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

Let's begin with next session. It's a great pleasure for us here at Goldman Sachs to welcome the next speaker William Leon Chalmers, Chief Financial Officer of Lloyds Banking Group. First of all, many thanks for joining us. By way of intro, William was appointed as CFO in August 2019, having a wealth of experience working in the financial services as an example of Morgan Stanley, where he was Co-Head of Global Financial Institutions Group. William, thank you very much again, first of all for joining us today.

Thank you, Martin.

Maybe let's just start with a broader market progression in the U.K. in investor conversations, one of the key concerns remains the outlook for the U.K. economy just in light of the consistently high print in terms of inflation. I was just wondering, could you share your view on the outlook both for inflation and the broader economy, just in terms of what the potential impact of Central Bank policy action might be?

Yes, sure. Thank you, Martin. I think -- as we look at it, perhaps just to step back for a moment and reflect upon what we said at quarter 1, where we thought there would be a 0.6% contraction during the course of 2023. And a base rate environment of around 4.25% of a peak thereof. What have we seen since then is actually an improvement in the GDP outlook. So overall, I think the consensus seems to be moving to a better place in terms of GDP outlook for 2023, it is also clearly moving to a higher interest rate base. Now clearly, those higher interest rates may have an impact upon growth in the years thereafter, 2024 and beyond. But nonetheless, for now, at least the GDP outlook is looking better. I think when we look at the effect of all of that, that is a relatively constructive operating environment, both as to income, certainly as to margin a little bit better. And as for asset quality, very sound, albeit I think rate increases are taking a toll on asset growth in the market. So you might get a slightly better NIM. But at the same time, you're probably also getting slower asset growth than you might have first thought. But it is, I think, Martin, fair to say that as we look at it right now, we'd like to see less volatility. Volatility is not really helpful to anybody. We'd like to see it peaking off in terms of the rates for sure. But as I said, at the moment, at least, as long as unemployment stays low, in particular, this is a pretty constructive operating environment and asset quality is behaving accordingly.

Great. Let's move to revenues, in particular, let me [ get out ] for net interest income. Obviously, rates are markedly higher now, up from close to 0 to 4.5% and we expected to rise further. What is the outlook in terms of NII and margins for Lloyd's? And are we at peak or close to peaking?

Yes. Yes, it's an important question. I mean again, I'd just step back a little and say that the size and rates that we have seen since 2022 [indiscernible] and indeed, in both our net interim and indeed, net interest in outlook. I mean that is the important point, I think, of context. So we printed 3.22% in Q1 as many of you will know. As we look at it since then, thereafter, rates have been a little bit higher. We did expect a step down in Q2, and we expected a relatively consistent net interest margin pattern thereafter. I think because of those rate changes that we've seen, it might be that our Q2 margin is a little bit better than we had first thought. But to be clear, still a step down and still a period of stability thereafter. But the step down perhaps a little bit less than we had thought. Now how does one think about that in the context of income? Two points I think to bear in mind. What is that asset growth picture that I mentioned just a second ago. The rates being higher. It's good from a NIM perspective. It's not so good from an asset growth perspective. So bear that in mind. And then as we said at Q1, we've also got nonbanking interest income, which is about funding the nonbanking businesses, helping our OOI for sure. But nonetheless, don't get to take that into account as one translates into the income consequences of that higher margin environment. Second point -- or second area I suppose, which I think is particularly important is that there is a lot of talk about peak NIM, particularly in the U.K. market. Over time, and this is stepping back over the medium term, it is, I think, important not to confuse peak NIM with peak income. What I mean by that, the effect of higher rates takes time to build into our P&L. It takes time to build into our balance sheet, and therefore, the P&L. We see that picture building in over time through, for example, our GBP 255 billion structural hedge, it doesn't frankly matter whether that structural hedge is GBP 250 billion, GBP 245 billion. The point is that you've got an asset that is currently yielding 1.2% starting to be built into a rate environment that at the moment at least, is more like 4.5%. So you get a pickup for every GBP 1 billion of maturity than the structural hedge within this higher rate environment. And Martin, as you know, the average life of that structural hedge is 3.5 years. So it takes time to build into the balance sheet, first of all, and [ suffering ] the P&L of the business. Now at the same time, '23 and '24, we've got a mortgage refinancing headwind. We wrote a lot of relatively high-margin business a couple of years back. That is coming up for refinancing at much lower rates today. But that washes out over the course of '23, '24 and the structural hedge effect, if you like, which is basically, at the moment, GBP 255 billion of hedge liabilities continues thereafter. So as the mortgage refinancing headwind pays itself out, so the structural hedge benefit starts to or rather continues to be built into the peer into the balance sheet and the P&L. And that accompanied by the underlying business growth fueled by the strategic investments that we're making right now is what underpins the earnings growth and ultimately the returns growth for the business that we see out into the medium term. So as I say, I think viewed on a medium-term basis we shouldn't confuse peak NIM with peak income.

Great. Maybe just to follow up on that point in terms of what you're seeing on the deposit side. So there's a lot of focus in terms of both deposit attrition, so deposits reducing and deposits migrating into higher-yielding categories of deposits, savings or [ more ] time. I was wondering what are you seeing there? Are some of the earlier comments you made in terms of the NIM step down maybe pronounces originally thought also related to a better experience there.

Yes, I mean that's a very topical point, Martin, and an important one. Again, just to set the context, I think it's important to bear in mind that deposit migration from PCA's, personal current accounts and instant access savings into fixed-term accounts and what we describe as limits on withdrawals. That is a fact of life in a higher rate environment. We saw it in Q1. We'll see it in Q2. Frankly, we'll see it in periods beyond that, including post the last base rate change. This is something that's going to evolve over time. But the key point is here, this is a gradual process. This doesn't unravel somehow overnight. It takes place over many years, and that's really our expectation. Now looking back to your question, Martin and almost by [way of the illustration] of what I just said actually, in Q2, we've probably seen a bit less of that deposit migration than we had previously expected. Hence, you referenced my comments for a few weeks back, Martin. We've seen a bit less versus expectations. That's not to say the post migration is not going on. It is. But it's going on in Q2 at least at probably a slightly slower pace than we had first expected. Now as I said, that likely means a stronger NIM in Q2, still a step down as per our previous comments, but nonetheless, slightly stronger NIM than we previously thought. Bear in mind those income effects that I mentioned earlier on, as to how one translates from NIM into income. But nonetheless, that's what we're seeing. So as I said, deposit migration, it's a fact of life, it will continue. But then -- again, drawing back the underlying operating environment that we see as a function of the same higher interest rates that are driving that deposit migration is unmistakably, unequivocally a better pace from a profitability and a capital generation point of view.

Great. Let me follow up on loan growth and the other comments you made on loan growth and I mean traditional obviously, number one, whatever loan growth you're most excited in the current environment. And related to that, obviously, the weakness in mortgage growth was on the back of higher rates, how long could that weakness persist?

Yes, it's a good question. I think at the moment, it's fair to say that loan growth within the sector as a whole is relatively modest. Now stepping back, what do we mean by that? If you look at the mortgage book, for example, by virtue of the macro environment that we see by virtue of the rates environment that we see, that is timing or slowing growth a little bit within that market. The housing market is a reflection of that. I suspect that we've got to see a period of stability in rates, Martin, in order for that to turn around which in turn means that as we look at it right now, we expect the mortgage book to be flat, maybe a touch down, but only very minorly so if so, during the course of this year. There's nothing that exciting going on within the mortgage book this year. Now other part of retail unsecured, we're actually seeing decent growth within unsecured, across cards, across motor, across loans, and that's as a result of many of the strategic investments that we're making, facilitating customer journeys pre-approvals within acceptable risk brackets, et cetera. And so it's falling in decent risk buckets, but unsecured is a little bit more interesting. And then on the other side of the balance sheet within commercial, I think we're seeing C&I loan growth more or less meet customer patterns kind of goes up and down depending on what the markets and customer needs are. Business and Commercial Banking is a little tougher for two reasons. One, IT's a relatively slow market with liquid SMEs and therefore, limit demand for credit. And the second is the bounce back loan dynamic going on, which is a feature of our balance sheet, and I suspect others whereby customers are paying back bounce back loans, which therefore come off the balance sheet. So a pretty muted picture there. That's the near term, maybe just comment on 2 in the medium term, which is a big part of our story, as you know. When we look at medium term, first of all, in retail concepts may or may not have heard of them, like Home Hub, for example, transportation hub which are basically activities, ambitions within each of those 2 respective areas will lead to loan growth opportunities. Likewise, mass affluent in both secured and unsecured, we're launching products this year, some are already underway actually which will heighten ambitions within mass affluent. Likewise, business of commercial banking digitalization, as some of you will know, is a big part of our ambitions. That will be accompanied by an improvement, if you like, in our lending capabilities away from the traditional real estate backed cash flow lending that we've tended to do. And that is in tune with the kind of development of the economy, we think and therefore, present lending opportunities. Those will take time, Martin, to be clear, but we think there's some pretty exciting opportunities underneath it.

Yes. That's great.Many thanks. Let's move on to other income. Obviously, a lot of focus in articles quarter or so a year has been on [NII] margins. How do you see the outlook for other income growth in the current environment? And is this a big focus given all the moving parts and the uplift you had in terms of NII.

Yes. Other income is extremely important to us. As you know, it's an area that I've spent a lot of time investing in and trying to make sure that we get right really since I joined. Other income, GBP 1.25 billion as of quarter 1. That's up 11% on quarter 4 of last year, 11% on a restated IFRS 17 number. What's going on underneath that? To be fair, there are 2 things going on underneath that. One is the presence of exceptionals, if you like, and reversion to run rate. That's kind of point one. Exceptional we did a sterilization deal in Q1. We saw general insurance improve off the back of an absence of adverse weather,#2. Those are unlikely to recur. They were partly behind that 11% growth. But also, there were some underlying growth patterns behind it as well. So if you look at retail, you look at commercial, you look at insurance. And there was, it's good to see some underlying growth going on within that number two. I think as we look forward, it is a huge focus of our strategic transformation. So two reasons. One is it gives us diversification and protectors from a declining interest rate environment. That's a very conscious decision for our transformation. And two, 2 is it's where our opportunities and therefore, our strategic investments like the two are very consistent. So if you look at -- again, mass affluent take an example. But equally, if you look at things like ancillary income streams in commercial, merchant acquiring, for example. These are areas where we're making significant investments where we think significant opportunities lie, which will deliver other operating income. That, again, will take time. I think in the meantime, Martin, including this year, we would expect to see measured growth within other operating income. By which I mean, if you look at IFRS 17 restated OI last year, you'll see a number of GBP 4.66 billion. I expect us to comfortably exceed that during the course of this year. Off the back of consolidation of BAU, off the back of the delivery from organic and to really the inorganic investments that we've made, more or less in line with the pattern that we saw i.e., GBP 1.25 billion during the course of Q1. I think that is a decent type of run rate and you might expect to be repeated.

Great. Very clear. Let's move to costs. I was just wondering is the flip side of higher rates, obviously, higher inflation, a risk of a higher cost base. It's a bigger challenge for you in terms of achieving the cost targets.

Yes. I think costs, frankly, always a challenge for any business and ourselves, we're no exception. Inflation impacts us, whether it's wages, whether it's technology, whether it's OpEx or its utilities, we're not immune from these things. That's what led us, as some of you will know, to increase our cost targets for 2024, which is one of our delivery years for the strategic transformation plan. We increased them from GBP 8.8 billion to GBP 9.2 billion. To be clear, what's going on underneath that is that we've got about 600 [indiscernible] inflation-driven costs. We figured that we could offset about GBP 200 [million] of those. And we passed on GBP 400 [million] of those. Hence, GBP 8.8 billion to GBP 9.2 billion. Now it's important also to bear in mind that within that GBP 9.2 billion, we are also absorbing the costs of our acquisitions recently. So Embark #1 and Tesco #2. So that's all included within the GBP 9.2 billion, which hopefully demonstrates a bit more discipline beyond what I've just said. I think along the way, we have a GBP 9.1 [billion] target to 2023. But I think the point for us is that we are effective cost managers. I hope it's safe to say that we have a decent track record in that expect, and I expect those cost targets for '23 and '24 to be hit. Looking forward, I think this is a more medium-term point, we expect as the investment plan or the investment associated with our strategic transformation tails off and as we start to achieve some of the cost saves, which are part of our ambitions for this transformation come into effect, take effect. That, in turn, should allow a flatter cost base going forward, which in turn, in conjunction with the income points that I made earlier on, allows a degree of operating leverage to be built into the business. And it's that combination alongside a stable macro environment, which gives us confidence in the returns to the business going forward.

Great. Let's move to asset quality. And I was just wondering how worried are you in terms of the impact, higher rates, higher inflation has on the quality of your loan book? And are there any early signs there any change in payment behaviors, mortgages or other behaviors, which you noticed at this stage.

Yes. I mean the short answer to that is we pay close attention to inflationary effects on the market, cost of living impact on customers, is something that we watch very closely. But to the point, the short answer to that is at the moment, the book is performing very well, and it's generally very benign, Martin. So I step back and say, what's going on behind that? What are things going on behind that? It is a resilient customer base. That stands behind what we think is a high-quality loan book. That we're only by quality loan book. Take a look at mortgage customers, for example, average income 70,000. Take a look at the cards book, prime customers. Prime customer card book by design as a function of the underwriting policies that we adopt. Taking on the Commercial Banking business, greater than 75% exposure to investment grade. So these are things that we think, over time, particularly over the last 10 years, has built a very high-quality customer base, which should be resilient in the context of challenging times. Alongside of that,Martin, we stress tested the book. So by way of illustration there, we've got about GBP 66 billion of refinancing mortgages this year, which will be coming off low fixed rates maturing on to higher fixed rates, clearly. But over 85% of that book, of that maturing book has been stress tested to rates in excess of 6.5%, which at the moment is in excess of anything that is out there in the pricing market. So a resilient customer base that has been stress tested. To your point, Martin, the early warning indicators that we're seeing, we have an array of early warning indicators across the business, retail, commercial, insurance are all pretty benign. Now I can go into specifics as to exactly what that is, but the overall picture is pretty benign, very stable pictures. And remarkably stable, in fact, given to an extent at least, as you say, a slightly more volatile external environment. And so very few signs to us. I think one point that is important here that we watch closely is unemployment. And as we look at the market right now, it's a tight made market, if unemployment stays under control. That is very consistent with the early warning indicators, let's say, refuse payment notifications, overdraft utilization, liquidity amongst our SME partners persistency in insurance. That is consistent with all of those things staying very stable, which is what we're seeing today. And then finally, looking forward again, we have provisioned an expectation that this will deteriorate. You've seen our ECL, which is GBP 5.2 billion. That is very ample cover, let's say, for the type of macroeconomic environment that we portrayed at Q1. Which going back to the earlier comments, is looking a little bit better now than it did then. And so we're pretty well provisioned. That GBP 5.2 billion is GBP 700 million in excess of our base case ECL requirement if our base case economics play out because of the probability weighting methodology within our IFRS 9 accounting. So Martin, overall, very few signs of stress. And at the moment, at least very little restructuring.

Maybe just to follow up on -- just with regards to commercial real estate, additional area of focus in terms of economic downturns, just historically in performance and probably compounded this time by change in working habits [indiscernible] light of working from home. How do you see the risk in your commercial real estate book?

Your point was obviously a topical one, Martin. I mean there's been a lot of talk about that on both sides of the Atlantic [recently]. The commercial real estate book has been -- for us, has been significantly derisked over the years. So in some of you will have tracked that, I'm sure. But at the moment, it stands at GBP 11 billion, net of significant risk transfers, which are about GBP 4 billion or so. So the book has come down significantly, so that core number that I just mentioned. It is also a book that is relatively well diversified and certainly subject to segment cap. So you mentioned offices there, for example, Martin. our office segment cap to give you some idea is GBP 1.5 billion. Now that's a cap. That's not the actual exposure at any given moment. That's a cap. Retail likewise, GBP 1 billion cap. So the book is diversified and it's managed to some pretty strict segment caps. Now when we look at it, it is cash flow based, to be clear. So we're not relying upon the cash flow behind CRE to secure the loan. And you would expect that, I'm sure. But the -- to give you some idea of what that means, we've got an average interest cover of greater than 4x within the book. 85% of the book is greater than 2x interest cover. And so these numbers hopefully testify to the fact this is a cash flow base business as opposed to relying on the platform behind it. But if we do get into trouble, and if we do have to rely upon the platform behind it, there's a lot of it. So the collateral we have an average LTV within that book of 44%. That gives you an idea that although we don't expect to get there if we did, we feel pretty comfortable. Experience so far, Martin, to your point. Again, it's been remarkably stable. We've seen watch list actually go down, watch list as a kind of early warning indicator type of function within the bank. We've seen business support unit levels within CRE very stable. Business support unit is when a loan actually does show signs of trouble. We put it into business for you not to help it work its way through, very stable. And Stage 3, which is evident in our disclosures, has actually come down. during the course of the quarter, or at least it's come down to the commercial book as a whole. Within CRE, it's been stable, but it's been stable at no levels. So the experience to date, really pretty robust. I think stepping back, I don't want to be complacent about it. I mean we recognize the concern and the macro as a whole. CRE is clearly an asset book that people talk about. We're keeping a close eye on it. But at the moment, there's not much going on.

Last one on [indiscernible] quality. Is there anything to call out in terms of SMEs. I would expect lower home purchase activity doing back cortical SMEs related to properties. Is there anything you see any concerns there?

It's -- well, first of all, the SME franchise is a really important part of our business. It's about GBP 35 billion, GBP 36 billion thereabouts in terms of quantum. It is, as everybody knows, well, some of those who watch us know a part of our strategic initiatives, digitalization of SME is a really important part of our strategic initiatives. But the specific focus of asset quality, Martin, this book has been through some high underwriting standards. It's been stressed by something called the National Stress Rate, which is effectively a higher interest rate that we stress test our customers against. It is very cash flow based. But as with the rest of the commercial book, it is also very well secured. So over 90% of the SME book is backed by collateral -- real estate collateral, so it's secured essentially. One of the early warning indicators telling us there, again, remarkably stable to invoice factoring better days, for example, average invoice factoring debt days. Very stable. Liquidity amongst the SMEs like wires, very stable, overdraft utilization, same thing. So at the moment, we're not seeing any real signs of disruption. You'll see, again, hopefully, by way of testimony for those study our disclosures, Stage 3 within SMB, which is what it's called within the disclosures, actually fell during Q1. Q4 to Q1 SMB Stage 3 fell. Now again, we are provisioning for a more adverse economic environment to be clear. So I would expect that to tick up over time, but that's all as anticipated within our provisioning. And so far, at least, it's not happening.

Great. Let's bring this all together and focus on returns. So in terms of the return targets for '23 or sort out, how do rates impact these return targets? I mean, obviously, in the short term, it looks like rates are going to be higher than expected, but there's some concern out there that rates might have to settle at the lower level in the medium term. How sensitive are you returning to [indiscernible].

It's an important question for us, obviously. The step back at the guidance that we've given to the market is, as you know, minus 13% in 2023, 13% in 2024. And then greater than 15% that time 2026. What's going on there, essentially, the income is consolidating as we get the benefits of rates starting to feed through in '23 and '24, but equally being matched by the mortgage refinancing headwinds I mentioned earlier on. At the same time, we've got investment ticking up in line with our strategic transformation and the OpEx associated with that. And therefore, as TNAV builds, depending clearly on interest rates and what they do, that delivered [indiscernible] for the next 2 years. Looking forward, as I said, the mortgage refinancing headwinds pay themselves through, the structural hedge tailwind, which is basically, as I said, just the interest insensitive liabilities hedged into a higher rate environment. that continues over the course of the next few years. And then alongside of that, we get the strategic investment starting to kick in and contribute to building into picture. [indiscernible] Investment to lead to a flatter overall cost picture and assuming a steady macro, that improves the return environment. Now you asked about what happens if rates fall, Martin. If rates fall, provided that it is kind of roughly within expectations, provided we're not going back to the kind of 2010, 2020 0 interest rate environment. That might change the numbers at the margin, but that's all it will be. It will be at the margin. It doesn't change the picture, and it doesn't change pictures or not just returns but also have capital generation.

Yes. Great. I mean higher profitability means higher capital generation scope of capital return. I was just wondering is there scope for Lloyd's to assess the potential for capital return more frequently? And how do you think about the kind of trade-off in terms of capital return versus some opportunities, which might be inorganic.

Yes, the M&A and [indiscernible] . I think, as you say, higher profitability should mean higher capital generation. That's certainly our expectation. Alongside of that, we're trying to remove some of our other capital obligations. Pension fund is the best example of that. It's a pretty big one. And we think we're making decent progress on that. We'll talk more about it probably in Q3-ish of this year once we get to agreement with the trustees. That all together with the income picture or returns picture, I talked about earlier on, leads to about circa 175 basis points of capital generation this year and next. And then that increases in line with my comments earlier to greater than 200 basis points by 2026. So it kind of follows profitability picture to your point. Capital return, a couple of points I think are worth making. One is the Board. We collectively are committed to the return of excess capital. We've been doing it by 2 mechanisms. One is by a progressive and sustainable dividend. And then the second, there's anything on top of that, giving it back most recently in the forward buybacks. Now we, I think, have a pretty ongoing pattern of capital return to the shareholders to our owners, which by the way, includes me and includes most of the employees at Lloyd's. And what I mean by that is that the progressive dividend is paid out twice per year. And then the buyback, although it's only decided upon at the end of the year is effectively deployed right away through the year. I mean it's going on right now, as you probably know, and therefore, at any given moment in time, chances are we are having ongoing capital repatriation going on. And therefore, when we look back, we kind of value the flexibility that we have within the capital program that we have right now. We also recognize growth potential within dividend, for example. And we feel pretty comfortable with that mechanic and that setup. And so, Martin, it's really a question for the Board in conjunction with their regular capital appraisal. But I think for now, at least, we feel it's appropriate. We don't have any plans to change it. M&A, just very briefly on that, we are pretty judicious on M&A, by which I mean if we see something that potentially enhances our capabilities or enhance scale, then we will look at it basically subject to 3 criteria. Is it going to get us there faster versus our organic ambitions? Is it going to drive more value versus our organic capabilities? And is it going to do so at lower risk versus what we might be able to do organically, which includes things like time and other considerations. And if those 3 tests are passed, then we'll look seriously at it. But having said that, Martin, I think those things are going to be few and far between. I've done 3 since I've got here. Tesco's mortgage acquisition scale, it's tiny, embark about capabilities in DTC investing relatively small. And then Tasker, most recently about developing new capability and transact schemes in cars are pretty small. I don't expect that in frequency, #1 and size being small #2 to change too much.

Great. Final question from my side before opening up to the floor. We haven't touched on regulation yet. And I was just wondering there have been instances of fragility in the banking system in the U.S. in parts of Europe. I was just wondering, do you see any merit in some [recaleration] of some of the framework? Do you see some risk of a regulatory response in the U.K.

Yes. The events in the U.S. and in Europe in March were pretty dramatic to your point, Martin. Now I think at the same time, without being -- again, without being [at all complacent] about it, they were somewhat idiosyncratic in their nature. That is to say in the U.S., you had unhedged securities books in Europe, arguably had a less-than-profitable business model or an unsustainable business model, let's call it. When we look at Lloyd's, again, without being complacent, we hedge our exposures. We have a diversified deposit book. We have a lot of liquidity. We have what we believe a strong and sustainable business model. And so those risks, we don't think apply in the same way, Martin. I think having said that, when you step back, what was interesting there and what potentially has read across for any geography any sector, any bank is the quantum and speed of deposit movement of those places. And I guess that's what the regulator will take a close look at. I think if they do, we would hope for a couple of things. One is we hope to be internationally coordinated. 2 is that we had hope that the regulator considers the interrelationship between the different levers they can pull, by which I mean what is the relationship between deposit insurance, for example, and outflow assumptions in the context of LCR. What is the relationship to those 2? And then 3 is alongside of that, I would hope the regulator continues with -- or to continue to recognize the importance of Central Bank liquidity as a tool in the toolbox to stop the runs from ever having in the first place. That is essential, I think. So I think it's hard to say at the moment, we've heard nothing to be clear, apart from what everybody in this room has seen it in the press and so forth. I would hope that if anything does change from that, it's done so in a coordinated way.

Great. Let's open up for questions from the floor. There is one in the front you just wait for the microphone.

To sort of continue on the potential impact of regulators sort of coming out of sort of like -- and then still increasing capital requirements. We first [indiscernible] are well will commence on well maybe we need to do something talking individually bank to bank or individually rather than dividend bands, which are didn't really work very well in the past. Now it's a bit of a mixed picture because in Tesa seems to be hearing nothing but other banks are indeed hearing, well, suggestions they need to beef up capital like AB&M role. How is the situation in the U.K.? I mean, is your regulator able to withstand pressures to move capital up and to front-run Basel IV?

Yes. It's a good question. The overall stance of the regulator. So they said publicly, I believe, is that the capital and the system is in the right place. And therefore, it's a question of distribution between banks. Now probably every bank you talk to will have their own individual story of what that means for them, therefore. But for us, I think there are 2 regulatory developments out there that I guess I would highlight. One is, as mentioned at Q1 and perhaps at the year-end. We're expecting to see the finalization of the CRD IV mortgage contributions this year. So we put in place about GBP 16 billion, 16 billion of incremental RWAs for the back end of 2021. That was our best guess as to where the inventory outcome might be. I think with the refinement of our understanding of what the regulator wants, we expect to top up on that during the course of this year. I'm not quite sure exactly when that comes or what exactly it will be to the second decimal place, but we do expect to see that. That is broadly, give or take, I should say, broadly anticipated within our circa 175. But clearly, if it's a little bit beyond what we expect it must be if it's a little bit less than we expect so much the better. So that's one. The second 1 that I would highlight is Bar 3.1, where every bank has its own take on what Bar 3.1 means to them. For us, the bottom line is that we expected to have a net neutral effect. So we do not expect a capital increase off the back of Bart 3.1 changes. Why is that? Two pretty simple reasons. One is that the benefit of having Foundation IRB, as we do in many parts of our commercial bank is that you're already kind of -- you've already got quite a heavy load of RWAs, and therefore, the adoption of Bar 3.1 doesn't really change that. And then the second reason is that the approach in mortgages, which we previously thought might bite in the later part of Bar 3.1, 2028, 2029, 2030. By virtue of mortgage valuation approach that seems to be getting adopted right now, we no longer think that is going to bite as we go through the time period. I don't realize we have to see how that finally gets adopted. Together, that means the Bar 3.1 doesn't bite in 2025. And at the moment, at least, we're not sure it's going to buy either in the later forecast period, but we'll have to see on that latter point.

We have time for one more question. If there's no more questions, William. Thank you very much again for joining us this year. I really appreciate that you're making time speaking to investors.

Well, thank you for taking the time, and thank you for inviting.