Good morning, everyone, and welcome to the Empire Room. It's my pleasure to welcome William Chalmers, who is the Finance Director of Lloyds Banking Group. As you know, the biggest bank in the land, William has been CFO there for four years, although I'm sure there are days when it feels like more. But it's a great pleasure to have him with us today. As those of you who follow the banks know, it's been a tough year for domestic U.K. banking stocks. There have been some negative surprises in the outlook for net interest income, in particular, in the last couple of quarters. Lloyds stands out as having shown a far more resilient picture on net interest income, and so it would be crazy to start anywhere else than that picture. First of all, William, thank you for joining us today. Pleasure. Thank you, Jason. Can we talk about net interest income? Of course. Yeah. Before I get into what might make Lloyds different, if you could just talk about the big factors that have been impacting this year, please, and give us a sense as to how those evolve in strength terms as we go into next year. Yeah. Happy to, Jason. Again, thank you for joining and, those in the audience, thank you for taking time. The guidance for 2023, as you know, is greater than 310 basis points for the net interest margin, which we restated and reconfirmed at Q3. That implies just over 300 basis points for Q4. And then, in turn, that's about a 6-7 basis point drop versus the 308 that we saw in Q3. So looking forward, Jason, to answer your question, the dynamics that we saw in Q3, we would expect to more or less play out going into Q4, and then again into 2024. So specifically on those, within deposits, we actually had a decent performance in deposits in Q3, up about GBP 0.5 billion. But within that headline number, there was churn from PCAs into savings, for example, and then within savings from instant access into fixed term. It would surprise me, frankly, if given the rate environment that we're in, that that doesn't continue in Q4, and indeed, we think will continue into 2024. But over time, I would expect that to taper a little. It'll be out because of the absence of bank base rate prompts that we've seen during the course of this year. It'll be because the money that is gonna move, by and large, probably has moved, or it's in danger of missing out, if you like, on peak rates. And it's in, also in the context of forward rates coming down, and therefore most probably fixed term offers, coming down with that, alongside a convergence of instant access rates somewhat closer to fixed term. So, you know, this deposit churn pattern continues Q4 into 2024, but we do think it starts to taper. Most likely at some point during next year, although being too precise as to when, you know, that's, that's harder. Alongside of that, the other major headwind, if you like, is the mortgage refinancing. Now, the mortgage refinancing is very mechanical. At the moment, we've got about 175 basis point spreads in mortgages rolling off onto about 50 basis point spreads in mortgages. As we go through 2024, those spreads that are refinancing off start to come down, and gradually realign themselves with the front book spreads within mortgages. By the time you get to mid-2025, that is pretty much taken care of. That mortgage headwind is pretty much eliminated by around the midpoint of 2025. And then the major tailwind, as you know, is the structural hedge, and that's a, that's a powerful tailwind. At the moment, the structural hedge is yielding about 1.35%. For every, derivative, if you like, that comes off the structural hedge, it is refinancing into a 4% to 4.5% environment, so a significant tailwind there. For 2024, however, it is somewhat back-end loaded, in its overall complexion. What that means is that for the net interest margin as a whole, given those kind of puts and takes, Jason, you're seeing a picture of most likely continued net interest margin pressure in Q4, as I indicated. That continues into 2024, and then at some point next year, I would expect it to start to pick up and, you know, via the benefit of the structural hedge, go in the other direction during the course of the year. Again, I wouldn't want to put too fine a point on precisely when. We'll talk a bit more about that at the year end. There's one other point which I'll, if you don't mind, just take advantage of, is when you look at our net interest income, don't just look at the net interest margin. Also, look at non-banking net interest income, which is essentially the interest expense, if you like, that we use to finance our other income activities. There are two points in that. One is obviously in a higher rate environment, that net interest expense will go up. And then second is, as you know, our other income activities have been growing and so there's a volume effect there, too. So when you look at that item, bear in mind that it's likely to go up in Q4. It's likely to also go up in 2024. And when you bring together, therefore, net interest income expectations, put that into the equation, too. Right. That's helpful. Really helpful. So in Q3, just looking at history, you know, a margin down about 6 basis points. Yeah. That's about a third of what your two largest listed peers turned in, I mean, is there anything you can say without wishing to have you talk about other people's businesses, about the market as a whole? Is it rational that you'd be very different over a, perhaps a longer period of time? Is it just a timing thing? As you say, Jason, it's hard for me to comment too much on peers. I can comment on our own performance. I think in the context of our performance during the third quarter, your particular comment maybe relates to kind of liability side of the equation d eposit performance in particular. We saw within that, as said, around GBP 0.5 billion growth within deposits, but to be clear, we did see churn within the overall deposit base, again, PCAs into savings and within savings into fixed term. Why did we fare the way that we did? I suppose a couple of points that I would make, really. One is it's a broad demographic from a customer base point of view, so you're getting all sorts of different customers within that overall mix. Two is we have a very proactive customer outreach program. So we've contacted, for example, well over 10 million customers in terms of making product recommendations to them, which hopefully makes sense from their point of view, whether they prefer yield or whether they prefer access, or whether they prefer distribution. And that leads into the third point, which is that we've got a pretty broad product set, and it is designed, if you like, to really cater to all tastes. So if you look at the instant access products we've got, whether they're PCAs or whether they're instant access savings, you know, different types of products for different types of customer needs. Alongside that, when you look at individuals who want to lock up their savings for longer, fixed-term products for sure, but also limited withdrawal, which in turn is a product that allows, as the name suggests, really limited withdrawals over a period of time, which suits some who want both access and yield. And so, Jason, I don't think there's anything, you know, particularly spectacular about what we're doing, but we do try to cater for different types of communities, different types of customer needs. We do try to ensure that all customers are aware of the products that we have, and that's manifested in things like PCA outflows being around two-thirds recaptured by our savings products. And I think overall, the fact that deposits were up during the third quarter hopefully points to a, you know, relatively resilient franchise and a robust offering to our customers, Jason. Thank you. Now, when interest rates were zero for all that time, we became expert in mortgage spread analysis because it was the only money being made effectively in the balance sheet. Although deposits are a big swing factor at the moment, mortgages are still a huge preoccupation. Yeah. So, for the longer term, shareholders and potential shareholders we talk to who'd like to understand why mortgage spreads are as poor as they are, no one we talk to is happy with where the market is currently settled. W hat can we infer from the fact that none of the big players like where spreads are right now? Yeah. It's a good question, Jason, and I think the first point that I would infer or at least observe is where you opened up, really, which is to say, at all times, keep an eye on the total spread from a bank point of view. So look at not just the asset spread at any given moment in time, but also the liability spread alongside of that. And I think that's an important start point. Beyond that, the completion margins, as you say, I mean, it's pretty competitive right now. 50 basis points is what we saw in Q2. It's also Q3. It's also what we saw in Q2. I think it's probably also more or less what we'll see in Q4 too. It seems to be, for the moment at least, settling at around that level, but it's a low and it's relatively, relatively competitive level. That, in turn, I think, reflects a combination of blending of two margins. One is product transfer margin, which is right now where the bulk of business is coming from, and that is a margin that is below 50 basis points, to be clear. But on the other hand, we know the credit that we're lending into there. It's an existing customer relationship. The other side of the margin is the new business margin, which is in excess of 50 basis points, which represents a growth opportunity, but of course, the trouble is right now that there isn't much of it around. So, given that relatively scarce supply of new business, everybody is competing hard to maintain their market position. You know, nobody necessarily terribly much likes it, but when we look at the blended average of that 50 basis points, that means that we are still writing mortgages that are satisfactory from a cost of capital point of view. We'd love the spreads to be higher, but at the moment at least, that level is at least clearing our cost of capital. And so it's not great, but we're okay to write mortgages at around that level. I suspect that at some point, hopefully not too distant future, we see some normalization of new business levels. Most likely, the market will get used to managing at higher rates, house prices will adjust to higher rates, and off the back of that, new business volumes will start to increase. And as they do, you know, the volume effect of that in terms of blended average that I mentioned earlier on, plus also the kind of easing up of the competitive tension, I think is likely to lead to a better overall completion margin for us and for other players, no doubt. That will take time, but I wouldn't be surprised if it starts to pick up a little during the course of 2024. Having said that, two points. One is, in the meantime, for 2024 forecasts, we're projecting pretty modest volumes and pretty modest pricing. So we're not banking, at Lloyds at least, on a kind of resuscitation of the mortgage market in that timeframe. Albeit, I do hope that we'll see the first signs of that. And then alongside, as you know, the strategy that we're developing is intending to build the customer relationship and relevance, both within the mortgage product and also kind of across ancillary and related products. And so over time, things like Home Hub and mortgages, for example, the addition of things like protection, current accounts, GI products, alongside the mortgage offering, they will both manage the cost base within the mortgage area and hopefully build customer relevance within the mortgage area, which in turn should allow us to somewhat offset tight margins. With other income. Yeah. All right. James von Moltke, the finance director of Deutsche Bank, was sitting in that chair just before you. And he was quite clear that change in deposit mix probably costs GBP 500 million to GBP 600 million of NII next year, and then it's off to grow again as the replication portfolio their hedge book comes back. I think you were quite clear earlier that you thought that margins would start to increase from a trough somewhere next year. I'm just wondering whether mechanically, that doesn't end up in the same place that mortgage spreads ended up. You know, it's a tailwind that could be invested i n a more competitive market. Is it right that the view is that the hedge takes us to a higher level of revenues in 2025? Is that something you could say? I think over time that is the picture. I mean, you know, it's right to start off with the observation that it is a competitive market, as you suggest, Jason, and, you know, we're seeing that play out in terms of various different product offerings. But again, it is important just to step back and look at the overall picture. And the overall picture right now is, you know, margins, we've said above 310 basis points during the course of this year. It's a relatively healthy margin, it leads to a relatively healthy RoE. Right. Indeed, it leads to a relatively healthy, sustainable yield from an investor point of view. I think looking at 2024, Jason, the comments that I made earlier on, I think would hold, which is to say that I do expect margin pressure during quarter four and going into 2024. I do expect the factors that I mentioned earlier on to play out and lead to some kind of revitalization, for want of a better word, of the margin as we go through 2024. We'll give guidance on kind of when we think that might happen at the year end, but that's the overall pattern during the course of the year. But of course, if you average out, you know, that pattern leads to a margin that is below 300 for the year, to be clear, but nonetheless, you've got that overall trend over the course of the year. I think in terms of the hedge for 2024 and beyond, at the moment, Jason, as you know, we've given guidance for about a GBP 800 million tailwind from the hedge this year. We said that we expect a similar figure during the course of 2024, and, you know, we're sticking with that. That is coming from, you know, again, a relatively mechanical rollover of the hedge from, again, a yield of around 1.35 right now into a yield that is more like 4 to 4.5 or so. I think then beyond, you asked about 2025, without giving kind of explicit guidance, the hedge tailwind potentially builds beyond then. It potentially builds beyond then as a result of two or three factors. One is the maturities that are coming up, and two is the locking in of pre-hedging that we have done in order to manage concentration risk around maturities within the overall hedge profile. Right. So that, in turn, builds a profile into 2025. But let's be clear, that depends upon prevailing interest rates at the time, and of course, it depends upon depositor behavior between now and then. So we won't be kind of more precise than that, but hopefully, that gives you a sense of the dynamics. It really does. One of the questions that I was going to ask, and you might be relieved to hear it's the last one on net interest income, was whether NIM can expand if rates are going down. You've produced a really quite nicely hedged NII line t o date. Other banks have shown much stronger acceleration in their top line. Does that position you well to defend or even grow NIM if the Bank of England cuts? Does the hedge give you that sort of boost? Yeah, it's a good question. Can you generalize? I don't know. Well, you know, one point that I'll make at the outset of that question is that in a way, it's why we do the hedge. You know, your point illustrates why the hedge is valuable, because the hedge effectively allows us to protect income streams, which in turn allows us to protect distributions, well, capital generation and distributions to shareholders. That is a big part of what the hedge, of course, is about. Now, it's also about protecting the regulatory capital position, which, as you know, encourages stable earnings, and therefore, if we didn't have the hedge, the volatility implied by that would probably imply a higher capital charge off the back of interest rate in the banking pack. So, you know, the hedge serves both purposes, shareholder purposes, but also regulatory capital purposes. When we look at the shape of the NIM profile, as you say, potentially in the context of rate cuts next year, I think we're in fact forecasting a rate cut next year, second half of next year in our base case economics. I think the important point is just to start from the comments that I made earlier on in terms of the net interest margin, Jason, for 2024. So those comments hold for 2024, and just keep that in mind for 2024. Mm. Then looking forward, the important rate for us is it's less the bank base rate than any given moment in time. It's more about the swap curve. The swap curve, as you know, drives hedge refinancing, it drives mortgage pricing, and it drives, at least for the one-year, two-year type time frame, deposit pricing as well, fixed term deposit pricing. And so the forward curve is already pricing in rate cuts, so some of that is already built into our expectations for earnings. Just to elaborate a little bit on that, therefore, the structural hedge current yield, again, rolling off at 135, going on at 4-4.5, anything above 135 represents a tailwind for the structural hedge. So there's quite a lot of room for rate cuts and still getting a tailwind in the context of a structural hedge because of that dynamic. Beyond that, the overall margin then depends upon deposit behavior, deposits, let's say, and depositor behavior, and then, of course, asset margins. Just to elaborate a little bit on that, if we get into a rate cutting environment, then in turn, that is very likely to affect fixed term pricing- Sure. -in the deposit market, which in turn is very likely to affect depositor behavior. Y ou know, i.e., less churn. You might see, in that context, better performance in the context of non-interest bearing current accounts or in the context of instant access, for example. And then in mortgages, it's possible also that a declining rates environment stimulates the mortgage market, stimulates the housing market, to the extent that it's not already embodied in swap curves, that is. And so again, you know, that could lead to stronger new business flows, which in turn could lead to a slightly stronger overall completion margin, per my earlier comments. So I think when you step back, therefore, a falling rates environment does not necessarily dictate the margin environment. Okay. The comments to 2024 hold. Some of the comments I made for 2025 hopefully give some guidance. But those are the factors that determine the outcome. That's helpful because I think it's observable that the sector, you know, it's got a 16% cost of equity implied in it. The market's saying that this is a classic cyclical over-earning situation. And maybe the revenues are more stable than might be priced. The other thing, we've had two years of war in Europe and energy crises and so on. Credit risk is obviously something we talk about, you know, CRE and so on. I think you're going to say that the book is extremely collateralized and low risk. So maybe I could ask you to potentially be drawn on where did the risk go? F irst of all, and then talk about what risk you actually hold. Yeah. Because it's inconceivable to many in the room that, you know, poor risks weren't written in a zero rate environment. Yeah. Where are they today? Yeah, it's a good question. You know, one answer to that question might be, we've been highly regulated since the financial crisis, as an institution, but also as a sector, as everybody will know. I think during that time, there is no doubt in my mind that as a result of that regulation, the stress test associated with the capital consequences associated with poor performance and so forth. There has most likely been a migration of risks, outside of the banking sector, and certainly from our perspective, at least outside of Lloyds Banking Group. Where do they lie now? You know, I think one could conceivably look at areas of the shadow banking sector, for example. I don't know in saying that, but I do think that regulation, you know, clearly has consequences. And some of them perhaps, you know, we see on our balance sheet or rather the absence of those issues on our balance sheet today. I think to get to the second point of your question, Jason, just to step back, and the credit performance, as you say, has been very benign. I'll try not to bore you too much with various statistics, but it, it has been very benign. The year-to-date charge, GBP 850 million, about 25 basis points, as you know. The Q3 charge, which is more of a kind of mark-to-market, I guess, GBP 187 million, which is 17 basis points. Now, once you add back in things like calibrations from better than expected unsecured performance, once you add back in multiple economic scenario charges, you're actually looking at underlying Q3 charge of more like 28-29 basis points. But it's still, you know, in the benign end of things and below our through-the-cycle charge. I think what's, what's pleasing from our perspective is that that has been reflected in decent retail performance, both secured and unsecured. I won't go on in any further length about them, but there's a lot of detail to add, as you can imagine. Well, I didn't want to deter you from telling the story. I'll spare the audience. And then, you know, on the other hand, likewise, in the commercial space as well, I mean, it's been really a very benign set of metrics from the commercial side. You saw that we upgraded our guidance. It was the only piece of guidance we did upgrade as of Q3, in terms of asset quality ratio to below 30 basis points, so below our through-the-cycle charge. What's going on there? What's driving it? I think it's probably three things. One is the macro. I mean, I know it's much talked about, but the macro has not been that bad. You know, macro to date, and indeed, looking forward, we're forecasting pretty modest GDP growth, about 0.4%, for example, 0.5% this year and next. But it's not a downturn, it's not an actual recession, if you like, or at least not beyond any one quarter. Likewise, unemployment. We're forecasting peak unemployment of just over 5%. At the moment, as everybody knows, it's within the 4% zone. So it's a tough macro, it's a slow macro, it's a pretty uninspiring macro. But it's not a hugely adverse or recessionary or high unemployment scenario that we're seeing, nor do we necessarily project one going forward. So I think the macro, number one. Second, high-quality customer base. We talk about our customer base as being prime, and I think we would stick by that definition, you know, across the board. And then the third, it's a high-quality book. So again, I shan't bore you with too many statistics, but 43% LTV in mortgages, for example, coincidentally, 43% LTV within commercial real estate, for example. And then it's very well provisioned. If we then look forward, based on our Q3 macro, Jason, I'm not sure that anything much changes. I mean, I would expect naturally we won't get the kind of one-off effects that we got in Q3 and Q4, so you will see the Q4 charge go up a little bit because of the absence of those one-offs. But looking forward, I wouldn't, I wouldn't expect that AQR charge overall to vary too much from the types of levels that we're seeing. If it does deteriorate, then I think, again, by virtue of a high-quality customer base and by virtue of a high-quality book, I think we're pretty well positioned. I mean, I won't repeat those statistics around the retail and the commercial books, but you know, once you kind of get through low LTVs, high average income, 75,000 for the mortgage book, for example, you're down to the provisions. And the provision, as you know, at GBP 5.4 billion, the ECL is some GBP 700 million in excess of our base case expectations for provisioning. So you've got a number of lines of defenses there. You've got an okay macro, but even if the macro deteriorates, you've got a high-quality customer base. If that deteriorates, you've got a high-quality book, and if that deteriorates, you've got a very strong provisioning position. A lot of lines of defense, and I think from a credit quality point of view, therefore, you know, we feel pretty comfortable right now, Jason. Well, with an eye on the clock, perhaps for just one last question. Slow capital demand environment, loan growth is low, decent return on equity and so on. You have made some acquisitions, Citra and Tusker and the like. Although the dogma of the market is you should give everything back all the time, it's not abundantly clear that you're being rewarded for doing so. Yeah. Are there arguments that you should be investing more aggressively or continue to be buying things to fill out the product range? Yeah. Well, a couple of points, really. One is, I think you're right. We're not really being rewarded for either capital generation or distribution right now. You can see it in the share price, frankly. But I think all we can do is just consistently and predictably deliver it, Jason. You know, we can't moan too much about it. We've just got to put up with whatever it is, but what we can do is, as I say, just deliver consistent, predictable, reliable returns. In terms of strategy, the strategy is first and foremost organic. It's gonna continue to be that way. The types of transactions that we have made, or done rather, have been either filling in capabilities where there's a bit of a gap, Tusker is a great example of that, salary sacrifice schemes in transport, or alternatively, scale. So we bought the Tesco mortgage book, 2019 or thereabout. Right. Again, just a straightforward scale acquisition. I think when we look at the overall plan, Jason, we want to and believe we can do two things. That is to say, sustainably invest in the business, which frankly, we have to do in order to make sure that we keep pace, not just with our peers and competitors, but also with kind of nascent trends within the industry, big tech being an obvious example of those. So we have to invest, and we will do so on an ongoing basis. But that investment is about sustaining those long-term capital generation numbers, Jason. So we've committed to 175 over the course of this year. You know, as everybody knows, that implies a sustainable and progressive dividend. We've got a 15% dividend growth at the interim, and then I fully expect to have an excess capital discussion with the board at the year end. Last couple of years, we've distributed GBP 2 billion in each year. You know, I won't second guess what the number will be this year. I'll await the board debate, but nonetheless, we'll have a decent excess capital debate at the end of the year, I'm sure. and so putting investments alongside generating capital is key. And a final point, perhaps, Jason, is we also aim to clear away the kind of capital blockers between strong P&L performance, strong capital generation, and anything that gets in the way of distributing that to shareholders, we're interested in clearing up. This year, we've made some progress on the pension fund. Right. That deficit has largely gone this year, as you know. That's significant progress since 2019, getting rid of a kind of GBP 7.3 billion deficit as it was. There are still one or two bits and pieces in the way. CRD IV is one that we highlighted at Q3. We still need to do some further work on that, but as those, capital blockers get cleared away during the course of this year and, and next, then the operating leverage in the story that starts to get delivered should deliver reliable capital generation, which, as we get rid of capital blockers, will allow us to distribute more to the shareholders. Off the back of that, Jason, again, invest alongside, generate capital. William, thank you very much. Thank you for joining us today. We really appreciate it. Pleasure. Thank you very much indeed. Thanks. Thank you.