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

Thank you for standing by, and welcome to the Lloyds Banking Group 2024 Interim Management Statement Call. [Operator Instructions] There will be a presentation from William Chalmers, followed by a question-and-answer session. [Operator Instructions] Please note this call is scheduled for 1 hour and is being recorded. I'll now hand over to William Chalmers. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you very much indeed for joining our Q1 results call. As usual, I'll run through the group's financial performance before we then open the line for Q&A. Let me start with our key messages on Slide 2. In Q1, we continued to execute on our strategic ambitions. You've seen this in our deep dive seminars including the mass affluent and IP&I session last month. Strategic execution underpins our ambition of meeting more customer needs and securing higher or sustainable returns. Alongside in Q1, the group again delivered a robust financial performance in line with expectations. The strength of the group's business model and strategic execution together with our sustained financial performance, gives us continued confidence in our guidance for both 2024 and 2026. Let me turn to a financial overview on Slide 3. As said, Lloyds Banking Group delivered a robust financial performance in the first quarter of the year. Statutory profit after tax was GBP 1.2 billion, with a return on tangible equity of 13.3%. In Q1, net income of GBP 4.2 billion was down 9% from the prior year, in line with the previous quarter. Alongside this, the net interest margin was 295 basis points, down 3 basis points from the fourth quarter of 2023. Operating costs were GBP 2.4 billion. This included elevated severance and the introduction of a new and P&L-neutral sector-wide approach for the Bank of England levy, as we highlighted in February. Excluding levy, operating costs are up 6% year-on-year. Asset quality remained strong. Excluding MES benefits, the asset quality ratio was 23 basis points. After MES benefits of GBP 192 million, reflecting improvements in the economic outlook, the Q1 impairment charge was 6 basis points or GBP 57 million. TNAV per share is now 51.2p, up 0.4p from the end of 2023. This performance resulted in strong capital generation of 40 basis points in the quarter after regulatory headwinds. With this, we remain on track to generate circa 175 basis points of capital in 2024. I'll now turn to Slide 4 to look at developments in the customer franchise. The customer franchise remains resilient. Total lending balances of GBP 448.5 billion were down GBP 1.2 billion in the quarter. This was driven by a GBP 1.6 billion reduction in mortgages with expected balance reduction linked to the refinancing overhang from maturities in Q4. We then see an increase in both application volumes and market share in Q1, which is expected to support growth in the mortgage book through the remaining 3 quarters of the year. Elsewhere in retail businesses, there was growth across credit cards, motor and unsecured loans. Personal lending balances were down by GBP 0.8 billion in the quarter, significantly driven by ongoing repayments of government-backed lending in small and medium businesses. Moving to liabilities. Total deposits decreased by GBP 2.2 billion in the first quarter. This includes growth of GBP 1.3 billion in retail, offset by a reduction of GBP 3.5 billion in commercial banking. Within retail, deposit churn was roughly equal to Q4 after slowing from Q3. Savings accounts were up GBP 1.6 billion -- or GBP 0.9 billion, including in wealth. Alongside this, current account balances increased by GBP 0.4 billion in the quarter. Within current accounts, seasonal tax payments were offset by strong inflows alongside lower spend. The timing of the Easter bank holiday also paid a role in adding to balances, and we expect a reversal of this impact in Q2, meaning higher outflows in current accounts. Overall, the underlying flows in deposits are constructive and in line with our expectations. In the commercial franchise, the decrease in deposits was largely driven by balance reduction from small and medium businesses. And in insurance, pensions and investments, we continue to see good organic growth with circa GBP 1.3 billion of net new money in the quarter. Moving on to Slide 5 and group income. The group saw a solid income performance in the first 3 months of the year. Net interest income of GBP 3.2 billion supported a Q1 margin of 295 basis points, 3 basis points lower than Q4 last year. The slower decline quarter-on-quarter is consistent with our expectations for the year as outlined in February. Behind the headline, margin development is led by expected headwinds from mortgage refinancing and deposit churn, partly offset by the reinvestment of the structural hedge. In the context of the deposit trends I described earlier, the structural hedge notional balance of GBP 244 billion reflects a GBP 3 billion reduction from year-end. We do anticipate this pattern continuing during Q2, in line with our expectation of a modest reduction of the notional balance during 2024. This should stabilize over the course of the year as deposit churn slows. Nonbanking net interest income was GBP 105 million, up from the prior year as expected. From here, we expect a modest quarterly increase through the rest of 2024, reflecting continued business growth in a higher rate environment. Average interest earning assets of GBP 449 billion was down GBP 3.7 billion in the quarter. This was driven by the previously mentioned and expected mortgage outflows and continued runoff of government-backed lending in small and medium businesses. Looking ahead to the full year, we'll continue to expect AIEAs to be greater than GBP 450 billion. We also expect the net interest margin to be in excess of 290 basis points for 2024. Within this, we anticipate that both the mortgage refinancing and deposit churn headwinds will ease through the year. The structural hedge will provide a continued tailwind, contributing in total about GBP 0.7 billion higher income this year versus last. Within this, note that the quarterly contribution of the hedge may increase or decrease slightly, in line with pre-hedging and maturity profile. Turning to other income. OOI of GBP 1.3 billion in the first quarter is up 7% year-on-year, driven by progress in both the retail and commercial banking business. This continued improvement quarter-on-quarter is in line with our expectations for other income to build gradually and reflect broad-based strategic investments and customer activity driving business growth. Operating lease depreciation of GBP 283 million represents an increase compared to the prior year. This is due to growth in the fleet size of Lex and Tusker as well as declines in used car prices and normalization of the charge. Stepping back for a moment. As you know, we're investing significantly for growth across our income streams. Indeed, our recent seminars are highlighting the areas of investments that underpin our ambitions. So let me move on to costs on Slide 6. Cost management remains a core discipline for the group. Operating costs of GBP 2.4 billion in the quarter are up 11% year-on-year. They include expected elevated severance charges taken early in the year to facilitate cost efficiencies as well as a circa GBP 0.1 billion charge relating to the sector-wide change in approach for the Bank of England levy. As you remember, we spoke about this point at the year-end. Excluding the levy, operating costs were up 6% from the prior year. Excluding the levy and the component of severance in excess of Q1 last year, costs are up 1%. The Q1 cost-to-income ratio was 57.2% or 54.4%, excluding remediation and the new levy. Group continues to maintain cost discipline in the context of inflationary pressures and strategic investments. We still expect to deliver operating costs in 2024 of circa GBP 9.3 billion, now plus GBP 0.1 billion for the Bank of England levy. It's important to note that whilst the full cost of the levy is recognized in Q1, the impact on profit will be roughly neutral in 2024. An offsetting gain will be recognized monthly in net interest income. Moving on, the remediation charge is low at GBP 25 million. This is all in relation to pre-existing programs. There have been no further charges relating to the potential impact of the FCA motor finance review. Let me now move to asset quality on Slide 7. Asset quality remains strong across the group. Mortgage arrears and default rates are improving. Within this, the slightly elevated trends in legacy mortgages seen last year are now easing. Other retail portfolios remain stable with unsecured assets continuing to exhibit low to new arrears and default trends broadly at or below pre-pandemic levels. Commercial banking also remains resilient with stable customer behaviors such as working capital utilization rates. The impairment charge of GBP 57 million for the quarter equates to a very low AQR of 6 basis points. It benefited from strong observed performance and an MES credit given improving economic forecasts. Before forecast adjustments, the observed impairment charge was still low at GBP 249 million or 23 basis points, reflecting both a resilient customer base and a prudent approach to risk. Compared to the prior year, the charge remains at low levels across the retail portfolios. Meanwhile, commercial banking benefited from a one-off release of circa GBP 50 million based on a better, more granular understanding of our portfolio and model loss rates. As mentioned, Q1 also saw an MES release of GBP 192 million due to updated economic forecasts, reflecting improvements in the outlook. We now expect HPI to rise by 1.5% in 2024, given observed resilience in the housing market. In addition, our unemployment expectations continue to assume only a gradual build to a now lower peak. Behind this, we continue to expect 3 base rate cuts this year starting in Q2. Lets talk of ECL. On the balance sheet, it stands at GBP 4.1 billion. This is still over GBP 600 million above our base case and higher than pre-pandemic levels on a like-for-like basis. This drove strong coverage levels across the portfolio. For 2024, we continue to expect the asset quality ratio to be less than 30 basis points. This guidance is clearly further reinforced by the charge in Q1. Let me now move to Slide 8 and address the below-the-line items and TNAV. Statutory profit after tax of GBP 1.2 billion resulted in a robust return on tangible equity of 13.3% for the first quarter. We continue to expect a return on tangible equity of around 13% for the full year. Within statutory profit, restructuring costs were GBP 12 million for the quarter, this should be roughly the run rate going forward. The volatility and other impact of GBP 117 million was largely composed of a GBP 114 million charge of negative insurance volatility. This was a function of the increase in long-term rates partly offset by positive banking volatility. The charge also includes the usual fair value unwind. Tangible net assets per share of 51.2p were up 0.4p in Q1. The increase was driven by profit accumulation, partly offset by the impact of movements in the rate curve on both the cash flow hedge reserve and the pension accounting service. Looking ahead, we continue to expect TNAV per share to grow over the medium term from buybacks, growth and the unwind of headwinds. Inevitably, the growth trajectory may be influenced in the short term by rate volatility just as we saw in Q1. Turning now to capital generation on Slide 9. We delivered strong capital generation in the first 3 months of 2024. Within this, risk-weighted assets at GBP 222.8 billion, a GBP 3.7 billion higher than at year-end. This increase includes the impact of unsecured and motor finance lending growth, but also the temporary RWA increase related to hedging, which is expected to reverse in Q2. Capital generation was 40 basis points after regulatory headwinds in the quarter and in line with expectations. After 22 basis points of dividend accrual, the CET1 capital ratio stood at 13.9%. We continue to expect to pay down to a CET1 ratio of circa 13.5% by the end of 2024 and to pay down to circa 13% by the end of 2026. We also continue to expect RWAs of between GBP 220 billion and GBP 225 billion at the end of 2024. Strategic balance sheet growth will be supported by active balance sheet management to offset regulatory pressures. Based on our ongoing profitability and active RWA management, we, therefore, continue to expect 2024 capital generation to be circa 175 basis points. Let me put our performance in context on Slide 10. In summary, the group is continuing to deliver in line with expectations. We're focused on our strategic execution. Alongside, we showed a robust financial performance over the first 3 months of the year with solid net income, cost discipline and strong asset performance. Looking forward, we're reaffirming our 2024 guidance, and this is set out in full on the slide. In the context of our Q1 performance and reaffirming our 2024 guidance, we remain well positioned for the future. That concludes my prepared remarks for this morning. Thank you for listening. I'll now hand back to the operator for Q&A.

[Operator Instructions] Our first caller is Aman Rakkar from Barclays.

Two main questions, please. One on funding costs, non-banking funding costs. I think that's a pretty decent pickup Q-on-Q. I think you talked about a modest sequential pickup, but I think it's more like up 25% Q-on-Q, the run rate in Q1. So can you help us think about that number going forward and the extent to which that to continue rising from here? Clearly, that's the source of noise first thing this morning versus market estimates. So whatever you can do to kind of help us understand the outlook for non-banking funding costs through the year and what it means for the full year would be really appreciated? Sorry, just related to that. Should we be thinking about any income benefit through, say, OOI associated with this part of that? And then the second question is just more broadly on NIM, please. You've been really helpful in terms of thinking about the drivers. Could you help us think about the NIM trajectory into Q2 and putting some numbers on some of these driving forces. I note your comment around the hedge contribution on a quarterly basis might bounce around a bit. I guess really what I'm trying to tease out here is could we see a stable NIM Q-on-Q in Q2? Or is that a bit too early?

Thanks Aman. Thanks for the 2 questions. I'll take them -- take each in turn. First of all, on non-banking net interest income. As you say, it increased from GBP 80 million in Q4 to GBP 105 million in Q1. We did guide to an increase in our Q4 numbers. And it's worth for a moment, at least just putting into context, that's an increase of GBP 25 million in the context of GBP 4.2 billion of overall income. So just to put it in a little bit of proportion, but it is important. We did advise, it would increase at Q4 going forward, simply because it finances our OOI activity, which, as you know, are growing. We're up 7% year-on-year in quarter 1. Last year, we were up 10% OOI. So this is about the cost of financing those activities, which leads to the OOI growth. Some of activities behind it are motor leasing. It's about 40%, 45%. And then insurance, commercial markets activities and Lloyd's development capital, each of which are around 20% in respect of the charge. The increase in non-banking net interest income is about 50% from growth in volume and about 50% from rates increases as our financing of those activities rotates or revolves, if you like, into a high rate component. As said, the growth component is correlated to the progression in OOI that we've seen. And you've seen that last year and again in this quarter be a pretty steady stream of growth. And then the rates increase is linked to around GBP 10 billion to GBP 11 billion of assets that are financed in the areas that I've just been through. But they're all financed over different terms often in different ways. And so what we've done in the past and what we continue to do is to give you indications of future trends when we report in respect of this item. And as said, we've seen non-banking net interest income of GBP 105 million in Q1. I think based upon our look forward for the year as a whole, we see it in somewhere around the GBP 450 million to GBP 500 million range. Now if you think that activity and rates will be strong, you're going to be at the high end of that range naturally because you're going to see expansion in other operating income. And likewise, at the back of higher rates, if that's your scenario. If you see at the other end of the spectrum, if you like, lower levels of activity, lower rates then, of course, it's vice versa. But somewhere in that range is not a bad guide. I won't comment beyond 2024. We're safe to say that, as you know, our strategy is about growing these businesses. It's about growing the transport business. It's about growing the insurance business. It's about growing likewise, commercial markets and LDC all in the appropriate ways, but it is a growth strategy. And so you should expect to see this growth, and you should expect to see it sponsor decent growth within OOI, which at the end of the day, as said, is very much behind our commitments in respect to '24 and in respect to '26. Aman, your second question is on net interest margin patterns. As you say, we saw a reduction in the net interest margin from 2.98% to 2.95% in quarter 1. That was pretty much as expected. It was a significantly slower reduction in quarter 1 than we saw in quarter 4. So 3 basis points. It's being driven by a couple of principal factors. In terms of the headwinds, it's being driven by ongoing deposit churn, which was very stable during the quarter, but as expected, it continued. And it's being driven by the mortgage refinancing headwind that we talked about a number of times before, so maturing mortgages, for example, coming off at about 128 during the quarter and being refinanced back on at around 65 basis points. So there's a mortgage refinancing headwind going on there. And then the principal offset to that, as you know, is the structural hedge, which is refinancing into a much higher rate environment. Now as we go forward, over the course of the year, we do expect those trends to start to inflect a little bit. In particular, we expect the deposit churn to stabilize over the course of the year, and the structural hedge contribution will pick up. So what that means is that by time at the end of the year, we do expect the margin to be taking a positive direction. I'd expect us looking forward, if you like, to see a little bit more of the deposit churn and likewise, the mortgage refinancing headwind, be a touch stronger than the structural hedge contribution during the course of the next quarter or so. But again, at the end of the year, we expect the margin to be ticking up. So that's the pattern. That's the journey that I've described for you, Aman, which I hope is helpful.

Our next caller is Benjamin Toms from RBC.

The structural hedge notional was down GBP 3 billion or 1.2% in the quarter. Do you expect the pace of reduction of the notional to decrease from here? I note your comments you expect outflows in current accounts in Q2. And where would you expect the notional to get to by the end of the year versus the GBP 244 billion today? And then secondly, there was no change in your motor finance provision in the quarter. You've no doubt how that conditions with the interested parties since your full year results. And perhaps can you just give us a high level thoughts on how your feelings have changed in the topic since the full year? Are you any more optimistic or pessimistic as we stand at our Q1 results?

Thanks very much indeed, Ben. Again, 2 questions, and I'll take them in turn. On the structural hedge, as you say, we've got GBP 244 billion of invested hedge right now. We've guided towards a modest reduction in the structural hedge over the course of the year. And included within that modest reduction is the GBP 3 billion reduction that we saw in Q1 from GBP 247 million down to GBP 244 million. So I think if you give some sort of color, if you like, to what a modest reduction means, it's worth having a look at last year for something that might be roughly similar. But of course, it will depend upon how deposits evolve over the course of the period. I'll come back to that in just 1 second. I think what that means, Ben, is that we might see a touch more in the structural hedge adjustments than we've seen just in Q1. But again, I'd expect it to be within the confines of the modest reduction over the course of the year, perhaps not dissimilar to what we saw last year. So that is all in the context of income from the structural hedge being plus GBP 700 million versus last year, which, as you know, will take us to a contribution of the structural hedge of around GBP 4.1 billion. And indeed, we see strong tailwinds from that contribution, not just in '24, but also in '25, and particularly within 2026. And so you want to see some decent pickup from that structural hedge in the years looking forward. I think one point to put into context there is the deposit performance. As you can see from the deposit performance, I commented on earlier on. But overall, particularly within the retail space, it's been a pleasing deposit performance. We've seen savings up GBP 0.9 billion during the course of the quarter. We've been seeing PCAs up GBP 0.4 billion during the course of the quarter, and while some of that was a benefit from the bank holiday weekend, at the same time, we also saw -- we always see quarter 1 as a tax outflow period. And so from slightly stronger inflows from, if you like, less significant outflows, we saw a robust performance in PCAs. It will come up a bit in quarter 4 because -- sorry, quarter 2 because of that bank holiday benefit, but nonetheless, it's a decent performance in PCAs. And with that benefit, I'm sure over time, it will have an impact on the structural hedge. So we feel very comfortable in the combination of deposit performance and how that informs our expectations for modest reduction within the structural hedge. Your second question, motor. In essence, on motor, there is no new news. We, as you know, took GBP 450 million provisions at the end of the year. That was off of a variety of scenarios, if you like, about how this issue might play out. We're engaged in as is the rest of the industry, a data gathering exercise right now. We saw the FCA comments around the speed of that data gathering exercise. From our perspective, at least, we're doing everything we can to support in that and believe that we're making good progress. So that is going very much according to plan. We've seen the various bits and pieces of commentary from the FCA and how they might look at this industry and in particular, the structural importance of this industry and the, if you like, a role of the FCA review, might play in ensuring an orderly outcome for what is the vital industry for not just the U.K. car business, but, of course, consumers accessing car finance. So stepping back, Ben, we realized the FCA is looking for misconduct and customer loss, number one. As you know, we believe that we've complied with regulations at all applicable times. We look forward to the review providing clarity, but we also look forward to providing a secure place for motor finance going forward.

Our next caller is Joseph Dickerson from Jefferies.

As we move into Q2 and Q3, do you expect the improvement in mortgage approvals to start to translate into mortgage growth, open book mortgage growth in Q2 or is it going to be later in the year? And then secondly, you see the growth in the current accounts on the retail side. But what are you seeing as well in Q2 thus far on SME and commercial deposits?

Thanks Joe. You cut out a little bit at the beginning of that question, but I think I caught it. And if I didn't, just let me know as we go through the response. In terms of the quarter 1 mortgage performance, and then I'll answer your question in terms of look forward on mortgages. A couple of points to make really. One is we flagged at Q4 that we had a mortgage refinancing overhang in the context of Q4, which we expected to take a toll, if you like, on mortgage book growth during the course of Q1. And so it rolled out pretty much exactly as we expected. That is to say refinancing decisions were taken, and off the back of that, we saw a slight reduction in the open mortgage book alongside a modest reduction in closed mortgage book together contributing to a GBP 1.6 billion reduction within mortgages as a whole. That played out pretty much, that refinancing piece paid out pretty much as we've guided and as we had expected. So what also happened is that the mortgage market itself picked up. And so we saw a 20% increase year-on-year in terms of applications. And we played a decent role in that. We saw our market share go up to just over 19% in terms of that applications volume. And that, I think, sets us up for a better year in the context of mortgage growth for the sector as a whole and for Lloyds Banking Group within that. So we're expecting mortgage growth over the year as a whole. And actually, the events of the first quarter have probably underlined, if you like, our conviction in that development. So I won't put too precise to kind of quarterly development on exactly how it flows through, but I think we've seen better progress than we expected within Q1 on mortgage volumes, and we expect the development of the market to be stronger in 2024, perhaps than we had previously anticipated, all of which, I think is a good thing for the development of the asset. Your second question there in terms of the performance of deposits, and in particular, on the commercial space. Let me give you a bit more color on that. As I said, retail really good, really strong performance across savings and across PCAs. Moving into the commercial area, I highlighted -- I think I highlighted in my comments that we saw about GBP 3.5 billion down in commercial banking deposits. What's going on there, just to pull that apart a bit. First of all, the Corporate and Institutional business. We, in the past, have taken out churn deposits, they're relatively expensive, not surprisingly because of the dynamics of capital markets. We've got a very liquid balance sheet. As you know, our loan-to-deposit ratio is around 96%. In that context, we can ease up on some of those deposits, which are at the more expensive end of our range. And so as a result, we've seen about GBP 1 billion of that GBP 3.5 billion off the back of reducing effectively high-cost deposits within CIB, which we see as a value-added step to take for the business. The second component in the context of SME, that's responsible for the other roughly GBP 2.5 billion of deposit reductions within commercial banking. What's going on there. One is just a very seasonal factor, which is to say tax payments from our SME customer base, happens every year. And so that part of the trend, if you like, is entirely expected and adjusted last year. The second point is despite my earlier comments, because the market in mortgages was slow last year, the housing market has been relatively slow in terms of, in particular, the legal sector this year, this quarter. And so if you like, some lower deposit volumes within the legal sector within SME, reflecting, if you like, the balance of completions from last year in the mortgage market. And then finally, in contrast to retail, the SME business in the deposit area was somewhat adversely affected by the bank holiday. And that's simply a function of payments in and spend out. And we think there was a bank holiday price there. We're not going to put a precise number on it, but it was in the several hundred millions, let's say, which in turn means that the underlying SME performance in deposits was actually a touch stronger than necessarily the headline today. So I hope that's useful, Joe, and gives you some context on SME performance.

That's very helpful. And presumably, the commentary on the mortgage share of apps and better progress in Q1 gives you conviction in the AIEA guide?

Yes. And it's a good point to raise, Joe. It does. We said at the end of last year that we expected AIEAs in 2024 to be greater than GBP 450 billion. We do indeed continue to expect them to be greater than GBP 450 billion. And if anything, the developments of the quarter in terms of not just mortgages but also unsecured, for example, give us greater conviction in that AIEA performance over the course of the year. So we're sticking with guidance, but I think it is guidance that has greater conviction behind it.

Our next caller is Jason Napier from UBS.

The first one, I guess building on a previous question around funding mix and deposit movements. Charlie has spoken in the past about the potential to run a slightly higher deposit ratio. Wholesale funding volumes were up at time. EBIT in the quarter, which I guess is more deposit driven than anything else. But I wonder whether you might talk about where you think par is for loan deposit ratio, how that might change as we come to repay the TFSME and what that means for NIM overall? And then secondly, capital generation in the quarter, notwithstanding the RWA growth, that's sort of temporary GBP 1.5 billion was very good on an underlying basis. And I guess, positions you to do quite a lot better than the 175 basis points of CET1. So I wonder whether you could talk about any foreseeable headwinds around capital generation in the residual 3 quarters of the year whether you've allowed for any further provisions below the line that you might make 175 more reasonable at current run rates?

Sure. Thanks, Jason. Again, 2 questions, and I'll take them in turn. The loan-to-deposit ratio finished the quarter at 96%. That is relatively low, as you know, by, I suppose, historical standards, although one has to take into account the variable or idiosyncrasies, if you like, of any given historical period. First of all, your comment in terms of wholesale funding, I wouldn't read too much into wholesale funding volumes in any given quarter. Money markets, for example, will fluctuate as part of that and give you a slightly different reads on any given quarter. The patent for hotel funding costs, which is perhaps what are the points behind your question, we saw a jump in wholesale funding costs last year in line with maturities around sort of GBP 250 million or thereabouts. The expectation this year because of maturity profiles, because of rate expectations being what they're, we expect that wholesale funding cost increase to be much less. So that is built into our better than 290 guidance, to be clear, and I'll come back to that in just a second. You asked about the kind of equilibrium loan-to-deposit ratio or the strategic ambition around loan-to-deposit ratio. I think it is fair to say that we'll be very happy to see it a touch higher than 96%. We don't have a target ratio associated with it. We do think that over time, the expansion of spending activities within the business, consistent with customer activity, number one and consistent with the expansion of our strategic investments as part of our strategy, number two, should deliver lending growth that is a touch stronger than we've seen over the course certainly of quarter 1, for example. With that lending growth, we'd expect to see the loan-to-deposit ratio develop, but only gradually because at the same time, we're seeing deposit markets expand, and we're also seeing our share in those deposit markets perform very respectively. And so that dynamic, if you like, we do see a bit of upward scope in the loan-to-deposit ratio, not awfully much. That is a function, not just of lending day, but also strength in our deposit performance. The -- you asked about the impact of that on NIM. First of all, our guidance this year, as you know, for NIM, is greater than 290. We feel very comfortable in that guidance, to be clear. When we look forward, as I mentioned in the earlier question, we do expect the margin to be ticking up at the back end of this year. And that gives you an indication of where we expect net interest margin to be going in '25 and then indeed in '26. And that's a function of all of the headwinds and tailwinds that we described in '24 continuing to play out as we go forward. So that gives you, I hope, a bit of a sense, if you like, of the dynamics behind the net interest margin over the course of the next year and beyond. Your second question, Jason, in terms of capital generation. Capital generation, as you say, in quarter 1 was strong. If you look at 40 basis points headline level, that's after regulatory headwinds relating to CRD IV, number one and transitional, number two of around 6 basis points. That is also after RWA or temporary RWAs, if you like, of the GBP 1.5 billion that I mentioned that's around 8 or 9 basis points. And so if you take all of those into account, you've got a strong underlying capital generation of around 50, 55 basis points thereabout. Now for the full year, we're sticking with our guidance of circa 175 basis points, which to be clear, it's strong and should allow decent distributions. I'll come back to that at the end. So we're sticking with our guidance of circa 175 basis points. What's going on behind that? A couple of things. First of all, quarter 1 benefited from some share-based payments around compensation, employee share save schemes being the very major part of that, plus also some market moves, which helps us a little bit. The overall combination of that is we've probably got around 10 basis points or thereabout benefit from those movements in Q1 share-based compensation and market movements that are not going to repeat in Q2, Q3, Q4. Building into that, Jason, as you look forward, bear in mind our guidance, if you like, for the development of the P&L and the balance sheet. And then on top of that, 1 or 2 headwinds and tailwinds, which I'll elaborate on. We do have the tailwind of RWA optimization. Likewise, we've the tailwind of the giveback of that temporary GBP 1.5 billion of RWAs that I mentioned earlier on. Likewise, we've the insurance dividend in the second half of this year. But at the same time, we've a couple of headwinds that are worth pointing out, CRD IV, we took GBP 0.3 billion of CRD IV in quarter 1. We've probably got about another GBP 1.6 billion or thereabouts to go for the remainder of this year. We've, as usual, the bank levy, which will arrive in the fourth quarter, just as it always does. And then alongside of that, we've got various capital markets activities that may take up a bit of an impact on capital. And finally, the organic RWA build that you'd expect to see as we expand the balance sheet in line with Joe's question about mortgages, but also we'll see that in the context of unsecured and other activities as well. So those are some insights, if you like, on the headwinds and tailwinds that we see -- expect to see in the context of our overall guidance. And it's that, Jason, that leads us to confirm our guidance of circa 175 basis points for the year, which, again, to be clear, is strong capital generation, number one, and Board's willing subject to Board's confirmation, should allow strong capital distributions at the end of the year, number two.

Our next caller is Rohith Chandra-Rajan from Bank of America.

William, I've 2 as well, please, if that's okay. The first one on volumes again. So average interest earning assets were down GBP 4 billion in the quarter, but spot loans were down GBP 1 billion. Is that averaging? Or is there something else going on there aside from what we see in the spot loan movement? And I think you -- just as a follow-on to that one, you sort of told in response to Joe's question earlier about volume growth for the remainder of the year. Could you talk a little bit more about the mix there, please? And then the second question, I think you mentioned mortgage completion spreads of 68 basis points. I was just wondering what you're seeing in terms of application spreads and how they're responding to the move higher in swap rates, please?

Yes. Sorry. Rohith, on your second question, would you mind just repeating it to make sure I understood it.

The second question was just on mortgage completion spreads. I think you mentioned 68 basis points for the quarter.

No. I got that. I just want to make sure I got the second part.

You mean part 2 of question one.

Yes.

That was really just around the mix of volume growth you're expecting for the remainder of the year? Is it dominated by mortgages or what are you seeing there?

Got it. Thank you for that. First of all, you highlighted the lending versus AIEA growth. There's a couple of things going on in there, really, Rohith, which are around the timing of balances and around the volumes of balances. We saw AIEA growth over the course of the quarter, rather AIEA reduction over the course of the quarter down about GBP 3.7 billion of GBP 449.1 billion. It is driven by a number of factors, which will play themselves out over the course of the year. So the reduction in mortgages for example, somewhat offset by the growth in other retail, but obviously, the mortgage reduction was bigger than the growth in other retail. And then at the same time, reduction in commercial banking balances, again, I'll split that between business in commercial banking and SME franchise, where most of that was basically payback of government-backed bounce back loan. So that's been an ongoing phenomenon in the balance sheet for some time. It will play itself out over the course of the year and maybe a little bit beyond, but the majority of SME reduction in balances, again, bounce back loan repayments. And then within CIB, CIB balances will fluctuate because a lot of the activity there is driven by ancillary income ambitions. It is -- from our perspective, at least,it is generally a good thing when we can see solid other income growth as we've seen in commercial without too much balance sheet growth. That is very much the strategy. And so you'll see CIB balances kind of ebb and flow a little bit in that context. Overall, we see AIEA growth, as said, has been greater than GBP 450 billion over the course of the year, or AIEA, I should say, has been greater than GBP 450 billion balances over the course of the year. The activities within Q1, if anything, have underlined our conviction in that. So for the moment, at least, I wouldn't get too focused on the distinction between lending and AIEAs. We think it will pass in the way described. In terms of the overall mix. For your question that was around how those balances develop. A couple of points to make there, Rohith. One is in respect of retail, we do expect to see continued growth in the context of mortgages and in the context of unsecured and likewise motor. That should continue over the course of the year. We're seeing some greater gearing in the context of mortgages there. Unsecured will continue just as it has done within Q1. And then within commercial, as said, within CIB, we'll see some ebbing and flowing, but overall I'd expect to see balance a touch higher at the end of this year versus at the end of 2023. And then within SME, you're going to see those cross currents that I highlighted. That is to say continued payback of government lending, which is going to push down the expectation, if you like, in AIEAs within SME. But at the same time, relatively muted new credit demand from what is still relatively cash-rich and quite shy of lending SME sector. So I think pretty muted growth within the SME, slightly more robust growth within CIB, all in the context of decent growth across both secured and unsecured in the retail space. You asked about completion spreads there, Rohith, in respect of mortgages. Completion spreads in respect of mortgages, I think, I said 65 basis points earlier on, which is what we've seen in Q1. As you know, that represents a bit of an improvement over Q4, which is more like 60 basis points. What's going on there? I think in the round, what's going on there is you're seeing a slightly stronger mortgage market, which, as we said in Q4, we thought would lead to slightly stronger margin conditions. They're still relatively tight by historic -- recent historic standards, as you know, but nonetheless, slightly better completion margins than we saw during 2023 when new -- when, let's say, mortgage volumes were very limited, and therefore, competitive conditions were even more intense. As said, we're seeing those ease up a little bit. We'll see how we go through the rest of the year. But our expectation is that completion margins will be at or around the 65 basis points for much of this year. I think if we see mortgage volumes increase, we might see that improve a little bit. And likewise, if you go to the other way, we'll see them be cost a little bit off the back of that, but that is not our base case. Our base case is circa 65 through the course of the year. If we see mortgage volumes increase, we may see some benefit.

Our next caller is Jonathan Pierce from Numis.

William. I've got a couple of questions. I'd like to actually step back a bit and think about the 2026 RoTE target. It feels like as we get ever closer to that, you're increasingly confident of hitting it. And in that context, I want to ask 2 questions, if it's okay. The first is -- they're both related to the hedge. The first is the yield on the hedge, everything you've told us about the income and the notional this year suggests that the average yield will probably be about 1.7% in 2024. By the time we get to 2026, if the yield curve holds, the 5-year rate at least would have been above 3% for nearly 4 years and would have averaged nearer to 4%, in fact. And accepting all of your hedge notions rolled by that point, an awful lot of it will have done. And it's a significant move from 1.7% up to something consistent with that in '26. And you told us 2025 tailwind is not really that different to 2024. And you've started to allude a lot more in recent meetings to this a digital tailwind in '26. How much bigger is that broad terms? Are we looking at a tailwind in '26 that I don't know twice the GBP 700 million that you're seeing at the moment? So a level of guide around that would be really helpful. And the second question is on pre-hedging. So to the extent to which you're locking this in today. Again, I know you won't give us a precise number, but it would be good to get a sense as to how many of the maturities over the next year or 2, you've pre-hedged. Is it 10%? Is it 50%? Is it all of it? Just to give a sense as to the risk to the '26 target from the yield curve itself moving between now and then.

Yes. Thanks. A couple of questions there, more or less, both on the structural hedge, but I'm actually going to step back a little bit and describe some of the dynamics in RoTE in '26 that go beyond the structural hedge. So maybe I'll start there, Jonathan, which is to say, fundamentally, we've -- we do have confidence, significant confidence in our guidance for 2026 of greater than 15% RoTE. What is going on there? A couple of things. One is we do see a positive improvement in the macro. You'll have seen in our economic forecast. There's a bit of gathering pace. It's not particularly strong, but it is a stronger macro versus what we've seen. Two is we do see an increase in net interest income that is driven by a number of organic activities. It is also driven by the structural hedge. I'll come back to that in just a second. So that does step up. The third component still within net interest income is that the headwinds that we've seen abate. So by the time we're in '26, the mortgage refinancing headwind is done certainly towards the second half of it and the deposit churn has stabilized, particularly in the context of rates as we outlined them. So the headwinds have abated alongside some of the strengthening tailwinds. The third point beyond net interest income or rather included in it and indeed going into other operating income is our strategic investments have been realized. And those are both revenue metrics, which, as you know, should contribute a further GBP 1.5 billion by the time we get to 2026 and also some of the cost ambitions in the context of our strategic investments have been realized. So that's a tailwind in the context of revenues and also supportive in the context of costs, which in turn the cost points at least delivers a degree of operating leverage alongside kind of stabilizing investments, if you like, that will be very helpful in terms of improving RoTE for the business going forward. Overall, that is a stronger return in terms of the numerator that we expect to see develop. You've seen our macro assumptions, so they'll help inform the AQR as part of that, Jonathan, but you're seeing a stronger return. Now to be clear that is also on top of a higher TNAV. And that TNAV is higher because of profit accumulation, because of RWA accumulation to finance ongoing growth, because of the cash flow hedge reserve diminishing, and the pension surplus building. So it's a stronger return on a higher TNAV, leading to a profit contribution, if you like, that is significantly stronger as we move towards 2026. Now, specifically, Jonathan, with respect to your structural hedge questions, you asked about the contribution this year. We put a number down of plus GBP 700 million over the course of this year. You asked about the yield, the full year yield on the structural hedge, it is about 1.7% to be clear. Your number is about right. That is in the context of, as you know, maturities, which are refinancing, pre hedges, which are coming on. And that's together what leads to the plus GBP 700 million over '24. When we look into '25, it really depends upon how rates go as to the added contribution in '25. But as you say, we've in the past commented that it won't be terribly different. It might be a touch better, but that really depends on how rates go over the course of the next periods ahead. Our timing at 2026 by virtue of pre hedges, by virtue of the yield on maturities that roll off, we do expect structural hedge income to step up during that time. So plus GBP 700 million in '24, a number that might be a touch above in '25, but it's not unrecognizable. And then a step up in '26. And that's -- if you like, that's relatively well programmed in, and that we know the rates at which maturing hedges are coming off, and we know the rates at which pre hedges will be coming on. The one point, Jonathan, which you mentioned in your question, which is not fully nailed down yet is around all of the pre-hedging that is being put on for the '26 outcomes. So to elaborate on that a little bit. 2024 structural hedge income is now pretty certain. It's pretty much locked in. 2025 is not entirely locked in because as you imagine -- as you can imaging, we've a set of rolling maturities and they're not 100% pre-hedged at the moment. So if we've a sharp rise in hedge -- sorry, in interest rates, that will contribute to a better outcome. if we've a sharp dip in interest rates, that will be a sensitivity on a downside. And then the same is true in respect to 2026, i.e., lets say '26 is locked in versus '25. And that is simply a matter of prudential management of the hedge, if you like. We're looking to secure stability and we can secure shareholder value, which means that we lock in to a certain extent, but not entirely. Hopefully, Jonathan, that gives you an impression as to the drivers behind the RoTE for 2026, the confidence that we've in the greater than 15%. The fact that actually there are many drivers to the RoTE in 2026, which have nothing to do with the structural hedge, but then also gives you a bit of an impression and a better understanding, if you like, as to the expectations for the hedge this year and beyond.

Yes. That's really helpful mate. Can I just ask one very quick follow-up, and you'll probably just say you're not answering this question. But is the maturity yield on the hedges in '26 close to 0?

Well, you're right, Jonathan, I won't answer that question with any precision. Safe to say that, as you know, the structural hedge has been in place for quite a long time. It's in the interest again on securing stability of the earnings pattern so that we're not exposed to sharp rises of all forms and interest rates. The reason why we do that, just to be clear, Jonathan, is because we want to secure for our shareholders a steady stream of dividends going forward. And so that is what's driving that stability concerns. And then it's around shareholder value in a similar way. We manage it in a way that is strictly governed by committees within the bank, but nonetheless allows us to ensure that we don't lock up deposits, if you like, when the curve is very flat. We're not getting rewarded for that locking up. We don't comment specifically on the maturities yield, if you like, within any given period. Safe to say because the structural hedge has been around for some time, inevitably, it contains some pretty low yielding maturities, which are gradually working their way through the hedge, and we're seeing a chunk of those come off in 2026.

Our next caller is Guy Stebbings from BNP Exane.

William. I've a follow-up on NIM and then one on volumes. So on margin, thanks for the color and the expectation to be back in growth by the end of the year. I mean that sounds unchanged versus the guidance back in February, but at the same time, some of the drivers perhaps running better than expected, such as deposit mix, where spot rates have held and the outlook for policy rates. So should we infer that, that conviction is enhanced and perhaps even that we're actually slightly better than prior expectations and we could be looking at stability, perhaps as soon as Q2 and growth in Q3 be accepting that guiding around specific quality NIM is challenging. But is that broad line of thinking on NIM trajectory fair? And sort of supplement to that. Can I just check, I think you said maturing mortgage spreads were 128 basis points in Q1. Can you confirm if that's correct? And then any sense on what we should be looking at for the rest of year? And then on volumes, I was hoping you could elaborate a little bit on unsecured, which looked very strong in the quarter, particularly in motor and unsecured personal loans. Just wondering if there's anything lumpy there? Or is that sort of a run rate, we can expect to continue? Is that sort of a sign of you leaning into credit, given the more favorable macro?

Thank you. Guy, I understood question 1 and question 3. I may need to come back to you on question 2, just to make sure I understood it fully, but let me address question 1 and 3 first, and then I'll ask you on 2. In terms of net interest margin, I think the patterns that we're seeing playing out are very much consistent with our expectations at Q4. And so we maintain our guidance of greater than 290. And we've, as you'd expect, conviction in that guidance, just as we did at Q4. Now to the extent that things turn out a little bit better than we had expected, for example, if the deposit patterns reflect a little bit more strongly off the bank holiday timing issue that I mentioned earlier on, we'll take a look at that in the context of the quarters ahead. But to be clear, we're early in the year at the moment. We're only, what, 8 weeks away from our quarter 4 guidance. So now is not the time to refresh that. We'll take a look at it depending on progress over the course of the year. The added point there that I'd make is that the margin performance is going to be dependent upon customer activity levels upon how exactly rates play out over the course of the year and of course, on competitive conditions in areas like the mortgage market, for example, but it remains our base case that we're greater than 290 in 2024, and we've conviction in that base case. The third question, in terms of volumes, as you say, we saw some decent performance during the course of the quarter across the books and in particular, across the unsecured books. A couple of comments to make in that respect is that, in respect of motor, for example, we've now got a Q1 balance of GBP 15.8 billion, that's about GBP 0.5 billion up in the quarter. That is a combination of organic growth, number one, in terms of very customer-facing growth. There is also a bit of restocking by the dealers in the course of quarter 1. So a little bit of that GBP 0.5 billion growth is off the back of basically restocking of forecourts and the like. So that means that you shouldn't expect to see GBP 0.5 billion in quarter 2, but you should expect to see growth, to be clear, it just may not be fully GBP 0.5 billion. So on the unsecured business on the personal loans, for example, you've GBP 0.7 billion in growth there. Don't forget the fact that we had the securitization activity in the course of quarter 4 in respect of that. And so you're not seeing the repayments affect the loans balance there. So again, you should expect to see respectable personal loans growth going into Q2 and beyond, but I don't think it's going to be the 10% level that you saw in Q1 simply because of that kind of distortion effect around the repayments of the back of securitization. So growth, but just not perhaps the GBP 0.7 billion that you saw in Q1. And then finally, in cards, as you know, we saw balanced growth of GBP 0.1 billion in cards. That is pretty straightforward stuff. I'd expect that to continue over the course of the quarters going forward and dependent upon economics. It may be that it's a touch stronger, if things play out in a more benign way from an economic point of view. Now your question 2, Guy, I just want to make sure I got the right sense off. Can you -- would you mind just repeating it quickly so that I get it right?

Yes, absolutely, and thanks for the color on those other questions. So I think you said the maturing spread in Q1 was 128 basis points on the mortgage book relative to 65 new spreads. So I just wondered how that 128 looks like and phases for the rest of this year, so we can get a sense as to the sort of residual mortgage spread churn as we look forward?

Yes. Yes. Got it. Thank you. As you say, we did see maturing margins of around 128 basis points in quarter 1. That compares to about 65 basis points at which it is coming on. Over the course of 2024 as a whole, we expect those maturity margins to be about 1.15%. So that gives you an idea, effectively. What's going on there is that as the -- particularly in COVID period, very high margins, at which we write mortgages start to come off, the balance becomes a fair representation of the whole book, if you like. So the 128 in Q1 falls to about 1.15% for 2024 as a whole. And that progress, it's a little bit lumpy on a month-by-month basis on a quarter-by-quarter basis. But nonetheless, that progress continues through the course of '25 into '26 consistent with my comments earlier on about the mortgage headwind gradually tailing off. Again, there will be bumps in quarters, but gradually tailing off as we progress through 2026.

As you know this call is scheduled for 60 minutes, and we've now reached the end of the allotted time. So this is the last question we've time for this morning. If you've any further questions, please contact the Lloyd's Investor Relations team. Please go ahead, Christopher Cant from Autonomous.

I just wanted to come back on NIM and non-bank NII, please. So in terms of the NIM, as we think about the progression into 2Q, just to understand your comments about the shape of the NIM during the year, given the Bank of England's funding changes, my understanding is that, that NII benefit will only start to impact the NIM essentially in the second quarter, where you've had the cost in the first quarter. So I think it's worth about 1.5, 2 basis points on the NIM on an annualized basis, given your commentary. Should we be expecting the NIM to be down still Q-on-Q despite the fact you've that tailwind? That's the first question, please. And then on the non-banking NII, I appreciate you don't necessarily want to give us a precise figure beyond 2024, but there has been a pretty material source of negative surprise, I think the consensus over the last several quarters cumulatively. And you're now talking about GBP 450 million to GBP 500 million for this year. I think you referenced 2 dynamics in there. Firstly, business growth, which we can all try to take a view on. And secondly, just the impact of the higher level of rates. On that second component, how much of a sort of refinancing impact do you still have to come through here in terms of sort of the quarter-over-quarter lumpiness that we've been seeing, how many of the sort of funding bonds that you allocate into that non-banking NII bracket has still to roll? And how much of an impact will that did have? Because presumably, that's reasonably foreseeable even if the business growth aspect is less easy to anticipate. So just keen to understand whether we've now sort of hit a level on rates, and therefore, if policy rates fall into '25 that aspect of it would actually start to work in your favor or whether we're still waiting for a large volume and low-yielding funding positions to churn into the new rate environment?

Okay. Thanks, Chris. Again, 2 questions there, and I'll just take them in turn. The net interest margin in respect of Q2 was your first question. As you know, we went down from 298 to 295 in Q1, dropped 3 basis points, a lot less than we saw in Q4. So when we look forward, your question was specifically around the Bank of England levy. As you point out, we've got very modest benefit from the Bank of England levy change in respect of net interest income in quarter 1. So very little benefit in quarter 1 from the Bank of England net interest income effect and the changing of the charging structure. That will come into play a little bit more in Q2. And then it assumes a run rate, if you like, in Q2 and beyond Q3 and Q4 and there is approximate P&L neutrality during the year and complete P&L neutrality over the course of 12 months just to be very clear. That is -- that does lean favorably into net interest margin over the course of quarter 2. Having said that, there are other factors at play within quarter 2. I've talked about deposit churn, I talked about mortgage refinancing. I talked in my script earlier on also about the hedge being a touch weaker in Q2 off the back of maturities and hedges, so pre hedges that is. And so overall, our guidance for net interest margin remains very much as it was, which is greater than 290 over the course of the year. Turning into a positive direction at year-end, we've very strong conviction that off the back of the developments that we're seeing across the book in terms of deposits, in terms of mortgages and, of course, in the context of structural hedge viewed in the year as a whole. But when you look at Q2, as I mentioned in some of the comments that I made earlier on, it's probably a touch too early for us at least to see stability in the margin in Q2. And we'll just see how that fares in line with rates, customer activity and the like. Your second question, Chris, on non-banking net interest income, I guess, we end where we started. We again, acknowledge the fact that non-banking net interest income has gone up GBP 25 billion, but it's worth of putting that in context as I did earlier on. The increase in that context is, as your question pointed out, about driving growth within the business. And so an increase in non-banking interest income, at least to the extent to which it relates to growth in the business is a good thing to be clear. It's driving other operating income growth across the 4 business areas that I mentioned, insurance, commercial, transportation, LDC and so forth. We've give the extra -- I've given the extra guidance today to say that we're looking at somewhere in the GBP 450 million to GBP 500 million range, hopefully to be helpful in that respect. There is behind that charge a kind of complex of different terms, as I indicated, for the different types of assets. Commercial, for example, is typically more or less an overnight charge, whereas motor is often a 3, 3.5-year charge. And so there's a lot of information that will be required to really model that. And hence, the guidance from a top-down perspective that we're giving you. Your question then, Chris, is how does it develop? I think your thesis is approximately right. That is to say, as we move forward, the growth component does not drop out. It continues to drive non-banking net interest income, and that's a good thing. Having said that, the driver from rates increases, that should start to drop out and it should start to drop out not during 2024, but it should start to drop out from future periods thereafter. And therefore, that element at least eases up and the growth very much remains within the picture consistent with our strategic objectives to drive growth within the business as a whole and in this context, particularly in the context of other operating income. So I hope that's helpful, Chris. So I think we're going to bring the session to a close now. We've gone over a little bit, but thank you very much indeed for the questions and for the interest likewise. There are a couple of questions that I think were left on the line. So apologies for not getting to those, but IR will make sure that they contact the analyst's individual concern. Again, this concludes Q&A session today. Thanks once again to everybody for joining the presentation. I'll now hand back to the operator to close the call.

Thank you. This concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website. Thank you all for participating. You may now disconnect your lines.