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

Good morning, everyone, and thank you very much for joining us. It's a great pleasure to introduce our next speaker, William Chalmers, Chief Financial Officer of Lloyds Banking Group, a role he has held since August of 2019. Prior to joining Lloyds, William held various roles in financial services including co-head of the Global Financial Institutions Group at Morgan Stanley. So thank you for being with us.

Thank you, Ben. Very nice to see you. Thank you for having us.

So I think let's get started with a bit of a broad question. So how do you see the macro backdrop for the U.K. currently evolving?

Well, it's a good question. And obviously, an important one for us. I think overall, we see it as very resilient, actually, probably a touch better than our expectations. So what I mean by that? You'll have seen that our quarter 1, we put our numbers up a little bit, we saw some improvement in GDP. We saw unemployment coming down, at least our expectations for the year, coming down at 4.3%. And we saw HPI going up about 1.5% over the course of the year, not much, but probably a touch better than we previously expected. I think if anything, since then, then we've seen the picture be a little stronger than we previously thought. So you saw the GDP improvement, for example, in quarter 1, that's pretty supportive. Now what's the impact of all of that? I think the impact is on asset growth, it's a touch better than we previously thought. On impairments, again, probably a touch better than we previously thought. So I think overall, that macro performance has been supportive. The one point that has been a bit higher and a bit more volatile than we'd expected is, of course, term rates. We still expect bank base rates to come down over a period of time. But nonetheless, term rates have been a bit more sticky, I think, on the upside than we had thought. What does that do? It slows down tangible net asset growth for us, not by much. We still expect growth, but nonetheless, the pace of it gets clipped a little bit by those term rates. And then, likewise, in our insurance business, we have a little bit of below-the-line volatility, which you saw a bit of in Q1. It's disconnected from capital, so it doesn't change capital outcomes and the like. But on the face of the P&L, it's a bit of noise. So I think stepping back, overall, a supportive macro environment, which, of course, we're very pleased to see. We see that carrying on in '24 and indeed going forward into 2025. And that's, I think, for us, at least the conducive backdrop.

Okay. And I suppose if we tie that into NII, you've guided for an average interest earning assets this year over GBP 450 billion and a net interest margin over 290 basis points. So could you just talk about some of the moving parts there? Where are you feeling more confident, particularly in terms of either the margins or the lending book?

Yes. Yes. Thank you, Ben. And 3 components really for net interest income. AIEA is number one, I'll talk about that in just a second; margin, number two, but of course, nonbanking net interest income, number three. AIEA is first of all, it won't surprise you to know that given that macro backdrop, the AIEA's performance has been pretty robust. We've given guidance for greater than GBP 450 billion over the course of the year. and we feel very comfortable with that guidance as we stand today. We saw GBP 449 billion in quarter 1, but don't forget that's because of a mortgage refinancing overhang that we tagged at the end of the year. So that's really not a surprise to us. It shouldn't be a surprise to the market as such. Underneath that, what have we seen? We've seen mortgage growth pretty strong. We talked about application volumes up 20% in Q1. It's not going to be that strong year-on-year, but nonetheless, it's a good start. Likewise, we saw some decent performance in unsecured and in motor. Personal loans and motor both had a little bit of a one-off effect in terms of quarter 1. Dealer restocking in the context of motor, effective securitization catch-up in respect to personal loans. But again, strip all that away, and it's still a pretty decent performance. Commercial, balance is driven within commercial by repayment of government-backed lending in a significant part, and that's going to continue to be part of the picture for the next few quarters. And underneath that, you've got still relatively slow SME overall demand. So the picture within commercial is probably a bit dampened than it is within retail, but no real surprise. And overall, it doesn't undermine or challenge our confidence in the greater than GBP 450 billion AIEA guidance for the year as a whole. Margin, second component, margin guidance of greater than GBP 290 billion for the year as a whole, and we feel very comfortable with that guidance as we stand today. You saw it's been 295 in respect of Q1. It was down about 3 basis points in the quarter, which itself is a significantly slowing down trajectory, if you like, versus quarter 4, where it was down something like 10 basis points. Let's go on kind of underneath that number, a couple of things really, 2 big headwinds, 1 big tailwind. The headwinds that we've seen, deposit churn, I'll talk more about that in just a second, and the mortgage refinancing headwind. Deposit churn is interesting. We're starting to see the beginnings of an inflection point. You saw a deposit churn in terms of exits from PCA into savings, exit from an instant access into fixed term in quarter 1. And I'd expect to see a little bit more of that, frankly, in quarter 2. But as the year plays out, we expect that to dissipate and attenuate. Indeed, we're seeing signs of that in quarter 2. The mortgage refinancing headwind, we see mortgage pricing right now around 65 basis points. The maturity yields on the mortgages that are coming off the balance sheet, however, are more like 120 basis points. And it's that combination, which is the mortgage headwind, and that's going to take a little longer to play out. That will be there in '24. It will be there in '25, albeit slowing down in pace over that time, but nonetheless, still there. Then, of course, the big tailwind is the structural hedge. So what's going on there, you saw some decent tailwind in quarter 1. We do expect to see some pretty strong tailwind over the course of 2024 as a whole. Bear in mind that quarter 2 at least will be a little bit of a drag, and that's simply because of the maturity yields on the hedges coming off. But overall, for the year as a whole, 2024 as a whole, the structural hedge will be a strong tailwind. And we expect that to pick up in '25 or at least be, let's say, the same to a touch better in '25 and again, better in respect to 2026. So some decent performance there in terms of the margin, which again gives us confidence in the overall greater than GBP 290 billion for the year. And then of course, the third point that I mentioned is just don't forget nonbanking net interest income. It goes hand-in-hand with other income growth, and you would expect it to tick up as other income growth activity levels increase in commercial, in transport and 1 or 2 other areas as well, insurance, pensions and investments, for example. So that's part of the picture, but it's there in part because of rate rises, but also in part because of good reasons relating to OOI activity.

Okay. And just touching a bit more on the structural hedge, so you've said that's greater than GBP 700 million benefit expected this year and picking up the steam from then on. So to what extent should we consider some of those benefits as fully locked in now? And how sensitive would you see them relative to the path of deposits?

Yes. Yes. Thank you for the question. It's an important one, and it's an important part of our equity story, clearly. I mean, in a sense, when you look at prevailing rates, the bank is underearning really right now, simply because it has a very large part of its deposit base parked in rates that are yielding much lower market rates are today. As we go forward, that underearning kind of comes out of the system, if you like, and that's what the structural hedge refinancing is all about. We saw structural hedge earnings of around GBP 3.4 billion in 2023. We expect that to pick up by about GBP 700 million in 2024. We expect that to be similar or possibly a touch better in respect to 2025, and then we expect to pick up again in 2026. And that's because of the yields of the hedge that are rolling off and it's because of the prevailing rate environment that we've given kind of guidance and outlook on, number two. So some pretty mechanistic trends, if you like, built into that structural hedge profile. In terms of the question that you posed about how much of that is actually locked in? How exposed are we? Just to give a couple of comments on that. We're pretty much done now for 2024, as you might expect. The further out you go, not surprisingly, the less than we are. But just to give a bit of context around that, we're probably about 4/5 done for '25, and we're probably about 2/3 done for '26. So as you can see, over time, as the years come closer, we're progressively locking in more and more of the structural hedge benefits that we expect to see, and therefore, that exposure becomes progressively less. Where -- as we go forward, what are we exposed to in terms of structural hedge? 2 main factors, one is deposits. We've seen a little bit of positive outflow from the structural hedge in the course of quarter 1, about GBP 3 billion. We expect to see something, probably fairly similar, I suspect, in quarter 2. But then that should start to attenuate over the course of the year, simply because we're seeing fewer customers migrate. The deposit churn effectively slows over the course of the year as the rates environment changes, as the money that was going to move has already moved, and indeed, there's things like inflationary pay settlements, which we are seeing in terms of the customer data, come into play more and more in terms of the balances that are invested in the structural hedge. So that deposit churn becomes less of a feature as the year goes on, but expect to see a little bit more of it in quarter 2. The second exposure is obviously the rates. And clearly, if rates collapse, then that has an effect on the structural hedge earnings that you might be able to redeploy new hedges into in future years. But let's just step back a bit and recognize that actually those 2 exposures are offsetting, or if you like, they go in different directions. So the more, if you like, that we see rates go up, which in turn is consistent with deposits going out, nonetheless, the deposits that you retain on the balance sheet in the structural hedge you're going to earn more from. So rates might go up, that might encourage deposit outflow, but on the other hand, the deposits that you keep, you're going to earn more money from. Likewise, if rates collapsed, deposits stay where they are. So there are 2 exposures there; rates, number one, deposit outflow is number two. But let's be clear, they're going in different directions.

That's clear. And while a lot of attention does remain on your NII, and it's worth noting as well that over 1/4 of your income in 2023 came from other income, so what are your priorities there as a management team and some of the key focal points?

Yes, important area for us, Ben. Thanks for the question. The other income performance, as I imagine people in this room will know, for quarter 1 was GBP 1.34 billion. So that's about 7% up year-on-year. It's about 4% up quarter-on-quarter, both of which I think are respectable growth rates. What's going on there? Underneath it, there are 2 things driving that growth. One is recovery in activity, essentially. That's given the type of supportive macro trends that we mentioned earlier on. And then two is obviously the landing of some of the strategic initiatives that we've been seeing and investing in quite heavily. Stepping back on a business line perspective, it's good to see that year-on-year those growth trends are coming from pretty much across the business. So if you look at retail, for example, you're seeing growth trends there from PCA. You're seeing growth trends there from cards. You're seeing growth trends there from transportation, although bear in mind that transportation has been somewhat offset recently by increases in op lease depreciation as well, which we saw in Q1, and we're going to see it again in Q2 given the developments in residual values and car prices and the like. But overall, the picture within retail and other operating income is one of good, decent, solid growth. Likewise, commercial banking. We've been pleased with developments in trading and capital markets and the like, where we've seen growth in share, growth in levels of activity and correspondingly growth in revenues. Thirdly, insurance, protection and investments. Some of you will have seen, we've been slightly refocusing our proposition there. We're investing heavily in places like workplace pension. We've been investing heavily in things like improving the infrastructure in GI. And we've seen some benefits of that flowing through in terms of the actual results from those earnings streams or from those propositions, I should say, in quarter 1 and expect to see it going forward. The focus of the investments pretty much follows those lines. You'll see the focus of investments in things like mass affluent in retail, and you'll see it in transportation and retail. You'll see it in workplace in pensions. You'll see it in merchant acquiring DC and FX and the like in commercial. So the investments are, thankfully, at least, producing results. They are then supplemented by some of the macro basis that we have. And then looking forward, type of growth that we saw in 2023, first quarter 2024, I would expect us to continue to see growth in other operating income going forward. The reasons mentioned, Ben, obviously, it will be macro dependent to be clear as a lot of things in our business are. But nonetheless, with that macro environment, I would expect that growth to continue going forward. And when we look at our 2026 ambitions of an incremental GBP 1.5 billion in revenues from strategic initiatives, around about 50% of that should be other operating income inspired, driven by some of the factors that I've been mentioning.

Okay. Fair. And turning now to operating costs. So you guide to GBP 9.3 billion for this year plus GBP 0.1 billion Bank of England levy. So how are you balancing investments and savings, especially as you move further forward to a sub-50% cost to income ratio by 2026.

Yes, yes. Yes, it's a good question. Just to take a step back momentarily on that. As you'll be familiar, we've guided to GBP 9.3 billion over the course of this year, per your comment just there, Ben. That now, of course, has the Bank of England levy, again, as you highlighted in your question, of about GBP 100 million. We expect to meet that guidance. We give our cost guidance after due consideration, and we've got a decent track record at least of meeting expectations and commitments in that respect. It's worth just very briefly pausing on that Bank of England levy point simply to reinforce the fact that it is net neutral from a revenue perspective. So we are now getting remunerated on reserves that we were not previously getting remunerated on, but we're instead being used to fund the Bank of England supervisory activities. Now instead, we get a cost for it. But equally, we get remunerated on those reserves. So it's net neutral from a revenue perspective. Meeting targets on the cost front, referring back to GBP 9.3 billion, it's frankly always hard. I wouldn't want to understate it. But as I said, we have a decent track record. Q1, we got GBP 2.4 billion in OpEx charges, OpEx costs, as you'll have seen. That included 1 or 2 doses of one-offs, if you like, Bank of England levy being one of them, excess severance, which we front loaded in order to get the benefit through the course of the year being the second. If you strip those 2 items out, then you've effectively got about a 1% increase in OpEx year-on-year as a result of that, which is not bad when you look at the inflationary environment that we are, if you like, countering we're having to deal with. The combination, if you like, of BAU measures, matrix management, organizational design, supplier management, number one, that collection of, if you like, BAU cost management techniques, plus some of the strategic investments that we've been making, which are in nature cost driven. So things like automation, forgive me, digitization, for example, things like decommissioning, for example, and things like trying to make the operating model for change cheaper, for example, those are strategic investment-driven cost savings. That combination of BAU and strategic investment is what's behind the cost objectives that we have. And indeed, what should allow us to deliver on our gross GBP 1.2 billion sales target that we've got out there, which in turn allows us to deliver on GBP 9.3 billion cost target plus, of course, the GBP 0.1 billion Bank of England levy. That's what's behind it. That's what's going on. You mentioned, Ben, in your question, what then goes on in respect to 2026. 2026, first of all, is a cost-income ratio target. It is not an absolute cost target. So naturally, you would look both to income in that respect and also to costs. Briefly in income, we touched upon it in the previous question, so I shall not repeat, but nonetheless, we've got 2 or 3 things going on in income. You've got restoration of activity levels, again, supported by hopefully conducive macro environment, but not above and beyond our guidance that we've given, number one. Number two, you've got the benefits, if you like, of strategic investments coming through. Some of the GBP 4 billion over 5 years that we're investing really starts to land by 2026. I mentioned GBP 1.5 billion of extra revenues just a second ago. And then number three, within the BAU, you've got the structural hedge refinancing, and we discussed that in response to a previous question, Ben. So that combination of activity levels, strategic investments landing, structural hedge, continuing to deliver, indeed growing significantly, that's what delivers the income profile. Now against that, you've got an investment program, which, let's face it, banks need investment. So I'm not going to suggest for a moment that all of a sudden that's going to get eliminated, it isn't. But nonetheless, the type of cost growth that comes off the back of the investment program that we have got should, over time, start to slow. And of course, with that, then depreciation follows and you get a slightly more stable cost growth pattern than we've seen in recent years. And it's that combination of income growth that we expect, and much of that is fairly mechanical, together with the continued cost discipline in the way that I've described that delivers operating leverage within the business. And it's that operating leverage, which in turn gives us confidence in the cost-income ratio of less than 50% by the time we get to 2026. So that's what's going on behind it. And I think a lot of that -- as described, I'd love to say it's all about management virtues and management being amazing, a lot of it is fairly mechanistic.

Very clear. Okay. So turning to asset quality. So you guide for an asset quality ratio of below 30 basis points for this year. In Q1, I think you did 23 basis points if you exclude the MES release and 6 basis points on a headline. So how would you assess the quality of the loan book at the moment? And how comfortable are you with that guidance?

Yes. Yes. Thank you, Ben. The short answer is, as I suspect won't surprise for many people in this room, that we feel very comfortable with the guidance on the asset quality ratio. As you said, 6 basis points in Q1. I mean, let's face it, we got the benefit of about GBP 192 million MES in Q1. But even if you strip that out and then you also strip a bit of modeling benefit that we saw in commercial banking out as well, you're looking at an underlying asset quality ratio of about 28 basis points, which is still comfortably within the guidance that we have seen -- rather the guidance that we gave. The full year guidance that we gave, as you know, is less than 30 basis points. Off the back of Q1 and the basis of what we're seeing in Q2, we feel very comfortable in respect of that guidance. It gives us a lot of confidence. Rest of the year, what's going on within that, that gives us that confidence. I think it's a positive portfolio performance. We've talked about it a lot at the Q1 results. Mortgages new to arrears, for example, coming down; other assets within retail performing at or below pre-pandemic type levels, number one. Number two, early warning indicators, really pretty benign. We're not seeing any signs of stress in terms of the customer base that we have. Minimum payers in cards, for example, pretty good. Overdraft utilization within SME, pretty good, very stable early warning indicators. As I think everybody knows, we have pretty prudent underwriting standards within the bank as a whole. So that gives us some degree of confidence again moving forward. And then on top of that, we feel very well provisioned. We have an ECL, if you like, expected credit loss, right now of GBP 4.1 billion, that is about GBP 600 million in excess of our base case ECL requirements. Now that is produced by virtue of our IFRS 9 modeling, to be clear, to formulaic output of the way in which we model IFRS 9 expectations, which include a dose of more adverse outcomes, and therefore, producing an ECL in excessive base, but it also makes us feel pretty comfortable in terms of provisioning of the balance sheet. It's a high-quality loan book, Ben, and I'd be very happy to kind of quote statistics and so forth backing that up. But just to give a small dose of them. You've got mortgages with about a 43% LTV, for example. Less than 2% of the mortgage book is greater than 90% LTV, of which much of that is government guaranteed because of the way in which the mechanics, if you like, work in the U.K. We've got an unsecured book, which is very prime in its orientation. We've got an SME book, which is more than 90% secured. We've got a C&I book, corporate and institutional book, which is more than 80% investment grade. So we've got, what we consider to be, a very high-quality loan book out there, which again supports our expectations around asset quality. So as we step back, the environment that we're seeing, the macro forecast that we've got then, we feel very comfortable as to our asset quality commitments that we put out there, and we should be comfortably below the 30 basis points.

Okay. And wrapping all the P&L together now you've given us some very clear moving parts. So you guide for around 13% return on tangible in 2024 and greater than 15% in 2026. So could you just help us with what drives that improved profitability at a high level? And then where you see through-cycle returns stabilizing?

Yes. Yes, a couple of questions in there. Ben, I'll take maybe just one by one. The -- first of all, in terms of '24 RoTE guidance, as you know, we've guided to circa 13% in respect of 2024. We, again, feel very comfortable with that guidance as we stand today. We saw 13.3% delivered in Q1. Now you might say, okay, but you saw the benefit of GBP 192 million MES provisions, if you like, or positives during that quarter 1. Yes, that's true, but on the other hand, we also saw the bank levy. We also saw excess severance. We also saw volatility. And if you add all of that together, that together is around -- or actually greater than GBP 200 million. So that offsets the MES benefits that we've got and makes the 13.3% that we saw in quarter 1 look to be robust. Looking at the rest of the year, you're familiar with the macro assumptions that we've got. We've talked a lot about income. We've talked about the cost commitment of GBP 9.3 billion plus BoE levy. We've talked about the macro environment, the impairments point. Overall, you can see in the context of a rising TNAV, which we still expect to see despite my earlier comments about term rates, that gives us confidence in the circa 13% RoTE for this year. Your question, Ben, is then looking forward, how does that change as we go into 2026? And again, just like the cost-income ratio really, it's worth bearing in mind that there are both income factors here at play and also cost factors here at play. So stepping back, people are aware, I'm sure, of the macro guidance that we've given. We're looking towards a pretty stable, frankly, not very exciting, but nonetheless, pretty stable macro backdrop as the backdrop against which we expect to perform. The bank is robustly positioned to be clear if that doesn't pan out, but nonetheless, that's the background assumption. What's going on, on the income side? Again, I shall not repeat, but there's 3 dynamics in the main going on; business as usual activity, structural hedge and landing and strategic investments. There's a fourth point, which is kind of in the mix there, which I didn't mention earlier on, but it's the elimination of 1 or 2 of the headwinds. I mentioned deposit churn, which we expect to see settling down in the second half of this year, supported by some of the early evidence that we're seeing in Q2. But also by the time we get to '26, the mortgage headwind just mechanistically comes out, if you like. That refinancing headwind of 120 of old assets being swapped for 65 of new assets, that's played out by the time we get to 2026. So that's another feature, if you like, of that '26 income story. And then, as I said earlier on, you've got a cost base, which is still growing, I would imagine, because we'll continue to invest within the business, but it's growing at a more moderate clip as the investments are slowing in pace, if you like, but also the strategic investments that we have made to reduce the cost base, points I was making earlier on, those kind of come home, and as a result, deliver in 2026 and deliver a slightly more stable cost outlook. That's the kind of operational leverage, if you like, that delivers a big part of the story. Now, as I said, because we get the structural hedge maturing, because we get additional pension contributions and the like, we also expect to see TNAV growing over this period. So we do expect a reasonable pace of TNAV growth over the period between 2024 and 2026. And when you put those 2 together, the P&L comments I was making, together with the TNAV comments that I'm making, what we see is effectively a decent and indeed stronger return off the back of a rising and higher TNAV. It's that combination of a stronger return and a high TNAV that we expect to see off the back by the time, I should say, we get to 2026. And as I said, a lot of that is relatively mechanistic in its orientation. Third point you asked, Ben, is around where do we expect returns to go over the medium and longer term for the industry? I think it's safe to say it won't come as a surprise to anybody that a lot depends on the rate environment that we're in. We've just seen 10-plus years of very low rates. And there's no doubt in my mind that, that led to a subdued outcome in terms of bank profitability. Equally, the rate environment that we're in right now is much more conducive to stable and better profitability within the banking sector. Now it's our expectation that rates come off, as I think probably the market consensus would suggest the same. That is to say we expect base rates to come down. We also expect term rates to come down with them over the course of time. It will take a little while to play out, but we do expect that. You've seen our medium-term rates landing zone, if you like, is now around 3% or so. I think the market is probably a touch above that. We're at around 3%. That is an environment that is conducive to decent profitability within the sector. Now when you compound that, in our case, with a business model that is specifically focused on, if you like, the more attractive areas of banking, retail and commercial banking focus, obviously, we've got the insurance business alongside of that, then a conducive macro environment is compounded by a business model that is focused on more attractive areas of banking. And I would expect in that context to deliver attractive returns on a sustained basis going forward.

Okay. And your points about TNAV, I think, twine quite nicely into thinking about capital development. You've highlighted that you expect to pay down to around 13.5% by end of 2024 and 13% by end of 2026. So how are you prioritizing there between returning capital to shareholders and pursuing growth?

Yes. Yes, thank you. Thanks for that question. It's clearly an important area. And as I imagine people in the room will be aware, we reduced our capital target by the time we get to 2026 to 13%, moving slightly away from our longer-term capital target we have for a few years now of 13.5%. So why do we make that move, first question, and I'll talk subsequently about capital generation a little bit. The move was really driven by 3 factors: one is a significant de-risking of the business that we've seen over recent years and I think has intensified since I got here, since Charlie arrived and so forth. What do I mean by that? Well, it's evidenced across a number of different areas, retail, for example; the heritage mortgage book, which goes back to mortgages written in the kind of 2000 to 2008 type period. That is steadily exiting the business. It's now down to around GBP 28 billion or so. It's come down sharply during the time that I've been here. And indeed, actually, the asset quality performance of that book has been very benign. I mentioned earlier on, new to arrears of the mortgages are dropping, that business has been a big part of that fall actually, behaving very well in the -- even in the current environment. That's in retail. Within commercial, we have a relatively modest CRE book, for example. We have an SME book that, as I mentioned earlier on, is very secure, and it has been performing exceptionally well. So on the balance sheet, a significant de-risking. That's been accompanied by de-risking across areas that are non-balance sheet related. So when I came in, we had a GBP 7.2 billion pension deficit. The actuarial pension deficit for us right now, as of the latest triennial, is 0. So we've eliminated not just balance sheet risk, but we've also eliminated a lot of non-balance sheet risk, and therefore, the business has been materially de-risked over the last few years. Second point is the regulatory picture going forward looks a lot clearer than it did just a couple of years ago. So specifically, what do I mean by that? We've seen CRD IV, which is basically the mortgage risk weighting rebalancing, driven, if you like, by some of the PRA requirements. We now have a pretty good picture as to where that's going to go. We expect about another GBP 5 billion of RWAs to be added on to our RWA account by virtue of the CRD IV mortgage modeling. But we kind of know more or less what that is. It might be a touch more than GBP 5 billion, it might be a touch less than GBP 5 billion, but we know it's roughly speaking, going to be in that landing zone. We'll know more as models get finalized, and of course, we'll update accordingly. Likewise, Basel 3.1. Basel 3.1, the timing is little uncertain, but we kind of know it's going to be roughly net neutral for the business. Retail is going to go up a little bit. Commercial is going to go down a little bit. Overall, net neutral. As a result, the timing uncertainties around Basel 3.1 don't terribly much matter to us because you've got that neutrality in terms of the outcome. And then finally, in respect of regulatory clarity, if you like, Pillar 2A charge, which is clearly a core part of our regulatory capital requirements, that's been pretty stable, and it's been pretty modest over the last few years. Now, it will move around a little bit from time to time, for sure, but nonetheless, stable and relatively modest is the overall expectation, the overall picture, which overall, I think, doesn't mean that all areas of regulatory certainty are perfectly in place right now. It doesn't mean that. But on the other hand, it does mean that the clarity is greater today than it was even as recently as a year or 2 ago. Now that's the second point. The third point, in terms of reduction of capital ratios to target capital ratios of 13%, is that we have very much kept our capital buffer in that overall capital target. So at the moment, we have a regulatory capital requirement on a BAU basis of 12%. Any stress basis on which we measure our capital requirements are in fact lower than that 12%. So the biting point for us is the 12% BAU capital requirement. Our 13% target deliberately maintains a 1% buffer to accommodate for macro uncertainty. Now we're also a profitable institution, as you know, in fact, quite a profitable institution, and therefore, there's buffer from the kind of BAU flows. But quite apart from that, there's buffer within the stock with that 1%, which -- for those who have really done its maths in their heads, apologies, but nonetheless, it's somewhere between GBP 2 billion to GBP 2.5 billion of buffer by virtue of that 1%. So overall, we feel very comfortable with that capital -- target capital ratio reduction, 13.5% to 13%. For those investors in the room, don't worry because actually -- because of the increasing RWA intensity within the business by virtue of CRD IV, for example, the actual capital within the business is going up during that time. And that's simply because RWA density is going up. So even if you drop ratio slightly, the capital investment in the business continues to go up despite that de-risking point that I made earlier on. Hopefully, therefore, it's good news for all stakeholders. Looking forward, as we allocate capital, perhaps to move slightly to the second point and stop there, as we allocate capital, we're going to be looking at 3 things really. One is, how do we make sure that we continue to maintain and indeed build the competitive position of the bank? Alongside of that, reward our colleagues appropriately. Alongside of that, grow the business. So that's a big part of our capital allocation. And that's going to be the start point for any consideration. Second is, and it's a kind of cynical, it's nonnegotiable. We maintain strong capital ratios. And I hope my points around 13%, if you like, have vindicated that and supported that point. Strong capital ratios, go without saying, they're a necessity for the business, and they simply won't be compromised on. And then thirdly, strong shareholder distributions, whether it's by dividend growth, we grew 15%, for example, in dividend last year, or whether it's by buyback, we've got a GBP 2 billion buyback in operation right now, we expect to see sustained strong capital distribution to shareholders. And so the capital allocation framework is going to look across those 3 points, Ben. We're going to look across how do we sustain business best going forward, how do we maintain strong capital ratios, how do we maintain strong shareholder distributions? And I think by virtue of the business model, by the setup that we have, by the scale that we have, by the customer service that we have, by the efficiency in both costs and capital, we should be able to triangulate to give the term between all 3 of those and satisfy all 3 constraints in any given year.

Very clear. So we have a few minutes left. If anyone from the audience has a question. I'm sorry, I just request that you wait until a microphone gets to you and then state the name of yourself and your institution. So yes, here in the front, please.

It's Dirk Becker from Allianz Global Investors. And I was wondering, do you have any comments on this motor finance investigation that's going on in the U.K.? You took this early provision. And is that the first indication? Is that the second PPA? Or what's going on there?

Thank you, Dirk. It's a very relevant question, a very fair question to ask. Couple of points maybe to make. One is, let's just view it in context for a moment. Motor Finance is financed that is used to fund somewhere around 80% of car purchases in the U.K. So whatever the solution that is arrived at, it has to be a solution that is consistent with an enduring and supportive approach to the role of motor finance within the U.K. That I think is why the FCA intervened. It does not want a disorderly outcome to what is going on. It needs to have an outcome that again is supportive to a significant part of the U.K. economy and secures an ongoing role for motor finance within the U.K., hence it intervened to ensure that we get to an orderly position. Third point, the FCA is looking for evidence, if you like, of misconduct and customer loss. From our perspective, we complied with all the relevant regulations at the relevant time, and therefore, as we look at the business, we have not found evidence of misconduct or customer loss. Now of course, you might say, well, okay, why did you then provision? And we've provisioned off the back of 2 things really. One is to take account of administrative impacts that, of course, we will see. The FCA has launched its investigation. We are gathering data. By its very nature, we're going to incur some administrative costs. But also, we then put in place a series of scenarios to see how this might play out. And some of those scenarios took an adverse view of the regulatory determinations, things like they find, I suppose, some signs of customer loss, and therefore, we need to address. And off the back of that, they don't allow any commission, zero commission basis. That's an adverse outcome versus a reasonable commission basis, if you like. Alternatively, they go back right the way to 2007 versus, let's say, alternatives like 2014. Likewise, proactive versus reactive type of inputs. And we looked at those different scenarios, some with, if you like, good outcomes on those key points, some with more adverse outcomes on those key points. And in our overall GBP 450 billion provision, we looked at those scenarios and took more or less a kind of weighted average, if you like, what those scenarios might imply, and therefore, administrative expenses, number one; potential redress outcomes, number two, equals GBP 450 million (sic) [ GBP 450 billion ] provision at the year-end. As we stand today, Dirk, it's our best estimate of the right provision. So there's no change. We expect to see some developments over the course of this year. The FCA has committed to publishing something by the third quarter. Not clear to us whether that will be determinative of the outcome, full stop, or whether that may kick it into things like financial test cases into the law courts, number two, possibly, in which case things will go on for a little bit longer. But as I said, right now, GBP 450 billion is our best estimate of the provision based upon that type of scenario planning that I mentioned earlier on in an industry that everybody recognizes has got to be a critical partner of the U.K.'s future going forward.

That brings us right to time. So, William, thank you so much for joining us.

Thank you very much indeed, Ben. Thank you.