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

Good afternoon, everyone, and welcome to the final of our 4 investor seminars focusing on our strategic growth priorities. Starting back in October, we've undertaken 3 deep dives on our strategic progress and opportunities across consumer, CIB and mass affluent and IP&I. Today, we're excited to focus on our business in commercial banking franchise, BCB, a highly profitable business and an area where we have placed renewed focus in recent years. It is also core to our purpose of helping Britain prosper. I'm today joined by Elyn Corfield, CEO of BCB. As in previous sessions, I'll provide a few introductory remarks before handing over. As always, following the presentation, we'll have a plenty of time for questions. Let me start on Slide 2. The key messages that I'd like you to take away from today's session are as follows: firstly, BCB is an integral to both the U.K. economy and our group performance. Secondly, our franchise is a differentiated proposition that spans a broad range of products and drives long and strong, sustainable standing relationships with our customers. Thirdly, our BCB strategy is focused on diversifying, digitizing and transforming the business to competitively position ourselves in an evolving environment. We are also increasingly leveraging the benefits of the broader group to meet more of our customer needs. Elyn will expand on these topics in detail. And finally, BCB is a significant contributor to the additional strategic revenues targeted by 2026, representing GBP 0.3 billion or nearly 20% of the total. Beyond the strategic initiatives, there is also a material upside from the core franchise growth and further improving operating leverage. These will be additive to a business that already delivers highly accretive returns. On Slide 3, I'll provide an overview of the structure of the business. Our BCB business sits within our externally reported commercial banking division. BCB accounts for roughly half of commercial banking income and is focused on businesses with less than GBP 100 million in turnover. As you will recall from our seminar in November, our CIB business captures those clients above that threshold. Our BCB customers have a diverse range of needs, which we support across 3 segments: business banking, SME and mid-corporates. As you'll hear from Elyn in a moment, one of BCB's strengths is its breadth of offering, spanning core products such as business current accounts, term lending and working capital but also including merchant services, trade finance and markets solutions. There is a clear opportunity to leverage this broad proposition to diversify the business across both products and sectors whilst digitizing and transforming to meet customer demand and to future proof our offering. Successfully executed, BCB will build upon its strong foundations to become a truly differentiated, digitally-led relationship bank. To close, I'll touch upon the financial impact of this strategy on Slide 4. We are committed to our target of generating GBP 1.5 billion of additional revenues from strategic initiatives by 2026. BCB is expected to contribute GBP 0.3 billion of this total or around 20% for circa 15% of the associated investment spend. This represents a strong return on investment. As you heard in February, we're making good progress towards delivering circa GBP 0.7 billion of additional revenues by the end of 2024, with BCB on course to contribute around GBP 0.2 billion of this. In addition to the strategic revenues, we see a significant further revenue opportunity from growth in the core franchise. This will predominantly be driven by retention of our sizable deposit base as well as our market share across various products. BCB will also be important in improving the operating leverage of the group with increased digitization, reducing unit costs and enabling us to build scale in an efficient way. With that, I'll hand over to Elyn to provide more detail on these drivers and outcomes. Elyn, over to you.

Thank you, Charlie, and good afternoon, everybody. Our BCB business is well established and sizable. We hold relationships with more than 1 million businesses across the U.K. and benefit from strong market shares in the key products that cement our relationship with these customers. This gives us scaled franchise with over GBP 30 billion of lending and nearly GBP 80 billion of deposits. Complementing our scale, the business is also highly profitable and makes a material contribution to the group's financial performance. In 2023, BCB represented around 15% of group net income, with a return on tangible equity of over 20%, significantly above group targets, and which we expect to continue to improve over time. I will today outline the opportunities we see before covering our 3 focus areas: diversifying, digitizing and transforming and unlocking broader group opportunities. Let me begin with the market backdrop on Slide 7. The business is served by our BCB franchise make a meaningful contribution to the health and performance of the U.K. economy. SMEs provide around 60% of U.K. jobs and contribute to more than 50% of private sector turnover. Consequently, our BCB business plays a critical role in delivering the group's purpose of helping Britain prosper. BCB has performed resiliently in recent years. It's continued to be highly accretive to group value. This is despite the challenges faced in the market, including the impacts of the pandemic, supply chain pressures, labor shortages and rising inflation, which have reduced appetite for borrowing. At the same time, we've seen new entrants access the market with competitive digital offerings; repayments of government-backed lending linked to the pandemic have contributed to the reduction in the market size for loans and deposits, albeit both remain meaningfully above pre-pandemic levels. This dynamic will ease over time with the vast majority of government-backed lending across the sector expected to be repaid over the next few years. The business is well positioned to capitalize on an improving outlook, including business confidence, which is materially above the long-run average. This provides us with optimism with regards to our growth plans to 2026. On Slide 8, I'll provide an overview of our broad BCB franchise. As you heard from Charlie, our BCB franchise business comprises of multiple segments. At the smaller end, with business banking, we hold relationships with more than 1 million businesses. This segment links closely to our leading consumer franchise. Given these relationships are primarily deposit-led and digital first, this is a highly profitable business area. SME and mid-corporates present larger customers that tend to have more sophisticated financial needs, including solutions provided by our CIB business, such as FX and rates. As a result, these relationships are often supportive of OOI growth. Across the business, we have a well-diversified portfolio, both geographically and by sector. It's highly resilient lending book, particularly in real estate, which has an average LTV of 45%. The breadth of our business provides a strong foundation for building deeper relationships with customers, helping to meet more of their financial needs. But what makes our business truly differentiated in a competitive market? Let me elaborate on this on Slide 9. We have a strong BCB franchise with unique competitive advantages. Firstly, we are a trusted provider and a leader on brand and service quality. Secondly, we have strong, lasting relationships supported by over 1,000 highly rated sector, product and relationship specialists in all parts of the U.K. And thirdly, our integrated, full-service proposition sets us apart. The breadth and depth of our product offering enables us to support customers through their life cycle from start-up to growth and maturity. Furthermore, our lending portfolio is diversified and high quality with around 90% of SME lending secured. Our prudent risk appetite ensures that the growth we deliver is value accretive and deliver sustainable returns for shareholders through the cycle. Finally, with our wider group capabilities such as in pensions and vehicle leasing, we are uniquely positioned to meet more of our customers' needs than other providers. We are also leveraging the capabilities of our leading digital consumer bank as we digitize our business. The consumer franchise also support flow into BCB, with around 70% of our business banking customers holding a relationship with another area of the group. This competitive advantage positions us well in market today and provides foundations for unlocking future growth. On Slide 10, I'll provide a high-level overview of our strategic priorities. We are building a digitally-led relationship bank. We have 3 strategic priorities: Firstly, we're diversifying the business in targeted products and sectors, enabling us to grow market share, increase product holdings and build other income. Secondly, we're digitizing our core business from front to back to improve customer journeys and increase personalization. This will enable us to deepen and grow customer relationships as well as deliver efficiencies. We're also leveraging data and technology to improve returns across the business. And thirdly, similar to what you've heard in previous seminars, we're focused on maximizing the benefits of being part of the broader group, delivering shared revenue opportunities. Let me share more about our diversification aims on Slide 11. Our strong share of customer relationships and deposits is a great foundation from which we can meet more customer needs in underweight areas such as working capital and merchant services. We have headroom for growth in lending. This is particularly amongst corporates with turnover greater than GBP 25 million, where market share is lower. As we deepen customer relationships, the income that we generate grows meaningfully. For example, a customer who has 5 products with us generates 7x more revenue relative to one who just holds 1 product. About half of our customers in BCB, particularly in business banking hold only one product. We see that as a clear opportunity. We are also focused on increasing representation in sectors such as manufacturing that have a broader range of needs beyond secured lending and tend to have higher product holdings and greater working capital and transaction needs. Given the market share differential of up to 3 percentage points, we have headroom for growth and growing in these sectors will support capital-lite income diversification, driving higher returns. It's important to note that we'll maintain our disciplined approach to lending, focused on sustainable value creation and align to our prudent risk appetite. How are we addressing these opportunities. On Slide 12, I'll provide examples of our progress and our plans. Our aim is to build deeper relationships. It's closely tied to some of the digitalization initiatives that I'll expand on shortly. These new simpler journeys will increase engagement and conversion, helping us to grow average product holding. Additionally, we're investing in data and technology to enhance our credit and pricing capabilities. 60% of our lending decisions in business banking are now automated, supporting a greater than 2x increase in gross new lending year-on-year. And we're also addressing new market opportunities with tailored sustainability solutions helping our customers transition to net zero. As an example, we've been working -- we've been providing core banking services to a Scottish energy business since they were founded in 2017. They recently won a large, new contract and our team worked with them to support their working capital needs and enable them to deliver sustainability linked projects. We are also leveraging our expertise to expand our franchise and drive growth in valuable sectors. We are upskilling our colleagues in these areas and have created a new specialist team that provides structured financing solutions for growing businesses. This closes a propositional gap and enables us to compete effectively in financing markets often occupied by alternative lenders. It's early days, but we're building good momentum here. On Slide 13, I'll discuss our progress in merchant services. Merchant services is a large growing market, but it's a highly competitive space we believe we're well positioned to compete through our integrated merchant business. From our existing market share of circa 6% today, there are meaningful upside potential. We have made good progress in the first 2 years of the plan, delivering more than 20% growth in our new clients per annum, whilst maintaining a real, clear focus on value creation. We have created a segmented strategy to reflect the needs of our customers, developing new capabilities with our joint venture partner, Fiserv. We are working to target -- we're working to provide targeted, simple solutions to our smallest customers and enhance our digital servicing. For larger merchants, we have transformed our proposition, now offering a single business management ecosystem with faster payment processing and omnichannel functionality. This signature proposition will be complemented by a range of value-added services such as dynamic currency conversion and merchant cash advances. We are also providing new solutions for merchants through our embedded finance proposition for consumers, as Charles discussed in October. Combined, these developments will increase the competitiveness of our offering and provide scope for growth, increasing access to valuable other income streams. I will now move to our second strategic priority: Digitizing and transforming on Slide 14. We have seen a material increase in digital engagement, heightened by the pandemic, meaning the businesses now expect slick, mobile-first solutions. This has been accelerated by new digital entrants. Today, around 85% of our customers are digitally active with mobile active customers up 30% since the beginning of the strategic plan period. Our customers are engaging with us more, and we expect this to increase further as we expand our digital offering. This, in turn, should further increase product conversion and with a lower cost to serve, support strong value creation. So how we're responding to these developments. We see opportunities to further improve our digital proposition particularly around 3 key themes that we'll cover in the coming slides. Firstly, scaling and improving our digital origination and servicing journeys; secondly, increasing personalization across our channels; and thirdly, leveraging data and technology across propositions and capability. Let me begin with digital origination and servicing on Slide 15, and we are focused on digitizing our core proposition from front to back. We will achieve this by expanding our ability to originate and service digitally and deliver a truly, integrated customer offering. In 2023, we launched our new mobile-first onboarding journey for business current accounts, and we have progressively rolled this out across customer segments. Off the back of this, the time taken to open an account has dramatically reduced by up to 15x. This compares well to best-in-class. And in some recent cases, we've opened account by as little as 3 minutes. We are growing the number of products that can be originated digitally, including mobile, instant access deposits in the last month. By digitizing, we are also creating opportunities to integrate multiple propositions. For example, as part of our digital BCA journey, customers can also take merchant service product at the same time. This is delivering positive results and a 15% increase in associated conversion rate. We have further to go, but we're targeting more than 50% of our products to be digitally originated and fulfilled by the end of 2024 with further upside in the years thereafter. We've also now digitized around 45% of our servicing journeys, improving experience and lowering the cost to serve. For example, when we digitize the process for changing a business address, it reduced related complaints by about 70% and the unit cost by around 60%. That's a transformational change. We fully expect that as we continue to digitize similar servicing journeys, it will drive further efficiencies. Let me now talk about how we are personalizing customer engagement on Slide 16. Digitizing our offering provides us with opportunities to personalize in a way in which we interact with our customers across multiple channels, adapting to their preferences and behaviors. We've also made good progress since 2021, moving from generic to more targeted content. For example, we have delivered a 3x increase in unique customer content supported by a 30x increase in the number of customer segments through which we can tailor our messaging. Increased personalization is tangibly improving customer engagement with our digital content driving product conversion and ultimately revenue growth with a 45% year-on-year increase from personalized digital marketing. Let me share a recent example. After a sole trader in construction opened a business current account through our new journey, we sent him a targeted and personalized message to make him aware of the different working capital facilities he could apply for online. He was able to review his options, apply digitally and receive an approval for an overdraft within just 10 minutes. This is a fantastic customer experience. There is more, lots more that we can do, and we'll further -- see further upside in the medium term. For example, as we continue to invest in our newly launched personalization engine, including through experiments with GenAI and deliver new insight tools such as helping customers better understand their finances. Turning now to Slide 17, where I'll talk to our focus on value creation and transformation. As a high-returning business, BCB has a strong track record of transformation. For example, in recent years, we pivoted our lending decision to take a more disciplined approach with value and volume trade-offs which has materially improved margins. We've also migrated a significant portion of our interest-bearing deposits to manage rate products, which has helped to drive a more than 50% increase in structural hedge-eligible balances. We also review our relationship operating model on a regular basis. And over the past few years, we have moved over 30,000 customers between our segments to better serve their lifecycle needs and deliver a more efficient model. Building on these foundations, we're investing in our pricing and our forecasting capabilities. For example, in lending, our strategic pricing tool leverage technology and data to offer more tailored pricing for customers, including around 8 million different lending price points compared to only 11,000 previously. We are rolling out strategic pricing tools further in 2024 across deposits and smaller lending segments such as our invoice financing meaning the vast majority of our products will be covered by the end of the year. On Slide 18, I will discuss our last strategic priority, unlocking group opportunities. As I touched on earlier, the synergies available from being part of a broader group are substantial and a unique differentiator versus other providers. We believe BCB benefits from a lower customer acquisition cost, given broader LBG relationships, whilst our digital ambitions benefit from the consumer division's proven digital expertise and architecture. We also provide low-cost, hedge-eligible balances for the group and facilitate pathways into our CIB franchise for our growing mid-corporate customers. Beyond these strong existing links, there is more that we can do to leverage the broader group such as providing referrals to our growing salary sacrifice vehicle business, Tusker, and ready-made pensions for the self-employed where industry data suggests that only 1 in 5 have a pension. We are also strengthening links with LDC, the Group's private equity business that recently completed its first investment in a BCB business just last month following a referral. Through these opportunities, we'll build deeper customer relationships and contribute to wider group opportunities. To close, I will highlight how our strategic initiatives contribute to our financial performance on Slide 19. Our growth priorities are supported by around 15% of the group's strategic investment, which, in turn, is expected to generate 20% or around GBP 0.3 billion of the GBP 1.5 billion total strategic revenue benefits to 2026. This growth is driven by our ambitious strategy to diversify, digitize and transform our BCB business. And I'm pleased with the progress that we're making. There is also significant upside from growth in our core business as we retain our low-cost deposits and grow share across targeted products and sectors, which will also contribute to realizing broader group revenue opportunities. Additionally, as we have outlined today, we expect our extensive digitization and servicing program to deliver further operating leverage improvements over the plan period. With this in mind, we are confident in the outlook for BCB and excited about where we're heading. We have a differentiated business that has unique advantages compared to our competitors. Our strategy builds on these strengths and will position us well for the long term, ensuring that we'll continue to deliver highly accretive returns to the group. I'll pass back to Charlie to close.

Many thanks, Elyn. So in summary, our BCB business is core to our group strategy and the purpose of Helping Britain Prosper. Hopefully, the session has demonstrated both the strength of the existing franchise and the progress we're making on executing our strategy. The business has performed resiliently against evolving market dynamics and is today delivering returns that are highly accretive to the group. Looking ahead, we're confident in the prospects for a business that will contribute meaningfully to our 2026 financial targets with further improvements in financial performance. Thank you for listening. I'll now hand over to Douglas, who will facilitate the Q&A session.

Thank you, Charlie, and thank you, Elyn. We've allocated around 30 minutes for today's Q&A session. [Operator Instructions] Okay, so let's begin. Our first question today is from Aman Rakkar at Barclays.

Yes. I had 2 questions, please, around the deposit base, please. So note the comments that you shifted to managed rate pricing model increasingly so. So I guess two kind of related questions off this. Are you able to help us kind of break down the composition of the deposit base in this business between particularly noninterest-bearing, but also what you would consider to be managed rate versus something that's kind of maybe more directly tracking base rate? I think it's an important to our understanding about the kind of rate sensitivity of this business. And relatedly, any color on how high pass-throughs got in this business through the rate hiking cycle that we've seen would be really good. And then the second is around trying to quantify some of this lending opportunity that's clear in your business. Are you able to put any numbers on the kind of pounds billion opportunity or percentage growth rates that we might be able to expect in the coming years from this business. I mean if you're not willing to quantify it in that way, maybe another way to ask is, is there a target loan-to-deposit ratio for this business? I noticed it's currently hovering around 43%, yes, so have you got to kind of target LDR for this business, medium term?

Excellent. Thanks, Aman. Elyn, I think probably if you could probably address both questions. So Charlie, I suspect you might have something to add.

Yes. So first of all, to talk about the deposit rate, the deposit base, the makeup of that, the NIBCA content and the pass-through cycle were the questions that you posed. Deposits for the BCB business is a core anchor product. It's something that we build with our long-lasting relationships with our clients and our trusted brand. As we look at this segment, though, it is a liability heavy segment. As you referenced, our loan-to-deposit ratio currently is 43%. We have, in recent periods, seen pressures on our deposit base with regards to inflationary pressure on businesses, rising higher rate environment as well as then the paydown of some of the government-backed lending. We have though throughout this period gained market share. We're now at a 21% market share. This has grown by about 2% since 2018. So it puts us in a good place with regards to our market share. When we look at the noninterest-bearing balances and the proportion of those within the group. Across the commercial bank, the percentage of our NIBCA is about 25% of the book. It's slightly higher than that when you look at BCB and the CIB split. So for BCB, it's slightly higher. And we have seen continued market pressure with regards to -- and this is something that's been totally seen across the market as we've seen deposits continuing to reduce. That has slowed though in more recent times. So we've seen stabilization, and we do expect that stabilization to continue as we go into 2025. With regards to our pass-through through the cycle. So as we went through the cycle and rates continue to move, we do, obviously, see this as a higher-margin business in that environment and the strength of that supports our profitability, but it was about 30% to 40% pass-through rate as we went up the curve, and we're expecting the same as we go down the curve. And why I say that as an average because it depended across the product. So if that be a term, a notice, instant access, it would be different depending on the product. But we constantly review, obviously, the environment, which is highly competitive market. We look for good quality deposits, and we will reflect wherever the market is and wherever we believe our pricing needs to be. So a constant review point. And then the lending opportunity that you talked about. So with regards to our lending. At the moment, we have got a 16% market share as we shared within the document, loan-to-deposit ratio of about 43%. Again, just some context on the market with regards to lending. Huge amount of government-backed lending put into the market, GBP 75 billion. So we did see a sharp increase in lending across the market, 29% increase. Now that's come down, and it's probably around -- reduced by about 16%, but we'll see the impact of the BBLS pay down for the next couple of years. So we've seen -- are seeing some underlying growth, but that's been offset at the moment with BBLS. We've got about GBP 4 billion of BBLS left on our portfolio continuing to pay down. Again, the things that are playing into that are the higher rate environment, environment uncertainty as well as the cost of living pressures that we see. The long-run average for the market is about a 1% growth. We do expect the portfolio to grow in line with GDP as we move out. I would say -- I've said it within the presentation, we're making deliberate choices on where we'll grow based on value and where we see value that's accretive to our portfolio. So we're not chasing market share. We're not chasing volume. We're very disciplined in what we do. And you can see that as you look at the margin over time and the book over time where we've made some deliberate choices to step away from some sectors and step into others. And that's where I talked about our diversification of our portfolio, both in our products but also across our sectors where we see -- we can see more engagement with customers. So that's probably where I'd go on both the lending and the deposit market and the opportunity that we see. Thank you.

Excellent. Charlie, is there anything that you want to layer on top off that?

Just maybe one point. Aman, thanks for the question, always very strategic. The deposit picture, I think you see that in the context of our broader NIM guidance for 2024 of greater than 290 basis points. We think deposit stability is important, but we are, as Elyn said, still projecting some churn in the deposit base. But just on loan-to-deposit and the strategic positioning, at this point, Elyn made around value, in this business, specifically through-cycle value is actually the most important driver and chasing market share can get you into trouble, especially because CRE, commercial real estate lending, is such a big part of the market and it's very easy to build the low return hurdle CRE exposure. So we do have, obviously, as a management team very clear targets for the strategic sectors and how we want to grow those, and we have a clear ambition with respect to the returns so it's accretive. But I think an overall target for this sector, which will always be a lower loan-to-deposit ratio actually isn't the right way to look at it. And all of that is obviously incorporated in our GBP 300 million of revenue growth of strategic initiatives revenue, both the split of that between OOI and the increased lending that we can see.

The next question is from Alvaro Serrano at Morgan Stanley.

I had a question around loan growth, and you just touched around on the answer to the previous question. But if I understood it correctly, there's still GBP 4 billion of government-guaranteed loans in this business. And if we think about how loan growth is going to evolve going forward, I think you said 2 years, it will affect it. Maybe if you can give us a sense of how demand is shaping up if we look through whether it's government-guaranteed or your own loans. And if this is going to weigh on the business for the next couple of years, would you expect to replace those loans with Lloyd's sort of normal loans and is that source of [indiscernible] inflation and increased capital allocation to this business.

Yes. Thank you for the question. So yes, going back to loan growth and the lending market. Yes, we have got GBP 4 billion of BBLS left on our portfolio. We believe that will be significantly paid down by 2026. But as I touched on, the pandemic period really created the growth and the spike. We peaked, grew by 29%, came down, now currently, it's reduced by about 16%. We do think, as we look forward, the long-run average, 1%, we will grow in line with GDP. I think the positivity that we've seen in the underlying business is that business confidence is improving. So we are at an 8-year high when you look at business confidence, which is fantastic. And it does suggest in the data that underlying business is growing but BBLS are offsetting that on an ongoing basis, and that will happen for a period of time until we see the bulk of BBLS paid down. What we're doing, though, is part of our strategy, I alluded to, it is part of our diversification and our digitization strategy. So how do we through digital, engage better with our customers, our straight through processing, our automation and using our data in a better way. How do we make that easier for businesses to do business with us? And then how are we diversifying our portfolio? So when I -- back on page -- in the document where I talked about on one side, we've got products where we can diversify and then sectors where we can diversify. If you take other lending products, including asset finance, invoice finance, merchant services, where can we grow some of that lending within other products as we diversify and then look across other sectors, manufacturing being one. With sectors that we've been lighter in and we can see we've got room to grow, the 3 basis -- 3 percentage points differential that we called out on that page. So we have our strategic initiatives will help us, and they'll be there for when the cycle starts to turn because the cycle will turn and lending will -- demand will be less muted because of the reasons that I stated, whether inflation, rising rates or pay down of BBLS, we'll be there ready to then take the benefit of the cycle changing. And our capabilities will have changed, but it goes back to the point that both Charlie and I have made, we'll make a deliberate choice and that will be based on the value that we see from the accretive lending that we can see in the market.

Thank you. We've now got a question that's been received direct online. Clearly, there is a lot of interest in this segment at the moment. Various challenger banks are targeting this area and one of your major peers did a strategy event only last week. Why do you think you can be successful in this market when it is clearly so competitive? Elyn?

Thank you. Yes. BCB does operate in a competitive market. It's going to be competitive. I touched on before, we've got a 20% ROTE. So that's going to drive competition. People can see good returns. They can build good relationships with businesses. But I think I touched on this in the presentation. I think we've got a few differential, unique competitive advantages here. The first one being our leading trusted brand. It's so strong in the market. Secondly, our strong relationship offering that we have, the breadth and scale that it has of 1,000 colleagues that are there across the country, and they've got expertise in products, sector or relationship specialists, and we have an NPS across those relationship specialists of 90 points that shows the strong service that we can provide. Next, I've touched on the full service proposition that we offer. So we've got broad product offerings and they're integrated. Touched on that when I went through our BCA journey, where we've embedded merchant service into that journey and also lending. So as you onboard with us now, you don't just take one product but you can be offered a multiple of -- a set of products as you go through that journey. And we're delivering our digitization from front to back as well. So it benefits new customers onboarding with us as well as existing customers within our base. And our base is about 80% active with regards to digital. Our prudent risk appetite as well. We've got high-quality business and lending through the cycle. And then the last point I touched on, which I think is really key to our unique competitive advantage is that the benefits we have and of being part of the breadth of the group. So the strength in the consumer side of the business that gives us flow, 70% of BB customers have got another relationship across the bank. We've also got the great skills and capability there that we've used to build the best digital bank in the U.K. We can use those skills here as we digitize this business. We've also then got pensions. I touched on vehicle leasing, salary sacrifice, the CIB franchise and then also our consumer offering with regards to embedded finance. As we have merchants here on this side of the business that we can then introduce, we've got 26 million consumers on the other side of the business. So we've got some unique offerings. I think the one thing that neobanks as they step into this space have raised expectations with regards to digitization and slick journeys. That is our ambitious strategy. That's where we're going. The digitization that I've shown you the proof points that we're delivering is there today. Our capabilities here are improving, and we'll be level or ahead of some of that competition in the future. And we're showing that through some of the journeys that we've already put live. And as a reminder, we've got the full breadth of businesses. So from 0 to GBP 100 million turnover, where neos and challenges are more at the lower end transactional needs for a business, so the lower end of business needs. So our breadth and scale are absolutely fundamental there. Thank you.

Excellent. Charlie, is there anything you want to add to that? Or is this pretty full coverage there, I think?

No, I think it is. And I do think, as Elyn was pointing out, the threat from the fintechs or the neobank versus the existing High Street banks is really different. We all have different scopes of broader businesses. But when you look at what Elyn's team is able to bring to a U.K. BCB client, it really is distinctive. And our opportunity as with many of the other areas we've talked about is how do we join up the group and make it really simple for our customers to get access to the expertise and products that we have. So -- and that's a nice starting point because we already have the clients within Lloyds Banking Group to make that happen.

Excellent. Thank you. So the next question is another question direct online, which I know you'll have a view on this as well, Charlie. So this is from Gary Greenwood at Shore Capital. Why do you think business confidence is so high at present? And is the 1% per annum long-term lending growth expectation nominal or real?

Great. Sorry, let me just read on the second part of it. On business confidence, let me say something, Elyn will, obviously, have a strong view because you spend so much time with our clients on this. I think there's a few things, and I think there's a temper to the business confidence. We have to say, although business confidence is high at the moment, actually, business investment, excluding the BBLS and CBILS, which have been there for the last few years, is actually still quite low. And one of the big opportunities, I think, for the U.K. economy and for next government is to actually reinvigorate the investment on the behind -- on the back of the business confidence we have. So when you look at business confidence, I think it's partly because businesses have been through such a challenging last 3 or 4 years. Obviously, COVID, cost of living and inflation in their supply chains, delivery problems in supply chain, skill shortages, and then lack of consumer demand, although that's recovered a bit this year. When you look at those challenges, it's been a really difficult 2020 through 2023 and back end of 2024. And alongside that, the cost of borrowing with rates has gotten more challenging. So those things combined, it differs by sector. We've seen some sectors have been more challenged than others within our business and commercial banking client base. Those have been significant challenges. As we look forward, energy pressures are receding, although there may be another spike coming at the end of the year. People can start to see a rate cycle that's going to be more positive. Business confidence and consumer spending has recovered in some areas in some sectors. And the sentiment, therefore, has really recovered. What we haven't yet seen is businesses start to take new financing or loans to invest for the medium-to-long term and that's, I think, the really important opportunity. On lending growth, look, Alvaro has just touched on this question as well. It's very hard to predict exactly when lending growth will continue to grow. The way we think about it is there's 2 headwinds at the moment really for the sector overall. And then there's 1 thing that we can really control. As we discussed, BBLS, CBILS are in runoff over the next couple of years, we expect. And so that will be a reduction in lending balances or assets. The other dynamic we've seen at the moment is either businesses not wanting to renew borrowing because of the higher rates or actually the healthy business is having cash, paying down lending to avoid the cost of interest. So you've seen these 2 drags on lending at the industry level that you can see through the Bank of England data. My expectation is that, that will continue through this year. And obviously, BBLS, we would expect to go through next year as well. The opportunity that we are doing alongside that, which I know will be hard for you to see, but I'll come back to why I don't think you need to worry about it is we're then particularly picking specific sectors and businesses where we are growing our market share. And at the moment, that growth that we can talk about that we can see isn't big enough to offset the top line reduction in BBLS, CBILS and then the reduction in the industry. But actually, the important point is it's improving our returns. And so when we talk to you about a business today that's generating greater than 20% ROTE, the reason we're very comfortable with the trajectory is as we reposition the lending, it's going to provide stronger returns. And obviously, we're growing the core franchise and deposits as well. Is the 1% lending growth nominal or real? In our assumptions, it's a real growth. But again, that's based on our broader economic forecasts. What I think we'll see, as I said, is a more difficult environment around lending this year. And then if we see more confidence translating as rates start to come down is more investment or more investment demand, we'll start to see lending growing in the sector again. But I think that will happen through 2025. Elyn, I've talked about your clients. I don't know if you agree with what I said.

Yes. And when I go out to talk to clients, there is renewed -- definitely I'm starting to see renewed optimism. I think the point just goes back to where will we play? I think where we see the value, and that definitely is with our diversification across our product set but also in certain sectors where we can see that we're underleveraged and we can see value. But the continuing to deleverage debt will happen for a little while longer. It's the underlying where we're seeing optimism. Yes.

Thank you. We have another question on the line from Ed Firth at KBW.

I guess my question was how confident you are, I guess, or how do you look at risk appetite? And how confident are you that you've got it dialed at the right level? Because I guess an observation maybe that Charlie just talked about how difficult it's been for customers over the last 2 or 3 years. But if I look at your impairments, you've made virtually no losses at all and it certainly would be invisible as a sort of the cycle, if you like, has been invisible at this time around. So a lot of people are talking about the importance of getting the U.K. growing again and getting growth, but we can't do that and that's a sector, particularly something as big as you guys is lending. And if you're focusing on maximizing returns, I guess that's the sort of question I'm struggling with in my mind. Is -- do you not feel that there's perhaps more possibility to take on more risk and get more growth and if that was at 18% return rather than 20% return might not be better for shareholders.

Can I have a first go from a group perspective? And then Elyn, you want to agree and Ed this is such a great question. So I think there's just a few parts we need to look at it. First of all, I think if you look over the last 30 or 40 years at this segment, and I know that's a long period of time. It's always been a very high-returning segment when the interest rate cycle has had been a bit higher and it's always been lower return as a segment, obviously, when the interest rate comes down, and that's purely because of the loan-to-deposit ratio, obviously. But you do have to think about it through cycle and through cycle and build relationships and business relationships and lending portfolios that work through cycle. So I think the first thing on the returns is, we look at it and think of it through cycle in that way. And the good news is, I think, obviously, at the moment, although we have suppressed demand, and I think it's largely demand from our businesses, I'll talk about the timing of your risk appetite question in a second. We know that will come back, and it will come back when businesses are ready and confidence to start investing. And part of the trajectory we have set out today where we're confident in our greater than 20% is obviously built on us growing other operating income, transactional activity as well as continuing to be a really core relationship bank for deposits. On lending, we are comfortable with our risk appetite, but I'm also comfortable that when the demand comes back for businesses to borrow more, we'll be able to lend into the segments and sectors. We really want to do that in even without adjusting our risk appetite. So there's plenty of capacity to do that. I know we're not showing today by subsegment where we have been successful, but there are some segments within this, which even in the last 18 months, we have won -- we've grown our lending greater than 10%. And we've done that because we had a very clear view around the types of businesses and the types of lending that we think we need to be supporting and which we think we have the appetite to support. I think the really hard sector segment in this, which will be always be hard, I think, for you as an analyst looking at what is reported is commercial real estate because through cycle returns on that business aren't always that high. There's a whole series of players over the last few years and longer term, 10 or 15 years that pulse in and pulse out of that sector and take market share. And when you look at that as a share of the lending of this whole segment, it's significant, depending on how people define it, but yes, 50-ish percent of all the lending in this segment is going through corporate real estate, so commercial real estate. And that's the one where we have obviously a huge amount of experience, a very clear view around where there is through-the-cycle returns for our shareholders and for our clients as well where we can do the right level of lending. And we take a more selective participation as we go forward. And you'll see we are underpenetrated as a percentage of that sector. And of course, it's a big sector. So as you look at it for the industry in total, I think that's the one that's most difficult when you look at it top down. But no, we have the risk appetite. We are intending to really support growth in jobs, productivity and the investment areas that we're very committed to. And I think the opportunity here is in front of us. It's over the next 18 to 36 months as business confidence translates into businesses actually wanting to borrow to invest, and we're not quite there in the cycle yet.

And then we expect demand to increase at that point. And I think that's where we can start to -- we need to use more of our risk appetite. It isn't moving the risk appetite point. I think it's definitely use that risk appetite. We do have a high-quality portfolio, though. It's diversified, 90% of it is secured. And we're continuing to, I think, the point of improving our capabilities. So our straight-through processing, our lending journeys and our better use of the data that we have will set us up for success in the future, but yet it has performed very resiliently throughout the period and remains benign. And as you quoted, you saw -- you've seen that through our impairment results. It's about a 30% mix though is CRE, which is low compared to the market, which is Charlie's point. Again, that's a very well-secured portfolio.

We have another question online from Raul at JPMorgan. Thanks very much for the presentation. Two follow-up questions. One, looking at the latest independent, SME banking service quality survey results, Lloyd's is doing much better than most large U.K. banks, but lagging the pure digital neobanks. Do you think you can close the gap to the neobanks in terms of service quality? Or is this less relevant to your customer target segments? And secondly, of the GBP 0.3 billion additional revenue targeted by 2026, how much has already been achieved so far? And how does this split between NII and non-NII? Elyn, probably makes sense for you to address that first, particularly on the service quality side.

Yes. So service quality, we've got fantastic foundations in our business. I touched on them before with regards to our strong relationship offering and the breadth of our RMs across the country, 90 points on an NPS, fantastic. What we're building now is to have the same digital capability. So we've seen that, and the feedback we've had from the journeys we've built so far is absolutely fantastic. Conversion is great. Engagement is brilliant. So what we are building is then the digital bank to go together with our core foundations of having a great relationship bank. I touched on to my presentation, digitally-led relationship bank. So that will come. And that is absolutely -- it's as important that we have slick digital journeys as it is our great relationship offering. Of the GBP 0.3 billion that's targeted by 2026, by the end of this year we'll have achieved GBP 0.2 billion of that target. So GBP 0.2 billion this year, GBP 0.6 billion -- GBP 0.3 billion in 2026.

You're doubling your target...

Yes, I'm not going to do that in front of the boss. And then from an OOI perspective, so when we look at OOI, so across the commercial bank, OOI is about today, looking at about 30% of our income. It's slightly higher in CIB because the mix of business, slightly lower in BCB. As we move forward, if you look at the strategic initiatives that I've given today, take it from today and move forward, so things like merchant services is a prime example how we're going to completely transform that business. That's OOI-accretive. So that's going to increase our OOI over the period. So we're going from a foundation about 30% today, and then we'll move ahead and increase that as we move forward, which is fantastic and will give us a higher split as we move forward. And the confidence I have in our delivery is because we're quite a way through our journey already, the proof points that I gave today and what we're seeing from customers as we're building some of these new capability gives me confidence that, that's where we'll be in the future based on the great foundations that we have today within our core franchise and the 20% ROTE.

Douglas, I just add because, well, I know we haven't given you the specific number on the GBP 0.3 billion split between OOI and net interest income. But as you remember, on the total number for the group of GBP 1.5 billion by 2026, we're saying about 50% OOI. So we're not going to split it if that's okay. And I'm sorry, we're not doing that for every specific business. But this is a strong contributor to the OOI business, and you can see the sectors and products we're choosing are OOI heavy relative to their starting point. But thank you.

Excellent. We virtually reached time, but there are 2 more questions. So we'll deal with both of those that have come online. The first one from Priya at Jefferies. I think some of this has largely been dealt with, so it might be a short response. What do you think needs to happen to accelerate lending demand by corporates or for corporates to have more investment confidence, i.e., would a rate cut or change in government policy be a trigger. Do you want to deal with that first, Charlie?

Yes. I can do. Look, I think you teed it up pretty well in the question. There's -- it does differ by sector, right? So some of the most challenged sectors have been things like transport, hospitality and agriculture and they have more fundamental cash flow challenges around some of the businesses broadly, not necessarily our clients but the sectors themselves. Business is looking for 2 or 3 things, a bit of stability and confidence around what the priority is going to be in the economy. And I think the government can have a good impact in that. They, obviously, at the moment are looking especially if they're consumer-facing businesses for confidence in the economy more broadly and especially from consumer spending. One of the things that we haven't talked about today, but there's now been 3 quarters of real wage growth in the U.K., and so that is a sign of confidence that businesses are liking, but they haven't yet really acted. And then the cost of borrowing will make a difference. So as we start to see the interest rate cycle change and obviously, depending on the length of borrowing the competitiveness around the cost of borrowing reduce and/or be more palatable, we should see with that an increased level of investment. And then there's some very sector-specific things, I think, which as we look forward, government and then the economic environment could really accelerate growth in specific higher-growth sectors. So we are optimistic actually about the next 18 to 24 months. Although you know our overall group economic guidance is still, what I would call, kind of slow but resilient growth. I think there is a case for optimism that this segment, the kind of SMEs and mid-corporates could really lead any future growth for the U.K. economy.

Excellent. Thank you. The last two questions are from Andrew Coombs at Citi. First of all, in the areas you highlight as being underweight, including asset finance, how easy is it to capture market share with a centralized credit decision process? To what extent do you need more specialist teams which possess more flexibility on underwriting standards in order to address customer needs and capture market share in these segments? And the second question related to how much of the business in these segments is written directly, whether that be either digital or branch versus sourced via intermediaries. How has your intermediary relationships developed? Elyn, it probably makes sense for you to address first.

So yes, I touched on this as I talked through our diversification. And yes, things like asset finance, we are underweight. And we see that as being an opportunity across our product diversification. We need to make it easier through digital processes or our RM engagement on how we engage and then go through that journey from a lending perspective. I think we have got specialists credit teams that support those RMs, those are across the country but also how do we make that straight through slicker process with regards to our digitization is very much at the forefront of our mind. We will target market share growth within that segment. I talked about. We're underweight at the moment, 9%, we're underweight. So we will continue to drive the right value share, like I touched on earlier. Value will be at the forefront rather than driving for volume and market share for the sake of it. And then how much will be written. Your second point with regards to intermediaries. We have an opportunity with regards to our intermediary channels. At the moment, our lending is predominantly booked direct. We have a great intermediaries market with regards to lending, it's about GBP 38 billion in the market. We have a single-digit percentage of that market. We think we've got opportunities and we've built some capabilities to grow in that space with regards to how we engage some of the tools and capabilities we need and the opportunities we have in building those relationships. It's a competitive market, but it's one that we think we've actually got opportunity in.

Excellent. Is there anything you want to add Charlie to stay on top of that? Excellent. That concludes all the questions. Thank you very much. We've gone very slightly over. But if I just hand over to Charlie for some final comments.

Thanks, Douglas, and thank you once again for joining today's presentation. As you know, and I have to say, for us, I love these sessions because we get to talk about the real businesses and the real dynamic of the business that we're leading. So thank you both for joining the session but also for the brilliant questions. I hope the sessions have been informative for you and giving you a chance to understand the next level of detail behind our strategic plans and our progress. And we look forward to speaking to you in next month when William and I will be sharing our half year results. So thanks very much again, and goodbye for now.