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

Good morning, and thank you for joining this webinar for Yellowstone Advisory and ShareSoc. We're delighted to have Lloyds Banking Group presenting today. I'm now going to hand over to Carla Antunes Da Silva, Group Strategy, Corporate Development and Investor Relations Director; and Douglas Radcliffe, Group Director of Investor Relations, to start the presentation.

Excellent. Good morning, everyone. I hope you can hear me. It is Douglas Radcliffe here. Welcome, and thank you for joining our ShareSoc webinar today. As any of you will have listened in before will know, I'm Douglas Radcliffe. I'm the group Investor Relations Director at Lloyds Banking Group. Also, here with me today, as Cliff (sic) [ Alex ] just indicated, is Carla Antunes Da Silva, and she runs effectively the group strategy team as well as Group Corporate Development and Investor Relations. She's also on our Executive -- Group Executive Committee. We are delighted to be actually, once again, have the opportunity to present to you today. We're keen to ensure that our retail investors have access to senior management and are able to raise questions about our business. And today's event follows on from previous events that we've undertaken with ShareSoc. We are also looking to do future retail events and potentially involve Board members going forward. So if we could move on to the next slide, please. So essentially, what I'm going to do is I'm going to run through our recent full year financial or full year results and financial performance. Carla will then provide an update on our new strategy, which we announced in February. After that, we will open it up for Q&A, and Carla and I will be very happy to take any questions you might have. I believe, as Cliff just indicated, you should be able to submit Q&A through the Q&A box on your Zoom screen. So I hope that you'll find the session both interesting and engaging and I'll now kick off to the full content. So in essence, what I will do is I'll cover the full year results to start with. As outlined on this slide, you'll see here that in 2021, Lloyds delivered a solid financial performance alongside continued business momentum. Net income, as you can see on the slide, of GBP 15.8 billion was up 9% on 2020, supported by net interest margin of 254 basis points, up 2 basis points on the year. We remain committed to efficiency. It's something that historically Lloyds has been very strong at, and we remain committed to delivering on that -- from that perspective. Our cost/income ratio for 2021 was 56.7% and operating costs of GBP 7.6 billion were in line with the guidance that we have previously indicated. The small year-on-year increase in operating costs was driven by the accelerated rebuild of variable pay. A number of you will be aware that the group didn't pay any bonuses to staff in 2020, given the performance of the business, hence, why there's been a rebuild of that variable pay in 2021. But clearly, that has simply been enabled by the strong performance of the group as a whole. Asset quality remains strong and combined with the improved macroeconomic outlook for the U.K., supported actually a net impairment credit in the year of GBP 1.2 billion. Driven by the solid underlying financial performance, statutory profit after tax of GBP 5.9 billion and the return on tangible equity of 13.8% were both significantly ahead of prior year. In this context, we have seen continued balance sheet growth and strong capital build of 210 basis points in the year. The group's exceptional capital position has enabled the Board, as you well know, to announce a total ordinary dividend of 2p per share for the year, with a share buyback of GBP 2 billion. The total distribution for 2021 was equivalent to GBP 3.4 billion or around 10% of the group's market value. Moving on to the next slide. As many of you will know, our purpose, as an organization, has been for a number of years, to help Britain recover. And within this, in 2021, our focus was on Helping Britain Recover. So the overall purpose of the organization Helping Britain Prosper and the recent focus on Helping Britain Recover, specifically addressing areas where we can make the most difference. We supported over 93,000 start-ups and small businesses in 2021, exceeding our original target of 75,000. We've lent over GBP 16 billion to over 80,000 first-time buyers and provided over GBP 3 billion of new funding to social housing. We are also making progress against our diversity targets, although clearly, there's always further to go. Looking at the next slide. Some of you may remember that in 2021, we outlined a strategic review for a period of transition. Essentially, it was very much a case that we knew that we were going to have a new Chief Executive joining halfway through 2021 that would be looking to update the strategy, which Carla is going to outline shortly. But on that basis, we needed to ensure that we actually had a strategy in place that it would enable us to transition to the new strategy itself. Our solid execution on this transitional strategy has provided a strong foundation for the new strategy that Carla's going to outline. So touching briefly on a number of those key achievements. We maintained a record all-channel Net Promoter Score at 69, seeing GBP 16 billion in net growth in open mortgage balances and delivered over GBP 7 billion of net new open book assets under administration in our Insurance and Wealth business. Alongside, we saw increasing customer usage of our digital channels, including growing the number of SME products originated digitally by around 60% and onboarding 3x more clients to the new cash management platform versus 2020. Finally, like many businesses, we are rolling out new hybrid ways of working. And as you can see on the slide, we actually managed to reduce the office space by around 9% in 2021, ahead of our target of 8%. Turning to the next slide, moving to the actual financial performance itself, and looking at net interest income. As many of you will know, net interest income is driven by both the quantum of assets that we have and the margin attained on those assets. Net interest income of GBP 11.2 billion was up 4% year-on-year, benefiting from a 2% increase in average interest-earning assets and the stronger net interest margin. Average interest-earning assets of GBP 445 billion were up GBP 10 billion in the year, with strong mortgage growth more than offsetting modest reductions elsewhere in the portfolio. The margin of 254 basis points, as you can see from the chart on the bottom left, was resilient with the Q4 margin of 257 basis points, up 2 basis points on Q3. Within Q4, the impact of competitive mortgage pricing was more than offset by rate rises and lower funding costs. We remain positively exposed to rate rises. As an example, as we outlined with the full year results, we would expect a 25 basis points parallel shift in the yield curve and the associated base rate rise to benefit interest income by around GBP 200 million in year 1. Looking forward, we expect low single-digit percentage growth in average interest-earning assets in 2022. This will be supported by growth in the mortgage book and recovering unsecured balances. We now also expect the margin for this year to be above 260 basis points. So touching upon some of that asset growth. As mentioned, we saw continued strong mortgage growth in 2021. Balances were up GBP 13.7 billion, including open book growth of GBP 16 billion. The fourth quarter saw modest open book growth of GBP 0.7 million, based on a somewhat slowing market and our own participation choices. Meanwhile, the back book of around GBP 64 billion is down 16% on 2020, seeing stronger attrition in Q4 given customer remortgaging in the context of rising rates. Clearly, that pattern could continue. It is worth touching briefly on mortgage margins. You probably read a lot about this in the press. The market has become increasingly competitive, with new business pricing moving below the level of maturities in the fourth quarter. This does result in pressure on mortgage margins. Looking forward, we expect the group margin, over time, to continue to be impacted by maturities of higher-yielding business, repricing at prevailing levels. This will, of course, apply to the proportion of the whole book turning over in any given period, including refinancing existing customers. To give you a sense of scale, in 2021, this number was around GBP 90 billion. With that said, we continue to see mortgages as attractive from a returns and an economic value perspective. Looking at the next slide, on other income. Other income is showing early signs of recovery. We delivered GBP 1.4 billion in 2021, up 12% on the previous year. The year benefited from an improving performance, particularly in Retail, Insurance and Wealth and our Equities business, while Commercial Banking has been broadly stable. It's worth mentioning that despite an Omicron-induced pause in December, we are seeing improved spending levels and are starting to see growth in credit cards. Balances were up GBP 0.5 billion in the second half of 2021. Looking forward, we expect the underlying run rate in other income to build gradually, dependent upon customer activity levels and including our new and continued investments. Looking on the next page, focused on efficiency, which I mentioned earlier. Operating costs of GBP 7.6 billion for 2021 were in line with our guidance. As mentioned, the 1% increase in operating costs includes the rebuilding of variable pay, which in turn was driven by stronger-than-expected financial performance. Remediation was significantly higher in 2020 and included a charge of GBP 790 million for HBOS Reading. The Q4 charge for HBOS Reading reflected -- and that was about GBP 600 million, reflected the estimated future operational cost and redress for HBOS Reading. In respect to this, please note that uncertainties do remain around timing, flow and the ultimate cost, but it is our estimate that, that is the full cost anticipated. Continuing our recent moves to actually enhance transparency and our overall cost management, from the first quarter of this year, we'll actually be issuing our results at the end of this month, will include -- we'll now report all restructuring costs, except M&A-related costs within our operating cost line. This reflects the more ongoing nature of that cost base. In line with this, we'll move certain fraud costs out of impairment into operating costs, better reflecting the nature of these transaction-driven expenses. So using -- and this is outlined in the chart on the bottom left there, so using 2021 as an illustration, the combined impact of these reallocations would have increased the above-the-line costs by around GBP 685 million to GBP 8.3 billion. Let's be very clear about this. This is simply a reallocation and will have no impact on the bottom line because the numbers would have previously been below the line, so were still included in the statutory numbers. After that move, our 2021 pro forma cost/income ratio would be about 61%. That number clearly includes a significant remediation charge, and if we excluded that, it is around 53%, which remains sector-leading in the U.K. Importantly, looking forward, the group will maintain its long-standing cost discipline and rigorous approach to managing BAU costs. Despite inflationary pressures, in 2022, we'd expect to see stable business-as-usual costs. An uplift in total costs is planned, driven by the temporary increase in investment from our new strategy together with the new business lines of Embark and Citra as announced in 2021. As a result, we expect 2022 operating costs to be around GBP 8.8 billion compared to around GBP 8.3 billion in 2021. Looking at the next slide, asset quality. Clearly, there's a lot of focus on asset quality at the moment. Asset quality remains strong and new to arrears remained low, with underlying charges below pre-pandemic levels. IFRS 9 accounting requires us to reflect the expected credit losses based on our economic expectations. This improvement in our economic forecast resulted in a GBP 467 million provision release in the fourth quarter. Together, the benign underlying economic environment and the macro environment resulted in a net credit of GBP 1.2 billion for impairments in our full year income statement, as we have reduced provisions. Our total expected credit loss of GBP 4.5 billion remains around GBP 0.3 billion higher than at the end of 2019 before the pandemic. This provides significant balance sheet resilience and protection against future credit impairments. Looking forward, we expect the asset quality ratio to be around 20 bps. Going on to the next slide on capital. The group's strong capital position enabled the Board to recommend, as I've already mentioned, a final ordinary dividend of 1.33p per share, resulting in a total ordinary dividend for 2021 of 2p per share. The total full year dividend represents a yield of over 4%, which compares favorably to the FTSE 100 average yield. Alongside this, we announced a share buyback program of up to GBP 2 billion. This reflects the need for the Board to manage the different preferences of the group's investor base, with share buybacks being the preferred form of excess capital return for many of our institutional shareholders, particularly given the share price trading below book value at present. The significant increase in shareholder distributions totaled to GBP 3.4 billion, equivalent to 4.82p per share or a total yield of 10% as mentioned earlier, and has been supported by the strong capital position at the end of 2021. It's also worth flagging that we remain committed to returning excess capital to our shareholders and plan to pay down to our target capital ratio of around 13.5% by 2024. Now let me hand you over to Carla to give you an update on our strategy. Carla joined the group in October 2015 and was instrumental in leading both the previous strategy review and this strategy review that we've just launched. Carla, over to you.

Thank you, Douglas. Can you hear me well and see me?

I can. Yes.

Excellent. Thank you. So thank you, and good morning, everyone, and thank you for joining another one of these webinars, which I hope you will find useful. And I can see that you've already been prolific in your Q&A. So I can see that, hopefully, I will also get you to ask a few more questions on the strategy as we go through it. So we're very excited because we pulled together and we announced to the market, about a month or 1.5 months ago, our new strategy plan with the new CEO that joined us with Charlie Nunn. And effectively, it's a 3-year plan, but actually, if you look at it as a longer-term strategy as well, with sort of 5-year outlooks in terms of financial outcomes and strategic outcomes. This slide summarizes the headlines that I think are important to just keep in mind. It is definitely a strategy that pivots towards growth and pivots towards revenue generation. So we have committed to generate GBP 700 million additional revenues from strategic initiatives by 2024, in 3 years' time, and more than doubling that to GBP 1.5 billion by 2026, with a very clear focus of trying to diversify that income split 50-50 with net interest income and OOI. At the same time, we know that we have a strong reputation in terms of our cost discipline, and we don't want to lose that. So we have committed to flat costs in 2024 versus 2022, and those savings will be offsetting -- there will be savings offsetting cost pressures, and that includes some of the inflationary cost pressures as well as additional investment. And the idea is that we target towards a cost-to-income ratio that's below 50% by 2026. We also are aiming to make sure that we create higher and more sustainable capital returns, because for every 1% of improvement in RoTE approximately, just to give you an idea, it's 30 basis points of additional capital generation and hence, the commitment not only to have a step change in the RoTE, so more than 10% by 2024 and more than 12% by 2026, but that will flow through straight into higher and more sustainable capital generation. So 150 basis points for the next 3-year period and thereafter, once we go to the more than 12%, to that 175 to 200 basis points. And we know how important it is, and we are committed to returning that excess capital and paying down to our target CET1 ratio, which Douglas mentioned. So on that basis, let me tell you a little bit about how we designed our new strategy for the next -- on the next slide, please. Eileen? That's the one. Excellent. So on our strong foundations, and many of these things you know, but I want to highlight and just reiterate them because sometimes we forget the scale and the impact that we have. So we are the largest bank and sole integrated financial services provider. So we have Banking, Insurance and Wealth propositions in the U.K. Half of the adults in the U.K. actually bank with us. About 1 million businesses have a relationship with us. And we have an enormous wealth of data that we can see through the monthly transactions. We've also done extremely well with having record all-channel NPS, including having digital NPS record levels as well. And we hit more than 18 million digitally active customers out of a total of 26 million, 25 million -- 26 million total customers. So this is the -- we are the largest digital bank in the U.K. And if you pull this all together, we're bigger than all neobanks combined. So that is very, very powerful as a starting point. It also means that our colleagues, who are really our dedicated colleagues, they have a breadth of experience and expertise. And that's -- those are the strengths that we would like to add to. Additionally to that, we had already over the last 10 years, done a huge amount of restructuring and cleaning up of the balance sheet. So we have a very strong balance sheet to start with and disciplined risk management. So that's really what we start with. Having said that, and maybe, if we turn to the next slide, please, we, like others, see a huge amount of change in the external environment. And there's a number of opportunities the group can focus on and should focus on in order to continue to leave us in a competitive position going forward. These are some of the key challenges we discussed among the Board and among the Executive Committee that we needed to deal with as we go forward. We need to be able to diversify our business from the dependence on interest income. Currently, interest income represents over 70% -- circa 70% of total income. And it is important that we diversify that even though there is a rising rate environment, but as margin pressures are likely to persist for the industry. Customer behavior has also very much changed in terms of how competition has been. So it's very fragmented. You have all sorts of different competitors. And in order to be able to have an opportunity to be with our customers, we need to deepen those relationships, both directly, and you'll see that part of our strategy is with our relationship brands, but also, indirectly with our intermediary brands. And that's a very important aspect of our strategy. There has been a continued shift to digital. And if anything, the COVID has only accelerated customers' digital adoption, and that is unlikely to change anytime soon. And so we do have a digital leadership position like I just mentioned before and presented, but we also know that this is an area where we have huge amount of competitors coming in, much more nimble. And in order to keep that digital leadership position, we also need to have a step change in the speed and the way that we create new propositions for our customers. And finally, and even though I say finally, it is extremely important, and we spent a lot of time discussing the continued strong alignment between purpose and value creation. We start with our Helping Britain Prosper, which remains very much the core purpose for the group. But we also think that we can serve all of our different stakeholders in a way that makes sense. And this represents also, significant growth opportunities for the group. And it's only by doing right with our customers that we will be able to deliver those higher, more sustainable returns that we're trying to achieve. So that is very much at the core of our strategy. So what are we trying to do with the next stage? Next slide, please. Really, at the heart of it and with our purpose staying very firmly, Helping Britain Prosper, we have a vision that we're trying to create higher, more sustainable value for our different stakeholders, and it's centered around 3 major pillars: growing, focusing and changing. So with growth, I've mentioned, it's about driving revenue growth and diversification, and that's by doing it across the different businesses that I'll mention, by going deeper with our relationships and also, broader with some of the product set. By focusing, what we mean is that we do not want to lose the discipline we've had in terms of our cost and capital efficiency, and that will remain very firmly as part of our strong foundations going forward. And in changing, we're trying to build, essentially, a powerful platform with the people, our technology and our data. And it's -- those are the 3 key pillars for the portfolio of investment that we pulled together for the priorities that we have on our strategy. So if we can just turn to the next page. So some of these numbers you've seen, but just to put this into context, we are investing GBP 3 billion of additional strategic investment over the next 3 years. In fact, it will be GBP 4 billion by the time we get to 2026. And that is very much focusing on the areas that we're able to drive additional revenue growth, but also, create additional resiliency and efficiency gains throughout the group. And with that, we hope that we will be able to also increase the capital return for our shareholders as we go through. Like I said, every 1 percentage point of RoTE does represent a significant 30 basis points or so of capital generation improvement. And if we do get to achieve the more than 12% from an international context point of view, that will put us in the top quartile, not only in the U.K. context, but also, more broadly, European and global context of banking profitability. So it's a great ambition to have and how do we plan to achieve that? If I go on to the next slide, can I just go a little bit deeper into the 3 blocks? Let's start with the revenue growth and diversification. So we've carefully prioritized growth initiatives across each of our businesses. And what we're trying to do is create -- at the same time that we balance the near-term value, we also want to create new revenue streams going forward and new areas that we can deliver over the long term. In the consumer segment, we aim to essentially bring more of our products and services to our existing customers as well as innovate and broaden our product offerings for our intermediary partners. So this is essentially for the relationship brands, so those are our direct to consumer that you will recognize on the high street. So that will be through Lloyds, through Halifax and through Bank of Scotland, we will go directly. But we also have 40% of our revenues that come from our intermediary distributed products. And so we cannot choose one over the other, and that is what we're trying to do in the consumer space to -- definitely, to try to increase our revenue and relationships with our customers. In addition, we also announced a new mass affluent offering. So this is to grow in an attractive and frankly, underserved market segment across both banking products, which we already have, and that will be the area we will start with; protection, which, again, with our Insurance business and Scottish Widows, we should also have a right to win there; and simple Wealth. Eileen, I think you've gone on to your own -- you're sharing your calendar. In our SME business, we will digitize our offering and grow and diversify our revenues in both products and sectors where we have a lower market share today. And then, we will target disciplined growth of our Corporate and Institutional business. I will stop here, maybe, and if there are no questions, very happy to, but the mass affluent, we've had a lot of questions on this strategically. We currently have more than 2 million customers that would fall under the category that we describe for mass affluent. And essentially, it's any one of our customers that have more than GBP 75,000 of annual earnings and/or of investable assets. And what we know is that we have a very a small percentage of what those customers do with us. But we also know that they have financial needs more broadly and they are using other providers. And it is that, the target market that we're trying to go for. In the U.K., we also know that on average, consumers have 7 financial products that they have with multiple providers across the different spectrum of financial world. And with the Lloyds Banking Group, we only provide 2.4 of those particular financial products. If we're able to increase that, only even if just by 10%, that will generate more than GBP 200 million of revenues for us, clearly, in a way that is about financial needs met, because those are being met elsewhere. So there's an enormous opportunity to go for here. The second area, which is on the cost efficiency, if I can just go to that, is very much about strengthening or investing and making sure that we continue to maintain our disciplined cost and capital management approach; again, a key traditional strength of Lloyds. I'm not going to go through all of these numbers that you see there, but just suffice to say that even though we have done well, there's a lot of opportunities here to have technology-enabled efficiency gains. There also, ability to actually reduce and lower the cost of change, which means we can do more in terms of the propositions and faster with those for our customers. And then essentially, lower cost to serve, but also, having an ability to look and relook at our property footprint and how we're going to serve in terms of operating hybrid new ways of working. Again, happy to answer any questions you may have on this. And the third pillar, which is on the next slide, which is maximizing the potential of people and technology and data. So we cannot do any of this if we don't have essentially, our colleagues executing the strategy, which are really the key strength for us. Their expertise, their skills will be instrumental. We are planning to invest in a lot of that reskilling as well. We also know that there's new ways of working that have been developing over the last few years, and we're investing enormously about -- in terms of the pace that, that requires to use digital technologies and also, how we support our customers. And we've built the largest U.K. retail digital bank, so that gives us confidence that we can actually replicate that across the piece and in larger-scale businesses for the group. So very much, at the heart of this investment is the technology and data to give us as a foundation for our strategy. And if we go to the next page. So I hope that what you'll have seen, at least in terms of some of the areas and in the way that we're looking at our strategy, is very much a compelling vision for the future. I think what you'll see is an excitement in terms of some of these areas that we think we can do more with and can actually grow our revenues, a step change that, hopefully, will bring higher and more diversified revenues, strengthening our cost and capital efficiency and ultimately, to the potential also of our key enablers with the people, technology and data. And it will be that, that if I turn to -- in terms of the final point is, that is hopefully what will allow us to then create that 2 percentage points improvement to that greater than 12% by 2026. And it's that exciting journey that we're trying to embark on. That is me for today, Douglas. I was going to hand over to you. I think you've all started typing questions anyway. But Douglas, you were going to host the Q&A and distribute the easy ones to me and the tough ones for you.

That's right. That's exactly what we agreed, Carla. Excellent. Yes. So a number of questions have come on. We will try and get through as many as we can over the next half an hour or so. But look, if there are any that we're unable to address, we will try and get back to either ShareSoc or please send us an email direct, and we can see what we can do from that perspective. So the first question that came through. This is completely random order, so just going through it, Carla, came in about the cost/income ratio actually. It was talking about the cost/income ratio at 56%, 57% actually seems remarkably high for a pure retail bank with customers doing more and more of their banking online. And the previous, almost, like a long time ago, under Sir Brian Pitman, the cost/income ratio being brought down to a much lower level in the 40s at a time when the group still had an international wholesale network. So the question was what happened? So in essence, let me address that to start with. First of all, as obviously as I flagged, in my section, if you looked at the pro forma cost/income ratio in 2021, it was about 61%. Frankly, if you took -- there was obviously a significant remediation charge that we talked about. If you stripped that out and looked at the pure cost/income ratio in 2021, it was around 53%. That 53% was actually market-leading, even as a retail and commercial bank across the piece. It's something that we've particularly focused on as an organization efficiency across the piece, and that's not going to change. Now the one thing you have to obviously bear in mind -- well, there's a couple of things, but one of them is, obviously, when you start looking comparatively over time on the cost/income ratio, yes, there has been a drive and banks have become more efficient. However, the operating environment in which we currently participate now is quite different to the operating environment from a number of years ago. And clearly, from an interest rate perspective, that is one of the key differentials. It's the -- and when you look at the cost/income ratio, clearly, it's driven by 2 elements. One is how low can your cost base be? But secondly, what can you derive from your income perspective? And the operating environments, presently, with low interest rates is far less attractive than medium-to-high interest rate environment, which actually gives a more optimal environment for banks to participate in. So I think from that side, that's the reason why cost/income ratios probably are higher than they have been in the past. However, what I would say is that we remain very competitive compared to our peers. Is there anything, Carla, you would want to add to that?

Yes. I would also add that one of the targets that we have, and we haven't forgotten that efficiency ratio, which is very important because it is that operational leverage that also allows for higher sustainable returns, is actually to bring that to below 50% by 2026. So we have actually got the focus on that as well. Temporarily, we have got the investment coming through, which is why we we've targeted in the first 3 years, an absolute cost number by 2024 in order to show that discipline, but the cost-to-income ratio is firmly a target as well thereafter.

Yes, indeed. We did mention this a couple of times actually on the call, both Carla and myself, but another question that's come in is very much about capital return and when Lloyds will return the cash to shareholders that we were prevented from doing so as a result of the Bank of England restrictions. So as most of you will be aware on the call, clearly, the Bank of England actually prohibited the banks from paying dividends in 2019. As soon as we were able to start repaying our annual ordinary dividend, we did. So when you look at the 2020 full year dividend, we paid the maximum amount we were enabled to by the government. Clearly, when you look at it from 2021, we obviously paid both an interim and a full year dividend, ordinary dividend, which accounted to 2p. As I mentioned in my script, that equated to -- the ordinary dividend alone equated to about a yield of about 4% on the stock, which actually compares quite well to a number of other peers in the FTSE 100. In addition to that, we announced a share buyback of GBP 2 billion. I'm very happy to have the discussion because there was a lot of discussion internally as to whether we should do a share buyback or whether we should do a special dividend. And the general view was that when we're looking at excess capital repatriation, we have to take into the account the needs of all of our shareholders, both our institutional and our retail shareholders. So from that perspective, the general preference for institutional shareholders for excess capital return, clearly, we've already got that base ordinary dividend that's in line and we've already said that, that ordinary dividend will be progressive, and it will be sustainable over time, so we introduced that as we rebased the ordinary dividend. And then with the excess capital, the decision was made this year to actually use some of that excess capital to make a -- announce a buyback of GBP 2 billion, which we're continuing to progress. You've probably seen, we make announcements every day of the amount of shares that have been bought in the market, and we've probably done about 1/4 of that so far, so probably about GBP 500 million. In essence, that decision on excess capital return will be made at the end of each year by the Board. And it all depends on the level of capital generation in the year itself. We have also announced that we will pay down, to our target capital ratio of around 13.5% by the end of the plan period, so at least. So within the next 3 years and just as a little bit of a background, if you take into consideration the additional regulatory capital requirements that came into force on January 1 this year, essentially, our pro forma capital ratio at the end of last year was 14%. So we're already holding some excess capital that will be -- we can pay down too over time. But in essence, we fully understand the needs of both our retail and our institutional shareholders and we'll continue to look towards paying out capital and dividends over time. Carla, is there anything you would ask -- you'd want to add to that?

Just a couple more things. One that our ordinary dividend yield was at the high end of our peers. So I think that already, we felt -- and that is very much a sign of our commitment as well. And I also think -- and you mentioned buybacks, but the reason why we also went for that was a valuation reason. And obviously, that plays significantly into a buyback decision.

Yes. And let's be clear, when we look at capital return at the end of each year, there are a number of different elements that we look at. We'll look at the potential for buyback or a special dividend. We'll also look as to whether we need the capital to invest in the business. Or the other option is clearly, M&A. But we've made it very clear that our strategy is very much an organic-driven strategy. We will look potentially at acquisitions if there are particular add-on, bolt-on acquisitions that can add to our skills or technical ability across the piece, but I would flag, it is very much an organic strategy that we're looking to implement here. Okay. Another question that's come in, Carla, is do you have the ambition to acquire mortgage back books to add further scale to your lending portfolios? Perhaps if I just touch upon it initially. I mean clearly, we are the largest mortgage provider in the U.K. at present. We have a mortgage portfolio of, what, nearly GBP 310 billion. So it is the largest portfolio in the U.K. I think we do have scale related to that already, I think within what we're looking at. And we have bought back books in the past where they have added value. But Carla, is there anything else that you would particularly want to add to that?

Yes. So I would say that we have bought them, and we bought them at a time when we felt like the pricing conditions in the market were not favorable for us to grow necessarily market share, but also, where we felt comfortable with the asset quality of those back books we were bringing in because clearly, they have to be in line with what we feel comfortable at the group level. Post-COVID and certainly, since that acquisition of the Tesco ones, what we found is that we are actually naturally growing our market share, and we were able to grow quite significantly, as you know, last year. And I think Douglas mentioned that as well in his section. So if we're able to organically grow, with the pricing that we're comfortable and the risk conditions that we ourselves have, then we would rather have that. Portfolios were just an aspect of a timing at that moment, but actually, this strategy that you see here is not that. What Douglas said, this is an organic strategy and the growth that we are suggesting and that I talked to was about doing more with our existing customers. And actually then, going into new areas that we haven't had in the past, like the affluent proposition, which would have actually new product offering and new areas of business, not buying those back books.

Okay. Another question that came in was what sort of time frame should we think that Lloyds will reduce its CET1 capital down to its target level over? I sort of mentioned that in my -- in one of my previous responses, actually and the fact that -- so if you look at it on a pro forma level, we're currently operating at about 14%. If you look at our target, it's about 13.5%. We've indicated this part of the new strategy that we will look towards running down to our target over the plan period at least. So that's certainly within the next 3 years. Another question that came through was what level of churn do you get when mortgages are renewed and what do you budget for? Well, I think one of the things -- again, we've actually provided a lot more detail on this with -- actually, within our disclosures this time round. Because although if you look at the back book and the attrition rates, the attrition rates are probably more like about 15%, something like that. In practice, what we tried to do, because there is this amount of competition in the mortgage market at the moment, there's quite a lot of the book that rolls off year-on-year. And what we actually flagged as part of the disclosure is that you actually find there's about GBP 90 billion of the book. And as I say, I previously mentioned that the book is currently just over well nearly GBP 310 billion. But you look at about GBP 90 billion, probably, reprices each year. So you can see from that side that actually, if you look at the overall book, on average, it probably would reprice over about 3.5 years. And that's clearly an issue over the next couple of years, just being very transparent. Because you've got business that was written 18 months ago, 2 years ago, which will be written at a much higher rate than the business that will be written now. So I think that's -- some of this is flagged. But yes, probably, about GBP 90 billion of the book reprices each year. There's a question -- unsurprisingly, we've got a question here on exposure to Russia and Ukraine, second order effects and what might that crisis cause for Lloyds. So yes, as you would expect, Lloyds is very much a U.K.-focused retail and commercial bank. So from that side, the -- our direct exposure to Russia and Ukraine is indeed minimal. Likewise, if you look, we're doing a lot of work at the moment looking at second order impacts from our clients. So where -- if have they got exposures to Russia, are there particular business streams, business areas that are particularly susceptible and will be at risk given the nature of the crisis? Again, we're doing a lot of work on that side, but it doesn't look as though that that's going to be material for us at this moment in time. The biggest challenge for us is probably, almost like the third order impact, which is very much what are the implications of the crisis in Russia and Ukraine on not just prices of oil, prices of utilities, what does it mean for the worldwide economy? And what does it mean for the U.K. economy? And what does it mean from a consumer crisis perspective? So I think that, that is -- the biggest impact from a Lloyds perspective is what is the impact of this crisis on the U.K. economy and how does it impact the U.K. consumer? Clearly, it looks as though there are going to be impacts on interest rates. There's going to be impacts on inflation and what that means across the piece. It will be interesting to see how that also relates too from an unemployment perspective. That could impact us from an impairments perspective. It could also impact from just a general affordability perspective as well. So that's probably the biggest impact for us as a group, which will be how that impacts U.K. businesses. Carla, is there anything further you would want to add to that?

No, I think what I would add is that currently, we're not seeing the impact, but clearly, as the energy prices start to come through and as we start to see the cost of living aspect come through, we will obviously be monitoring it. Currently, the asset quality has been very benign and that was one of the aspects of our full year results as well. So we'll have to look at it in the future, what that means. But no direct exposure is the important message as well.

Exactly. Linked to that, there was another question on how high do you expect interest rates to go in the calendar cycle? And this is an interesting one, this one is, actually, because clearly, we give out our economic expectations as part of our full year results across the piece. And the actual -- I reckon, our assumptions also are a key input to the guidance that we make across the piece. So if you look across at our -- almost like our base case and if you look at it from almost like our average rates, we're looking at interest rates going to be about 1% at the end of 2022. No change in 2023, and then another change, probably towards the back end of 2024. So that's from a rate perspective. Now those are our economic expectations. Those are the actual rates that we use within our guidance. Now a number of people have actually indicated that actually, those are quite prudent. Those are quite cautious. And as a result of that, they deliberately drive the guidance that we've had. And clearly, if you believe that rates are going to increase at a higher rate than that, then it will certainly be beneficial for us as an organization because of the operating environments that we work in and the fact that we are a rate-sensitive business, given the amount of our portfolio that's driven by net interest income. So I think when you look at actually our predictions, we're predicting sort of like 125% at the end of 2024 from a base rate perspective. Relatively prudent, but clearly, it has a big impact on us as an organization. Anything further, Carla you would want to add to that side?

No. Only that -- and I think you mentioned that, but when we speak with institutional investors, they are also able to then apply their own assumptions. So for those who feel more that the rate environment will be higher, I think we've been quite clear on how they could model that, and then they can actually understand what that is or not. But certainly, our base plan was a conservative one, and we wanted to make sure that, that was the ingoing assumption because we don't control the rate environment. And so we didn't want to be overly optimistic on that.

Yes. And the other thing -- and there's another question that's come in related to this. Look, from our perspective, what you tend to find is what's driving the income, but it's also really important to us, is pass-through assumptions. And there's another question here on when actually customers will benefit from the increases in rate rises. And there's a number of pass-through assumptions that are made. We very much deliberately take our assumption is that 50% pass-through on rate rises. So essentially, that's deemed to be assumption across the piece. As a customer-focused business, we're well aware of the need to balance customer returns as well as shareholder returns. That's very much about running a business optimally, is getting the balance right. What you tend to find is the fact that when rates increase at a low level, you tend to get less of the rate increase passed on to shareholders. As rates tend to increase more, you tend to pass on more. So there is a balance across the piece. I think from a Lloyd's perspective, it is about getting the balance right to all stakeholders, and that's something we're very conscious of. I think the vast majority of banks within the U.K. haven't passed on much with the first rate rises, but that would probably be expected. There's another question here. Just are you able to comment on links to Greensill and the controls in place to mitigate political influence? Look, what I would say is that we don't have material links to Greensill and we've got -- from an exposure side, that's not material to us as an organization. And look, frankly, when you look at it from a governance and a risk perspective, we are very focused on ensuring that we are considering the needs of all stakeholders, and we don't have political influence in place. That's -- it's very much as an organization, we tend to be more prudent, we tend to be more conservative, so that's not going to be something that we want to get dragged into. Very much neutral from our perspective. Going on to -- there's a question here on size of the branch network and how we intend to approach branch closures going forwards. Now clearly, this is a key element of our strategy. What I would say is that our branch network is probably just under 1,500 branches at the moment. It has fallen in recent years, but the reason it's fallen is very much driven by the nature of customer usage. And that will continue to be the way that we look at branches going forward within the cost base. They're not being used to the same extent as they were previously. Digital is very much the primary driver and how customers feel that they want to be dealt with very much in both looking at it from a digital perspective or from a telephone perspective or across the various channels in which we operate. But our view is that the number of those branches is likely to be influenced by customer needs going forward. Is there anything, Carla, that you'd want to add to that?

Yes, I'll add a couple of things. So yes, just under -- actually, just above 1,400 branches for our 3 brands. The -- our market share, in terms of branches, has actually gone up because we've closed branches slower than some of our competitors. So actually, our market share of total branches has been going up. And actually, COVID accelerated or accentuated the structural trend and probably, has accelerated the need to revisit. Now our distribution strategy, which is what's important here, will continue very much to prioritize access to cash. It will also continue to look at what is the optimal way to think of our multi-brand and our multichannel distribution. And the truth is, again, post-COVID aspects like telephony, et cetera, have taken on a different life of their own. So I would position our branch network within our full distribution strategy as well, Douglas.

Yes. Absolutely.

Douglas, could I just come in here and say you've got a few minutes left now. Perhaps, you could choose. I know we've got a lot of questions, so apologies that we haven't been able to go through all the questions because a lot of questions outstanding, but Douglas, if perhaps, you could choose perhaps a couple more questions just to finish off this Q&A section.

Absolutely. Okay. I'll make sure -- There's a couple of strategic ones that I think would be quite useful to touch. First one, Carla, this is probably one more for you. But look, you are investing substantial amounts in growth. What are the returns hurdles in place to ensure that these investments are the best use of shareholders' capital?

So you're absolutely right. And I think I mentioned, but if I have, apologies for repeating. So about 2/3 of that GBP 3 billion strategic investment is going to be dedicated towards our growth initiatives, so absolutely, a big, strong pivot to that. Now in order to see that increase in the profitability, that 2% of the increase from 10% to 12%, that is a combination of that revenue, but also, of the costs. And those revenue growth, so that GBP 1.5 billion after the 5 years or the GBP 0.7 billion after the GBP 3 billion, is very much a 50-50 split of OOI, NII. And it's that mix change that will improve the profitability. So going back to your question on investment hurdles, all of those have to go through some pretty thorough investment prioritization. They are a mix of the shorter and longer term, but they're also a mix of building new revenue streams, which take longer, which is why you see that step change from year 3 to 5, and it doesn't all happen in the first 3 years. But be assured that they have to go through that, with some actually, of the additional investment on the efficiency being more about resilience and that, though, is less of a financial return. But frankly, it's an equilibrium and a balance we have to strike in terms of our portfolio of investment. So I hope that helps.

Excellent. Good. There are 2 more questions I quickly want to cover, Cliff, which we might just go very slightly over. But first one was, one of the strategy goals was to help the societal vital transition to net carbon zero, and how is this being done. I'll just very quickly cover that actually, the whole climate change and transition to a low-carbon economy is a real priority for the group, and it's something that actually, we've integrated within our plans, probably with 2 elements: one, which is our own operations, where we're looking to go to net zero carbon operations by 2030; and secondly, I think as our role as a bank in the fact that we're actually looking to help reduce the carbon emissions we finance by more than 50% by 2030 and on the path to net zero by 2050. And likewise, from a Scottish Widows perspective, they're looking to halve the carbon footprint of all of their investments by 2030 and then [ path ] to net zero by 2050, but very much looking to embed it within the business, and we'll continue to look towards delivering and announce further details on those plans. The final one, it's probably worth touching upon, Carla, is probably just more -- just about the whole approach of increasing financial products per customer. And this is a question obviously related to growth, talking about the fact that we have 2.3 financial products per customer, but really, saying about how do we actually make a difference there? How do we actually meet the needs of more customers more effectively to enable that?

Yes. And it's a question that we get all the time, because just saying it. I do think that reference, which I made, which is to that, the starting point is we see our average customer holding 7 financial products in their -- with their financial needs. So we know that we are meeting 1/3 of those financial needs. We also know that we are the only group in the U.K. that has got that insurance integrated financial provider. And with the recent acquisition of Embark, we also are going to deliver an investment platform that will also allow to capture a lot of those needs as well without our customers needing to go elsewhere. The idea here, if I can describe it, is the sort of creation of what we of aptly describe as a super app, where, frankly, our customers can come and actually serve all of those financial needs if they should decide to do so. But in order to do so, what we need to do is make sure that we're bringing in -- so for instance, if I take a home buying journey, we're bringing in within that, not just that mortgage product, but also, that protection product and then carrying on with a lot to do with the investment and the later life type of retirement and savings products that also need to be done. And then after that, we've also got a huge suite of unsecured products with our car financing and our leasing and Lex outfits and on top of which, MBNA and the credit card unsecured portfolio. So we believe that if we can join these things together, our customers should, through their technology, through their digital app, but also, if they then want to have more of that personalization, have those conversations. It's not going to be easy, but if we're able to turn the tide, it is really a very tangible improvement in our revenue growth. And just increasing that, like I said, by 10%, which is a fraction, so 0.2 of those financial customer needs, will increase our revenues by GBP 200 million. So it is huge amount of revenue there to go for and if done properly, of course, because it needs to be done within the [ content ] proper way. And our digital capabilities is really what we're coming from. We believe we have that, and we believe we have the scale to be able to offer to our customers more of what they need.

Excellent. Great. I'm conscious we've gone -- I've gone a few minutes over, but hopefully, that has been useful for everyone. As I said, I'm more than happy to take offline any further questions that people have.

That is brilliant. It does bring to the end this webinar today. We're really grateful to Carla and Douglas for engaging with retail investors. It's something that we appreciate. And if I can ask you to, as you leave today's presentation, to provide some feedback, I know management really appreciate that. I'd also just like to flag up a couple of webinars we've got coming up the end of this month on the 26th, 27th and the 28th of April. Firstly, with BlackRock Latin American Investment Trust, then with Capita plc and then with Checkit plc. So again, yes, thank you, Carla. Thank you, Douglas, for presenting so clearly and answering all those questions. A final apology that we weren't able to get through as many questions as were asked, but if you do have any outstanding questions, please send them through, as Douglas said, to the IR team at Lloyds Banking Group. And with that, I will say thank you very much, and we hope to see you all soon.

Excellent. Thank you very much.

Thank you. Bye-bye.