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

Thank you for standing by, and welcome to the Lloyds Banking Group 2023 Q1 Interim Management Statement Call. [Operator Instructions] There will be a presentation from William Chalmers followed by a question-and-answer session. [Operator Instructions] This call is scheduled for an hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

Thank you, operator. Good morning, everybody, and thank you for joining our Q1 results call. Let me start with an overview of our key messages on Slide 2. The Group has continued to deliver in Q1. As ever, and particularly in the current environment, our purpose of helping Britain prosper is central to how we operate. Our purpose-driven business model enables the Group to offer significant support to customers and colleagues, as they navigate the increased cost of living. We've also continued to deliver against our strategic ambitions for the Group. You will hear more about this at the half year and in our deep dive sessions in H2. Underpinning this, we delivered a solid financial performance in Q1, including strong income growth and capital generation. Our confidence in the Group's business model, strategy and continued financial performance are reflected in our maintained guidance for 2023. In an environment of change, our commitments have remained constant. Let's turn to the financials on Slide 3. Lloyds Banking Group delivered a solid financial performance in the first quarter of the year. Net income of GBP 4.7 billion is up 15% on the prior year, supported by a net interest margin of 322 basis points growth in other income and a continued low operating lease depreciation charge. Operating costs of GBP 2.2 billion were up 5% on the first quarter of 2022. This reflects our continued strategic investment alongside inflationary effect from the cost base. We remain committed to maintaining our market-leading efficiency position and are on target to achieve our guidance of circa GBP 9.1 billion for 2023. Asset quality is resilient. The impairment charge of GBP 243 million is equivalent to an asset quality ratio of 22 basis points, supported by a small release relating to the improved macroeconomic outlook versus Q4. Consistent with recent periods, given the reporting changes we implemented a year ago, underlying and statutory profit before tax are now largely aligned. Statutory profit after tax for Q1 was GBP 1.6 billion, and the return on tangible equity was 19.1%. This drove strong capital generation of 52 basis points, even after taking the full GBP 800 million fixed pension contribution. Alongside, TNAV is up 3.1 pence per share after the IFRS 17 restatement. I'll now turn to Slide 4 to look at our resilient customer franchise. Mortgage balances stand at GBP 307.5 billion. This is down GBP 3.7 billion in the quarter, largely driven by the GBP 2.5 billion legacy portfolio exit that we mentioned at the full year. Excluding this, the open mortgage book was down GBP 0.6 billion in the quarter, reflecting lower activity levels across the market. Alongside, we continue to see modest growth in our other retail businesses with credit cards, loans and motor finance, all showing progress. Likewise, we continue to take advantage of strategic growth opportunities within the Corporate and Institutional business, delivering growth of GBP 0.7 billion in balances in Q1. As in previous quarters, this is offset by repayments of government support scheme loans within SME and some lower underlying balances. Turning to the deposit side of the balance sheet. Total deposits are down GBP 2.2 billion in the first quarter or roughly 0.5%. This includes a reduction of GBP 4.3 billion in Retail and growth of GBP 2.7 billion in Commercial Banking. The Retail balance development includes an outflow of GBP 3.5 billion in current accounts. This reflects unusually high seasonal outflows, mainly tax payments, higher spend given inflation and rates, and a more competitive market, including government NS&I offers and our own savings rates. Looking forward, it is likely that the higher customer spend levels, internal churn and market competition continue, but we do not expect to see the circa GBP 2 billion of tax payments repeating this year. Savings balances in Q1 were essentially flat, albeit with some expected movement from variable fixed rates. In Commercial Banking, we saw modest SMB outflows due to spend increasing in corporate and institutional inflows. Some of these inflows were strategic, some likely short-term quarter end balances. Across deposits as a whole and acknowledging uncertainties, we expect balances in 2023 to be broadly flat on 2022. Alongside, we've continued to see good organic growth in insurance with circa GBP 2 billion of net new money in the quarter. Moving on to Slide 5 and the Group's strong income performance. Net income of GBP 4.7 billion is up 15% year-on-year with higher NII and other income. Net interest income of GBP 3.5 billion is 20% higher than the prior year, benefiting from a stronger net interest margin and higher average interest earning assets. The Q1 margin of 322 basis points is up 54 basis points year-on-year, but stable on Q4, as we had expected. As set out at the full year, we've seen continued pressure on asset margins, broadly offset by tailwinds from base rates and benefits from the reinvestment of the structural hedge. Mortgage completion margins were around 50 basis points in the quarter. This average included slightly higher new business margins and slightly lower product transfer margins. As you can see, the nominal balance of the structural hedge remains at GBP 255 billion. The weighted average life also remains around 3.5 years. Given an average yield of around 1.2% and currently prevailing swap rates, reinvestment of hedge maturities is expected to continue providing a healthy tailwind in the coming quarters. Looking forward, and as outlined in February, we continue to expect the net interest margin to reduce in Q2 before stabilizing in the second half of the year. Overall, a base rate rise beyond our initial expectations has been offset by tighter product margins. We, therefore, continue to expect the full year margin in excess of 305 basis points. And alongside, we continue to expect broadly stable AIEAs in 2023. Turning briefly to other income. OI of GBP 1.3 billion in the quarter is up 6% year-on-year and up 11% on Q4. We've continued to see activity build and benefits from investment, providing underlying growth. In addition, Q1 also benefited from benign weather in insurance compared to Q4 and a profit on sale of the legacy mortgage book. We continue to expect other income to build gradually supported by customer activity, our ongoing strategic investments and releasing the store of insurance earnings within our CSM liability. A brief word on operating lease depreciation. The charge of GBP 140 million in the quarter is higher than previous periods. The Lex car fleet grew, and we recognized lower gains on sales in Q1, as new vehicle supply constraints ease. Augmented by Tusker, we expect this trend to continue through 2023 and therefore, to see the operating lease depreciation charge grow through the year. Now looking at costs on Slide 6. Operating costs of GBP 2.2 billion are up 5% year-on-year. As you know, the increase is driven by our planned strategic investments, the costs associated with our new businesses and inflationary effects on the cost base. The cost income ratio of 47.1% or 46.6%, excluding remediation, continues to be competitive. Looking forward, we will maintain our rigorous cost discipline and remain on track to deliver operating costs of circa GBP 9.1 billion in 2023. Remediation was very low in Q1 at GBP 19 million. There is no charge in respect of HBOS rating, although as ever, uncertainties on this remain. We continue to have a base case remediation charges of around GBP 200 million to GBP 300 million per year. Let me now move on to asset quality on Slide 7. Asset quality continues to show resilience across the Group. Our Retail businesses are performing well with arrears at or below pre-pandemic levels. Meanwhile, commercial performance is strong with the Q1 charges largely relating to cases that were already in Stage 3. The net impairment charge for Q1 was GBP 243 million, equivalent to an asset quality ratio of 22 basis points. This includes a GBP 322 million charge before the updated economic scenarios, roughly consistent with Q4 and equivalent to an AQR of 28 basis points. As you can see, there's a small release in respect of the updated macroeconomic scenarios, stemming from reduced energy prices and a looser fiscal constraint, the base case represents a modestly improved outlook. As usual, the detail of our scenarios is in the appendix. The stock of the ECL on the balance sheet is marginally lower in the quarter at GBP 5.2 billion, with coverage levels remaining very strong. And given everything we can see, we continue to expect the net asset quality ratio to be around 30 basis points for 2023. Turning to Slide 8 and looking across our portfolios. Retail performance is resilient. We're seeing a modest increase in new to arrears in some portfolios, but from a very low base. Movements are within or in some cases, better than our expectations. Mortgage book is very high quality. The average loan-to-value is 42% and 93% of the book is below 80%. We have seen a small uptick in arrears in the variable rate legacy books from 2006 to 2008, but the rest of the portfolio shows no noticeable movement. The unsecured book meanwhile is performing better than we had expected. In the Commercial business, we continue to see stable SME overdraft and RCF utilization trend. Watchlist and business support unit levels are stable to modestly down on year-end. Our Commercial portfolio is very high quality. Around 90% of SME lending is secured, whilst more than 75% commercial exposure is to investment-grade clients. Within the Commercial business, our net real estate exposure after significant risk transfers is GBP 11 billion and has been significantly derisked in recent years. Lending is focused on cash flows with 84% having interest cover of 2x or more. The average LTV of the portfolio is 44%, while 95% have an LTV below 70%. The portfolio is also well diversified and subject to sector caps and limits. Our exposure to offices is around 14% of the portfolio, 10% to retail and 11% to industrial assets. Across our businesses, we feel very comfortable on asset quality. Let me now move on to Slide 9 on the Group's liquidity position. Given recent events, it would be remiss not to spend a moment on deposits and liquidity. The Group continues to have a very well-diversified deposit base and a very strong liquidity position. The net stable funding ratio at 129% and loan-to-deposit ratio at 96% demonstrate the strength of the Group's funding. We benefit from a predominantly retail-focused deposit base with around 3/4 of deposits coming from retail and a well-diversified portfolio of SMEs. Over 90% of the deposit increase of circa GBP 60 billion since the end of 2019 has been in the retail franchise. A very significant proportion of our customer deposits are insured with over 80% of retail customer balances and 57% of total deposits, protected by insurance schemes such as the FSCS. The liquidity coverage ratio of 143% is stable and is well above both regulatory requirements and our internal risk appetite. Group's liquidity remained robust throughout the recent volatility with all liquidity measures well above internal thresholds at all times. Our liquidity pool of around GBP 140 billion is held in high-quality liquid assets, with the majority held in cash and government bonds. The entire portfolio is hedged for interest rate risk with only credit risk driving limited movements in fair value throughout the comprehensive income, and this was negligible, both in 2022 and in Q1. Together with Central Bank facilities, this provides over GBP 210 billion of available liquidity, a very strong position. Now moving on, let's look at TNAV and capital on Slide 10. Tangible net asset per share of 49.6 pence, up 3.1 pence in the quarter after the IFRS 17 restatement. This is largely driven by attributable profit, but also benefits from the cash flow hedge reserve movement and pension surface build. Risk weighted assets of GBP 211 billion, flat in Q1 as we continue to benefit from portfolio optimization. We saw no impact from credit migration. We expect to receive an update on CRD 4 models later this year, and so this results in an increase in risk weighted assets. Having said that, this will still be consistent with our 2024 RWA guidance of GBP 220 billion to GBP 225 billion. Capital build remained strong at 52 basis points. Within this, we've now taken the full GBP 800 million fixed pension contribution for the year. The CET1 capital ratio is stable in the quarter at 14.1%. This is after the impact of regulatory change, the acquisition of Tusker and accruing for the dividend. We remain comfortably ahead of the Board's ongoing target of circa 12.5%, plus a management buffer of circa 1%. Looking forward and including the strong performance in Q1, we continue to expect 2023 capital generation to be circa 175 basis points. Turning to Slide 11 to wrap up. In sum, the Group has delivered a solid financial performance in the first quarter, supporting strong income growth and capital generation. We are committed to supporting our customers. Our franchise and portfolios are demonstrating resilience. Looking forward, we're maintaining our guidance for 2023. We continue to expect net interest margin for 2023 to be greater than 305 basis points. Operating costs to be circa GBP 9.1 billion. The asset quality ratio to be about 30 basis points. Return on tangible equity to be circa 13% and capital generation to be about 175 basis points. You can see that in an environment of change, Group's commitments have remained constant. We remain well positioned for the future. That concludes my remarks for this morning. So thank you very much for listening. I'll now hand back to the operator for Q&A.

[Operator Instructions] The first question comes from the line of Raul Sinha from JPMorgan.

William, maybe 2 questions from my side to start with. Given the margin seems to be behaving exactly as you predicted last quarter, I was wondering if I could ask you about the extent of the margin decline in the second quarter. And in particular, I guess, if we were to assume a base rate hike for the May MPC, should we still expect it to be down? Or would you then expect it to be flattish? And then my second question is around the other income line, which obviously was a very good outcome this quarter. I'm just trying to get a sense of the new underlying run rate, if there is one. I mean how big were the mortgage loan book sale gains? And it looks to me like the annualized run rate might be closer to GBP 4.95 billion almost. Would you agree with that?

Yes. Thanks, Raul, for those questions. First of all, in terms of the margin developments in Q2, you saw in Q1 that our margin was 3.22%, which, as you say, was pretty much, as we had expected when we gave our full year results announcement. There are a combination of factors that play there, including the benefit of base rate changes, somewhat offset by the mortgage headwind. Those are the 2 main factors, together with some run-through of the hedge maturities in Q4. When we look forward into Q2, we do continue to expect a step down in the margin just as we highlighted at the full year results. That is going to be driven by a variety of factors, but the principal factor in terms of the headwinds into the margin in Q2 are around the bank base rate changes combined with the churn and pricing impact on the deposit side. So it's really around the evolution of the deposit base and the pass-through of some of the pricing changes that we've seen into the deposits into Q2, and that has a preponderant effect in terms of the evolution of the margin going into the quarter. We do not have any structural hedge maturities into Q2. So that's an absence, if you like, of a tailwind that we'd expect to see playing through later on in the year. And then further, as we go into the year, the mortgage headwind starts to evolve. So in Q3, Q4, you see more or less the offsetting impact of the structural hedge maturities on the one hand against a kind of maturation, if you like, of the mortgage refinancing headwind on the other. But for Q2, it's largely around that churn and deposit pricing impact. You asked about the effect of the bank base rate on that in Q2. And if we do see rather a further bank base rate change, what effect might that have? It is, as you know, normally the case, the bank base rate changes will help our margin. That is off the back of leads and lags and to an extent, any deposit widening that you might [Technical Difficulty], liability widening you might see. Having said that, we are seeing a competitive deposit market. And so the question will be in Q2, Raul, if we do see a bank base rate change, how much of that feeds through into deposit pricing in the market as a whole? And how much do we see it as appropriate to ensure that our deposit base is resilient and robust and competitive, as we've seen it in Q1. So those are the dynamics. I think, overall, even if we do see a base rate change and even if that does benefit the margin slightly in Q2, I would still expect to see a step down in the Q2 margin. That is not going to change. Your second question, Raul, on OI. OI as you say, was a pleasing performance in Q1, GBP 1.257 billion. That was up, as said, 11% or about GBP 130 million off the back of Q4, GBP 1.128 billion or thereabouts. What's going on there? There's a couple of different factors going on. In each of our business areas, we've seen some positive developments. So in retail, for example, we've seen some positive underlying developments in Lex business growing likewise in terms of cars related activity. Within commercial, we've had a strong first quarter, as we normally do, but it's been particularly marked this quarter, which is good to see. And then in insurance, pensions and investments, we've seen 2 benefits really. One is the absence of weather that we saw in Q4. So the absence of a negative there. But then more importantly, we've also seen the roll-up in the contractual service margin off the back of the IFRS 17 changes in 2022 start to then roll out off the liability into Q1 of this year. When we look forward, there are, as you say, a couple of one-off benefits. We talked about the legacy mortgage book. I've just talked about weather or the absence of whether, let's say, in insurance. Those 2 will clearly ever weigh, but their place will start to be taken by kind of activity led growth by some of our strategic investments, both organic and inorganic, and they will play into the OI looking forward. So I think off the back of this kind of GBP 1.25 billion number that we produced at Q1, you should expect to see that consolidate over the course of the remainder of this year. As you know, we don't predict OI, so I won't go into that precisely now. But I think that GBP 1.25 billion number is likely to be a kind of roughly consistent type of run rate that we'd expect to see for the remainder of the year.

One moment please for the next question. The next question comes from the line of Benjamin Toms from RBC.

First one is on costs. If I take the Q1 and multiply by 4 and then add in something like GBP 150 million for the bank levy, I think I'm a bit below your guidance for the full year. So is it fair to say that costs will step up slightly in the coming quarters? And then secondly, a question just in response to news flow around prefunding a deposit guarantee scheme in the U.K. Have you had any discussions with the regulator in respect to this? And do you have any thoughts you can share with us on that?

Yes. Thanks, Ben. In relation to costs, I think the most important point in costs is that we're sticking with our guidance of GBP 9.1 billion for the full year. That is going to be the bottom line for the full year. We will deliver on that guidance just as we always do. In respect to Q1, as you say, we got GBP 2.17 billion for operating costs in Q1. There are some factors that play themselves out in the later part of the year. Bank levy, you mentioned has a bit of a pattern to the overall investment spend and associated charges with that. There's a bit of a pattern to inflationary pressures over the course of the year, including things like pay settlements and so forth. And so that combination Ben, is going to produce a pattern of cost, which will vary a little bit quarter-by-quarter. But again, I would focus on the bottom line is the GBP 9.1 billion guidance that we'll deliver. In terms of the protection schemes that may or may not come to pass, as a result of the recent volatility we see in the banking sector, we have not had any discussions so far with the regulator about what may happen there, whether that's a focus on deposit insurance, whether it's focused on liquidity and indeed, to the extent that it's the former, how would it be funded. It is in its current form at least going to be a funding mechanism, which should have a relatively modest impact on our overall earnings going forward simply because of the way in which the funding mechanism feeds through into our P&L. So absent some very significant change in the way -- in the quantum of insurance or alternatively the way in which is funded, we see this is -- if it does change having a relatively modest impact on the P&L, that gives you some indication of the bottom line expectation.

One moment please for the next question. The next question comes from the line of Martin Leitgeb from Goldman Sachs.

I just had 2 questions, please, relating to NI and the margin outlook. And the first one, I was just wondering if you could comment on the evolution of product margins. You have called out product margins earlier, obviously having an impact in 1Q. Completion margins up 50 basis points in mortgages. Could you just highlight what you have seen recently and whether application margins have started to edge higher? And secondly, I was just wondering in terms of deposit composition going forward, how should we think about the shift from current accounts and particularly in retail to other pockets of deposits going forward. There is a -- I believe a 3% decline -- quarterly decline in current accounts in retail, would you expect this pace to continue? Or do that really change from here?

Yes. Thank you, Martin for questions. First question on product margins. What have we seen? As said, we've seen product margins tightened slightly over the course of the quarter. It's been relatively competitive market, both in deposits and in mortgages. Taking each of those, there are 2 effects really within the deposit market. One is the pricing offers that you make to customers. Obviously, some of that attracts new money, some of that also generates internal movements. And as you have that internal movement, that increases your deposit costs by virtue of deposits moving from interest free in the context of PCAs into interest bearing in the context of, let's say, fixed term deposits, for example. So some tightening up. We have some good offers out there in the market just as others do, and that overall is leading to deposit costs, which are increasing on a quarterly basis. Within mortgages, we highlighted a completion margin of 50 basis points. As said in my comments earlier on, that 50 basis points is composed of 2 elements. One is the product transfer or retention part of the market, which is actually marginally below 50 basis points. Why are we comfortable with that is because we know the customers because we're building the relationship, and so we see an attractive return profile for that type of mortgage even if the headline pricing or spread is slightly lower. The other component is new business margins. New business margins are, in fact, higher than the 50 basis points that we gave. We haven't put a number on it. But we've seen new business margins anywhere between 60 basis points to 80 basis points through the duration of the quarter, depending upon a particular point in time that you look at. So those are higher. The challenge is that the volumes of new business in the current market is relatively modest, and so that overall produces a blended margin of the 50 basis points that we've given you. That's the completion margin for Q1. As we look forward, our expectation is that the mortgage market will continue to be relatively muted, and therefore, retention will continue to be a significant component of our overall completion margin within the mortgage business. That, in turn, I don't want to be too kind of predictive at this point, but that, in turn, leads us to think that completion margins in Q2 will probably not be terribly different to what we've seen in Q1. We'll see how that evolves, but that's our base case right now. It's worth saying that the margin is well -- sorry, to give a pun, it's worth saying in other products as well, unsecured, for example, we've seen slightly higher funding costs there, while pricing has stayed more or less stable. So there's a little bit of margin compression going on there. But all of these developments, deposits, mortgages, unsecured and indeed the commercial book are all contained in our greater than 305 basis point margin guidance. And as per the comments that I made to Raul's question earlier on, if we see base rate changes and not all those base rate changes get competed away, then indeed, one might expect to see a little bit of upside in our margin develop over the course of Q2 and indeed into the remainder of this year. I think we just have to see how that plays through. But again, if we do see more base rate changes, perhaps that's where it ends up, but it does depend upon how the liability markets move. In terms of movement in the overall book, we have seen some movement from PCAs into fixed rate and also a product that we call limited withdrawal, which gives customers slightly better rates, in turn for sacrificing instant access on a -- as the name implies slightly more limited basis. We've seen money flow out of PCAs. About 25% of that [ GBP 3.5 billion ] outflow of PCAs has actually been recaptured in our fixed rate limited withdrawal products. We've also seen within the savings book a little bit of movement from variable rate into fixed rate and likewise limited withdrawal. And then, we've also seen new money from outside of the bank come into that fixed rate limited withdrawal product. So that overall is leading to the types of changes in composition of the book. You look at it on a quarterly basis, and the overall changes are pretty modest on a quarter-by-quarter basis. But of course, that's what we saw in Q1. I would expect a little bit more of that to continue going into Q2. And again, that's all contained in our overall margin guidance of greater than 305 basis point for the year.

One moment, please for the next question. The next question comes from the line of Jonathan Pierce from Numis.

Got a couple of questions, please. The first is on net interest income. The margin was slightly better than [indiscernible] thought and the interest-earning assets, likewise, so the headline NII was a touch lower, and if it's non-banking interest expense that has moved up quite sharply in the quarter. So just to understand what that is, is this equivalent to what some other banks call trading book funding costs? And is there an offset there going through non-interest income? And if so, should we be looking at that sort of run rate [ GBP 75 million ] or so a quarter now, as long as base rate goes up, where we are? The second question is on the scale of the risk weighted assets increase you might be looking at later this year on the CRD 4 clarification. Could you give us a sense as to how large that is and which particular area it's coming from? And just -- sorry, an additional -- in relation to that. I think when CRD 4 changes came through early last year, there was not only some increase in RWAs, but there was an increase in some capital deductions as well. So can you just tell us whether this clarification may affect both the numerator and the denominator? Or it's just a risk weighted assets issue?

Yes. Thanks, Jon. First of all, on the net interest income and impact on net interest margin of non-banking interest income. There -- when you look at the progression of net interest income quarter 4 into quarter 1, and as you pointed out, Jonathan, you look at the margin, it's basically the same, you look at the AIEA and it's basically the same. To your point, what's going on there. 2 things. One is there is a day count issue. There are fewer days in quarter 1 than there are in quarter 4. That's about half of the impact. And then the second one, as you point out, is the non-banking interest income for want of a better word, which actually, if you look at our disclosures at the back of the interim statement is an expense, and it's an expense of about GBP 76 million in quarter 1. That is up a little from quarter 4. And on a year-on-year basis, it's up about GBP 55 million or thereabout [ GBP 56 million ], I think, to be precise. As you look forward, that is a run rate number. And the reason to explain kind of what's behind it is that it is basically funding the non-banking businesses, the non-interest income driven businesses for want of a better word. You described it is kind of trading expense in other institutions. There's a bit of that with us for sure. There's also things like Lex, for example. These are businesses, which are not driven by virtue of interest-bearing balances, and that, in turn, drives the non-banking interest income expense, which is essentially a funding expense for those businesses. Now to a degree, as those businesses grow, you would expect to see some benefit from that coming through other operating income. Lex business increasing in size, for example, benefits other operating income, likewise, some of the trading activities. But actually, the main factor driving it alongside of that, let's say, is the increased funding costs, the increased interest rate environment that we're in, and that's what you see playing through into Q1. And as I said, you should expect a run rate not dissimilar really to what you saw in Q1 for the remainder of this year. When we calculate our interest margin of 3.22%, we exclude that component, and that's how you can reconcile that plus the new days point to the run rate net interest income from Q4 going into Q1. You asked about CRD 4, Jonathan. CRD 4, as I said in my script, we do expect to receive further news on from the PRA over the course of this year. And it is likely we think that, that will lead to a modest increase in RWAs. Just to sort of track back and give some history on that. When we set out our CRD 4 expectations on January the 1st of '22, which you referred to in your question, we saw at that point about [ GBP 16 billion ] increase in RWAs, [ GBP 14.5 billion ] of that was in relation to mortgages. We said at the time, the CRD 4 component for mortgages was a best estimate, if you like. It was a place marker based upon the fact that the discussions of the PRA and the models were not totally finished business. As we've rolled forward since that time, we've learned more on the PRA technical requirements in this area, we've learned more about their approach to historical data and to a degree, their approach to cyclical sensitivity. And so off the back of that, we expect a modest increase in RWAs to be informed to us, if you like, by the PRA later on in the year. I think the most important point there, Jonathan, is that, that increase, I won't put a number on it precisely, but that increase is within our circa 175 basis points capital guidance and also within our 2024 RWA guidance of [ GBP 220 billion to GBP 225 billion ], which tracking back at the year-end, I said it was, broadly speaking, a kind of linear trajectory, '23 going through into '24. So that's how that CRD 4 expectations from the PRA is factored into our numbers, if you like. Specifically on your point that, is this a -- sorry, a numerator and a denominator issue. No is the answer. This is likely just to be RWAs, which in turn is a denominator issue purposes of our capital calculations.

One moment, please for the next question. The next question comes from the line of Chris Cant from Autonomous.

I think you've covered quite a lot of ground already, but just a couple of follow-ups around NII and your thinking there going forward. In terms of the mortgage piece, could you give us an update on where the back book mortgage spreads are on the non-SVR component of the book just so we can understand the sort of degree of headwind that kind of 50 bps level likely to present? And then, thinking about structural hedge, obviously, you've seen some current account outflows. You expect the deposit market competition to expect and some of those trends outside of the tax impacts to persist. So how are you thinking now about your structural hedge size prospectively? You previously said you're very, very comfortable maintaining it, given offers, et cetera. But if you're now expecting to see some persistent current account outflows, even if they're relatively modest, how does that then feed into your thinking on the size of the [indiscernible].

Yes. Thank you, Chris. Just taking each of those. On the mortgage book, first of all, I won't give you quite the split that you want, but I'll give you a few numbers that I hope will help you reconcile some analysis. When we look at mortgages, in terms of the yield this year, the yield on the mortgage book this year, we expect to be about 135. To give you some idea as to the effect of refinancing this year, we've probably got about GBP 65 billion, GBP 66 billion rolling off from the fixed rate book during the course of this year. That stock of refinancing fixed rate mortgages is at around 1.8%. And as you know, from the -- our comments around completions, that is rolling back on or that part of which we retain is rolling back on at an average completion margin of around 50 basis points. So quite a significant headwind this year. I know it's not the split SVR versus fixed that you're asking for, but I hope it gives you some idea that now you get to that answer. Having said that, the headwind from that refinancing next year starts to dampen down because the maturities or the price of the maturities at which they are rolling off, it starts to get significantly less. So it's well below the [ 180 ] that we're going to see this year. I won't put a number on it, but it's well below the [ 180 ] and therefore, there is much less of a squeeze in terms of the headwind that it causes. That means, in turn, as we said before, that the bulk of the mortgage headwind is addressed and dealt with by the time we get to the back end of 2024. You asked about structural hedge size. The structural hedge size is currently GBP 255 billion. That's the size that we feel very comfortable with today. We have a buffer, which is about GBP 19 billion. In the past, we've always operated with a buffer, which is around 5% of the structural hedge. GBP 19 billion is more like around 7.5% of the GBP 255 billion that we've got in the structural hedge today. So the buffer of GBP 19 billion is probably in excess of the types of levels that we would seek to carry going forward. Now having said that, as you say, deposit churn, we believe, will continue. We think that we will continue to see a little bit of outflows within the PCA. Why is that? Well, it's because spend is clearly greater in an inflationary environment than it was before. People are paying higher interest bills for various financing other products than they did before. We will not clearly see a repeat of the tax issue within January that we and other banks saw having said all of that. But that means, we may see a little bit more PCA flow. Likewise, PCAs also be attracted into the savings book, including, as I mentioned earlier on our own. Within the savings book, we would expect to see a little bit more out of variable rate and into fixed term deposits and limited withdrawal, as I said, people are prepared to give up access for a bit more income in a higher rate environment. So I think we expect to see that continue to a degree going into Q2. That clearly has an impact on the structural hedge in terms of the balances that are available to be put it within there. But at the same time, we have 2 or 3 tools to manage that. We have the size of the buffer, as I said, GBP 19 billion probably in excess of what we choose to run with. We also have upcoming maturities. Can you play, if you like, a slightly lower buffer off the back of a significant volume of upcoming maturities? Yes. They are tools and interact with each other. Thirdly, you have the weighted average life. Can you slightly shorten elements of the structural hedge, bring the weighted average life in again, as a further tool to manage. And then finally, we have very conservative pass on assumptions within the structural hedge. So those, in turn, give us a further degree of security, if you like, as we look at the overall structural hedge. So I think in sum, Chris, where we are with that is the size is currently GBP 255 billion. We feel comfortable with where it is today. We are also conscious of the fact -- we're aware of the fact that we're in an evolving environment. We have not been in a rate cycle for, let's say, 15 years, and it's not entirely clear how that plays out and the pace at which it plays out. And so we are where we are today, we feel comfortable with it, but we monitor the position, and we'll keep an eye on it going forward.

One moment please for the next question. The next question comes from the line of Aman Rakkar from Barclays.

William, I just wanted to touch upon deposits, again, if I could. I'm sure we can kind of piece it together the various disclosure that [ you gave us ]. Could you just confirm what proportion of your deposit base is non interest-bearing current account currently? And also what proportion of your deposit base is term deposits, as things stand? And then secondly, could you maybe just give us some indication of what deposit mix you assume in your NIM guide alternatively, could you help us kind of understand some kind of sensitivity that might pose a risk to your outlook for NIM or NII. So if -- there's actually more migration of current accounts to term deposits, kind of what's that threshold in your mind, where we should kind of be thinking about?

Yes. Thanks, Aman. A couple of questions there. One is the split between interest-bearing, non-interest-bearing within the deposit book; and then the second around sensitivity to the margin from deposit movements. We do not formally disclose the split between interest-bearing and non-interest-bearing within the deposit book, but I'm going to give you a couple of numbers that will enable you to make some assumptions and get there. First of all, you can see the PCA volumes in our retail book. That's disclosed on our balance sheet every IMS. So I'll leave you look at that. Second of all, the commercial book is roughly speaking, 28% or thereabouts non-interest bearing, so that's given you a very precise number, but 25% to 30%, it will go up and down on a quarter-by-quarter basis. But if you combine that because of the PCAs, you've got a pretty good idea, I think, is to the non-interest-bearing component of our overall deposit book. The second question is around how do we see the flows within our deposit book? And to what extent might those cause sensitivity to the interest margin. In short, in quarter 1, we saw within our deposit book, overall, a combination of variable rate to fixed rate, PCA into fixed rate term and limited withdrawal and indeed, our wealth deposits into limited withdrawal and fixed rate. That number in total was about GBP 8 billion or GBP 9 billion, thereabouts, that type of movement. That type of movement is probably not totally unrealistic to project forward into Q2. But then as we see bank base rates start to steady off, i.e., fewer bank base rates thereafter, we think you're going to see less movement thereafter because there's less reason to move, if you like, you've got less change in rates. You will still see some playing out of a higher interest rate picture to be clear, but less movement. So those are the types of flows that we've seen in Q1, those are the types of flows that we might expect to see in Q2. But as you can imagine, we built a degree of cushion, if you like, within our overall interest rate expectations to ensure that we are able to give you guidance that we can achieve and beat. And I would add to that, if we see the bank base rate environment play out in a way that was being discussed earlier on in the call, to the extent that is not fully passed on or competed away in the deposit market, that probably causes a degree of upside to our overall margin expectations. Again, still expect that step down into Q2 and leveling off in the remainder of the year, but at all points greater than 300 basis points. And again, there may be that benefit depends on how the bank base rate and deposit margins play out.

Thanks very much, William. That's really helpful. Can I just clarify your -- the amount of term deposits that you have as part of your overall mix. I think you refer to it in some places in the disclosure, but I'm never quite sure if you're exactly referring to fixed rate term deposits. Could you confirm that number for us, please?

I don't think we do disclose that, Aman. I mean, you can see on our Slide, Page 9, I think it is, the retail savings and wealth components. You can see in our -- in my comments earlier on, the amount of flows that we saw in the context of Q1, and the split that we've given on the balance sheet analysis and the IMS is probably about as far as we go, I think, in terms of disclosures. So sorry, we're not going to get back to you precisely on that.