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

Good afternoon, everyone, and welcome to the first of our 4 investor seminars on our strategic growth priorities. Over the next 9 months, you'll hear from the management teams that is delivering our business ambitions, which contribute to our revenue growth and cost savings targets across 2024 and 2026. We are successfully executing against our 4 strategic priorities. So I'm excited to be able to share our strong progress to date and vision for the future with you. I'm delighted today to be joined by Jayne and Jas, who'll kick off these seminars with a deep dive on our consumer business. Following their updates, I'll briefly wrap up, and we'll then have plenty of time for your questions. Before handing over, I'll briefly introduce today's session. Let me start on Slide 3. There are 4 key messages that I'd like you to take away from today's session. Firstly, we have the leading consumer franchise in the U.K. across channels, products and engagement levels. This provides a strong foundation for growth. Secondly, our consumer business has a vital role to play in helping Britain prosper. This is more important than ever in the current environment, and we're playing our part with targeted and proactive support. Thirdly, whilst our near-term outlook is partially impacted by highly competitive markets in our core product areas, we have a long-term strategy and are investing for growth. Our strategy in consumer is focused on building upon our strong foundations to meet more of our customers' needs, driving stronger engagement through digital and broadening our product and platform capabilities to deliver solutions to our customers value. And finally, we're progressing well against these strategic priorities and are on course to meet our targeted outcomes. This, in turn, supports our revenue and cost targets at the group level. We'll cover these throughout today's session, but let me now turn to an overview of our strategy on Slide 4. Our strategic ambitions are facilitated by a clear commitment to investment. In line with what we said in February of last year, we are investing an incremental circa GBP 3 billion of strategic investment by 2024, increasing to circa GBP 4 billion by 2026. We invested around GBP 1.4 billion over the first 18 months of the plan. Our strategy is growth focused with around 2/3 of this investment weighted towards 4 priority areas. These priorities will deliver circa GBP 0.7 billion of additional revenues by 2024, growing to circa GBP 1.5 billion by 2026 as we build a more diversified and sustainable revenue base. At the same time, we are retaining our cost discipline. We are targeting circa GBP 1.2 billion of gross cost savings by 2024. This has increased from an original GBP 1 billion and we've realized around 50% of the savings for the higher target as of the half year. Successfully executed, our strategy will deliver a return on tangible equity of greater than 15% in 2026 supporting over 200 basis points of capital generation. Turning now to Slide 5, where I'll provide a brief overview of our strong positioning in Consumer. Our Consumer business has significant scale and reach with leading positions across all channels and products. Our business is built on strong relationships supported by a portfolio of trusted iconic brands that cover the breadth of our participation choices. It is also the largest contributor to the group's financial accounting for more than 60% of income and PBT as well as 80% of our loans. Moving now to Slide 6. Our consumer business aligns to our externally reported retail division. From an operating perspective, this is divided between consumer relationships and consumer lending, which are run by Jayne and Jas, respectively. Consumer also operates closely with our insurance business, allowing us to meet all of our customers' financial needs in one place. Our new mass affluent offering is a further strand of our consumer proposition. However, given its importance, you'll hear more about our ambitions here as well as in insurance in a stand-alone session in March. Our strategic growth priorities in Consumer are supported by around 30% of our investment spend in 2024. In return, they make a material contribution to the group's additional revenues and gross cost savings. With that in mind, I'll now close my introduction by providing more detail on the financial outlook on Slide 7. Based on our progress and our plans we are confident in the financial outlook for the Consumer business. As you know, we're managing competitive dynamics in core markets. However, despite near-term margin headwinds and slower-than-expected growth in AIEAs, we believe our strategy in consumer positions us well over the long term and will support sustainable value creation. The Consumer business will deliver approximately 30% of our circa GBP 1.5 billion of additional revenues in 2026 or around GBP 0.5 billion. This equates to circa GBP 0.2 billion in 2024. Revenue growth is driven by a number of the areas we'll cover today and is grounded by clear targeted strategic outcomes. I'm pleased to say that we're making good progress against these, and in some cases, have already surpassed them. You'll hear more about these during today's presentation. Consumer also provides the largest business contribution to the 2024 gross cost savings target, representing about 40% of this amount or GBP 0.5 billion. As you'll hear from Jayne, this represents further improvements in digital journeys, which helped to reduce cost to serve alongside ongoing rationalization activities. And finally, every proposition that you'll hear about today is in line with the group's strong risk appetite, providing confidence in sustainable returns generation. And so with that, I'd now like to hand over to Jayne and Jas to talk through our exciting plans in more detail. Jayne?

Great. Thanks, Charlie, and good afternoon, everyone. We have a leading consumer franchise. Our strengths include our significant scale and reach highly engaged customers and a comprehensive product offering across leading trusted brands. We have strong relationships with half the adults in the U.K., and we can meet more of their needs by delivering an integrated, simpler and more personalized experience. And this is a significant growth opportunity for us. Over the next few slides, I'll tell you how we're deepening customer relationships through 3 key levers. Our targeted approach to deposits, our focus on growth in more valuable segments through customer value propositions and our leading mobile experience, which will help us build deeper engagement and meet more customer needs, all of which drive our growth in the depth of relationship. On Slide 10, I'll start with deposits. We have a strong and broad deposit franchise with over GBP 300 billion of customer deposits across our retail division. We have leading market shares across multiple products. In PCAs, we have a 24% share of both balances and customers. This is a significant advantage as current accounts still serve as the core anchor product that allows for deeper and ultimately more valuable relationships over time. Our deposit relationships also provide us with unique insights on the behaviors and preferences of our customers. And as you'll hear shortly, we are focused on using these insights to develop more targeted offerings that deliver greater value for both our customers and the group. Our deposits are also a key enabler to structural hedge growth, helping to promote a stable, predictable earnings profile for the group. On Slide 11, I'll look at how we compete on deposits, particularly relevant in current environment. Our approach to deposit management balances multiple objectives, including value and liquidity. Price is clearly an important competitive dynamic, particularly right now as we see customers shift towards savings products to access better rates. However, price is not our only competitive lever. Our broad range means that we attract deposits from across the whole market. In our Club Lloyds proposition, we offer preferential rates and a range of lifestyle benefits that are attractive to customers and help us build deeper relationships. With multiple brands and scale across channels, we can be much more targeted in our offering. Through our ongoing investment in data, we can more accurately forecast market dynamics and get new propositions to market much more quickly. Through these differentiators, we have retained customer relationships in a highly competitive market. Like others, we have seen movement out of PCAs but in the first half of this year, we recaptured a substantial proportion of balances within our own savings propositions. And as a result, we saw lower deposit attrition than our peers. We've launched new innovative products and proactively contacted our savings customers to tell them about our better rates. And through this, we gained balances in key areas including around GBP 10 billion in one of our limited withdrawal products and doubled the size of our fixed rate book so far in 2023. The combination of very targeted customer prompts and new propositions demonstrate our clear focus on delivering great customer outcomes. Linked to this, the new consumer duty aims to uphold high standards across the industry for customers and is an important piece of regulation. As a truly customer-focused organization, we have always been committed to making decisions that deliver fair value for our customers and having conducted a full review of our customer communications and the level of support that we provide, including for our vulnerable customers, we believe we are well positioned. Just to finish on deposits. Despite the possibility of fewer base rate increases going forward, we do still expect the ongoing shift in the mix of deposits to continue. That said, based on targeted actions and our holistic approach we are confident that we can retain and strengthen our customer relationships. I'll now look more broadly on Slide 12, that how we're revitalizing our customer offerings to deliver deeper relationships through key life stages. We've built deep relationships with our customers but recognize the potential to meet more of their needs, particularly in some higher-value segments where our market share is lower. So a key strategic priority for us is customer value propositions. These capture our full range of products and services with tailored customer-led experiences, using our extensive data and insights, we are delivering more personalized experiences, increasing engagement and offering rewarding products and services. These are all tailored to the key needs and life stages of our customers from first-time buyers to financial planning in later life. This way, we deliver value by attracting and retaining relationships across each of the higher-value segments that we've identified. We'll also meet more customer needs by extending our offering beyond traditional financial services through 3 key ecosystems. These are essentially a shop front across Homes, travel and transport. And they provide the platform to access nonfinancial needs such as flight bookings delivered through third-party brands where we retain the relationship with our customers. Jas will cover the progress that we've made in Homes, which is our most advanced ecosystem at this stage. Importantly, as we develop these ecosystems and extend beyond financial services, we'll grow our other income category for the group. And whilst we expect to realize more value from customer value propositions in future years, I'm really pleased with the early progress that we've made in targeting these higher-value segments. Since 2021 deposit balances are up by more than 10% for learners and 5% for independent earners. Now to bring customer value propositions to life, I'd like to talk about our families and households segment on Slide 13. This segment has a really diverse set of needs. Financial responsibilities are often shared with a partner and range from day-to-day considerations like budgeting, to preparing the financial futures of children, supporting elderly parents and planning for later life. And as a result, this population has around 30% more financial needs than the average U.K. customer. And around 70% of those are met by other providers today. There's a clear growth opportunity for us here, and we are really well positioned to meet these needs given the strength of our franchise. We know that customers in this valuable segments expect simplicity from the bank. They want recognition for loyalty. They want help to navigate day-to-day financial choices. So we're enhancing our offerings to directly address these expectations. To help make things simpler for them, we're rolling out new tools such as bill splitting and new payment journeys for families so that they can transfer money more easily. We're also developing new functionality to enable families and households to set financial goals, such as saving for a holiday or renovating their home as well as help with tracking their progress towards these goals. Our new children's current account, Smart Start, has had over 100,000 new accounts opened, and we're going to expand the age range over time, capturing more potential customers. At the same time, we'll introduce new digital tools to support children's financial education and to reward customers for deepening their relationship with us, we're developing new propositions that include preferential rates, cash back offers, discounts and a broad range of lifestyle benefits. More recently, we added Disney+ as a benefit to our Club Lloyds account, demonstrating our role as the home of leading third-party brands that our customers love. Our partnership with Octopus Energy has also increased access to nonfinancial solutions, such as retrofitting, which is increasingly important to U.K. households. Mortgage balances within this segment have increased by around 4% since 2021, demonstrating some really good progress to date, and we see much more potential here. A key enabler to delivering all of this is the shift to Mobile-First Distribution, which I'll cover over the next few slides, starting with Slide 14. We're already a leading provider across our digital channels with the largest digital bank in the U.K. Our digital user base of 21 million active users has grown at a significant pace, up by around 15% since the launch of our strategy. This is beyond the 10% growth target to 2024, and our digital reach is significantly ahead of the nearest incumbent. 18 million of these customers use our mobile app. Only the social media apps have a greater level of engagement than this. That said, our leadership position is not defined solely by scale. Our mobile app and user experience are highly rated, and we are recognized as having the leading digital sales capability for banks across Europe. To date, 15 million customers have registered for personalized marketing so that we can be much more targeted in our communications. We can strengthen our engagement and increase relevance all while improving our efficiency. These strengths are driving value for the group today in the form of revenue growth and improvements in cost to serve. For example, we've recorded a 60% increase in mobile app product openings this year. And looking ahead, we're building on these strengths with a shift to Mobile-First Distribution. And to be clear, it's not mobile-only, mobile-first means meeting more of our customers' needs via the mobile whilst having a more flexible physical points of presence that I'll cover more shortly. In 2022, we rolled out a record number of mobile app releases, streamlining journeys, but with much more customization and personalization to give customers greater control of their finances. This significantly increases our level of engagement with customers, and we plan to do more of this to deliver a truly personalized experience. And we've got a short video to try and bring this to life for you. [Presentation]

I hope that gave you a flavor of how we'll continue to maximize the value that we generate through our mobile app. These future changes will transform engagement and deliver further value for the group, and we'll launch the next generation of our mobile app in early '24. On Slide 16, I'll cover how we're thinking about physical distribution as we shift to mobile-first. Much like our digital offering, our physical presence has significant scale and reach with over 1,100 branches across our brands. We continue to see benefits of our physical presence with clear links to value and relationship building. However, customer behavior continues to evolve. And when we look at the last 12 months, 30% of our active customer base are digital only, and interestingly, over a 3-month period that increases to 50%. As a result, we continue to manage a balance between our physical and digital footprint, ensuring that customers can bank with us how and when they choose. Since the launch of our strategy, we've achieved a 6% increase in customers served per distribution FTE, and we're well positioned to hit our greater than 10% target by '24. Looking ahead, we're planning for much more efficient and flexible points of presence in the communities that we serve, keeping customer engagement and satisfaction front of mind. We're trialing several formats, such as Kiosks, Co-servicing and our Community Banker Program, deployed in locations that our customers frequent. And we have all the data to know where these locations are and how they might shift over time. We're introducing these different formats as we continue rationalizing our existing network, ensuring that we remain active across communities in a format that is much more reflective of customer demand. These alternate formats represent a meaningful cost opportunity for us with a cost to serve differential of more than 80% of a full service branch. I'll now close on Slide 17, with a look at our depth of relationship target. The actions that we're taking to maintain our strong deposit relationships meet more of our customers' needs across the life cycle, particularly in high-value segments and transform engagement through a mobile-first distribution model are key enablers to unlocking the future growth. When we launched our strategy in February '22, we said that on average, we meet 2.4 of our customers' financial needs out of the roughly 7 needs for the average U.K. customer split across multiple providers. We're targeting an increase of greater than 5% by the end of '24, and this is on track. We're deepening relationships across the breadth of our consumer business, benefiting from more personalized offerings and the innovative developments across our lending products that you'll hear about shortly from Jas. Increasing depth of relationship will drive higher revenues to the group that contribute to the GBP 0.5 billion of additional revenues that our customer growth priorities expect to generate by 2026. Thank you. I'll now hand to Jas.

Thank you, Jayne, and good afternoon, everyone. I will now speak about the progress we are making in our consumer lending business. Consumer lending has significant scale with over GBP 360 billion of loans across our mortgages, credit cards, personal loans, motor finance and leasing businesses. We have unrivaled market shares, and we are the leading provider across these products. I'm also incredibly proud of the impact our green lending propositions are making in helping consumers transition to a more sustainable lifestyle. Despite our scale, we continue to see material opportunities for growth across our business. In the coming slides, I'm going to focus on 4 themes that demonstrate our strategic progress and our continued ambitions. These teams span mortgages, affordability in loans and cards, embedded finance and our transport business. As part of these updates, I'll demonstrate a clear sense of how we are building on our strong foundations to evolve and grow with our customers. So on Slide 20, let me start by talking about our mortgage strategy. Our mortgage business includes over GBP 300 billion of lending that spans the U.K. residential and buy-to-let market. We have 5 priority growth areas across mortgages, which we believe will differentiate our offering. Firstly, we have a broad proposition that provides consistent support for a range of customers, including first-time buyers, home movers and customers looking to remortgage. We see an opportunity in targeting high-value segments, including enhancing our proposition for customers with larger mortgage sizes. We're also targeting deeper relationships in our direct channels, allowing us to integrate complementary products such as protection into our customer journey. Additionally, retaining more of our customers has always been a focus area. To do so, we are now creating an even more compelling offering through our Homes ecosystem. I will expand on both of these topics in a few minutes. We currently serve more than 10,000 brokers across the U.K. market. I'm incredibly proud of the feedback we get from brokers about the quality of our service. Our market-leading Net Promoter Score demonstrates the work we do in ensuring that we service the broker's needs, both now and in the future. However, we are clear that there is more work to be done in enhancing and supporting broker journeys in the context of a more technologically enabled world. Finally, we are making good progress in enhancing our sustainability offering and helping our customers make their homes more energy efficient. As you know, the U.K. has Europe's oldest housing stock. Over 15% of the U.K.'s carbon emissions and 35% of the U.K.'s total energy use comes from our housing choices. We are committed to providing comprehensive support for customers with a range of propositions that include helping them understand their energy efficiency options, assisting them with financing as needed, and over time, helping connect them with specialists who can retrofit their homes. Now of course, that is the long-term strategy but I'm incredibly mindful of the challenges and uncertainty in the current market. So while the focus of today is on our broader strategic actions, let me take a few moments to discuss how we are responding in the current environment? The steep increase in interest rates has resulted in higher monthly payments for customers applying for new mortgages and for existing customers on variable rates. In that context, it is very important to us that we provide proactive support to all our customers as they absorb the increased cost of their mortgage into their family finances. Despite this challenging backdrop, in line with what William said at the half year, we are seeing broadly stable arrears across our book. This is helped by our prudent approach to lending and a portfolio that is well positioned for higher rates with strong income profiles and a low average LTV. Now of course, higher rates are creating a more price-sensitive market. In this environment, it is imperative that we both focus on the retention of existing customers, while at the same time, managing value and volume. Whilst that may mean margins remain challenging in the near term. The delta between the margin on maturing mortgages compared to new business should reduce by the end of 2024, largely dissipating by the end of 2025. Despite the near-term challenges, mortgages remain an attractive product for the group, both from a returns and an economic value perspective as well as helping us to play a pivotal role in society that completely aligns with our purpose. On Slide 21, let me now bring to life the progress we are making in deepening relationships with customers through our direct channels. We are seeing more of our customers wanting to explore mortgages digitally. As a result, we have transformed our onboarding process, enabling customers to more easily navigate the mortgage journey through a seamless digital experience while supporting them to speak to one of our mortgage advisers at any point in the process. The onboarding experience also allows us to integrate complementary group products such as mortgage linked protection into the customer journey. Although the transformation of the mortgage journey is in its early stages, we can see clear benefits. We are seeing a marked increase in the number of our mortgage customers who are taking up our protection proposition as well as a material increase in our share of the relationship mortgage market. Our plans are to continually improve this experience and to make it easier for our customers to get mortgages from the group. Now let me turn to how we are building a deeper and richer home ecosystem on Slide 22? Jayne touched on the home ecosystem, and this is one of the example of how we are broadening our proposition. At its core, the ecosystem is a tool that allows customers to see the value of their home and manage their mortgage with a seamless, frictionless experience on the app. In addition, we are creating a one-stop shop for all the ways customers can improve their homeownership experience, including linking with relevant third-party partnerships. Since we've launched this proposition, we've already seen great examples of customer engagement, with more than 200,000 customers using it each month. We can also see incremental value and improved retention of these customers. In a more competitive environment, giving customers reasons to stay with us becomes even more important. And we've already retained close to GBP 1 billion of mortgage balances that would have otherwise been lost. We would expect this contribution to grow over time as we further develop the offering and extend it to more customers. We see an opportunity to grow the active user base by around 10% through 2024. On Slide 23, I will now turn to the second of our growth priorities and our efforts to transform affordability. More than ever, customers want more confidence that they are eligible for a product before they start an application. Often, they achieve this by going to external providers that give them their credit score and an indication of what products they might qualify for. To address this clear customer need, we have built a market-leading offering called Your Credit Score. This proposition was designed and built in conjunction with TransUnion, and is a great example of how we can work with an external provider to create transformational experiences within our own app. The tool, which you can register for through our app, not only shows customers their credit score, but at the same time, helps them improve their score and offer suggestions on products that might suit their needs. We have continued to deepen the proposition over time. And the take-up so far has been phenomenal, with 8 million registered customers since our launch. In addition, we've seen around 2.5 million customers share their income and expenditure details to allow for a more personalized outcome. Even more impressively, 60% of registered customers are using Your Credit Score every 3 months. This reengagement level is significantly higher than the industry average. This has already increased our conversion rate with a 10-percentage point increase in the number of customers that complete a product application having started it. But more importantly, it has also created better customer outcomes and supported over 400,000 customers in improving their credit worthiness. Pre-approval is a natural progression of Your Credit Score. The capability allows us to create certainty for customers so that they can have a frictionless experience when they apply for a product or attempt to buy something with credit. Our ambition with this functionality goes beyond Your Credit Score. And we are integrating this capability not just within our own app, but also into third-party propositions. On Slide 24, I'll now talk about how these changes are creating value in our loans and cards businesses. The eligibility tools I just outlined are creating an enhanced pipeline for our lending products. For example, around 10% of customer demand for loans is generated through Your Credit Score. Whilst over 80% of customers to third-party channels are now pre-approved. And we have an ambition to grow this for the next year. This improved demand, combined with the work we have done on our credit cards and loans processes is helping us take a greater share. For example, we have extended our loans proposition to third-party channels and opened them to customers who don't have an existing relationship with the group. This has grown our non-franchise loans from a point of no participation to 19% share of flow without changing our risk appetite. In addition, we have built a range of affluent propositions and more personalized products within our credit card business. The growth across both loans and cards is also in line with our strategy to grow these products in a low-risk way, focusing on pockets where there is unmet customer demand. Let me now turn to the third of our growth areas, Embedded Finance, on Slide 25. We see Embedded Finance has a significant opportunity to develop and shape what could be the future of consumer credit. Now Embedded Finance means many different things to different people. But for us, it is helping customers with their payment or lending proposition in a nonfinancial journey of their preference. This market is growing rapidly and has the potential to be a major revenue pool. Having considered this carefully we have decided that now is the right time for us to enter the market. We can see value for our customers as well as a path to creating a sensible and low-risk product that doesn't compromise on our risk appetite. There are a range of potential embedded finance solutions across the market. Where we are at our most advanced is in e-commerce, which we see as one of the largest potential revenue pools. I will expand on this offering on Slide 26. We have recently agreed on a partnership with New Day to launch an e-commerce installment lending product in 2024. This partnership is built on innovative technology that allows customers to sign up once and then access point-of-sale financing across an extensive merchant network. What is also unique about this partnership is the dual lending solution, which will mean that a very large proportion of a merchant's customer base will be eligible to pay in installments through this solution. Whilst I should be clear that LBG will only be lending to prime customers, our partner, New Day, will lend to those beyond our appetite. We see this partnership as a considered and sensible way to enter the installment lending market. It leverages our scale and gives us important capability in a fast-growing market, whilst crucially maintaining our prudent risk appetite. Finally, I'm going to talk about the work we are doing in our motor franchise on Slide 27. We are the U.K.'s largest motor financing and leasing provider with vast scale. Our offering gives us very broad coverage and a large share of the entire motor finance landscape. We finance or lease more than 1 million vehicles, and we fit around 200,000 tires each year. We have Black Horse that's largely focused on vehicle financing for new and used cars. Lex leases cars to businesses and consumers. And then there is the newest addition to our franchise, Tusker, which provides salary sacrifice schemes for ultra low emission vehicles. Salary sacrifice is a fast-growing segment that provides a tax-efficient route for employees who want to drive a new electric vehicle. We're seeing a significant increase in the demand for low emission vehicles. And we have a clear target for GBP 8 billion of financing and leasing of these vehicles by 2024. Despite the recent volatility in the EV secondhand market, financing and leasing electric vehicles remains a commercially attractive opportunity. As you would expect from our business, the residual values built into our contracts are prudent, creating a material buffer to current forecasts. Consequently, we see the Motor Finance business, including ultralow emission vehicles as a highly attractive market that aligns with our sustainability ambitions. I touched upon Tusker briefly. Let me talk about it in a bit more detail on Slide 28 to finish up. Tusker, like the rest of the motor franchise has significant scale with a fleet size of over 30,000 vehicles. It has 1,600 business customers that employ 1.6 million people, and it is the largest player in a fast-growing market. These customers include large employers in the U.K. such as Siemens and Scottish Power and a range of smaller employers, including local councils. Importantly, in the context of net zero ambitions I just outlined, Tusker also has an order book that is 90% ultra-low emission vehicles. We also believe that the business has a clear strategic advantage. It is the preferred partner for 9 of the 10 biggest employee benefit providers and offers best-in-class technology as well as a comprehensive all-inclusive proposition. Tusker meets customer needs for simplicity and is, I believe, a standout business in the market. From day one, Tusker has benefited from our scale, in terms of the cost of vehicles and cost of funding. And of course, we can now utilize Tusker to support our commercial clients in their transition to net zero. As such, we view Tusker as a highly complementary acquisition, that will be immediately accretive to shareholder value and has clear growth potential. I've now talked you through our strategic progress and continued aspirations in the consumer lending business. Hopefully, you agree that we are building on strong foundations whilst making significant strides in deepening customer relationships and expanding our proposition. These opportunities will enlarge our addressable revenue pool with scope to unlock diversified income streams that support our group ambitions. Thank you for listening. I'll now hand you back to Charlie to conclude our presentation.

Thank you, Jayne and Jas, for your updates. As you can see, we have a lot going on, and we've made a strong start increasing our confidence in future delivery. So to conclude, our ambitions in consumer are built on strong foundations as the leading franchise in the U.K. We're well positioned to deliver long-term sustainable growth that will generate significant value for the group, enabled by strategic investment. This is being delivered by meeting more of our needs of our customers and developing new propositions that our customers value. At the same time, we're building strong customer engagement through unique and highly personalized experiences, leveraging our strengths as a digital leader. These strategic actions will enable us to realize our ambition of delivering a best-in-class and future-ready consumer franchise, while supporting our revenue, cost and capital generation targets for shareholders. Thanks for listening. I'll now hand over to Douglas, who will facilitate the Q&A.

Thank you, Charlie, and thank you to Jayne and Jas for your updates. For those that do not know me, I'm Douglas Radcliffe, Group Investor Relations Director for Lloyds Banking Group. We now have about 45 minutes allocated for questions. [Operator Instructions] Okay. So let's begin. Our first question today is from Andrew Coombs at Citi. Yes. There seems to be a slight problem with the audio there with regard to Andrew. We can see him, but we can't hear him. So let's move on to some other questions. And I'd remind anyone else out there, if you could please register your question as I've just indicated. So let's move on to a couple of questions that we've actually received direct. Firstly, a couple of questions actually that came in to Jayne. Jayne, 2 questions, if I may. Firstly, do you believe your physical presence still provides a competitive advantage in the market? And secondly, do you think your mobile-first offering allows you to compete effectively with Neo banks that are seen as the leader in this space?

Thank you for the question. We do believe that having a physical presence alongside a best-in-class mobile app provides us with competitive advantage. We see relationship building. We see a lot of our most complex needs still coming through our physical channels. And over time, they're becoming more advisory in nature as the simple servicing moves out through digital. In terms of competing with Neo banks, if you look at the breadth of our mobile offering, I'd say we have a much fuller offering of financial products and services in many of the Neo banks. We have 21 million digitally active customers and a really strong NPS and feedback from customers. If you look at things like our cost to serve, of our digital customers, we compare very well with the Neo banks. So yes, I think we are competing very effectively.

Thank you, Jayne. Let's try and go to the video link again. We have Ali Woods from Morgan Stanley on the line. Okay. It looks like we have, again, a slight problem with the audio, that's not coming through. In the meantime, we'll try and see whether that can come through from there. Jas, I have another question here that we should ask. One of the things that you referenced within your presentation was the Embedded Finance and installment pay market. Why is now the right time to enter that market?

Thanks, Douglas. So we can clearly see that it's a part of really good consumer demand that's unmet today. We can see more and more consumer behavior is to be part of a broader digital buying journey, and they want payment or lending to be more seamlessly embedded in it. You can also see there's about 2 million of LBG's customers who use some format of Embedded Finance in their day-to-day lives. Now of course, not all of those 2 million people or customers would fall within our credit appetite. But between 30% to 40% of those customers have unmet needs today that we haven't met. But also, as I said in my presentation, we think, done in the right way, Embedded Finance has the potential to be the future of consumer finance. Hence, on balance, you've taken the choice to get to participate in this market now and build it up in a gradual fashion -- build our participation up in a gradual fashion.

Thank you very much, indeed. Just before going to the line once more, let's -- there's another question here, which has come to yourself actually, Charlie. It is actually relating to the acquisition of Tusker that Jas talked about earlier, but more interestingly relating to M&A more widely. Your acquisition of Tusker seems to have complemented your strategy, do you have any further plans for M&A in areas where you may struggle to achieve scale organically?

Thanks for the question. No, as we always said at the start of the strategy that we set out in February 2022, Plan A is an organic growth strategy for this period of time through 2024 and 2026. But we would look opportunistically at kind of capability or infill acquisitions where they made sense. We did the Embark acquisition in 2022 and the Tusker acquisition. And they are 2 great examples. And it was great to hear Jas talking through Tusker because we feel really good about the synergies we've delivered. And actually, we'll talk about this in one of our next or upcoming seminars, but Embark, we've done a number of things with it. But recently, we launched something called our Readymade Investments journey where we started to bring an investments journey to a lot of Jayne's customers which is another really good example of synergies. So yes, we'll continue to look opportunistically at those kinds of acquisitions. But the core of this strategy for this phase is getting that organic growth, building our operating leverage around capital and costs and delivering the outcomes we laid out for shareholders.

Excellent. Thank you, Charlie. Whilst we still look at the issues with regard to the video and the audio, we've actually now got the question that Andrew was going to ask directly. So Andrew is saying which actually is going to come through to yourself actually, Jayne. It was said, can you provide further detail on your on sale versus off-sell deposit book? What are the respective proportions? How does pricing compare?

Great. Super. I'm glad we were able to get Andrew's question. Thank you. Some of the challenges that the industry had been working through, particularly in respect of consumer duty has been that kind of fair value across on sale and off-sale deposit books. We've got a very clean set of deposit products where there isn't the differential pricing between our on sale and offset -- off-sale deposit book. This is a conscious choice by us to make sure that we're offering the best value for customers. I might just expand on the answer given what we've seen in the deposit market. overall, we've been pretty pleased with our deposit performance. William and Charlie would have commented at the first half that whilst balances were broadly flat, we did see PCA slightly down but savings up. And at the half year, we spoke about recapturing 2/3 of the PCA outflows into our own savings propositions. We were really quick to market with some innovative products. So we know that whilst price is important, it's not the only thing that our customers tell us about they're very interested in making sure their money is with trusted brands and some have access -- the access to the funds and liquidity is of interest to some of them. So we have a full range of products. We have fixed term products. We have instant access. And then we've got a hybrid limited withdrawal product, which has been really popular. And we've grown GBP 10 billion of balances there, and we've doubled the balances in our fixed term book this year. So whilst it's been a very competitive market, I think we're faring better than most of our peers. We had a 2 percentage point lower deposit outflow in H1 versus the high street banks. Hopefully, that's helpful.

Thank you, Jayne. Let's see if we can actually get the audio questions working now. And let's see if we can take the question from Aman Rakkar from Barclays. Okay. I'm not sure that, that is coming through yet. So in the meantime, let's move on to another question. And this will be one that relates to both Jayne and Jas. It's a question that's actually -- how important is insurance within the cross-sell propositions that you're talking to?

Should I get started?

Yes, Jas, why don't you kick off.

It's definitely an integral component of our overall proposition that we go to customers with. As you might have heard when I was talking about my update and what we are doing with mortgages. We're seeing a clear difference in being able to talk to more of our customers about more distinct protection and home insurance. Even within our home ecosystem, we often talk to customers -- I talked about the entire homeownership experience. Part of that also comes from providing them home insurance. So we are definitely seeing an important part to the lending proposition to have relevant and targeted insurance products being offered alongside the lending product, et cetera. Jayne, anything to add on that?

Yes. Look, I think a lot of the work that our teams have been doing, putting the mortgage journeys into our digital channels and on our mobile app. We know that we've seen around a 4% increase in insurance products because we've combined the journeys because we've made it really easy for customers to discover them, both existing customers and new customers can use the Home Hub to look across our full range of mortgage and home products, including our protection products.

Another couple of questions that have now been fed direct to me seems to be the best approach at the moment. Both Jayne and Jas, both of your presentations have highlighted some very positive developments in the business. What do you see as the key execution risks in your respective areas? Jas, perhaps you could start again.

Thanks, Douglas. So I am pleased that you recognize the positive developments and the progress we've made over the last few months in executing on our strategy. I mean, in some sense, there are the things that we can control are how do we make sure we're delivering good customer outcomes? How do we make sure the propositions we are launching are done in a fashion which is true to what the intent is? And I feel really, really good about that. I feel really good that we can manage good customer outcomes. You can manage good propositions. I also feel good about the fact that we've started to build relevant and targeted third-party partnerships, that help us deepen and richer our overall propagation. And that's again a great place to be in right now. The things that obviously remain outside our control is what's happening from a macroeconomic perspective? What's happening in society overall? And -- but again, if you think about the changes that have happened in the last few months from a funding rate perspective, and the impact that's done to -- that's happened to both not just mortgage customers but all customers who've got relationships with the bank. I feel really good of how nimbly we've reacted and been there from a proactive perspective to talk to our customers and offer them help and support, but we can't completely control the changes outside us. Jayne?

And I think I'd add, pace is super important. Customer expectations are rising all the time. And our competitive landscape is also very different. So we're getting much better, I would say, at driving the pace of change. The key execution risks for us come from not prioritizing right or not thinking about the road map and sequencing the changes across the entire bank. Part of our holistic customer value propositions is bringing all of the different products and services across Lloyds Banking Group to our customers and having an incremental kind of minimum viable product approach, just as the tech companies do is an important part of the way that we protect our ability to execute and get some great outcomes into the market for customers.

Thank you, Jayne. We've had another couple of other questions come through. This one is from KBW. The question is, how does the inflationary environment change the cost benefit dynamics of the investment program set out at the beginning of the strategic update? For example, have you had to spend more to achieve the same efficiencies or have certain product sets, EG deposits become more profitable and, therefore, more attractive to invest in. So perhaps it's something perhaps Jayne, you could address first and then either Charlie or Jas may want to add some extra context to that as well.

Yes, great question. Thank you very much. Our ability to manage through the cycle, given both sides of the balance sheet is obviously one of our advantages. In terms of our investment program and how inflation has changed that we've had to look at ways to be more efficient in terms of delivering the change, but managing our cost is something that we're very good at. We balance the benefits that we have through our investments. We have a number of them. Our cost benefits, a number of revenue benefits. And we've had to optimize the mix in the current environment. But on balance, I think we're managing that well.

I don't have anything to add. I don't.

Maybe I'll just add a couple of thoughts. Just a more macro view applying that Jayne's just laid out, which I obviously agree with just in terms of dealing with costs, as you know, we raised, I mentioned it in my intro, we raised our gross cost savings ambition from GBP 1 billion to GBP 1.2 billion, and that was because of this higher inflationary environment, and that enabled us to stay true and committed to our cost targets that we've laid out for 2024. And we thought that was important. But also, as Jayne said, to continue to drive that level of change based on greater efficiency. So I think that's really important. The second thing is obviously what's driving the inflation MIR rate cycle. I know I've said this a few times, but we did at the end of 2022. And again, this year, just look back at the strategy and say, does this still work for 2024 and 2026. And our conclusion was actually the actions we're taking are even more important in this higher rates and higher inflationary cycle. For the reasons Jayne said, for us to be differentiated from other high street banks and other Neo banks in the U.K. really being more customer-centered, rebuilding on our digital capabilities, getting the other operating income growth. These are the things that will be differentiating. So we really did believe higher rates and inflationary environment -- we looked at all elements of the strategy, and we concluded it was the right thing to do was to double down.

Thank you, Charlie. We're now going to try the video questions again.

Great.

Let's see if it works this time. Ali, I think you are still there. So Ali from Morgan Stanley. Okay. Again, the audio is not coming through from Ali. So I have a couple of other questions that have been registered. Redburn, so far has submitted a question. Two questions. How does the pricing work in the installment lending partnership with New Day? Given they are providing the balance sheet you may want to clarify on that particular element there. But is it a price per transaction? And what kind of share of this do you take? And secondly, on embedded finance, how do you sell this to merchants? And how do you price? Is it on a subscription basis? Do you provide the merchant balance sheet for this as well? I think, Jas, both of those are questions for you, which I think is probably a bit of clarity on how the relationship works.

So there's a couple of bits in your question, how does the pricing work from a consumer perspective? So I should be very clear, the way we will design the journey, the way we designed the proposition is customers who meet within our credit appetite would sit with -- on LBG's balance sheet. They would be offered pricing that's in line with how we think about pricing today for similar type revolving products. Customers who sit outside of LBG's credit appetite, who would fit into New Day's risk appetite who sit on their balance sheet. And for those customers, New Day would choose to price independently and how they think about pricing in line with their credit appetite and their risk profile. So they are 2 different things. Our pricing would work for our customers. I think the other part of your question was how would it work with merchants? So it's very early days, right? But again, we've started to have some really good discussions with merchants about engaging with this proposition. Generally, what to think in this market, pricing works from a merchant perspective works in a few different ways. The merchant gets a fair bit of value in being able to complete on a transaction that they might be worried that might not go through. So let me give you an example of someone who might be a hypothetical merchant, and this is truly hypothetical, who might be looking to sell refrigerators on the website. What their benefit to them might be the fact that they might complete on a transaction that might not have happened. So there's value to the merchant in that particular case. And what we might find on a case-by-case basis is actually there is this return to us from the merchant, from us being offered -- being able to offer lending propositions. In other cases, we might want to just partner with the merchant and have -- because the benefit to us comes from having the lending value, we might want to partner the merchant in a different fashion. It will evolve as we go along, but there is a clear customer need and a customer proposition and there's a clear merchant need and a merchant proposition. But our lending will be within -- on our balance sheet will be within our appetite.