Lloyds Banking Group plc (LYG) Q2 2015 Earnings Report, Transcript and Summary

Good morning, everyone. Thank you for joining us for our first half results presentation. I will start with the key highlights for the first six months of the year, before setting out the trends we have seen in the UK economy. Then I will turn to our strategic priorities and the progress we are making against them. And George will then present the financial results in detail, after which, we'll take your questions. So turning to the highlights of the first six months of the year, the first half of the year saw us make further progress on our strategic journey to become the best bank for customers and shareholders. We have delivered significant improvements in both underlying and statutory profitability and balance sheet strength, while at the same time, improving our customers' experiences and continuing to support and benefit from the UK economic recovery. The completion of the sale of TSB to Sabadell was a significant milestone to the Group, enabling us to deliver our commitment to the European Commission well ahead of the mandated deadline. Our proven track record of delivery, both strategically and in terms of financial performance, has allowed the UK Government to make further substantial progress in returning the Group to full private ownership in the first half of the year. Today it’s holding stands at less than 15%, around one-third of its original stake, returning more than £13 billion to taxpayers to date. And following the resumption of dividend payments, at the 2014 full year results, today we are announcing an interim dividend of 0.75 pence per share. Turning briefly to the financials. As you can see, underlying and statutory profits have continued to increase, with underlying profit up 15% to £4.4 billion, compared with the first half of 2014, driven by increased income and lower impairment charges. At the same time, our underlying return on required equity increased to 16%. And our statutory profit before tax of £1.2 billion is up 38%, despite additional conduct charges, including £1.4 billion for PPI, which was disappointing. The additional provision mostly reflects higher than expected reactive complaints, with higher associated redress. George will cover this in more detail shortly. This increased profitability, coupled with a reduction in risk-weighted assets, has led to the strengthening of our balance sheet, with a Common Equity Tier 1 ratio of 13.3% and a leverage ratio of 4.9%, both post dividend. Turning to the UK economy, as a UK-centric bank our future is inextricably linked to the success of the UK economy. The economy continues to recover in a steady and sustainable way, providing a solid foundation for the Group's future prospects. UK GDP has increased strongly, and has outperformed the Eurozone. At the same time, unemployment has fallen significantly to its current low level, business confidence has recovered over the past three years, and wage growth is at its highest rate in over five years. Most importantly, household and corporate debt as a percentage of GDP, have continued to fall to more sustainable levels. Against this backdrop, bank base rates are expected to rise slowly and remain lower than pre-crisis, which should support the continuation in the economic recovery. From a retail perspective, the strength and sustainability of the recovery is further evidenced by the fact that consumers are spending more, yet household debt as a proportion of disposable income, is reducing. UK house prices continue to recover and are broadly at the same level as the previous peak of 2007. It is important to remember, though, that this recovery has occurred in a gradual manner and, given inflation over this period, house prices remain below the previous peak in real terms. This increase in house prices, together with a proportion of our new mortgage lending versus stock, which has reduced from almost 34% in 2006 to 11% today, have contributed to a significant improvement in the quality of our mortgage portfolio. The average loan to value of the portfolio has reduced from around 56% in 2012 to less than 46% today. And the proportion of our book with an LTV in excess of 100%, reducing from 16% in 2008 to only 1% at the end of June 2015. Now turning to our UK-focused business model and how this is supporting the economy. As you know, we have created a simple, low risk UK retail and commercial bank. We have a clear strategic focus and differentiated business model which, in turn, provides us with a number of competitive advantages, including a market-leading cost position and a lower cost of capital due to our disciplined approach to risk. Last October, we outlined three strategic priorities to take us through to the end of 2017, creating the best customer experience, becoming simpler and more efficient, and delivering sustainable growth, which I will cover in the next couple of slides. Starting with creating the best customer experience. During the first six months of the year, we have made a strong start to the next phase of this strategic journey to become the best bank for customers and shareholders. Our multi-brand, multichannel approach allows us to meet customer needs more effectively, allowing them to choose how and when they wish to interact with us. We are adapting to the digital revolution and today, we have more than 11 million online users and nearly 6 million mobile users, numbers which have increased by around 0.5 million each since yearend. This provides significant opportunities for serving our customers in new and more efficient ways. A recent example of this was the launch of our Halifax motor finance offer. This is the market's first digital direct to consumer secured car finance proposition. In addition, we continue to streamline our processes and have reduced the average intermediary mortgage application to offer time from around 25 to 14 days with further improvements targeted. Our progress in creating the best customer experience has been reflected in our net promoter scores, which have increased by an additional three points in the first six months of the year and by 60% cumulatively since 2010. Despite these scores, we are not complacent and recognize that we, together with the industry, have more to do in order to rebuild customer trust. And on becoming simpler and more efficient, we have continued to increase our investment in IT in the first half, resulting in simpler, more efficient processes, more resilient systems, and better digital experiences for our customers, as well as cost reductions for the Group. The first six months of the year, we have delivered run-rate savings of £225 million against our target of £1 billion of savings from the new Simplification program by the end of 2017. These reductions, together with our strong underlying financial performance, have resulted in further strengthening of our already market-leading cost to income ratio, which is now 48.3%, providing us with strategic differentiation and competitive advantage. We continue to target a cost-to-income ratio of 45% as we exit 2017 with reductions every year. We are committed to supporting the UK and its communities. We remain focused on becoming the best bank for customers and shareholders by helping the people, businesses and communities of Britain to prosper. Over the last 12 months, lending, excluding TSB and run-off, grew 1%. This included growth in the mortgage book of 1% against a market that has grown around 1.5% in the same period. We have provided gross new mortgage lending of £16 billion in the first six months of the year, and we continue to be the number one provider of mortgages to first-time buyers, providing one in four. At last year's strategic update, we outlined that we would grow our mortgage book in line with the market. Given our focus on preserving margin, and the fact we are in a low market growth environment, our share in the first half has been slightly below this level, a position we are comfortable with. On the other hand, we have built on the strong progress made by consumer finance in 2014, achieving UK loan growth of 17% year-on-year, which is significantly above our expectations of high single digits. This has been delivered through new business growth of 34% in motor finance and 5% growth in credit card balances. Commercial banking continues to take a lead role in supporting the UK economic recovery. We have maintained our lending to our mid-market clients in a declining market, and have supported one in five new business startups. At the same time, our SME lending has continued to outstrip the markets with growth of 5% year on year. We have now seen four years of delivery since our first strategic review, and we have increased our SME net lending by 23% in this period while the market has fallen by 16% in these four years, while maintaining our prudent approach to risk. We also remain a leading participant in the funding for lending scheme, having reported the largest increase in net lending to SMEs under the scheme in the first quarter. In conclusion, as a Group we are focused on supporting our customers and the UK economy through the successful delivery of our strategy. We have made a strong start to the next phase of our strategic journey with further increases in profitability and returns, despite additional conduct charges. We have strengthened our customer proposition, achieving improvements in customer experiences and efficiency, while supporting the UK economy with growth in our key customer segments. Through the strategic initiatives we announced last year, improving on our key competitive advantages of having a leading cost-to-income ratio and a low risk business model, we continue to target the sustainable return on required equity of between 13.5% and 15%, at the end of the strategic plan period and through the economic cycle. And on an underlying basis, we currently stand at around 16%. As a result of this progress, we are today improving our guidance for 2015 and announcing an interim dividend of 0.75 pence per share, and also providing further clarity on the distribution of our excess capital. Our aim is to have a dividend policy that is both progressive and sustainable. And, as previously indicated, we expect ordinary dividends to increase over the medium term to a dividend payout ratio of at least 50% of sustainable earnings. In addition, the Board will give due consideration, subject to the circumstances at the time, to the distribution of surplus capital through the use of special dividends, or share buybacks. I will now hand over to George, who will present the financials in detail.

Thank you, Antonio, and good morning, everyone. I'll give my usual overview of the financial performance and position of the business. Starting then with a brief summary of the P&L, as you've heard, underlying profit increased by 15% to 4.4 billion, driven by a 2% increase in income, flat operating costs, and a significant improvement in impairments, with an AQR of just 9 basis points. Within income, NII continues to be strong, increasing by 6%, while other income was down 4% due mainly to prior year disposals and the impact of the run-off portfolio. With increased total income and flat operating costs, we had positive JAWS of 1.5%, and a market-leading cost to income ratio of 48.3%. Going through the P&L. The 6% increase in net interest income was mostly driven by a continued improvement to the net interest margin, with a 2.62%, was 27 basis points higher than the first half of 2014, and 17 basis points higher than the second six months. As in previous periods, these trends continue to reflect improved deposit pricing, low wholesale funding costs, and the disposal of lower margin run-off assets, partly offset by ongoing asset pricing pressure. On a divisional basis, the improvement in NIM was the main driver in the 7% increase in retail's result, while in commercial NII was flat with an 18 basis points NIM improvement offset by a slight reduction in interest earning assets. Looking forward, we expect these drivers to continue and we're improving our guidance for the Group's full year net interest margin to be around 2.60%. Other income, as mentioned, is down 4%, largely due to disposals and run-off, although Q2 was up 4% on Q1, and broadly in line with last year. Retail remains challenging, due to current conditions and regulatory environment, but has been offset by improved performances in commercial and insurance. Within commercial, it's been led by capital markets. In insurance, we flagged, at our strategic update in October last year, our intention to enter the bulk annuity market. And the improvement in OOI reflects the execution of our first such transaction with the Scottish Widows With-Profits fund, as well as the absence of one-offs that we saw in 2014. Looking ahead, we continue to expect other income to be broadly stable for the full year. On costs, operating costs of 4.2 billion were flat, with efficiency savings from our Simplification programs more than offsetting increases from pay and inflation, and over 190 million of additional investment in the business. On our new Simplification program, we've already achieved run-rate savings of 225 million, led by savings from organizational design changes, and we're on track to deliver our targeted £1 billion by the end of 2017. Our market-leading cost to income ratio of 48.3% continues to be a source of competitive advantage. And looking ahead, we continue to expect our full year ratio to be lower than the 49.8% we reported last year. Moving on to asset quality, on impairments we're seeing a further 75% reduction in the P&L charge to £179 million, with the AQR improving to 9 basis points compared with 30 basis points last year. This improvement was seen across all divisions, with run-offs better by more than £300 million, and our ongoing businesses by some £170 million. As in previous periods, the low charge reflects the improved economic environment, and our effective risk management, as well as provision write backs and releases, which total approximately £400 million, compared with £500 million in 2014. The quality of the Group's loan portfolio also continues to improve. Impaired loans at 2.7% of total advances compared with 5.1% one year ago and 2.9% at the start of the year. Coverage also remains strong at 55%, with a slight reduction to the end of 2014, largely due to the sale of heavily impaired assets from run-off, as well as further disposals within commercial. As you may have also seen yesterday, we announced the sale of a £2.6 billion portfolio of Irish commercial loans which effectively eliminates our exposure to the Irish commercial market. Adjusting for this transaction, impaired loans would reduce to 2.2%, with a revised coverage level of 48%. Finally, and returning to P&L, given the low impairment charge in the first half, and our future expectations, we've improved our AQR guidance for the full year from around 25 basis points to now 15 basis points. Looking briefly at financial performance by division, we've delivered underlying profit growth across all divisions, driven by income and reduced impairments. In retail, we continue to deliver strong profits and returns, achieving 8% increase in underlying profit to £1.8 billion, with a reduction in other income more than offset by NII, and a 41% reduction in impairments. In commercial, underlying profit was up 3% to £1.2 billion, driven by the improvement in other income and another significant reduction in impairments. The return on risk-weighted assets was 33 basis points higher at 2.29% and will remain on track to deliver our new targeted return of at least 2.4%. Underlying profit in consumer finance was 1% higher at £0.5 billion, with increased investment in future growth more than offset by income from asset finance, and again, reduced impairment. And in insurance, the bulk annuity transactions and the absence of one-off charges were the main factors for the 27% increase to £0.6 billion. In run-off and central, the improvement mainly came from a significant reduction in the run-off portfolio and improved credit charge. And finally, the £0.1 billion for TSB represents three months' profit ahead of the sale to Sabadell, compared with the full six months last year. Looking at statutory profit, asset sales and other items were £578 million and include a £390 million mark-to-market charge from ECNs reflecting the change in the value of the equity conversion feature, while the prior year included a £1.1 billion charge from the ECN exchange. TSB costs of £745 million are unchanged from Q1, while on conduct, as you've already heard we've taken a further £1.4 billion on PPI, which I will cover in a moment. Other conduct charges were £435 million and includes £117 million settlement related to PPI complaint handling which we announced in June, as well as a further £318 million relating to claims and mediation for products sold through the retail, commercial, and consumer finance divisions. Finally, the tax charge of £268 million represents an effective rate of 22%. As you know, there've been a number of recent changes to our tax position and given these, looking forward, we now expect our medium-term tax rate to be more like around 30%. On PPI, as Antonio has already mentioned, we're disappointed, we're again having to increase our provision, with increases in the period due to reactive claims' trends, as well as revisions to the costs and scope of the remediation program. Our past business review activity is, however, now close to completion and required no increase to existing provision levels. On remediation, we've increased the provision by £0.4 billion. And this reflects our overturn rates and average redress, as well as changes to the scope of the program, with total expected cases increasing from 1.2 million to 1.4 million. We now expect to substantially complete the remediation by the end of the year, which is later than originally envisaged, due to that revised scope. But as both PBR and remediation draw to a close, the cost of these programs will fall away, with the current monthly run rate of around £140 million to be more like around £30 million by the end of the year. On reactive complaints, these accounted for the remaining £1 billion of the provision increase, which is clearly in excess of the £0.7 billion risks that we highlighted at yearend. This is due to higher than expected average redress and while complaints are down 8% year-on-year, they remain stubbornly high and above the level seen in Q4 last year. For the overall PPI provision, a number of risks and uncertainties, as ever, remain, including the outcome of the current FCA review. And, as you've seen from the charge today, reactive complaint trends particularly remain hard to forecast as they're dependent on the volume of complaints we receive, which in turn are mostly driven by CMC activity. Our current provision assumes a significant reduction in reactive complaints over the next 18 months. If this decline does not happen, and complaints in the second half remain at the same level as the first six months, we'd expect to take a further provision of around 1 billion at yearend, with a similar level of provisioning required for each six months if complaint volumes continue to remain flat in 2016. Turning then to the balance sheet. In terms of assets, our average interest earning assets were 456 billion in the first half, 6% or 28 billion lower than in 2014. This has been driven by a 13 billion reduction in run-off and 12 billion from TSB, with average assets in our ongoing businesses broadly flat, with reductions in commercial offset by strong growth within consumer finance. On risk-weighted assets, the Group continues to make good progress in de-risking the balance sheet with RWAs reduced by 13 billion, or 5%, with improvement in credit quality across the business, the continued reduction in the run-off portfolio, active portfolio management within commercial and, of course, the sale of TSB. On capital, the business continues to be well capitalized and strongly capital generative, with a 70 basis points strengthening of our CET1 ratio in the first half to 13.5% before the dividend, and 13.3% after. This increase is after PPI and other conduct charges, as well as a 0.3 percentage points decrease from the TSB disposal, with the overall improvement primarily driven by underlying profit and the reduction in RWAs. The Group also remained well placed in terms of leverage and total capital, with ratios of 4.9% and 21.7% respectively position us well for current and evolving regulatory requirements. And as you've heard, we also continue to generate strong returns with an underlying return on required equity of 16.2% in the first half, an improvement of 2.2 points over the prior year. On net assets, our TNAV per share before the dividend of 54.3 pence is slightly down from the yearend, with an increase of 4.9 pence from underlying profit offset by conduct, again the impact of TSB, and the movements in other reserves, which is mostly the cash flow hedge reserve. Post payment of the dividend for 2014, our TNAV was 53.5 pence. And on the dividend, as Antonio has already mentioned, the Group's today announced an interim dividend of 0.75 pence per share. Looking ahead, as you know, as Antonio mentioned, the Group's aim is to have dividend policy that's both progressive and sustainable with ordinary dividend increasing over the medium term with a payout ratio of at least 50% of sustainable earnings. In addition, given the expected strong capital generation, going forward the Board will give consideration, subject to circumstances at the time, to the distribution of surplus capital through the use of special dividends or share buybacks. Surplus capital represents capital over and above the amount we wish to retain to grow the business, meet regulatory requirements and cover uncertainties. And while the amount is likely to vary from time to time depending on circumstance, it's currently around 12% plus an amount broadly equivalent to a further year's ordinary dividend. So to sum up, the Group has a clear strategic focus and a differentiated business model, and the first half of 2015 delivered another strong financial performance with increases in profitability and returns and a stronger balance sheet. And for the full year, we're improving our guidance for net interest margin and impairments. At the same time, the Group has made a strong start for the next phase of its strategic journey, progressing its three priorities of creating the best customer experience, becoming simpler and more efficient, and delivering sustainable growth. Through these initiatives, the Group is well positioned to become the best bank for customers while delivering strong and sustainable returns to shareholders. That concludes my review and today's presentation. We're now available to take any questions.

Okay sir, shall we start here?

Please.

Fahed Kunwar from Redburn. The first question I had was on the NIM and your mortgage market growth. So on your current guidance on the 260 bps it looks like in the second half of the year the NIM will be coming down. Is that how you guys see it? And then, going forward with your guidance on mortgage market growth being in line with the market, your peers are still looking to grow their share in the mortgages. Is it the case that if they're keen to grow then to protect your NIM you're willing to let your mortgage kind of slip below the market level and, actually, have that growing lower and not going forward? Could that be a change, or would you protect your margin at that point? That's the first question.

Right. And so, by parts, in terms of the NIM guidance, we are not foreseeing NIM to go down. We are at around the level that we guided for and we think we will be around that level for the end of the year. So, we had said in the beginning of the year we would be above 2.55. We have now confirmed that we will be, and we are giving you more precise guidance, around 2.60, and the level in the first half is around 2.60. So we are not thinking that we will go down in the second half; we will be around the levels at which we are at the moment. In terms of the mortgage market, we have said for three years now that we would grow reasonably in line with the market. As I said in my remarks, the market is growing at 1.5%. A year ago, when we presented the strategic review, the market expectation was for a growth this year of around 2.5%. And given that the market is at 1.5% and our growth is around 1%, so we are slightly below the market. We are comfortable with that level, as I said, because we have been able to offset the assets margin pressure which is continuing as it was before, no more, no less. We have been continuing to be able to offset it with the margin of the deposits and the lower wholesale funding costs. We think this picture will continue, and that's why we are giving you the same margin for the year. But even that our focus is on preserving margin, we accept to raise our mortgage volumes a little bit lower than the rest of the market. In a low market growth environment, which is the case, so 1.5% to grow it around 1% is not significant. For example, on the consumer finance side, where we are growing significantly above the market, at 17%, with 34% growth in car financing, for example, and car financing market is growing 11%, the market share is much more relevant, given the weight of new business versus the stock. When new business is very slow, is very low in terms of the stock, those small trade-offs, in our opinion, are irrelevant and it is the right thing to do in order to preserve margin.

And the second question, just on the dividend, when you're thinking about the capital threshold, it looks like you've increased your guidance on what you think your minimum capital level is, by putting in the line about saying you need one year's dividend in there as well. How likely is the PRA, seeing as you picked up your capital guidance but also the PPI charge, likely that you pay a significant dividend with the buybacks in the event that PPI and the reactive claims don't come down and your threshold is picking up? How do you see that over the next year, 1.5 years, I guess?

Okay, I'm going to do that part. First off, we don't see it in terms of increasing our requirement. That's why we've described it in the way that we have. We've talked previously about around 12, that remains the case, and we've now talked about holding back an amount broadly equivalent to the next year's dividend. And if you put that together you get to about a figure of about 13%. So that's what we're working off and that's what we look at. In terms of processes, that is the Board's decision, that's the Board's judgment. And in terms of liaison with PRA, of course as you would expect, we would share with them both the interim dividend and what we would be saying about the dividend. But it's very much, this is the Board's decision, this is what we are proposing, but have the PRA seen it, of course they have. In terms of the go-forward and how the modeling and the interactions with PPI, the separate elements are that, yes, we've increased the PPI provision today. But what you've also seen is, in the first half, we continue to be strongly capital generative, even if those PPI claims persist. So, in terms of that growth from the 12.8% to the 13.5%, that's got not just 0.3% from TSB, but that's certainly got 0.9% in terms of conduct costs. Now obviously, we want to see the end of PPI, et cetera, but what we're able to demonstrate is that, given the financial conditions and the financial position of the business, we're able to grow that base and, should we have to, live with a certain level of PPI complaints.

Tom Rayner from Exane BNP Paribas. Just on the same themes, really, if I could just push you a little bit more on the margin guidance. Excluding TSB, from Q1 to Q2 the trend was still upwards 2.60% to 2.64%. Even if around 2.60% means the second half is 2.62%, so in line with the first half, it still implies a bit of a change in the trend from rising to possibly declining. I wonder if you could add any color to the underlying drivers here, the asset spread, the liability re-pricing, the churn on the back book. Could you add a bit more color, because it does sound a bit like the trend is changing, even if the guidance for the full year is not particularly different?

You're dealing with small degrees, you really are, Tom. When you look through what's caused the increase Q2 on Q1, we continue to get the same old themes: a few basis points of asset price here and a few basis points off -- we were able to offset it through pricing of ISAs, et cetera., fixed deposits, instant access, we're able to do that. We will still get benefit from wholesale funding; we will still get benefit from structural changes. Things like the SVR book remains in place. We've seen a slight pickup in attrition, but that's about maturities in, as opposed to anything else. Trying to divine the movement between 1 or 2 basis points up and flat, it will move around that space.

And I guess the reason I ask because I'm thinking a little bit further forward. So if we start thinking about next year's margin, if the trend is down, rather than up in the second half, will you extrapolate the trend or is the rate environment changing does the whole thing change again when we think about next year and beyond?

Well, Tom, extrapolating on a longer term view and I think we left this clear in our strategic review last year, we believe that interest rates will start to rise soon. We think they will rise slowly and they will stay lower than pre-crisis level for some time to come. And in that environment, as we said last year in the strategic review, our margin would go up, and we even gave you a sensitivity of how much by 25 basis points after the first two rises. So obviously, to be very clear, as always, obviously an interest rate environment close to zero is not the ideal environment for a retail and commercial bank like us. And we have told you repeatedly, contrary to what happened with other banks in the sector, that given our multi-brand, multichannel strategy and the way we manage assets and liabilities in a combined basis, we manage the difference of the two. And we do this at the highest level of the organization on a weekly basis. We have been able to offset the asset pressures with lower impairments in the market. Asset margins have been coming down. We have been able to offset them with better liability management, as you said, both in terms of the cost of deposits and the fact that we have less wholesale funding costs. Now we have the lowest credit default swap of any UK bank. But obviously, we cannot do this for ever if interest rates were going to stay at zero. So if, in your assumption, interest rates will stay at zero at current levels for a long time, obviously that is not the ideal environment for us. If you assume this, which is our assumption, that interest rates will start to increase by the end of the year, slowly as I said and progressively, this will drive our margin up in the future, along the lines of the plan, as we said in October last year. So these are what you have to consider. And obviously, depending on your own assumption of interest rates, you have the different implications.

Thank you. May I just have a second the capital generation? One of your peers set a sort of guidance where they would distribute everything above a certain level, and has subsequently ruled out any such distribution for at least until 2017. And I'm just wondering, in this guidance, which sounds a bit like anything above 13% will be distributed, are you thinking also about future RWA inflation, the UK stress test, and all these potential caveats? Are they all at play? We can't just mechanically do our numbers and assume that everything's getting paid out, I guess, at the earliest opportunity.

I think we've been quite clear that the Board will give due consideration at the time, in terms of what we do with surplus capital. But just to reaffirm the point, we would see that anything above 13 would constitute surplus capital, but we would give due consideration. So I'm not going to give you a date, but I'll give you an amount, but I will give you it will be considered, based upon the circumstances prevailing at that time. In terms of things that you allude to, I can talk about headwinds and tailwinds. There is some upward pressure on RWAs, we don't see it in the more extreme ends, for example. We've talked a bit earlier about impact of things like conduct charges, et cetera, but I would point, again to repeat my earlier answer in terms of our capital generation, even when one has to absorb those forms of costs. So, we think what the guidance gives to people is a clear view as to where we see what our capital levels will be, and how we'll approach it. And as I said, we will give consideration to how we deal with the surplus at the particular time when we're north of that 13%.

Thank you very much.

Let's go through now for -- he is part of the room, there on the first floor, please. Sorry, can you -- your name?

Raul Sinha, JPMorgan. Thanks for taking my question, Antonio. If I can ask you a broader one on NIM, please, just to follow from the first two? Essentially, the gap between your mortgage growth and the market is 50 basis points, you're growing at 1, the market's growing at 1.5. If, over the next 12 to 18 months, the pace at which mortgages are growing in the UK starts to accelerate, let's say it goes back up to 2.5%, 3%, and that is accompanied by significant margin pressure, as you would expect, because everybody has got a growth plan out there, based on mortgages, would you be comfortable in letting that gap to the market effectively expand, or would you feel compelled, given that you are the market leader, to chase that margin dilutive type growth ahead? Essentially, my question is, are you going to choose capital return to shareholders, or will you continue to grow balances at the expense of margin?

Yes, I understand the question, and it's a fair question, but it's a bit theoretical question, because we have to decide, at each moment in time, depending on the circumstances at the time, depending on what competitors do, what interest rates outlook are, et cetera. I do think that the mortgage market will stay around this level for the year. So it is growing, Bank of England numbers two days ago, it is growing in the 12 month, exactly 1.6%. It is going to be around this level, 1.5% in my opinion. You see in the press a lot of comments about acceleration of approvals; you have to take into account seasonality. So we think the level will be 1.5%. There was some impact from the mortgage market review, last year, which has decreased a little bit the growth. It is correct as well, that that review has significantly improved underwriting standards, which was a very good thing. We are, as I told you, even all the circumstances, will need to go slightly below the markets, given everything else I told you, but it's slightly below and that's what we intend to accept, not more. So to be very clear, given it is a slight thing, we have accepted it. Our continued guidance is to grow reasonably in line with the market, and I don't think the market is growing to shoot to the 3.5 percentage you say this year, so we'll have several quarters to discuss this, going forward. I would like to raise one point which is quite interesting, by the way, and this is quite important, because it connects to your question in a separate aspect. The fact that the UK economic recovery is taking place as I showed, with less debt, which is quite unusual, so the economy recovered based on higher consumer spending. But given the successful decrease on interest rates, given the monetary policy, and the FLS, people were able to increase consumption but, at the same time, save more as a percentage of disposable income, is a very powerful argument for the economic recovery to have a long way to go, because that consumption recovery has led to additional business confidence. Now you have additional business investment, and this is a virtual circle, going forward, where the household debt, which was a problem in the UK, is decreasing, as the economic recovery takes pace. This is very positive for the UK economic recovery, and in my opinion, the trends that you are seeing in NPLs and GDP, apart from any external shock, are quite sustainable, and this is quite important.

Thank you, Antonio. Just a quick clarification for George, if I can, please? The PPI charges you took in the first half, George, were they tax deductible, or not?

Yes, it's our understanding that they're tax deductible. As you may know, obviously the government came out with the changes to the deductibility of redress payments, and they were initially thinking of doing this essentially on a sort of pro rata basis, but then a couple of weeks back, it's more on what's defined as a just and reasonable basis. So our assumption and our numbers reflect tax deductibility for the PPI, yes.

Chris Manners from Morgan Stanley. Two questions, if I may? The first one was on the commercial banking business; I saw you've reduced the RoRWA target to 2.4% from 2.5%. When we wash that through, obviously the tax rate's gone up as well. It's actually quite a big drop in the expected ROE from roughly 16% to maybe 13% on allocated equity. I'm just trying to understand the drivers behind that, and why you aren't holding the team to a higher ROE, just given where you can get returns on the rest of your business. And the second question was just trying to quantify what we could look at on the special dividend there. So if you can do 1.5% to 2% of capital generation per annum, so if we take the midpoint that's 1.75% of RWAs per year, £225 billion of RWAs, gets you north of 5p. Is that of total dividend, is that the sort of thing we should be looking at for next year? Thanks.

Okay, I will answer to the first question, which is the easiest one, and I'll leave the second to George. Look Chris, we have not changed any targets for the commercial division, so there must be some confusion there. Andrew has in his plan to achieve a 2.0% return on risk-weighted assets for the current year, which we have achieved ahead of target. We are now above that target. And we have, in the strategic review last year, set out a new target of 2.5% for the -- 2.4% for the end of 2017. So not only commercial is well ahead of the previous target. They reached the target of 2.0% ahead of the plan, because it was for the end of this year. But now we have a more ambitious target of 2.4% return on risk-weighted assets for commercial for the end of the plan period, which is 2017. And commercial is now already above the 2.0%. We have had a huge transformation in our commercial division, which I am very proud of. We went from a product-based strategy to a client-led strategy, with clear segmentation. As I told you in my introductory speech, we are now, for four years in a row, increasing SME net lending by 5% a year in a falling market, leading to 23% net lending growth when the market fell by 16%, 17%; it's a huge difference. We still have room to grow, because our share of net lending in SMEs is only 17%, so this work has been, in my opinion, exemplar. We are also gaining market share in mid-markets where we held in this first half, but while the market came down to minus 2%, according to the latest Bank of England numbers the markets fell in June significantly. And as a whole, we are well in line, in my opinion. We had said, in the strategic review, that between mid-markets and SMEs we would grow around £1 billion net in each segment per year, so £2 billion every year. And if you look at year on year at the moment, we are at around £1.6 billion, so we're well on target, in my opinion, to get the £2 billion in both segments year-on-year. So, quite probable to work then in commercial, in spite of difficult market conditions, until the end of the first quarter.

On your second bit, and I won't check your math, but when you look at the numbers we've disclosed today in terms of the first half, we've got through 1.8 of underlying, there's about 0.4 of other, which is things below the line. But if I've got a net 1.4, which is pretty ongoing in terms of capital generation, the RWAs at 50 basis points. As previously discussed, there are some headwinds out there but I would continue to expect to be able to derisk, et cetera, in terms of the book and it would offset that. The TSB 0.3 will disappear. If you part conduct to one side, if you run the math through as you obviously have, then you can come to your own outcomes. But I won't comment on your number, which might frustrate but I'm sure you anticipate, but what it does show is a strongly capital generative business.

Thanks.

Here, on the third row.

Martin Leitgeb, Goldman. Two questions, please, from my side. First on buy-to-let lending, which obviously is an important part of your overall loan book, how should we think -- or will the changes announced in the budget affect volumes here, going forward, in that book? And the second question, just to follow up on your earlier comments on mortgage volume growth, you obviously have the 30 billion loan growth target. Shall we still think this will be about 30 billion so that a slight weakness in mortgage lending might be compensated by a strong performance, say, in consumer or elsewhere in commercial, or could this number potentially be lower now? Thank you.

Juan will take the first part of your question on buy-to-let and then I'll tell you about the 30 billion and how we see it.

Yes, on buy-to-let, there will be an impact on the business, but our understanding is it will not be material. What I think is that a big part of our buy-to-let was done many years ago. The indexed rental income compared with how much they had to pay, so the rental cover of the buy-to-let portfolio the index one is quite high. And even if you factor in the interest rate growth, potential interest rate growth over the coming years, we think that the impact will not be material in our portfolio. We have done a first analysis of return and we don't think it will be material.

I -- risk asset quality comment, so you don't think it will be affecting volume growth?

In terms of volumes, we think that the buy-to-let is something that we need from customers and what we are just doing is to follow the customer needs. And we think the market will adjust to cover this customer need.

Just to add a few comments on what you asked to Juan. This is quite interesting, we only gave you two slides in the appendix. But if you look at slide 23, which shows the mortgage LTVs, and this is an aspect which I don't think has been very much highlighted recently, the fact that, contrarily to the pre-crisis time, you have new business of mortgage volumes slower than before and, in this case, this year in our case, gross lending, from new business gross lending, is only 11% of the stock, as I said in my speech, when in 2006 in the market it was 34%. So the fact that you have a smaller proportion of new business versus the stock, has an incredibly positive impact on the quality of our book and on the finances of our customers. So if you look at these numbers, not only our average LTV, as I mentioned in my speech, decreased by 20% in the last 2.5 years, so from more than 56% to 45.9%. But the amount of mortgages that we have below 80% LTV was 60% 2.5 years ago and is now around 90%. So an additional 30% of the mortgages of our customers are below 80% LTV. This is, roughly speaking, on a 300 billion mortgage portfolio, like 100 billion more equity on our customers. This from a quality book's point of view, number one. And number two, from a commercial perspective, in terms of additional options we have in terms of serving our customers' needs, is really amazing. And when you look at the LTV specifically of buy-to-let, you can see that it is around 56%, so it has also decreased very significantly. It is above the average, but only 56%, and the new business volumes at around 62.7%. So that's why, as Juan says, we are quite comfortable about this segment and we think the changes that are gradually going to be introduced will not have, in our specific case, a very significant impact. But I would draw your attention to the amazing improvement, given house prices are increasing with low business volumes, on the quality of our overall stock and, of course, of the mortgage stock of the UK, and how that impacts risk and risk-weighted assets and capital in terms of the banks in general. To your second question, when we mentioned the £30 billion last year, it was basically divided in the 6 billion I just mentioned between SMEs and mid-markets, 2 billion a year each year, which we are well on the way to deliver. It was also based on 2 billion between credit cards and car financing every year, so another 6 billion, which makes to 12 billion. And 18 billion was what we thought at the time would be the market growth and us keeping the participation of that market. So the fact that the market now is growing instead of 2.5%, 1.5%, should the 1.5% be kept, this has an impact because we would be growing 1% less per year just in terms of market, which should be, just doing the calculation, £3 billion every year, £9 billion. But we continue, as I said before, to target that we will increase our mortgage portfolio over the three years, reasonably in line with the market.

Chintan Joshi, Nomura. I've got one question on NIM and one on taxes. I'm not yet worried about your NIM, but I'd still like to fuss about it. If we can talk about, as we get into the rate hike at the end of the year, start of next year, how do you see yourself and the industry passing that on, on mortgages and key deposit products? Is it in line with the base rate, is it below, is it above? Can you offset this 8% surcharge by being a little bit higher on that asset margin expansion? And also, if you can talk about -- George mentioned the attrition rate has picked up a little bit. How much, just so that we are in the know there? And then one on taxes.

So maybe I'll just do a generic answer in terms of how we see, generically, impact of interest rates, the impact on margin and maybe you can go into detail on the two questions? The guidance that we have given is that we expect base rates to start increasing slowly around the end of the year. And we said that in the first two base rate rises, we don't expect significant impacts on our margin overall. And from then onwards, there should be positive impacts. And we said at the time, around the £100 million per 25 basis points on a discrete point in time. I think that is our overall view at the moment of what will happen. Of course, everything depends on competitive pressures there or on what happens. I think another quite important point, in terms of how margins will evolve in the near future, will be the definition of ring-fencing, because I personally believe that there are two important factors that you don't know yet in terms of the ring-fencing. The first is. What is the leverage ratio for the ring-fenced bank which, in my opinion, will be higher than the Group's ring-fenced leverage ratio? So I think that the ring-fenced bank will have a higher leverage ratio. And second, in our case, you know because we are basically going to be a ring-fenced bank, but in other banks you don't know what will be inside the ring fence or outside the ring fence. And given mortgages lead mathematically to a lower leverage ratio, if there are ring-fenced banks with mostly mortgages inside, then you may have a competitive pressure for margins to increase, because the restriction in terms of capital will not be the fully loaded ratio, will be the leverage ratio. So that basically doubles the cost of equity for mortgages, depending on how the ring-fenced bank is constructed. So I'm just giving you another impact of what might change in terms of the future, apart from interest rates moving, which I think is quite important. But overall speaking, what we are counting on our plan, is, as I tell you, that interest rates will start rising slowly by the end of the year. The first two base rate increase will basically be neutral and, from then on, it will be positive in terms of impact on our margin. There were several specific --.

Yes, I'm sure I can add to that.

There was one on taxes.

Yes, so what was the tax --?

The attrition rate on the Halifax book, you said there was a slight pick-up, just wondering how much.

Right, sorry, yes. We talked previously there was about a 7% attrition; that's ticked up to about 9%. That's for the Halifax book and for the overall SVR book. So I think we said the Halifax book was about £56 billion at Q1; that's probably about £54 billion at Q2. But as I said, what we're actually seeing is, it's actually part of it is the profile in terms of maturities. And actually, it's maturities into the book that actually are down rather than people actually leaving the SVR book. So that's the reason for the change. Did you have a question on tax, did you say?

Yes, and on taxes, you've guided us to 30%; I'm just trying to reconcile that. So insurance profits won't face the surcharge, and current corporate tax rate plus the surcharge gets you to about 28%.

Obviously, there's been quite a bit of change and there is prospective change as well as the corporation tax drops away, which is why we've had this medium-term-type rate. And you're right, and there is actually going to be volatility as well within the rate. So you're right, it's on bank profits so excluding insurance company, also excluding holding companies as well, so that's quite an interesting thing people are talking to the revenue about at the moment in terms of their constructs and where they have debt, et cetera. So there's some interesting things being worked through at the moment. But we'd previously said, I think, in the low 20%s was our guidance. I do say around 30% and that around is quite important. There will, obviously, also be a bit of volatility should one get in the future any form, obviously, conduct-type charges, obviously, they're not deductible so that will introduce some volatility into your result. But at the moment, we said 22%. You add 7% or 8% to that, you'll come to around the 30% number but there's a danger in being too precise at the moment, but around 30% is --

Is it the conduct that makes you a little bit cautious on the 30%?

Yes.

Okay. And DTA's utilization hasn't really picked up; it's £4.5 billion at the full year stage and at the half-year stage. When do we start seeing that number come down? It's good that the CET1 ratio's going up without DTA help but, at some point, when do we start seeing that number come down in --?

It's stable now because of the conduct but it has been coming down. You're right, we can always go faster. I think we disclosed -- we previously had about a 2019 expiration point which we pushed out to about '22, '23. But again, the change in terms of utilizing some of the pre-crisis losses, so -- or post crisis losses. So again, we still stick by that we would expect the losses to be consumed by about the early 2020s.

And would the DTA number get impacted by this tax change, 30% surcharge?

No, because you can't offset it, there are no offset. As I said, there are discussions now around what constitutes banks, et cetera and I know there are people out there, obviously, lobbying in terms of where limits kick in and things like that. But some of the interesting stuff is around how you construct yourselves and what is a bank and a non-bank.

It impacts, timing differences so, I guess that doesn't impact Lloyds so you don't see any impact on DTA level.

No, we do not from the surcharge.

Thank you.

Can we move on to another question, there -- side of the room?

Good morning. It's David Lock from Deutsche. The first question, just to follow up on PPI, a lot of your PPI charge is for administrative cost. I just wonder if you could clarify, is that non-tax deductible now? Because it obviously has quite a big impact when we think, going forward, if you're taking further PPI charges.

The way it's been constructed, they're doing an uplift. So rather than going into the awfulness of trying to constitute what's the cost of administration, the approach now is to take redress. And I think it's to apply a 10% surcharge which, essentially, is your expense allowance. So that's the way they're going to deal with the tax deductibility.

Okay, thank you on that. And secondly, on retail deposit costs, we've seen a slight pickup, if we look at the Bank of England data, in deposit costs across the UK. I just wondered if you could update us on where you see your back book retail deposit costs and where you see your front book deposit costs coming through at the moment. Thank you.

In terms of back book, we talked about some numbers I think at Q1 and what we've seen across the back book is, again, a few basis points shaved off those in terms of quarter on quarter, so things like instant access was, I think, a blended cost, about 57, that's come down to about 56. Variable ISA at Q1, we had about 89, that's down to about 78. And in terms of fixed ISA, which was about 260 I think it's down to about 230. So again, we continue to see some just shavings off of the cost of those [multiple speakers].

We're not seeing any pressure on our deposits to go up. On the contrary, as George says, they have continued to go down. Maybe those data that you saw are because some other banks may have a more price-led strategy in terms of pricing deposits or mix. But, in our case, we have been able to attract deposits at quite good rates and with lower costs. That's why our loan to deposit ratio is basically the same we're on the levels that we had before.

Thank you. It's Rohith Chandra-Rajan from Barclays. Two as well, please, if I could? First one's just on the AQR guidance, so the 15 basis points full year, 20 basis points second half from 9 in the first half. Just wanted to check what the underlying assumptions were there. It looks like a continuation of the underlying cost of risk, if you like, and maybe a halving of the write backs from 400 million to 200 million. I just wanted to check whether that was the case. And then secondly, on the non-interest income 4% Q-on-Q growth, you highlight commercial banking and insurance as a driver of those and you've reiterated your guidance for the full year for flat OOI. Just wondering about sustainability of that Q-on-Q pickup. If you can provide any more clarity there, please.

Juan will tell you about the trend that we see on NPLs and about AQR, and George about the OOI.

On AQRs, you're right, we have had a proportion of the AQR is impacted by write-backs and accountable in the write-backs will -- they are slowing and they will continue slowing. But what I can tell you as well is that the trends of our portfolios are pretty stable. We are seeing improvements in all portfolios, so we don't anticipate any change in the trends of the gross impairments.

And just to corroborate on what Juan said, if you look at one of the slides that I presented, the effect that in this case so not only household debt as a percentage of disposable income is going down, but also corporate debt, which in the UK has never been an issue, also goes down, these are two very good factors also for the future. So not only the fact that interest rates should start to rise only slowly and stay lower than before for a long time, coupled with the fact that the economic recovery is being joined by both household debt and corporate debt as a percentage of GDP decreasing, are quite good leading indicators in terms of the trends that we are continuing to see.

Do you expect to see a well below normalized AQR next year?

We expect to see the continuation of the present transfer some time to come, no doubt.

And on AQR yes, you're right, at half 1 obviously retail is down some 20%, we got I think 4% growth in commercial, and that's up slightly, so I think we're up 20% insurance. In terms of continuation of those, yes, insurance has been benefited by the bulk annuity deal that we've talked about, so that is a sort of form of one-off although we're looking to enter the market externally, so I would expect to see a continuation of annuity deals as we move forward. In terms of where we might get OOI, I won't give a projection, but I would certainly expect insurance to still be up year on year. Similarly, commercial was up 4%; I would certainly expect to see that for the full year.

Yes, here side to your left.

Sandy Chen, Cenkos. Three questions, and actually the first just a follow-up, George, on that insurance guidance. If I could get a bit more detail on it because, ex the bulk annuities, LP&I looks like PVNBPs were down 26% year on year. And if you look at the profit, again without the increased profit contribution from bulk it was down year on year again. I guess, if you could just expand a bit further in terms of beyond 2015, and really excluding the bulk, what the trends in the rest of the insurance business is? And then the other questions were just -- yet another question on the NIM guidance, and thank you for that, if I heard it correctly £100 million extra NII for every extra 25 bps in the base rate. What's the SVR attrition assumption in that and has that been revised for a bit, because I think you saying, George, that that's ticked up as well? And the last one was on PPI guidance. I noticed in the detailed notes that, in the Q1 average monthly reactive complaints, they were actually up quite a bit, whereas Q2 reactive complaints were down. Why in Q1 weren't we being guided in terms of or flagged that PPI charges, PPI impairments, sorry provisioning, might be going up?

Okay, there's a range of subjects there. On insurance, going back to the start, I'll talk about insurance but I'm afraid I'm not going to exclude bulk annuities because bulk annuities are a key part of the proposition, going forward, and I think in terms of a business proposition the Scottish Widows have a good one. We've got a great brand name, we've got the capital strength, we've got the expertise and this has been a good market for a number of Scottish Widows’ peers and it's something that we should be part of it and we've started and we will continue to be part of. So it is very much part of their go-forward story, so I won't exclude it. What also will be part of the go-forward story is, I think, the corporate pensions business where we have a market-leading proposition and we're experiencing above market -- above GDP growth and will continue to do so. So that's going to be a massive part of this business, going forward. And we have a great general insurance business, and in the general insurance business we have a great book. What we haven't mastered at the moment is distribution outside of the branches, and that's something we're investing money in, in terms of direct propositions, and something where we want to see our new business flow much more closely; match our overall share of the market from a stock perspective. So we have three great product lines and they're very much part of going forward. Some of the deterioration in the terms of year on year would reflect some short-term things around, as we talked about, withdrawal from things like the selling of protection through the branches, which we announced last year. But going forward, those three key products, as I say, the bulks, the corporate pensions, home insurance are going to be the anchors, the cornerstones of the Scottish Widows proposition. In terms of SVRs, I can't give you precise numbers, but when we talk about NIM guidance, and when we look internally about our NIM expectations, and we talk about expectations of rising interest rates, one of the things that we assume in that is that you will see increased attrition in terms of SVR. But obviously, we have offsets to go against that in terms of things like deployment of reinvestment on structural hedge, et cetera, that more than offset. So it's part of when we look at the net impact, SVR is one of the factors that we include within that. And then on PPI, if I understood the question correctly, I think it was that complaints were up in the first quarter, why didn't we guide then that things might deteriorate? Look, we have a very long tail in terms of PPI and the extent of which, when one takes the short-term trends and extrapolates it, and to the extent of which the complaints that are coming in represent a trend or represent a blip, I don't think people would want us amending provisions each time I see a weekly change in terms of our PPI numbers. And we get weekly numbers in terms of what we're actually receiving. So we've had a risk out there in terms of what might happen. We amend our numbers when we think what we're seeing constitutes the trend, and then we reflect that and amend our estimate. But one has to wait to see in terms of more than four weeks as to what constitutes the trend.

Edward Firth, Macquarie. I just have two very quick questions. The first one was just bringing you back to your provision cover, or rather your impairment cover, which has fallen quite substantially, certainly since Q1. And I hear what you say about the mix, but if I look at the disclosure that you helpfully give us on page 32, you can see you've reduced your cover across most of the retail book, most of the commercial banking book, et cetera. And I suppose I just wondered, what was your thinking behind that in the sense that I guess traditionally banks look to build up cover in the good times rather than reduce it further. So I guess that was my first question. And my second question was about the PPI guidance. There's a lot of talk in the market about the Plevin case; are you factoring in some of that in your guidance, and if you are or are not, what is the sensitivity to your numbers around whether you have to pay out commissions or not have to pay out commissions? Thanks very much.

I will comment on the coverage; the coverage is pretty much stable, so there have been some changes -- there is some impact in the commercial book because of the difference of the coverage between cases coming in, which are better quality and, therefore, the coverage is lower, and cases which are being worked out. In the retail space that you are mentioning, the main impact in the impairments is relative with the fact that we have sold some written-off assets and this is impacting also in the average coverage of the portfolio. And also -- but we have not changed the way we are calculating the provisions in the portfolio. It's just a reflection of the good quality of the portfolio and we have not changed at all the way we are calculating provisions.

Can you give a sense to where -- is your coverage by book, I guess, broadly where you think it should be now? I mean, are we below? Will you have a chance to reduce that further, going forward, do you think? Should we see more releases into the second half, or are you broadly comfortable?

As Juan said before, we have some releases and there will be more to come, although at a slower rates. But the coverage is absolutely then in light of our strategic aim of being a prudent and low risk bank. So, if you look at our coverage at 55% it's higher year on year from 54% to 55%. It is a bit lower in December from 56%, but that only reflects, as Juan was saying, the better quality of the book. Let me give you -- you are looking at me in a suspicious way

Well, no, I guess the better quality of the book --.

Let me -- sorry, I have a special button here. Let me give you a very specific example. I think this example will be enlightening. We just sold, as you know, all of our commercial exposure in Ireland for £800 million with a small gain pretax and 7 basis points capital accretion. Given that they were heavily provisioned, our coverage is going to go down, but we sold the whole book so is our book better today than it was two days ago? Yes. Has the coverage gone up? Yes, because it's a better quality book. More questions, please.

On your question on Plevin, we have a disclosure, actually it's around page 77 of the RNS where we talk about Plevin, and you'll see with that we explicitly say we have not included or made any allowance for Plevin, as you would expect, along with the rest of the industry. That's one case and we're actively trying to assess the consequences thereof, but there's not much I would say over and above what's shown on page 77. But that's where it is.

Time up. No question here for some time, sorry.

Thanks, it's Chris Cant from Autonomous. I just wanted to come back to you on dividend again. You were at 13.3% at the half, and I appreciate that it's going to be a point in time decision at Board level whether you distribute excess capital over 13%. But if you think about conditions today, and the fact that you're likely to accrue capital in the second half, are you aware of any conditions now which would dissuade you from distributing excess capital at the yearend? Because obviously things may change in the second half, but is there anything today that would -- assuming no change, would you be able to distribute over 13% come yearend, should you choose to? Thanks.

You get full marks for the question, but no, I'm not going to answer that. It will be a decision that the Board will take at that moment in time and I'm sorry, I'm not going to say any more than that.

If I could ask just one completely unrelated question then which, hopefully, might have an answer? The tactical deposit book you disclose in the announcement you still have 33 billion or so of tactical deposit balances. It's down about 4 billion on the yearend, but given some of the pricing action you took in the first quarter there, that's not a bad result really, and just wondering if you think you can extract further margin benefit from those balances. And maybe if I can frame it like this; if you were to replace all those 33 billion of tactical deposits with retail deposits, or rather relationship deposits, how much NIM accretion might we realistically expect to see? Thanks.

Right, Chris, it's a fair question. It's a good question. It's difficult to comment on that question for the following reason, I think, as I told you many times, that we have developed a competitive advantage in the way we manage margin. Because on top of the multi-brands, multichannel strategy we are the only one that has a multi-brand strategy, which I really believe is very useful in a low interest rate context on managing deposit rates. We have a way of managing margin, which is, we consider it as a whole, so we look on a weekly basis at the highest level of the Bank to all of the asset margins on the retail space and all of the liabilities, all of the deposits. And we manage this combined having the whole picture, if you want, in front of us on a weekly basis at the highest level of the Bank. Given that most other banks manage these on a monthly basis, separately assets from deposits, and at different ways in the organization, we think this is a competitive advantage, and we think this has been reflecting in a different behavior of our margin in the latest quarters' versus the market. But exactly because we do it on a weekly basis and looking at everything that the market is doing. And on your specific question, given they are tactical deposits, it's very difficult to anticipate your strategy about tactical deposits. So we really have developed these competitive advantages; depending on how the market unfolds and how the situation evolves, we will react. But we don't exactly know exactly what to tell you about the tactical deposits exactly because they are tactical. So while in all of the others we have additional restrictions because they are our key segments, they are relationship, et cetera, the tactical deposits, as you correctly said, are more volatile. We look at them both from a value perspective and a funding perspective. You know that we want to keep our loan to deposit ratio between 100% and 110%, more tied to the 110% because of the low interest rate environment where we think it's the prudent thing to do, especially when our wholesale debt in net terms is now close to zero. Then we look at them in terms of value combined with the overall picture and we will evolve depending on the circumstances. So I don't want at all to frustrate you, but that's exactly why we call them tactical deposits. And they include not only the online deposits in Germany, but they include a Scottish Widows deposits, Birmingham Midshires, et cetera, so we have several of those tactical brands [ph] that we manage both for value and for funding.

Can I ask then what's the average rate across those deposits currently, if you're not willing to comment on what the balance might do, going forwards?

The online are about 50 basis points. I don't have a figure -- we can come back to you on what the figure might be for the Birmingham Midshires. We can give you those.

Thank you. It's Claire Kane from Royal Bank of Canada. Can I have two questions, please? The first really is trying to assess the tailwind you have from the sub-debt roll off. So you have £23 billion outstanding, down 10% from yearend. Obviously, part of that is the ECNs, so perhaps you could give us an update on how you think that court case on August 24 will go? And also, really in respect of the residual amount of sub-debt that you have outstanding that doesn't meet the Basel III fully loaded criteria. Is there any potential there for buying back some of that sub-debt? And if there's any timeline perhaps on that. And then maybe my second question, it's a quick one, hopefully. In terms of your capital stack, two parts to that really; on the Pillar 2, do you have any update or really your view on the new framework that came out a couple of days ago? Clearly, your absolute buffer requirement is now a larger percentage of your RWAs at 2.2%. And then coming back to your comment on the leverage ratio requirement for ring-fenced banks, that would suggest you think the systemic buffer for the ring-fenced bank will be closer to the higher end of the range, which then, when you add that all together, comes quite close to your 12% capital surplus threshold. So from that, should we then deduce that your management buffer is equivalent to one year's dividend? Sorry, that was a lot all together.

Going back to the start, yes, ECNs, court judgment; it's 24th/25th or 25th/26th when we go for our appeal. Suffice to say we expect to win; we think we should win. We think there are, obviously, flaws in the original judgment around the definition of the word any as opposed to whether that is on the first occurrence the CDE kicks in or whether it is any possible or any future -- so we think it's quite clear it's the first occurrence. And then there's the small matter of we think an instrument that converts at 1% would, in those circumstances, count towards a stress test, which is an ex-ante review of a going concern capital position of a business and what actions one should take, for which we think 1% has no place in such assessment, and certainly no place in terms of management actions. But anyway, the court may see different, but that is our view and we await for the judgment on 25th/26th. To your very long subsequent questions, I'd probably give a slightly sort of shorter answer. In terms of buybacks, we continue to scan in terms of relative pricing and in terms of perceived paybacks and where we think there is value, and we think it makes sense for the business then we have acted and will act. But I don't you would expect me to tell you where we might see such opportunities lie. Then in terms of capital stacks, again, I'll answer you in a relative generality. We are in a good position vis-à-vis, our UK peers and certainly our European peers, and certainly our expectation is that you're unlikely to see certainly any form of reduction of the total size of capital stacks that we currently hold as we move in to the new regime, so that's a sort of general question. And you'll have to help me with your specific last question which I missed, but we can pick up afterwards as to what the specific question was around buffers.

And by the way just to clarify one point which I'm not sure that we said, relating to your question on the ECN case. Obviously, the guidance we've just given, because we like to give it on a prudent basis, is, although everything George said obviously is what we believe, we gave you the guidance on a prudent basis, so assuming the present court decision where we lost. So the NIM guidance that we gave you is assuming the present court decision where we lost, although as George told you, we expect what you just heard. But just to be clear, that is what's included in the guidance is the present court decision. Okay.

It's Peter Toeman from HSBC. I was going to ask you whether you'd included the court win in your guidance.

I saw it coming.

So instead of that, could I ask you about the SVR book and why it is that the rate of attrition on the SVR book has been so low, much lower than commentators have suggested, particularly the time when your competitors see your sort of 50% SVR book as a prime source of new business for them?

Do you want to answer that?

It's a question that gets asked, and without privy to the other people's books it's hard to answer in terms of a relative assessment. So there are others out there with higher rates, which presumably is a factor; there are some 4.84 and stuff out there so -- and one would expect that those would have greater attrition. Whether it's anything to do with LTVs, interest only proportions, we can but speculate as to the reason. So I can't give you a definitive answer, but it's quite a long-term trend that we have observed.

We can tell you later on how our SVRs are split, because a very significant portion of our SVR is a much lower interest rate which is also an important factor. So Tom, maybe last question as we are reaching 11 o'clock.

Sorry to be back again on it, I just fancied one last try at the capital guidance and distribution question. If I give you a hypothetical position 2016, at the end of the year you're looking at a 14% ratio before distributions. What are the sorts of things that the Board might decide that prevent you from actually paying out everything to get you back down to your 13%, because I'm trying to understand this guidance. Is it guidance or a kind of aspiration?

I don't think I can preempt or predict the Board's discussion. No, Tom, you could devise things that might be out there in terms of whether it's regulatory changes, whether we talked about things like evidence [ph] and stuff like that, what's going on in the external environment, how we are viewing our own internal capital requirements. So, Tom, I can't be precise, sorry.

Well I had a go, thanks, thanks very much.