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

Good morning, everybody. Lloyds Banking Group is delighted to be running another one of these retail briefings. We've got the largest retail investor base in the U.K. and we believe these updates are an important way of keeping in touch with our shareholders. So thank you very much for joining us this morning. As Mark indicated, I'm Douglas Radcliffe, and I'm the Group Investor Relations Director for Lloyds. Within this call, I will run you through some of the key messages from our third quarter results that were issued at the end of October. However, before I do that, I thought it would be beneficial to hear from Lloyds Banking Group's Head Economist, Andrew Pipe. Our view on the U.K. economy is fundamental, not just because that is where the business primarily operates. Indeed, over 95% of our assets are in the U.K., but because our impairment charge is directly impacted by our economic assumptions. I therefore thought that it will be a good base for the overall presentation today. As ever, as was mentioned earlier, there will clearly be time at the end for Q&A, both for myself and Andrew. So with that, let me hand over to Andrew.

Okay. Thank you very much, Douglas, and good morning to everyone on the call. I guess I would assume that trends in the wider economy maybe feel like a bit of an abstract concept to most people most of the time. But that's probably not the case at the moment. We've just come through, obviously, a global pandemic, which has huge impacts on our ability to work and to spend in a normal way. We now have consequences of the pandemic plus the Russian invasion of Ukraine, which have pushed inflation up, above 10%, which is easily by far, the highest that most of us will have experienced in our adult lives. So today, we're kind of all experiencing quite personally the big-picture developments of what's going on in the wider economy. So I was going to talk a little bit about kind of what's going on behind the scenes and also what the next year or so might hold for us. But in order to do that, I think I'd like to kind of take a step back to start with because I think that understanding the future starts with understanding where we are now and indeed how we got here. And of course, the last 3 years, has been a quite extraordinary time for the economy. I think it's quite easy to criticize the government and to criticize companies and ask why our economic situation isn't better than it seems to be. But actually, when you take a step back and think about it, the economic recovery from the pandemic shock has actually been quite good. And so if we could have the next slide, please. So for example, if you just look at GDP for the U.K. and GDP is just kind of the big casual statistic that measures the amount of total activity in the economy. Then total activity is now back to within a whisker of where it was pre-pandemic. And in the labor market, the unemployment rate now, we have the lowest unemployment rate since 1974 despite, of course, the risk that the pandemic could have put a large wave of companies out of business, they just couldn't have survived without the systems. House prices have risen about 20% or so since before the pandemic to a record level in comparison to household incomes. And commercial real estate prices have also risen up about 10% even though a lot of people now work from home, and of course, that means reduced demand for office space. And even though online retail has continued to gain share from physical retail. And of course, the pandemic gave an additional boost to that trend. If we could rewind time back about 2 years to the end of 2020, to a period where we'd come through [ a ] first lockdown, we were thinking about a second. We were just beginning the vaccine rollout for the first time. If someone had told us at the time that we could have had this degree of economic recovery and this shape of economic recovery, actually, I think we'd have jumped at it. We would have said, yes, please, because the uncertainty was so great at that time. And in fact, this recovery has turned out to be better then we had [ did ] forecast at that time 2 years ago. But -- and there's always a but isn't there? But dig under the surface and there are elements of the economic recovery, which are less positive. Say, for example, the U.K. has had a weaker GDP recovery slightly than some of the other major Western economies, which may suggest that, in fact, we could have done even a little bit better than we have. The unemployment rate, it's only so low because we've had a big increase in the number of inactive people, those people who are neither working nor looking for work. And in large part, that reflects a rise of about 400,000 working-age people who now claim they are long-term sick, which we think is linked to the worsening in NHS waiting lists. So although we have navigated the pandemic shock quite well, I think it's apparent that the U.K. economy could do with some what we might call kind of maintenance work to improve the medium- to long-term economic outlook. And for me, the priorities there are things like improving health outcomes, which will help with this issue on labor market participation and improving productivity growth then underneath that, there are things like we need to invest more in skills, in education, training, invest more in infrastructure. And gosh, a period of political and regulatory stability would definitely not go a miss. If I can have the next slide, please, Ed. Unfortunately, those are kind of medium-term issues, but unfortunately, we have a much more immediate challenge of the economy to navigate first, and that is the impact on the cost of living of the Russian invasion of Ukraine. Households' costs of gas and electricity are tripling. And a large part of which is actually already hitting us now as of October, even with the government's energy price guarantee that represents something like a 4-percentage point hit to household spending power. And more broadly, the economy as a whole is suffering a rise in energy costs of something like 8 percentage points of GDP, so 8% relative to the size of the economy. And 1/3 of that energy is imported and therefore, that is a -- that results in a 2% to 3% reduction in net income of the country. We are 2% to 3% poorer as a country as a result. Whatever the government does, it can't prevent that happening. All it can do is try and cushion the impact basically by spreading it out over time. So instead of having a one-off big hit that -- the hit is kind of spread out more gradually. But the 2% to 3% reduction in the country's spending power that is bigger than the country's normal annual growth rate. And therefore, this shock is big enough to push the overall economy into recession. And of course, it's not just about households, rising energy prices increase company's costs. They therefore boost prices across the economy. That's why we're seeing wider inflation now in upper levels like 11%. And that's why the Bank of England is raising interest rates in attempt to prevent that high inflation becoming sustained. And in turn, of course, that's raising people's mortgage costs at the time in which you refinance or if you're looking to buy -- and buy a house. And that means more pressure on household budgets and that is now starting to feed into lower house prices gradually. Now while the invasion of Ukraine is very costly to our living standards and of course, it's absolutely tragic in terms of Ukraine itself. If there's a good news economic story here, it's that most forecasters expect the coming recession to be mild. You can flick on to the next slide, please. The fundamental reason for that is that previous recessions have often been preceded by a period of what you might call overexuberant borrowing and spending. And it's the reversal of that overexuberance that tends to lead recessions to be deep and prolonged. But this time, you haven't had or we haven't seen a buildup in private sector indebtedness over recent years, as we had prior to other recessions. And okay, we've had the pandemic recently, which masks things. But even looking at the 5 years before the pandemic, private sector indebtedness was pretty flat. So the ratio of debt to GDP pretty flat for both households and companies. So if there is a concern on the debt side, it's actually a more medium-term concern this time, and it actually relates to government rather than households. And that is that government debt has ratcheted up over the last 13 years. And after having gone through -- the country has gone through a succession of economic crises, firstly, the 2009 financial crisis then the pandemic, now the energy crisis. That leaves very little ability for the government to respond when the next crisis hits in terms of extra support to the economy. And that, in turn, explains why the government has recently been paring back some of its future spending plans and indeed why it's raising taxes at the same time. So undoubtedly, the outlook is challenging near term. Again, if you could flick on a slide, please. Now Lloyds, we were prudent in trying to recognize this deterioration in the economic outlook quite early, and we did so in our forecasts that underpin our Q3 results. And in fact, the forecasts that we made at the time still look pretty sensible, I think, against more recent forecasts from other forecasters as shown on this slide. We also try to be prudent in then our impairment provisions already incorporate risks that the economic downturn could be deeper than we have assumed in our base guess. And say, for example, a severe downside economic scenario that we incorporate into our impairment estimates, that severe scenario was in fact more severe than the scenarios that many of the other banks were using at the time in Q3. So to kind of summarize this with an overall perspective. Yes, we are forecasting recession, I'm afraid, but actually quite a shallow one. We think unemployment will rise, but probably only to about 5.5%. That compares to 8.5% in the last recession, so significantly better. We think house prices will fall, but we think by only about 10%. I say only because that only takes the price level back to where it was about a year ago, which itself was at the time, a record high level of house prices versus household incomes so we're not talking about a big reduction here. And because there is no private sector debt overhang to work through this time, then we think that the economic recovery when it comes, could be a little bit swifter than that, which we saw after the last recession through the mid-2010s. So yes, the near-term outlook is difficult, but not as severe as previous recessions and we think with less -- low-lasting impacts. As we said at the top of the call, there will be Q&A at the end so I'm happy to take questions on that. But before we do that, I'm going to hand back to Douglas to talk about the impact of the external environment on our business and Lloyds' strategy more generally. So Douglas, back over to you.

Thank you, Andrew. As you can see, the economic assumptions are clearly fundamental to our results, and I'll further reference their significance as I make through this presentation. Before I touch upon the financial performance, I'd just like to reiterate our strategy, as announced in February. And for those of you who are following the slide presentation, I'm going to start with Slide 9. Excellent. So just to flag, as many of you will be aware, the group's overarching purpose is to help Britain prosper. And as part of that, our vision and our participation strategy is very much to be a U.K. customer-focused, digital leader and integrated financial services provider. We talk about being an integrated financial services provider because we've got both the insurance business through Scottish Widows and indeed the retail franchises, whether that be through Lloyds Bank, Halifax or indeed Bank of Scotland. And looking at also capitalizing on new opportunities using the scale that we have as an organization. So essentially, what we're trying to do is we're endeavoring to create more sustainable value for all of our stakeholders through 3 primary pillars. First of all, driving revenue growth and diversification across our main businesses, basically through increasing the depth of relationships and breadth of products. Secondly, through focusing on strengthening the group's cost and capital efficiency further, building on our strong foundations and finally, executing by building a powerful enabling platform, combining people, technology and data to support our bold business ambitions. So in that context, we've constructed a portfolio which ensures an appropriate mix of priorities to grow revenues and increase efficiency. And these will deliver value across both the short term and the longer term. So moving to Slide 10. As you'll see, growth is a core focus of our strategy with about 2/3 of our incremental strategic investments aligned to growing and diversifying revenue. We've carefully prioritized opportunities across each of our businesses to ensure we generate value in the near term as well as creating new revenue streams, which deliver over the longer term. In the consumer segment, we aim to bring more of our products and services to our existing customers as well as innovating and broadening our product offerings and basically making it easier for customers to access them through our intermediary partners. In addition, we'll create a new mass affluent proposition to grow in this attractive and underserved market segment across banking, protection and Simple Wealth. In our SME business, we aim to digitize our offering and grow and diversify our revenues in products and sectors where we have a lower market share today. And we'll target disciplined growth of our Corporate and Institutional business. With that said, we are clearly operating in a fast evolving and uncertain environment. I'll now turn to Slide 11 and how we are supporting our customers in the current environment. The vast majority of our customers are actually continuing to demonstrate resilience and adapting to the cost of living increases. However, we know that many are concerned about the outlook, and we are committed to proactively helping where it is most needed. This is in the best interest of both us and the country. In retail, for example, we are contacting vulnerable customers with advice and guidance from relevant product adjustments. In Commercial, we are reaching out to business banking clients with specialist relationship managers' support. And Insurance, we are removing monthly interest charges on home insurance products, enabling customers to spread the cost of their policies. As said, we are committed to proactively supporting our customers. We remain vigilant for any signs of stress across the portfolios. So let me now turn to Slide 12 to look at an overview of the financials. As you can see, and many of you will have noted in October when we actually issued these results, Lloyds Banking Group delivered a robust financial performance in the first 9 months of 2022. Net income of GBP 13 billion was up 12% on the prior year. The net interest -- as you know, the net interest margin is the difference between the interest we earn and the interest we pay, and this has strengthened to 284 basis points for the first 9 months of 2022. We've also seen growth in other income and a continued low operating lease depreciation charge largely related to our vehicle leasing business. We remain committed to our market-leading efficiency. Operating costs of GBP 6.4 billion are up 6% on the prior year. This includes stable BAU costs alongside higher planned strategic investment and the costs associated with our new businesses. Observed asset quality remains very strong. Impairment has increased to GBP 1 billion, but this is largely driven, as Andrew indicated, by the weaker economic outlook and associated scenarios adopted in Q3. I'll go into this in more detail shortly. Taken together, this robust group performance resulted in statutory profit after tax of GBP 4 billion in the first 9 months and a return on tangible equity of 12.9%. Our financial performance alongside effective management of risk-weighted assets has resulted in capital generation of 191 basis points for the year-to-date, which clearly is beneficial when you start to look at capital return. I'll now turn to Slide 13 to look at the ongoing strength in our customer franchise during the quarter. As you can see, our mortgage book continues to grow including open book growth of GBP 1.8 billion in Q3. Credit cards have continued their gradual recovery, balances are up very slightly, just GBP 0.1 billion in Q3, with improving spending levels particularly in discretionary categories, although much of this is offset by customer repayments. Unsecured personal loans have increased GBP 0.3 billion in the quarter, in part due to our enhanced preapproval capabilities for attractive low-risk customers in the intermediary channel. And Commercial Banking balances are up GBP 0.6 billion in the quarter. We are seeing attractive growth opportunities within our Corporate and Institutional franchise alongside the effect of exchange rate movements. These are partly offset by repayments of government support scheme loans in SME. Looking briefly at the other side of the balance sheet, we continue to see inflows to our trusted brands. Retail deposits were up GBP 1.5 billion in the quarter, building on the growth seen in the first half. Within this, current accounts are up GBP 2.3 billion in Q3, more than offsetting lower savings balances in our tactical brands with our relationship brands essentially flat. Commercial deposits were up GBP 3.5 billion in the third quarter. Note that part of this growth is short-term placements, which are likely to reverse in Q4. Alongside, we continue to see good organic growth within our insurance business, including over GBP 6 billion of net new money in the year-to-date. I will now turn to Slide 14 and the group's income growth in a little more detail. As mentioned, net income of GBP 13 billion is up 12% year-on-year with higher NII, so that's net interest income and other income alongside lower operating lease depreciation. Net interest income of GBP 9.5 billion is up 15% on the prior year, benefiting from a stronger net interest margin and higher average interest-earning assets. Average interest-earning assets of GBP 450 billion are up GBP 8.4 billion on Q3. Within this, mortgage growth is more than offsetting the lower average balances in SME. The year-to-date net interest margin of 284 basis points is up 32 basis points on the prior year. The margin in the third quarter was 298 basis points benefiting from the bank base rate increases and favorable structural hedge reinvestment more than offsetting the drag from mortgages. In respect of mortgages, completion margins were about 60 basis points in Q3 in the context of considerable swap volatility. Looking forward, our updated economic assumptions now include a year-end base rate of 4%. This will act as a tailwind to the margin. Indeed, with the benefits of this and other factors, we are seeing sustainably higher margins than previously expected. Accordingly, we have enhanced our 2022 net interest margin guidance to greater than 290 basis points. With respect to volumes, we continue to expect low single-digit percentage growth in average interest-earning assets in 2022. Now briefly turning to other income, which is referenced on the bottom of the slide. OOI of GBP 3.8 billion year-to-date is up 2% on the prior year, while GBP 1.3 billion in the third quarter is roughly in line with recent periods. Within OOI, retail other income is up 11% year-on-year, including improved current accounts and credit card performance. Commercial Banking is up 3% given financial markets and transaction banking income. Insurance, pensions and investment income is up 6%, reflecting a good performance in workplace pensions and bulk annuities. Going forward, we continue to expect other income as a whole to build gradually supported by customer activity levels and our ongoing strategic investments. We will see an impact from the implementation of a new accounting standard, IFRS 17 in 2023. We'll go into this in more detail at the year-end. Now moving to costs. Operating costs of GBP 6.4 billion are up 6% on prior year. As expected, essentially, what we have is stable BAU costs alongside planned higher investments and costs associated with our new businesses. We continue to expect 2022 operating costs to be circa GBP 8.8 billion. Our cost/income ratio of 47.8% in Q3, including remediation, has significantly improved over recent quarters. Clearly, that's driven by the income strength. Looking forward, like all organizations, we are impacted by inflationary pressures, as Andrew was talking about earlier, we're talking about around 10% at the moment. But irrespective of that, we retain our rigorous cost focus. We will look to offset higher costs wherever possible as we have with the circa GBP 65 million expense associated with the one-off payments to staff in Q3. We'll provide an update on the cost and investment outlook at the year-end. I should highlight at this point that the phasing of our strategic investment is expected to peak next year, which will clearly make a difference. As mentioned, remediation remains low at GBP 89 million for the year-to-date and GBP 10 million in Q3. Looking now at impairment. Observed asset quality remains very strong. The net impairment charge for the third quarter was GBP 668 million. As you can see on the slide, and as Andrew referenced earlier, around 2/3 of the charge in the quarter actually related to our updated economic outlook. The accounting rules require us to book expected future losses and the deteriorating outlook in the quarter resulted in this charge. Importantly, and as I mentioned already, this is not the result of any underlying credit deterioration. I should also note that the Q3 economic charge is materially driven by a very severe downside case. This is a function of our methodology, which is also an unlikely outcome. The Q3 charge pre-updated economic scenarios of GBP 250 million reflects very strong observed asset quality. It's equivalent to about 21 basis points for Q3 or 15 basis points year-to-date, in line with our previous guidance. MES and observed charges together bring the net year-to-date impairment charge to approximately GBP 1 billion equating to an asset quality ratio of 30 basis points. We now expect the net asset quality ratio to be around 30 basis points for 2022 as the year as a whole. So turning to the next slide, I'll look at customer behavior across our businesses. As I said, we have seen a few signs of pressure in our customer base from cost of living increases. Credit card spend in September was up 16% compared to September '19, driven by our middle and high-income customer banks. Indeed, our customer base is continuing to increase discretionary spending providing further opportunities to adjust outgoings if needed. Alongside regular minimum payers in the card portfolio remain at consistently low levels. We continue to see stable trends in SME overdrafts and revolving credit facilities. Indeed, RCF drawings remain at around 80% of pre-pandemic levels, so RCFs are effectively revolving credit facilities, as I mentioned earlier, while invoice financing debtor days have remained broadly stable throughout the year. So as you can see, we're not seeing any deterioration as we speak at the moment. Now that's not saying that there won't be deterioration. And certainly, given the economic forecast, it is likely that will happen at some stage. But clearly, at the moment, we're not seeing it. So moving on, I'll turn to statutory profit on Slide 18. Year-to-date statutory profit after tax of GBP 4 billion and the return on tangible equity of 12.9% represents a robust performance. We continue to expect a return on tangible equity for 2022 to be around 13%, even after the impairments and volatility charges that we have seen in Q3. Turning to Slide 19 and looking at our strong capital generation in the 9 months. Risk-weighted assets of GBP 211 billion are down GBP 1 billion, excluding the regulatory inflation on the first of January. Underlying lending growth of GBP 3 billion has been more than offset by model reductions and ongoing portfolio optimization. As before, we're seeing no impact at this point from credit migration. Capital generation of 191 basis points year-to-date is strong and reflects robust financial performance. This includes 169 basis points of underlying banking generation as well as the GBP 300 million interim dividend from the insurance business. This is also after the full GBP 800 million fixed pension contribution for 2022. The CET1 capital ratio of 15% is very strong and well ahead of our ongoing Board target of around 12.5%, plus a management buffer of around 1%. Based on this and the robust financial performance to date, we now expect capital generation for 2022 to be between 225 and 250 basis points. The Board remains committed to shareholder remuneration. I've already seen that there have been some questions coming in around this, and I'm happy to talk about it further when we get to the Q&A. But essentially, our policy is to have a progressive and sustainable ordinary dividend. Our ordinary dividend was up 20% to 0.8p per share at the half year, supported by excess capital distribution. And that decision will be made as per normal at the full year. Now turning to Slide 20 to wrap up. In summary, the group is performing well and faces the future with confidence. The current environment is naturally concerning for many people. As always, we're committed to maintaining the support we give to our customers. However, our franchise so far has been resilient, and our low-risk portfolios are well positioned for more challenging times. The group has delivered a robust performance in the first 9 months of 2022 with improving net interest income and cost discipline, driving robust profitability despite the revised macroeconomic outlook. Looking forward, the group's robust financial performance and revised economic outlook are reflected in our updated guidance for 2022. So we now expect the net interest margin for this year to be in excess of 290 basis points, the asset quality ratio to be around 30 basis points and capital generation to be between 225 and 250 basis points. The rest of our guidance for 2022 remains unchanged. That concludes my comments. Thank you for listening to both Andrew and myself, and we've now got plenty of time for Q&A. I know a number of you have been typing in your questions into the Q&A box already, and we'll now address them appropriately.

I think -- so clearly, there's a number of different questions that have come in already. Why don't I start off with a question relating to distributions because I'm sure that's what a lot of you are interested in, and we'll provide a little bit more detail. So in essence, as I say, this is a -- we have a almost like a policy, which is a progressive and sustainable ordinary dividend. That's very much the basis of our capital distributions. You'll see, obviously, we had increased that ordinary dividend by 20% at the half year. So essentially, at the half year, we announced a dividend of -- an ordinary dividend of 0.8p per ordinary share. Clearly, if you look at the full year last year, you would expect that. Our full year dividend last year was 2p per ordinary share. So normally on a -- when we split the interim and the ordinary it tends to be -- it's like a 1/3, 2/3 split, which gives you where you would expect to be with a 20% increase for this year. Now clearly, the actual Board will make an additional decision at the full year as to exactly what that final year dividend would be. But as I say, it was a 20% increase at the half year. And then what in essence happens is, the Board considers the excess capital. And so when I say excess capital, that's capital in excess of our 13.5% capital requirement. So the 12.5% plus 1% I was talking about earlier and then looks at how much capital we can pay down. So last year, excluding the additional capital requirements that are coming on board, we essentially paid down to 14% given the market uncertainty that was out there. We've committed to paying down to 13.5% by the end of 2024. So [ that's ] essentially in the plan period. But given the uncertainty, we'll have to see whether the Board decides to do that now. As I say, they paid down to 14% at the end of last year. So then essentially, what the Board makes a decision on is they look at the excess capital that's left over and say, how can we use that most effectively for the business? Is that actually going to be capital repatriation? Where there are effectively 2 ways we could look at. One is going to be effectively a buyback. The other would be a special dividend. In essence, you could look at both. And essentially, what the Board looks at is the different shareholder requirements. Clearly, whether you're looking at being a retail shareholder or an institutional shareholder, your requirements could be quite different. Indeed, your requirements could be quite different as an institutional shareholder. Clearly, some funds have different requirements to others. So essentially, the Board takes into consideration all the different stakeholders and then makes a decision on payout. So in essence, that's how distribution decisions are made. Those decisions are made by the Board at the end of each year. So let's go down a couple of the other points. I'm not quite sure. So the first question is, does Lloyds have any plans to take over the space left over by HSBC? I'm not quite sure what that's relating to, whether it's a specific brand space or whether it's any particular areas where HSBC have come out with. I think clearly, a big difference between ourselves and HSBC is the fact that actually, we are very much a U.K. franchise. In some respects, that's why it was so important to get the update from Andrew today because we are very much a bellwether for the U.K. economy, whereas HSBC's participation is clearly around the world. So that's a very different participation choice that they have made and exposure to different economies. The next question just going down was that I could see was about Lloyds and Scottish Widows. First of all, about how it's looked at as part of the group. As I indicated right at the start, when you look at the vision of us as a group, we're very much an integrated financial services provider. As an integrated financial services provider, the view is that we should be looking to gain the synergies between both our commercial business, our retail business and our insurance business. On a regular basis, clearly, the Board looks at actually the participation strategies where we look to compete most effectively. And indeed, whether the ownership is right within the business or indeed elsewhere. I think very much due to the -- both the operational and the capital efficiencies, I think the view is very much that it makes sense to look at Scottish Widows as part of the group. So these sort of things are looked at on a regular basis. I think, but the view is at the moment that it does make sense to have it within the group. There was another question almost like related to that as to whether it would make any difference if it was separately listed given ring fencing. Now effectively, when you look at the ring fencing, effectively the insurance business is included with the core retail bank. So it's the Lloyds Bank capital markets that is clearly is the different area. So the LBCM that's separate from a ring-fencing perspective, and that's effectively in a -- the commercial banking business. We don't really have a full size investment bank. We never have done. So we don't do equity capital markets. However, we do do some of the more debt capital markets and some of the ancillary products that come in that area. So I think that's unlikely to have an element. Let me -- going down there. Were there any other particular questions on the economic side that you've seen, Andrew, that you could address? Or was that...?

Not really. I mean there was a question about deposit betas, which I think you can probably answer better than me. I mean, I guess the general perspective here is bank margins, NIMs have actually been unusual for the last decade whilst we had bank rate pretty much at 0, NIMs unusual in the sense of the split between the interest spread on lending versus the interest spread on deposits. Obviously, on the deposit side, things got very compressed as bank rate hit almost 0. And as bank rate moves away from 0, you might expect over time some kind of gradual normalization of that split of NIM between deposits and lending. In other words, you might find deposit rates do go up a little bit more slowly than bank rate. But on the other hand, you won't see full pass-through of bank rate rises on the lending side. So I think that would be my general comment, which you can probably widen out on Douglas. But that was the only question that I saw that kind of related to the wider economic picture.

Yes. And I think that's a very fair point. I mean, it's really interesting because from a bank perspective, look, it's very easy to focus either on the mortgage margin or the deposit margin. And frankly, when we're looking at the overall profitability of the group, it's really important to look at both margins together. So at any one point in time, you may have more pressure on your deposits or your margins. Now frankly, if you look at it where it is at the moment, actually, there's probably more competition when it comes to from a mortgage perspective than a lending perspective. So I think I talked in my speech that actually we looked at our completion margin on our mortgage book of about 60 basis points in the third quarter. Interestingly, it was the same in the second quarter. Frankly, however, if you -- as we said, almost like 1 of the biggest headwinds that we have next year is the fact that we have a whole lot of business that is rolling off, new business that was written last year that was written at margins that were much more like about that, the [ 160, 170 ] level. So you can see actually that is quite a headwind when it comes to the mortgage over the next year -- in the next couple of years, actually. And it's interesting when you look at the actual mortgage margins and the market and the competitive dynamics because in essence, what you see is the fact that actually it can vary a lot, well, actually week to week, let alone month-to-month. So well, we saw -- if you go back and look at Q3 you effectively had July margins or July mortgage margins that were probably well within our target range. Our target range tends to be around the 75 to 100 basis points, well within the range for July, well within the range for August. But then what you saw was the swap curve increased dramatically in September as we saw the turbulence in both the political and the economic perspective. So effectively, the curve increased dramatically. As a result of those swap curve increasing, effectively, the margins reduced dramatically. Now it's very much up to us as almost like the leading provider in the U.K. to continue to offer mortgages even at times of pressure. So although we withdrew some mortgages, we still have significant offers out there and the margin would have reduced in that period. Now what you tend to find is actually those margins have reversed back to where they were. And you've got different dynamics in play. Likewise, if you look at it from the other side, from a deposit margin perspective, which is really quite interesting, is the fact that actually -- and as Andrew said, we've always indicated that the pass-through assumption will be about 50%. Frankly, if you look at what's happened on the first few rate rises, is banks haven't actually passed through as much as that. They passed through more like 20% to 30%. But that will always be the case when you're actually starting off at a very low rate because at a very low rate, and you have very little optionality when it comes to managing the margin, which is why, frankly, it's always been said from a bank perspective that an optimal operating environment from a bank perspective would be very much more where you've got rates of 2.5%, 3%, 3.5% because you can manage both the asset and the liability book effectively. But from that side, as rates start to increase, effectively you -- or as rates do increase, a higher rate environment is generally a better environment for banks to operate in. But as rates do increase further, the amount of pass-through you make will be greater so the amount of margin benefit will be less. And that's -- it's very typical of any economic cycle across the piece. So yes, it is the -- those dynamics are really quite interesting. If we look at a couple of the other questions coming on board, I think I've touched upon the floating of Scottish Widows and other parts. I think at the moment, it's very much seen as a core part of the business that provides capital efficiency and indeed operational efficiency and benefits of being in. So I think that's the case. If you look at other parts of the book, I think again, if you look at some of the Lloyds car finance and other operating businesses, I think the view has been that they will benefit from the operational efficiencies from the group as a whole and being part of the group. So I think the view is that having a separately floated businesses like that wouldn't provide the same sort of benefit. The next question, which is an interesting one is, obviously -- we're obviously the leading provider of mortgages within the U.K. So clearly, we have a significant amount of experience when it comes [ from ] the property market, not just from a lending side, but also clearly, we do home insurance and the like. So one of the things, and this is a reference here is that a number of you may have seen that we started up a business a couple of years ago called Citra, which was very much more about building to rent. So effectively that we would be involved in actually building properties or going into partnership with builders to actually have those properties rented out to customers and effectively manage that as a business. This is something that we wanted to go in on a very measured basis. Effectively, when you look at it across the, I suppose, the overall -- the customer base, there are some customers that naturally want to own their own property. There are others that prefer to rent. And so this actually provides another opportunity for those customers that enables us to use our significant skills. In essence, it's interesting because actually, our strategic focus on this hasn't changed at all. I think the -- you may well provide -- we may well see that actually if the housing market starts to slow, as Andrew indicated, we've got -- we're currently expecting an 8% fall in house prices in 2023, effectively at 10% when you look at it from a peak-trough perspective. In some respects, you could argue that actually, if we're going to be looking to purchase properties to rent out, then that provides almost like an even more beneficial place to enter that sort of market and purchase those properties. So effectively, the ambitions haven't changed. It's still looked to be part of the overall offer, the overall proposition. But I should be very clear here that it's still really quite small when you compare it to other parts of the portfolio. So the next question is from Kobe, Bounce Back Loans and the like. So in essence here, it very much depends, but very much they are government guaranteed loans. So from that perspective, it's quite clear that it is our responsibility to manage the operating elements of those loans and to ensure that where repayments aren't made that we're contacting them appropriately. But if those loans essentially go bad, effectively, they are government guaranteed. Is there anything, Andrew, that you would want to add from that side just from a economics perspective or general market?

Well, I think the experience is that actually, the payback rate on those loans has been better than was originally assumed at the time that they were made, and therefore, this is kind of a smaller issue than might be thought. But I think your key point, obviously, is correct that they are government guaranteed. And therefore, the risk to the bank from those loans apart from the kind of operational aspect of having to reclaim any money that isn't repaid is very, very small.

Yes, exactly. There's another question again from Stephen. Does Lloyds seek to rival major insurers in the bulk annuity market? Bulk annuities are a project that we are happy to write, we will consider, certainly from our perspective, there are strategic benefits of being in that business given the fact that we own Scottish Widows, we own an insurer, there is the ability to invest in long-term assets, which you may well have seen that there have been some regulatory changes recently that could well make bulk annuities more attractive. The challenge with bulk annuities is that they are a very long-term contract. So essentially, from that side, it's very much a case of looking at the individual contracts and looking at their capital efficiency and making a decision on each basis. So is it an area that we want to continue to participate in? Yes, it is an area. Whether we will participate with some of the large insurers to the scale that they are, I think it will very much depend because I think it is -- you go down the bulk annuity route and you do end up utilizing quite a lot of capital. So from that side, it's a case of, yes, it's an area that we want to participate in. We will see exactly from -- over time as to what the volume and quantum of business we decide to write in that area is. What else have we got there? House buying and rental plans, I'll try to cover that. COVID loans, I'll try to cover that. If ring fencing is reduced tomorrow as part of the government plans, how will that affect LBG? Will that enable bigger capital distributions to shareholders? Well, I think it's quite clear at the moment that if you look at it from an overall market perspective, there is fine-tuning going on to the ring-fencing rules, frankly, and there have been various consultations that have occurred over the past few months and indeed over the last week, there have been some refinements that have been made. Essentially, we're supportive of a lot of those recommendations that have been made. I think it's unlikely -- and I think what it's trying to do is reduce the rigidity of the regime and it's looking to say that over time, the requirements should reduce given the correlation with other recovery and resolution mechanisms. Practically, in the short term, most of the changes that are going to be made are changes that will implement -- that will impact the smaller banks. I think the impact from our side is likely to be relatively limited in the short to medium term. What other questions are there? Will the Board of Directors consider a share consolidation with some additional benefits for shareholders or something similar? There is always good news from the -- when the share price continues to decline lower year-on-year, and the dividend shares have simply lost out massively. The share price was -- okay. So I get the point of that particular question. So I think for us, there are a couple of different elements here. So one is when you look at it from a buyback perspective because clearly, there's a bit of a -- there's always a bit of a debate when it comes to the buyback as being how this is beneficial or not. And the theory, as most of you all know, is clearly it makes sense to undertake a buyback if the actual value of the share price is beneath the tangible net asset value, which it is at the moment, so it should affect effectively -- from a theoretical perspective, be a good use of capital. Now the challenge has been in recent times because of the external environment, because of other factors, as you well say, the share price reaction hasn't effectively reacted positively. If you actually look at the effect of a buyback, I mean, the effect of a buyback is it should be to reduce the total number of shares in issue. So if you reduce the total number of shares in issue, you, in essence, haven't reduced your asset base. So it is expected that shareholders who retain their shares in the company will benefit from the share buyback program as they'll own an increased proportion of the total shares in the company. And so therefore, in theory, what you should see is an increase in the dividend per share going forward given the reduced number of shares in issue. So in theory, there should be a benefit. It's a little bit like -- so that's how the dynamics work. I mean, interestingly, when you look at it from a share consolidation perspective, a share consolidation doesn't change the assets in the business either. So effectively, you have the same value of a business, but you just have less shares in issue. So a share consolidation essentially would mean that you have less shares, but each of those shares is worth relatively more. So it's an interesting look from a from a pure visibility perspective, it clearly looks as though your share price is greater, but the fact that you have less shares means that, that shouldn't be the case. So that shouldn't be the case. Now if you look at it from a strategic perspective, and I think this is the most important element. Clearly, we've got a new management team. We've got a new -- led by Charlie Nunn. We've got a new strategy, that I talked about earlier, that new strategy, which was launched in February this year is very much a strategic investment of GBP 3 billion over the next GBP 3 billion -- GBP 3 billion over the next 3 years, GBP 4 billion over the next 5 years. And actually, when you look at that strategy itself, the whole idea is to actually increase the income generation and actually to increase the returns of the business. So effectively, the additional investment that we were making would look towards increasing the return on tangible equity by 2 percentage points. Not only would it actually look towards increasing the return on tangible equity by 2 basis points, but it would also look to increase the actual capital generation of the business. You'll see at the time that when we actually went out with specific targets, we talked about the fact that the actual capital generation of the business would increase. In fact, we were talking about it increasing up to 175 to 200 basis points of capital generation per annum. Now frankly, that was -- those targets were set back in February when the interest rate environment was very different. So I suspect that we'll be updating those targets at the year-end. We have benefited quite significantly this year. Clearly, as you've had a reduction in the RWAs and the rising rate environment. But if you end up having a strong capital generation, you would normally expect to see a strong capital return. And I think that's what you would expect to see coming through. So that's just a very brief overview. Another question there is on M&A. Look, I think M&A across the piece doesn't matter whether it's build to rent, whether it's across the piece, it's -- essentially, it all looks at the value to the organization as a whole. We've made it very clear that we've got a clear strategy. It's an organic strategy. If there are additional capabilities that we can add on, if there are additional small businesses that make sense to acquire, we would look to acquiring, but it has to make sense both strategically and from a value perspective. So that was the question there. The other question was very much about, look, returns and benefits of the HBOS takeover. Clearly, the HBOS takeover was a long time ago now. We've had different management teams in place. It's very much about we have the asset base that we have at the moment. We have the capabilities that are there, and it's very much a case for the management team to drive, to deliver increased returns, increase capital generation. And if you get that capital generation, further dividends will come through. So it's very much a case of running that one business now. I hope that's addressed most of the questions as we've been going through I think we've actually now reached the time at 12:00. Unless Andrew, you've got any final comments or questions, my view would just be, look, thank you very much indeed for dialing in. I do hope it's been useful. If there are any further questions, please let ShareSoc know or indeed e-mail us direct and we can address them appropriately. But otherwise, thank you very much for dialing in, and I do hope you have a great Christmas.