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

All right. Thank you very much. We'll kick the session off, so first of all, I just want to say thank you very much, everyone, for joining us this morning. You're in the European track of the Barclays Label Financial Services Conference. Delighted this morning to kick things off with William Chalmers, Chief Financial Officer of Lloyds Banking Group plc. I don't think William needs much introduction. But first of all, I did want to thank you, William, for your time and joining us here.

Thank you for inviting me.

Okay. Cool. Just to kick things off then. So you announced Accelerate 200 alongside the half year results with new targets, including ROE above 18% by 2028 and around 20% by 2030. What are the key strategic priorities of the plan -- and how does it differ from the kind of previous 2022 to '26 strategy?

Yes. Thank you, Aman. And as I said, thank you for inviting me here, and thank you to everybody for taking the time to join us today. I guess, first of all, in terms of what have we tried to do over '22 to '26, essentially 3 things. One is small growth within the business; 2 is improve the efficiency of the business; and three, is derisk the business. And I think we achieved some success in respect of each of those 3. So if I think about our market share in target areas, we increased it by around 3% on average. If I think about the efficiency point, we got to grow GBP 2 billion in gross cost savings. And if I think about derisking, we took the pension deficit down from GBP 7 billion to 0. We did about GBP 28 billion of RWA optimization, a fair chunk of that in the context of the legacy mortgage book. So some decent successes in that respect, Aman. And what it does is it gives us a very firm foundation for delivering '26 ambitions, which, as you know, are terribly important to us. And at the same time, the foundation for accelerate 2030. To accelerate 2030 really builds upon that. And maybe the first port of call is to say you'll have seen our participation decisions. They're very consistent with where we left off, #1, and they're very consistent with the core strengths of the group, number two. The strategy beyond that, I'll maybe just spend a moment in terms of dissecting -- so First of all, it's about enhancing customer experience. Second of all, it's about improving group connectivity. Third of all, it's about improving group productivity, i.e., efficiency. And then fourth of all, it's about driving all of that through the implementation and introduction of new technologies right the way across the business. So that's the strategy. We put it forward, it rests upon 3 pillars. Grow the core, grow the core is pretty much what the name suggests. That is to say, taking advantage of our market leadership positions and developing those further. Whether that is through technology, whether it's through rewards, whether it's through ecosystems, whether it's through proposition enhancement, all of the above ready, but it's about growing just at the core. The second, we describe as innovate deeper and diversify. And again, the objective is really in the name, and it's about innovative offerings across the group. Sometimes, those will be stand-alone wealth is an example. Sometimes, those will rely upon cross-group behaviors. And indeed, bancassurance is 1 example of that. innovative banking within BCB, linking up retail, BCB and wealth is another example of that. In most cases, they will hinge upon and benefit from the introduction of new technology. Just like growing the core will benefit from the introduction of the rewards program. And then the third pillar is simplification. Simplified to outperform is the way that we've named it. And there's 3 components to that. One is about an AI-enabled data set operating on a set of modernized platforms, absolutely key. Second is that will then allow us to access efficiencies in terms of the operations of the bank in terms of the servicing of the bank and so forth. And then related to that, thirdly, about capital optimization and about continued capital efficiency. So those are the 3 pillars, if you like, that the strategy rests upon. Where does that take us? It takes us to the financial outcomes that we have articulated. So mid-single-digit income growth and within that high single-digit ROI growth. sub-45% cost/income ratio, circa 20% RoTE by the time we get to 2030, as you highlighted Aman. And then in addition to that, credit 225 basis points capital generation again by the 2030 period. So that's really the financial outcome of what I've just outlined is the strategy in February 2030. We're looking forward to it.

Great. I just wanted to step back then to clearly, very topical at the moment, the top down picture in the U.K., there's a significant focus on U.K. policy, the economic backdrop, including change in Prime Minister and relentless discussion around bank taxation. Interested in kind of how would you assess the operating environment, current customer sentiment and activity? And do you have any insights on potential bank taxation from here.

Sure. I mean, I wouldn't claim necessarily privileged insight into that point, but let me address it in my comments. The first part of your question, Alan, is about how do we see the operating environment right now?

Yes.

In 2 words, really, the operating environment, as we see it, is pretty constructive. It's not about operating environment. Now we put forward, as you know, some relatively modest, I guess, you might describe as prudent forecast for the macro. Over the course of '26 and '27 and indeed beyond. So we're looking at GDP growth of shade over 1%. We're looking at HPI growth probably about the same for each of the 2 years that I just described. We're looking at unemployment peaking at around 5.5% sometime probably quarter 1, quarter 2 next year. So overall, some relatively modest expectations for how the economy is going to play out. I would say so far, Aman, the actual performance has probably exceeded our expectations, and we saw our GDP print, for example, the other day, which was significantly actually in excess of where we expected it to be just like the market. But at the same time, the possibility of things like data revisions, the possibility of energy prices, which still have to work their way through the macro, that's tempering our enthusiasm. We're not getting carried away by what we're seeing because of these 2 points that I've just mentioned, maybe 1 or 2 more. So we stick with something like our relatively modest expectations. But as I said, that doesn't obscure a pretty constructive operating environment. The customer positioning in that, and this is partly why I think the business is doing reasonably well. The customer positioning in that is pretty positive. Debt to GDP levels, at least in the private sector are pretty good. savings levels pretty high. Confidence indicators, generally speaking, going in the right direction. So all of that, I think, portrays a customer positioning that is generally pretty constructive and additive points I made earlier. We've seen that evident in performance, EUR 11 billion growth in lending in H1, about 2.5%, GBP 4.5 billion or thereabouts in deposits, overall, a pretty constructive performance. And then if you track down the P&L, you can see it echoed in the context of the asset quality numbers, for example, really very constructive. Likewise, you take a step further forward and look at the early warning indicators, which we monitor across the retail and the corporate base, again, very benign. I think there's no doubt that as we look forward, we'll probably see lending slow a little bit in H2, that's expected. At the same time, maybe they're a touch higher than we might otherwise like. But in a sense, these are shades. The overall operating environment as said, is pretty constructive. You got the devilish topic of tax Aman, so I obviously can't ignore it. First of all, I said, I don't think we would claim necessarily any privileged insight particularly. But when we have our government conversations and of course, we have a lot of them as the U.K.'s largest bank, we see a government that is positive on the bank sector. It recognizes the role of the banking sector in the context of the government's overall growth objectives. So that's where the government is coming from. I think in this context, it is important, therefore, look at tax in the context of everything else that is going on and in particular, things like the regulatory reform agenda. So there's a tax debate for sure. But equally, there is a financial services and market tech, which is generally reforming or proposing to reform the conduct agenda in a positive way. Likewise, a prudential agenda around ring-fencing or around the FPC capital debate heading in a positive direction. So it's worth just putting tax debate in the overall context as I say, I think is evidence of a basically supportive government. It's also worth keeping the tax debate in proportion from a statistical part of view, from a numerical point of view, and specifically, what I mean by that is that for every 1% increase in the bank levy, which as you know, Aman is the 1 that's most speculated upon. For us, it's about GBP 75 million. The increase in the bank, maybe to be clear, is not our base case. But you can tell from my comments to a modest increase in the bank levy is not going to make any difference. It's not going to make a different store equity story. It's not going to make any difference to our return targets. Again, it's not our base case, but if it happens, that's where I see it.

Yes. Okay. I guess, returning kind of back to the business itself and the update in H1. You're guiding to a pretty significant increase in cash investments and 10% to 15% from '27. I'm interested in how do you expect the investment to be allocated? And in particular, what outcomes are you kind of seeking from the investment?

Yes, a really important question. I guess maybe to start off, '26, what's going on there. '26 cash investment around the $3 billion mark. That's consistent with 2 things really. One is the culmination of this strategic cycle. And then 2 is a reduction in severance versus $25 million, and that's what leads to our circa GBP 3 billion in cash investment in '26. When we look forward, we would expect that to step up in '27. That is consistent with obviously starting to accelerate 2030. It's the new cycle. It's a new cycle of investment. What that results in is obviously slightly higher cost growth in the course of '27 versus '26. When you look back -- sorry, when you look forward, I guess, and figure out what are we actually going to be spending over the course of this cycle, it's about GBP 13 billion, GBP 13 billion over 4 years, that suggests just over GBP 13 billion per annum, which is a bit of a step up versus the last cycle that we've just been through and very deliberately so that sees the opportunity that we see in front of us. You asked that allocation around timing allocation wise, I think it will more or less mimic the current cycle that we're in, which is to say a little bit of front-loading probably followed by a period of stability. Probably followed by a bit of tailing off towards the back end. So that's the kind of timing allocation shape that I would expect to see. Business unit allocation, which is maybe the more interesting part of that is -- if you look at all the business units and indeed all the functions, including my own finance, we are all going to be getting a decent dose of investment over the course of this plan. There will be some business units, EG Retail, where proposition development, just the key pace of the competition and hopefully exceed it is going to be quite intense. And so there's probably a bit more stock of investment flowing into some of those areas. By the same token, there are other areas. CIB is a great example for us. Corporate and Institutional Banking is a good example for us where it's going to be slightly more OpEx intensive. That's just the nature of the business. And so there's that kind of change, if you like, that variant. But underneath all of it, there is going to be a lot of investment in what we describe as enablers, a lot of investment in enablers. And obviously, specifically there, I mean things like AI and data -- and it's that, in turn, that will enable us not just to better equip the business units for achieving their objectives, but also to inform the connectivity point that I made earlier on and allow us as a group to better exploit the breadth of the business model in bringing value to our customer base. What's the outcomes of all of that? I think in 2 words, Aman, is franchise enhancement. That is what it is all about. And of course, that should deliver on the revenue side, and it should deliver on the cost side and likewise, the risk side and so forth. As you would expect and as we saw in the last cycle, we are going to govern that investment. It's a lot of money. We're going to govern that investment with rigorous return expectations with continuous tracking from painful people like me and the team, and if necessary, reprioritization. None of this stuff is a given. It is always, if you like, held to accountability and held to task. Where does all that get us? It gets us the targets Aman. That is to say it gets us to mid-single-digit income growth. It gets us to sub 45% cost income ratio and it gets us the inputs to those targets, the greater than GBP 2 billion cost reductions that I mentioned earlier on. So ultimately, it's that investment that delivers the financial targets that we set out.

Okay. Let's talk about income, then you've alluded to it a few times, you're targeting mid-single-digit income CAGR through to 2030, stronger growth expected in 2027. Interested in the primary drivers of that growth rate and what do you see as the main factors that could lead to a different outcome versus the base case expectations. Interest rates, clearly, the structural hedge. You've also made some quite prudent assumptions around competition?

Yes. I mean we certainly tried to. We'll discuss some more, I know. But what I'd say, I mean, first of all, as you know, our income expectations for the group, mid-single-digit growth with high single-digit OOI growth within that. That's the backdrop. Now informing that is a bunch of macro assumptions, clearly. We've tried to lay them out in relatively prudent terms. We tried to make a relatively prudent forecast that is -- but at the same time, to be clear, we do assume a stable macro. So it might be modest, but nonetheless, it is stable. That's a core assumption. And then in terms of the drivers, Aman it's really twofold. Driver 1 is obviously net interest income. What is behind that net interest income, really 2 or 3 components. Structural hedge is a big part of it, as your comment just alluded to. Structural hedge income growth, we expect to be in excess of GBP 1.5 billion this year, get us to GBP 7 billion. We then expect a further GBP 1 billion over the course of '27 gets to over GBP 8 billion. Just as a kind of data point, if you like, informing that growth pattern. At the moment, Q2 yield on around GBP 246 billion of structural hedge was 2.8%. That's in an environment where we are refinancing that hedge currently around 4.6%, 4.7%. There's a big gap there. And it's that gap, if you like, refinancing into that gap that drives the structural hedge income growth, certainly 2030 and indeed most likely beyond. So that's what's going on in the structural hedge side. The second component of net interest income growth is some ebbing away in terms of some of the headwinds that we've seen, most notably the mortgage refinancing headwind. -- where effectively at the moment at least, every new mortgage that we write is coming in at a lower price point than the mortgage that is maturing. That headwind basically lays off during the course of quarter 1, quarter 2 next year. That's based upon current spreads, and it remains our expectation. And then thirdly, within net interest income, we are obviously benefiting from lending and deposit growth, i.e., volume growth in essence. Now I mentioned some statistics earlier on that gave an indication of that in the course of H1. Over the course of the plan, we expect our lending growth to be at GDP plus is how we've described it. You probably all I should say, nominal GDP be even clearer. You're all probably familiar with roughly speaking, our nominal GDP expectations. You'll obviously have your own, but nominal GDP plus is where we expect to be. So that's NII driver #1, if you like, Driver #2, other operating income. And of course, really, really important to us. Strategically, as we seek to, if you like, we in the business office dependency on net interest income, other operating income is what we're counting on and other operating income is what we expect to build. What's going on there? I guess it's 3 points really. One is business unit specific engines. And that's, of course, what we've seen over the course of the current plan, and we expect to carry on. So retail, transportation, value-added services, for example, commercial banking proposition and coverage development, for example, insurance, pensions and investments, workplace development, general insurance development and then Lloyd's Equity Investments Limited, Lloyds Living and LDC. So that's kind of -- that's bucket #1, if you like, business unit specific engines. Bucket #2 is getting the group to more effectively work on a cross collaborative basis. There's plenty of examples there. Bancassurance is a good example. I mentioned innovation finance and PCB is another example, where we should be able to link up the combination of PCB CIB product and indeed the wealth proposition. There's plenty more examples we might make in digital payments for area, for example, which will give rise to retail opportunities, allied payment opportunities, including things like embedded finance. And then beyond that, we expect there to be a third strand, which is around innovation. And innovation implies things that we haven't really done before. Connected Commerce is 1 example, linking up again, the retail and the SME space. Digital payments is another example. These are innovative strands of income growth within the OOI line. We haven't done much of it yet. A lot of it is testing ground, but it's very exciting, and we do expect it to add something over the course of the plan. You mentioned risks, Aman. And of course, there are risks for sure, there are risks. The first 1 that you might talk about is the macro. I really don't think that's a U.K. issue, frankly. I think it's more of a global issue. And obviously, everybody will have their own interpretation as to what global risks are, but that's out there. Interest rates -- interest rates probably right now a touch higher than we might ideally like to see them. What effect that's going to have. I really don't think it's an asset quality issue. It's more just about maybe tempering asset formation, i.e., loan growth. That's the second type of risk. I think then competition, for sure. We can always talk about competition. When we look at the competition, it's always there. Sometimes it's stronger than others. Right now, it's strong in the deposits area, as you know. But having said that, that is what Accelerate 2030 is about, i.e., it is about developing a broad customer relationship. The rewards program, for example. We put in place in our plan appropriate margins. We're also assuming a rational market. But most of all, as I said, Accelerate 2030 is about our response to those competitive markets and we believe it's a pretty good one. Now we're going to execute.

Yes, thanks for the fulsome answer. I mean just to kind of round out then on the fee income -- you're guiding to a high single-digit case you've been delivering high single-digit CAGR since 2022. There's clearly a lot of conviction around the broad-based nature of that growth. I'm just interested in the mix of the business then. Kind of when you project forward. How does the mix of the business evolve from here? And there is a leaning into fee income in terms of the revenue composition from here, right?

Yes, a little. I mean, the trends within OOI, I just covered in the previous answer, which they're really important to us. But again, business unit specific #1, cross-group offerings; #2, innovation #3. Those are the 3 strands that will power OOI going forward. The first 2 of those, we have got a pretty decent track record in. We've delivered something like 8% compound annual growth rate in terms of AOI over the course of '22 to '26 plan. This year, OOI is up around 11% as of the half, and I wouldn't be surprised if it's a similar number over the course of the year as a whole. So that's all looking in pretty good shape, and there's a pretty good track record that suggests we can at least deliver on the first 2 of the 3 trends that I mentioned earlier on. Then innovation, it's about us proving out what we can deliver there. assisted by the technology developments that we see, the opportunities where we think the group is in a leadership position on and so forth. What does all that mean? I mean, fundamentally, as I mentioned earlier on, the participation choices of this bank for the Accelerate 2030 cycle are pretty much the same as participation choices for the last cycle. Maybe a little bit of difference around the edges. We might accentuate some parts over others. But overall, we end up in 2030, continuing to be a retail and commercial focused financial institution. That's the shape of the group. But within that, to your point, Aman, 2 points that might be worth making. One is OOI will probably assume a greater weighting in the overall revenue picture. That is by design, not by accident, because as I said earlier on, the time whenever it is the next rate cycle happens and rates go down, we want to be equipped for that as an institution, and we want to be able to perpetuate the growth and the success of the franchise going forward. And so building the OOI share, if you like, of overall income towards the 40% mark is very much the ambition of Accelerate 2030. And then beyond that, and this is only really the edges, but maybe worth mentioning, I would expect from commercial banking and IP&I because they are starting from smaller bases and because there's probably more for us to do there, a slightly faster growth rate than you might see in other areas, EG retail. Therefore, you might see a percentage point or 2 rebalancing in that respect. It's not a big deal. It doesn't change the shape of the group much -- but nonetheless, that's probably a second strength that I would say. And then final point, this is a cyclical point of a structural point within any given quarter within any given period, you're going to see certain of those engines within our OOI streams, ebb and flow. So take an example of that, we saw commercial banking pretty weak at a tail end of '25, pretty weak in the first half of '26, but now coming back in quarter 3. By the same token, we saw insurance pensions investments pretty strong in tail end of '25, pretty strong in the first half of '25 -- '26, sorry, but we're going to see a bit of substance in quarter 3 of '26 in -- in all of that, what's key is diversification. Diversification is what really matters because it means that 1 engine works when the other 1 might be a little bit slower. And what that allows us to deliver is strong OOI growth in H1 of this year and it will be strong OOI growth in H2 of this year. But as I say, the different engines tick over at different rates at different times for these idiosyncratic reasons.

Perfect. So I guess we're going to move on to efficiency and AI. So you're targeting EUR 2 billion of gross cost saves in the new plan, broadly in line with the pace achieved under the current plan with AI expected to play a key role -- how are you thinking about deploying AI across the group? And what's the kind of impact that you're targeting across your business?

You want to be asking this question a lot today. It's obviously really important to accelerate 2030. I think just as everybody else, we see AI as presenting a very significant opportunity for the group. What I'd say about was that, first of all, I think I'd say AI in its broad form has played a pretty key role to date in terms of the overall franchise. But it's been more about traditional forms of AI. So machine learning is an example of that. Whereas today, what we and I guess everybody else is all talking about is the potential of generative AI and the potential of Agentic AI and that's really what's different about this next cycle. I would like to say, and I think we have some validity to the claim that we have a little bit of a leadership position in this respect. Of course, I would say that -- but nonetheless, it is manifested in terms of it being increasingly kind of intrinsic and integrated ingrained within the business model, #1. We have a very established setup with effectively a control tower at the center and then dispersed use cases around the institution as a whole. It's proliferated through the organization. So we have as an example of that, somewhere in excess of 40,000 copilot licenses for around 60,000, 65,000 colleague base. All of these, I think, are examples of kind of how we're set up. And if you go back to Ron and Charlie's video, which was back in what October of last year or something, they will no doubt be able to give you more and greater detail as to that. We've put in place for '26 an ambition, as you know, of GBP 100 million in terms of AI expectations for generative and agentic. And that is very deliberately both revenue enhancements and cost enhancements. So on the revenue side, for example, we've invested in something called Spend AI where we've now got 11 million retail customers checking out their spending patterns and learning more about how they spend money. We've got invest AI, helping people make investment decisions, on the cost side, we've got full detection mechanisms, which have a 90% success rate fired by AI. Likewise, in terms of legacy code conversion, obviously important for us. We've had a 50% reduction in terms of code conversion time facilitated by AI. All of that is going into that GBP 100 million. When we look forward, it's kind of more of the same really. If you look at the revenue opportunities about customer coaching, for example, it's about the rewards program, for example, it's about personalized pricing. It's about quality underwriting. All of that, you've got access to just a different game when you deploy AI. Likewise, when you look at the cost structure, is also a lot of our cost structure is basically about operational and servicing costs. An awful lot of that is process oriented, which in turn, lends itself to what you might be able to do with AI. And then that's not to mention, obviously, risk advances that you'll see or we will see. And likewise, capital optimization, including things like collateral savings. All of these things become accessible through AI, over the course of time, the timing point is important. It's important to keep that in proportion, but it is meaningful. We had a big debate before we set out Accelerate 2030, we had a big debate about whether we put an AI number into that presentation. And in the end, we stopped sure. And I was very much in favor actually stopping short for basically 2 reasons. One is because I think when you put a number in it suggests that AI is just kind of over here and the rest of the business is over here. And that isn't the case. AI is everywhere in the business, as you might imagine. And therefore, that's, if you like, ever present nature of AI as opposed to compartmentalization was reason #1. And the second reason, Aman, is we see this technology developing so fast that any number that we give to the market today is probably obsolete by tomorrow. And so we want to be really careful. Therefore, no long-term business target, but an expectation that informs all of the targets that we've laid out. Two points to finish up with maybe -- which are very important to us in 1 is cost control. AI can get the better of you, if you're not careful. And therefore, strategically designing a cost control approach to AI is at least as important as the deployment of AI in the first place. I could talk more about how we're tackling that particular problem, but it's absolutely key to the strategy we've adopted. And then the second is commoditization. In our view, there is no doubt that AI over time is going to be accessible to everybody, maybe it already is today. But a lot of what AI offers is going to be commoditized, and therefore, it's going to feed through to the sector as a whole. And the question becomes what is the long-term competitive advantage that you can secure with AI? And for us, at least there, it's data, #1. It's scale, #2, -- it's innovation #3 and its trust #4. And it's our view that we have a competitive advantage in respect of each of those 4 things. And therefore, over time, with AI, we would expect to have a meaningful competitive advantage, but by virtue of those 4 things as opposed to the earlier point I was making.