Lloyds Banking Group plc
Q1 2019 Earnings Call Transcript

Published: 2 May 2019

[Operator:]

Thank you for standing by, and welcome to the Lloyds Banking Group Q1 2019 Interim Management Statement Conference Call. There will be a presentation by George Culmer followed by a question-and-answer session. Please note this call is scheduled for 1 hour. I must advise you this conference is being recorded today. I will now hand the conference over to George Culmer. Please go ahead.

[George Culmer:]

Hi there, and thanks for that. Good morning, everybody, and welcome to the call. I will give a short presentation and then we’ll open it up to Q&A. In Q1, we’ve made a good strategic progress and delivered another strong set of results with statutory profit and EPS up 2%. Starting with strategic progress on the first slide.

[Operator:]

Your first question comes from the line of Raul Sinha, J.P. Morgan.

[Raul Sinha:]

A couple of questions, if I may. But firstly, on the underlying NII trends. Can you unpick a little bit in terms of how much of the weak performance this quarter is really going to stay with you as you move through the year and try to grow this open mortgage book back to flat? And obviously I’m looking at consensus, which is broadly flat to slightly down on NII for the year. Given where you started the year, obviously it looks like running below that run rate. So if you could give us some thoughts on what should we think about the full year. And then maybe a similar question but from the other side on other income. Obviously, headline has got insurance benefit and the VocaLink earn-out. But if you take those two out, you’ve got a softish sort of run rate there. And perhaps, you’ll get them back through kind of reduced deals or higher build gains. But if you could talk through the underlying run rate, that would be really helpful. Thank you.

[George Culmer:]

Raul, yes. Okay. Look, first of all, on the – dealing first with the mortgages. I mean our overall strategy has not changed and we continue to adopt a prudent and a disciplined – as I said in the presentation and as you’ve heard many times before. In Q1, what we’ve seen is that, as I said in the presentation, we expected larger levels of maturity. So in Q1 2018, we have maturities of roundabout 10-point-something billion and that’s up a couple of billion in Q1 2019, so an expected larger maturity. So that’s sort of Q1, but it’s Q1. Immediately, I saw a seasonal type effect. As I said in the presentation though, we remain committed to and expecting to getting mortgages back on track in terms of closing the year in line with where we’ve opened it, so basically making up that ground. And we’ll do that through a combination of continuation of focus on retention and referral. Also, what we’re seeing is, in terms of campaigns, our rate campaigns and some of those application pipelines, which we’re actually seeing is about 10% up at the end of March and about 15% up at the end of April. So there’s now fulsome expectation that we will move through the sort of seasonality and the phasing of the Q1, and we’ll get mortgages balances back in line with where they were at the start of the year, and we will do that. But at the same time, it’s not stepping up NIM because we’ll do it in a disciplined way and we’ll stay in, as you would have seen, our guidance, reaffirming that guidance of around the 290. So we fully expect them to be able to get back in terms of the mortgages, the open book back to where we’ve started the year. So if you take that big mortgage movement and alongside with that, I would expect – and again, you’ve heard this many times before, those areas that you’ve seen grow in Q1, things like SME, asset finance, again, I would sort of expect to see them grow as we move through the year. So I would certainly expect – I mean, I think loans and advances are down to the sort of £440 million level, having come in at £444 million or something like that. I would certainly expect to see us moving back towards that opening year position as we move through the rest of the year. So from an asset strategy, the overall strategy isn’t changed. I think you’re seeing the sort of low point at Q1, and our expectation is that we will build that back as we move through the second half of the year. But what I would stress is, well, within that, that we are sticking with our margin guidance as well around the 290. And that’s not about buying growth, that’s about staying disciplined on price and underwriting but leveraging our multi-distribution, multibrand approach, et cetera, et cetera that you know. So that’s where we sit on the asset strategy.

[Raul Sinha:]

Okay. If I could just follow up on the NII point, what have you done with the structural hedge in the quarter, if I may ask? Because if I look at the slide you showed there obviously it’s down through the quarter, it’s becoming a little bit since in Q2. But have you been rolling the balances or expanding them in Q1?

[George Culmer:]

Look, on structural hedge, yes, I think it was said at year-end given – we don’t adopt an automated approach for this, we will do what we think is right in the best interest of shareholders on this. And at certain times, if we don’t see value and we don’t see any merit in basically hedging our non-interesting-bearing balances, we won’t do so. While our natural position is to be fully hedged and we have capacity up to about £185 billion, and we have a duration on there of around about four years. But given where rates are, as you said and as you know, we’ve stood off that at the sort of year-end point and we’re still basically more out of the market than in. And the equivalent would be now that I think we’re on invested balances around about 172 and we’ve got a duration of about 3.5 years. So I think we have uninvested capacities that is sitting there which we’re able to deploy, both from a volume, from a summation and from a weighted average life. So that’s the position that we’re at, at the moment and that’s what we think is the right thing to do in terms of current economics and how we deploy shareholder money. So that’s all we have.

[Raul Sinha:]

Thank you.

[Operator:]

Thank you. Next question comes from the line of Joseph Dickerson, Jefferies.

[George Culmer:]

Hi Joe.

[Joseph Dickerson:]

Most of my questions have actually been answered. So if I look at card loans, they were down about 2% year-on-year. That’s an area where you’ve been growing in the past. If there’s any color you could provide there, particularly with regards to the trajectory of that book over the course of the year, that will be useful. Because presumably, one of the drivers of your margin strength has been the unsecured products. So any color there will be helpful. And then that in terms of thinking about the capital – the lower capital threshold that you announced yesterday. Can we tack on that 30 basis points into whatever buybacks we have penciled in for this year? Is that something you’ll hold back as you think about things like Basel IV in the future? How to think about deployment of that or uses of that benefit would be also helpful. Thanks

[George Culmer:]

Okay. If I deal with the second one first. I mean this is I’m obviously delighted of the news, and we’ll be able to communicate that. It wasn’t that something happened unexpectedly, the combination of those, what happened in Pillar 2A last year and the reduction in the systemic risk buffer from what we had previously included in the guidance reflects deliberate management actions in terms of managing the ring-fenced bank. And I think it’s – well, first, I mean it’s important onto itself because the only route for capital changes have been afterwards. And it’s important onto itself as an amount, but also as a symbolism. That says actually if you manage your business, you can invert that direction. So it’s good unto itself, and I think just good in terms of bucking that trend and demonstrating the art of the possible. In terms of utilization, as you said, 60 basis points is best part of a billion. But look, the group is not going to change its approach through – either through dividend or distribution strategy. And by that, I mean you know that from the dividends we have a sustainable progression, and I think it’s quite clear in terms of the sort of growth rates the market should we look to for that. But in terms of distribution of any capital above our requirement, which is now the – essentially the 13.5%, the 12.5% plus around the 1%.– 13.5%, that will be a decision for the board that they will take at the end of the year. And so all I will say is that, that decision will fall as part of the normal decision-making process as to how we run the business. So what we do with surplus capital above our requirement, above our target will be a determination, as I said, for the board at the end of the year. And we will deal with that then and we will make that decision at that point. But there is certainly no change in our distribution policy and how we apply that. So that’s – the second bit, on the car loans. Yes, they’re slightly down and I would expect this to be slightly higher come the end of the year. The overall strategy – having – we’re looking to grow market share, et cetera, essentially achieve that with the acquisition of MBNA. And perhaps there’ll be slightly more choice in terms of where we target the growth, and you particularly to see that when we did that balance transfer, where you’ll see in terms of some of the option have come back quite severely and were part and parcel of that. So a slightly different strategy in terms of acquisition versus overall book management. And slightly down at Q1, but I would expect to see a slight growth in terms of – by the time they may move back in full year.

[Joseph Dickerson:]

Great, thank you.

[Operator:]

Your next question come from the line of Fahed Kunwar from Redburn. Please go ahead.

[Fahed Kunwar:]

Sorry, I’d sort of come back to NII, if you don’t mind. On the structural hedge point you made – so I appreciate obviously the NIM guidance are the same and hopefully volumes grow for – they will grow according to guidance from here. But you didn’t invest in structural hedge this quarter because of the low swap rates it sounds like. So if the Bank of England stays pretty dovish and the swap curve just stays pretty low, then would you invest that structural hedge capacity to meet NIM guidance? Or would you say, "Look, we don’t think it’s economical," or you’re happy to miss the NIM guidance. Because I think you would reinvest that hedge – I mean I just wanted to understand because obviously other banks are very mechanical with the hedge, but you guys do it differently. So how do you think about using that capacity on the hedge? And there’s more deposit growth in the current account space given if swap curve stays low, that will be very helpful. And the second question I had on NII as well is your back book front – your front book is still obviously below your back book. Your SVR book is kind of moving down at the same kind of pace, but it’s moving down. So what kind of mechanisms do you have right now to offset that back book pressure on a kind of 2-to 3-year view? Obviously, you use the unsecured market. A lot of the banks have gone towards five years, but it looks like a lot of those things are – the capacity to keep on doing that is slowing down. The rates don’t rise. How do you offset that kind of back book pressure that doesn’t seem to be going away? And third question, which is a very easy one, is the RoTE target is 14% to 15%. But obviously, if you pay down the 13.5% core Tier one ratio, should we then expect a higher RoTE now because you don’t need to hold as much capital as you did when you kind of set those targets? Thank you.

[George Culmer:]

In terms of the reverse order, I mean, as I said in the previous question, any action on distribution vis-a-vis the 13.5% will be taken at the year-end by the Board consistent with our policy, et cetera, et cetera. But I would also say the 14% to 15% is quite a broad range in terms of returns and in terms of pounds that sits sort of behind that. So there is quite a spread of financial outcomes we look forward in the 14% and 15%. So I’m not sure I’m – and my answer around – suggestion would be formulaically run things through. I’m just saying that there’s quite a spread between the 14% and 15%. And any decision on what we do would be only taken at the year-end. The mortgage bit, yes, it’s a good question. I mean as we said to you numerous times, when we plan and when we talk about our long-term guidance, we don’t plan on the presumption that the asset pricing rise as the Seventh Cavalry and just come back to save everybody by suddenly getting a whole lot less competitive. We assume the market stays competitive. And within that, without publicly airing all our strategies and tactics moving through the durations in terms of being able to refinance in terms of targeted campaigns within the mortgage book. And then everything we talked about previously in terms of offsetting it in flows in some of the higher-margin areas

[Fahed Kunwar:]

Very helpful. Could I just ask you for one quick follow-up. You mentioned the current account. Obviously, that has been one of the reasons that overall deposit costs? Has it continued – has it decreased or has it…

[George Culmer:]

No. It’s pretty flat actually when I look at things across the board. And when I look at – I mean –in Q1 2018, Q1 2019, where we had some 12 basis points loss on our assets and then claw back some liabilities . If I’d show you the Q4 and Q1, Q4 2018 and Q1 2019, it would be a pretty dull slide. I think it’s just one basis point off of that. So I think the cost of the savings, for example, is around the sort of low to mid-40s and it stayed around about that level Q1 versus Q4.

[Fahed Kunwar:]

Okay thank you very much for the questions.

[Operator:]

Your next question comes from the line of Chris Manners, Barclays. Please go ahead. Your live in a call.

[Chris Manners:]

So just sort of two linked questions, if I may. The first one was just on Basel III impact and the mortgage book. I guess we’ve got one Jan 2022, we’ve got the 60% output floor coming in. Obviously, you’re risk weight density to your mortgages is sort of roughly 10% from your latest Pillar three. How much RWA inflation you’re expecting on that mortgage book. And then the sort of linked question on that is how do you think having higher risk weight density is going to impact front book mortgage pricing? Are you actually starting to price those as higher risk weights? I mean if you’re at a 5-year fixed, it’s going to be held on your book until 2024. And about that in pricing? And if you are, do you think your competitors are thinking about that in their pricing? And so I’m just trying to link in that RWA inflation and what that might mean for price reaction on the mortgage market. Thanks.

[George Culmer:]

Well, Chris, yes. Look, in terms of RWA inflation, I mean as you put – if the question you didn’t ask it. I mean before we get sort of Basel III and lots of stuff. I mean in terms of the sort of broader base, you’ve got the sort of foothills of – actually the first thing was the IFRS 16 which you’ve seen today and you saw the 11 basis points in terms of capital, it went ahead of me. As you know, I’ve got the – more of the sort of PRA, EBA inspired one. So I’ve got the definition to I think in terms of 2020. I’ve got the PD calculation 2020. I think I’ve got the EBA entire program, which is 2020, 2021. And I’ve got sort of securitizations I think which is sort of 2020. And those could add anywhere between about sort of £6 billion to £10 billion or something like that in terms of RWA. And when we talk about our – as you’ve heard lots of times before in terms of our capital guidance, that’s why – what grows that profit, et cetera, and some of the – a number of things like that RWA inflation which just keeps that capital guidance pretty static over that period as I seek to do that. We – I mean the balance here which is sort of 2020, yes, it comes in, in 2022, but a lot of it is back end in the outer years of that. So 2025, 2026, 2027. So in terms of pricing, when we price products, we’ll look at current RWA requirements. We are cognizant of stress capital requirements. We’re cognizant of leverage ratio requirements. You don’t explicitly put in the new floors just yet, but I don’t show that as parallel to that given the other things we look at and given the timing that would come in. We haven’t actually given an explicit estimate in terms of Basel III. Your estimation of sort of 10% is pretty correct. By the time you get to Basel III coming in, you would’ve been through the foothills of the definition, the fault of the hybrid PD coming through as well. So I would imagine by the time you come into Basel III type of stuff, the 10% could be anywhere up to 10%, 12%, something like that. So I’m already starting to tune into that. But those are the sort of the numbers. And then, as you say, you can gain of 72.5 over that period, then you can do some sort of simple math to work that out. But I – this is going to sound complacent in those sorts of things, and I definitely won’t be here. But the actions that one takes and how one responds to that, there’s plenty of time to give absolute thought to in terms of what’s the overall approach to this. And as you know, it shows a whole load of interesting dynamics in terms of how you approach such a relatively closed yardstick. So anyway, so partially answering your question.

[Chris Manners:]

Yes. So I guess the thought was, as the risk weight density goes up, that will mean it’s much harder for mortgages to hurdle. The intense competition that you’ve been seeing from your competitors may then abate to a degree and so maybe just, if you could, is that a fair thesis? And also, I’d be interested in just how you’ve seen maybe over the last sort of two or three months mortgage pricing evolve.

[George Culmer:]

I don’t know. I missed your sort of punch line. I mean it’s a very fair. It’s a very rational thesis in terms of risk weighting. We would also say that in terms of – determined by leverage ratios against ring fenced bank will become very relevant in terms of how people should be. If you are looking to make economic returns on these products and not just deploying excess liquidity, for example, you should be very pertinent in asset pricing as well. So there is a very rational case as to why asset pricing should move and not necessarily right above me as well, but just in terms of some of the PRA moves. As you say, the imposition of ring fencing, the imposition of leverage ratios as they come through, as people refinance, some of the challenges in particular, some of the Bank of England-sponsored funding to market-originated funding and just given some of the travails, some of them are probably getting throughout at the moment. All those cost of liabilities should feed through into a higher cost on the asset side. I agree with that, with you entirely. And in terms of recent observations, the market remains tough. There has been a slight easing. So prices have stalking up a bit. The market is in the sort of 2-and 5-year type. I think that’s where about 90% of the action is at the moment. But swap rates haven’t moved. The swap rates haven’t all been priced through which is good. So there’s been some alleviation in the sort of 10 to 15 basis point range. And so we’ve talked about prices on new business margins of about 2%. And so I’m going to say it’s slightly ahead of that. So there has been some easing. However, much as I’d love to, I’m not going to stand here and say, I’m calling a turn in market, but there has been some recent easing. There’s no doub.

[Chris Manners:]

Thanks George.

[George Culmer:]

Thanks Chris.

[Operator:]

Next question comes from the line of Andrew Coombs, Citi. Please go ahead. Your live in a call.

[Andrew Coombs:]

Two clarification points. The first is, can you just remind us please what you have assumed in terms of base rate hikes for your guidance for the full year? And second question, which looking at your return on tangible equity target at 14% to 15%. You’ve obviously printed 12.5% for Q1. It would be 17% on an underlying basis. So a delta in terms of whether you can get there or not seems it will be down to the below-the-line items. So if you could just give us an idea, particularly on the volatility in other items line, the split of that first between SLA and other and then where you think that goes going forward and then also thoughts on restructure?

[George Culmer:]

Second question first. Yes, there’s other things to talk over that. But you underlying shows a consistently strong. The 12.5% seems to be the 14%. We annualize. So essentially, we take the sort of below the line in Q1 and it gets annualized up. So the extent of this one we suffered for Q1 then you get – that does get that – that hurts you in terms of the methodology, the calculation. I certainly hope and I don’t expect to be taking SLA increases to quarter two, three and four as we go through this. So you’re right. It is around the sort of below-the-line items. I mean within them, as I called out in the presentation, we’ve got about 120 or so from restructuring, of which about 40 or so was for redundancy. I had about 40 or so from the last part of MBNA which is essentially done now, as I said in the presentation, so that should drop away. Within the banking volatility, I’m afraid I’m going to be somewhat opaque. And that’s all due to, as you’ll know, within there, we have included the estimated charge for exiting the Aberdeen Standard Life investment contract. And that will not be disclosed into the market in terms of the amount that is included in there. The other in terms of volatility that sit within those just to clarify is that you have insurance volatility. And as you know, both insurance and banking, we essentially look to hedge the capital position, which sometimes you get disconnects between capital positions and P&Ls. And what I can say is that having suffered a large negative delta for insurance in Q1 – sorry, not Q1 – in Q4 of last year, and that was equity market-led as well as credit spreads, credit tightening, equity market recovery, we’ve got a better performance in insurance, and again, we have a banking volatility where we essentially hedge out our purely – first of all, apologies, our foreign currency, RWA exposures. And we also pick up our cross-currency basis, and that’s gone negative in Q1 as well. But in terms of precise components, precise elements of the math, in disclosing a part of it or revealing the other part, I’m afraid I’m going to have to sort of frustrate you. So that’s sort of the theme. But in there, I’ve got the estimated charge for Aberdeen Standard Life. I have a positive in insurance and I have a negative from my banking for those reasons. And those are the components that sit within that. So that’s the elements of that. And then in terms of rate hike, sorry, yes, we assume one over the course of the plan. So this year it was the back end, sort of November time or August. I can’t remember which one we’ve assumed. As you’ve seen from our previous disclosures, I think it’s about £86 million per sort of 25 basis points. And I think I might have said this before. I’d say it does not have a material impact on – if there is no rate increase on 2019. And thereafter, if it stayed flat, what we do is what we always do, is we will hunker down and we’ll go back. And if I’m looking at a rise in income, I would look at what else I can do across my business in terms of mix, in terms of pricing, in terms of expense actions to see what I can do to make sure I hit my return targets. And I know you’ve heard this many times, but the business model that we operate and the management processes and structures that we operate give us early line of sight on that stat and give us a better chance than most of being able to deliver that. So there you go.

[Operator:]

Your next question comes from the line of Jonathan Pierce. Please go ahead. You’re live in a call

[Jonathan Pierce:]

Three number ones and they’re quite quick. The first one is TNAV. And you went up about 1.4p in the quarter and I think the dividend went up in April. The earnings is about 1.5p and there wasn’t much in the way of buybacks. They should be broadly neutral anyway. But was there something going on that we can’t see because we don’t have sort of full balance sheet out in the conference.

[George Culmer:]

In pensions, we’ve seen a – because of timing of credit spreads have lost about £1.5 billion on the pension valuation in the quarter. So that’s the piece that you’re missing there.

[Jonathan Pierce:]

Okay. Again, that’s helpful. Second one on the share count. I think there’s about 170 million of buybacks in the first quarter in terms of millions of shares. The share count went up 10 million, 20 million. So I guess the awards were something in the order of 200 in the first quarter. Can you give us a sense us to where you think that award number will end the year? Is it a similar level to last year at 700 million, 100 million? Okay. The third one is the poky book.

[George Culmer:]

Okay.

[Jonathan Pierce:]

Is the poky book, the credit impaired HBOS.

[George Culmer:]

Okay.

[Jonathan Pierce:]

I think we’re seeing quite a lot in – I mean, as we have historically quite a lot of reduction year-on-year on that book, as you will expect. I guess that is where that book is at in a closed mortgage book. What sort of margin are you generating on that book, if I can ask?

[George Culmer:]

You can ask. Well, I can give you a straight answer. I may have to come back to you on that one in terms of the margin. It is coming out, again, I’m not sure if I can be less generic that I want to start out particularly because I can’t remember. But in terms of spreads on that, I do not have that in hand, so we will come back to you on that. On the awards bit, yes, my expectation will be – I think last year we issued something like 700 or something. Now I would imagine if you assume it will be a consistent amount over this year. And then obviously, my buyback depends on the price. There are a lot of things, but it’s almost shy of three billion or so shares. I would have thought over the course of the year, 7.0 billion, 8.0 something of that order. So you’re probably looking at a sort of net 2 billion, 2.1 type of reduction over the period will be my expectation.

[Jonathan Pierce:]

Okay, brilliant. Thank you for that.

[Operator:]

Thank you. Your next question comes from the line of Guy Stebbings, Exane BNP. Please go ahead. You’re live in a call.

[Guy Stebbings:]

Good morning, thanks for taking my question. Firstly, a couple of very brief clarifications on RWA. I think you said earlier in the call you thought the RWAs are going to fall from a Q1 position this year. So just trying to understand what’s driving that. And then also just to check the £6 billion to £10 billion guidance, does that capture mortgage default, mortgage rate changes, securitization changes and the EBA repair program, so all those three?

[George Culmer:]

Yes, there is some sort of one’s up to sort of the launchpad of Basel III. So all those things that was – slightly big, slightly enlarged range because these things have yet to be fully fleshed out. We’re still to get final papers on this. Who knows whether you EBA repair program will come in as one here or will be staggered and also transition really part of that. So there’s an element obviously of variability around this, but that’s just sort of an indication.

[(43:]

06)

[Guy Stebbings:]

Okay. Perfect. And also, can I just check on the new capital guidance that you’ve given in terms of how permanent you view that? Presumably, on the two to three year view, there’s a possibility of moving back to the threshold, the 0.5% of the SRB given the limited gap currently. Is that fair? And if so, are you assuming that you will see offsets elsewhere like Pillar 2A or lower pension risk. That means that using 13.5% is kind of long term even if the SRB was to go back up?

[George Culmer:]

Okay. Look, on the capital, yes, there are a number of moving parts. And if I start with the sort of negative, the countercyclical or whatever in terms of where that might move to, there’s something like Pillar 2A. The flip side, for example, of I’ll be making some substantive pension deficit contributions over the next few years, and the way the Pillar 2A is calculated, the starting point is the position of your accounting surplus on your pension scheme. So as I put money into the pension scheme, for example, I will move that from a capital perspective, but if I’m increasing my Pillar 2A starting point for pensions, I should be getting 55% or 57% of that back theoretically, all things being equal, on the Pillar 2A. The systemic risk, look, it’s a very simple calculation. It’s around calibrated to the size of assets, and the 250 down to 200, the magic number is 610. We closed last year well below that, below the 600 level and deliberately so. We know kind of what we’re doing. And as we plan out, we see ourselves staying below that level. And if you think about it, I’m not quite sure what business, what piece of business you can write me that tips me over from 669.99 to 610 and still make a decent return on capital. So the margin across that last piece. I would expect to stay below is what I would say to you.

[Guy Stebbings:]

Okay, perfect. Thanks a lot.

[Operator:]

Thank you. Your next question comes from the line of Edward Firth, KBW. Please go ahead. You’re live in a call.

[Edward Firth:]

Yes, good morning. Apologies. Probably just 2 points of clarification. I think you probably touched on both already. Just on Basel III, you were saying you think that’s a 10% incremental after you’ve had the 2020 changes? Is that right?

[George Culmer:]

No, I didn’t necessarily say that. All I’m saying is, we are currently at around 10%. We have to try and look at – we’ve got the PRA changes, definition of default, probability of default rather there. And I imagine we’ll be sort of 13%, 10%, something like that. But by the time you come to the start of the Basel III implementation. And then the Basel III implementation in terms of 2020, but I mean, the main thing is going to kick in at the back end of that. So let’s see where that gets us.

[Edward Firth:]

Okay. So as of this stage, we don’t really have any guidance on Basel III in terms of total? So just…

[George Culmer:]

We said what we said.

[Edward Firth:]

No. That’s fine. And the other question was consumer, gilt gains in Q1 both this year and last year and the equivalent period last year. And what – do you have any visibility or what you would expect us to be putting in for this year as a whole?

[George Culmer:]

Yes. So for this year, it was roundabout £100 million and was slightly less than that, £80 million, £90 million last year. I think as we guided the full year, we expect to be about £100 million, so less than last year. I would have thought going forward the gilt gains would be slightly about the same as we see before in Q1, but less than that in terms of the rest of the year. So less gilt gains and most of them have been taken in Q1. So that would be my estimate there.

[Edward Firth:]

Okay. So basically that’s it for the year, the £100 million you got in Q1, we should expect that to be zero for the rest of the year?

[George Culmer:]

I’m sorry, I was not completely clear. What I was saying was, probably just less than, about the same again through the next three quarters, yes.

[Edward Firth:]

Okay, thanks so much.

[Operator:]

Thank you. Next question comes from the line of Robert Noble, RBC. Please go ahead. You’re live in a call.

[Robert Noble:]

Good morning. General question on the sort of the economic outlook and what’s happening with your books and things like that. And have you seen any slowdown in the mid-market, corporate book going down, you said it sort of tax. Was there any signs of pulling back in investment in the corporate book? So you point to strong underlying credit quality, but the presentation does show a pickup in credit card arrears. Is there anything going on there at all or is it just normal volatility?

[George Culmer:]

Yes. No, no, yes, if you look at that slide, you’ll see a little pickup in terms of cards. No, that is not underlying deterioration trend. That is sort of operational factors. So that’s, for example, things like as we moved over the MBNA book, what we migrated out of the Lloyds book basically customers aren’t able to pay off for a period of time, and there’s also a lot of operational reasons in terms of drop-down in outbound calls, et cetera. So we see that as operational factors. So that will kick up at the end of that. It’s operational, and that’s not a big area of return. We’re just seeing the start-up there. Elsewhere, as you say, look, I think you can see it in the results in terms of business investment. Remember, in Q4 of last year and continuing to this year, you are seeing a step-up in terms of levels of business investment. That is undoubted. At the same time, we are not seeing any deterioration in trends in these sort of areas, et cetera, we’ve just been speaking about. And the consumer stays relatively robust and resilient, and you see that in the most recent data around levels of – better levels of unemployment and employment. There’s something recently like 200,000 new jobs created already this year. And you’ll see wage growth now moving measurably ahead of inflation and coming through as well. What we do look at, though, and this is when you still talk about our outlook, we’re reaffirming our forward metrics, but we are looking out at things like HPI and stuff like that where again you will have seen the various stuff, VIX, et cetera, and whether we should be tempering that. That’s something that we’re thoughtful about necessarily will the Brexit uncertainty persist. So that’s something that we are thinking. So we are seeing slightly different things. Businesses standing off, still resilience among the consumer. Obviously, not only a consumer bank, but things like HPI, et cetera, we are thoughtful about where that’s going and what the latest data is showing and also what’s the geographical dispersion of that as well vis-a-vis London, for example, where we’re underweight and ex London where we’re slightly overweight. So those are things that we are mindful of and we are looking carefully at.

[Robert Noble:]

Just a follow-up. On house prices, just what’s the sensitivity of your models to a change in house prices if they were to fall across the country by 5% in the future?

[George Culmer:]

We used to talk about – let me try if I can remember now. There was £1 billion in terms of – 10% was £1 billion of RWAs. So that was at least we’ve talked about and I think that’s still relevant. So the first 10% of RWAs. Now how that plays through – I forget whether – so what’s the sort of RWA type sensitivity. And I think that is true. We still got 10%, usually about £1 billion, £1.5 billion of additional RWAs. There was also a little bit around, as I say through into the wonderful world of IFRS 9. And if I’m dropping my HPI and my economic scenarios and how that plays through in my book as well, so that’s something that’s worth considering.

[Robert Noble:]

All right, thank you very much.

[Operator:]

Thank you. Next question comes from the line of Martin Leitgeb, Goldman Sachs. Please go ahead. You’re live in a call.

[Martin Leitgeb:]

Yes, good morning. I have one quick number question and two follow-ups on earlier comments. And the number question is just whether you could comment on what level of attrition you have seen within the, either the SVR or your variable back book in the quarter as most of your competitors have flagged that attrition has gone up somewhat in the quarter. And then just in terms of your comment with regards to mortgages and mortgage strategy going forward. I was just wondering what do you see currently in the market? Do you see a couple of players being overly aggressive or not sensible that they’re writing business which is potentially below their cost of equity or do you think the market is generally at such level that it’s getting closer to cost of equity that the upcoming changes in terms of risk weight, capital density and so forth are likely to be supportive for pricing going forward or is there one or two out there which might destroy the broader pricing? And the final question just on scope for liability optimization. So just wondering if you’d comment on whether you see scope, it is mostly now in the deposit side or is there some other instruments potentially out there which could be helpful? Thank you.

[George Culmer:]

Hi Martin, so yes, on attrition, it’s still around the 13%. I mean, it’s been – while I was about to say remarkably consistent, it’s probably in that 13% about the last 18 months, something like that, of that order. But the in-quarter attrition is still around about 13%. So that is the size of the book that we’re seeing. And I mean the Halifax book, I’m going to say it’s now about – I think it’s about £35 billion. That’s smaller, I think, in size, I think. There was around about, yes, the 13% attrition is what we see. And it’s about £35 billion is the Halifax book. The mortgage stuff, look, it’s a very much – there is no one lender leading the market. And this isn’t just sort of being polite or a step stone. In previous times, we see lenders and obviously either Nationwide or HSBC, but at the moment, all major lenders are competing strongly. Our response is – and this sort of touches on some of the tactics that we’re facing. Halifax is a competitive brand in sort of house purchase. And they use Lloyds, for example, when they do mortgage. We take different brands in different spaces. In terms of 10-year, I think, as I mentioned to an earlier question, it’s a 12 and five-year game between the two of them. And they’ve got almost 95%. You got more of the market going through with those elements. So it’s still tough out there. As I said to the earlier question, we’ve seen a slight deviation and limited to TFS, the leverage ratio, et cetera, pricing. They’re all rational factors as to why you should get some underpin, I think, in terms of the mortgage market. But the presumption is it stays tough. And to your cost of equity, it sort of fit in – I’m sure these banks will sit in front of you and justify and explain, et cetera. All I would say is, we struggle to see how some make cost of equity and whether it’s people are simply earning more than cash, whether it’s people are not putting on the full cost of funds and what the market rate really is as opposed to simple margin and banking margins we’re slightly suspicious of, but we struggle to see with some of the rates out there. Of course, you might assume about rollover and continuation and turning over, those sorts of things, but we struggle to see how current rates make the cost of equity.

[Martin Leitgeb:]

And on the liabilities side in terms of liability optimization.

[George Culmer:]

Oh, sorry, apologies, my apologies. The liability side of things, yes, as I said to an question, a pretty sort of stable room. I think there’s still a bit of room around the fixed book. I still got some £20 billion or so in my fixed book which I never brought down, still being able to pair elements of some of our variable branch rates, et cetera. I think there’s still opportunities to do that. So those costs are fixed and variable. I still see opportunities to be able to price down to offset some of that margin pressure.

[Martin Leitgeb:]

Okay, thank you very much.

[Operator:]

Thank you. Your next question comes from the line of James Invine, Societe Generale. Please go ahead. You’re live in a call.

[James Invine:]

Hi, good morning. George. I Just wanted to ask about PPI. The net provision has been running around in the provision, but of course, we’re all expecting a bit of a surge. Are you just taking the view that it will be what it is and then you’ll take a provision in the second half to clean it up or you’re just not that worried this time around? Do you think the CMC is just generating spurious claims rather than real ones?

[George Culmer:]

Okay. I’m never not worried by PPI. I guess how that sounds. Look, PPI, £100 million will be taken basically. What we’re seeing is, yes, this is your net complaints are pretty much where we expected them to be. So we are now at the 13,000. I think the precise average for Q1 was 12,800. What we have though seen is a vast increase in gross complaints in PIRs. So those are basic information requests. And those are up by about 30% to 40% as we approach the time bar. And the issue is that each of them has to be dealt with. And near term requires effort in terms of searching databases, searching records, et cetera, et cetera. So we were expecting at this moment in time to essentially be running down, for example, the workforce or colleagues that we have working on PPI, but we currently have something like 6,000 people. And that’s simply because that gross level that are coming in is requiring work and effort in terms of validating or determine that there is no case to answer, so to speak. So it is that. It is that surge in increase. And the £100 million is not a pay as you go. That’s basically us assuming through to – it’s a bit beyond sort of all this time because if something comes in the form, you’ve got to sort of deal with it. And that’s just assuming that we keep those elevated levels of colleagues deployed dealing with that surge in gross complaint.

[James Invine:]

Okay. Lovely. When do you think we’ll finally have the actual total number? Does that come with the Q3 numbers or do we have to wait for the Q4?

[George Culmer:]

I think it will probably be Q3. So you might have to ask William that.

[James Invine:]

All right, we’ll do. Thank you.

[Operator:]

Thank you. Due to time constraints, we have one final question. It comes from the line of Chris Cant, Autonomous. Please go ahead. You’re live in a call.

[Chris Cant:]

Hello, George, thanks for taking my question. If I can just come back to the RoTE target questions and your remark that 14%, 15% is a broad range. Just mechanically, the shift bound of 13.6% from 14% might add something like 50 bps to whatever you thought you were going to be within that range. But as we discussed at full year 2018, your definition excludes intangibles amortization. And if I look at what that was adding in the quarter, that’s adding about 95 basis points now versus what at least I would consider to be a more typical definition that your peers are using. You indicated that you might revisit that definition now that, that intangibles impact is getting quite large. So are you perhaps simply going to offset those two factors in terms of the return? I.e. lower capital positive but actually including the intangible amortization as an offsetting negative? That would be one question. Just trying to understand what’s happening to guidance, I think. And on capital generation, you said you’re sticking to the 170 to 200 for the year and you view the first quarter performance consistent with that. How much capacity in terms of basis points of capital do you still have to come through over the next year or two from further optimization of the Widows capital position? How much do you sort of have in your back pocket there and how much of that likely deployed this year, please? Thank you.

[George Culmer:]

Okay. All right. Chris, those are two good questions. The second one on Widows, I’m not going to give you a precise number, but there is more we can do. It is an ongoing piece of work in terms of derisking that business. So I would still expect there to be supplements to the normal dividend streams that come through us derisking the Scottish Widows business and be able to upstream capital. So I’m not going to price that in and give you a number, but the principle is right. And they’re doing a great piece of work in that business in terms of both growing it and making it more capital efficient. And we see some more opportunities there and being able to derisk that. And then to your first question, I haven’t thought of that actually. But look, on the RoTE calculation, yes, I mean, I agree with what we said last time. I think we will look at it. That we actually might – that we will look at it. For the purposes of the go forward, I think it’s simple everyone we stick with what we’ve got because it’s clear and it’s transparent to what we do, and we can take a subsequent look as to the right way of actually calculating that. But I don’t think we’re going to do anything for this year because we’ve got – you pointed out some way it diverges from our peers and we’re looking at that. But looking at those, what it is, and I think we’re not going to change it for this particular year. We’ll stick with it. And we’ll work out if and should we move in terms of 2020 onwards. But at least it’s clear. We know how it’s calculated and we’re transparent about it. But again back to the sort of first part of it, we are very pleased with that revised capital requirement. And how we deal with it, the Board will decide as part of its normal process at the end of the year. So that’s where we are.

[Chris Cant:]

Okay, thank you.

[George Culmer:]

All right. Thank you, everybody, for taking part. I think that’s the end. I mean made motions to me. So many thanks for that and thanks for all the questions. Cheers, everybody.

[Operator:]

Ladies and gentlemen, this concludes the Lloyds Banking Group Q1 2019 Interim Management Statement Conference Call. For those of you wishing to review this conference, the replay facility can be accessed by dialing 0 [phone] within the UK, 001 [phone] within the U.S. or alternatively use the standard international on 0044 [phone]. The access code is 89406841. Thank you for your participating.