly easier questions to answer, actually, Rohith, as you ask it. Credit quality picture right now without sounding at all complacent about it, frankly, is very benign -- continues to be benign. When we look at that, that's really for two reasons. The write-back that you saw in H1 was coming from, A, underlying benign asset quality in both retail and commercial. As you know, it's a net write-back on an underlying basis in commercial and a relatively modest, even lower than pre-pandemic charge in retail. So that benign asset quality in H1 continues now as we see it today. And then it's also offset by or rather it's also led by the economic changes -- the economic outlook changes. And so again, you will have seen in our H1 numbers that there was -- within the GBP656 million H1 credit, there was about GBP837 million of economics -- forward-look economics inspired changes to our overall impairment charge as a big positive within that overall composition. Now looking forward, you talked about the PMAs within ECL. ECL at the moment stands at around GBP 5.6billion. Within that GBP 5.6 billion is around GBP 1.2 billion of effectively post-model adjustments or management adjustments. And that, in turn, is composed of two main components. One is a GBP 400 million so-called overlay that we have applied. That is essentially an insurance policy. Again, it's the conditioning assumptions of our base economics case being wrong in relation to exogenous factors. In this case, it's basically virus mutation. So if the virus follows a path that we don't expect, we need to address that, that GBP 400 million as an insurance policy against that. The GBP800 million of other in the total of GBP 1.2 billion is effectively credit adjustments, which are there to assume and build for credit losses that we think would have occurred, but for government policies being in place. So to your question, Rohith, when do we take a look at these things, when do they roll off? The GBP 400 million overlay rolls off when we feel very comfortable about the path of the virus mutation in particular. It's a little hard to tell when that is today because we're looking at an environment of Delta and -- the Delta variant and all that it's doing. But it rolls off as we get increasing confidence about the path of the virus and indeed vaccines against it. The GBP 800 million of other credit adjustments, as I said before, they are credit adjustments or, if you like, assumed impairments off the back of government support programs but for those would have taken place. And so the answer there is as those government support programs roll off, most notably furlough, then we'll be able to take a look at whether or not those GBP 800 million of assumed impairments actually transpire. We'll know a bit of that over the course of the coming two or three months. I suspect it's going to take us several months before we get the full picture. And so we'll take a relatively cautious view, but the information flow to make a determination around that GBP 800 million block essentially starts [ at further end ].

Thank you. Just had a question -- a clarification question from the audience going back to where we started in terms of your expectation of RoTE above cost of equity. The question was just really to clarify what you consider your cost of equity and what time period you'd be able to deliver that RoTE over?

Yes. Well, on the cost of equity, Rohith, we've never given a precise number. Safe to say that I suspect our cost of equity is not terribly different to that which the audience or you would probably use. So I'll perhaps leave it at that on the cost of equity point. As the time period, medium term for us typically means two to three years. It's in that zone. I would say that it is, I'm afraid right now, particularly activity dependent, which won't surprise you, but that is ultimately what drives our asset book, for example, across the retail spectrum and indeed into the commercial. And likewise, what also drives things like interest rate markets. And so we need to probably leave it at that, two to three years, Rohith.

Okay. Thank you very much for that. We are actually at the end of our time now. So I'll just finish up by saying thank you very much William. It's been a pleasure having you with us again this year. We very much appreciate your participation. Thank you.

It's my pleasure. Thanks very much, indeed, Rohith.