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

Thank you very much, everyone. And welcome to the Barclays Global Financial Services Conference here in New York. Delighted to be joined by William Chalmers, Chief Financial Officer of Lloyds Banking Group. William, thank you very much for your time.

Thank you.

I'll give a brief introduction. So I'm Aman Rakkar, Head of Coverage of U.K. banks. Barclays has been a firm since 2011 and I've been covering Lloyds for most of that time. I'll also just briefly introduce William to those who are not familiar. I'm sure everyone knows, but William joined Lloyd's Board in August 2019, appointed Chief Financial Officer; you're interim Chief Executive Officer during 2021. And previously, you've been working in financial services for over 25 years, held a number of senior roles, most notably at Morgan Stanley, you're Co-Head of Global FIG, Head of EMEA FIG and before that, had been esteemed with JPMorgan amongst other institutions. So this is an example of William's tenure. Thank you very much, really appreciate you making yourself available today. So we just kick things off, sentiment towards the U.K. has been improving in recent months, albeit from a low base. Inflation is falling. Interest rates are falling. And the critical backdrop does feel more stable following this with the general election. But despite this, there remains market concerns around the potential of bank taxes. So given your unique vantage point, I'd be interested in your assessment of the operating loan.

Yes. Thank you, Aman. And perhaps before you are going, I want to say thank you very much indeed for hosting today's conference. It's great to be here. And two, thank you to everybody in the audience for taking the time to join us. Aman, as you say, sentiment on the U.K. has improved, but as you also say it's from -- let's say to a pretty low base, so we've got a way to go, I think. I think with that sentiment improvement, with that overall macroeconomic stability, if you like, we have seen the first fruits of that, including before the election, I would guess. I mean the backdrop is, generally speaking, pretty constructive. It's good for asset growth. It's good for deposit stability. It's good for other operating income growth. It's good for likewise asset quality. So we're seeing that will come through in the numbers. And we saw a sense of touch of that in the context of Q2. So our asset growth overall about GBP 3.9 billion in Q2. We saw deposit growth of about GBP 5.5 billion, of which I think about GBP 3.6 billion was within retail. We've seen other operating income growth up about 9% over the quarter year-on-year. So with all of that, we're in a pretty good shape. And again, it's supported by a generally benign macro environment, again, as certified to asset quality experience, which we'll talk more about, I'm sure. I think overall, that is good. I think the political backdrop, as I said, is one of stability. It's one of a growth imperative. It's also, I think, encouragingly, one where the politicians seem to understand the value of a healthy banking sector. I think to your point, and not surprisingly, the market is a little bit in wait-and-see mode on that. They'll be looking I'm sure, you will be looking I'm sure, for the kind of pre-election words to turn themselves into action, and frankly, we all are. So in that respect, at least, the October budget will be an important event. But I think underneath it, stripping all of that away in that constructive environment, we do think that the commitment to growth is genuine. It certainly seems that way from our perspective, and we'll look to see more of that going forward.

Perfect. Let's switch to the business then. So net interest income, it's been under pressure for a while now, falling for 6 consecutive quarters from a peak in the fourth quarter of 2022, that you've been pointing to a recovery in coming quarters. Can you talk to the main drivers that sit behind that view, including any potential sources of upside and downside risk? I'm particularly interested also in your view on the mortgage and deposit headwinds that you faced? How these are playing out and whether you see any green shoots?

Sure. Sure. Maybe just to come to the second part of your question first, actually and to follow on from that economic commentary that we were just discussing. I think overall, as you have seen, we've marginally upgraded our economic expectations at the half versus what they were at first quarter. We're seeing expectations of GDP growth about 0.4% this year, 1.5% next year. We're seeing rates falling, as you mentioned earlier on. We're seeing HPI increase as expected to be around 1.5% this year. Actually, I think the outcomes overall will probably exceed i.e., better than our forecast is my expectation right now based on what we've seen. And that, to your point, Aman, it is conducive to asset growth, it's kind of supportive of margins fringe, which I'll come to in just a second. So that backdrop, just following on from the first question, is overall pretty constructive, and you're seeing it evidence, as I said earlier on, in terms of the numbers so far. Specifically on the margin, and what have we seen, we saw 293 in the margin, that's Q2. As you know, that was down gently, if you like, in the 295 that we saw at Q1. What's the context for that? First of all, that is consistent with our expectations. That gentle decline -- that pattern of gentle decline very much consistent with our expectations. Second is, as I said before, we do expect that margin to tick up in half 2 and certainly by year-end. Third, it is consistent with our greater than 290 guidance for the year as a whole. I'll come back to that in just a second. And then fourth, as we said before, we do expect net interest income to tick up ahead of the margin. So all of that, I think all of what we're seeing within the margin development is very much consistent with what we had expected, maybe a touch better at the margin, if you'll forgive the pun as it were, but nonetheless, that's pretty much what we're seeing. Within that, what are we seeing? Three main driving forces as you'll know from our previous comments, and that is to say mortgages headwinds, number one, continues to play out. We're putting on mortgages on the book of about 70 basis points. We're seeing the maturity margin of about 110. Deposit churn continues. That is to say, we saw PCAs down about GBP 1.4 billion in the second quarter. That, by the way, is not a bad result, but we're also seeing movement, if you like, from instant access into fixed-term limited withdrawal. That we do expect to slow in the second half and all the evidence that we're seeing in June, July, August really confirms that expectation. So that's a good sign. And then the structural hedge, we didn't see much evidence of that in Q2. That's mainly because of maturity volumes, maturity yields, but nonetheless, that's a major supportive factor for the margin. And so looking forward, what do we expect to see? Again, first of all, consistency with our guidance of greater than 290 for the year as a whole. A turn again at year-end that we expect to see and that, in turn, is supported by reduced churn by increased contribution from structural hedge, which will more than offset the drag, if you like, from bank base rate reductions and the associated part from lag that comes with that. The upside and the downside. I mean I think it will come down to how does churn develop. As said, the signs that we've seen in June, July, August on the whole have been pretty constructive. How does mortgage pricing develop? There's much talk about a price war in mortgages right now in the U.K., but frankly, from our perspective, at least, that just seems to be taking us back to more or less where we were in Q2. So I would continue to stick with our Q2 expectation for completion margins circa 70 basis points. And then are there going to be more bank base rate reductions than we expect? We expect 2 bank base rate reductions, of which we've had one. If there are more than that, then, of course, that's a drag. But I suspect it might be compensated for -- by other factors, including things like slow deposit churn, for example, including things like less SVR attrition, for example. So those are the kind of sources of upside and downside overall, Aman. The one point I'll say and I'll finish off with is we do feel comfortable, in fact, I'd say, increasingly comfortable with our overall margin guidance. So from here, it looks pretty good.

Great. So I mean you alluded to rate cuts, pass-through, so the Bank of England delivered its first rate cut 1st of August. Markets are pricing in at least one more cut by year-end. These cuts are expected to impact deposit pricing with the pass-through or beat us as we prefer were the key areas of interest. You outperformed many of your peers on the way up passing on a relatively lower proportion of rate hikes. How do you think about your ability to lower rates as we progress through those perspective base rate cuts.

Thanks, Aman. I can't resist but come back to one part of your question there, which is that I don't think we did really pass for much lower than -- much less than any of our peer group. We are pretty much in the pack is what I'd say. As you are part on the strategy fundamentally, it's driven by a combination of customer value, first and foremost, funding needs of the business secondarily and how are our competitors moving thirdly. I mean those are the drivers of our pass. And as said, I think on the way up, we were pretty much in the pack and as a testimony to that, you'll have seen our deposit performance over the course of '23, and again, in the course of '24, all of which is very healthy from a volume point of view. In fact, I would say at the leading edge, if you like, of our peer group. So that, I think is testimony to the pricing strategy. The bank base rate reductions are included, as said, in our guidance of greater than 290 for the year as a whole. As we see bank base rates come down, we will pass on. We will pass on based upon the same factors as we did on the way up, i.e., the same 3 dynamics that I just highlighted. But it won't be lockstep. So just as it wasn't on the way up, it won't be a lockstep on the way down. It's worth just stepping back actually and just commenting on the way in which we manage the margin, which is in a very holistic fashion. There are pricing decisions on deposits, Aman, as you can imagine, are going to be in part at least influenced by what we see on the asset side. That margin is managed in its totality, and that's what we'll be looking for. The overall setup then for the margin, I think, is looking in pretty good space. There's a lot of talk, perhaps you alluding to this in your comments a little, Aman. There's a lot of talk around regulatory and political pressure on deposit pricing in particular. What would I say to that? First of all, I'd say we're obviously keenly aware of what consumer duty brings to the table. But having said that, and I hope this is consistent with what we said before, the concepts behind consumer duty are nothing new. What I mean by that is to say that we have managed the business for customer outcomes for some time. Frankly, in the U.K., as in many other jurisdictions, it's just too punishing not to. And so great customer outcomes have been part of the philosophy of the bank for many years now, including proceeding my time, that is quite independent of whatever the regulatory and political tenor might be at any given point in time. And therefore, the thoughts, if you like, behind consumer duty, they've been with us for some time. In that context, I'm not sure the political and the regulatory pressure make a whole lot of difference to the way we should go about the business.

Perfect. We're going to maybe turn to the ARS question. So you've got these devices on your desk. I know this would probably be the first time you're using it today. So yes, please do participate. We're going to -- we've got 6 questions. We'll go through a couple now and then maybe a bit [indiscernible] and the others as we go along. But question one, what would cause you to become more positive on Lloyds' shares? Number one, better NII; two, stronger fees; three, better cost control; four, better asset quality; five, greater capital returns; six, clarity on the FCA's promoter finance review.

That's a good outcome. I was going to make a comment actually as you introduced 1 through 6 there, Aman, but then I thought I better not leave the audience but rather leave it up for them. Maybe you want to comment first on that, Aman, I'm happy to?

No, I think it's pretty consistent with the kind of conversations that we're having. Net interest, it's hard to get beyond net interest income for the dominant part of the earning stream. I mean, I guess we'll kind of come back to the discussion on most finance perhaps a bit later on, but again, I think that's pretty consistent with the conversations we're having.

I think it is, yes. I mean there's one comment that I would make is, as we discussed at the half year, I'm pretty confident net interest income is going to be better in the second half than it is in the first half. That will be led by the types of dynamics that we've just been discussing this morning.

Perfect. Let's move to question 2. What are you most concerned about at Lloyd's: one, weaker earnings; two, weaker capital; three, distributions; four, reg risk; five, political risk; six, M&A?

Well, I think as a bank investor, you've always got to be focused on the earnings stream, haven't you? You can tell, I think, from our commitments, both out to 2024 and indeed, as to 2026, that, a, we feel confident in near-term delivery, but also, b, we feel confident in the more medium-term delivery. The regulatory legal risk, the political risk goes back to one of your questions, I think Aman, which is to say you've got a new government and it's very committed to restoring the U.K.'s position and indeed growth as part of that. I think we all look forward to that.

Yes. So the 30th of October, the budget, I guess, is key date in people's mind. Okay, let's turn back to the business. Structural hedge, turning to your structural hedge, a significant multiyear tailwind. You've guided for a greater than GBP 700 million income, up less than '24, driven by higher reinvestment yields. That's been tempered by falling notional. That's going to be substantially offset this year by things like mortgages and rate cuts, I guess you've alluded to. But how confident are you that this can drive the bottom line beyond this year?

Yes, yes. Thanks, Aman. Structural hedge is clearly incredibly important part of our overall earnings story. I think stepping back, it continues to be a really healthy outlook for the structural hedge. That is to say, consistent with our objectives of stability in earnings and indeed value for our shareholders. Specifically, what do I mean by that? As you know, we've committed to the structural hedge delivering in excess of GBP 700 million increase in contribution in '24 on top of the GBP 3.4 billion that earned in '23. And that is a function, if you like, of a yield of around 1.7% this year, refinancing to a kind of 3.5%-plus rate as we stand today. So that's a significant step up. That, as you say, has been offset this year, at least by a little bit of notional attrition. Overall, we saw attrition in the notional of around GBP 8 billion last year. We expect to see something roughly similar this year, of which we've seen about GBP 5 billion so far. And then, of course, to your point, Aman, we've seen 1 or 2 headwinds in that mix. That is to say the mortgage headwind that I talked about earlier on, a bit of deposit churn, nonbanking net interest income, likewise, those have all kind of ebbed away a little bit of the structural hedge benefit and contributed to the earnings story that we have seen, which is a strong one, but nonetheless, it's a function of that balance. 2025, what we expect to see? We expect to see a jump in structural hedge contribution in excess of that greater than GBP 700 million that we see in 2024, number one. Number two, in 2026, we expect that jump in structural hedge contribution to be again a material step up, and in fact, in '26, a more material step up than what we expect to see in 2025. So jump in excess of GBP 700 million in '24, step up again in excess of GBP 700 million gain, if you like, in '25, and then a more material step-up from that in respect to 2026. That's pretty much how we expect the hedge to play out. And as you can imagine, we're trying to lock that position in, if you like. We'll always be a little bit exposed to upwards and downwards trends in interest rates. You've seen our sensitivities in that respect, but nonetheless, we are trying to lock in that earnings path that we have given you for '24 and in respect to the '26 follow-through. So what does that mean in terms of structural hedge? We're pretty much done for 2024 now, number one. We're probably around 4/5 done thereabouts for '25 and we're probably around 2/3 done for 2026, and we're building in that respect. The difference by the time we get to 2026 is that many of the headwinds that we've all been talking about for a while now are either eliminated or dissipating. Specifically, what I mean by that, the mortgage headwind that we talked about is pretty much gone as of the first half of 2026, number one. The deposit churn headwind in the context of a more stable rates environment, we expect to have gone, in fact, well before that, but nonetheless, will be basically not happening during the course of '26. The bank base rate reductions that are, if you like, a headwind over the course of the second half of this year, going into 2025, that will be largely done because we're moving to a more stable bank base rate environment if you look at our forecasts. And the headwind that we've seen in the context of nonbanking net interest income, likewise, that's pretty much gone by the time we get to 2026. In fact, aspects of it may be in slight reverse by that time. So as a result, what you're seeing in 2026, I think, is the structural hedge continuing to contribute in a kind of ever larger way with a step change, that step change in particular in '26, but not being met by the types of headwinds that we're seeing in 2024 and a little bit in '25. So the contribution, if you like, takes a net significant step-up during that time. Now if you add back to strategic initiatives contribution, which, as you know, is expected to be GBP 1.5 billion incremental revenues in '26, allied to the fruits of some of our investments coming through in the cost line, which contributes to greater stability within costs. But what you've got is an operational leverage story. And that operational leverage story fundamentally is what drives our greater than 15% RoTE target and indeed are in excess of 200 basis points capital expectation. There's nothing, frankly, magic about it. It's more or less a function of arithmetic, a lot of which is already built in as we stand today. And that, in turn, is a position that as you know, we continue to restate with every major earnings announcement that we make, whether it's the year-end, whether it's the half year because it's one that we feel confident in. Turning to growth. So there's a view that U.K. banks are under-risked or indeed risk averse. I think that's evident across a number of metrics, but not least a sustained period of sub-normalized impairments. I mean that's a remarkable outturn given what is a challenging backdrop [indiscernible]?

As demand recovers, is there an opportunity you take more risk as you drive growth?

Yes. Yes. So it's a good question. And I think there has been a perception around the U.K. banks in particular. I think it's frankly still a bit of a hangover from the financial crisis and the regulatory response to that. So it's a function of the environment in part. I do think to your point Aman it has been evidenced, frankly, by the performance of the bank, not just for us, but I think to be fair, most of the banks in the sector. And we've seen more of that in the quarter. Quarter 2, as you know, AQR, asset quality ratio of 5 basis points. Now admittedly, that was informed by MES judgment in our favor. But if you strip that out, at 16 basis points, I feel pretty low. And then if you strip out 1 or 2 model judgments, including the removal of inflationary adjustments within our modeling, even after stripping that out, it's still 23 basis points in quarter 2, which is, again, a pretty favorable AQR and consistent with our quarter 1. So you've seen a very solid and consistent pattern of asset quality performance during the course of 2024. I think actually, and of course, I would say this, but I think it is observable that it is part of a track record. That is to say the true losses in the context of the COVID environment. We're really very modest. Likewise, you've seen our stress test performance, which has continued to improve over time. And I think what's going on behind that is a strategic focus on the prime customer base, on the lower risk part of lending. So our mortgage LTVs, for example, 43%, our CRE, LTV is 46%. We've been progressively either reducing or alternatively selling some of our legacy exposures. And all of that, together with 1 or 2 other factors has led to a progressive and significant derisking of the bank. I think to your point, Aman, that has led to asset quality performance of the type that we've seen and an overall perception that perhaps the bank sector and us amongst it could take potentially at least more risk. I think let's see how the economics develop over time going forward. I do think one point that is worth making is that despite that low-risk attribute, our lending has actually been pretty positive. So GBP 3.9 billion over the course of quarter 2 is not bad. That's a 1% increase in loans and advances in one quarter. We expect that growth to continue in quarter 3, and we expect to continue in the remainder of the year, maybe not quite at that clip. I mean 1% per quarter is a lot from what is fundamentally a kind of GDP plus based entity. But nonetheless, we do expect growth to continue going forward. That, in turn, will be supported by any kind of macroeconomic benefits that we see off the back of a more stable government for sure. That is helpful. But I think the point that I'd like to push back on a little bit is that there is a correlation between risk and growth. I think if you look at the performance of the bank over the recent quarters, we've managed to achieve growth, witnessed the lending comments that I just made. At the same time, there's pretty minimal risk and I think by virtue of our strategy, which has a focus on customer segments that we are currently in and indeed exploit the -- exploit is the wrong word, further it's or, let's say, customer relationships. Overall, I would expect us to be able to deliver growth and low risk at the same time. That has certainly been a hallmark of our strategy for many periods, including proceeding me, and I think many peers looking forward. That's what we expect to see. So no necessary opposition, I think, between the growth of the business and the risk that we may need to take, albeit I do hope that within the U.K., we see a political environment that is more conducive to risk taking as a whole.

Great. To round out the discussion on revenues then. So other operating income, I think it's been a nice and positive in recent quarters. It was up 9% year-on-year in Q2. That followed [indiscernible] growth in Q1. Part of that bolstered by improving activity but also strategic investment behind the revenue items. Can we expect a continuation of this level of growth?

Yes. Thank you, Aman, for the question. In short, the answer is, yes. You should expect to see continuation of [indiscernible] growth. What is behind that comment? As you say, the record recently has been not bad. 9% second quarter growth year-on-year, 8% half 1 growth year-on-year. And I think, pleasingly, that has been informed by performance across each of the business lines. So specifically within that retail, for example, PCA revenues growing, likewise, transportation within commercial markets business growing within IP&I GI growing. So it's good to see it kind of have a pretty broad base. I think that's been a function both of BAU performance, i.e., off the back of reasonably stable economic background and then off the back of the fruit, if you like, on some of the strategic investments that we've been making, I'm talking a lot about in the public domain. So both of those 2 factors, I think, have been coming through. That's led to OOI, as you've seen, around GBP 1.4 billion over the course of the quarter. Looking forward, I think that is going to continue to grow off the back of the 2 points that I just made, that is to say, inspired by BAU, inspired by strategic investments, fundamentally coming from similar places. As you know, we've committed to GBP 0.7 billion of incremental revenues as a result of the strategic investments in '24, GBP 1.5 billion in '26, of which half 50% is coming from OOI. So quite a substantial contribution from OOI going forward. Why is that? What do we see within other operating income? We see an opportunity to serve more of our customer needs. We see an opportunity to grow capital-light revenue streams. We see an opportunity to build growth generally speaking within the business and achieve that operational leverage that I talked about earlier on. We see an opportunity to increase diversification and reduce our traditional dependency on net interest income and the volatility that goes with that when rates go up and down. So overall, there's lots of reasons as to why we're chasing this other operating income growth. And as said, from both a BAU perspective and indeed from the strategic investments that we're making, we are starting to see some results, and we believe that those will continue, which is what's behind my comment that, this audience, our investors should expect to see continued other operating income growth as part of our plan, and that's our expectation.

I guess, just related to the operating lease depreciation have kind of been, account sales has been going up. I mean, I think you pointed to continued growth from here.

Yes. I mean I -- operating lease depreciation is worthy of a comment. It's a very fair point, Aman. What have we seen there? I think 2 things that we've seen there. One is, we've seen normalization. Actually 3 things, I should say, that we've seen within operating lease depreciation. One is normalization of the operating lease depreciation line. We had an extraordinarily for 9 periods of very high used car prices, I think in part inspired by the COVID issues, which in turn gave us some significant gains within operating lease depreciation. So we went from a charge that was circa GBP 1 billion -- just shy of GBP 1 billion before the pandemic to a charge that looks more like GBP 300 million, GBP 400 million, GBP 500 million during the pandemic and part of the trend within operating lease depreciation, things revert back to normality, if you like. The second thing that has been going on is that we've been growing the business. Now that is a very profitable, attractive business that serves an important societal and customer needs. We make, as I said, very attractive return from it. Our customers require the service. It's something that we should be in. And strategically, we have a very attractive platform in that space. And so we grow the business and with that operating lease depreciation grows a little bit. The third point, frankly, which is less welcome, is the volatility that we've recently seen in used car prices, particularly in electric vehicle prices. And that's what's been behind basically an incremental circa GBP 100 million in our lease depreciation charge as of quarter 2. You'll see our charge was just shy of GBP 400 million. The underlying charge there is more like GBP 300 million. And so when we look at quarter 3 and beyond, I would expect to revert to that type of level. It will obviously be augmented by a bit of growth within the business, which is, frankly, what we want to see because it's profitable and attractive and it serves our customers' objectives. But nonetheless, you should see a reversion in Q3 to something more like a kind of run rate plus growth circa 300, maybe a touch above, something like that. And then allied to that, the final point that I'll make is, when we look at that stream, if you like, the operating lease depreciation stream, we are very focused on the volatility point that I just mentioned. That GBP 100 million hit that we took in quarter 2, it's not particularly welcome. And so we're looking closely at what we can do to derisk that element. Whether it is sharing any elements of residual value with the manufacturers, for example, whether it is engaging with the capital market and the risk pricing of that, for example, whether it is pulling the various levers that we have available to us in the financing market versus the leasing market, for example. All of those are tools and others that we are looking at in the context of just trying to mitigate, reduce that volatility because it's unwelcomed to us in the context of a bank that should be a very reliable set of earnings and a very reliable source of capital repatriation to our owners. So that's what we'll be looking to do. But made no mistake, the motor business is an attractive, profitable and strategically important business for us.

Excellent. Let's move to the ARS questions, please. Question three. What do you see is the biggest risk to Lloyd's earnings? One, rate cuts; two, competition; three, cost inflation; four, loan losses; five, government or reg intervention bank taxes.

It is, yes, I mean, looking at that a couple of thoughts, really. One is, I'm not terribly worried about the rate cuts. That is to say this bank will do better even in a cutting rate environment. It's hopefully some of my comments around the structural hedge illustrate. Two, the competition is a part of the business. It's there with us. The one unfortunate point, I think, is our [indiscernible] point. That was to say it's a fantastic franchise with scale. And we really ought to be able to compete effectively in that market, and that's our expectation. I think three -- third point, government regulatory intervention fair enough. I mean we've had the comment around the politics, and let's see what happens. As I say, the underpinning that gives me confidence is the -- what appears to be pretty unequivocal commitment to growth. And with that, I think it solves a lot of questions -- it answers a lot of questions.

Question 4. What do you expect from Lloyds' revenues into '25? One, growing driven by NII; two, growing, driven by fees; three, flat year-on-year; four, falling driven by NII; five, falling driven by fees.

I'm trying to extract the '25 revenue guide out of you without. I thought this was a trap actually, Aman, I must say.

We have a comment you have on.

Of course, I'm sure you'll have. I think outside of the answer that I've given to your other questions, Aman, I probably shouldn't comment any further. But hopefully, I've given this a little bit of confidence in terms of our outlook for the business as well.

I guess is actually from the U.K. banks, so I speak to, there's kind of -- it's actually easy to talk about the medium term and it is even economy...

I think it is. I mean, I think within the U.K., maybe it's just true of bank markets generally, particularly in the type of backdrop that we've seen, people get very focused on the very immediate term, the very near term. And I think we're constantly trying to say that people step back a little and look at the bigger picture. And the bigger picture, as I said, is really constructive. Now that's not to say that you should expect volatility in the intermediate period, you shouldn't. You should expect what you invest in. But nonetheless, I do think the bigger picture is really what gives us confidence in the story of the bank. We'll deliver on our commitments this year for sure. But we are equally focused, if not more so on delivering in '26.

I'm going to switch back to the business. The motor finance review has been a key area of focus this year. So the SG&A launched the review into the historical commission arrangements in motor finance market. You took a GBP 450 million provision with full year results. And from my observation, it's been remarkable how comfortable you sounded on this issue and on the offset. FCA has since announced a delay in proceedings to May next year. Interested in kind of what do you make a delay? And does this increase the risk of the further provision?

Yes. Yes. And it's a fair question, Aman. The one point that this room should be aware of, I suppose, is we totally recognize the investor concern on this point. And frankly, we are also very focused on it. I think within that, rather beyond that, what would I say? The first point is everybody recognizes regulator, politicians, society, banks, et cetera, everybody recognizes the importance of motor finance to the U.K. economy. And indeed, I think that is what is behind the FCA trying to see the thing to ensure that we move towards a speedy and orderly resolution of the issue. The FCA focus has been and continues to be, Aman, on finding evidence of misconduct and customer harm. And as you've heard me say before, from our perspective at least, nothing has changed. That is to say, we believe that we've been in compliance with all the regulatory requirements at the relevant time. So nothing has changed from our perspective in that respect. The provision that we've taken of GBP 450 million, it was predicative on 2 things, as you perhaps have heard. One is the inevitability of administrative expenses. I'm afraid to say we're beyond that. We're going to incur administrative expenses. We already have done. That was point one. The second point was a risk of redress -- the risk of redress as opposed to the inevitability of it, which, in turn, we have provisioned within that GBP 450 million based upon a variety of potential outcomes. When we look at the FCA announcement, the delay into 2025, frankly, comes against the backdrop of us wanting just to get beyond this. In that context, a delay. I'll be honest, it isn't particularly welcome. It just suspends a period of uncertainty for you as investors and for us, so that part of it isn't particularly welcome. But then if I look at the substance behind it, nothing has actually changed in the FCA's position on this. Nothing has actually changed as to the facts of the matter, if you like. And so from our perspective, Aman, we stay very much in the same place. That is to say, repeating the comments that I made earlier on, our understanding of the situation has not changed from where we were at the beginning of this year, and we remain comfortable with the position. As said, anything that delays this inevitably, however, it isn't what we want to see. We want to see speedy resolution of this just as you do.

I guess the related question then is around capital. So you want cost to end the year with a surplus capital position at 14.1% CET1 ratio at H1. You're likely to build into H2, you've committed to paying down to 13.5% by year-end. But interested, how do we get down to this level then from what is likely to be a surplus capitalization at year-end? And how does the motor finance -- the delay in the motor finance review kind of feed into that process...

Yes. Yes, it's, both good questions. First of all, just to take a step back and comment briefly on the capital stock and the capital generation. It is, as you say, and of course, I would say this, but I think it's true. We have seen strong capital generation so far this year, 87 basis points year-to-date, 47% in quarter 2. That is on top of or rather has resulted in a strong capital stock position, 14.1%, as you say. Our build in H2 will continue. It's my expectation that we'll deliver on our guidance for circa 175 bps over the course of the year. So you should expect to see that H2 capital build continue within line with that guidance. And I just want to step back for a moment on this. And you'll have to forgive me for kind of momentary straying into indicating the story, if you like. But I do think that is consistently strong capital generation. Number one, because of the financial performance we described is robust. But in the context of a business model that has reliably done that and should reliably do that going forward because of its focus, because of its retail and commercial orientation and so forth. So strong capital generation from a focused business model. I mean that to me is what Lloyd should be about, and I very much hope that our strategy continues to set us in that place. Capital targets and how we get there, Aman, to your question. The capital target that we're focused on now is 13% by 2026. Along the way, we're going to get to 13.5% by 2024. How are we going to get there? I think 3 things that I would stress. One is we're going to continue to capitalize and invest in the business, very much consistent with the guidance that we've given you. But that clearly is a deployment of capital within the business to ensure that we deliver on our transformation that the business is as strong tomorrow as it is today. Second point is a progressive and sustainable dividend. You have seen our dividend was up by 15% as of the half as I think everybody in this room knows, the first half tends to be more or less a foreteller of what the overall story is for the dividend growth and therefore, once you expect something like that over the course of the year as a whole. And indeed, going beyond that, I would expect progressive and sustainable dividend growth to continue to be a hallmark of our story. There's plenty more room for dividend growth in my expectation, in my view, over the course of the coming years. And then the third point is further capital repatriation above and beyond that. And so far, at least we use buybacks and we've used buybacks because we think it offers a great value proposition. And the owners prefer it that way. I suspect informed by the same thing. That is to say, our owners are telling us the buyback of the favorite form of capital repatriation we think, because they see the same value in the stock as we do. We are committed to attaining the type of capital targets that I mentioned. Obviously, year-end capital decisions will always be a function of the Board. So I should say or whether I should make that caveat. And then to come to the final part of your question Aman. What is the motor finance review due to that? How does that feed into that calculus, if you like? Hopefully, as you could tell from my previous answer, the motor finance review and the provision that we've taken associated with it has not changed. It has not changed as a function of the delay. Our position in our view continues to be totally appropriate based upon everything that we know today. Now if things change in an unexpected way, bear in mind, the stock of the -- capital stock of the bank is great. The capital generation of the bank is great. We'll deal with it if it comes to that eventuality. But as we stand today, we see no reason to change.

Excellent. Let's do the final 2 ARS questions, please. What do you expect from Lloyd's on capital dividends versus market expectations. I'll expect everyone to be completely familiar with consensus estimates for dividends and buyback share. Question one, be on better earnings volume growth; two, be on lower capital requirements; three, miss a weaker earnings volumes; four, miss on higher regulatory requirements; five, miss on inorganic.

No, I'm glad to see that. That's -- just needs that to be reflected in our multiples on the valuation front and the [indiscernible] front. The only one I'll comment on -- I mean, that all seems fair enough to me. The only one I'll comment on just because I think it's interesting, particularly given my background is point five, miss on inorganic acquisitions. I think that's very unlikely. Our approach to inorganic or M&A, if you like, is we will look at M&A if it is consistent with our strategy. We will only execute upon it if it is value creative from a shareholder point of view. If it is acceptable from a risk point of view. And if it gets us there quicker than our organic strategy ever would. And so very few opportunities pass that test and when they do, they typically tend to be quite modest in size. They're either adds to our capabilities or they may add to our scale, but pretty limited. We've done 2 or 3 in the time that I've been here. One has been a scale add-on, if you like, within mortgages. What has been a capability build within investments. And the other has been a capability build in salary sacrifice motor finance, all of which have been great, but they've also been very small and pretty modest.

Final question 6. Okay. We've asked you about bank taxes a few times that we'll give it another go. How concerned are you at site the risk of U.K. bank taxes. One, not concerned, I don't think it will happen; two, low concern by the low likelihood or a manager impact; three, moderately concerned; four, very concerned.

How do you see that? Aman, I mean to me, that reflects pretty much sentiment spoken in the room, but more broadly balance response.

I think we're out of time. So I think we'll call the session to an end there. But I -- William, I wanted to thank you for your time for it was an excellent session. And thank you, everyone, for joining us.

Thank you very much.