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

Good morning, everyone. Thank you very much for joining us. This is the European track of the Barclays Global Financial Services Conference in New York. We made the other people that were in the room that will kind of kick off. We're delighted to be joined this morning by William Chalmers, Group Chief Financial Officer of Lloyds Banking Group. I'm sure you'll be very familiar with William. William, thank you very much for your time. We do really appreciate you taking the time to be here with us. And without further ado, in the interest of time, I think I'll just get straight into it.

So many U.S. and international investors with us here today will be worrying about an uncertain macro backdrop in the U.K. and implications for its banks. Given your unique vantage point, I'd be interested in your assessment of the operating environment? And how would you characterize the outlook for your business?

Yes. Well, first of all, thank you for inviting me in. It's a pleasure to be here. And I'm glad to see that in a week when New York is hosting the fashion week. You've actually joined the Bank's conference he said, which is great to see. Anyway, Aman, the question that you posed is an important one. You will have seen, I'm sure many in this room will have seen our quarter 2 economic refresh. In that context, as you know, we predicted a modestly better GDP outlook, about 0.2% positive this year as opposed to the recession, which we previously thought about. We also expect unemployment to continue to be pretty low in the forwards this year, peaking a couple of years out around 5.3%, but pretty modest throughout. The price of that is effectively higher for longer interest rates alongside of that, probably slower macro growth in the years thereafter. So when we look at that, it is, again, a broadly reassuring economic picture. And the question becomes, what does that mean for our operating environment? What does it mean for our bank? First of all, I guess, in terms of growth, I think what it means is relatively modest balance sheet growth, relatively muted economic activity. Second, in terms of margins, that interest rate environment is probably constructive for our margin. You saw a bit of that in the context of H1. Third of all, in terms of asset quality, I'd expect to see asset quality continue to be pretty robust in those circumstances. And again, you saw a bit of that in H1 and the indicators that we look at in terms of early arrears, also early warning indicators on a look-forward basis continues to be really pretty benign. Then finally, in terms of the bottom line, RoTE and capital generation, in that environment, again, I think it's a pretty robust picture. You saw a lot of that in H1. We would expect that to continue going forward. So I think in short, the operating environment demand, it's not exciting, but it's pretty benign.

Thank you very much. We switched the revenues NIM, obviously, an important part of your investment case, your guidance for full year '23 of NIM of greater than 310 basis points. It does suggest further NIM pressure from the 314 basis points that you delivered at 2Q. Can you talk to the major drivers of NIM and indeed revenues from here? And where you see potential sources of upside or indeed downside risk?

Yes, in the income line as a whole. Yes. Sure. Yes, happy to. First of all, just to start with H1 as people would have seen, we upgraded guidance in terms of NIM at H1 to greater than 310 basis points. That was driven really by two things, mainly by bank base rate changes that we haven't forecast, a little bit by probably a touch better deposit performance than we had expected. So that's the pattern in H1. I think when we look forward, what are the headwinds, two main headwinds. One is, again, this continued deposit change shift that we're seeing both in terms of a little bit of PCAs as the savings and then also some changes within savings itself, migration within savings itself, instant access to fixed term typically. That's kind of headwind #1. Headwind #2 is the mortgage refinancing, very high-margin mortgages, refinancing into a lower mortgage margin environment. That will taper off in 2024 but at least for this year and much of next, we've got that in place. And then in terms of tailwinds, well, of course, the biggest single tailwind is the structural hedge. We've got GBP 255 billion of structural hedge balances which are currently yielding 1.25% that a refinancing of more like 4.5% plus and they're refinancing at a rate of about GBP 40 billion per annum. So that is a very substantial tailwind for the margin going forward. Beyond the net interest income picture, what else do we see? We see other operating income, which at GBP 2.54 billion in H1 was probably a touch above where we had expected it to be, a slightly better performance than we expected demand. That's across all of the business lines, retail, commercial, insurance pensions and investments. And I would expect that to continue, both as a function general economic activity and also as a functional strategic initiatives starting to gain traction, again, in each of those 3 business lines. When we look at the headwinds and tailwinds to your point or rather the risks on the upside and the downside, I suppose both ways, upside and downside, what would you highlight the macro question, how does that play out exactly customer behavior, how does that play out exactly. We're pretty confident on both of those two. But nonetheless, that's a source of both upside and downside, I guess. And then finally, a couple of upside pointers. One is particular business initiatives. We've seen some decent performance in corporate and institutional U.K. market share this year. Likewise, the transportation business is in retail has shown some decent growth, particularly following the Tusker acquisition. And then we see some positive sectoral developments in certain areas. GI is an obvious example, where we've seen rate hardening and we've seen the absence of any negative weather events, for example. So overall, that looks pretty good, too. Those are sector developments, which might augment the pattern.

You touched on deposits. That's a key area of uncertainty that comes up in conversations with investors that I speak to. This comes amid a backdrop of rising competition, political pressure and evolving customer behavior, mix shift, in particular, from things like PCA into term deposits. It feels like an area of uncertainty. History indeed suggests this kind of mix shift we could potentially have quite a long way to go to return to more normalized levels in quotation marks, perhaps pre-financial crisis. This is all the kind of thing that could impact NIM quite considerably. How do you think about this? And how concerned are you by the prospect of rising deposit costs more broadly?

Yes. Yes. Thank you, Aman. It's an important area that takes up a lot of investor dialogue, obviously. For me, the right place to start here is just to put it all into context, which is to say increasing deposit costs are an inevitable consequence of a rising interest rate environment, indeed a non-zero interest rate environment, those 2 together. Now to be clear, that is a good thing. It's a good thing because it enables us to deliver better profitability for the institution. And it's a good thing because it enables us to generate better, stronger capital return for all of you as our owners. So it's unequivocally a good thing to see. When we look at the patterns going beyond that, when we look at the patterns over the course of this year so far, the year-to-date, we've seen about GBP 6 billion of PCA migration. We've also seen a bit of migration within the savings book. Again, as I mentioned earlier on, instant access typically the fixed term also limited withdrawal. That pattern of movement is going to continue into Q3 and most probably beyond. To be clear, that is already discounted in our margin guidance. So what we put out there, if you like, encompasses what we've seen. And the performance to date as we look into the third quarter right now has been very much in line with our expectations, as I've just said. So over time, however, that pattern will start to taper and it will start to taper because, a, we'll see bank base rate prompt, if you like, for savers to move money, start to peter out. Secondly, we'll see that the hot money, one of the better phrase that was going to move in the context of rising interest rates has already moved. Thirdly, we'll see intent access rates start to increase and therefore, offset some of the shift, if you like, that we've seen within fixed term. And then on the other hand, we'll see some offsets to take place. We're already seeing the effect of inflationary wage settlements within the overall deposit book, for example. Customers typically will hold higher precautionary balances in the uncertain world that we seem to now be in versus where they might have been before. Likewise, you'll see macroeconomic growth leading to deposit balances increasing. And then finally, as you know, we have many strategic initiatives, some of which at least are targeted at relationship building with the objective of enhancing deposit balances, both in the retail space and indeed in the commercial space. And so those will be offset and as I said, over time, it's hard to call precisely when, but over time, therefore, the times of migrations that we're seeing today will start to taper. What if we're wrong? Well, we model sensitivities that look at if we are wrong, what happens and what happens if we go back to something that is closer to the 2010 type proportions of things like PCAs in our overall retail book. When we look at it in that context, again, the spreads are offset. The spreads that we lose and the structural hedge are offset by the spreads that we gain in terms of fixed term, in terms of limited withdrawal. Likewise, the spreads that we gain on the structural hedge that stays in place, are typically higher in that type of environment until there are some material offsets. And I think in that context, therefore, it's very important here just to not lose the wood for the trees as it were. We're seeing an interest rate picture, which is consistent with better profitability and indeed higher capital returns for our owners.

Just to round out the discussion on deposits. The U.K. has implemented consumer duty as of the end of July. The regulator seems to be taking quite an interest in the assessment of fairness of the customer proposition, in particular, a 14-point action plan on cash savings. Interested in your thoughts on consumer duty, the impact that it could have on your business, the industry more broadly. And in particular, the impact on customer savings rates to legacy back book products to the extent that just?

Yes, yes. Thank you, Aman. Again, an important topic. For those of you in the room, not from the U.K. regulatory backdrop, consumer duty was introduced as of July of this year. It was pretty well trailed in the years proceeding there, so we had a long time to kind of get used to it. The reason I say that is because, again, it's cut to the bottom line, consumer duty is effectively confirming or more or less codifying what it is we do in the business already. That is the bulk of consumer duty. Alongside that, it seems to me very likely to ask very likely that over time, consumer duty probably plays the advantage of the large-scale players. And maybe it's the disadvantage of some of the more marginal or higher charging players across the piece. Why do I say that? Well, consumer it effectively is an all-embracing regulation, which requires you to treat customers fairly. Going forward any of you to know that, that is an objective that we have always aspired to. And so as consumer duty comes in, it's not clear to me that necessarily changes terribly much as to how we go about business. Specifically, consumer duty asks you to put forward a so-called value framework for your customers. When we look at our customer propositions, we look at price, we look at access, we look at distribution. These are all factors which lead us to make customer base decisions, which in turn are entirely consistent with the value-based framework the consumer duty calls out and ask us to support. You mentioned the savings action plan, which in the sense is an extension of the consumer duty principle, Aman. What we're seeing there is a lot of further obligations to notify customers to prompt customers to do things with their money in the context of the rate environment that we're in. If you signed on to our app anytime recently, you'll see we do a lot of that already. And so we see these things at the margin incremental but not really changing the objectives or necessarily the reactions of the institutions. Consumer duty is about transparency. Overall, it's a good thing. And as I said, we think we deliver it already. Consumer duty, as said, we think will benefit scale players over time, of which we are considered healthy one. So overall, I think, Aman, we see it -- we obviously pay close attention to it, and we will evolve with it. But that's what it is. It's about evolution, not revolution.

Thank you very much, William. We do have a bunch of audience response survey questions. You'll see the remote handsets kind of sitting on your desk. And if it's okay, I think we'll take a couple of questions to kick things off. Question one. So please do respond with the remote though. Question one, what would cause you to become more positive on Lloyds shares? Number one, positive NII surprises; Number two, more fee income; Three, better cost savings; four, better asset quality; five, bigger distributions; six, clarity on U.K. Macro; seven, 7, on political uncertainty. [Voting]

Cool thing is they are responsing.

There's quite a lot of answers to -- Okay, that's very interesting. So by some way, I think the standout response there is clarity on U.K. macro. It's quite an all-encompassing answer is I don't know if that's a great surprise.

Well, I think it's very consistent with our understanding. I mean when we look at the operating performance of the business, as I mentioned earlier on in relation to your question, Aman, it feels to us basically very reassuring. We're doing pretty much what we said we'd do. The challenge that is a little bit out of our control is obviously the U.K. macro. And it's that we look to for not just enhanced opportunities for business but also a greater sense of stability in the equity markets and indeed to reduce the cost of equity. I think the only question there that's already answer there that, I guess, is a word in that I'd like to say is not part of vocabulary is worth surprise on the first one which is to say one of our big objectives in life is to deliver predictability for people. And although we can't [ bante ] surprises altogether, we certainly want to see too many of them.

Great. Can we shift to question two. Okay. What are you most concerned about at Lloyds? Number one, weaker earnings; two, weaker capital; three, lower distributions; four, regulatory risk; five, political risk. [Voting]

Again, it's quite interesting. There's more evenly spread -- the most popular answer is political risk, followed by weaker earnings and then not far behind regulatory risk.

Yes. I thought regulatory risk and political risk might dominate a little bit more there, actually. Weaker earnings, we've given guidance. And I hope that, that is what informs your expectations around the stock and your appraisals of it. In essence, we're seeing earnings as we have profiled for the course of '23 and '24, and then we see significant operating leverage kicking into the business in the years after '24 as the headwinds that we've seen in particular mortgage refinancing pay out and as the income tailwinds, in particular, refinancing and structural hedge, aligned to strategic initiatives kick in. And that's what drives the operating leverage of the business, which in turn leads to a stronger earnings and indeed capital generation and repatriation level going forward into the 2025, '26 time period.

Can we go to question 3 as well, please? Clearly, a key driver of the earnings outlook. How do you think about Lloyd's NII into '24 . Number one, growing, driven by loan growth; two, growing driven by the structural hedge; three, flat; four, falling given headwinds; five, given other headwinds. So four is deposits headwinds; and five is other headwinds. [Voting]

Interesting. Well, obviously, the growth is a standout response there, given the hedge, but it's, I guess, balanced by concerns around deposit headwinds.

Yes. I mean, Aman, and I didn't rehearse these questions before, but any question about 2024 as those that tune into the conference call, we'll know is a bit of a trap really because we tend to comment on guidance in '23, but not so much a year out. Other than the guidance that we gave in February '22 and updated it earlier on this year. The -- that outcome doesn't turn that surprise me. I mean I think we'll see how things go. We'll see how the interest rate environment develops. We'll see how deposit migration per my earlier comments developed. I think one important component, which you'll be aware of, again, is that the mortgage refinancing tailwind plays itself out in the second half 2024 and to where we see the real operating leverage developing is in the years thereafter.

Ofcourse. You didn't fall for our trap then to trying to get '24 guidance.

No, I thought having resisted it for the conference call.

So look, we talked about the hedge. It's a key tailwind for the business. It's a unique characteristic of our balance sheet in the U.K. Your investing balances at much higher yields. You do also have falling balances. Hedging notionals guided to fall high single-digit [ pounds ] billion this year. I guess that's driven by an uncertain outlook for things like current accounts. Can we talk about this hedge tailwind? And indeed, if you see any risks to really fully realizing what seems to be a pretty significant multiyear tailwind?

Yes. Yes, happy to Aman. Again, I think just to cut to the chase, when we look at the structural hedge, it is a very substantial tailwind going forward. We've got circa GBP 255 billion of balances again, yielding 1.25% that will be yielding into the kind of 4.5% plus range as we refinance. We expect the size to reduce, as you say, Aman. We've given indications for a single-digit billion reduction during the course of this year. And indeed, things are playing out currently in conformity with that expectation, in line with that expectation. Having said that, our guidance again is informed by that expectation. And even despite that expectation, we still see the structural hedges generating in excess of an GBP 800 million income tailwind per annum. That's after having adjusted for those size expectations that we talked about earlier on. It is, as I said, likely that deposit changes, deposit migration is going to, first of all, steady and then start to taper over time. And that's down to the factors that I mentioned earlier on. We also take a look at say, as I said earlier on, what happens if deposit migration is greater than we expect. Well, again, the structural hedge still provides a very significant income tailwind even in those circumstances. It is also worth saying the structural hedge is not some Lloyd's idiosyncratic earnings factor. This is a sector-wide phenomenon. Everybody has a large structural hedge within the sector. And so if there is a sense in which deposit migration changes well beyond people's expectations, which is clearly not the base case, but if that were to happen, you could expect to see that in gender a sector-wide response. In terms of pricing of other financial assets elsewhere to customers. So we should not lose sight of the fact that this is an industry-wide phenomenon, which in turn, informs the competitive pricing of the industry, not just in terms of deposit products, but really across the board. And I hope that's some source of comfort. As I say, from our perspective, structural hedge will be, no matter what, in any plausible non-zero rate environment, a source of significant income tailwind on a multiyear basis.

If we shift to mortgages, a key part of your business. You've seen lending volumes fall for 2 consecutive quarters. I mean a difficult backdrop characterized by subdued demand and pressure on front book spreads. How are you navigating this kind of challenging operating backdrop and do what's your strategy here? Are you actively prioritizing near mover volumes.

It's -- I think the best way to answer that question, Aman, is to say, it is always our intention that we will deliver both growth and indeed manage returns in a way that is consistent with our shareholders' best interest. So we will always manage growth and returns in a way that is consistent with shareholder's best interest. That is the case while recognizing that we want to be a long-term player in a market where we see ourselves as having a structural competitive advantage. We are at the end of the day, the biggest player within the U.K. mortgage market and we expect it to remain that way over time, and that gives us a structural competitive advantage. It's worth just putting the trends in the open book into context in that respect, Aman. That is to say, we saw about GBP 0.7 billion reduction in the open book in quarter 2. I put that into context, that's off the back of a GBP 298 billion open mortgage book stock. And so these are pretty small movements that we're seeing. I think within any given quarter, you're going to inevitably see some ebbs and flows in terms of the performance of the open book often that is in relation to phenomenal events that took place several quarters previous to the actual quarter in which we are reporting simply because it takes time for applications to migrate into completions. And indeed, you've seen that a couple of times this year. The underlying strategy, however, remains the same, which is, again, that we want to stay a major player in this sector in pursuit of our overall purpose. And so when we look at our strategic plans and our strategic initiatives, in particular, Aman, what are we doing in that respect in the mortgage market? Well, we are developing some product areas, which will help us build relationships with our customers. Again, whether that is in respect of deposits, whether it's in respect of insurance, whatever it might be, it's point one. Point two is we are developing subsector specializations. You've seen us be pretty active in the first-time biomarker, for example, over a number of years that is indeed where we aim to continue that alongside 1 or 2 other subsectors, which we see as favorably advantaged from a margin and a risk point of view. We also aim to enhance the remortgage capability, a critical part of the U.K. mortgage market, particularly in times when new mortgage balances are relatively few and far between relatively slow market like the one we've got today. And then finally, we've got a great setup in terms of channels. And so delivering kind of ever slicker channel experiences and optimizing between channels is a further part of our mortgage strategy. And so those are the types of things that we're doing in the context of our strategic transformation. Those are the types of things that we'll see us remain and indeed consolidate our position as a major player within this attractive market, consistent with our purpose. But within any given quarter, as I said, you may see some ebbs and flows. It is safe to say that over time, you'll see that position consolidate alongside the strength that we've seen in H1 in some of the other retail areas, whether that's cars, whether it's unsecured, whether it's motor. So that's the pattern, that's a commitment.

Kind of rounding out the discussion on revenues. Last year's strategy update saw a significant increase in investment through to '24 and an ambition to grow revenues by GBP 1.5 billion by 2026. And that was roughly evenly split between NII and fee income. How is that progressing? And how confident do you remain in achieving this target?

Yes. Yes, an important question, Aman. I'm sure everybody is aware, but we are engaged in a very significant strategic transformation for Lloyd's right now. We've pledged to invest an incremental GBP 3 billion in the years up to 2024. That will turn into GBP 4 billion in the years up to 2026. In addition to our regular BAU investments, in terms of what we describe as legal, regulatory and mandatory and discretionary. So it's an extra GBP 3 billion to '24, GBP 4 billion to '26, on top of that. What we are trying to achieve by making those investments, a couple of points really. One is revenue growth and diversification, so enhanced revenue growth and diversification. Two is we are trying to enhance, if you like, build both cost and capital efficiency. And then 3 is we are trying to maximize the potential of what we describe as our enablers, whether that is people, whether that's data or that technology. These are the enablers that enable us to deliver a more promising, better returning business. When we look at it, we are now seeing the signs of traction, which is good to see. We're about 1 year, 1.5 years into our strategic plan, and we're starting to see some signs of traction and delivery. So if you look in the retail area, for example, ready-made investments was launched earlier on this year, which is a significant contributor to the ambitions of both retail segment and also the insurance pensions and investments area. Likewise, we've just launched something called mobile onboarding, which greatly reduces the time for a new customer to join our business and commercial banking capability and offering. That is now reduced significantly versus where it was. It's a significant achievement over the course of first half of this year. And then alongside of that, as you've seen, we've also started to expand capability and hence, market share within the C&I area. So overall, we're seeing some good, healthy and significant signs of traction in terms of delivery. There are one or two areas as well where we've actually surpassed some of the expectations for 2024, mainly in the nonfinancial area, so digitally active customers, for example. We surpassed our ambitions for 2024. And having done that a bit earlier, that causes us the question where the targets minding enough and how can we go further. Likewise, one or two other areas, similar type of analysis. Stepping back and to your question on revenue and cost targets, which is where always stuff hits the bottom line Aman, as you say. When we look at that, to be clear, we've got lots to do. But as we stand today, we feel very comfortable, very confident about hitting our 2024 revenue and cost ambitions and likewise, hitting our 2026 revenue and cost ambitions as a function of the strategic transformation that we are engaged in right now. For those who are interested, we're launching a bunch of seminars during the course of this autumn and then going into the spring to enable you to take a closer look at what we're doing in each of these areas. I think consumer is coming up first, which will encompass the relationship side, broadly speaking, the savings and deposit side and the lending side doing what it says. That will, I think, be in October of this year. Hopefully, it will give you some insight. I've no doubt it won't give you enough numbers, but nonetheless, it will give you some insight into what it is we're doing. And from there, how we're delivering on the strategy.

Great. Can I ask one more before going back to the ARS questions. Sorry, I'll ask one more question to William first. Around asset quality, it's key topic of discussion in investor meetings that I have, particularly over in the U.S. Clearly, there's uncertain outlook for the U.K. economy, high-profile step-up in borrowing costs for mortgage customers in particular in the U.K. and an uncertain outlook for interest rates, how long they're going to stay -- but the remarkable observation is how benign things have been so far and the confidence that comes around the messaging and asset quality from yourself and your peers where does this confidence come from? And are you seeing any signs of stress emerging in your portfolio?

Yes, it's an important question. In short, the confidence comes from performance, and that includes both historic performance, but also the performance of look-forward factors. I'll elaborate on that. When we look at the overall business, we're very happy with asset quality. We're very happy with the portfolio performance. We're very happy with the way in which what we describe as early warning indicators, which is the range of kind of horizon factors that we look at on a look-forward basis. We're very happy with how all 3 of those are developing. If you look at the H1 charge that we took, it's around GBP 662 million. That's about 29 basis points of our portfolio, very much in line with the guidance that we gave for the asset quality ratio of circa 30 basis points this year. More precisely, if you take a look at quarter 2 to get a kind of more mark-to-market view of what's going on, you can see there, first of all, the 419 charge, which includes multiple economic scenario IFRS-driven non-impairment related charges. But beyond that, you see an observed charge of GBP 335 million, which is the actual default experience, if you like, that we're seeing. So that's 29 basis points. But actually, if you scratch read the surface of that, there's a couple of, roughly speaking, non-impairment type factors going on. One is bank base rate discounting and future recoveries for existing impairments, which is not a new impairment point. It's rather a function of the interest rate environment that we're in. And the second is the so-called Stage 1 roll forward, which, as you know, is a function of future economic expectations as opposed to actual default experiences. So you strip that lot out, and you're down to about 26 basis points of underlying impairment charge, if you like. Under a similar analysis, that is very similar to what we saw in Q1 and also in Q4. So no deterioration within that line. When we look beneath that, as highlighted at the H1 Q2 reporting period. We talked a little bit there about some deterioration in our legacy mortgage portfolio, and it's true. We've seen a little bit, but it's pretty modest in its overall scope. And if you go beyond that, the rest of retail and indeed all of commercial is performing in a very benign way, certainly in line with our expectations. So the picture looks pretty good. Aman we then, as said, look at a range of so-called early warning indicators. And it almost doesn't matter which one you look at. You get a similar, very stable picture. So you're going to look at early payments, for example -- sorry, minimum payments within the cards book as an example. You can look at debtor days on invoice finance. You can look at the behavior of insurance policies. And are they paying up early in order to give the customers cash and so forth. Again, across the board, we're seeing a picture that is a, benign; and b, stable. I guess one might ask the question, why do we think that is right now as you did -- and I think some of it is down to a prime customer base, which you've heard Charlie and me talk about ad nauseam, I'm sure you feel, but nonetheless, we talk about it a lot, and it is a prime customer base, and that is now showing through. I think the second point is we have a pretty cautious set of underwriting standards. Again, you've heard me talk about that a lot over the course of the year, the stress testing that we do when customers come in and take a loan out all rest of it, pretty cautious underwriting standards. In terms of the customers that we take and also in terms of the customers that we don't take on to the asset side of the book. And then finally or thirdly, I suppose, which is not Lloyd's brilliance, but we're in a low unemployment environment. And in the low unemployment environment, we typically don't see very significant defaults. And going back to response to your first question, Aman, we see that low unemployment environment as continuing. Might tick up a little bit, but overall, the picture is pretty benign from an employment point of view. So I think that's why we're seeing the performance of the book as it is. Now what happens if we're wrong? What happens if all of what I've just told you doesn't pan out to be quite what happens in reality. Well, underneath that, we have what we believe is a very high-quality book, and it's not just me who says that, but you can actually see it in the objective stats that we produce. LTVs within commercial, for example, 42%, very high levels of interest rate cover on the -- sorry, interest coverage ratios on the commercial book. Again, a very highly collateralized book, whether it's an SME or whether it's investment grade in the commercial book, for example. So a very high-quality book, which protects us from any downturn. And then finally, what happens if the worst comes to worst, Well, as you know, we've got a GBP 5.4 billion ECL expected credit loss on the books right now from provisions that we've taken over the course of the last few quarters. That number, GBP 5.4 billion is GBP 700 million in excess of our base case expectations for provisions that would be necessary in our base case economics. So it's a prudent provision, and it is also buffered by an excess because of the probability weighting methodology that we deploy in ECL above and beyond whatever might come out of base case losses. So I think Aman, this is very much a situation where the experience is benign. The outlook is benign. We think we've got a prime quality customer base. On top of that, we think we've got a very high-quality book. And then finally, if things go wrong, we think we're very well provisioned.

Excellent. I'm going to return to the ARS, we're going to talk through these question for how do you think Lloyd's will perform versus market expectations for capital and dividends. One, beat expectations give better earnings; two, beat expectations given lower capital requirements; three, miss expectations given earnings; four, miss expectations given higher reg. requirements. [Voting]

Beat expectations given better earnings. That's a pretty emphatic response there, probably speaks for itself.

Well, I probably shouldn't comment on, isn't it Aman.

Question five. So look, I think question five, what do you see is the biggest risk to Lloyd's earnings? I think this is in the context of what I would characterize as a low share price subdued valuation. So I think it is interesting to probe where this sensitivity comes from. But what you see the biggest risk to Lloyd's earnings? One, rate cuts; two competition; three, cost inflation; four, loan losses; five, government or regulatory intervention. [Voting]

It's interesting. So evenly split competition loan losses, five, government or regulatory intervention bank tax is obviously very typical.

Yes. It's an interesting one. I mean another manifestation of it is why the share price is where it is and what's behind the implied very high cost of equity that comes out of that. And of course, from our perspective, at least, it's hard to understand why the share price is where it is in the context of the returns that we expect the business to generate over the coming periods. I'm sure that wouldn't surprise any of you. When we look at it, -- 2 or 3 reasons why that might be. I suppose, competition for deposits is 1 point that is noted down here. As I said earlier on in my comments, we can't really see any plausible non-zero rate scenarios that causes a problem of a scope that is anticipated by some of the conversations. Second, in terms of loan losses, you'll be able to tell from the comments that I gave just a second ago, it feels people are expecting something which is wholly disproportionate to what we expect to see. And then occasionally, the politics comes in, which is 0.5 here. But in a sense, isn't that related back to deposit performance and some of the debate that's going on in that space. So when we look at it, it is hard for us to understand the cost of equity that is being implied by the current share price. Now we're takers. There's nothing we can do about that except for, we can continue to ensure the business delivers predictable and robust returns, number one. And then number two, try to clear out any capital blockers that they might be between those returns and getting the money back to you as our owners. That entails dealing with legacy issues in the main. And if we do that, then hopefully, over time, the cost of equity will saw itself out.

Great. Question 6, final ARS question. How would you view significant acquisitions at the group level? One, very positive, given potentially higher return on investment; two, marginally positive; three, marginally negative; four, very negative; five, prefer the capital back to shareholders. [Voting]

Yes. That's helpful. And I think, broadly, as I guess I might have expected. I think the way in which we see acquisitions to the group is -- we will look at things that either enhance capabilities, and we saw that a bit with the Embark acquisition last year, salary-sacrificed scheme and transport area that we bought with Tusker this year. or alternatively enhanced scale. When I first came in, we bought a mortgage book off of Tesco, a U.K. supermarket helped us in scale on mortgages, and we are obviously a lower-cost provider. But all of these transactions are small -- in the scheme of things, they're small relative to the scale of the earnings of the group relative to the capital generation of the group and relative to your capital returns. So they're all pretty small. How do we look at them? We look at them in terms of we know what our strategic objectives are. So will any of these things accelerate the speed that we can achieve those objectives at? Can any of them be done at an acceptable risk. And thirdly, and perhaps most importantly, can any of them be done in a way that accrues value to our shareholders. And those, for us, are pretty high bars. And so the strategy is organic. That's first, foremost and also last. In between, there might be the room for the type of acquisition that we've seen over the course of recent periods, but I doubt that it will be anything more significant than that.

We're running short on time. We're almost hit the end point. I'm going to sneak in one real quick one at the end. On the theme of capital returns, 14.2%, your CET1 ratio is strong, it's ahead of your 13.5% target. You're capital generative. You're going to end the year with a surplus cap position. You announced a GBP 2 billion share buyback this year. It's a big number. But I do note that you completed it at the end of August. It seems like the outlook for surplus distributions is positive. Indeed, it seems like the market could absorb a bigger number than GBP 2 billion. I mean is that you can say on the outlook for surplus distributions in particular?

Sure, sure. Yes, it's -- perhaps or just kind of starting out with a couple of entry points, Aman. As you say, the capital stock is very strong, 14.2% as of the half Capital generation also feels very robust, circa 175 basis points for the year, which a substantial proportion was delivered out of the half. It's good. It's good to see that capital generation. It's good to see a strong stock because it allows us to finance any regulatory capital requirements. You saw a bit of that in H1. It allows us to finance both organic and occasionally inorganic growth within the business. Again, you saw the Tesco acquisition in H1 as evidence of the inorganic piece. And it allows us to invest in a strong and indeed growing return to all of you as our owners. And you saw the 15% increase in the interim dividend over the course of H1. So capital generation is important. It allows us to achieve those 3 objectives, maybe more. When we look at it, the capital return policy, Aman I missed the heart of your question, it very much remains as we have always said it, which is to say a progressive sustainable dividend policy alongside an assessment of and indeed commitment to return excess capital at the end of each financial year. Within that, the buyback is a really important component. As you say, we closed the buyback just recently actually. Over the course of that GBP 2 billion, we bought back stock, which effectively gets rid of close to 6-- over 6%, in fact, of the stock of the company. So it's quite a significant achievement that buy back, that overall capital return policy allowed us to deliver GBP 3.6 billion in respect of last year to shareholders. GBP 3.6 billion, I'm afraid the presently is about 13% of our market cap. I wish it was less. But nonetheless, it's a significant achievement. And as said, the buyback role in that is important cancels out over 6% of the stock this year. If you look at the last 2 years, '22 and '23, the combined buyback after share issuance has actually gotten rid of almost 11% of the company's stock. So it's really very, very powerful. We recognize within that, the preference of our owners, they want to see buybacks and it's understandable because we also recognize within that the value opportunity current share price, it delivers real value, we believe, to our owners. So it's an important commitment. It will continue to be one, and I expect to see more of it, Aman.

Okay. Excellent. Okay. Thank you very much for your time. We do really appreciate it. Thank you, everyone for joining us this morning. I think we will end the session here. I think we've got Bank of Islands next one. So thank you very much.

Thank you very much.