Lloyds Banking Group plc (LYG) Q1 2013 Earnings Report, Transcript and Summary

Thank you, António, and good morning, everyone. I'll update you on our financial performance, and then cover our balance sheet and capital positions. Starting with the P&L. As you heard from Antonio, in the first half of the year, we delivered significantly improved profits on both an underlying and statutory basis, driven by income growth and further substantial reductions in costs and impairments. Underlying profit improved nearly threefold to GBP 2.9 billion, with core business profit of GBP 3.7 billion, up 26%, while non-core losses reduced by nearly 60% to GBP 0.8 billion. Statutory profit before tax was GBP 2.1 billion compared with the loss of GBP 0.5 billion in 2012. Statutory profit includes gains of GBP 780 million from the repositioning of the gilt portfolio in Q1 and GBP 485 million of positive insurance volatility, primarily reflecting the rise in equity markets in the period. Simplification and Verde costs were GBP 786 million. Within this, Simplification was GBP 409 million, with the program contributing run rate cost savings of GBP 1.16 billion. Verde build costs were GBP 377 million, and we continue to target an IPO in mid-2014. On legacy, we've taken a further provision of GBP 575 million, comprising GBP 500 million for PPI and GBP 75 million for our legacy clerical medical business in Germany. Other items were GBP 304 million, and include a charge of GBP 104 million related to pet revisions in pensions benefits. This compares with a GBP 250 million pension curtailment gain in the first half of last year. Finally, the tax charge was GBP 556 million, marginally higher than the effective U.K. rate due mostly to the policyholder tax charge. This gives a profit after tax of GBP 1.6 billion. Looking at income. Core income was GBP 9.1 billion, up 6% with a 2% increase in net interest income and an 11% increase in other operating income, driven primarily by the gains on sale of SJP. Excluding the SJP effects, core income was up 1%, mainly due to a 5% increase in Commercial Banking. Core other operating income was GBP 3.5 billion and in line with last year, with a strong performance in commercial and reduced weather claims and assumption changes in insurance, offset by a lower bancassurance and protection income in Retail. The 2% increase in core net interest income to GBP 5 billion reflects a small reduction in average interest earning assets, which were down 1%, and which is more than offset by an improvement in the core net interest margin, up 7 basis points to 2.39% for the 6 months, while the overall group margin was up 8 basis points to 2.1%. The 2.1% is obviously significantly ahead of our original guidance for the full year of a group margin of 1.98%, and the outperformance reflects improved deposit margins and better-than-expected asset performance. We've also taken advantage of the recent interest rate rises to reposition our structural hedge and so eliminate almost all of the 6-basis-point drag we highlighted at Q1. Given this strong performance, for the full year, we now expect a group net interest margin of close to 2.10%. On impairments, our strong risk management and prudent provisioning has resulted in a further substantial reduction in the impairment charge and has significantly improved AQR, as well as a continued reduction in impaired loans and prudent increase in the coverage ratio. The charge in the first half was GBP 1.8 billion, 43% lower than last year and GBP 3.6 billion lower than the first half of 2011. This was mainly driven by substantial reductions in non-core, which were down 58%, driven by commercial and International. And non-core impairments are, for the first time, lower than core. Within the core, the impairment charge is down 7%, principally driven by improvements in Retail. The group AQR was 69 basis points, with improvements in both the core and non-core books, and with the overall group ratio again benefiting from the decreasing proportion of non-core. Gross impaired loans are GBP 40 billion, down some GBP 13 billion year-on-year and down GBP 20 billion since 2011, now represent 7.7% of the book compared with over 10% in 2011. Net of provisions, we've seen a GBP 12 million reduction, GBP 32 billion to GBP 20 billion, which represents almost a 40% reduction over the same period. On coverage, the group coverage ratio is up to 51.1% from 48.2% at the start of the year. Within non-core, the ratio increased from 50.7% to 54.6%, with increases across most portfolio, including a further strengthening in Ireland. Within the core, the coverage ratio now stands at 42.6%, up from 41.2% in December, with increases in commercial and WAFI. Looking at performance by division. In Retail, the impairment charge decreased by 16% to GBP 0.6 billion, driven mainly by continued improvements in our unsecured portfolio, which was down 23%, reflecting underlying improvement, as well as the benefit of debt sale activity. While in the secured portfolio, the impairment charge is in line with our experience in 2012. In Commercial, the 48% reduction to GBP 0.7 billion is largely due to lower charges in non-core, while the increase in the core is primarily driven by collective unimpaired release in the first half of 2012, which was not repeated this year. In Wealth, Asset, Finance and International, impairments fell 55% to GBP 0.5 billion led primarily by lower charges in the non-core Irish portfolio, which is now 64% impaired and 73% provided for. For the full year, we expect the trends seen in the first half to continue, leading to a substantial reduction of impairments in 2013 as a whole. Moving on to legacy. On PPI, the volume of complaints continues to fall, and in line with our expectations. Average monthly complaints received in Q2 were approximately 12% lower than Q1 and around 40% lower on the second half of 2012. Costs in the second quarter, however, continued to be higher than expected, partly due to a number of one-offs, such as acceleration of FAS cases and a VAT ruling. We've also seen higher uphold and settlement rates, and revised up our estimate of future administration costs. As a consequence, we have increased the provision by GBP 450 million, which comprises around GBP 250 million for increased redress costs and GBP 200 million for additional administration expenses. As reported in the IRS, we've also been referred by the enforcement team at the FCA through investigation on our complaint handling process. We've made a provision of GBP 50 million with regards to the likely administration costs of this exercise. This brings the total PPI provision to date to GBP 7.3 billion. But then the number of risks and uncertainties remain regarding the ultimate final cost. As of the end of June, though, approximately GBP 1.7 billion of the total provision remained unutilized. On the balance sheet, as already mentioned, we've seen continued growth in core loans and advances in Q2, and a return to growth in the first quarter of this year. This has resulted in GBP 3 billion of core loan growth across the half as a whole, and this is after a GBP 0.7 billion reduction following the disposal of our core International Wealth operations. Elsewhere, we have continued the process made over the last 24 months in the derisking and strengthening of our financial position. In the first half of 2013, we've grown deposits by GBP 8 billion and reduced non-core assets by GBP 16 billion. This has enabled us to repay our LTRO funding of GBP 11 billion and reduce our wholesale funding by GBP 13 billion in the first half or by 27% over the last 12 months. These actions have led to a 13% year-on-year reduction in RWAs, which is ahead of the 9% fall in total banking assets, and which also includes a 41% reduction in non-core risk-weighted assets. Looking at non-core. The portfolio now stands at GBP 83 billion, with the reduction, since December, of GBP 17 billion or GBP 16 billion after currency effects, significantly ahead of plan, and again driven by non-retail assets which were down by a quarter. We continued to achieve these reductions in a capital-accretive way, releasing GBP 1.6 billion of capital in the half. The reduction in our non-core RWAs was 24% and ahead of the 16% reduction in total non-core assets, and clear evidence of the continued derisking of the portfolio. In terms of reduction, GBP 12 billion was in non-retail, with GBP 5 billion in Treasury assets, including GBP 3 billion of U.S. RMBS, GBP 2 billion in International corporate assets, GBP 1 billion in other corporate portfolios and GBP 4 billion in U.K. commercial real estate, which is ahead of the run rates seen over the last 2 years. The sale of our Spanish Retail banking operations was a primary contributor to the GBP 3 billion reduction in Retail assets. Given this accelerated progress, as Antonio mentioned, we are now targeting non-core assets of less than GBP 70 billion by the end of 2013, 1 year earlier than previously expected. Within this, we expect non-retail assets to be less than GBP 30 billion by the end of 2013 and less than GBP 20 billion at the end of 2014. Given the expected size of the non-retail book, it's our intention to cease separate non-core reporting at the end of this year. And finally, on capital, we continue to remain confident in our capital position and outlook. As previously announced, we expect to meet the PRA's capital requirements without issuing equity or additional caucus. We've already covered GBP 5.1 billion out of the GBP 7 billion requirement, and remain confident in closing the remaining gap. With the actions we've taken in the first half, our fully loaded core tier 1 ratio now stands at 9.6%. The improvement over the half year was driven by underlying profitability and RWA reduction which added 130 basis points, while business disposals contributed 80 and a further 60 came from the payment of the insurance dividend, all of which more than offset the adverse impact of pensions and other items. Given the progress we've made in the first half, we now expect a fully loaded core tier 1 ratio of about 10% by the end of 2013. On current rules, our core tier 1 ratio improved to 13.7%, and our total capital ratio to 20.4%, already well in excess of the ICB's recommendations. Again, all ratios have benefited from underlying profitability, RWA reductions and accretive non-core disposals. In terms of leverage ratio, the group's fully loaded tier 1 ratio increased to 4.2% from 3.8% at the end of 2012, and when excluding grandfathered tier 1 to 3.5% from 3.1%, and both ratios are obviously in excess of any proposed 3% minimum. As a result of the significant progress made in strengthening the balance sheet and our substantial improved statutory financial performance, we now expect to commence discussions with our regulators in the second half of this year on the timetable and conditions for dividend payments. That completes my review, and I would now like to hand over to Mark.

Thank you, George. Good morning. I'll now give you a brief update on progress with costs in Simplification. At the midyear, our total costs were GBP 4.75 billion, a 6% reduction on the first half of 2012. Once again, the key driver is Simplification savings, which are GBP 321 million higher at GBP 619 million. Costs are also GBP 41 million lower in this half, following the sale our stake in St. James's Place in March. All of this is offset partially by inflation and other cost movements of GBP 56 million, and increased investments in our strategic initiatives, up GBP 23 million to GBP 158 million in the half year. As you can see from the chart at the bottom of the slide, we are maintaining our strong downward trajectory on costs. If you do the sums, you'll see that this suggests cost will be higher in the second half than in the first, which is our normal pattern because of certain costs that incur in the second half like the U.K. bank levy. We remain, however, on track for the full year figure of GBP 9.6 billion. Looking further forward, we guided that the first quarter results that we now believe we will reduce costs to around GBP 9.15 billion in 2014, assuming a half year of cost from Verde and in 2014. Now looking at Simplification in a bit more depth. As I've highlighted before, Simplification is not just about cost savings. It's also central to our strategy becoming the best bank for customers by making improvements to the customer experience. I previously spoke about some of the significant changes we made to customer processes, and on-screen, you'll see some further examples that demonstrate further progress in the last 6 months. Our new automated ISA transfer system is making a real difference for customers. At the beginning of the year, in addition to the industry-wide ISA switching process, we also implemented a fully automated ISA setup process. 80% of requests are now completed at the first point of contact in our branches or on the telephone without the need to complete a paper application. This brings obvious savings in time for both our customers and ourselves. For fixed term deposits where we have over 500,000 maturities each year, we have rolled out a fully automated process that reduces the setup time by 85% from 20 minutes to just 3. And this includes capturing the customer's instructions for maturity at the outset therefore helping saving time at the end of the deposit term. This is successfully launched into Halifax and Bank of Scotland, which have the majority of our fixed time deposits with Lloyds TSB to follow shortly. In the digital space, we deliver improved functionality to our customers on a 4 weekly cycle. As a result, our strong online growth continues, with an increase in net new active internet banking customers to over -- of over GBP 1.1 million in the last 12 months to more now than GBP 10 million, including 3.7 million mobile banking users. On the 28th of March, we hit a new peak of 4.97 million log-ons in a single day. On an average so far this year, 2,302 customers have logged onto our internet banking service every minute, and that's a 15% increase on the same figure last year. We're also seeing 30% of internet log-ons now coming from mobiles and tablets, with over 7 million mobile transactions completed per month and that's more than doubled on this time last year. This growth in digital, and in fact, we now have nearly 14 million paperless current accounts and savings accounts has also helped contribute to further reductions in our paper and distribution costs. In telephone banking, we've made further improvements to our automated call routing and speech recognition software, which we call Say Anything. Nearly 2/3 of all calls are now being fulfilled in the automated service. And if customers do need to talk to someone, our enhanced routing capability directs them more quickly to the right person. The improvements we are making are perhaps best evidenced by the response from our customers. On the left, you can see the data published by the FCA on banking complaints, which all the banks report to the regulator. In each reporting period, we have demonstrated very clear progress. And at annual results I announced we were bringing forward our target of 1 complaint per 1,000 accounts from the end of 2014 to the end of 2013. As you can see from this slide, we've achieved this new target early. Lloyds Banking Group achieved an overall figure of 1 reportable complaint per thousand at the half year. And at the brand level, both Lloyds TSB and Bank of Scotland achieved 1 complaint per thousand. Halifax actually achieved 0.9 complaints per thousand. Similarly, we're making strong progress in improving satisfaction scores across all our brand channels, with net promoter scores for the group up by over 10% in the last 6 months. Looking now at how we're simplifying the group. We continue to make strong progress in the way we source third-party goods and services. The group's total supply base has reduced further to fewer than 9,600 suppliers at the midyear point. This is a 47% reduction since the start of the program, and over 80% of our spend is now concentrated with the top 100 suppliers. Given the success we've seen in reducing supplier numbers, we have now tightened our target from the original figure of 10,000 by the end of 2014 to just 8,500. We've also continued to streamline the organization. In March, we further consolidated our mortgage systems, so that we now process mortgage accounts totaling GBP 236 billion for all our core brands on 1 single platform. We've also delivered a new integrated learning and development system, with over 7,500 training options available to our colleagues all in a single place. If we look at how all this activity is flowing through into Simplification savings, we continued to make excellent progress. As at the end of June, as Antonio and George have mentioned, we have realized annual run rate savings of GBP 1.16 billion. This has increased to GBP 313 million since the end of 2012 and nearly GBP 650 million since this time last year. This is slightly ahead of our plan at this stage of the program, and we remain well on track to meet our targets of GBP 1.9 billion annual run rate savings by the end of 2014. So to summarize, the strong downward momentum on cost continues. The Simplification program, which is a major contributor to this, is going well and is on track to deliver against all its targets. Thank you. I'll now hand it back to Antonio. António Mota de Sousa Horta-Osório: Thank you, Mark. Before we move to Q&A, I would like to close this morning's presentation with 3 slides to summarize our performance, to draw together our guidance and outlook and to end with a reminder of our strategic focus. Underlying profitability in the first 6 months improved substantially across all divisions and all lines of the underlying P&L, as did the Group's statutory performance and we continue to deliver well ahead of plan in many key areas. 2 years ago, we presented our strategy to you, structuring the plan around the 4 key pillars of strengthen, reshape, simplify and invest. Our delivery of this plan gained momentum early on and has been accelerated despite economic and regulatory headwinds, legacy issues and the challenges posed by the turbulent funding markets of recent years. We present our half year results to you today, as a company that has been substantially transformed, whilst retaining and harnessing the great strength of our strategic assets, our brands and our people. The progress we have made in reducing the non-core in this and previous periods has meant that our Group results increasingly reflect the strong profitability of our core franchise, where returns have grown and remained significantly above the Group's cost of equity. We continue to simplify the business to the benefit of customers, colleagues and shareholders, reducing costs and enhancing the franchise. I expect the momentum behind the delivery of our strategy to continue to accelerate. We are on track to meet our existing targets for 2013 and are pleased to be able to upgrade guidance in 3 key areas. The momentum of the Group is strong, with the growth of core lending set to continue, while the Group margin is expected to improve to close to 2.10% for the year. As you have heard, we have, today, accelerated guidance for the reduction of non-core assets in a capital-accretive way. Simultaneously, the ongoing prudent management of risk will deliver a substantially lower impairment charge in 2013. This combination of accelerated derisking and the Group's improved financial performance means that we are now targeting a fully-loaded core tier 1 ratio of above 10% by the end of this year, and we'll now seek discussions with our regulators regarding the timetable and conditions for dividend payments. And finally, I would like to close this presentation with a brief reminder of our strategic focus in becoming the best bank for customers, as set out 2 years ago. We are a U.K.-focused retail and commercial bank, which places customer needs at its heart in order to help Britain prosper. The lending and debt financial services this Group provides to the U.K. form an inextricable link between the success of our business and the health of the U.K. economy. We undertake this responsibility prudently, primarily funding this flow of credit to the economy through the savings and deposits the Group safeguards for its customers. We strive for greater efficiency and simplicity, creating an organization that is lean, agile and responsive to the needs of our customers. Through this low-risk, high-efficiency model, we expect to achieve a substantially lower cost of equity, delivering strong, stable, sustainable returns for our shareholders and allow the U.K. taxpayers' investment in the Group to be repaid at a profit, which is now a reality. Thank you. This concludes our presentation. And I now would like to invite you to post any questions you may have. António Mota de Sousa Horta-Osório: Okay. Tom, please. Can you start?

It's Tom Rayner from Exane BNP Paribas. And 2 questions, if I may, please. And the first on the discussions you'll be having in the second half with the regulator on dividends. Clearly, you passed the recent PRA stress test, both on leverage and on sort of the Basel metrics. And you're going to be fully loaded Basel III, above 10%, by the end of this year. So I'm just interested to know what you think the points of discussion will be around and what sort of constraints there might be? And I have a second question, please, on margin. António Mota de Sousa Horta-Osório: Right. Well, let me start with the first, and then George can elaborate and also tell you about margin. I mean, this is not new. I mean, we are repeating to you for 1.5 years now that we would wait for the CRD IV paper to be published in order to see European law relating to capital. And second, after that, we would wait to see what the PRA interpretation, especially in terms of the insurance deduction would be at local, national level. The CRD IV paper trailed a lot, as we all know. It was finally published in the first quarter of this year. And then, in June, consequently, the PRA also clarified their policy in terms of the insurance deduction. And therefore, we are moving to stage 3 of what I have been repeating, which is we now together, as you say, with the finishing of the stress test measures towards the end of the year, we will now start engaging with the regulators to have a timetable defined for dividends, which we will then share with you as promised since some time ago. Because the 2 first stages are done, we are going to start on stage 3.

Okay. And just on the margin. Obviously, the structural hedge is quite large for a bank like yourselves, and it has moved quite significantly in the last sort of few periods. And I just wonder if you could just say something about your sort of margin guidance to sort of give us comfort that it's not just about sort of calling directions of bond markets that it is actually -- this is just part and parcel of your overall sort of management? I'd just like to understand a little bit more about that, please?

All right. Tom, yes. I mean, obviously, as you all know, the original guidance for this year was around 1.98%, which we've now basically come out and say we now expect to be close to 2.10%. Now, that pickup, what it was, was a number of things going on. And so, it broadly falls into a couple of buckets. One, basically, I think is the our out-performance in terms of the management of this sort of liability assets spread. And put simply, I think in terms as we've moved through the year, liability pricing has gone lower than we were anticipating -- and I think on the assets side, there has been more resilience than we've anticipated. So that is about half of differential. The balance, as you said, comes predominantly from what we've done with the structural hedge. Obviously, as I got into, we have a structural hedge for the noninterest-bearing liabilities. As you recall, last year, we were a big seller of gilts and into sort of Q1 of this year. We're basically being sort of under-invested in terms of our structural hedge. So we came into the year basically in about a, sort of, 50% uninvested position with regard to that structural hedge. So we just basically -- we took the action in the gilts, and we've been letting that roll off. What that obviously gave us was the ability, the flexibility to respond and to restore, put in -- replace that hedge when we thought the market was attractive, and we were sellers at the sort of 180s, 170s. When the market got up to 220s, we basically redeployed that excess liquidity and put that to work. As you would expect, we have very strict guidelines around term, around amounts, et cetera, with very strict control of the amount that we use and the durations that we extend to, we are obviously significantly set inside of those and we still have some headroom on the hedge. But that was the sort of background and that's where the pickup that you've seen come through. António Mota de Sousa Horta-Osório: And we are still -- as George has said, we are still positively exposed to interest rates increasing. So if they increase further, we'll do more of the hedge. If they decrease on the other hand, we'll have locked in what we have at much higher yields, basically.

It's Mike Trippitt at Numis. Can I just -- on the margin question, just ask you about your liquidity portfolio and how you sort of see that develop. Obviously, it has come down, and that's part of -- I guess, part and parcel of the gilt sales earlier in the year. But as growth restores, what sort of size do you think that gilt portfolio -- or, sorry, the liquidity portfolio should be? And whether you see a sort of tailwind effect as you switch into high-yielding assets going into next year?

There's a sort of a tailwind effect in terms of eligibility for that liquidity portfolio, as you can go into sort of Tier 2-type securities, which we've not been a big player. And then, that's something that we'll be looking to develop. So we would expect to see a slight yield pickup from that. But with regards to quantum, I wouldn't expect to see any sort of material reductions in the size of the liquidity portfolio that we currently hold. António Mota de Sousa Horta-Osório: Okay. Any more questions?

Chintan Joshi from Nomura. Can I check with you how your discussions are going with the Treasury on the Help to Buy scheme? There are a number of unknowns in that -- in the mortgage guarantee scheme, particularly around capital charge and what kind of fee they'll choose to charge for the guarantee. If you could give us some sense of how that's going. And then, I have another. António Mota de Sousa Horta-Osório: Yes. Well, let me start by saying, I mean, we were the first bank to publicly endorse the scheme because, as I have said already, we think it is very positive for the U.K. economy. House prices until 3 months ago were going down across the country, and there was a real difficulty for customers with deposits of less than 25% to be able to buy their first home. I do believe that the difficulty is very much tied up with the uncertainty created on capital with all the discussion post FPC. And therefore, it makes a lot of sense, in my opinion, to support temporarily the housing market, to address that market failure in a way, which I believe, will probably drive house prices in the next year at -- back in line with inflation, 2%, 3%. Mortgage stocks are growing only 0.7% according to Bank of England numbers, which is extremely low, the lowest over the last 15 years. And this should stimulate first-time buyer demands, increasing stock mortgages, probably by 2, 3 percentage points next year. And more importantly, given this start with the new first-time buyers, this will drive new builds. And new builds in the construction sector are the largest drivers of employment in this country. So I strongly believe this is the right thing to do on a temporary basis, on an also optional basis to sustain a market to recover to its normal position, and this exists in many other countries, for example, such as Canada where it is even compulsory. So the discussion now is exactly how much the government is going to charge, as you said, for this. And the view that we are discussing with the government is the government should charge the capital costs of the credit risk between 75% and 95%, which we estimate on average to be around 30 basis points plus the administration costs of running the scheme. Given that, 2 months ago, when the scheme has been announced, the difference in price between a 75% LTV mortgage and a 95% one was more than 150 basis points. You can see there is a lot of leeway to be able to pay the capital costs plus the administration costs and still lower prices in order to make these mortgages more affordable to customers. So I really think this will be set out around the government recovering the cost of the scheme, and there will be room for prices to be lower and for customers to be able to jointly have a deposits, lower cost of mortgage, and this will stimulate, as I told you, employment, new build, et cetera.

And I mean, you did indicate that 150 bps can come down. I mean, how should we think about that coming down below SVR and the risk of re-mortgaging picking up because of that? It's been pretty resilient so far... António Mota de Sousa Horta-Osório: Well, the interesting thing is that you are replacing, theoretically, lower prices but with zero volumes by much bigger volumes at still very attractive margins. So you have to bear in mind that almost -- there is no market above 75% LTV mortgages. Of course, as those prices come down, people in SVRs will have more trends to switch, but that has to be coupled with increases in house prices, which will take a long time. So you are right. There will be some additional attrition, which is normal. We consider ourselves neutral in that position because there are people with very big books in the market and much higher SVRs than us. So we should -- you should see us in a relative position. Yet I believe that the additional volumes, at healthy margins or adjusted 75% LTV, would be beneficial for the banking sector given that we don't do almost anything. There is a repressed demand above the 75% LTV level.

And the second question was on the structural hedge again. Any chance you could give us a sense of how much of your NII comes from the hedge, so we can think about how much is business NII and how much is hedge NII? António Mota de Sousa Horta-Osório: We will consider it. Okay. Any more questions? Let's change to this side, please. On the second line, second row.

Peter Toeman from HSBC. Going back 2 years you -- when you did your initial presentation of the market, you presented a slide where you said that the Group margin could be between 215 and 230 basis points by 2014. I suspect people sort of rather ignored that slide. But with the upgrade today, I want to ask you if you still feel that's a realistic expectation? And to what extent does it depend on, maybe, short-term upward movements in base range? António Mota de Sousa Horta-Osório: Yes, yes. That's a good point because, as you know, I mean, we make a strong point in going back to what we announced 2 years ago because we like to say what we think and then be measured against what we said. We have upgraded that guidance slightly to 220 to 235 in the way not as an upgrade, but as a technical point in the way we measured it. So that 215 to 230 is now 220 to 235. And as you saw, our core margin is now above this level. Hence, given that part of the non-core assets will return to the core -- and I'm referring to the self-certified mortgages, which are really not bad assets, they are our customers, use our current accounts, our credit cards, and those are GBP 30 billion. I think that, that guidance is absolutely compatible to where we will be. Hence, we do not need significant increases in interest rates, as you see from the combination of the 2 at the moment, to reach those levels. I would agree with that. On your right? Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division: This is Chira Barua from Bernstein. There are 2 questions that I have. So one is on leverage ratio. So I guess, with leverage ratio implying a different kind of return profiles on your per docs [ph] do you see a significant change in your portfolio business mix in the next 3 years? That is question #1. And the second is if could you just give us a little more color on what exactly you're doing in credit cards and personal loans, the 2 areas where you're kind of on the ball in the last 3 years? That will be great. António Mota de Sousa Horta-Osório: Right. Well, on leverage ratio, given that we are a balanced -- a well-balanced, if you want, retail and commercial Bank, as you saw in George's numbers, we don't have any -- it is not an operational restriction for us. We are at 4.2% now at around 50 basis points since the start of the year. The trend continues to be upwards, so that will not be an effective restriction for us going forward. And therefore, I don't see any business mix change as a consequence. What I think is, which is interesting, I believe, is that given it will be an operating restriction for others, especially in the building society-type bank, that will probably have an impact on their business mix or their prices in mortgages, which might be beneficial. Second, on credit cards and UPLs, you are absolutely right, we are not happy about our position in UPLs and credit cards because while we have 25% of the U.K. retail market in savings, current accounts and mortgages, broadly speaking, we are at 1/2 that level in personal loans, credit cards, insurance, asset management and OOI of companies-related products, such as interest rates, protections, FX, transaction banking and capital markets. So we have a lot of room to grow in those 8 areas, just to give you 8. We have therefore set specific internal growth initiatives around these areas, and we expect these portfolios to start to grow next year and then to accelerate its trajectory. Here -- sorry, second row here. I'm sorry. I'm benefiting the first row. So next time, you'd have to choose the first rows first.

It's Rohith Chandra-Rajan from Barclays. I wonder if I could ask 2 as well. Actually, the first one, a follow-up on the dividend question. And I do very much appreciated your comments on dividend are subject to discussions with the regulator. I was wondering if you could share your views on what you think the right sustainable payout ratio would be given the returns on growth you expect and also whether you would expect to move there immediately on dividend resumption or whether it would be a phased approach? António Mota de Sousa Horta-Osório: Right. Well, I don't want, as I said, to give any more specific indications on timing in the short term. But speaking of the long term -- sorry, the first part of your question, I think it is rather obvious that given our increased returns substantially above the cost of equity already on the core and with the non-core disappearing quickly in a capital-accretive way, Lloyds will be a high-dividend paying stock in the future because a small portion of our earnings will be necessary to sustain loan growth and all the rest, which basically derives from being a more efficient bank than the peers with a lower customer income and the lower risk bank and therefore with lower provisions than the peers, that will be able to flow into shareholders with a high-dividend paying stock for sure. We'll see how much in due time, okay?

I'm sure that was all I could expect from that question. And the second one, hopefully, maybe a little bit more just on the non-core -- very helpful disclosure in terms of the asset mix of the residual non-core and the RWA mix. I'm just looking at the performance in the half year. The Retail business is virtually breakeven non-core, and the AQR generally in non-core is coming down. Just wondering if you could sort of give some indication of what particularly of the retail part of non-core you mentioned moving that back into core and the impact that will have on the margin? Just if you could give some indication of the profitability of the Retail elements of non-core that you expect from your next year on? António Mota de Sousa Horta-Osório: I can tell you that the movement of the self-certified mortgages into core will not affect the margin by more than -- less than 10 basis points. It's not very relevant. So the GBP 30 billion coming back into the core would not affect the core margin by more than 8, slightly less than 10 basis points, okay? Manus?

It's Manus Costello from Autonomous. You mentioned that you got a total capital ratio over 20%, which is well in excess of any [indiscernible] requirements you might have. Should we assume that, going forward, you'll be retiring significant amounts of your sub-debt level [ph] to bring you back down to 17%? And what kind of NIM support could that provide because, presumably, that's going to be NIM-accretive as you go through that process as well? António Mota de Sousa Horta-Osório: It is a difficult question. And therefore, I'll leave it to George.

And I will duck here. So we start in a good position, in that we're 20.4 and as we said, that that's over and above the requirement. We also will get a side benefit from in terms of -- since we suffered pain from what is now the prescribed treatment for insurance businesses, we're actually going to get a benefit in terms of the Tier 2 treatment. So we actually think the risk go up as you said to retire and to come in at a slightly leaner position in terms of the total capital. But I'm not going to give you a specific amount or tell you, which particular issuances we will be targeting, but you're absolutely right.

Presumably, for the Group overall, that would be NIM-accretive over the next few years, as you do that?

That is correct. António Mota de Sousa Horta-Osório: Row 3 here?

Andrew Coombs from Citi. I have a couple of questions on the margin and then 1 on PPI, please. Firstly, on the interest margin. Obviously, your 2.1% guidance for the full year points to an exit run rate for the second half of 2.2%, so just in treating that if that's entirely driven by the back book savings rates rolling onto the front book rates, as well as the lower drag from the structural hedge? Or does it also assume a further decline in new savings rates? António Mota de Sousa Horta-Osório: It doesn't assume any new further decline in new savings rates, no, it's a kind of where we are and rolling forward the points to be raised, as well as some of the other factors, such as the ongoing switch between core and non-core, but it's not making a, if you like, dynamic cause upon where rates go.

Great. And then, on the asset margin. You've seen a 9 basis points decline to 0.96%, and that's after 5 basis points decline in the second half of last year. So I know that's held up better than expected, but it is accelerating. So I'm just intrigued to know your thoughts there going forward. António Mota de Sousa Horta-Osório: On that point, and with the risk of being boring in my response to you, you have to understand that what we manage is the difference between the 2 because I strongly believe that in a country where the long-term deposit ratio is above 1, every units you fund, you have to go and get deposits for it. So what makes sense is to consider the difference of the 2 margins. And then, you have to consider that we have a multi-brand strategy, which enables us to be much more responsive, in my opinion, to changing customer needs and patterns in a segmented way. And we'll continue to do so. I.e., the fact that we have a multi-brand strategy gives us much more levers than others in the market in order to adjust our pricing difference of the 2 to the customer preferences through a differentiating strategy. And therefore, the trends that you saw in H1, in our opinion, are likely to continue over the next quarter or 2 quarters. So I don't like to give guidance on intensity, and I'm not -- but as George has said, what we saw in H1 is what we are extrapolating for the next 1, 2 quarters, and we are not seeing any different trends in the markets. On the contrary, as I just said, when I answered a previous question, I think the leverage ratio would be a natural restriction to many players on the mortgage markets, which might have implications on their pricing.

On PPI, one of your peers earlier in the week happened to flag that they would -- they'd achieve 2/3 of their active mailing and that the response rate on that to date is 24%. I don't know if you have the comparable figures for yourself, please?

We do. I think we have it buried in the back -- we have some sensitivities on the back of the R&S which talks about in terms of where we are through mailings and response rate. We're about halfway through. And if I'm quick enough and be able to turn pages, I could tell you what the response rate would be. I think it's around about 27%. So I think it's buried way on Page 132, which I presently may have not flicked through to yet.

And the active mailing there as well and the proportion of active mailing completed, is there as well, is it sir?

What is that? I will get back to -- what was the proportion for our proactive mailing? About 20 -- no, that was the response rate -- sorry?

53...

53. António Mota de Sousa Horta-Osório: More questions? Sorry. The lady on row 4.

It's Claire Kane from RBC. I've got 2 questions. The first is a follow-up on margin. The big delta this quarter was clearly the repricing of deposits. Could you give us an idea of the duration of those savings? Clearly, they're built up at the most expensive time. How quickly they are pricing lower, and how much more we have to come through on this? And my second question then is on the asset quality. The Group loan loss ratio is 57 basis points this quarter. You've guided, 2014, 50 to 60 basis points. Can you tell us if there's any reason we should see the core losses trend higher from here or if you potentially could see that come down? António Mota de Sousa Horta-Osório: George will answer your NIM and Juan on the AQR.

Yes. Claire, so I am not going to give the sort of details in terms of the duration and the particular tranches in terms of where the deposit pricing's coming through. We do, as I say, expect it to continue to come through for the remainder of this year. As we look into next year, some upward momentum, but a more muted level would be our expectation. And on AQR? Juan Colombás: Yes. And on AQR, in the first half, we have been 69, in Q2, we're in 57. We said 50 to 60. The core book is moving to the 40, 45 range. And our forecasted stability in all the portfolios, either the retail portfolios or the commercial ones. So we don't see any reason to expect changes in the core book. What we expect is the non-core to keep on reducing, both in size and AQR, so -- which is what is combining the improvement. The combination of both is improving the AQR at the back. António Mota de Sousa Horta-Osório: So you are correct that the guidance we gave 2 years ago was likely to be exceeded. Just before you. Yes, please.

It's Jason Napier from Deutsche. Two questions, if I may. Somewhat predict to be coming back on net interest margin. I appreciate the guidance that of the half-on-half improvement around half of it will come from structural hedge improvements and the like. Just looking at first half performance by division. Retail NIM was up 3%, commercial was up 30% and Wealth was up 30%. And I just wondered, given that if half of the benefit is from structural hedge, and that's driven by -- in a way, you've got industry deposits or behaviorally sticky deposits, should we expect most of the momentum in the second half to show up in Retail? And I have a second question.

You will definitely see more of it coming through Retail. That's correct, yes.

And then, perhaps a question for Mark. In terms of cost saves and so on, you've obviously, as a firm, made a huge progress in taking down costs and a lot of that is very impressive. But I wonder to what extent you are limited by the capacity of an organization to be changed? And I'm thinking in particular about the nearly 13,000 people that are slow booked to central in the Group? How much of that is due to things like Verde? And whether you really do have just a multi-year process that stretches well beyond the end of next year from a restructuring standpoint?

I don't see any limiting factor in terms of the organization's ability to change. We've been at this for quite a long time. And overall, if we look in the longer sweep of time, we've reduced by 25% the size of the cost base, the size of the employee base over the last 5 years. And it is a very structured process. You shouldn't misread central for head office. For example, a lot of my businesses are partly classed to central. There's a lot of a very high functioning activity in there in the center. It's not all strategy and investor relations. And the organization generally does feel tight and more efficient these days, and it is noticeable I think in the organization. We got a clear line of sight till the next 18 months. I think, beyond there, of course, it's really about drawstring income and cost as we start income growth. Clearly we're seeing activity growth in the mortgage story, which we talked about balances, but the actual number of mortgage applications is much higher now than it has been for the last 2 or 3 years, and we've got more people doing mortgages. I mean, in our view, that's good cost. António Mota de Sousa Horta-Osório: Jason, I think on costs, I think it is interesting to just make a more strategic comment, which is we are decreasing nominal costs of this bank very quickly as you said. But we are the only bank in the U.K. which is not closing branches in net terms. So we are not, in our cost program, decreasing our future capacity of generating revenues because in the branches is where you have the sticky deposits when interest rates finally start to rise. And at the same time, all of our NPS scores in all 3 brands are going up, Lloyds being classified the best high street brand the last quarter. And the complaints per customer -- the banking complaints per customer halved in 2 years and are now a 1/3 of 3 out of the 4 of our main competitors. So I think this is the really important combination for you to assess because to cut costs is very easy. The problem's only you cut cost and then you have an impact on revenues when you cut cost at the expense of service. And that's why we are very comfortable that we will continue to drive costs down because the results on quality, on complaints and without closing branches gives us a lot of confidence that the program we are doing as markets playing is absolutely to benefit customer experience, and therefore, we can go even deeper in this direction. To your right, please. Raul Sinha - JP Morgan Chase & Co, Research Division: It's Raul Sinha from JPMorgan Cazenove. If I can just invite you to comment a little bit on the outlook for core loan growth. Obviously, it's up very nicely in the last 2 quarters. And I noticed your comments on funding every unit of loan growth with a unit of deposit growth. Should we expect the LDR to be the main driver of core loan growth going forward, sort of remaining around 100%, so deposit growth is what will drive your core loan growth? Or do you actually expect, given that Retail is going from negative to positive in the second half, we could actually see the LDR starting to move in deposit trajectory again ? António Mota de Sousa Horta-Osório: Right. Well, that's a very interesting question, and it has lots of questions within it. But the order is not exactly that. I mean, the order is we want to increase net lending in several segments of the country as we always did for the last 2.5 years in SMEs, which now accelerated to 5%. Given that we put SMEs together with mid corps last year in order to put the best practices done in SMEs to mid corps, both mid-corporates and large corporates increased in net terms in quarter 1, 1 quarter ahead of what we thought, given the best practice from SMEs. And second, the usage of the FLS, especially on the larger corporate segment where we have the funding cost disadvantage. And with FLS, we did not have it anymore. Therefore, we used FLS to get back those customers low risk and have more of the share of wallet of them in terms of LOI, right? So that happened 1 quarter ahead of target. We increased 1 billion net quarter 1, but that has been a mix of higher growth in corporates and still negative growth in mortgages because our commitment was to increase mortgages in quarter 3 after we achieved the 100% core loan-to-deposit ratio. In quarter 2, the growth doubled to GBP 2 billion, still including some negative but mild impact of mortgages. We already have now the applications of the mortgages, which will drive quarter 3 positive in terms of net mortgage lending. And therefore, on -- from quarter 3 onwards, you will see all of our segments -- so Retail, SMEs, mid corps and large corporates, increasing. In mortgages, we don't want to grow more than the market because we are already at around 25%, so we will grow with the market. On SMEs, and mid corps, it's a different story. We have 21% in SMEs, around 20% in mid-corporates. Other banks have 30 plus, and therefore, we want to grow our presence in SMEs and mid corps above the market like we are because the market is holding 3, and we are increasing 5 in SMEs and around 2 in mid-corporates. So you can expect on the corporate sector for us to grow more than the market. And then we will grow deposits in order to keep an 100% loan-to-deposit ratio, which is a restriction we think is prudent and wise to maintain. Sorry. You on Row #4.

Vivek Raja from Oriel Securities. So I have -- the first question was back to the margin and the second question on other operating income. So in terms of the margin and the Help to Buy scheme, I sort of got the implication from your presentations that actually, asset margins have held up better than you would have expected up until now. And I'm just wondering, when you think about the Help to Buy scheme, which parts of your mortgage stock you think would be most at risk and what the implication for asset margins there would be, and how much you'll defend your market share basically, assuming there's a real uptick in competitive pressures. And the second question on other operating income. I note from St. James's Place results yesterday that they have picked up a lot of high net worth bank advisors recently, a lot more than what they would do in the past. I'm assuming that some of those have come from you. And I'm just wondering, how will you protect the revenue opportunity there or the revenue that you generate from those clients when you've lost these bank advisors? António Mota de Sousa Horta-Osório: Right, right. Well, that's quite interesting in terms of conceptualization. I mean, you are right in everything you said, by the way. What is interesting is, again, you have to consider the asset margin minus the deposit margin because we don't think on them separately. I mean, other banks do asset pricing and deposit pricing separately, and we don't. We do it together, and we do it every week. So we don't do it on a monthly basis because we think it's one of the most critical decisions that we should do on the Retail space given the proliferation of products and the different channels through which customers can access products. It's critical to do it together on a monthly basis at the top of the organization. And therefore, I do expect, as you said, asset margins to come under pressure, more pressure because the FLS is driving interest rates lower, which is macroeconomically the right thing to do. When you wanted to stimulate an economy, you lower interest rates in order for people to have a lower opportunity cost of consuming or investing now versus saving for the future. But given, as we discussed, that deposit margins have been going down even further because people are still saving a lot, and therefore, deposits are growing and increasing their growth rates and with the FLS also available, deposit prices have been coming down. What is critical for the bank's profitability is to properly manage the difference of the 2, right? When some other players may tell you, "I'm increasing deposits substantially." But then if you pay substantially, you have an impact on profitability. So the important thing is to manage both volumes and the difference of the 2 margins. And I believe, as George also told you, that we do not see a different pattern for the next 3 to 6 months than the pattern we saw in the past. And on top of it, which I already said twice, I think that the leverage ratio may impact some players' pricing policy positively in terms of the industry, you see.

Okay. Your market share is more important than the margin? António Mota de Sousa Horta-Osório: Yes, but I already told you that we are going to rise mortgages from quarter 3 onwards in line with the market, which means that I'm going to keep market share constant. So of course, this puts a lot of restrictions on our management, but that's what management is about. It's to manage many restrictions in a holistically coherent way. So we'll keep market share constant. We'll manage the difference of the margins as well as we can, and we will do the multibrand strategy appropriately to maximize that combination. On the OOI, which you are absolutely right, I think it's fair to say that given our absolute focus on our conduct strategy and treating customers fairly where, as you know, the industry suffered a huge shift in the last 2 years, and we were the first in announcing our strategy of being best bank for customers, not only in words but based on the lower cost to income because the lower cost to income is the key weapon in order for us to be able to offer better value for money for customers, which is absolutely coherent with the conduct strategy. And in implementing this conduct strategy, there were, like in the extreme case of PPI, there were behaviors which we changed, and there were products which we no longer do. And one of the examples, which you mentioned, is the advice below GBP 100,000, which we don't do any more, in line with what the FCA regulated, and of course, that translates into less LOI for the bank. But we are absolutely determined to pursue the right conduct strategy. And the fact that, that will translate into less LOI in the future versus what otherwise would be is something which you should include into your expectations as well, right? But again, it's absolutely -- we will follow what is right to do for customers. So you have those examples which you mentioned, which are right, but our response is not to protect, for example, the advisory 700K is we will not do advise 700K. There will be execution only, and we will focus on providing the lowest-cost execution for our customers to be able to transact with us at the lowest possible cost and serve them through that approach. Yes, please. Now I have to go to the longer rows, please. To the farther-away rows, yes.

It's Joe Dickerson from Jefferies, and I don't have a question on the margin. The... António Mota de Sousa Horta-Osório: Really?

Basically, if I look at your commercial segment, you released GBP 1.6 billion from the stock of provisions. It looks like it was on the back of U.K. CRE. Do you see scope for further releases going into 2014? And could you discuss some of the underlying dynamics of that industry? And then I suppose, secondly, it begs the question as to kind of the lag in the Irish business and to when that business may cross an inflection point from the standpoint of what you've reserved for business versus potentially releasing reserves from the Irish business? António Mota de Sousa Horta-Osório: Maybe Juan can start with the Irish business, how we see it and how the transactions. Juan Colombás: Well, you know that we are close to the Irish business, so we are not lending there anymore, and all there that is booked is in the non-core, and we are managing for exiting these portfolios. The evolution of the Irish assets in the last quarter have been, in the Retail space, positive. So Q2 have been -- we have had price indexes in the positive territory for the first time. And real estate is more difficult because the overhead of assets is bigger. Hence, you are seeing in the P&L still provisions in the Retail -- sorry, in the Irish books. Our expectations is that we think that the economy is flat, flattening, not bottoming. So for the coming quarter, we expect this more normalized trend for the coming quarters. What -- that's basically what we are seeing there. António Mota de Sousa Horta-Osório: Okay. And George, can you speak about CRE?

Yes. The first bit was about funds to be collected, so the commercial disposals and gains thereon, which I -- assuming by this, I mean, we done a number of things in the year in terms particularly on the non-core book, the rundown of that in terms of -- we're down about GBP 4 billion on the CRE. We also, as you know and I think which you refer, things like the disposal of the U.S. RMBS, which did produce a significant gain. I'm not going to sort of speculate on individual transactions, on what we might or might not do. What I would say is, collectively, across that non-core book as a whole, as we sort of bored you in the past, we will continue to do that on a capital-accretive fashion. That doesn't mean every single disposal will be capital-accretive in every quarter whatever. But over the course of 1 year, we will basically do that rundown, do those disposals in a way that adds to that capital base. But I'm not going to sit here and tell you what gains might -- what additional gains might be locked up in some of those disposals going forward. But I would reiterate our commitment to -- and as you've heard all the targets from today, in terms of accelerating that rundown, and do it in a way which is good for our capital base. António Mota de Sousa Horta-Osório: We have seen positive trends in the U.K. CRE market in the last month. And then you can see that the reductions that we are doing in the U.K. CRE books have been bigger than the previous half. And so this is helping to do more transactions, so we are confident that we will be beating. Okay, more questions? Yes. And then afterwards, Chris, younger, first lane.

It's Fahed Kunwar from Redburn. And I had a question about the non-retail -- or sorry, the Retail portion of the non-core book that is eventually go in, off for FY '13. And obviously, you don't make much of a loss in there right now, but the non-core charge as a whole is coming down. And I was wondering, how much of the non-core reduction is in that Retail portion? Where does the impairment charge go? And I guess the ultimate question is -- without asking for a full P&L of that Retail business, that can have 0 ROTE on that business at the moment. Is that increasing as the impairment charge reduces in that business? And what kind of drag do you see on the kind of total ROTE from that as have seemed to the core business? António Mota de Sousa Horta-Osório: Let me just tell you what we have there and then George will tell you about the impacts. So debt portfolio, the non-core Retail assets basically includes -- basically include 4 -- 5 portfolios. They include the self-certified mortgages or the biggest one that I referred to, the GBP 30 billion which will come back to the -- to Retail core for the reasons discussed. Then you have Black Horse, GBP 4 billion, which is a great business. We totally revamped the business, lowered the costs, better risk approach. It's very profitable now, and it will go into the Asset Finance business like we already have their legs out of these, and that will make part of our core Asset Finance book. So those 2 will go into core. And then you have 3 portfolios, which are non-core and which we will exit ourselves. One of them is Australia where we have some Asset Finance activities in Retail, which performed very well, but they are non-core. Second is -- and it is -- these are around GBP 4 billion. Second, you have Netherlands where we have around GBP 6 billion, which is basically a mortgage origination business, which performs well, no issues there, although the Dutch economy is getting worse. The mortgage behaved well. It's non-core, so we'll have to decide in due time what we can do with that. And thirdly, which is our worst portfolio, as I have always said, you have the Retail Irish mortgages, which Juan referred to. And the 2 first ones will come back to the core. The 3 last ones, either we'll sell them or we'll see what we do with them. But we will continue to report them to you as a closed book so that you can see the impact, the trends. Everything will be transparent. We will just not report the whole as a non-core book because the non-core assets will be less than 5% of the banking book, and therefore, they are not meaningful enough for you to have a non-core book as a whole. But we'll report the different portfolios, those on Retail and the non-core non-Retail so that you can follow the trends and the performance. We will continue to report them separately.

And those trends, I mean, I've answered the question correctly. I mean, again, without giving P&Ls, that will be a cautious yes in terms of the positive earnings trends given the levels of impairments previously taken and the expected coming through. But that will be a -- but it will be a cautious yes. António Mota de Sousa Horta-Osório: For example, when you look at that part of the worst book, which is the Irish mortgages, you should bear in mind 2 things. We are the only bank in Ireland that has an impaired ratio, a declared impaired ratio in mortgages, which is bigger than the 90-day NPL ratio, which means that we are conservative in the way we consider a mortgage as impaired. All the other banks have a higher ratio in 90 days overdue loans than the impaired ratio they declare. And second, on that conservatively declared impaired ratio, we have 72% coverage. When you put the 2 combined, that is double the coverage of any of our peers. And that's why if you look quarter-by-quarter, they have been catching up and doing increasing provisions, and we have been doing less and less provisions.

And just advisor [ph] then your total non-core FY '14, you said less than GBP 20 billion on the non-Retail portion, and the Retail... António Mota de Sousa Horta-Osório: No, no. The less than GBP 20 billion will be the non-Retail portion, yes. Sorry.

Yes. So your Retail portion is probably going to be about -- it was GBP 12 billion on Ireland net, so about GBP 22 billion, so you're about GBP 40 billion non-core in FY '14 broadly? António Mota de Sousa Horta-Osório: No, because GBP 34 billion, so the self-certified mortgages plus Black Horse will become core. We want to keep them and grow them. We don't want to exit them anymore because the only reason why the self-certified mortgages have been classified as non-core is because we don't allow people to self-certify their income anymore, as you would agree. But after 5 years, those cohorts have been behaving okay. They are our customers. They have our credit cards, use our current accounts. They are part of the Retail portfolio. So they will come back to the core. And the impact, as I said, is less than 10 basis points on the margin. And Black Horse, we totally revamped and restructured the company. And it will be part of the core Asset Finance business, and we will want to grow Black Horse. So you have to take those GBP 35 billion away. You'll only get the Dutch mortgages, the Australian Asset Finance and the Irish mortgages.

Perfect. One quick follow-up was that GBP 27 billion RWAs then, how is that split between the GBP 34 billion you're going to keep and the other bits you're not going to keep on the Retail side? António Mota de Sousa Horta-Osório: I will have to come back to you on that, okay? Juan Colombás: One point, we are now going to reopen the business in self-certified. It would transfer into non-core but to run on. António Mota de Sousa Horta-Osório: The one we are going to grow is the Black Horse. The other one will continue to run down. But we will treat the customer as a core customer because they have more products with us, as I just said. We'll come back on the lot of that. I don't know that number, about 8?

Yes, it's about 8 [indiscernible]. António Mota de Sousa Horta-Osório: George knows everything, so...

Yes, it's about 8. António Mota de Sousa Horta-Osório: Okay, any more questions? No. You -- Chris, first. Chris, first. I'll come back to you.

It's Chris Manners from Morgan Stanley. Just 2 questions if I may. Firstly, on loan demand on the corporate side, obviously, that had been weak. Just if you could give a bit of a commentary on how you see business confidence and if you're seeing demand picking up in that area, which may again give a tailwind. And secondly, and you published this in the release, but under the PRA capital size, the 7% fully loaded prudent adjusted hurdle by the end of the year, could you give us an update on where you are on that ratio and on the leverage ratio on that prudent adjusted basis at the moment, just obviously the progress? António Mota de Sousa Horta-Osório: I'll answer you on the business confidence, and George will detail to you the PRA question. So on business confidence, it's quite interesting. I mean, I have said repeatedly last year that I was not seeing the U.K. economy going down. If you remember, I was not seeing a double dip. I was seeing the economy stable. From the beginning of the year, that I told you, I think the economy is recovering. And I can now tell you I think the signs are even stronger. So I do not expect a very quick or strong recovery. But the signs are much stronger in terms of breadth of the recovery and direction of the recovery. So I would say that in the beginning of the year, we thought GDP would grow between half and 1%. Now we see the growth at the high ends, around 1% and into net 2% next year. So much more certainty of direction and much wider signs in the economy. To give you an example, in SME lending, net lending, we are growing 5%, accelerating from 4%. We are growing in all regions of the U.K. except one. So everything is spread across the country. And business confidence, according to the studies that Lloyds has been publishing lately, confidence is increasing. I think the FLS was a game changer, not only in terms of the scheme itself but about the confidence that the publicity of the scheme being available transmitted. And I do believe, as I just told you, that the Help to Buy will be another game changer in terms of new buy housing markets, construction sector, employment. So I think the signs are good. But again, it will be a long and difficult recovery because when you to have to deleverage, the recoveries are also weaker, always weaker than otherwise. George?

And on the capital leverage ratio, it's versus sort of PRA. Actually, it's a slightly trickier area. But the -- in terms of the capital ratio, the 7% stress target that they put out it, it won't surprise you to know that given that we expect core tier 1 to be sort of north of 10% by the end of the year, we expect to meet that 7% stress ratio. Leverage ratio, if you go back to the start of the year and try and work out what the sort of PRA adjusted and apply headwinds or whatever you can come up with a number, it is a bit of a movable [indiscernible] since then, as you've seen over the first half of the year, we've grown our leverage ratios by about 4 or 5 basis points. And you've then also got the amortization of those headwinds that the PRA applies to those. So it's all the number we discussed with the PRA, but we expect to have the -- I mean, we expect to comply with all requirements that's placed upon us. António Mota de Sousa Horta-Osório: Yes, comfortably.

Yes. António Mota de Sousa Horta-Osório: Any more questions? There was a second question here. Nomura.

It's good to see questions there as appearing faster than in the past. Two follow-ups, one on DTAs. Clearly, a big DTA component deduction within your Basel III core tier 1. How should we think about that going away? If I read your annual reports, you said 2019 is by when you expected to utilize. That 2019 has been constant for the past 2 years. Clearly, things are improving now, so where is your judgment in terms of utilizing that DTA, how long will it take? António Mota de Sousa Horta-Osório: And the second follow-up?

Unfortunately, on NIM, you said the 220 to 235... António Mota de Sousa Horta-Osório: I'm not going to allow you any further questions.

You said the NIM guidance are technically -- or the 215 to 230 becomes 220 to 235. António Mota de Sousa Horta-Osório: Well, that's a correction we have made already like 1.5 years ago. It was a technical correction. It was not a guidance, not new guidance. So just it was a technical correction because if you remember in the summer of '12, we changed the internal pricing, and that was just a technical adjustment. It was not new guidance. Right, Charles? c

[indiscernible]

So easy. That one is skipped.

I mean, the DTAs -- I mean, we would still expect -- it's the 2018, 2019. And you would see we actually started utilizing them. We utilize part of that -- those assets this half year and then -- in return to profitability, which we obviously expect to be sustained. Gets a bit more complicated than that because you get things like pension deficits. You get movements in AFS reserves that add to the deferred tax asset as well. But 2018, 2019. António Mota de Sousa Horta-Osório: Okay. More questions? Any more questions? No? Yes. So -- sorry, you on second row. You have not asked a question yet. And then I'll go back to you Mike [indiscernible].

It's Sandy Chen, and I'm from Cenkos Securities. The -- and it's not a question on net interest margins. Actually, a question on insurance. Every 2 years, I guess you get a question like this. The PVNBP seems to be going down. I was just looking for more guidance on both revenues and costs because the income looks like it's flat or slightly down year-on-year. And given that the -- a lot of the growth is in, say, corporate pensions, which might be thinner margin. Is there -- what's the outlook in terms of... António Mota de Sousa Horta-Osório: It's good, we have an insurance expert here.

Look, I mean, the insurance remains a great business, and we've seen that from the results we did over the last few months. When you look at the dividend flows coming out of that Insurance business, and we took -- we paid up a dividend of about GBP 0.7 billion, so we obviously had that GBP 1.6 billion, that GBP 1.6 billion, which was essentially, if you like, excess profits that were sitting within the Insurance business. It didn't reflect 2013 earnings, so it continues to be huge and important part of this group and a source of capital and a source of cash flow. Within things like earnings past and the PVMP, yes, you're right. And in terms of where you see those ratios going, you'll see the increased proportion of this with the corporate pensions as a part of that, and that is -- that has a sort of slight diluted impact on that ratio. But the business remains very profitable. One of the great assets of that -- the insurance business is it's picked the fields that it wants to play in, corporate pensions, protection, general insurance and annuities. And unlike a lot of its brethren, it's stuck to them. And now then we have a great profit stream. You've got a business that's throwing out GBP 1 billion a year or so, and will continue to do so. If you look at their half year results, year-on-year, yes, I think, as we said in the presentation, there's been some benefits from assumption changes. But we've used quite a lot of that to offset with things like a persistency amendment as well, which has gone against that. But profits are up. The general insurance business remains a great business. Corporate pensions, in terms of profitability, is actually moving ahead of our internal plans. And we've actually got internally some great initiatives in terms of where we take the protection business and where we take the annuity business and develop that through the intermediary channel. So it's been a great profit stream and will continue to o so. António Mota de Sousa Horta-Osório: Yes. And on top of being a great business, as George says, we are also creating additional synergies.

Yes. António Mota de Sousa Horta-Osório: I mean, the fact that it's integrating in the group which are basically 3, given the customer behavior is changing with IDR, and you don't know in which direction exactly yet. The fact that we are the only integrated bank and insurance company in the U.K., I think, gives us an advantage in terms of being able to react quicker in an integrated way to customer behavior changes, number one. Number two, we have now fully integrated the operations people within the bank, and Mark joined the board of the insurance company. So 3,600 people in operations in the insurance company, of -- out of it, a total of 6 are now integrated in the bank in order to serve the insurance company through a TSA with lower costs that are already showing, as we showed it to you, in the performance of the insurance business. And thirdly, we are also creating financial synergies through the purchase of the insurance company last year and in the first quarter of this year of portfolios in the bank with high maturities, long maturities and higher yields, like social housing, student loans, project financing, and replacing that by the sale of gilts at very low yields, as George also mentioned to you. So on the top of the gilt we sold in the bank last year, where we made a GBP 4 billion profit, the insurance company sold GBP 4 billion of gilts replacing those by assets we had in the bank, which are no longer appropriate in the bank given the new liquidity rules but that are absolutely appropriate for the insurance company that has long-dated liabilities and matches those with long-dated assets. So those 3 synergies on top of being a great business are even creating additional advantages of us having an integrated insurance company within the group, which we are very pleased about.

And just one unrelated question on Verde. The -- just reading the language at the back of the big book, is there any change in that regarding the E.U.'s potential decision-making regarding the timetable on the disposal? António Mota de Sousa Horta-Osório: No. No, the existing timetable isn't until November. We have said in anticipation that given what happened with the co-op that we would, number one, open the bank because we have built the bank. The bank is now ready. And in -- on the 9th of September, you will see the TSB Bank on the high street, enter a massive advertising campaign. You'll see all the branches changing. The TSB Bank will split from the Lloyds TSB. You'll see Lloyds Bank and TSB Bank on the high street on the 9th of September, with a separate board and an independent Chairman. And we will then until November have to have authorization from the EC to do an IPO like next year, which we have as a tentative target, around the midyear of next year. But the bank will be operating on the high street independently, although owned by us, from the 9th of September onwards. More questions? Mike, you have another question?

Just one final question, Mike from Numis. In your 10% or more guidance fully loaded, what's -- can you say what the assumption is on risk waiting on the mortgage book? Because that was obviously, part of the PRA stress test was risk weight floor. So should you assume that there is some absorption of capital for additional risk waiting? António Mota de Sousa Horta-Osório: Our impact of that for us was minimal because our mortgage are at 18%. And although that is not on our portfolio, basically, the impact was minimal. So that has minimal impact on us. The big hit was nationwide as you know, okay? So if there are no more questions, look, thank you very much for joining us, and have a good summer. Thank you.