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

Thanks, everyone, for making it to the second session. I'm delighted to introduce what most of you already know him, Charlie Nunn, CEO of Lloyds Banking Group. Before we start, shall we do the usual polling questions to get warmed up. We're going to leave motor finance out as an option. So what do you see is most important to drive Lloyds' share price performance -- outperformance going forward? Number one, structural hedge and balance sheet structure delivering a resilient NIM medium-term; two, strategic initiatives, delivering additional revenue growth; #3, cost discipline despite the inflationary environment; #4, capital generation to reach 200 basis points; #5, a confirmation CET1 can be paid down to 13%. [Voting]

So resilient NIM medium-term wins by quite a bit. I'm sure we will touch on it. Thanks again, Charlie, for coming. I think it's your third year with us, I think so. Why don't we start? If I look back at 2023, it was a very difficult year. I remember vividly how difficult in particular Q3 was for your peers. However, you delivered on your targets and kept the commitments for both 2024 and '26. What do you think has allowed Lloyds to deliver despite the sort of very difficult year with intense competition in both mortgages and deposits.

So thanks, Alvaro. Thanks for having me again. And by the way, what a great set of questions. And I would have liked to have seen more on the strategic initiatives because that extra GBP 1.5 billion of revenue growth that we see coming through in '26 and then we delivered GBP 0.5 billion through '23, we think is really important, but we'll get to the second. So firstly, '23, it was a noisy year. And I'm sorry for all of the people in the room covering financials because it was a difficult year in that context with the shift in the yield curve, expectations changing and then some one-offs that came through all of the banks. Why do we navigate it? And you need to be humble around this, I think, as a management team. I think we did navigate it well. And what we announced 3 weeks ago now, hopefully, you saw we met our guidance for '23 exactly as we said we would on the critical NIM. We guided towards greater than 310 basis points of NIM for the year, and we delivered 311 basis points last year. And we delivered the capital generation and the distributions and then the growth in the strategy that you laid out. Look, I think there's a few reasons which are very specific to us and our strategy. The first is the inherent nature of our customer base and our mix of businesses. We've always said with a very broad-based and large-scale business focused on U.K. retail and commercial with insurance. That gives you a more resilient customer base if you manage it well. One of the key things we saw last year is that our deposits performed more strongly than the other High Street banks. The non-High Street banks were gaining share last week -- last year. We can talk about but that was partly a deliberate strategy. So inherently, who we are, who we serve and kind of the scale that we have in the U.K. makes a difference, obviously, really importantly. Critically, as the yield curve goes up and down, one of the things I've always said to you before is what you want from NIM is a balance sheet that is well leveraged. We've got 96% loan-to-deposit ratio. Has a good mix between -- on the asset side, secured and unsecured and retail and commercial assets and that you manage proactively because there's a massive natural hedge in -- through that balance sheet and the dynamics of that very stable customer base and that very well leveraged and derisked balance sheet, I think, helped us last year. So that's important. The execution around the incremental revenue from our strategic initiatives, we delivered 10% growth in other operating income last year, which was half of the growth in revenue that we've committed over the strategic plan that helped in terms of the returns and the capital distributions. And then you all know Lloyds' for good operating leverage, focus on cost discipline, offsetting inflation. And then we also saw -- you will have seen we took a number of capital actions last year to really recycle the capital out of lower returning parts of the business or doing securitizations of assets that would stress particularly badly. And using that to offset the regulatory headwinds we saw. And we knew that, that was an issue that affected some of our competitors more than us in that context. So I think all of those things made a difference. When you look forward, that's the key thesis we've laid out. The '26 story that we have committed to, that we have recommitted in the last 3 weeks that says we can continue to execute the strategy and deliver a greater than 15% RoTE in 2026 and greater than 200 basis points of capital is based on that story. It's the growth in the strategic initiatives, GBP 1.5 billion of additional revenue by '26, the stability of our customer base and being able to continue to get the upside on the structural hedge and then maintaining that operational leverage on costs and capital. By the way, thanks for the easy starting question. I know they'll get harder.

We'll also give the audience an opportunity to press you on themes. I'm very interested on to start with digging a bit deeper on the deposit dynamics. The sector data points to a more benign picture of late. It looks like migration to term deposits has definitely slowed down, in particular, household maybe even largely done. Has the visibility there as far as you can tell, really improved? Because I guess this still TFSME rollover we've got ISA season soon. Is there anything else that we should bear in mind? And what are you assuming in your over 290 basis points NIM guidance?

Yes. It's obviously a hugely important for all of the banking sector in the U.K. with a large balance sheet. As I said, what happened last year was we did see significant outflows from current accounts in the U.K. But for Lloyds Banking Group, we saw less decline than the other High Street banks. And then critically, from your perspective, your point around the slowdown, in Q4, we saw about GBP 1.9 billion of outflows versus over GBP 3 billion in the prior quarter. So good evidence that things are slowing down. And by the way, that's very in line with what we've talked about here before, which is what we would expect consumer behavior to be as you start to see the expectations of rates reduce, #1, which means that time deposits are less attractive because the time deposit pricing starts to fall. So if you lock your money up for 1, 2 or more years, you're getting less. And then also, we're now 18 months, 24 months into the rate cycle. So customers that do have money that they're looking to invest have already moved quite a lot of it. So we're not saying it's slowed down. I'll come back to -- it's ended. I'll come back to that in a second. But it's exactly what you'd expect at this stage in the rate cycle and given the expectations around future rate rises. And the good news is we took a whole bunch of actions around pricing products that we launch and then how we manage our customer base to show more stability last year. As we look forward -- and by the way, on the savings business, you'll have noticed that we actually grew our total deposit base in Q4. So people are actually choosing to open more accounts and save more with Lloyds Banking Group than they are taking money away, and that's really important because while we're still making margin on TDs, term deposits, and we make appropriate margin on our instant access savings where people value the liquidity. But when you look forward, you really want to be relevant to your customers and still be able to be a bank that people want to save with as well as hold their current accounts with. So that's good news through 2024 -- 2023. As we look at 2024, we have still assumed there'll continue to be movement, but at a slower level. Now we haven't given specific guidance on the individual types of savings and current accounts. But we have assumed that people will still take -- be moving money out of their current accounts into savings. Our expectation is that it will be more into instant access savings and it will be time deposits because as the yield curve drops, the returns or the gap between time deposits and instant access will reduce. But we do expect that churn to continue this year. And that's all built within our guidance of greater than 290 basis points of NIM along with the headwinds that come from mortgage margins that will still feed through our business this year and then really start to tail off as we go into '25 and '26, which then gives you a cleaner growth. And then the third dynamic around NIM is obviously our structural hedge, which, as you know, we saw about an GBP 800 million increase in our revenue from the structural hedge in 2023. And I think William has guided that to being about GBP 700 million or GBP 800 million again this year. And we are obviously predicting the same level of incremental revenue in '25 and '26 and that builds even further into '26. So us being able to continue to reinvest the structural hedge as it rolls off into this slightly higher rates environment is a critical part of us managing NIM this year.

You've touched on mortgages. That obviously was the other product that's proven tremendously competitive. I remember at the beginning of your plan, you were budgeting, I think, it was 75 basis point spread. Back then, we all thought, wow, that's very conservative and the spreads have gone down to 50% or below at some point last year. How do you manage the business when it becomes so, so tight? And at what point does it become uneconomical to underwrite some of that business?

Yes. So I think even more shockingly, I remember the 24th of February 2022, which is when we announced our strategy, it was the day Russia invaded Ukraine for those that remember that day remember it well. We announced, as part of our strategic plan that mortgage rates we thought would be 75 to 100 basis points. Let's keep me honest because we were -- we underestimated the tightness in mortgage margins. But we do -- at that stage, we were predicting the rate curve would only get to 2.5%. So not the 6.5% that the yield got to. But that's what we announced our strategy on. And then as you say, last year, what we wrote was a mortgage business about 50 basis points. Critically within that, we have seen -- we continue to see that new business is at a slightly higher margin. And in the remortgage business, our existing customers, either doing product transfer or remortgaging with us is a lower margin. And the reason the lower margin works, by the way, economically, which I'll come to in a second, on your second part of your question is you don't pay a mortgage broker fee, GBP 500 to GBP 700 more. So it's free of the third-party distribution costs, but you also know the customer and you know the risk. So the cost of capital is better in that context. Just before I go to what level of mortgage margin works, which I'm not going to give you the perfect answer on, Alvaro, although I have painful detail around this in terms of our models. I think the good news is we start 2024 is the mortgage market has been a bit healthier, both in terms of volumes. Volumes have been back above our long-term rate and margins. We're not obviously disclosing that fully, but they've been trading at above 60 basis points plus. So it's good to see that there's a bit more health in the market in terms of the volumes and the margins have stabilized. Now obviously, we've seen the swap curves go up again in the last few months. So we'll see how behavior -- competitive behavior evolves. But I think that's really good for the industry and actually exceeds our expectations in the first 2 months. Now as I always say to my team, one month doesn't create a quarter, let alone a year. And I'm in the business of delivering full year of results and then distribution. So one month doesn't really mean anything, but it's a good start to the year. Now what level of returns are we comfortable with? And I won't give you the perfect answer, but we all remember the history pre the credit crisis, which was a completely different context, but where the cost of wholesale funding was higher, people were writing margin mortgage business at 15 to 25 basis points. When we look at our own models and many of you know William. William is very, very robust about how we model our returns. We use a externally priced swap curve price. We use a market view of the transfer price on liabilities. That's really important because some competitors don't for good reasons, but they would marginally price their cost of funding at something below the risk-free rate. So we do a fully market tested cost of funding. We then add our cost of capital based on the type of mortgage and the risk of the mortgage and then you have the operational expenses of opening, onboarding and then paying a broker fee, which is, as I said, GBP 500 to GBP 1,000. Our models include all of that. 50 basis points is still very strong through-cycle returns for us, even at a point in the cycle last year, it was, so we're comfortable with that. The one thing, and I've been challenged by a few of our analysts is I think there's an assumption on the cost of equity, and you'll have to have your view around the cost of equity. If you use an implied cost of equity of 20%, which is kind of what our share price says, 50% will -- depending on your model will look tight. But if I start writing marginal business at an implied cost of equity of 20%, Lloyds Banking Group won't be generating 200 basis points of capital in 2026. So you have to have a cost of equity, which say through cycle cost of equity that makes sense.

And do you think this year is the year for mortgage recovery? You mentioned the first 2 months, but spreads coming off the lows, approvals going up, rates coming down. It is a good setup for mortgage recoveries this year.

Yes. So we have this heuristic, if you like, or a simple view that through time, we've seen about GBP 1.5 billion of mortgages being written per day in the U.K. market, not Lloyd's per day, as you know, we're the biggest provider in that context. Last year, it fell down as low as GBP 600 million a day. It was then trading at kind of GBP 800 million to GBP 1 billion a day. And then in the first month of this year, it's been above GBP 1.5 billion a day. So it's good to see the strength of the market, which people have been coming back into as rates come down -- or sorry, the swap curve comes down and mortgage pricing came down a bit. And as I said, it's good to see that the margin has stabilized in that more higher-volume market. Look at what we've announced in our economic guidance is slightly at odds with what we've seen. So let me just be blunt around that. We are still predictive this year based on the fundamental economy that house prices will fall 2%. And that would make you think that the mortgage market would be a little less certain this year. What we've actually just come off the back of it is now, I think it's 5 months. It was 4 months when I did the results 5 months of house price increases on average in the U.K. So we've seen customers really wanting to come back into the mortgage market, supply increase on people selling as the swap curves have come down. I think that's a really good sign for the economy. We just need to be sensitive to the fact that swap curves have come up another 60 or 80 basis points in the last month after the dip that happened in December on the back of Power's comments. So let's see how it goes, but it's a good start to the year. And from our perspective, that will provide upside because as you saw, we have guided for 2024 that our AIEAs will be greater than GBP 450 billion. That's a relatively stable picture of the top line. Underpinning that, we're seeing some portfolios run off and we've got some growth in new business. But if the mortgage market is healthier, it will be good for Lloyds Banking Group at the back end of this year and into 2025 and 2026.

Maybe we can talk about the 2026 targets, which you've maintained with the full year results. One of the things that called my attention from that reiteration is despite the rate curve is very different. You've kept your targets, of course. But 2 questions related to this. First of all, it comes back to the polling question. Do you think your NI is less cyclical than peers? If so, is it -- I mean you touched on some of this, but maybe you can dig a little deeper. Is it because of consumer lending? Because of your hedging strategy? What makes it a more or weather NIM, if I can use the term?

I think one of our competitors use that term. So I'm not going to use that term all with the balance sheet. Look, I think there's 2 parts to this as to why 2026, we have confidence in the top line. The first is the fundamental structure of our business and our balance sheet, as I said, we've got the most leveraged balance sheet in the U.K. when you look at the ring-fenced banks from a loan-to-deposit ratio and we have the best mix of assets between retail and commercial. But then within retail, as you know, we have about 25% share of the consumer finance business along with 19% share of mortgages. So our mix has been secured and unsecured. That does give you a different evolution around how customer pricing and returns go through cycle. And then we have on the deposit side, the liability side, of the biggest mass market retail customer base, which should be the stickiest retail deposits if you manage them well. So I do think just structurally where the rates are going up, and you're getting more margin on the liability side of the business based on the way we all transfer price it or when rates are coming down as we saw in 2018, Lloyds Banking Group's NIM was still about 300 basis points in Q4 2018 when rates were 0.1%. Fundamentally, you have the customer base and the balance sheet to manage a through-cycle NIM that should be in that -- around the range that we are targeting. Now obviously, the structural hedge is a massive part of that story. And as you remember, when I came in, in 2022, so in 2021, the structural hedge was returning 1% or just below 1%, and we add about GBP 250 billion worth of our deposits, invested in that structural hedge. What we announced as we exited 2023 is as we've reinvested that structural hedge in the last 2 years, it's now returning 1.5%. So one of the great opportunities for us and then for investors in Lloyd's is if we can continue to invest that through 2026, our medium-term view of rates is that rates will stabilize about 3%. But bluntly, anywhere between 2% and 4%, and there will be significant upside on the structural hedge, and that's building in a stability about the revenues for Lloyds Banking Group, which we haven't seen in 15 years because of a 0 rate environment. And what's even better, and hopefully, you and I'll be here in 2030 talking together. But if I'm not the one sitting here in 2030, whoever takes my role in '26, '27, '28 is going to have that stability for the following 3 to 5 years because the structural hedge has a weighted average life of 3.5 years at the moment. So how we leverage the stability of our customer base and then build the certainty around our structural hedge revenue, I think, is a really important part of our investment thesis. And we're coming off a low, right? It takes 10 years of 0 rates for the structural hedge to reprice rate right the way down. We're now on the pricing the way up, and that will give us momentum around our revenue. So I think it's definitely our customer base, definitely the way we can then manage our structural hedge at this point in the life cycle. And then although I know you put the GBP 1.5 billion of additional revenue growth as lower importance actually, it's very important in terms of us delivering what we've said we're going to deliver because it's marginal growth on the existing asset and cost base we have, #1. And #2, as you know, we've prioritized businesses, which will drive other operating income, which is very capital-light and very accretive. And therefore, it's great in terms of generating capital for shareholders. And to get some kind of organic growth or Alpha out of Lloyds Banking Group at this stage in the cycle, I think, is a really important part of both delivering the returns in '26 but giving a different investment thesis for a banking group that's actually been shrinking for decade.

Can we actually touch on that noninterest income revenue stream. Because you grew noninterest income 10% last year, is that the kind of growth we should look forward to? Because I would say the biggest difference between maybe the 2026 targets and the consensus, which is not quite there. Could -- is it this line that you think is misunderstood? What kind of growth should we...

I don't know if it's misunderstood, but we've been pretty clear on our guidance. As I said, we -- in '22, we said GBP 1.5 billion of additional revenue growth from strategic initiatives, of which 50% by 2026 would be other operating income. Now obviously, there's been a really significant shift in the interest rate cycle through that period. We're still completely committed to that. What we announced at the end of '23 is we've already delivered GBP 500 million of that revenue growth and it's well balanced. We didn't give you the split between OOI and NIM, but it's well balanced in the businesses and the growth is across all of our businesses. So we have examples of strong other operating income growth in our Corporate & Institutional business, where FX and rates are growing successfully, our share of U.K. DCM has really progressed very, very well. And that business is actually slightly ahead of plan. We have growth in our SME business, what we call business in Commercial Banking, through our merchant services business and some of our trading and transactional services, working capital services for SMEs. We have strong growth in our insurance, pensions and investments business through things like workplace pensions, which is a very fee-based business and then some of our GI businesses, which are progressing well. And then on the retail side, we've seen good growth in payments. Our share of one of the strategic targets I set for the group, but I want to increase my share of payments, which has transactional fees linked to it, just again, the dynamic. We have a business with 25% share of credit cards but only 16% share of spend. So great opportunity, right? Everyone said I couldn't grow this business, but a great opportunity to grow the business on the retail side. And our transport business, which is generating fees is also growing well, and we bought Tusker last year, which was a smaller salary [ sacrifice ] car financing business. And we have significantly exceeded the revenue synergies by bringing Tusker to our whole corporate base in the last 12 months. So there's other operating income growth across the businesses. That gives me confidence that if any one business doesn't work out because they never do when you've got a portfolio this big, we'll still be able to deliver the upside for the business and for investors. As I say, what's important about it is the obvious point. It diversifies our revenue streams, makes us a little bit less NII sensitive, although NIM is obviously progressing well in this period as well. But critically, that revenue growth is very capital-light. So it enables us to bring a stronger capital generation for shareholders.

Yes. Very clear. I've got to ask you about motor finance. You've taken GBP 450 million provisions. Some analysts were as high as GBP 1.5 billion, GBP 2 billion estimating potential liabilities. I fully realize that it's difficult to know what the final outcome is going to be. But maybe you can help us understand the moving parts. What have you considered in that GBP 450 million? And what should we be looking out for in terms of next steps?

Yes. So first of all, I know this was -- I said it was a noisy 2023. I think there was lots of noise. This is one of the things that made your Q4 probably less easy. So apologies for that from an investor perspective, but we really thought that provisioning this GBP 450 million -- well, under the accounting standards, we thought we had to do it, and we thought it was the right thing to do in the context of what we saw. There is really significant uncertainty around this number, and I'll just break it down for you in a second, not least because we only have one case that's been decided on behalf of Lloyds Banking Group or Black Horse by our financial ombudsman called [ Mrs. Y ] for those that have gone deep on this case. And so that one case is very hard to use as a precedent, if you like, across the book. And actually, when we look at the business more broadly, we don't believe we've reached regulation or the law during the period that's been discussed. And the lower court cases that have been running through our books in the last year or 18 months. We've actually won 75% of those lower court cases. So we really do need clarity from our regulator as to what the decision points are that are going to impact this business because our starting point is we don't yet understand what customer harm, if any is, as a result of this issue. So why in that context, did I provision? And how do we provision? We provisioned for the simple reason that when you move from a provision being possible to probable from an accounting standard perspective, we're obliged to provision. I think it's good, by the way, for you to have that transparency. And there's 2 parts to the provision we've put out place, put in place. One is our operational expenses of supporting the activity of the regulator and responding to customer complaints. That alone should require an institution to provision because we're already incurring those costs. There's no uncertainty around that. There are some costs. And so part of the provision is that. We haven't given the split between the 2, but I'm sure this may be one of the areas people will question either here or later in the one-on-ones I have. And then the second part is our estimate of a reasonable remediation amount if the FCA or the higher courts conclude there is a remediation to be done. That's based on a number of bumps variables. And what we did so that you have confidence as this goes forward is we looked at each of the variables, a bit like our multiple economic scenarios in our ECLs. We laid out different scenarios and then we probability weighted them back. So we've got worst case scenarios, and we've got best case scenarios and then we've looked at the probability weighting around those. There's 2 or 3 big variables in this that will make a difference. The first is, is there a reasonable rate that customers should be remediated to. The financial ombudsman didn't really try and tackle that. They just went with a 0% commission rate because there is no precedent for them to set an alternative, we think. But that's a very material shift on how much this will ultimately cost the business because a lot of the contracts that were done through this time period would have done below the communicated rate, not above it. And so if there were a reasonable rate, the number of customers impacted would fall dramatically. And then the amount of any remediation per customer would also change. So that's one really big variable. The time horizon is variable. So the FDA is looking from 2007 to 2021. The regulation only took oversight in 2014. Our commission models only had downwards adjustment from 2017. So a downward commission model hasn't been tested yet. So there's lots of time horizon variability. And then I'll give you one third bigger factor is if the FCA does conclude, there is a subset of commission models where there should be some remediation deliberately a lot of conditional language there. So if that were to be the case, then it's a proactive or reactive campaign and we've done lots of these as an industry over the last 15 years. If it's reactive, about 30% of customers tend to have a repayment. If it's proactive, you get to about 80%. So you can see there's real variables, significant uncertainty around the variables. We have all of the data on our side, and we've modeled it all. So if anything changes, we get clarity. We'll just explain to you what's happening. But this is a very sensible provision, and it could be less, it could be more based on those variables. The other thing I hope you've got some confidence from is by recommitting to our 2024 and 2026 targets and actually reducing our CET1 target, which I'm sure we'll come to in a second for 2026. We hope that would give you confidence not just as a management team, but you know our board and our regulators will have looked at our capital generation, the trajectory we're on and what something like Motor Finance could create is uncertainty. And that should give you confidence that both our Boards and our regulators can see that reducing our CET1 target of the capital we need to hold is a bit of a confidence boost in this context.

So everybody make sure is we do have the CEO of the FCA on Thursday presenting in case anyone wants to dig deeper into this theme. Maybe a last one, which you've already alluded to, with the GBP 2 billion share buyback that announced the full year despite the motor finance provisions, the reduction of the capital target of 13%, what was behind that reduction? And why now? The timing is obviously convenient to give reassurance. But why now and what's behind that reduction?

Yes. So we review the capital that we need to hold with our board regularly. We do it multiple times a year because we're highly aware that for our investors, if we are comfortable holding less capital, that means we can distribute more. And that's one of the obviously things we are fully committed to and have been committed to in the last couple of years. Now there's 3 things that we look at. One is the business risk of the business. The second is the regulatory uncertainty. And then the third is kind of the economic uncertainty or environment we're looking at. And when we looked at this in Q4, we felt at least 2 of those had come down significantly, and I'll talk about it individually or in a second. And then we still have the right principles around how we manage economic uncertainty. And the critical thing there is we still have a 1% buffer built in within our 13% target. So in terms of business risk, as you know, many of you will know, we've done a lot to derisk the business in the last 2 or 3 years. Some examples, we had a pension deficit of over GBP 7.3 billion in 2019. As you know, we've now paid that down and/or exited that completely. That means there's less draw on capital going forward from the pension deficit. That's a massive change for the group, as you know, and it's a really important one that William and I were very committed to getting clean so that you had more confidence in capital distributions when we generate capital. We had a legacy portfolio business of mortgages pre-2007, which has got, as you know, significant stress an stressed assets. You'll have seen we've been shrinking that deliberately at pace. And with half the size of that book, that's partly why in the regulatory stress test, the ACS, we materially improved our performance in last year, which I'll come to in a second. You would have seen our commercial real estate book. We've taken actions both to reduce the size of that exposure and use SRTs to derisk it. So we've materially derisked that book. And then would have also seen the quality of our unsecured lending has performed very, very well through a more stressed economic environment. I know we haven't had unemployment, but we performed very well, and we've maintained discipline. So significant derisking of the business. And I think the ACS results that the regulator announced last year, we went from the lowest performing High Street bank to the highest performing, I believe, stress. It's indicative of those changes. So that's the first factor. The second one is regulatory uncertainty. And I spent a long time to work out when I was going to recommit to U.K. financial services. One of my core beliefs is we need more certainty around the regulatory environment to have confidence so we can build shareholder returns. Some of the capital and uncertainties have been Basel, Basel 3.1, the implications of IFRS 9 and then CRD4. And as you know, that some of that uncertainty has been around since 2015, 2016. What we can see is we now have clarity on those issues. So CRD4, as you know, we, as part of last year's performance, increased our RWAs by GBP 5 billion, and we are guiding that we think there is another GBP 5 billion needed by 2026. That is in our plans. So you don't need to adjust for that. That could be more or less, but that's a lot more clarity on CRD4 than we've seen. Basel 3.1, we haven't yet had a final announcement, but we're pretty confident that the impact on us will be net 0 impact. There's parts of our business that will benefit some parts will have a slight drag. So Basel 3.1 is going away. And as you know, we're now consolidating IFRS 9 in our capital and our stress position. So the regulatory uncertainty around capital is materially different. And that clarity has come in the last 3 to 6 months. And as I said, in terms of economic uncertainty, the 13% CET1 still has a 1% buffer for economic uncertainty. And so that's really important. One last thing on this is particularly important for our debt holders. If I just say it bluntly, I've got more regulation -- regulatory capital today than I had before I joined and I've derisked the business. So the RWA density has gone up. So even with a CET1 of 13%, I'm holding more equity in the future than I am today. So I've got a derisked business with a derisked economic level of regulatory uncertainty. If I hadn't reduced the CET1, I would have thought you as my investors, my equity investors at least should have been hounding me and saying, why not. Because I'm now holding more RWAs for the same business and I've derisked the business. So that's the way we certainly thought about it with our Board, and we had good conversations with the regulator and the regulator supports us.

I think it's time to open it up for questions from the audience. There's one over there, please.

Thanks. Are there other products outside of Motor? Where you think the regulator could interfere again or beat the current? Because motor wasn't like all the clients were completing.

Great. So again, we always have to be humble around this one. So when I came in, we did a review of the GBP 450 million worth of lending Obviously, some of the other assets through derivatives have exposures to things like LIBOR. But we went through that in detail. The good news, if you like, is motor was highlighted as an area where there may be issues, but we had no clarity around what the issues were. It wasn't until we got a decision from the financial ombudsman in December, a final decision that we realized that, that issue is now crystallizing in a way that meant that we had to take a provision. So I have looked across the portfolios. There are some other smaller issues, some of which have been in the press. So shared depreciation mortgages. You'll have seen that we've done some deals on that. But based on what I know today, there are no other material issues like motor commissions. And bluntly, 6 months ago on motor commissions, we knew it was a risk, but we didn't see the decisions come and expect the decisions in the way we're now seeing them come because of the facts I laid out earlier. We had no evidence that would breach regulation of the law at any stage over the last 15 years, and we don't still have evidence of customer harm. But we'll see where the regulator gets to on that issue. The one bit which I will always stay humble on and I know you're highly aware of, and it's a slightly significant issue for me to say. But again, with Nikhil here later in the week, it's a good chance to challenge him on this is if -- what I said is true that we find out we didn't breach the law or regulation, but still there's some retrospective remediation. The real issue is I don't know what I don't know. If I can put it that way, the old Rumsfeld issue, is there in some future stage going to be some reassessment of something that exists today? I can't give you confidence on that. I don't believe there will be, and there's no conversations. But that's the one issue. I know that you, as investors, have got as an uncertainty around the way the industry is operating. Just to give you some confidence on that point, many of you know me, we are in very proactive discussions with our regulators and our government about this issue. I believe it's one of the issues that's suppressing the overall investability of U.K. financial services this specific point. And so you've seen -- I won't disclose anything I shouldn't disclose, but you've seen the conversations that are publicly now being had and the roles with the focus we've got on that as an industry, and I am leading on some of those conversations. I do know we need to give you greater certainty around this issue. And so I'm very focused on working with the current government, a potential future labor party and the regulators to say, how can we get more confidence around this specific issue. I hope that's okay. That's a very honest answer. I never want to sit here on the stage and tell you something definitively when you can sit there and work out, but I couldn't actually give you that commitment. But I've got no concerns at the moment.

Next question please is, Greg, in the middle there. Just say a few words on -- yes, sorry, the back or -- sorry.

Yes, the impact of the FCA conduct rules on deposit back book prices.

Yes. So -- the FDA hasn't come out with anything specific. What they have come out with is they have done an assessment on the back of consumer duty that was launched last July and there's another implementation this July or this summer. They've asked us to look at how we're managing pricing on our deposits and they're doing an investigation around that. And then you'll have -- maybe some of you will have seen, they've also been proactively supporting some marketing campaigns to customers around our pricing. So we don't have any specific findings or issues broadly, the FCA's position has been the one I think we would all hope it should be, which is pricing as a matter of competition. And they've been very focused on ensuring that the competitive nature of the market is working effectively. And what does that mean more specifically? That means that customers can understand what their pricing is and what their products are. There is no inertia. So there were no customers left behind if I use that kind of U.S. military language, where we, as an institute as a bank will know if customers aren't accessing their digital screens or they're not seeing the rates and they've got money tied up at lower rates. So are we proactively contacting customers? And then if customers do want to switch products that there isn't any constraints, what we have done is put a very proactive program around our customer base and communications. For example, we contacted 15 million -- over 15 million customers last year to show them what their savings options were and what the alternative prices were and even how much more they could get on their savings if they were to choose an alternative product. We opened 4.9 million, but 5 million savings accounts last year across our digital and physical channels. And as I said, we actually grew our deposit base. So we believe the market is competitive. We've got really strong proof points about our customers do understand their options. And we've got lots of customers choosing just for the spirit of this conversation. We're worried about churn. We've got customers moving -- choosing to move their money out of current accounts into instant access savings, we have 2 types of products [indiscernible] into [ time ] deposits. Now the really important thing for me, customers don't just choose on rate. And this is where I think the debate has to really go to be focused on. 60% of our customers have less than GBP 1,000. Whether they get 0% or 5% on that, that's GBP 50 a year. When they're facing GBP 1,500 increases in energy prices, GBP 50 isn't the determinant that they're worrying about. And so people are choosing to leave their money for 3 reasons: One is trust in the institution. That remains, as you know, critical in moments in stress. And last year, less we forget, we had banks failing in other parts of the world. The second is their liquidity needs and customers are really, really sensible. They understand if they need cash for liquidity that has a cost. And then the third is the interest rate. And that's why we have a breadth of products that allow customers to choose for them and for their deposits, what's the right choice between those 3 factors. And the value exchange is on all 3. It's not just on the interest rate. So for example, last year, we introduced a product called a limited withdrawal product. It had a better marketing name. But it was kind of halfway between instant access and time deposits. And what it said was, we'll give you a better rate than our instant access. And you can withdraw money 4 times a year, and you can withdraw 100%. But if you start withdrawing more than 4x a year, it will go down to the instant access rate. And we thought that was -- by the way, it was pretty distinctive. We thought that was a really important product because it really explicitly gave customers that choice between liquidity and current account with no return, time running out for 1 to 2 years above the base rate in our time deposits as they were at the end of last year. And then 2 forms of liquidity accounts, instant access accounts. So that's how we're competing. We'll continue to engage the FDA strongly. We'll see if anything that comes out. My view is that's got to be the basis on which you have a healthy deposits market.

We're going to squeeze the last one from Greg. Yes?

Nice to see you again. For the GBP 450 billion of AIEAs, it sounds like lending growth is picking up again or frankly, strong at this point. How do we think about that incremental loan growth? Is it a shift within the average earning assets in order to maintain the CET1? Is it that you can take on the additional lending growth and you're okay with the LDR where it is or increasing? Just how can I think about the overall balance sheet growth if loan growth is better?

Yes. So a couple of points. The first thing is I don't think a 96% loan-to-deposit ratio is necessarily optimal. We haven't given guidance around this. But you can imagine we've debated. I think a bit more leverage would be ideal ultimately. But obviously, nothing like we saw in the past. So let's -- if William were here, probably be worried my team will be worried, but 100% to 105% is completely doable. So I actually would like from a pure returns and then through-cycle returns perspective, even a bit more leverage on our balance sheet. So we're not constrained from a funding or a capital perspective on AIEA growth. There's 2 or 3 things that are probably just worth looking at. The first is this spirit I've talked to you a lot about is my job is to recycle assets and costs from lower returning areas into higher-returning areas. Now what does lower returning mean? That can mean obviously lower margin, but it can also mean assets that have particularly ugly stress characteristics where I have to hold a lot more capital under stress given the regulatory environment. So I still think there's opportunity for me to do that. And there are some parts of my balance sheet, which are going to continue to run off. The 2 big ones. I still want to run off the legacy mortgage assets I've halved it basically, but there's still some runoff there. And then as you know, there's government-backed lending on the SME side is about GBP 8 million to GBP 8.5 billion left of that, and that will run off -- it's been running off about GBP 0.5 billion a quarter, I think will continue to run off. So actually, there's some runoff that gives me capacity before I grow. And that's the main reason in a -- what we thought was a difficult kind of resilient but flat economy why we weren't going to grow significantly this year. We're going to continue to optimize let the runoff happen and then grow the capacity back. If the market is stronger, then I want to grow with it, and we will do that. We'll have the one other issue. I said there's 3 issues. So I'd like to grow, but in the context of the balance sheet reshaping. The final issue is obviously competition. And I hope what you've all felt. I know you asked me when I came in and said, are you just going to get on trash mortgage margins based on a growing market share. You'll have seen, I have not grown market share, and I typically haven't been #1 in the mortgage rate tables. So you can't blame me for the mortgage margins. But I -- we will compete sensibly around our big asset businesses. There's no point me chasing margins down and having a bigger balance sheet, you would not thank me for that. And I think we've done very sensibly in 2023, and we will continue to be sensible. The one strategic issue is -- as you'll remember, over -- from 2010 to 2020, our mortgage market share fell every year from 30% to 19%. If we can't trade in the kind of the range we're in now and that doesn't have to be 19% you won't keep the leverage on the balance sheet. And I won't be sitting here in front of you saying, I've got the all-weather balance sheet that Albras language used that you want me to have. So there is a complex strategic dynamic around how fast I grow the AIEAs but I'm not going to go and chase volume growth that is dilutive to our shareholders. What I'll ask, and William will do this, if we continue to see the good momentum that we saw in January and February, we'll give you upgrades we'll give you updates. You can do the upgrade -- you do the upgrades, I'll do the update. We'll give you updates on how we're seeing AIE growth as we go through the year. I just -- we just work through it together.

Thanks very much. We've got to leave it here. Thanks for Charlie. Thank you very much.