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Edited Transcript of LLOY.L earnings conference call or presentation 31-Jul-19 8:30am GMT

Half Year 2019 Lloyds Banking Group PLC Earnings Call

London Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Lloyds Banking Group PLC earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Lorenzo

Lloyds Banking Group plc - Chief Executive of Scottish Widows and Group Director of Insurance & Wealth

* António Mota de Sousa Horta-Osório

Lloyds Banking Group plc - Group Chief Executive & Executive Director

* Mark George Clifford Culmer

Lloyds Banking Group plc

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Conference Call Participants

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* Alice Mary Timperley

Morgan Stanley, Research Division - Research Analyst

* Christopher Robert Manners

Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research

* Edward Hugo Anson Firth

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Fahed Irshad Kunwar

Redburn (Europe) Limited, Research Division - Research Analyst

* Guy Stebbings

Exane BNP Paribas, Research Division - Analyst of Banks

* James Frederick Alexander Invine

Societe Generale Cross Asset Research - Equity Analyst

* Jason Clive Napier

UBS Investment Bank, Research Division - MD, Head of European Banks Research and Bank Research Analyst

* Joseph Dickerson

Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst

* Martin Leitgeb

Goldman Sachs Group Inc., Research Division - Analyst

* Raul Sinha

JP Morgan Chase & Co, Research Division - Analyst

* Rohith Chandra-Rajan

BofA Merrill Lynch, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Lloyds Banking Group 2019 Half Year Results Event Conference Call. (Operator Instructions) There will be a presentation by António Horta-Osório; George Culmer; and Antonio Lorenzo, followed by a question-and-answer session.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [2]

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Good morning, everyone, and thank you for joining our 2019 Half Year Results presentation. I will talk briefly about our performance in the first half of 2019 before Antonio Lorenzo gives you some color on insurance and wealth. We will then hear from George on the financials, and we will have time at the end for questions. We have delivered strong strategic progress and a good financial performance in the first half with market-leading efficiency and returns. Together, this has enabled the Board to announce an interim dividend of GBP 1.12 per share, an increase of 5% on last year.

Over the last few years, we have delivered prudent growth in targeted segments while reducing costs and increasing investment in the business. As we said at Q1, economic uncertainty persists, and this is now leading to some additional softness in business confidence, while we also observe some weakening in international market indicators.

In this environment, our balanced approach, progressing our strategic transformation, while being watchful and responsive to short-term risks remains the right one, and this resilience is reflected in our 2019 guidance. At the same time, our longer-term guidance remains unchanged, although continued economic uncertainty has the potential to further impact the outlook. We remain well placed to continue supporting customers, help Britain prosper and deliver sustainable and superior returns for our shareholders.

In terms of financial performance, we have delivered a good result with statutory profit after tax of GBP 2.2 billion, a strong return on tangible equity of 11.5%, and underlying profit of GBP 4.2 billion. While being selective on growth opportunities has some impact on volumes, the net interest margin remains resilient and is in line with our expectations at 290 basis points.

At the same time, costs are down 5%, and our market-leading cost-to-income ratio improved by a further 1.8 percentage points to 45.9%. In parallel, we've increased investments in the business.

We are also maintaining our prudent approach to risk, with credit quality remained strong and the net asset quality ratio of 26 basis points remaining inside our full year expectation of less than 30 basis points.

Across the business, we have seen a strong performance from insurance and wealth who are running ahead of the strategic plan. Retail continues to deliver in a tough market, and we have seen challenging market conditions in Commercial banking.

We were disappointed to incur a further PPI charge of GBP 550 million in the second quarter, led by a surge in information requests ahead of the August deadline. However, we have still generated market-leading returns and built 70 basis points of free capital in the first 6 months despite the 33 basis points impact of PPI and 11 basis points for IFRS 16. This has resulted in a CET1 ratio of 14.0% post dividend and further demonstrates the capital-generative nature of our business model.

I will now turn briefly to the U.K. economy. As I have already mentioned, the economy has remained resilient, although we are seeing continued uncertainty, which is leading to some additional softening in business confidence and in international economic indicators.

Consumers remain well positioned as employment has continued to rise, with over 1.2 million more people working than at the start of 2016, and real wages are also rising at more than 1% per year. All of this supports consumption and therefore, GDP growth.

The impact of the economic environment is however felt most keenly by U.K. corporates. Company's employment and the investment intentions have both deteriorated in the second quarter, and PMI surveys suggest lower activity levels across sectors.

We have also seen global growth softening and interest rate curves flatten in the second quarter, which is a less supportive environment for retail and commercial banks. Against an uncertain backdrop, we continue to undertake a significant transformation of the group, which positions us well for the future.

Over the last few years, we have deliberately reshaped and repositioned the group, improving balance sheet strength and delivering sustainable profitability. The group has a broadly similar-sized car loan book in 2019 as it did in 2010 of around GBP 440 billion, given our prudent approach, but there has been growth in our targeted segments.

Consumer Finance, SME and mid-markets have grown by GBP 22 billion in this period, while large corporates and the mortgage book are deliberately lower, offsetting this. Risk-weighted assets are down GBP 208 billion, halving over the period and run-off assets, which totaled nearly GBP 200 billion in 2010, are de minimis today. This high-quality repositioning has enabled the group to improve returns while reducing risk and releasing capital to shareholders.

At the same time, we have implemented a culture of relentless focus on efficiency and costs. This has driven down operating costs from GBP 9.6 billion in 2010, excluding TSB, to a target of less than EUR 8 billion in 2019. This has been achieved by taking underlying costs out of the business. Our business as usual cost base was down 30% at the end of 2018, including the impact of the acquisitions of both MDNA and Zurich's workplace pension business.

We have also continued to increase our investments in the business for the benefit of our customers and have committed to more than GBP 3 billion of strategic investments over the course of GSR3.

I would now like to spend a few moments showcasing our strong progress to date. We are now halfway through this ambitious strategic plan, responding to the changing environment and transforming the group for success in a digital world. We are already delivering a number of tangible customer and business outcomes against each of our strategic priorities, supported by GBP 1.5 billion of strategic investments to date. These successes reinforce our existing competitive advantages and create new ones, equipping us to compete more effectively, both today and in the future.

As I have mentioned previously, this investment is enabled by our unique business model and market-leading efficiency. This allow us to continuously increase investment in the business, delivering improved processes and further productivity enhancements as well as tangible improvements to our customer experience, while generating sustainable and superior returns for our shareholders. We see this as an additional key competitive advantage.

I will now look briefly at some successes across our strategic pillars, starting with digitizing the group, where we continue to spend more than ever before on technology.

In the first half of 2019, our technology cash spend equated to 19% of our operating cost price, an increase of more than 20% on the prior period. And over 70% of the first half technology spend has been weighted towards creating new capabilities and enhancing existing ones.

As Zak mentioned in February, we have adopted a modular approach to transformation and we continue to successfully execute against this. It provides benefits to both customers and colleagues as we deliver change quicker, more cost effectively and on a more meaningful scale than ever before.

For example, virtual assistants are now managing up to 5,000 conversations daily, with customer satisfaction increasing by 10 points, and 25% of queries handled without being passed to a colleague, a trend we expect to increase over time.

We are also significantly ahead of our plan in terms of migrating apps to our private cloud. Halfway through GSR3, we have transformed around 40% of our cost base, up from 12% in 2017. We are on course to meet our target of greater than 70% by the end of 2020.

Let me now show you how this investment in digitizing the group is helping deliver a leading customer experience. We have repositioned the business to be a truly customer focused organization, with this reflected in strong and improving customer satisfaction levels.

Our Net Promoter Score continues to increase at 5% in 2019 to 65%, and by more than 50% since 2011. Our score for the digital channel surpasses this and has also increased by 5% to 67%. You will see shortly, these improvements are not just limited to our retail channels.

In corporate pensions, we have transformed the customer experience, improving our employer NPS from a negative 41 to a positive 52 over the last 4 years. These scores reflect the unique competitive advantage of our multi brand, multi-channel model. We are the largest digital bank in the U.K. with around 16 million digitally active users and 10 million mobile app users, with 75% of products now originated online.

This is complemented by the largest branch network in U.K., which we are refocusing to meet more complex and value-added needs, such as mortgages, financial planning and retirement and business banking.

The combination of these has also enabled us to deepen customer relationships. We are the largest current account provider in the U.K., with more than 17 million active current account customers. Most importantly, our overall balances have grown by around 60% since 2014, significantly ahead of the market as a result of our targeted propositions across our brands.

And finally, looking at maximizing group capabilities. As we highlighted in February, we are the only provider to serve all of our customers' financial needs in one place, building on open banking with our unique single customer view proposition.

Single customer view is now available to over 4 million banking and insurance customers and demonstrates unrivaled engagement, significantly surpassing early open banking levels and those of standalone insurers. We will extend this to more than 9 million customers by the end of 2020 and provide greater functionality, something that Antonio will cover shortly.

We also expect open banking usage to increase as new products are added, and we have seen the initial size of this, having been the first bank to add credit cards and savings last month. This will be complementary to our single customer view, creating an opportunity to further deepen relationships with our customers.

In addition, we have delivered GBP 10 billion of gross lending to U.K. businesses in H1 2019, ahead of schedule to meet our GBP 18 billion target for 2019, while we also continue to target GBP 6 billion net lending growth across startups, SME and mid-market businesses by 2020.

We are pleased with our strategic execution to date, but we are not complacent and now there is still a lot to be done to achieve our GSR3 goals and therefore, success in a digital world. Delivery will be supported by our unique business model and market-leading efficiency, which continuously creates the capacity for increased investments. As I mentioned, this investment drives improvements to both internal processes and customer experience, while also delivering superior returns to our shareholders. We have a proven track record of delivery in this regard, and I continue to see scope for further improvement.

In summary, the first half of 2019 has seen strong strategic progress, along with good financial performance. We have the right strategy for the current environment and continue to invest strongly in the business. The resilience of our business model is seen in the guidance we have given for 2019, which you can see on the slide.

Longer-term targets remain unchanged. Although, as I said earlier, economic uncertainties continue and could impact the outlook. Despite this, we remain well placed to continue to support our customers, help Britain prosper and deliver sustainable and superior returns for our shareholders.

I will now hand over to Antonio Lorenzo, who will talk to you about the significant strategic progress being made in our insurance and wealth business.

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Antonio Lorenzo, Lloyds Banking Group plc - Chief Executive of Scottish Widows and Group Director of Insurance & Wealth [3]

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Thank you, António, and good morning, everybody. I am delighted to be here today to tell you about the great progress we are making in insurance and wealth. Our financial performance has been strong in recent years with new business premiums up 72% versus the first half of 2017. This is a result of growth across multiple business lines, including corporate pensions and the step-up in auto enrollment contributions as well as growth in individual protection.

As I will show you today, we have also grown share in other areas that we have heavily invested in and prioritized, such as home insurance, where our offering has been transformed following replatforming. Given this, new income is up 23% over the same period, more than a certain runoff from longstanding products. This growth, combined with a strong cost control in the period from increased digitization, has supported a 58% increase in underlying profit over the last 2 years. Business is now an increasing contributor to the group, representing 38% of our income in the first half of 2019, up 7 percentage points year-on-year. The business has also upstream around GBP 7 billion of cumulative dividends since 2011.

Insurance and wealth is a uniquely positioned integrated business with a comprehensive proposition across multiple product lines, leveraging the group multi-brand and multi-channel model.

Since 2015, we have reshaped the business to be leaner and more customer-centric, while significantly increasing investment. As a result, we are in a better place to harness the considerable operational and financial synergies arising for being part of a wider banking group.

Looking ahead, we are well positioned to capture further growth across a number of fast-growing and attractive markets as well as deepening engagement with our customers. I will now discuss some of these areas in more detail.

We see our single customer view as a unique and unrivaled opportunity to meet all of our customer financial needs in one place. We have already made this available to over 4 million customers, and will extend this to more than 9 million by the end of 2020. As you have already seen, customer engagement today has been strong with over 9 million monthly pension used alongside banking products and active engagement around funds and contributions.

Looking forward, our intention is to increase functionality to our customers allowing them to have greater control of their financial needs than ever before, including pension consolidation and fund switching. With approximately 60% of our group pension customers having a multi-touch point relationship, we see this as a significant differentiated opportunity.

Beyond this, we are targeting growth across the board, strengthening our positions in multiple businesses. We believe, in today's environment, for a business division of a major financial services group, it is quite unique to have achieved above-market growth since 2015 in business lines where we already hold top 5 market share positions. And most importantly, with clear line of sight for further growth over the coming years.

To bring this to life, as I mentioned in February last year, we intend to increase our share across the attractive financial planning and retirement market. We are targeting 15% market shares in both corporate pensions and individual annuities by 2020 and GBP 50 billion of open book assets under administration growth. Here, we have already delivered GBP 20 billion of growth as of July, supported by the Zurich acquisition.

Beyond this, for the first time, I am also sharing with you our previously internal ambitions across a number of other areas, leveraging a strong growth in both digital and physical channels. For instance, we are increasing our customer reach through the branch network in line with a refocus on complex needs. With home insurance policies distributed through this channel up by more than 25% year-on-year. And in digital, we are growing more than 40% in the same period.

On bulk annuities, we continue to be an active participant having decided to enter this market in 2014. Although our focus is on pricing with discipline. As a result, we have grown below the market in recent years, opting to distribute surplus capital to the group instead. Despite this, we see ourselves as well positioned for growth in the future, given our lower cost of capital and stronger distribution capabilities.

Turning attention now to 2 main areas of our financial planning and retirement strategy where we see great growth opportunities: Corporate pensions and our joint venture with Schroders. Our financial performance has improved significantly in corporate pensions since 2015, and is reflective of our recent reshaping of the business. In 2015, we have negative NPS scores and a limited position across panels. Today, as a result of our focus on enhancing the customer experience, we have significantly improved NPS and we now enjoy full panel coverage.

This has been further supported by maximizing group opportunities across the group, including building relationships with corporates through our Commercial banking business. The Zurich acquisition is also a major enabler in this market, significantly increasing our reach to some of the largest corporate pension schemes.

Finally, we are creating a market-leading wealth management proposition for our customers. Its aim is to provide a full-service offering, meeting simple and more complex customer need.

We will do this through 3 lines of business. Firstly, a group branded mass market offering that we will launch at the end of 2020. Secondly, our Schroders Personal Wealth joint venture. And thirdly, through providing access to a leading wealth management and investment business, Cazenove Capital, for our high and ultra-high net worth customers.

Through our partnership with Schroders, we are now able to meet our customer more complex needs. The partnership brings together Lloyds multi-channel distribution model and unique client base with Schroders investment and wealth management expertise and technology capabilities.

Looking specifically at the Schroders Personal Wealth, we believe that the business is well positioned to meet its ambition of becoming a top 3 financial planning business by the end of 2023.

Having established the company in the first half of 2019, Schroders Personal Wealth will launch to the market later in the year, operating restructuring model with a wide product set. We believe that the best-in-class product offering, combined with transparent and competitive fees, will be attractive to customers in the growing mass affluent market.

Growth will also be supported by referrals of our Lloyds customers, with this already up by more than 20% year-on-year as well as the consideration of inorganic expansion should suitable opportunities exist.

And as we move forward, the success of the business will be measured across 4 key areas: Assets under administration; adviser numbers; growth in net new business flows; and increased profitability.

Thank you. And I will now hand over to George, who will run through the financials.

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Mark George Clifford Culmer, Lloyds Banking Group plc [4]

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Thank you, Antonio, and good morning, everybody. As you've heard, in the first half, we've delivered a good financial performance with underlying profit in line with prior year of GBP 4.2 billion. Net income of GBP 8.8 billion is down 2%, but more than offset by a 5% reduction in costs, while impairments remain in line with expectations. Statutory profit after tax is GBP 2.2 billion and down 4% due to increased below the line charges, particularly PPI, and I will discuss these shortly.

Turning first though to net interest income. NII is GBP 6.1 billion, and down 3% due to a GBP 3 billion reduction in average interest-earning assets, and a margin in line with guidance of 290 basis points.

On average interest earning assets, the movement reflects the continued run-off of the closed mortgage book of GBP 2 billion, and the sale last year of the Irish business of GBP 3 billion, both of which are offset by continued growth in targeted segments, including GBP 1.4 billion in motor finance and 0.8% in SME.

On the margin, we've again seen a reduction in asset margins offset by improved liabilities. And I would expect this to continue in the second 6 months and for the full year margin to be in line with guidance at around 290.

In terms of asset margins, we're not seeing any real change to the trends that we have set out previously. In mortgages, as you know, the market remains very competitive. Most recently, we have seen a slight improvement in new business pricing, but also a slight pickup in SVR attrition to around 15%. And the overall mortgage market margin has remained resilient at 1.8% and in line with the second half of 2018.

In Consumer Finance and Commercial Banking, margins are obviously at higher levels than mortgages and simply remain resilient at 6.7% and 2%, respectively, driven particularly by growth in SME and motor.

On liabilities, the margin has also remained stable at around 0.5%, and we continue to target growth in high-quality current accounts, which were up GBP 1 billion on the start of the year and GBP 3 billion on prior year. We've also continued to run down tactical deposits, which at GBP 17 billion are down more than 10% in the last year.

The growth in current accounts has also increased our hedge capacity though we have stepped off hedging in recent months given market rates. We're currently around 90% notionally hedged with a balance of GBP 172 billion and a weighted average life of around 3 years, and this compares with GBP 180 billion at around 4 years at the start of the year. It means we now have about GBP 13 billion of hedged capacity, which we invest when rates offer better value, which provides additional flexibility.

Turning then to other income. Other income is GBP 3.1 billion, in line with recent years though Q2 is down on the equivalent period last year, due to higher levels of financial markets activity in commercial and higher central gains in 2018. In terms of divisional performance, you've just heard from Antonio, and the excellent progress made in insurance and wealth, which is up 21%, led by new business in workplace planning and retirement, which is up nearly 50% and a much-improved general insurance result.

Elsewhere our other income in retail was down 4% at GBP 1 billion with our current account fee income offset by lower Lex fleet volumes, while commercial fee income was disappointing in a challenging market and down 13% as a result mainly of depressed markets activity and the strong performance in Q2 last year.

In the center gilts gain totaled GBP 181 million in the first half, down slightly on prior year's GBP 191 million. Going forward, while we continue to have gains on the portfolio, I would not expect to realize further material amounts this year.

Finally, operating lease depreciation is down 5% on prior year though marginally up in Q2 through slight reduction in used car prices.

Turning to costs. As you've heard, our relentless focus on cost is a significant competitive advantage for the group and particularly so in the current operating environment.

Total costs in the first half were GBP 4 billion and down 5%, with a 3% reduction in operating costs and a 44% reduction in remediation. The operating costs are driven by a 5% reduction in BAU with our property marketing and staff costs offset by a 3% increase in investment-related spend as we continue to invest in the business.

And on investment, the above-the-line cash spend in the first half was GBP 1.3 billion, and included GBP 0.6 billion of strategic spend, has remained on track for more than GBP 3 billion target by the end of 2020. Around 60% of this GBP 1.3 billion spend was capitalized, which is in line with previous periods.

Going forward, there remains further opportunities to reduce costs, and I continue to expect operating cost to be below GBP 8 billion for this year and for the cost-to-income ratio, including remediation, to be in the low 40s as we exit 2020.

Looking at credit. Credit quality remains strong, reflecting the group's ongoing prudent approach to risk and provisioning and a high-quality, low-risk loan portfolio that is well over 75% secured. For the full year, we continue to expect net AQR to be less than 30 basis points.

In the first 6 months, the growth in net AQRs are up 7 and 6 basis points, respectively, at 34% and 26%, reflects a number of items, including the alignment of lower MBNA credit card approaches, slightly softer used car prices and a small change in methodology in motor finance, while there are also 2 individual names in commercial banking. In terms of actual experience, we are not observing any changes and new to arrears for mortgages and credit cards both remain low.

On balances and coverage. Stage 3 balances are in line with the start of the year at 1.9% of the portfolio, while coverage fell slightly to 23%, largely due to the balances in commercial entrants in Stage 3, where we do not expect to incur significant net losses.

Stage 3 balances and coverage within the mortgage portfolio are both in line with year-end at 1.7% and 14.7%, while the other products in retail have seen Stage 3 come down slightly to 1.8%, but with coverage maintained above 50%. And across the group, we've maintained a total balance sheet provision of GBP 4.4 billion, which compares with an expected normalized cash write-off for the full year of around GBP 1.2 billion. And again, unchanged from the last couple of years.

Looking next to statutory profit. Restructuring costs were GBP 182 million in the half, mostly comprised severance, the completion of the MBNA integration and non-branch property costs. And these are down over 50% on prior year, mainly due to the completion of the ring-fencing program and significantly lower MBNA spend. Volatility and other items are GBP 465 million, and include the costs associated with changing asset management provider, fair value and amortization costs of GBP 169 million as well as GBP 85 million of negative banking volatility compared with a GBP 250 million gain last year.

The PPI charge of GBP 650 million includes GBP 550 million in the second quarter, and I'll cover this in a moment.

The effective tax rate is 23% and slightly lower than our expected long-term rate of around 25%. This is despite the PPI charge and due to the one-off release of a GBP 158 million prior-year deferred tax liability in the second quarter.

Finally, our statutory return on tangible equity at 11.5% is a strong return, was clearly been impacted by the below-the-line charges, and we now expect ROT for the full year to be around 12%, and slightly below our original guidance.

On PPI, it's obviously disappointing to again be reporting another material charge. Process complaints have been just above our provision at 14,000 per week. However, in the second quarter, we've seen a significant increase in PPI information requests or PIRs, which are the first stage in the CMC complaints process.

Previously, we've received around 70,000 PIRs a week, of which around 9,000 or just 13% eventually resulted in a complaint. In Q2, the number of PIRs increased to around 150,000 per week, and it's now running at around 190,000, partially offset by deterioration in quality and a lower complaint conversion rate of around just 10%.

In our numbers, we've assumed that PIR stay at this elevated level of around 190,000 and of slightly lower quality through to the industry deadline at the end of August. And the impact of these additional volumes equates to around 200,000 extra complaints over and above our previous assumptions. This accounts for almost 3/4 of the GBP 550 million increase with the balance comprising slightly higher cost per complaint and higher related administrative expenses.

Turning then to the balance sheet, loans and advances of GBP 441 billion are stable on Q1, with growth in targeted segments, including GBP 0.8 billion in the open mortgage book where we've delivered growth in a competitive market while maintaining our overall margin through the selective targeting of segments, including our branch originated sales. And for the full year, I still expect the open book to close 2019 in line with 2018.

Elsewhere, as you've heard, SME is up over GBP 0.8 billion on prior year and continues to grow ahead of the market, and we continue to target growth in our high-quality consumer portfolio where motor finance is up GBP 0.9 billion in the half.

Finally, RWAs are up GBP 1 billion on the start of the year at GBP 207 billion as a result of the implementation of IFRS 16 although down GBP 1 billion in the quarter as we continue to optimize the business mix, particularly within the commercial division.

And looking forward, as you know, the number of RWA changes coming in 2020 and beyond. While there are still a number of moving parts, we now expect the 2020 regulatory increase to be towards the top end of the GBP 6 billion to GBP 10 billion range we've spoken about previously, the impact of which though is included in our free capital build guidance of 170 to 200 basis points per year.

And turning then finally to capital. As you know, and have heard, the group has built 70 basis points of capital in the first half. Underlying capital bill remains strong with 97 basis points from banking operations and 5 points from the insurance dividend, offset by the 33 basis point impact of PPI and 11 from IFRS 16.

This strong capital build has enabled us to pay an interim dividend of 1.12p, up 5% on last year. And as we announced in May, when we move into quarterly dividends beginning in Q1 2020.

Going forward, we are maintaining our ongoing guidance of 170 to 200 basis points of free capital build per year. But in 2019, as you've heard, we would now expect it to be at the lower end of this range due to below-the-line charges.

Finally, as you've heard at Q1, the group has a capital target now of around 12.5% with a management buffer of around 1% with a 50 basis point reduction from the previous target coming from the lower systemic risk buffer on Pillar 2A requirements.

So to conclude, in the first half of 2019, we've made strong strategic progress, delivered good financial performance and increased the interim dividend by 5%. In the current environment, our strategy remains the right one, and you see this in the resilience of our results.

For the full year, we expect the margin to remain at around 290, operating cost to be below GBP 8 billion, and the AQR to be less than 30. These will support capital build at the low end of our 170 to 200 basis point range and the statutory return on tangible equity of around 12%. And for the longer term, we are maintaining our targets, although as said, continued economic uncertainty could impact the outlook. We remain, however, well placed to continue to support customers, help them prosper and deliver sustainable, superior performance.

And that concludes my presentation. We've now got time for Q&A.

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Questions and Answers

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [1]

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So shall we start here? Jason?

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Jason Clive Napier, UBS Investment Bank, Research Division - MD, Head of European Banks Research and Bank Research Analyst [2]

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Jason Napier at UBS. Two questions around net interest margin, please. Firstly, we've seen in the market an improvement in credit spreads on flow of mortgages but you've already mentioned the impact of increased SVR attrition on the back book. So anything you could say about what open book growth and that sort of behavior means for forward credit spread income for the business? And then secondly, just to focus on the contribution of the hedge, if we could. I appreciate you reiterated guidance for NIM for this year and next. But clearly, the yield curve is less helpful than it was. And so any color you could give around the contribution headwinds that you'd face if the yield curve stays here? There's an intense interest in maturity profile of the existing positions.

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Mark George Clifford Culmer, Lloyds Banking Group plc [3]

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Okay. So I'll deal with the second one first. I mean, the structural hedge remains a fundamental part of how we do business. And I think we've been very clear over the years as to what our strategy is, and I think we're very clear in terms of what the contribution is. And my expectation is, as we go forward, that will remain the case. And you've seen today in terms of just our balance sheet numbers. First up, the continued focus on the high-quality current accounts and the growth in hedgeable balances. That's very much where our focus is, and that's very much the core of the structural hedge as part of our business, and that will continue. In terms of specifics, look, we're in a different place from a year ago, and we're in a difference place in terms of market implied rates, 5-year rates, in particular, and what that might mean for us. We still though think that we are in a strong and a protected position, and that is the sole purpose of the structural hedge in terms of bringing that stability to earnings. And as an example, just as interest for people to calibrate off. If one was to take, the current market implied around about 70% or whatever, you would look at that in terms of impact in terms of year-on-year structural hedge contribution of reducing that by something like around about the GBP 250 million mark. That's the sort of equivalent number that you would see if you applied current market implied. Why that number? It was obviously linked up to things like the run-off profile and the maturity of the structural hedge. If we look out over the next 18 months or so, we have about GBP 10 billion of the structural hedge maturing in the second half of this year and about GBP 30 billion or so maturing as I go through 2020. So I'm not looking into any cliff event in terms of that structural hedge composition. And as I said, it's about GBP 40 billion over the next 18 months or so. And in the context of GBP 172 billion, currently deployed, theoretically deployable, GBP 185 billion, you need to see that in context of hedges delivering whatever it is, GBP 2.6 billion, GBP 2.7 billion per annum. So very much remains our focus. We will continue to target our balance sheet strategy, so that we can contribute to that structural hedge. As I said, I think we're very clear on what our strategy has been, and it will remain a very resilient part of our income, even in -- even if today's rates and that sort of things play out. So it remains a core part of what we do, and it's a key part of us underpinning our confidence in earning.

To the first part, flow mortgages. Yes, look, it's -- over the last couple of months, things have got slightly better in terms of the mortgage market, simply through, again, what's happening on those swap rates and the non-passing through of those into customer pricing. And so that is a welcome sign and a welcome change. Do we sit up here and call a change in the market or a change in material profitability? No. We're still looking at it, if we came in roundabout 1% new biz, you're up to 1 15 et cetera, that's still to come through in terms of completions. And that still compares to a back book of around 1.8. But again, I think you've seen from the slide I presented in terms of the evolution of that overall margin that we are very active in terms of retention strategies and retention policies, which are hugely important to us. We are also hugely focused in terms of, again, as I said in my presentation, targeting parts of the market that we think are more valuable to us; we prefer first-time buyers. It's part of our helping Britain prosper commitment. We also see greater value there vis-a-vis refinance, we're also more interested in things like retention, which, again, is more attractive to us. We're more interested in things like growing our branch market share, which is up about 2% or 3% year-on-year, which is a great evidence of us deploying branches for sales of more complex products. So we see that as a big positive. And overall, our share of mortgages in the first half was something like 17% versus 16% last year. And I think things like the pipeline, I'll get this stat wrong, is something up like 20% or whatever from where it was in equivalent period of last time.

So you know what our strategy is, things have looked a bit better, we're not going to call the turn, but we're also not going to call a change to our strategy. And then going back, I think you did ask, we do remain confident of closing this year, as I said in my presentation, in terms of that open mortgage book, in line with where we started the year.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [4]

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Additional questions, there were a few here, Rohith. Can we have the microphone here, please?

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Rohith Chandra-Rajan, BofA Merrill Lynch, Research Division - Director & Senior Analyst [5]

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It's Rohith Chandra-Rajan from Bank of America, Merrill Lynch. Again just to follow-up on the mortgage book, please. The [ESVR] book contraction has accelerated materially in the first half of the year, so down GBP 8 billion in the first half, is a 22% annualized contraction. Just wondering if you could split that between Q1 and Q2, if there's been any step-up in a particular quarter, and clarify what the rate that those customers are refinancing away from? And then secondly, on gross lending, a pick-up in the open mortgage book in the second quarter, as you guided to, I think you did GBP 8.7 billion of gross lending in Q1, curious to as what that was in Q2. And then just on the competitive environment, which, as you say, the swap foot rates benefited new business spreads more recently in the first half of the year. It looks like in the last couple of weeks, a couple of your competitors have cut pricing. I was just wondering if that's something that you've observed in the market.

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Mark George Clifford Culmer, Lloyds Banking Group plc [6]

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In terms of the last one first. In terms of activity over the last couple of weeks, it's sort of doesn't surprise, at least going back to Jason's question. I'm not going to call anything. It stays competitive. And over the course of this year, you've seen different people doing different things, and you can try and divide motive. And are they doing something very clever or they're doing something very stupid. And is this influenced by surplus liquidity or is this influenced by a land grab? It's just part and parcel, so I wouldn't read into anything this early.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [7]

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As we have been telling you over the course or the meetings we have been having, people have different behaviors over quarters. I don't think we -- I would call anything in particular in the last few weeks. Maybe some people and some products have lowered prices. On the other hand, you have people exiting the market, like Tesco Bank for example, you have other competitors saying on their calls, they will be more mindful about margins and volume. I don't think the last 2 or 3 weeks have any difference to what you saw in the last 8 weeks, which is an improvement, as George said, on spreads, and we have taken a larger share during that period, which is already to be completed in the books. So the open-end mortgage book will continue to increase, as George said.

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Mark George Clifford Culmer, Lloyds Banking Group plc [8]

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And then the other questions. In terms of sort of the reversion with that book, yes, certainly interest comes to about 14.5%, 14.8% towards Q2. The equivalent of that, I think in Q1, was about 13%. So we have seen a slight pickup. Some of that was actually due to bringing the low maturities into that book. But I probably would expect, if I would pick a number for the full year, it would be around about 15%.

You're right as well, the total book reversion is now about GBP 94 billion compared with about GBP 104 billion at the start of that year. Within that, the Halifax, which is May 1 in terms of price, is up about GBP 33 billion, and that's down about GBP 5 billion in the year. But again, the actual attrition rate is actually irrespective, it seems a very sort of agnostic, to actually, rate charge. And it's pretty consistent in terms of across the pieces.

In terms of mortgage volumes across the piece. I think in Q1, we were looking at, I think growth in it of about GBP 10 billion; that's grown to about GBP 12 billion in the second quarter. So you've seeing that pick up, and that's consistent with what we've been showing you in terms of Q1 versus Q2. I think as we said at the start of the year, in that mortgage evolution, we knew there was a big redemption. So that took the book down, which we sort of expected in Q1. So you are seeing that pickup. And as I said, the apps pipeline looks strong. And the one thing I don't have a number for, though, is in terms of what people are moving away from you. But I would imagine you would describe something particularly different from the ones that we've talked about in terms of the Lloyd's book.

Please.

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Guy Stebbings, Exane BNP Paribas, Research Division - Analyst of Banks [9]

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It's Guy Stebbings at Exane BNP Paribas. First question was just on the credit card strategy. The balances are I think flat on the previous quarter but down about 10% since Q3 last year. Is the strategy still to grow that book?

And a follow-up question there. Saw a pickup in unsecured impairment rates. If you look at the Trust data which doesn't include MBNA, there wasn't a sharp move in terms of new NPL formation. So is it fair to assume it's MBNA which is seeing a slight pickup in impairments?

That was the first question, do you want to hear the second?

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Mark George Clifford Culmer, Lloyds Banking Group plc [10]

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That was 2 questions.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [11]

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There was 2 questions.

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Guy Stebbings, Exane BNP Paribas, Research Division - Analyst of Banks [12]

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The second one was just on guidance around capital generation for the second half of 100 basis points. If you reflect intangible growth, pension contributions, AT1 coupons, things like that, looks like you're guiding for profit after tax of about GBP 2.6 billion, GBP 2.7 billion. I think consensus is a little bit below that. Or are you expecting RWA to actually be down in the second half of the year, to help contribute there?

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Mark George Clifford Culmer, Lloyds Banking Group plc [13]

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Okay. I mean, on that last one, we are looking at continued RWA optimization. And so the -- without being just a comment on your back-solved PAT, just as an input to your calculations, we are looking at RWA optimization. There was a bit of that in the first half, I would expect us to do more of that in the second half. And that is particularly things like the large corporate business, where we're very active in terms of returns and efficient use of capital. In fact, you've heard us talk about that over the last number of years. And we certainly have some actions that we would be hoping and expecting to take in the second half of this year. So I would expect to see that.

The unsecured, the MBNA. [Normally there's no part of it]. Actually, I've got a sort of slight model change where actually I have now have aligned MBNA's IFRS 9 numbers to the Lloyds. We will basically use it as like Lloyds PDs on them, perform with aligned collection procedures. So there's about a GBP 40 million step-up which simply comes from a methodology alignment and isn't actually relating to underlying experience.

And then in terms of card strategy, look, part of the MBNA, we were underweight and we were looking to grow market share. It was an area we liked and we wanted more of. So it's probably fair to say we were slightly more aggressive in terms of our approach to that market. We're now where we want to be, and it's about pursuing what we think is the most successful strategy for that particular part of the market. And in that, you've seen the most obvious picks are coming in on things like balance transfers, where you've seen a material reduction in the terms offered and the period of 3 periods as part of the product design. So you have seen a slight shift in terms of before and after the MBNA deal. And it's about deploying what is -- we think is the most successful strategy for that book. I mean, you would expect the market to be growing 2%, 3%. And we will be there or thereabouts, I would have thought.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [14]

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The markets have been decelerating lately on credit cards and we should be more or less in line with the market with no change of strategy. We are very pleased with the integration of the MBNA, completely aligned and integration by now with a final ROE of 18% versus a 17% result at the onset.

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Mark George Clifford Culmer, Lloyds Banking Group plc [15]

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Raul?

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Raul Sinha, JP Morgan Chase & Co, Research Division - Analyst [16]

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Maybe just one follow-up on the hedge and then 2 separate questions. Just to finish up on the hedge. I think in the past, we've discussed heavier unhedged capacity rises that has a chance of picking up a capital charge on which the -- as you know, your hedge position moves. I mean, are you expecting something like that in the second half or not really?

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Mark George Clifford Culmer, Lloyds Banking Group plc [17]

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No. We don't. [So I know it's just on the] -- no. I mean -- I'm of the -- you're right. It's -- if you take it to extremes, then you're at the mercy of stress tests and all those sorts of things. 1.72% plays 1.85% at the moment. You're at the margin. We've seen, in terms of reinvestment, in terms of actions that we've taken, that we don't see that there's a value there, we don't see what downside is being protected, so we've stood off. But it's not to the extent to which I think I'm going to engage in a capital position, which it's not to the extent which I'm going to engage with a capital position.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [18]

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In the latest numbers we have, we are growing 5% as of May versus the market, which is growing 3%. So we keep growing above the market, 5% to 3%.

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Raul Sinha, JP Morgan Chase & Co, Research Division - Analyst [19]

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And then maybe just 2 separate topics that we haven't talked about. Firstly, obviously, maybe a strategy question, but the revenue environment is quite challenging now for the whole industry. And this was exactly -- this wasn't what you were planning on when you laid out the medium-term target.

So I think you've delivered a very good cost performance again in the first half, but I always go back to you already start with a very efficient cap -- cost position. So what more can you do? What other cost levers that you will look to pull? Are you going to start to rethink some of the investment that you guided to? Or is there something else you can point to -- 10 years now, where else can you take cost out?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [20]

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That's a fair question. You omitted (inaudible) rather than have been hearing that question for 5 years. So we have -- I think that, that question split into strategic and operational. From the strategic point of view, I am a strong believer that you need a culture of a passion for efficiency and costs in order to be able to relentlessly implement a reduction on BAU costs. Number one. And #2, strategically as well. I think you should manage your BAU cost base with a second eye on quality. So you have a BAU cost base, you have to look at quality because you could potentially cut the wrong costs. And thirdly, you have to look at, as you correctly pointed out, to -- to your investment capacity. So are you making your company more efficient? But at the detriment of quality or at the detriment of investments. While NPS scores, we have shown you, they have increased 50% over the last 8 years with another 5% increase this year, both on the multichannel approach and also on the digital channels, which are slightly above the remaining channel.

And in terms of the investments, we have stepped up the investment pace to our shelf. We are exactly in line with what we thought at GBP 1.5 billion, now it's midst of the plan. And I have no intention, no intention whatsoever, of cutting the investments, which we could, as you say. But I don't think it makes any sense to cut the investments, except in 2 circumstances. In these, the investments don't deliver the forecasted benefits and we are on plan, as we show you. I'm very excited about all the benefits we are getting, and I -- we try to show you the results of that, for example, after 3 years in insurance area. And with the plans we have for the Wealth business.

Secondly, if there is a material discontinuity. So of course, if there was to be a no-deal Brexit and there is a discontinuity. And the paybacks of those investments, if instead of 3, 4 years, it become 10 years, of course, we could lower the investments. And it is true, as I just said, that we have it, GBP 1 billion of discretionary investment every year, which about half is immediately expensed or all of it goes out on dividend capacity, as you know. Because everything which is intangible, we distribute from the dividend capacity.

So we have a big lever there, but we have no intention of cutting those investments because they are delivering; because still, the scenario most likely, and the one the government favors, is a [not-hard] Brexit. We are seeing the results of those investments and we don't feel any pressure to do anything differently. So we are not going to cut to the investments. But it is true, to your question, we have that lever should there be a discontinuity.

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Raul Sinha, JP Morgan Chase & Co, Research Division - Analyst [21]

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I did have one more question, if that's okay, on the fee income outlook. You can see the current accounts be a bit down half-on-half despite the higher balances. I was wondering if you could talk a little bit about where the pressures are coming from. Are you seeing any pressure from the overdraft regulations as well? If you could give us a number on that, [pretty please].

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Mark George Clifford Culmer, Lloyds Banking Group plc [22]

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Okay. Well, as I step back. I mean, on whole sort of OOI, we -- at the start of this year, we talked about an aspiration to target then in line with sort of last year, GBP 6 billion or so. We affirmed that at Q1. There was a lot of questions on that. That is still our target. Has it got a bit tougher? It has got a bit tougher to achieve. And we'll see how the second half of the year plays out. But that was our sort of aspiration, and that stays the aspiration, but it has got a bit tougher. Within that, what's going on. I know you asked specifically about the sort of retail bit. But when you look through the numbers and in terms of the H1 experience, retail is doing a tough job. It's a pretty tricky circumstance. It's down for on year, but I've got -- I've taken action in terms of fee charges, I'm seeing a slight benefit from things like ATM reciprocity, which used to be going against me. I've done some internal changes in terms of commission payments between retail and insurance, which has impacted retail as well. But they are slightly down, and it will stay pretty tough there.

Commercial, which is down around about 13%, it's probably down more than we expected, to be fair. And that is a more challenging market environment. And in terms of people stepping off activity, you see it in the indicators, you see it in the comments and you probably hear it talking to businesses. So there's no doubt that, that is slightly worse than expected. But at the same time, again, going back to what you've seen and heard from Antonio and on the slides, insurance has been a standout. And in ROI, to be up 20-plus percent, 21%, it's a tremendous achievement. And I think that result is very reflective of the change and the success and the building of that insurance business.

So for the full year, as I said, targeting close to GBP 6 billion with the aspiration it says there. It has got tougher. For the full year, I would expect retail to be sort of much of a muchness. I would expect insurance to continue to show a strong result. It's not going to be 21%, but I would still expect it to be good daylight between 2019 and 2018. And I would be hopeful however within commercial that we can claw back some of that territory and some of that ground within commercial.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [23]

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Joe? There we go.

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Joseph Dickerson, Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst [24]

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Joe Dickerson from Jefferies. George, I think at the full year, you gave us the unrealized gains on the Gilt and Liquid assets portfolio. If you could give us a sense of what those unrealized gains might be as at H1, so that would be great. And then secondly on liquidity, I just know that your liquidity coverage ratio is at 130% and your cash is up 8% year-to-date. Presumably, like other banks you've been having the whole higher liquidity because of the uncertainty in the environment. I guess, could you quantify how much of a drag that has been to the net interest margin? Because it seems to me like, on the other side of all of this next year, it will be quite a tailwind on the liquidity side to the margin. Then lastly, do you still intend to distribute capital down to 13.5%?

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Mark George Clifford Culmer, Lloyds Banking Group plc [25]

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Okay. The carrying cost to excess liquidity was -- I'd like to say, there's a massive opportunity to anesthetize. And I'm not [so precise] on that. I don't think it's a big drag on the numbers. And we have not been required to or asked to do anything as regards to that. As you might expect, going back to 31 March, that Brexit, we sort of took the opportunity to get ahead in terms of funding. If markets were open, then we thought we would access them and take advantage of that. So when I look at what we actually -- what we've actually done over the last 15 months versus original plan. We've accelerated and brought forward. And I think that was the sensible thing to do, and that kind of remains our overall stance. But I don't see that there's a massive prize in terms of NII, in terms of the carrying cost there.

The unrealized gains. If this number isn't viable, then I'll change it. But I think it's just shy of about GBP 200 million, is the number that's in my head. And if that's wrong, I'll get Douglas to do some work and ring everybody up.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [26]

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That's what he's here for.

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Mark George Clifford Culmer, Lloyds Banking Group plc [27]

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And on capital, look, nothing's changed. You're not going to expect me to say anything different from what I'm about to say, but nothing has changed. We were pleased to get the reduction in the capital requirement because we believe it reflected real derisking of the business, both from the Pillar 2A perspective and things like contributions to pension schemes and to earlier questions around hedges and things like that and in terms of scale and size of the ring-fenced bank. So we were very pleased for the reduction because we thought it reflected actions that we had taken. So we're pleased to see that. But the policy has not changed. You've seen our interim dividend which will be sustainable and progressive. And you've heard these words before, but the Board will take their decision at the end of the year, which is the right time, after we've completed the stress tests and after we've completed plans for the subsequent years in light of the information pertaining to that period in terms of what they do with the surplus, over and above that requirement of 13.5%.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [28]

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Chris?

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Christopher Robert Manners, Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research [29]

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It's Chris Manners from Barclays. Just 3 questions, if I may. The first one was part -- just a [fact check] on the capital. 170 basis points of capital generation, that's about GBP 3.5 billion. Looking at where the RWAs are, 50 basis points drop in your requirement is another GBP 1 billion. That looks like about GBP 4.5 million of sort of surplus. If we look at what you've indicated with the interim dividend, that actually looks like you got buyback capacity of well over GBP 2 billion. Just trying to think about, is there anything apart from a hard Brexit that we should be considering to stop getting to that sort of level for next year?

And the second question was just about the shape of the yield curve. And clearly at the moment, the curve is pricing potentially different outcomes. It does look like there's going to be more than a 50% chance of a rate cut over the next 12 months. How should we expect you to be able to react to that? Can you leech in some of the pricing on the taxable deposits more? And how would your sort of deposit meter in reverse and work? How much can you just sort of take out that managed savings book? Be interesting to think about that. And the last point was on asset quality. So the gross AQR obviously jumped up a bit in the quarter, 38 basis points. I know you flagged there was -- saw a couple of big corporate defaults in there. How should we think about that gross AQR trending? Should it then glide down a little bit from here?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [30]

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Let me just on the second part -- on the second point that you mentioned. Just because what George said, George gave you an extrapolation of if the curve stays as it is, what happens in 2020? That is without any management actions. So as you said, depending on the scenarios, we will be taking management action. Because we take all the time. As we took in the first half versus the second half, where we do. That's our job, right? And don't forget that we look at the balance sheet holistically. We'll always look at margin as the asset prices minus the liability prices. We look it by segment, we manage it on a weekly basis. Hence, that has proved a competitive advantage. So I just want to reemphasize the point. That's depending on the scenario. And if that happens, we will see what we can do. We have had in the past scenarios like that when took action. We will be taking management actions. But I wanted to reemphasize that George's extrapolation assumes no management actions so that you have a sensitivity, which is important in terms of, should the curse stay as it is as today as to guide you what happens in 2020, but that's without management actions.

George, on the credit...

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Mark George Clifford Culmer, Lloyds Banking Group plc [31]

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[As what I said] on the growth bit. So what we've guided to is below 30 this year. And I think whatever the numbers for playing it around. So you'll have something like that. We've also said there will be a lower level of write-backs and releases, although we would expect to see continuation at the lower level, which would guide you into a sort of a few basis points above. To your -- sort of to your question, yes -- this time's result has been to -- sort of those 2 commercial names we talked about, we added about 5 points to the growth. So that there, they sort of give it a little spike, to your question, that are distorting the trend. So they can happen at any time, all those sorts of -- give out that ones. But that's the sort of distortion to the 6-month number.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [32]

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And then just to clarify, Chris, they are not defaults in adjusted. It's only impairments with regards to bank. Those are not fully formed. It was 2 additional impairment charges from 2 different names we decide to take prudently. They are not defaults, just to precise.

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Christopher Robert Manners, Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research [33]

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In Stage 3 or Stage 2?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [34]

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Yes. Stage 2.

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Mark George Clifford Culmer, Lloyds Banking Group plc [35]

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And then to your -- probably -- and James talked about the rate cut and how we've responded. We've responded before. I think you would expect to see us respond again in terms of taking appropriate action in terms of product pricing. And thereafter, to Antonio's answer on costs and all those sorts of things as well. We will look across the business in terms of what we might or might not do.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [36]

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And your question on capital, it's just -- I mean, the Board policy is unchanged. And I think we have a proven dividend policy. So the ordinary dividend rose, as we told you before, in line with nominal. So we think to increase it 5%, but the Board has handled the year, post-stress test, post-PRA effort, with all the information available, and at a fair rate, as usual, we'll take the decision. Our target is around to 12.5% to [4.1%]. And we will decide what to do with the excess. That is exactly the same procedure as we have been doing in previous years. There is no change whatsoever.

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Mark George Clifford Culmer, Lloyds Banking Group plc [37]

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Go ahead.

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Unidentified Analyst, [38]

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Just a very quick couple of questions on insurance. Are there any CMI related releases in the results? That's the first question. Second, on the [symmetry] ratio of the 149% at the end of 10-year swap percent down [that's been] Q2. So I'm just -- I'm sure it's the case that you have still no impacting your growth aspirations with the risk that you're dong. And just the final question. On bulk annuities and the growth asset which just keeps getting better and better, will you be looking to change your reinsurance strategy to perhaps grab more market share?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [39]

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Well, let me start with the latter. I think in terms of, as I said in my presentation, we are managing in bulk and with distribution pricing. We don't have any issues. And we have the right -- we see the right pricing in the market. The better position to go ahead subject to any -- to the capitals. But I think it's -- we don't have any -- we don't see any issues, as I have said. And if the returns are okay, obviously, we are having now that the people are looking for growth, this is an opportunity for growth us, as many others that we have in the portfolio. And your second question was?

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Unidentified Analyst, [40]

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The [symmetry] ratio is down because of...

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [41]

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It's -- well, I think there are different impacts in the capital ratio. We have equity, we have the inter rate, the credits. Obviously, inter rates are hitting us. But really, there are other things that we are doing in terms of reducing the risk, and we have some changes in the models, but we are managing in order to be in the right place with the capital. So we are -- obviously, this is -- this has an impact, and we are doing other actions, and we are taking other actions in order to be above that 140%.

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Unidentified Analyst, [42]

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[Like to] follow-up and ask you what kind of actions is it? [Has to be] expenses?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [43]

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Well, you have -- I think we have a lot of opportunities to manage longevity, because certainly, we are probably, in terms of the competition, most other people have a lot of longevity risk hedged. We are keeping a lot of everything in the longevity in good way. Now I think that this as an opportunity always to manage capital as we have seen others doing.

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Mark George Clifford Culmer, Lloyds Banking Group plc [44]

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Okay. So we go to this side now. Fahed.

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Fahed Irshad Kunwar, Redburn (Europe) Limited, Research Division - Research Analyst [45]

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It's Fahed Kunwar from Redburn. Sorry to come back onto NII. I just feel that there's 2 quite big shifts here. So I think in the structure there, you had structural hedge income increasing as a proportion of revenues -- are coming in a larger share of revenues. And obviously, you had one rate rise in param, and we're looking at flat or rate actually just place where they are. So I understand the GBP 250 million guidance. But the flat margin guidance is predicated on those assumptions. What would need to happen for that flat margin guidance to change? Why would -- how would margins come down from here, considering those 2 material shifts potentially aren't adjusting that guidance? So just some flex in understanding what kind of economic environment we would need for that flat margin guidance to be challenged, would be helpful. And on the second question, on OOI. I understand the GBP 6 billion this year is difficult, but the insurance growth is very, very good at the moment and other operating income. When should we start getting growth in that line? So when should the insurance kind of benefit to offset the impacts from retail and commercial?

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Mark George Clifford Culmer, Lloyds Banking Group plc [46]

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Yes. That's a good question. Look, it's been tough for different reasons in different parts of the market. And we talked this year, as I said as an answer to an earlier question, of approaching -- targeting GBP 6 billion. I would be cautious about giving any longer-term guidance. The amount of number of uncertainties out there are huge. Well, I will try and reassure you that we are doing things in each of those individual businesses in terms of generating top line. You see the evidence in risk today. You -- addressed, sorry -- in insurance today. Within retail, in terms of some pricing actions that we're taking and in terms of product enhancements. Again, we are doing all the right actions. Commercially, it's tough. And there was a market dependency that would stop me saying precisely where I think that's going to come out and makes it tough for this year, let alone next year. So I can tell you internally, we're doing all the right stuff. But the external market dependency in terms of business activity, it would caution me against giving you any type of long-term projection that says it's GBP 6 billion this year and it will be GBP 6.2 billion or whatever, whatever, whatever. It's too uncertain. There are too many things that are beyond my gift, beyond my ability to control. And then in terms of...

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [47]

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Margin.

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Mark George Clifford Culmer, Lloyds Banking Group plc [48]

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Margin. What's raised me off? Look. We are -- going back to the start, our core assumption is still there's some kind of orderly withdrawal. We thought there will be a rate rise this year; there won't be. Our current view on rate rises is back end of next year on an orderly withdrawal-type basis. Kind of stress myself to death. If that doesn't come through and if there's some kind of no deal, then I -- whatever I was talking about, the market imply, which is actually it'll either go up or will come down. If I do move into negative rates, in terms of what that means, is something we'll have to work through. But it's volatile and it's proven that over the last few months in terms of where that market implies has gone, and let's see what happens going forward.

So yes, we're in a slightly different scenario, obviously, from when we sat here 2 or 3 months ago. So I would say this, wouldn't I? I think -- there was a testament there to what this business about and how it's run. Within that scope of change, I'm still able to stand in front of you and present these types of numbers. And that goes back to stuff we bored you with before around the shape of the business model, how it's run, the levers that are available to me right across the business. And if I have to pull different levers at different times, so be it. But I know what my objective is, and that's how we'll continue to manage the business. That's probably the best I can do.

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Fahed Irshad Kunwar, Redburn (Europe) Limited, Research Division - Research Analyst [49]

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Can I ask one quick follow-up on AIEA? Sorry. Closed-mortgage book, the adoption. Obviously, you have -- we know unit grows flows coming on the open mortgage book. Should we start to see AIEA pick up from now in the second half of the year? And with that -- would the increase in the open book offset the closed-mortgage book? Or are we still looking at net flat?

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Mark George Clifford Culmer, Lloyds Banking Group plc [50]

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Well, you're still -- I mean what have you got? In terms of AIEAs, you've got -- I mean it's just because of how the comp works, we'll be through the Irish stuff. That's gone, that drops out, the calculation, that's fine. That makes it easier for a start. You're right, they don't really go anywhere unless that mortgage book goes anywhere because that's the mortgage book growth. The rest would have to run so hard, simple math doesn't work. So I'll be stable this year, but I still got a slight runoff in terms of that, whatever is the GBP 18 billion, GBP 19 billion closed-mortgage book. And that will lose GBP 1 billion, GBP 1.5 billion a year. So I probably have to convert.

If I'm stable, and I've got a GBP 1.5 billion close headwind, then I can probably just about getting that flat in terms of consumer finance and then SME. It depends where I go in things like large corporates, and I said to an answer to an earlier question, we probably will still be looking to continue to optimize large corporates. They're more likely to go down than up. So if you follow those pieces together, you're probably closer to flat than growth at the moment still.

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [51]

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Martin Leitgeb from Goldman Sachs. If I could ask, maybe start with a broader question, just on Brexit and the Brexit impact on your business. And just thinking about the usual variables, loan growth and credit quality. I think you alluded to that you saw, in particular, an impact on business confidence, I guess, the business loan demand. Could you shed a little bit more light what you're seeing across your business as a retail and corporate in terms of loan demand and also asset quality, whether there has been any pockets of deterioration you have notice at this stage?

My second question is just with regards to loan provisioning and general loan provisioning. I think some of your peers have built general provisions regarding a specific macro risk facing the U.K. I think Lloyds hasn't. Just your thinking behind that?

Just to follow-up on the various NIM questions. Just if we were just to think about NII progression from here, assuming the rate environment were not to change, how should we think about NII progression from here? Would you expect that the kind of decline we have seen over the last 2 quarters would continue?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [52]

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Okay. So I'll take the first question and George will take the other 2. Look, as I said, I mean there are -- to separate this in segments, you have the retail side and you have the corporate side. We are mostly a retail bank, as you know, most of our loans and most of our activity. And on the retail side, we see, as I said on my introductory remarks, we see no change whatsoever. We don't see -- mortgage growth continues at more or less the same price as the previous year, around 3% stock year-on-year, as you know. We have seen a slight deceleration in car finance, it continues to grow in single digits. We are watching in the lightest amount, a slowdown in credit cards, it's positive, and [UPLs] are also growing positively in single digits. So we don't see, in terms of growth, any significant change. A slight slowdown.

In terms of impairments, we don't see any signs of impairments on the retail book. You see, as we mentioned before, some deterioration in secondhand car prices, which we have both on [L Co LD] and a little bit in provisions. That if you remember, was something we were anticipating last year and did not happen, and we kept the provisions, and it happened this year. So we have adjusted accordingly. And as George said, we also changed the model to cut through the cycle provision, which had some impact. But so -- apart from the residual secondhand, residual car prices, which I would say is more of a catch-up, which we expect last year, it happened on the first half.

The consumer book is in the same position. We don't see any significant deterioration. I am not surprised about that, Martin, as I think I said as well, because when you look, you see employment continue to grow. That obviously improves demand and contribute to GDP. Consumption is 2/3 of GDP. Real wages are now growing at 1% or more for more than a year, which also supports consumption and GDP. Unemployment is at a historical low since the statistics began being made, as you know. Interest rates are very low and going lower. So I'm not surprised that on the retail side, you see no changes in the current environment. Obviously, subject to no discontinuity.

On the corporate side, as I also mentioned, and we had those already mentioned in Q1, that there was some softening of business confidence. That softening has continued, and I show you the PMI intentions, hiring intentions and business confidence. In terms of what the translation is in business demands, we have seen a slight deceleration, again, in SME and in market lending, and we are now growing at 2%. You might remember that in the past, we have been growing at 3%, 4%. We are now gaining at 2%. So slight decrease, but not very significant, in the market. According to our numbers, it's growing between 0% and 1%.

And in terms of impairments on SMEs or mid-markets, as George mentioned as well, we don't see any change -- any systemic change. We have made, as we mentioned before, 2 additional impairments for 2 specific cases of 2 larger corporates, different sectors. So specific things, which sometimes happen in large corporates. But its effect, as you know, that business confidence is having a progressive softening with a small impact of our -- in terms of business demand, and we don't see any signs in impairments, which, again, should not be the case. With the level of interest rates, with the level of employment, consumption, et cetera. So that's a bit more color going segment by segment. I hope that's helpful.

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Mark George Clifford Culmer, Lloyds Banking Group plc [53]

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And then your 2 other points, I mean if I fancy laying provisioning, which should be making specific provisions for a specific macro. I mean I don't know if it's a reference back to coming into the sort of Brexit scenario. But I mean IFRS 9 provisioning, as you know, my base I have a 30%; my upside, 30%; my downside, 30%; and my extreme 10%, which sort of seems quite obvious. But I think as I went through last year, I don't think we appear to set off in that position in terms of having that spread. And there were some changes and they move through the year. We didn't move because we'd already captured an element of that, that severe right in our 1 gen numbers, and we're consistent in the deployment of that as we move through the year.

Now what we have done in terms of this half, as I say, our core assumption is still orderly withdrawal. But we have within that, I think as I said earlier, reflected the current environment. And that current environment is slightly lower GDP, is slightly lower HPI, but at the same time, slightly better unemployment. And when I flow all those through my macroeconomic scenarios, it had an adverse impact in the sort of tens of millions-type stuff in terms of that H1 impairment charge you saw.

So our central prognosis of orderly exit hasn't change, and our percentages on the various scenarios hasn't changed. But the backdrop, we slightly weakened, but that's not a Brexit, that's simply, going back to Antonio's comments about the economy, just observing what we're seeing around business confidence, GDP HPI, et cetera. But there is an offset and I [quote with it]: We feel that, that is appropriate and reflective of how we see the world going forward.

Then to your last question, which I must -- I think is a bit of a setup question, as you say, if I see the rate environment won't change, what happens to NII, which I think was a question in NII. I think I just said that AIEA is going to be relatively flat. We talked about a resilient NIM, and we've talked about in the current rate environment, and the market implies I lose about GBP 250 billion. So in that scenario, we'll just be working harder, Martin. All right?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [54]

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So shall we go there? The other side of the room we haven't gone yet there.

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Alice Mary Timperley, Morgan Stanley, Research Division - Research Analyst [55]

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It's Alice Timperley from Morgan Stanley. I think most of my questions on NIM have been addressed, I was pleased to hear. But just a quick follow-up on the PPI, please. The 190,000 weekly information request is obviously a big step up. And could you give us a sense of the uphold rate on that 190,000, how that compares to the past?

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Mark George Clifford Culmer, Lloyds Banking Group plc [56]

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It's not much uphold; it's the sort of conversion factor. So I think I said previously, the rule of thumb is -- and when we're talking about our sort of 13,000 provision, previously, which is what we were seeing and what we we're observing in terms of complaints processed per week, that used to be about 4,000 direct from customer and about 9,000 from CMC originated, and that CMC 9,000 was basically off the back of about 70,000 of these PPI information requests. And so that's a 13% conversion rate.

And then what we've seen, as I said in the presentation, first, the 150,000 then to about 190,000, but we have seen that complaint conversion rate drop to -- and it's still moving around, but just below a sort of 10-type percent. So that's the sort of conversion rate.

And what processes this will work on this? The important thing in all this is that we're 4 weeks away from the deadline. It is hugely disappointing to have to announce a big PPI provision again, and it is also hugely disappointing to have to say uncertainties still remain. But we will get through this, and we will get through this, and we will move to a much better place beyond. But at the moment, it's just a question of dealing with that surge ahead of the deadline.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [57]

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(inaudible) question. Sorry.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [58]

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It's Ed Firth from KBW. Just 2 quick questions. The first one was on centrals. I mean I think centrals is now making a bigger contribution than in insurance if I strip up the 136 in Q1. So again, we don't really get much guidance as to what's in there and what's driving that number. I mean it bounces around all over the place. So I wonder if you could help us a little bit with actually what is actually in there. And how we should think about that as it rolls forward? That was the first question.

And the second question was, I'm just getting quite concerned about credit. And I know we've had a couple of questions on this. But if I just look at your numbers, you got an increasing charge and a falling cover. At a time when, as you've rightly pointed out, the economy is going pretty well, unemployment is at all-time low, interest rates are very low and yet, you could -- you don't need to be fanciful to think of any number of shocks that we could hit in the coming 6 to 12 months. And yet it doesn't look obvious that you're well prepared for that. Or that you are adding to your buffers at the moment. So could you just guide to us where are you? How are you looking at that? And how are you getting yourself ready for what could be a pretty tough time?

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [59]

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Well, that's -- I mean just to comment and George will answer. I mean I think we are very well prepared for that because the first thing I would tell you, which I said in my introductory remarks. That's why I have included a long series on the presentation. The best preparation for a potential, not likely, but a potential, as you say, credit shock is the rate of your credit growth. Our core loan book is exactly the same as it was 8 years ago, as I mentioned, with a GBP 22 billion bond growth in targeted segments where we were under-represented, so consumer finance and SMEs and the corresponding offset on parts of the mortgage book that we did not like, and on large corporates where we thought, there is written was not appropriate. So apart from having shared practically all over the GBP 200 billion of toxic assets following the H1 acquisition, we have kept the core loan book at around GBP 440 billion. So for me, having been banking for 30 years, that's the best indication that you are well prepared for a potential shock.

On top of it, as we told you repeatedly, our model is of a prudent model. So not only on the growth rate, which is 0 over 8 years, we have -- we only do prime business in the sectors that you know very well. So absolutely concentrated on prime business. We don't chase business, so we have always emphasized mortgage -- sorry, mortgage margins and capital and risk versus growth. And in certain moments of the past, we have been questioned about it. So we are very comfortable about that. We have a risk appetite that we review every year, and we are well within risk appetite.

And on the third point, before George may want to add something, we think we are prudently provisioned. That's what is our internal opinion and of our external auditors. And we have different scenarios to Martin's question, where we have a 30% on side, the 10% extreme. So high capital levels, 0 net debt. So I mean if there is any external shock, we are as well prepared as we are complete.

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Mark George Clifford Culmer, Lloyds Banking Group plc [60]

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I would add to that. It touches every part of what we do from risk approval to book shape to portfolio construction, in terms of that secured, in terms of where we play, in terms of where we don't play, it covers every bit. And then to bring you down to specifics, the work we've done on single-name exposures, yes, we've talked about a couple of names that impacted. But the work we've done over the last few years in terms of the books that were inherited are to making sure that our exposure to single names are brought down, and that is the names you want to be as massive. We show you the loan-to-value on the mortgages, it's a completely different space.

Let me touch briefly on what we couldn't -- what we ended up doing on some of that motor finance. So we've always talked about being prudently covered. Prices were off a bit this period. We used to allow for about a 4%, 5% reduction, came through. I've taken for that. I could use a stop there, but our numbers actually now allow for a further reduction. So I've re-set up my prudent provision. I could have stopped short. So what -- it goes across the whole piece. Anyway so that's that.

So then to your first question, I'll cover this. First off, I really wouldn't strip out the 136 reinsurance. I mean I really think that is about a recognition of a better deal, lower expenses and a real business benefit to insurance. Yes, under insurance accounting one PVs, the benefits, that's the way it is done. But that is a real reflection of a business being better run that we will be producing better returns. So I think it's completely wrong to slip out the 136. There's also, if you look at -- they benefit about 240 this year from assumption changes. One of which is the 136, other of which is improvements in longevity. These are real business benefits that are coming through to the benefit of shareholders within the business. So I wouldn't strip it out.

And then in terms of what's in the center. As ever, within centers, you've got a mixture of balances. But some -- main elements that sit within there now, I've got my [guilt gain], so I've got to just under GBP 200 million. I have my LDC, which goes through there, which, again, is about GBP 150 million. I have my VocaLink, which sits in there, which is about GBP 50 million. So all those are [fresh] balances. But I also, above there, have basically the net of things like internal transfer pricing, which doesn't net out to 0 and mainly for some technical factors. So for example, things like the cost of AT1s, which from a P&L perspective go below the line. But in my internal transfer pricing, I charge them out to the businesses. So actually, the center, which is GCT, from a P&L perspective, gets the money back, but isn't actually paying out cost of that because that's below the line. And then that kind of makes up the delta. So those are the main things that are within that.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [61]

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(inaudible) also, you wanted to ask a question. We can take 1 or 2 more questions, then we'll finish. And then to your left.

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Unidentified Analyst, [62]

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Just a question on current account strategy, please? You talked about the balanced growth, but the cast data shows that Lloyds has gone from being quite a net gainer until about the middle of last year. The figures last week show you the biggest net loser balances by number, and that's across the brands...

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Mark George Clifford Culmer, Lloyds Banking Group plc [63]

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By number?

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Unidentified Analyst, [64]

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By number. So a number of people switching away. Lloyds is #1 loser along with both Halifax and Bank of Scotland, so just to understand that shift, please.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [65]

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Yes. That's a very interesting thing, and we were discussing that. And you can see in the appendix that we show that our market share of digital, which we always present, went down from 31% to 18%, and we were looking at why. And the reason is exactly the reason you mentioned, because the challenger banks, in general, have been opening lots of current accounts and of course, that impacts our market share in spite of us continuing to opening current accounts.

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Unidentified Analyst, [66]

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Sorry, just in the switching data, the challenger is very small. It's HSBC and Nationwide or (inaudible). So it's just the net shift just understanding...

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [67]

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No. In terms of switching data, well, first, don't forget that the switching data is not everything, it's a small part because you have the openings and closures, which do not show on the switching data. So in current accounts, the picture is clear, as I think we showed you. The number, and we showed you that on the slides, the number of active current accounts continues to increase. And much more important, the quality of those current accounts is improving very significantly. The average balance per customer has improved 50% since 2014, significantly above the market. And just to give you the latest development number, which I said earlier, as of May, we are growing on PCH 5% versus a market that is growing by 3%. So we continue to gain market share. And that gives you, I think, the best indication of quality in current accounts, which in the U.K., contrary to other markets, are the most important product from a loyalty point of view. So our customers grow into users.

We think that the digital offering is a big contribution to that. Those deposits are convenience deposits, not price orientated. They are growingly with putting those deposits with us, and our market share is increasing. So that, I think, the best indication. And I was going to make the point on the challengers. Everybody's opening current accounts on the challenges because, as you know, the price is 0. So for you to have more current accounts, don't have any cost. And there are specific things that people like to do with them, but I think the right criteria to monitor going forward is the quality of those accounts, the average balances and the potential revenues that they produce to be seen.

Okay. Final question here.

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James Frederick Alexander Invine, Societe Generale Cross Asset Research - Equity Analyst [68]

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It's James Invine here from SocGen. Can I ask about the nonbanking net interest expense, please? I guess, this is for you, George. I think -- I guess it's gone up. They become more negative because of IFRS 16.

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Mark George Clifford Culmer, Lloyds Banking Group plc [69]

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Yes, that's true.

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James Frederick Alexander Invine, Societe Generale Cross Asset Research - Equity Analyst [70]

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I think the last time we saw you, you we're saying we wouldn't get near GBP 200 million. But I mean we were already there, just in 6 months of the year. So is there anything funny in the first half that has made that number more negative or this is...

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Mark George Clifford Culmer, Lloyds Banking Group plc [71]

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No, it isn't. Are you sure I said we wouldn't get near GBP 200 million? I -- my memory does go with me.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [72]

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Especially these days.

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Mark George Clifford Culmer, Lloyds Banking Group plc [73]

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No, I'm pretty sure I didn't say that. We expect it to go up because I mean this is the funding costs of basically non-NII generating aspects. And we saw GBP 70 million or whatever in the first half, which is -- it's slightly odd in terms of H1 last year, but it's more in line with the second half of last year, which I think was about GBP 60 million. And I would expect for the full year to be about double that. I mean IFRS 16 is GBP 30 million, GBP 40 million of that. But I don't -- look, if I did, I did. And I was wrong. Because it's kind of -- it's basically tracking to where we expected it to be, so I would expect the full year to be about double this, and there is an IFRS 16 pick-up. It moves around dependent upon -- because we're -- how much type of business, the commercial in terms of fee, predominantly fee generating income that they do, but elsewhere is funding of LDC, the funding of Scottish Widows and things like that. But I would expect it to be about double that for the full year.

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António Mota de Sousa Horta-Osório, Lloyds Banking Group plc - Group Chief Executive & Executive Director [74]

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Look, thank you. Just before I close, I mean just to say a few words. As you know, this is George's last set of results before he retires this week. George has been a crucial member of the team and of the turnaround with me at Lloyds. So I think he has been an outstanding CFO. And on behalf of myself, the Group Executive Committee, the Board, I just like to publicly thank him. And I would like to really recognize the greatest of your contribution to the bank. Thank you very much, George.

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Mark George Clifford Culmer, Lloyds Banking Group plc [75]

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Thank you, everyone. Good to see you here.

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Operator [76]

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Ladies and gentlemen, this concludes the Lloyds Banking Group 2019 Half Year Results Conference Call. For those of you wishing to review this conference, the replay facility can be accessed by dialing 0 (800) 032-9687 within the U.K., 1 (877) 482-6144 within the U.S. or alternatively, use the Standard International number of 00-44-20-7136-9233, the reservation number is 88430299. This information is also available on the Lloyds Banking Group website. Thank you for listening.