Lloyds Banking Group plc (LYG) Q1 2015 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Lloyds Banking Group Q1, 2015, interim management statement conference call. There will be a presentation by Antonio Horta-Osorio and George Culmer. [Operator Instructions] Please note, this call is scheduled for one hour. I must advise that this conference is being recorded today. I'd now like to hand the call over to Antonio Horta-Osorio. Please go ahead, sir.

Good morning, everyone, and thank you for joining us for our first quarter results presentation for 2015. I am joined here today by George, who will shortly present the financial results in detail. And at the end, we have some time for questions. Turning to slide 1, for the ones of you that are of you that are following the website presentation. 2015 is a milestone year for Lloyds Banking Group, in which we celebrate the 250th anniversary of Lloyds Bank and the 200th anniversary of Scottish Widows. We have made a strong start to the year, with an underlying profit in the first quarter of £2.2 billion, an increase of 21% compared to the first quarter of 2014. And we now have an underlying return on required equity of 16%. Similarly, our balance sheet continues to strengthen. Our common equity Tier 1 ratio has increased by around 60 basis points in the quarter, to 13.4%. And we have made a strong start to the next phase of our strategic journey. In October of last year, we outlined our three strategic priorities of creating the best customer experience, becoming simpler and more efficient, and delivering sustainable growth. We are already making good progress against these priorities. On creating the best customer experience, we continue to invest in customer propositions, including new digital initiatives, through our multichannel and multi-brand strategy. We continue to make good progress on becoming simpler and more efficient. Our cost to income ratio for the first quarter was less than 48%, and we remain on track to deliver a reduction against the full year 2014 position of around 50%, including the bank levy. Delivering sustainable growth is a key element in supporting customers and the UK economy. We have lent an additional net £6.3 billion to our key customer segments, including £1.1 billion to SMEs over the last 12 months, an area where we continue to outperform the market. We agreed the sale of our remaining stake in TSB to Sabadell in the first quarter, and, as part of this agreement, we sold approximately 10% of our stake in March. The full disposal of TSB will enable us to meet our commitment to the European Commission ahead of the mandated deadline. Our strong performance has also enabled the UK Government to continue to reduce its holdings in the business, further enabling our return to full private ownership. Following its announcement in December to undertake a measured and orderly sell down of shares over the first half of 2015, the UK Government has reduced its holding to 20.95%, representing less than half its original stake. Whilst uncertainties continue to exist, particularly around the political and regulatory environment, we firmly believe the Group is very well positioned for the future. Turning now to an overview of our financial performance on Slide 2. The increase in the underlying profit to £2.2 billion was driven by income growth of 3%, including net interest income, which was up 7%, driven by an expansion in the net interest margin to 2.65%. And impairments fell sharply by 59%, reflecting the successful derisking of our balance sheet and the benefit of the continued low interest rate environment. On a statutory basis, we delivered a pretax profit of £1.2 billion in the quarter, despite recognizing the costs associated with the sale of TSB. Excluding this sale, which was an EU mandated action, our statutory profit was up 37% year-on-year. As I've already said, our common equity Tier 1 ratio strengthened by around 60 basis points to 13.4%. This was primarily driven by underlying profitability and was after recognizing a negative impact of approximately 20 basis points from the deconsolidation of TSB. Similarly, our leverage ratio has strengthened further and now stands at 5.0%. Turning to lending growth; lending to our key customer segments grew by 2% year-on-year, and we are making good progress on the lending commitments we set out in our Helping Britain Prosper plan. In mortgages, we provided gross new mortgage lending of £8 billion in the first quarter, and we continue to expect our mortgage book to grow in line with the market for 2015. We continue to support first-time buyers and are the largest lender to this segment, lending more than £2 billion in the first three months of the year, and providing one in four of all mortgages. In SMEs, we continued to outperform the market, with net lending at around 4%, against a market that has contracted by 2%. Similarly in mid-markets, our 2% growth compares with a market that is also down by 2%. Through our commitment to the commercial sector, we have supported over 23,000 business startups and remain the largest participant in the Funding for Lending scheme. Our consumer finance business also continues to grow strongly with UK lending increasing by 17%. This has been above our expectations and driven by our asset finance business, where we have seen growth of around 37% year on year, reflecting the strength of the UK market and the successful partnership we launched with Jaguar Land Rover last year. In addition, our credit cards business, which has recently returned to growth, increased by 4% year on year up from 2% in 2014. I would now like to hand over to George, who will run through the results in more detail.

Thanks, Antonio. Good morning everyone. I’m going to talk briefly about some of the key highlights of the results, starting with net interest income on slide four. As you heard, net interest income was up 7% to £3 billion largely driven by an improved margin of 2.65%, some 33 basis points higher than the first quarter of 2014, and 18 basis points higher in Q4 last year. This improvement is largely due to continued benefits of reduced funding and liability costs, as well as the disposal of lower margin runoff assets, all partly offset by lower asset pricing. In addition, and as shown on the slide, the last quarter of 2014 was impacted by the simplification of our savings product range, which reduced the margin by 5 basis points, while in a comparison with Q1, 2014, the margin improvement reflects the benefit of the ECN exchange that we undertook last year. Looking forward, given the performance over the first three months, we now expect the NIM for the full year to exceed our original guidance of around 2.55%, with expected pressures on asset pricing continuing to be offset by improvements in the liability spread and mix, and reduced funding costs. On other income, the 6% year-on-year reduction to £1.6 billion primarily reflects the disposal last year of SWIP and lower retail fees and commissions. Compared with Q4, 2014, other income was up 5%, led by retail, following a weak last three months of 2014, and commercial banking. Looking forward, we continue to expect other income to be broadly stable for the full year 2015. Looking briefly at costs and impairments on slide five, Q1 costs were flat year on year at £2.3 billion of additional investment in the business, which offset by savings. In terms of cost to income, our market-leading ratio now stands at 47.7% ahead of Q1 and Q4 2014 although as you know, the Q4 costs always include the bank levy, which was £254 million last year and will be greater this year. On impairments, the 59% reduction in the year-on-year charge, and AQR of 15 basis points, reflects effective risk management, the continued benefit of current economic conditions, and the significant reduction in the size of the runoff portfolio. The quality of the group's loan portfolio continues to improve. Impaired loans now stand at 2.8% of total advances, down from 5.7% quarter one last year, largely driven by the reductions in the runoff portfolio, and down from 2.9% at year-end. We have, at the same time, continued to strengthen our coverage ratio, which now stands at 57.1%, up from 51.1% at the same time last year, and from 56.4% at December. Given the lower impairment charge in Q1 and future expectations, we now expect the full-year AQR to be around 25 basis points, compared to our previous guidance of around 30 basis points. On Slide 6, we show our usual reconciliation from underlying to statutory profit. The net charge of £111 million for asset sales and other volatile items compares to a net positive of £120 million in the first quarter of last year, which included £105 million from the sale of SWIP, together with a £200 million positive movement in ECNs. On TSB, with the sale of Sabadell, this is the last time that TSB will feature in our earnings. In Q1, we have dual running costs of £85 million, as well as a net charge of £660 million from the disposal of the business. This charge reflects the net cost of the transitional service agreement, the contribution that we'll provide to TSB in migrating to an alternative IT platform, and the gain on sale. Finally, with simplification redundancy costs of £56 million, and other statutory items of £82 million, this gives a statutory profit before tax of £1.2 billion, and profit after tax of around £940 million, with an effective tax rate of 22%. So coming now to the balance sheet; again, as you've heard from Antonio, our strong balance sheet and key ratios continue to improve. RWAs reduced by around 2% in the quarter to £234 billion, primarily driven by the deconsolidation of TSB, while the fully-loaded CET1 ratio increased by around 60 basis points to 13.4%, with the improvement mostly driven by underlying profit, which more than offset the 22 basis point negative impact from TSB. Our total capital, our ratio improved to 22.6%, positioning us well compared to our peers, and for later in the year, when we expect to receive greater clarity on MREL requirements. And our leverage ratio, as you've heard, also remains strong now standing at 5%. Finally, in terms of net assets, our TNAV per share increased from 54.9p to 55.8p, driven mostly by a strong underlying earnings generation. That concludes my review, and I will now hand back to Antonio.

Thank you, George. So to summarize, the successful delivery of our strategy is enabling us to drive a significant improvement in our financial performance, while delivering sustainable growth in targeted areas. We expect the Group to continue to perform strongly. In 2015, we now expect our net interest margin to exceed our original guidance of around 2.55%, and other income to remain broadly stable. Given the strong trend we saw in the first quarter, and our future expectations, we now expect our low-risk business model to be reflected in a full-year AQR of around 25 basis points, an improvement from our previous guidance of around 30 basis points. And we continue to expect the cost to income ratio to be lower than last year. While we recognize that we still have a lot more to do, we believe that the Group's differentiated business model is aligned to the evolving political, regulatory, economic and competitive environments. We are, therefore, confident in the Group's prospects and are well positioned for further progress this year. It, therefore, remains our intention is to pay an interim and final dividend in 2015. And we will provide a further update on our payout plans later in the year. The combination of our strategic priorities for the next three years, underpinned by our increased investment in digital, our differentiated business model and our unique brands, makes me very confident that we will deliver our dual aims of becoming the best bank for our customers and achieving strong and sustainable returns for our shareholders, while also helping Britain prosper. Thank you. This concludes today's presentation and we are now available to take any questions you may have.

Thank you. [Operator Instructions] First question today comes from Chris Manners of Morgan Stanley. Please go ahead.

Good morning Antonio, good morning George.

Hi, Chris.

Two questions, if I may? The first one is on returns; obviously, you've printed 16% return on required equity in the first quarter. I know you're targeting, by the end of 2017, 13.5% to 15% return on required equity. Just trying to work out, is the 16% as good as it gets, or is there sort of rationale here you might up your return on required equity target by the end of 2017? Because that looks like you're on a good track there. And the second question was really on net interest margin. I think, obviously, upping the guidance there, you've confounded a number of people who expect a net interest margin to see a bit more pressure from asset margin compression, just maybe if you could give us a sense of how the drivers should be playing out over the next second half of the year and next year. Should we be expecting more liability re-pricing to actually continue to see a bit of an upward drift ex-TSB? Thanks.

Hi, Chris. I'll pick up on those On the returns, I'm not going to comment whether that's as good as it gets. There's a very good AQR, 15 basis points, which is well inside our long-term guidance, but obviously, we've improved that for the year. Looking forward, though, I would expect the NIM to stay robust; we can talk about that and the details of that in a few moments to come. And you know what our actions are on costs and I think the results of Q1 demonstrate that we're well on track to delivering those. So I'm not going to comment in terms of what the ceilings might be, but I am confident in terms of being able to deliver strong sustainable earnings with those attractive ROEs, as we move forward, and managing the various factors between the two. They will move around, but I expect to be able to generate those strong type of returns. In terms of the NIM, as you say, yes, we have improved our guidance for the full year and we've come in pretty strong in terms of the 2.65% versus the 2.47%. As you've seen, there's a number of factors for that; there was the one-off, as we disclosed on the slide, in terms of the savings consolidation that I talked about. But then, in the quarter itself, we've had about sort of 6 basis points that is come from liability pricing. We've had about 5 basis points – I think we call it wholesale funding other on the slide. I think actually about half of that is wholesale funding and a couple of basis points is other; there's always another. And going the other way is a couple of basis points of asset spread. Going forward, what I would be able to say is that I think I would continue to be confident in terms of managing liabilities and maximizing our competitive advantage in terms of things like multi-brand and optimizing across those liabilities. In Q1, we've seen continuation of lower rates across things like instant access, variable ISAs, et cetera, none of them are dramatic unto itself, but instant access has dropped from about, I think, an average cost of about 61 basis points down to 57 basis point, variable ISA has gone from 98 to 29 et cetera, fixed has gone from 265 to 261. So you don't see dramatic changes, but what you see is shaving of funding costs. And we've seen it in Q1, we saw it last year, going forward I would expect to be able to maximize that mix of liabilities and, as I say, maximizing that competitive advantage of that multi-brand offering. Separating from that also funding, as I said that's down and I would also continue to expect that to be down. We've got a lot of crisis funding that will roll off. We've got the action that we're taking on the ECNs that you'll see come through, so I would continue to expect to see underpin from wholesale funding going other way those asset, the asset pricing headwinds will continue; we're down a couple of basis points, we saw that last year, that will continue to move forward. But I would expect the first two to more than offset that. And then obviously, last but not least, there is the changing structure of the Group and, again, I think we called out about 4 basis points some disposals and runoff. When you look at those average interest earning assets, we're down about, I think, 5% year on year and a couple of percent from Q4. But within that, those runoff assets that hardly generate any NIM, they're down to about £17 billion of average interest earning assets, which is down over 50% on Q1 last year, and down 27%, actually, on Q4. And that changing shape of the Group, and the reduction in those very sort of thin NIM-dilutive assets, will also be a feature. So look, a long answer. We remain robust in outlook and that's a combination of how we manage the Bank and things like roll-off of terms of some of that crisis funding and the change in structure of the Group.

Perfect. So it sounds like the tailwinds outweigh the headwinds for the moment still then.

That is correct. That's a better summary. I should have said that, shouldn't I?

Thanks, guys.

Yes.

Thanks very much. Your next question comes from Rohith Chandra Rajan from Barclays. Please, go ahead.

Hi, good morning. I had a couple as well, please. One follow-up, actually, just on that very helpful NIM comment, and then just also on capital. Just on the net interest margins, just to clarify, the wholesale funding benefit that you saw in the quarter, I mean just in terms of the maturity profile, is that particularly lumpy during the course of the year, or is this the sort of progression that you'd expect to continue in coming quarters? So that was the first question. And then the second one was just on capital, really; Antonio, you mentioned discussions around the dividend later in the year. Obviously, the core Tier 1 progression was very strong. I was just wondering if you are able to quantify, at all, potential impact of risk-weighted asset inflation, and also just the timeline for discussions with the regulator around the dividend. Thank you.

Okay, I'll do the NIM bit? Although I'm not going to give a very precise answer, I'm afraid, on this. It was a couple of basis points. I would expect there to be a continuing benefit. I'm not going to quantify; there are actions, as I say, around like the ECNs, etc., that have come in and will add a significant benefit to that as we move through the year. I mean also, from a general position as well, it's interesting when you look at some of the costs of our back book funding and the roll-off and the opportunities that we've got with the back book for senior funding is probably still about 140 above LIBOR. So we've got opportunities there to refinance that. And the sub-debt is probably about 230 actually above seniors. So we've got opportunities just to refinance that. So I’m sorry, I'm not going to give you a precise amount, but I would expect wholesale funding to be a continuing significant feature in terms of the NIM story at Q2, Q3, Q4.

Rohith, it’s Antonio. Just to add a point on this; as George was saying to Chris, this is what really we have said repeatedly over the last few years that we were developing a competitive advantage in the way we believe we manage margin. And you know that retail is all about detail. We manage the margin, as you know, very tightly between the asset margin and the deposit margin, as the difference of the two which we really believe is the correct way of looking at it, especially when you have reasonably the same amounts on both sides of the balance sheet, number one. Second, we do it on a weekly basis across all retail products; and thirdly, we do it at the highest level of the Bank. When you consider those three points that we have discussed at length in the past, together with the multi-brand strategy and the holistic approach to funding in all areas of the Bank including the corporate bank, consumer finance and all areas, this reflects in a competitive advantage, which I think, as per Chris’ questions, reflects the difference to what peers have been saying. And we believe that this will continue for the rest of the year, and it’s why we are upgrading slightly our guidance versus what we said. On the other hand, we don’t want at all to look complacent. We are only in quarter 1 and, therefore, we don’t want to upgrade guidance in the start of the year unless really necessary, and in this case it is necessary, because of the numbers you just saw.

Thank you. So just on that guidance actually, if you just take TSB out and annualize the Q1 you’d get about 261 for the full year. To use Chris’ strapline, headwinds greater than the tailwinds, it sounds like you’re guiding something above that 260, 261 level on your current expectations.

Absolutely not, it’s very candid and very – I mean as George said, it’s clear that we started the year better than we thought. So we thought it should – because we are always very transparent with you, we should upgrade our guidance because we started better. But as I just said, it is only quarter 1, so we have three quarters to go, so we have to see how the rest of the year unfolds. But our expectation, as we have been discussing, I think, over the last few quarters, is that the continuing margin pressure on the asset side, we will be able to continue to offset it through better margin on the liability side and lower wholesale funding costs, basically, okay? On your capital question, just some comments and George may give you the timeline and other points. We had, as well on capital, a good start to the year. We are now significantly above all other banks in the UK, both in terms of core Tier 1 fully loaded and leverage ratio. And this is, obviously, going to be an important point on our Board discussions, going forward, and we will make a view, and we'll give you guidance more precisely in the remaining part of the year, about what we will do, going forward. You know that our policy is to distribute at least 50% of our sustainable earnings, so obviously, the more sustainable and the bigger the earnings, the more we will distribute, timelines.

Well, timelines, I'm not sure there's much to say, really. As we say, our intention is to pay an interim and final we will give more details, I think, in terms of the go- forward when we come to that interim stage in terms of What Antonio said, in terms of the capital generation, it's obviously to be able to talk to a 60 or 80 basis points underlying. We are very pleased by that. We're not changing our guidance. The 1.5 to 2 which we've got out there we're not making any special call-outs for 2015. I would expect the strong, sustainable earnings to continue. There are some uncertainties. We will do the ECN exchange; the ECN exchange will impact capital generation just because of the nature of that transaction. Conduct remains uncertain as well. So we're not changing guidance, but we're very pleased with what we've achieved in Q1.

Okay, Thank you. And any early indications what RWA inflation impacts might be?

Sorry, I forgot about that. No, you know, as well as I as well as others, there's still consultation going on. We've got a couple of standards out there that we've got to work through, standardized credit risks, and capital floors, etc. These are 2017, 2018, I've got a quantitative impact studies ahead of that, so.

We have a different business model, Rohith. So our business model is not predicated on the areas which will be most impacted by RWA expansion.

Okay. And on the mortgage side specifically, any comments there?

It’s highly modelable class. There's a whole load of discussions to come in terms of imposition of floors, and all those sorts of things. I think we've previously set out a few, as indications, if we went for flat sort of 15%, like that, it will be about a 60 basis point. But we …

My opinion on that, Rohith, is that what will come out of the Basel agreements will likely be, where assets are subject to good modeling, they are going to insist on model insist on model harmonization, not on floors. So you may have floors as a backstop, but the main point will be on model harmonization. And I think it is clear that both at European level and UK level, they really believe mortgage is one of the best assets to model. I think that view will prevail. And in any case, just to give you the full picture as George said, in case we have a floor of 15% portfolio per portfolio, which is a harsh view, it will impact our capital ratio by around 60 basis points, to give you an idea of this.

Okay. Thank you. That's very helpful.

Thank you very much. And our next question comes from Chintan Joshi from Nomura. Please, go ahead.

Hi, good morning. Can I have two as well, please? The first one is continuing on the NIM line. If I want to think about where the pressures might be, it's very obvious, people have been talking the SVR book. Can you give us some sense of what the attrition rate was in the Halifax book in Q1, and also on the Bank of Scotland SVR book? And also, how big is the 2.5% capped book, because that's where margins probably are still improving? And some visibility on the attrition rate there as well. And then the second one – or should I take one at a time, please?

No, give us your second one as well, so we can shark for that.

Okay, sure. On PPI, it seems you are indicating [multiple speakers] – on PPI, if I read your update in the Annual Report contacted/settled then provided for approximately 45% of policies sold since 2000, what is the go-to ratio for that 45%? I mean clearly, I don't want to think it's 100%, otherwise, gosh, that will be hard. But it can't be – I don't know how to think about it. So if you could give some color on that ratio, or where it should land, that would be helpful.

Okay, alright. Chintan. Going back to the first question on SVR, and attrition rates and composition, all those sorts of things, to be very precise about it, the SVR book in totality, at the end of Q1, stood at about £163 billion. And within that, the Halifax book was £56 billion, that's a 399 book. We've got the Lloyds book especially about 260 that stood at £43 billion. BOS book this is about 396 in terms of rate, that stood at £12 billion. And I think Birmingham Midshires, which face about 294 that stood at £37 billion. And I think we’ve got about another £15 billion, if my math is correct, which gets you back to the total. So that's the book, of which the Halifax, at 399, is just on £56 billion. That £56 billion compares to – at the yearend, that was about £57 billion and this time last year was about £59 million. So you are looking at attrition of sort of 5%, 6%, 7% in that. Quite interestingly, the Lloyds book, that £43 billion, that was sort of £44 billion at Q4 and by £48 billion at Q1 this time last year. And actually on the Birmingham Midshires, using the same timeframe, £37 billion, £38 billion, £39 billion. So I think as we see – that we’ve seen attrition around about the sort of 5%, 6%, 7%. And that's kind of been across all books, irrespective of price. And we've seen a continuation of that as we've moved into the first quarter. So that's what we're seeing, and that's what we would expect to see as we continue to move forward throughout 2015. That's been our experience, and that remains our experience. That's the cut on the SVR book. Second question on the PPI, there isn't a go-to rate. We've disclosed that number in terms of those whom we've contacted, paid out on, et cetera, since 2000, and that's some 45%. So there is no go-to number. You’re absolutely right; it's not going to go to 100%. The best evidence I can give you of that, when we do these past book reviews and one does proactive mailings, and these are very explicit proactive mailings and you've got to mail people up to three times who had a PPI policy, the response rate is about 30%, or just under that. So even though where there's clear evidence of had a policy, as I say, you have about a 30% response rate, so it’s not going to go to 100%. I can't tell you whether it's 48%, 50%, or whatever. What I can tell you on PPI, as we've disclosed, I think, in RNS [ph], obviously, made no provision at Q1. What we're seeing on the three elements, you've got the past book review, you've got remediation on the reactives on the past book review. And the remediation, we've previously said that we expect to be complete basically first half of this year. That very much remains the case, so we would complete those. Because we're going through those, the monthly spend has gone up. I think we've spent, cash spend about £800 million in this quarter. The norm would be about £600 million. But what that reflects, effectively, that's good news because that represents us clearing cases and getting through that remediation. Hopefully, we will be through that in the first half. Reactives, again, as we say in the RNS, I think we're about 11% down Q1 on Q1 slightly up on Q4, but part of that is seasonality. Does still remain uncertain and risk does still remain, I should point that out. And we did disclose that Q4; that, were reactives to remain flat, there would be this, approximately, £700 million charge at the half-year, of that order. That risk still remains. At the moment, we've got about £1.7 billion, I think, left unutilized on the balance sheet. And, as I said, we've taken no action at Q1. Making good progress on the first two elements, but there is still risk attaching with regard the reactives. Although, obviously, once you're through the first two and just into the reactives, PPI, it moves down to a different scale of issue in terms of – a different scale of financial outlay. But that risk, that’ still remain.

Thank you for that. A quick follow-up on the first one. If I think about your new lending, can you give us some sense of what mix that is? What is the two-year mix, what is the five-year? I just want to get a sense of which way the market has moved in recent quarters in terms of what is the most popular product. Two years always has been, but has there been a little shift away from it?

I don't have those stats to hand, Chintan. We'll come back to you on that. But anything I say now will be top-of-the-head.

Sure. Thank you for the very clear answers. That was great. Thanks.

Cheers.

Thank you our next question comes from the line of Raul Sinha from JPMorgan. Please go head.

Good morning, Antonio and George. I've got two, as well, please. The first one is on costs; obviously, on slide 5 you give us some very good disclosure. Now, revenues up 3% and costs flat is a great performance. But if I look at the detail of the slide, if you didn't have that other increase in the quarter then, clearly, you would have done even better. And your simplification benefits are clearly offsetting pay inflation, as well as investments. So my question is, how should we expect the rate of investment spend to progress during the remainder of 2015? And should we start to expect costs to be down materially, going forward, from the run rate that we are seeing in Q1? That's the first one. The second question is on other income, which was a touch weaker than expected, for us. If you could give us some detail around your confidence of achieving a broadly stable run rate, which you talked about for the rest of the year, that would be great. Thanks.

Raul, it's Antonio. On your first question, you know that we consider the cost to income one of our strategic competitive advantages, together with the cost of risk in terms of being a low risk bank and having the lowest cost to income, which we believe is critical in a very competitive environment. In the retail market, going forward, we believe it's the only way to ensure good service and value for money for our customers, together with superior returns for our investors. So in that sense, we manage the two, as you know, together very tightly. We have guided, in the end of the year, for you to expect the cost to income story to shift from a cost story to an income story in terms of jaws, when you should expect costs slightly up throughout the year, with income rising more than the costs. Therefore, our target cost to income ratio by the end of 2017 being 45% and jaws positive every year, which means the cost to income should decrease every year. That is exactly what happened in this first quarter. As we said at the time, should income, which is obviously not totally within our control, prove more difficult, we would act on costs, as we did in the past. So you can expect, and you can see, the 3% jaws in that context. I would guide you for the rest of the year as per the yearend. I think we continue to expect cost to be slightly up. We continue to expect revenues to outpace those costs, and the cost to income to trend downwards from the 50% cost to income as of last year. And the 50% is completely comparable to the 48% we presented now. You know there is the bank levy at the end of the year, but we do continue to expect to have positive jaws and have a decreasing cost to income, so increasing our competitive advantage by the end of the year. You should expect it to continue to be now, going forward, a revenue story, so I would continue to point you to costs slightly up for the year, revenues above. I repeat, if there is more difficulty in revenues, we will obviously act upon the costs which we believe we completely control.

And on other income, it still remains a pretty tough market, a pretty tough environment, for reasons that you're sort of aware of. We have those called out today, and flat, which I think would be a good result in these particular circumstances. Within that, going through the divisions, as I think I called out in the presentation, commercial banking was up on Q4, which was pleasing that we've seen volumes come back and we’ve seen some at value gains as therein. So we would continue to be confident in terms of commercial banking pulling ahead in terms of 2015 versus 2014. Similarly, consumer finance, particularly with some of the asset growth that you've heard from Antonio, and the growth in things like Lex Autolease, I would be confident in terms of consumer finance pulling forward as well. Insurance it's tough and will remain tough. Although some of the new initiatives that we talked about again at the full year, things like new bulk annuities and improved business mix, and pensions new business, corporate pensions business, and should offset some of the economics. But it's going to be a pretty tough environment. And probably still most tough in retail. And I think in the presentation, retail was up Q1 on Q4 but that was more about Q4 on Q1.

Yes.

And reach was down Q1 on Q1. And again, the reasons it's up are relatively well known They've got the regulatory pressures on certain product types, you've got things like increased ATM charges, and all that flowing through into lower new business charges. So I think its going to be a quite a tough year for retail, but taking the performance of the divisions in the round, that's where we would still stick with, hopefully, coming out at stable for the year 2014 on 2015.

That's really helpful. Thanks, guys.

Thank you very much. And our next question comes from Arturo De Frias from Santander. Please, go ahead.

Hi, good morning. One question on capital, on the various re-pricing and very robust improvement in the core equity Tier 1 ratio during the quarter. I was looking at the bridge you have on page 7 of the presentation, and I'm a bit confused with the numbers. You say that most of the improvement is driven by the underlying profit, the 90 basis points improvement, driven by the underlying profit. But if I take these 90 basis points and I multiply by the £234 billion of risk-weighted assets, that could me give an improvement of around £2.1 billion, which is, basically, the underlying profit, but not taking into account, or apparently not taking into account, the impact of taxes and the impact of one-offs. So first part of the question, what is the impact of taxes and one-offs in this bridge? And the second part of the question, if, as it seems here, most of the improvement is driven by underlying profit, and we should expect probably the underlying profit to be similar, if not better in future quarters, can we expect similar improvements in the core equity Tier 1 in coming quarters? Thank you.

Hi, Arturo. I commend you on your math, and you're correct the underlying profit is it says. We actually show the underlying profit, so that's that. Pretax, what adjustment we do actually strip out insurance, because that – obviously, the insurance end profits only account extent to that dividend is up. So we take underlying profit and we take out insurance, although we do actually add back, there's an insurance threshold in the sense of, as we grow other capital, the insurance allowance increases. So it is the underlying profit. There are, effectively, no taxes. Because of our deferred tax position, our profits essentially flow into our capital position on a tax-free basis. And we would separately call out, there aren't many regs who've got many other items below the line. So if I exclude TSB, which we show separately, I think we've just put the other ones into other, as it says. If they were material, we would separately disclose. But your math is absolutely correct. The underlying profit is what it says. And that comes off of the underlying profit number, as adjusted for insurance.

Okay. So yes, you're absolutely right, I forgot the DTA impact. So in fact, to the second part of the question, if we see for the next three quarters another £2.1 billion, £2.2 billion of underlying profit, should we expect, for the next three quarters, another 90 bps uplift to the core equity Tier 1, due to this underlying profit? Because that could suggest a very substantial additional improvement to be expected in the core equity Tier 1 for the rest of the year.

You're absolutely right, Arturo. Were we to generate another £2 billion or £2.1 billion whatever the number is yes, that would flow through those 90 basis points and they wouldn’t attract tax, etc. What I would say, though, is refer you back to one of the earlier questions. There are still uncertainties out there around things like conduct. There will be an impact when we do the ECN exchange, so there are some uncertainties. So you may see some other lines populate that chart, as we move from left to right. But you're absolutely right in terms of the first block each quarter should look a bit like it looks at the moment, as a contingent of our plans.

Okay. Thank you very much.

Yes, bye, Arturo.

Thank you. Your next question comes from Jonathan Pierce, Exane. Please go head.

Good morning. A couple of questions. One is back on the margin. Thank you for all of the extra numbers you've given us this morning; it's very helpful in understanding the moving parts. I just wanted to clarify something I think you mentioned earlier, which is the fixed rate deposit cost. I think you said that was still 261 basis points. Is that correct across the whole stock? And if it is, how big is that deposit book please?

The deposit book, within the retail side of things, well, you've got the fixed ISAs, which is about £34 billion, and then, I've basically just got my fixed, which is about £33 billion. And the cost of those are, yes, one's about 2.6% and the other's about 24%. And they were about 2.5% in Q4. So that's the amount and the cost to those books. And you can see just a few basis points coming off quarter on quarter.

And you're obviously not writing anywhere near 2.6% on new business?

And that’s probably came from new business.

Okay. And on a similar line of questioning, you've given us the senior debt cost, which, across the book, I think you said was 140 basis points above LIBOR. And we can obviously compare that to new costs are today. On the covered bonds and the securitization, can you give us an idea what the stock is paying there, so we can get a sense of the potential moving forwards as well?

I don’t have that number, so let's see if we'll give that number out as well. Let me have a think on that, Jonathan, but I don't have that in the hand.

Okay. Thanks a lot for that. On capital, the second question. As other people have alluded to, and we can see in the numbers, the capital build is really very substantial now, and you're, I think, appreciably ahead of your own target and what even people like us would think you need to move to on equity Tier 1 and total capital, just as importantly. Is the discussion starting to take place at the Board level around the different forms of payout? I noted, Antonio, you mentioned payout plans, without being specific about dividends. Are you starting to have discussions around buybacks, special dividends? And on that question, how's the PRA thinking about this? Do you get the sense that they are comfortable so long as you're passing stress tests and the ICAP, etc? Anything over and above those required levels can come back to shareholders and they won't get too involved in that regard?

Look, Jonathan, we really don't want to anticipate too much at this stage because, as we said at yearend, we had focus on resuming dividends. We said we would resume at a token level and then would move to a sustainable payout of at least 60% of sustainable earnings. We said we would start the Board discussions after what we announced to you on quarter one, which we did. So to your question, yes, we did start our discussions at Board level and, as George said, we will report to you our positions and guidance at H1 results. We have been discussing both things. So both what we will announce for interim and year end and also about expect capital position which we have, as you just pointed out. So yes we started those discussions. We'll make criteria at Board level by then and, of course, we will involve our regulator, as appropriate, in the process and after that. So that's what we can say at this stage.

Perfect. Thank you very much.

Thank you. Your next question comes from Andrew Coombs, Citigroup. Please go head.

Good morning. Just one question on slide three. I'm interested to know your expectations on how long you expect the drag from wealth and global corporates to continue? And perhaps you could also try and quantify the runoff timeframe, or the average maturity of the assets, particularly with regards to the £15 billion runoff portfolio and also the £10 billion of assets sitting within the other category as well, please.

Excuse me, Andrew, the drag of global corporates and what was the other one?

And wealth as well. You draw out lower balances in wealth as the reason for the decline in unsecured personal and other retail. Thank you.

Okay. Relating to global corporates, as I had also guided you at yearend, I do expect global corporates to evolve reasonably in line with our target key segments as a whole for the year. As you know, it is volatile. We don't target obviously global corporates credit because we do whatever they want, either it is credit or capital markets or whatever funding they choose. But my sense is that you should count with the progression for the other books as a whole for the year, which I think should be around 2%. In terms of unsecured personal, we look at it together. So we look at it UPLs plus credit cards and car financing, which, as you know, are on the consumer finance division. So as I told you, car financing is above our expectations, significantly. I had guided you to upper single- digit growth this year. We are in upper double digits. So I now expect the year to be on the low single digits, significantly above – what we had said at the end of the year, so I would consider that point for negative as a blip. It is just the way we look at the three products and the way we best serve the different customer needs, because, as you know, there are alternative products for basically the same customer needs. So altogether UPLs plus credit cards plus car financing, they are above our expectations, above what we had guided you at the end of the year. On the other hand, as I said, mortgages is slightly down on what I guided you. We thought the market would be around the same level of last year which was 1.8, the market is so far1.6 and we are at 1.2. Of course, again, a quarter doesn't have much significance. We feel very comfortable we'll grow in line with the market, as we have been doing over the last three years. By the end of the year we expect the market now to be slightly lower, so around 1.6, the present level, and we will grow in line with the market, more or less. So this is broadly the balance, Andrew, of the different factors.

I’ll talk briefly on the runoff, Andrew, I can't give you a fixed term or anything like that. But when you look at the composition of what's left, the sort of £15 billion of assets. Within that you’ve got things like 1.6, 1.7 of treasury which will be price dependent. And that those ones that don't cause us concern. It's all a question when you would realize those. CRE is now down to a couple of billion and that compares with well over £6 billion, £7 billion back in 2013. So that's a good position. We've got a number of corporate portfolios to chip in a couple of billion, for example. Ireland, we're now down to about £4.6 billion, £4.7 billion. We’ve made good progress on Ireland; that's down from £8 billion, £9 billion before. And I've got about a £1.5 billion in international retail. So we're at the point now. And I can't give you term because, actually, it's in terms of some of those assets, we're not going to sell them to crystallize losses. I would expect the £15 billion to continue to reduce as I move through the year, but we haven't given a target because some of it's in terms of price dependent. They don't cause me credit issues; it's about realization and what is a good price.

And I would add to what George just said, you are right. When you look at the runoff, £12.2 billion, it looks obviously the double of the core segments of the total Group excluding runoff and other. But as George said, this picture is a bit misleading in terms of trends, because at the end of the year, given we only had £17 billion in runoff, it was no longer priority, as we discussed and we told you at year-end results. In the first quarter, we only decreased the runoff book by £1.5 billion, which is 10% basically of the remaining book. So as you will go through the year, the £1.5 billion obviously will not go to £12 billion or anything near to that because it's no longer a priority. We have a much smaller book. So as the total Group, excluding runoff and other, will continue to be around 2%, the runoff, as we move through the quarters, will be a much smaller number.

That's very helpful. Thank you very much.

Yes.

Thank you. Your next question comes from Fahed Kunwar from Redburn. Please, go ahead.

Good morning. And I just have a couple of questions. Thanks for the information on the SVR book. You're seeing from your peers, they're talking quite a lot about attrition on the SVR book whereas you guys aren't really seeing the same amount. I was just wondering, what is the kind of LTI on that SVR book and the LTV above the kind of 4.5% and then 95%. Is the MMR helping you guys keep the back book rates broadly stable and is that why you're not seeing the same level of attrition coming through? That's the first question. And the second question was just a clarification on your earlier two answers. Your AIEA in the quarter fell by about 2% excluding TSB, but I assume a lot of that is runoff. So just to be clear, going forward, ex the runoff, as that gets lower and lower, you'd expect that AIEA to be flat this year and then increasing thereafter. Is that a fair assessment? Thank you.

Shall I do the second one; George will take the first one. As I was just saying to Andrew, I think what you described is a fair picture. It's the total Group, excluding runoff, and that will be around 2% to reach those levels or slightly higher. And the runoff 1.5 first quarter, so it will be less than the total Group excluding runoff. That's correct; that's what you should expect.

And if you put that into math, the AIEA were 476, as you say, take off 22 TSB that was 23 of runoff, gives you about 430 in terms of your average interest earning assets. And Q1 you had 468, loss 22 for TSB, 70 for runoff, you're basically flat, so you're right, in terms of where the shape of those are going. In terms of attritions and those LTVs, LTIs, I don’t have the stats to hand. So I don't have a number to give you to say whether it's certainly not MMR as a factor, as you would expect, because that would be pan-industry factor. So it's not MMR as the factor, but it don't have reason to give you to say it's because of LTV or interest only, or whatever characteristics. So I can't give you any greater detail on that one I'm afraid.

Okay. Thank you.

Thank you. Your next question comes from Chris Cant from Autonomous. Please, go ahead.

Good morning, all. I had two quick ones, if I may? The first on the deposit mix shift benefit that you flag in the slide of 6 basis points. George, you mentioned the multi-brand strategy. I was just wondering if you could give us an indication of roughly how much of that 6 basis points came from the core brands and how much came from re-pricing of the tactical brand books. And the second question. The ECNs you said would be capital hit; I just wanted to check I was understanding how you arrive at that, because I think there was a £646 million ECN put liability at the end of the year. You say there's a charge related to that derivative liability of £65 million in the quarter. So that would be in additional liability of £711 million that you would be cancelling, if you took out all of the ECNs. And if you're going to par-call some of them, and presumably if you did par-call them the others traded down, I struggle to see how you would end up paying out more than your net liability position really when you take into account that £711 million put. So I didn't understand how you end up with a capital hit from that. Thanks.

I'll deal with that first. The main element will be in the embedded option that we take through reserves, which currently has a value of, whether it's £500 million/£600 million of that order and moves around. It depends upon the price of these instruments versus their equivalents, without that embedded option. So we value that option. We take it essentially through as a capital –we've taken it through in the past as a capital benefit. And obviously, when one cancels these instruments, you lose that capital benefit. So it's essentially the value of the embedded option within those instruments that gives us the benefit. And when I cancel those instruments I will lose that option. So you'll lose, whatever the number is. And it does move around. The variable that we take that you referred to again, that's just the differential in terms of the price of ECNs, and I would say, versus the pricing of an equivalent instrument without that option in. But that's where you will get the bulk of that hit. The embedded option that we currently carry through capital, the benefit of that, will disappear. So that's the main bit. I don't have the analysis on the tactical brands and differential between tactical and relationships. So I will just repeat to you what we said in terms of the competitive advantage it gives us in terms of being able to move between them. And, as Antonio said earlier, how the Bank is run in terms of manages as a single entity and looking across the brands. And what we also do, actually, it's not just a question of retail, but it's also within commercial and corporate as well. And with commercial deposits costing, whether it 50 basis points as well, being able to move between commercial operations, between retail operations between brand and managing that as a single unit, and looking both on the liability and the asset side, we believe gives us a unique advantage in terms of the franchise that we've got and then how we manage that franchise.

Okay, thank you.

Thank you very much. And our last question is comes from the line of Claire Kane from RBC Capital Markets. Please go ahead.

Can I have a follow-up NIM please? When I look at the underlying Group, ex-TSB and ignoring that Q4 one-off, you had a very stable NIM in the second half of 2014, it went up only 3 basis points. And regarding the positives you've had in Q1, I'm struggling to see why we've had such a step change and we've gone up 13 basis points in a quarter, when we didn't really have much of an impact in the past. And also, why we shouldn't then think that this 13 basis points could continue quarter on quarter, given you think the positives will continue to outweigh the negatives. That's my first point, if you could just give us some context around the step change in Q1 relative to the second half last year. And then my second question is on the ECN. You mention in the notes that you have the court date around the May 18. Is there any risk, do you think, to your ability to call back those bonds at par? And if not, when do you expect to do that and when would we see the benefit in the numbers? And is it still your expectation to just reg par the ones that didn't take the exchange offer? And when would you address the remaining bonds? Thank you.

Okay, Clarie, hi. On the ECNs and the reg par call we go to court, I think, week commencing May 18. We are fully confident in our position, in terms of what the purpose of these bonds for, though there has been a capital disqualification event and, therefore, our ability to do the reg par call. We intend to proceed with that. And yes, you're right at the moment our intent is to invoke that on those prioritized bonds that we touched before. We will wait and see what we do on the others. So that is a matter for our discussion and decision and that lies ahead. But at the moment, in terms of those that we prioritized before, it is our avowed intent to invoke the regulatory par call. And we believe that will happen and that will be some time after that May meeting. And the benefits of that will flow through into our numbers. In terms of Q1 versus H2, I don't have a perfect answer for you in terms of why one has moved and another hasn't, I can think about changing for example, in terms of net interest margin in term of the average interest earning assets, and we did some big disposals at the back end of last year, particularly in things like Ireland. So there's 4 basis points – you talk about 13, but actually 4 of that came from the thing we talked about earlier, so that was back ended. So that maybe a benefit. Part of the answer may lie in average interest earning assets, which we can go back and have a look at. I think that would be part of the answer. And let's see if we can get a better one for you, a more complete and get back to you.