Lloyds Banking Group plc (LYG) Q3 2015 Earnings Report, Transcript and Summary

Good morning, everyone. Thanks for joining our 2015 third quarter results presentation. I am going to give a short overview and George will then cover the results in more detail. Turning to Slide 1 for those of you following the website presentation, in the first nine months of this year our differentiated UK focused business model has continued to deliver with the group making strong strategic progress in becoming the best bank for our customers and shareholders while also delivering a resilient financial performance. Starting with the macroeconomic environment we are encouraged by the robust recovery in the UK economy the sustainability of which has been reflected in lower employment levels, increased house prices, increased consumer spending and reduced household deaths. As a UK focused bank our business prospect are closely aligned with the strength of and outlook for the UK economy which we continue to support through our Helping Britain Prosper Plan. We have continued to deliver against this plan in the first nine months of the year. For UK consumers we remain the largest lender to first-time buyers having provided approximately one in four mortgages or £7.7 billion of gross lending to 55,000 customers. Similarly we continue to support UK businesses given their important role in the health of the UK economy. In the first nine months, we have supported one in five new business startups while also increasing net lending across our SME and mid-market clients by over £1.5 billion year-on-year. Since the end of 2010 we have increased our SME lending by nearly £6 billion or 24% while the market has shrunk by 16%. As you know we have focused on developing two key competitive advantages, our cost discipline and a low risk business model. Our cost to income ratio has been the lowest of the UK major banks for some time and our low risk model is being recognized by the market with our [indiscernible] swaps spread now were not the lowest across the banking industry worldwide. In the years-to-date we have continued to make strong progress in both these measures by becoming simpler and more efficient while effectively managing the risks to which the group is exposed. This has resulted in a significant additional reduction in impairment charges and a further improvement in our market-leading cost to income ratio. Our underlying profits are up 6% with our underlying return on required equity at 1.7 percentage points to 15.7%. We're able to deliver the significant increase in statutory profits despite additional PPI charges in the third quarter. At the same time we have strengthened our very strong balance sheet position with our CET1 ratio in outstanding at 13.7%. Underlying profit was however low in the third quarter than the equivalent period last year. This reflected lower-than-expected other income in the quarter partly offset by improvements in costs and impairments both of which were lower than we had previously guided for. We expect [indiscernible] to recover in the fourth quarter and George will elaborate on this point further. Although the regulatory environment continues to evolve, we are now getting greater clarity on a number of issues that are significant for the group and overall the banking sector. Specifically we note the recent regulatory announcement on [indiscernible] and the UK competitive environments. We believe we are well positioned to continue to support the aims of these regulatory bodies and ensuring the stability on the UK financial system and that small business customers as well as retail customers benefit from effective competition. Our strong financial performance and strategic delivery have enabled the UK government to make further substantial progress in returning the group to full private ownership at a profit for the UK taxpayer. The government has now reduced its holding to less than 11% and returned approximately £15.5 on top of the dividends [indiscernible] 2015 to the tax payer. We welcome this progress and we'll fully support the proposed retail offer from the UK government. The combination of the UK economic recovery with our differentiated UK focused business model gives me strong confidence in the group's ability to generate strong and sustainable returns and through this become best for customers and shareholders. I will now like to pass the call over to George who will run through the financials in more detail.

Thanks, Antonio and good morning everyone. Total income for nine months was 13.2 billion with a 4% increase in net interest income driven by an expansion in the net interest margin offset by lower other income. Impairments fell shortly by 64% while costs were down 1% with the cost to income ratio improved to 48%. As you heard underlying profit increased by 6% to 6.4 billion with the underlying return on required equity of 15.7%. Statutory profit before tax increased by 33% to 2.2 billion, of TSB disposal costs and conduct charges including a further PPI charge of £500 million in Q3. Statutory return on required equity rose from 3.9% to 4.4%. On the balance sheet our core Tier 1 ratio is strengthened at 13.7% at the start of around 1.1 percentage points pre-dividend and the leverage ratio of 5% remains strong and significantly ahead of our peers on regulatory requirements. Looking at the underlying business in more detail within net interest income the margin was 2.64% in Q3 and the year-to-date NIM is now 2.63% which is some 24 basis points higher than the first nine months of 2014. This improvement is once again largely due to continued benefits of reduced funding in project cost which more than offset lower asset pricing. For the full year we now expect NIM to be in line with our year-to-date performance of 2.63. On other income, Q3 was disappointing for us we expected reduction insurance primarily relating to the bulk annuity deal in Q2 accompanied by tougher trading conditions in commercial and lower income from run-off assets. Looking forward, we expect other income to recover in Q4, we now expect full year performance becoming slightly below last year. On cost, operating cost were down by 1% year-on-year or 6.1 billion with our cost income ratio further improved to 48% and this is after increase in level of investments and simplifications costs of 319 million. We continue to focus on becoming simply more efficient through our simplification program and we now achieve run rate savings to total 91 million, up from 225 million in the half year are on track to deliver our target 1 billion of savings by the end of 2017. Looking ahead in Q4 our cost as well as previously includes the bank levy which was 254 million last year and which will be greater this year as we continue to expect a full year cost income ratio to be lower than prior year. Finally an impairment charge of 336 million, 64% lower than 2014 driven by significant reduction in run-off business and improvements in all banking divisions resulting [indiscernible] of 11 basis points. Quality of the loan portfolio continues to improve, impaired loans now stand at 2.1% to total advances down from 2.9 at the end of last year and from 2.7% to the half year due largely by the recent sale of the Irish commercial loan portfolios. Given the strong year-to-date performance and the quality of the loan portfolio, we now expect [indiscernible] to be below 15 basis points for the full year. Looking at the movement from underlying to statutory profit. The net charge of 955 million for asset sales includes the mark-to-market charge [indiscernible] of 369 million and negative insurance volatility of 316 million. This compares to a net charge of 1.3 billion in 2014 which included 1.1 billion loss from the ECN exchange. On PPI we have increased the provision by a further 500 million in Q3 of which 125 million relates to [mediation] and 375 million to reactive complaints. Reactive volumes are broadly flat on level seen in the first-half and higher than estimated for the provision increase is slightly lower than the sensitivity run rate discussed at the half year due to lower redress rates. For the time behind [indiscernible] the recent announcements from the FCA, but as well as the government review in to the regulations of claims management companies and wait further clarity on what this might mean for the sector once the outcome of the associated consultation processes are known. Finally our tax charge first nine months was 536 million representing an effective rate of 25% slightly higher than the UK corporation tax rate primarily due to the impact of things such as policy holder tax. Turning now to balance sheet and starting with lending growth, over the last 12 months lending excluding run-off has grown by 1% and by 2% on a year-to-date annualized basis. But mortgages as you know in the market remains competitive and our 1% growth compares to market growth around 1.5% and reflects the focus on margin. And year-to-date we still have a variety of gross new mortgage lending of 27 billion, up from 16 billion in H1 and we continue to be the number one provider of mortgages to first time buyers providing one in four. With consumer finance we delivered UK loan growth of 17% driven by new business growth of 34% in most finance lending should gain benefit into our partnership [indiscernible] and we’ve also delivered 5% growth in credit card balances. Within new markets we’ve maintained our lending in declining market while in SME we’ve continued our strong performance outstripping the market once again with [indiscernible] growth of 5%. That’s on the balance sheet, on risk weighted assets the group continues to make good progress in de-risking with RWAs now standing at 225 billion, down 6% or 15 billion from the start of the year and by 2.5 billion since the 30th of June. Average interest earning assets in Q3 up 439 billion, down 4% or 20 billion from Q3. The 4 billion reduction in the last quarter was primarily driven by run-off in a low global corporate balances where we've now set lending growth targets. On capital, the business continues to be well capitalized and strongly capital generative. Total capital is a strong 22.2% and CET1 is 13.7% up from 12.8% at the start of the year which represents capital growth around 1.1 percentage points pre-dividend. In Q3 CET1 increased 40 basis points driven by the strong underlying profitability partly offset by conduct charges and number of other market related movements including changes in the available for sale reserve. Finally, our TNVA per share increased from 53.5 at the half year to 55.0 pence and this increased to 1.5 times was again driven by the strong underlying earnings but also benefitted from changes in the underlying value of Group's DB pension schemes, partly offset by conduct charges. So, in summary the Group's differentiated UK focused business model has continued to deliver in the first nine months to 2015. This continues to support our customers and deliver sustainable growth by increasing net lending our targeted areas and delivering on our commitments within the Helping Britain Prosper Plan. We've also delivered a resilient financial performance with significant improvement in statutory profit, and further strengthening of our leading Common Equity Tier 1 unleveraged ratios. We've been able to improve our guidance for NIM and the AQR while updating our guidance for other income and reconfirming our remaining guidance. Looking ahead, the combination of the Group's differentiated, simple and low risk business model and the robust outlook for the UK economy positions us well for the evolving competitive and regulatory environment, I'm confident it'll generate some strong and sustainable returns. And that concludes today's presentation. We're now available to take questions

Thank you. [Operator Instructions] Our first question today is from Chintan Joshi of Nomura. Please go ahead.

I had two questions, please. The first one was on new mortgage business, front book rates. If I look at the kind of business that you're doing on the front book, one in four share in first time buyer, you've got a strong brand in buy to let market through BM and the LTV bands that you compete in well. My guess would be that your front book business is at a meaningfully higher level than the industry average, which, according to Bank of England, was about [257]. I just wanted to get a sense whether I'm right on that, and get some sense of where your front book business is being written at this year. And the second question was a quick one on packaged accounts. I see you've taken 100 million provision there; can you elaborate a little on the trends you're seeing there? Should we expect this kind of run rate for the next few halves until we see a peak in this issue? Thank you.

If I deal with the second one first, no we took a 100 million basically, out of the conduct but that did not relate it to packaged account, it related to things that actually you might have seen in the past with regards to things like our review of our investment product sales that we're undertaking whereas we're doing a sort of case by case review where actually the scope of those products we're looking at has got larger. So, there was nothing in there for packaged accounts. We took a provision of about 175 million at Q2 on packaged accounts and we have made no increase and actually we've seen most recently I think a drop off in complaint levels with regards our packaged accounts coming through. So, as you know packaged accounts we have a good overturn rate. We have very good experience of falls where I think the overturn is down to single digits, essentially, but there was nothing for packaged accounts. Within the front book I can give you the percentages. I mean the market remains competitive and you'll see that in our rates and you'll see that in our growth stats. And as we talk deliberately around focusing over the margin over the volume, we continue to see some of those asset headwind pressures in our NIM performance. So whilst the NIM was only so very marginally up in terms of year-to-date. In Q3 I think we saw about a couple of basis points asset headwinds which we were able to offset mostly because of a bit of deposit pricing. So, it remains a competitive market, some people have been pretty active out there, but I can't give you the numbers that you're asking for in terms of comparisons with market.

The next question is from Michael Helsby of Bank of America, Merrill Lynch. Please go ahead.

I've got a couple of questions, both around margin, actually. First, George, you just alluded to it a little bit then, and I know the margin's only down a bit, quarter on quarter, but it does feel like the delta's changed. So can you talk a little bit more about the moving parts? Has asset spread headwind got sequentially worse, or is it the liability tailwind just got a bit smaller? And I think I sense that you're a bit more positive on the outlook for NIM if rates stay lower for longer, so can you comment on that as well? And secondly, George, at the Q1 trading statement you gave us some really helpful color on the SVR books, their absolute levels, how they've moved the yield, but also on the fixed rate deposit book size and yield. And that was good, because we can then look at future margin re-pricing that we might see. I was wondering if you could give us an update on that as at Q3. Thank you.

Well I will deal with the first one [indiscernible] when you look to sort of Q2 versus sort of Q3 you get from whatever it is 265, 264 and you are dealing with fine movement. So there is a couple of basis points in terms of active spread headwinds, there are a couple of basis points in terms of offset that from basically continued liability pricing that goes the other way. So you're talking about fine movements. Yes we do still remains robust in terms of where the NIM goes from here and when we look out and see how we’re able to manage those assets as we spoke of this we can do a bit more on liability pricing. There will be more benefit coming, funding will come through [in Venezuela] also the structure basically in terms of run-off that benefits NIM as well. So those are aspects, what we do also say that -- I can manage the book and I can optimize those deposits et cetera. Eventually if base rates stay flat forever I can’t defy gravity and you would see those impacts come through. But certainly as we look forward we remain pretty robust on the NIM as we look out. In terms of…

Just a few points to what George is saying Michael before George moves on to FCR, I mean as George just said, we are more confident on NIM now than we were three months ago and that’s why we have again updated our guidance positively. As you know we do believe that we have a competitive advantage in the way we manage NIM and given that we manage together the assets minus liabilities which we think is a right thing to do in a retail bank even we have to fund whatever loans we give with deposits. Second we do this on a weekly basis and third we do it at the top level of the organization. On a multi-brand approach, we have different brands that address different customers preferences and we do this holistically on a top down approach. So as we have moved in into the third quarter, we think this has continued to perform a little bit better than we thought. On the wholesale front cost if you noticed, our credit default swap moved to the top of the table in terms of the lowest credit default swaps of the banking industry. So our wholesale funding costs as we renew our maturing bonds will continue to improve. We have, as George said, margin on deposits to continue to accommodate the prices on mortgages which once it move slightly down and where we have not enough line in the market so we move in line with the market. But we have given the multi-brand strategy and specifically on the Halifax brand, we still have room to continue to accommodate the evolution of the project on the asset side. And then in terms of mix as you know which is very important and we have been public about this on quarter two already, we prefer on a market which is a mortgage market which is only growing 1.5%, we prefer to grow slightly below the markets, we are going at around 1%, but to preserve margin, which we think is exactly the right thing to do in a low growth market environment and which is competitive. And on the other hand in terms of mix, we are significantly outperforming on the consumer finance unit where we have guided last year for growth this year of high single-digits that we guided at Q2 for low double-digits and now as you see we continue to be at high double-digits which is now what we think will happen by the end of the year. And the consumer finance division which is growing significantly as I just described, has significantly higher margins. So in terms of the mix of the business as well that has been favorable, so as a summary we will hold margin at current levels for longer than we thought three months ago and that is why we have [indiscernible].

Okay and I'll just come back to that. My point on this in terms of -- I am banking up just in terms of these funding cost et cetera. So we have seen as I said a continued reduction in the sort of cost of deposits from fixed savings and to you those numbers [indiscernible] is just about 0.54 when over the cost of Q3 that was about compared with 0.56 Q2 variabilized, 6.64 compared with 0.78, fixed size 215 compared with 231, fixed 221 compared to 230. So it's more on the same in terms of just you to take that price out which provides that underpin to the NIM and on the other side in terms of those sort of asset sides headwinds in terms of [SVR] what we’ve seen is the Halifax book, it was about 53.6 of Q2. The Q3 is just about 53.5, so you actually haven’t seen much in quarter movement within that. We’ve gone year-on-year, I think it's down about 9% which was the same stat as it was for Q2. So you’ve seen sort of negligible movement there. The other balance is which obviously have lower rates than the [390 are the lowest] again, we haven’t seen tons of a movement. So the Lloyds is 40.4 that was 41.9 at Q2, [pause] 11.3 that was 11.8 [indiscernible] 36.5 that was 36.6 and the [rest is] 13.9 [versus] 14.4. So again you're seeing no new dramatic trends within those business, when we go to those factors it gives us personal confidence that Antonio was just talking about.

Your next is from Chris Manners of Morgan Stanley. Please go ahead.

I have a couple of questions for you on the capital return. The first one was, given we've got, potentially adding a systemic risk buffer, the Pillar 2A, into the stress test baseline, would that have any impact on the capital stack that you see, the 12 plus one year's dividend and the ability to repay? Or are you still confident about that level, because at 13 points, definitely it looks like there could be a really decent payout coming pretty soon? And the other one was on the revision to the standardized approach mortgage risk-weight floors. As I understand it, there's a good chance that may not be implemented in the UK but, obviously, it could have a material impact on your business. If you could just maybe run us through your thoughts on that, that would be really helpful to clarify. Thank you.

With first up, sort of capital expectations remain unchanged. So, [indiscernible] we’re seeing is kind of where see us the one thing is where we see our capital requirement. Yes, as you as call at that forever a number of moving parts and whether it's systemic buffer or changes to standardized this way et cetera, something's we think will happen. So, think changes in op risk will through and said that will be through 2018 time. As you say, things are standardized I think is proceeding and imposition of floors I think is back to the drawing board with regards to that. Also noted there's recent stuff that's come out around stress tests, etc. So I fully expect to have -- to deal with a continuing flow of people tinkering with the capital regime, be it requirements, be it base calculation, be it composition of buffers, that [indiscernible]. Where we look -- as we look out on number stay as we've previously disclosed, and what does matter which again I think we should say we continue to be able to generate capital. We are as we are, there was a weather eye out to stuff out there. There will forever be people tinkering with stuff.

And just to add to on to what George said. I mean my feeling from the contact with the UK regulators is that they are quite happy with the level that the UK industry reaching in terms of capital and any changes like the ones you have mentioned would be more moving parts leading the industry but keeping the overall level reasonably constant. And we absolutely understand that there is no need in there for you to have effective floors in terms of mortgage RWAs, we are very comfortable about this.

The next question is from Jonathan Pierce of Exane BNP Paribas. Please go ahead.

I've got two quick questions, please. The first one is on the margin again. Could you give us an idea of the benefits of the margin in Q3, as you did in Q1, of the rundown of the runoff portfolio? I think in Q1 it shrank by 6 billion and there was a 4 basis point benefit to the margin of that. So if its 3 billion rundown in Q3, was there a 2 basis point benefit to margin in Q3 from that?

I don't have the number here. There's a logic to what you say but I don't have the number here. What I can tell you is that when I look year-on-year there's about 10 basis points swing that comes from that. And in that sort of 24 basis point nine month on nine month there is about a 10 basis point structural benefit. So, I'm giving you a number for different time periods.

The second one is just a slightly more detailed question around what's happening to this AFS portfolio. I was surprised to see there was a hit in Q3 of about £352 million. I thought the AFS portfolio for you guys was largely UK Government bonds and with the swap rate down in Q3, and I think the price of a benchmark bond up. I'm just wondering why there was such a big AFS hit in Q3. Is the mix of that book still as it was? Is this hit coming from the corporate debt portfolio that's been building in that AFS portfolio?

We have no corporate debt portfolio Jonathan.

There's a couple of things in there, our equity holdings, so we've taken a hit from the Aberdeen and Sabadell. So, that's comes through that. So, that won't be in your calculation. The other bit, it is around the asset swap spreads so basically we swapped the gilts back so the differential between the government bond and the swap rate movement is what's considered [to hurt us].

The next question is from Claire Kane of RBC. Please go ahead Claire.

Could I have one follow-up on the capital comments you made, and then a question on the OOI please? You mentioned, I think, operational RWAs to come in 2018; I just thought previously you mentioned that actually you might get that inflation hit in the fourth quarter. Maybe you could just clarify? And if you could give any guidance in terms of the quantum of that increase? And then OOI, could you just give us a bit more detail about the sequential decline and if you think we have reached a floor. And really where you see the recovery coming and what the timing effects were in Q3, please. Thank you.

I am sorry to say, but I don’t expect the op risk to be a Q4 impact. As I say, I think it's 2018 I think it is when that comes into play. I won't give you a precise number, it's not overly material, but it's about 2018, so that’s not sort of short-term, that’s just sort of an out there type ting that we have to deal with and we'll deal do with. Although yes, I mean obviously attention [everyone], as I said in my presentation we’ve sort of been disappointed by as the performance in Q3. Now some of that was in inverted commas, expected in the sense that, as I said in Q2 we have a big benefit from the bulk annuity deal in insurance which obviously wasn’t repeated in Q3. Some of that again as I said in the presentation is our are market trading conditions, things commercially were slightly worse than we expected. And also there were things like run-off where we have one of businesses which sensibly volatile, just to give you an example in Q3 of the last year the run-off business contributed something like about over 100 million, about 113 million and this is where we’re sort of vexed in positions and taking gains on that, that was last 13 million in Q3. So that had an impact on it as well. As we’ve clearly said, we do expect to come back from this and I think as Antonio said, we expect OOI to recover in Q4 is putting a stronger show. What drives that, a number of things. Within the commercial business, I expect commercial to recover. I expect to see stronger trading within commercial in Q4 and we’re already seeing that in October. Insurance, I would expect to see a strong position in Q4. It tends to be a strong performance from a seasonality perspective from insurance in Q4 that will come though. And within some of that run-off business, I mean the run-off was as I said 100 million in the Q3 2014 it was about 30 million or so. In Q2 I would expect it to get back closer to that sort of level in Q4 of this year. So those are the trends that I would expect to see for the short term, and I expect to see it would recover. As I look further out what we have been speaking and I would sort of repeat those things, cost of goods -- things will stay up in retails, that’s something that you know about in terms of the regulatory environment impact on productivity, product sales, et cetera, expense remains tough. I do expect commercial to keep moving forward and we’ll see that as we move through into 2016. I would expect consumer finance to move forward; it won’t be at the same range as balance sheet growth, because you got things like margin compression that will come through that from things like interchange fees and I would hope for forward progression in insurance. So there will be rounds of volatility in that because you got things like the bulk annuity deals that will come through. So I do think Q3 is a low, I do expect it to recover in Q4 and I talked about some of the main things I think which will take us forward as we move into say 2016.

The next question is from David Lock of Deutsche Bank. Please go ahead.

A couple of questions. First one is on the NIM again. You've given the 2.63% guidance, but I note that obviously average interest earning assets have been moving around quite a lot this year. So I just wondered if you could give us any color on how you expect average interest earning assets to develop as going forward and given they kind of sell Q-on-Q? And then the second question is really on the impairment, I know the guidance for the full year that doesn’t imply a bit of a pickup in the fourth quarter, is there anything that we should read into from that or is that just you being conservative your annual guidance for this year? Thank you.

There is nothing I would point to other than the Chief Risk Officer there's nothing I would point to in terms of Q4 those explicit events. We’ve seen a group performance and actually as we look out one of the [indiscernible] we get more bullish on credit as we look further out in that regard. So there is nothing particularly I would point to, or there's nothing I would point to, rather, in terms of Q4. I’ll give you a particular number, yes you're right that down and in Q3 now some of that was around the run-off book and I do expect that to have a -- reducing the impact as we move forward and then within the other assets it's predominantly with a global corporate which tends to be the most volatile and I think excluding that we were pretty stable in terms of other parts of the business, the retail consumer finance, actually consumer finance was growing, stability in retail. So if I strip out the run-off which will have a diminishing impact just because of scale I would expect a much more stable picture in terms of averages in some of the assets.

Your next question is from Raul Sinha of JPMorgan. Please go ahead.

I've got a couple, please. The first one is, I think you talk about a tax charge by the end of the year for the tax changes, as well as the non-deductibility of PPI and conduct. Would you be able to give us some sort of ballpark number for that for the next quarter?

What I can say is you're right we talk about the 25%, there is sort of an accounting issues to when you actually reflect the changes in the budget et cetera. So what happened in Q4 is you essentially have a sort of catch up adjustments in terms of the tax that we provided on the PPI in Q3 basically being undone in Q4 which I know sounds a little bit bizarre, but that's just where the [indiscernible] work and that would add about 100 million I think to the tax charge in Q4 based upon what we’ve seen in Q3. So it's a bit screwy but that’s the way we have to do it in terms of how far the tax legislation is being enacted, so I provided something in Q3 that are essentially [while I am doing in] Q4 it's about a 100 billion is the impact.

And then the second one, George, while I've still got you, is this PPI slide on slide 11. You do say that your reactive complaints were flat in the quarter, but if you look at the detail of that, September was down materially, and then October even though you say it's an estimate as of 26th of October, so pretty much flat on September. Any reason -- firstly, what is driving that, and secondly, do you expect a spike in that, because of the time bar?

Two good questions, wish I had two good answers. Look it remains volatile and yes I mean having gone through this sort of first part of the third quarter we think it's being if not that's slightly up in terms of the first half. It was good to see them drop off and see that sustained through in September and October. I cannot and will not predict what I think might happen in terms of reactions to consultation et cetera that is out there, it would be sort of foolish for me to -- beyond that, as we go forward, I would expect December to be lower for seasonal reasons, but we're showing you what we are currently seeing and as I just said you're as informed as we are. What happens in the coming weeks, we wait to see but we certainly started broadening out a bit. Welcome things like the time barring, we're waiting for the consultation papers we think within that two years is excessive, etc., and not in the interests of customers who act earlier with a shorter timescale, nor one where you need to actually communicate with people but yes we wanted to show that trend but I've been here too often to try to tell you, with any great precision, what will happen, going forward.

And just to finish off, maybe with Antonio, I didn't see a reiteration of the dividend policy. Obviously, given this is a Q3 statement, can I just ask, Antonio, if you might confirm that, at the full year stage if you have a core Tier 1 which is greater than your minimum, which is 12 plus one year's divi applied to 2015's divi, you would still be looking to return excess capital on top of that?

We are not going to comment farther than we did in Q2. We absolutely reaffirm the exact guidance that we gave on dividend as approved by the board in July. So, we absolutely have exactly the same comments and guidance and we are not adding anything at this stage.

The next question is from Chris Cant of Autonomous. Please go ahead.

A couple from me, if I may? On the NIM, if I could just come back to this point, I think was raised in an earlier question on interest earning assets, if I look at your year-over-year trend, quarter-over-quarter trend in the loan book, and whether I look at that in a Group aggregate view, or strip out TSB, loan growth was positive, on both measures, and your interest earning assets trend has continued to come down, and it looks like there's an increasing divergence there, in the growth rates. So I was just wondering, firstly, if you could explain what's going on there. And secondly, when should we expect to see the loan growth we're seeing in the core businesses actually convert into higher interest earning assets? Because I note you said you expected to be stable, going forwards, but given that your loan book is growing, surely we should be expecting interest earning assets to start ticking up at some point. And then on SVR, thank you for the very quick run through of the statistics on the couple of the books, I think one you did miss out, was the Bank of Scotland book, which, from memory of 1Q, was about 12 billion. There was an interesting data point recently, from TSB, on their mortgage enhancement book, which is obviously drawn from the Bank of Scotland loan book. About 50% of that book is SVR, and in the quarter, that shrunk by 8%, which was quite an acceleration on the previous quarterly trend, which was about 5% a quarter. And I'm guessing potentially some of that was due to SVR refinancing, so I'm just wondering whether you're seeing any similar uptick in refinancing within some of the other SVR books that you didn't mention, particularly Bank of Scotland. Thank you.

I will take the first question on [AIEA's] and George will take the second on SVR. So, just to try to add some color to what to what George had already previously described on the AIEAs, and I think the best way to tell you is, as I have been telling you every quarter is to give you a color on each of the segments so you can make your own models. So, we do expect at this point that in the consumer finance division as I said in one of the previous questions, we have growth which is significantly above what we expected. So, last year we guided, so at the end of the year we guided for high single digits which we have reviewed to low double digits in H1 and I'm now telling you it is in quarter three and we will be at the end of the year high single digits, that is increasing at a much higher rate than we thought because the market continues very strong and we have had as you know all the impacts of having this exclusive agreement with Jaguar Land Rover, where basically all new business becomes a net business because there is no outflows redemption in the first three, four years. So with tight underwriting criteria and prudent risk standards, we are increasing 37% our car finance segment and we are increasing our cars business by 5%, plus we had for the first time increase the book by 4% in line with a market we have now 5% and this should continue -- both of them should continue for the next few quarters which is the line of site that we normally have and the two combined are low -- the two combined are high double-digits and you should assume that we’ll continue. When you go to mortgages as we have said already at H1, the market is growing less than we thought around 1%, 1.5% and we thought it would be higher at the stage of the cycle. And we are growing around 1% so less than the markets because they also said during the context of the NIM we think that it's absolutely the right thing to do in a low growth environment which is competitive, we should preserve NIM and if the price for that is to grow slightly below the markets we think that's exactly the right trade-off like in consumer finance, the right trade-off is to increase market-share while the NIM in consumer financial is coming down. So I think you should expect our mortgage portfolio going forward to evolve slightly below the market as it has happened in the last two quarters. When we go to SMEs, we have been fairly stable I would say growing around 5% a year when the market has been negative these last four years, it's still negative by around 1% and we continue to grow at 5% and I think that is likely to continue for the next few quarters as well. On the mid-market segment where is most as large of SMEs we are around zero in a market which is shrinking 2% and I think we will increase this going forward slightly. So the two combined if you remember once we said last year it's a strategic review, we have a target of increasing £2 billion per year in each of the next three years and I think we are well underway of achieving those 2 billion per year over the next few years, so 6 billion is a whole over the next three years. And relating to large corporate where we don’t have living targets, this is more volatile that I would expect if you see the slide where we have the growth for each segment is you can see already that our loan portfolio is 1% higher year-on-year. But the year-to-date annualize is two and the reason why that happen is basically because large corporate are positive in the year-to-date and we do expect as I have said previously last quarter that large corporate should reasonably evolve with the rest of the portfolio, of course they are more lumpy because we don’t target. Obviously loan growth is large corporate that I would expect them over the next three years to an average growth in the rest of the book. So what is bringing IIA down as we have also mentioned in the past and George alluded to we have the run-off which is going down, but now it's going down at progressively slower rate and you can extrapolate how it could go down going forward, it's not the priority anymore given that it is now around £10 billion is incredibly small and we have the close book of self-certified mortgages and the Dutch mortgages which also runs down as time goes it elapse every time and which we give you the value separately in the same slide. So that is probably the best clarity we can give you in terms of how this differences moving parts will evolve going forward to complement what George had previously told you. I think that versus our previous guidance we are increasing slight reduction mortgages and we are growing significantly more on the consumer finance division. The rest is more or less in line with about we [indiscernible] target in a strategic point.

Thanks for the very comprehensive overview of your loan aspirations. I guess, just coming back to the quarter-on-quarter point though, your loans to customers were up overall, and this is ex repos, 2.6 billion. Your interest earning assets were down 4.2 billion, and that's still quite a big divergence which I don't really see how you get to a 6 billion gap from some run-off in your specialist book. It's not obvious to me how we reconcile the trend in interest earning assets with the trend in loans. So I still don't really understand why, if George, your answer to an earlier question was you expect interest earning assets to stabilize. Overall, Antonio, your answer suggests that we should expect loans to continue to go up. So should we continue to see this divergence going forwards? Is interest earning assets flat from here but the loan book grows overall? Or should that interest earning assets trajectory turn round, going into 4Q and into the first half of next year? Because don't forget the importance here is obviously, we can all model your NIM, but if we don't know what the interest earning assets are going to do it becomes quite difficult to implement your guidance in terms of what we plug into our models for NII.

Thanks for that Chris, I don’t have anything to the go forward, but I mean I will make the observation around when you look at the competition to make sure that you're allowing for impairments obviously because the loans and advances are always net impairments where average interest and assets grows and particularly in the last quarter where you’ve had something like the Irish disposal which obviously is heavily impaired, doesn’t do many things from like sort of loans and advances, but that’s quite a big impact on my average interest earning assets. Let's see if we can do a better reconciliation, but certainly that will be a big feature in terms of the diversions trends we’ve seen in the last quarter, but let's see if we can be more helpful.

The Irish is in Q4 though now? That comes through in the fourth quarter?

Q3. That was when the deal happened in Q3. So, you would see a big reduction -- we've been over the point. And then on SVR, so Bank of Scotland, apologies if I missed that out. So, I think it was, advances about 11.3 and it was by 11.8 at Q2 and I think it's down about 12% so there's a slight pickup and there is to your general point, I mean we're seeing a pickup in refinancing so that is a general observation and obviously, whenever we give you the numbers you've got maturities into as well as exit out of. So we are seeing a sort of general pickup but 11.3 was the number that was the Bank of Scotland [393] rate book.

The next question is from Chirantan Barua of Sanford Bernstein. Please go ahead.

A quick question; you've been mentioning bulk annuity, just want to understand how do you book it? Do you all book it upfront and is most of it reinsured which is why you see the volatility? And also I want to understand, are you sitting on -- you have sight for some of the deals coming through in Q4 which gives you the confidence going into Q4? That's one on the insurance side. And Antonio, just one thing around risk appetite. We're getting into macro revisions negatively around the world and the macro picture is not as good and your corporate book shows it. So does it give you -- what gives you the confidence to grow the SME and consumer finance book at quite breakneck speed, given where the mortgage book is, a sharp divergence? So just want to understand how do you modify that risk appetite going into the next year if the macro is actually weaker?

It's on the bulk annuities, the inherent volatility will come round to transactions. So, these are -- there is no -- well actually [indiscernible] I'll modify that with one aspect in a moment. But essentially, the volatility will come from -- these are deal-driven and that will determine the flow. And in terms of the accounting for it, essentially it's been in the insurance business so you get the benefits of present value accounting. So it'll reflect a large part of the value that will come upfront. The one sort of caveat to that is what you do also recognize, as they come over onto your book and as you transition the assets from that which you see to your target asset mix, you will get increments as essentially as you move through. So, if I take a bit of business it comes over and I will put it into certain type of assets if I then transition that over into more my mobile pickup that I want you will basically reflect that pickup in value as you soon move through the period. So, I do a deal, I get a benefit day one from doing that deal, but then subsequent to that if you think I'll change the asset mix and I will reflect the benefit to that asset mix as and when that happens so you'll get an initial new business profit and then some sort of follow-ups that will come through so that's how it looks and in Q4 yes we are active, we've done the first deal we did which was the internal deal with the Scottish Widows with-profits fund, but we are active in the external market and that remains confidence in terms of winning and that's also confidence that how I actually feel with the deal I have already got on the table in terms of how I know I'm going to transition assets relating to that in Q4 if that makes sense to you.

Are those deals in the size of the millions that we're talking, or are you talking about 1.5 billion, 2 billion growth every year?

I won't go into the specifics but -- with-profit deal was a special deal. That was a size of about 2.5 billion of liabilities. The moment once in the market was a significantly smaller scale than that, we're into the 500 size of that order.

On your comments on the economy and the loan growth, so what I'll tell you on that is the following. I mean in spite of the slightly weaker number on the quarter GDP yesterday, we see the UK economy is very robust as I said in my comments. And we see it's growing at around 2.5% both this year and next year. I think one of the best things of the UK economy as the growth has unfolded is that you started with additional consumer spending which was possible together with additional consumer savings given the Funding for Lending Scheme and the liquidity measures implemented by the Bank of England, this has enabled a very important thing which I don't see in other Western economies which is that's the UK is growing robustly as the consumer confidence led to consumer spending and to business confidence and business investment, this has happened with lower household debts. So household debt is a percentage where GDP has gone down sustainably by almost 10 percentage points over the next -- the last three years which is a big credit to the UK economy recovery because we are growing more with less debt on households where we should, in corporate where we were already low as a country and now the public that is now also going starting to full. So, the economic recovery is taking place with less debt overall and specifically on the household sector which needed to do that. So, we are quite positive on the economy, we also think that the house price recovery to the three of seven levels is positive in terms of the banking sector given that's the market is growing is very little and therefore the house price increases translates growing in lower LTVs of the stock which makes our capital position more and more robust and our commercial opportunities with customers to increase. So macro economically speaking, I don’t think we should take this quarter with any special concern, the economy is growing robustly and we expect it to continue to do so. This is what we see across the board both on the retail sector and on SMEs and mid-markets in all of our geographic regions. When you ask me about the specific loan growth on SMEs and consumer finance as I can say before on consumer finance, the market is growing around 12%, we are not managing at all the risk curve and we keep our very prudent and the writing standards. The only reason we are increasing 37% which look very high, but on a like-for-like basis is 12%. The additional growth comes from the fact that we have an excluding agreement with Jaguar Land Rover one of the biggest car makers of the country and this means on the retail language if you want that we have an additional product to sell and we have many more shops, the custom of the shops were exclusive to check Jaguar Land Rover. So we are selling more across the board which again on the retail language, but this on a pro forma basis is the same growth as the market. We very likely residual by risk, we keep that in the writing standards, we are not at all going up on the risk curve. And as you can see on the margin of the consumer finance book which is going down as I told you part of the reason why it's going down is because on the Jaguar Land Rover given the high quality of the book we have lower margins. On SMEs where we are growing 5% year-on-year versus the market, which is going down one. We are doing this now for five years, so 24% up at the end of 2010 which is £6 billion versus the market trend by 16%. We absolutely monitor very well the risk of the new cohorts versus the existing stock and you can see the series overtime our RWAs has been going up less than the other which shows the quality of the new business which is included. We have strict limits for commercial real estate. We managed this on a customer-per-customer, we are the largest bank in the country, we operate through SME centers very well implemented in the communities with people that know the customers from decades, with credit officers that know the customers as well for decades. We feel very comfortable about the segment given our business model and our implementation and it is a fact that external to us that some banks have deliberately decided not to play at all or as much in the segment and we have been taking advantage of this. Nevertheless our market-share is only (17%) it has increased from 13 five years ago to 17%. We can continue to grow we are only the third largest player in the country and we can continue to grow at around these levels.

That's very helpful. And just a quick follow-up just on risk; will you be able to give us some idea in terms of your exposure balance sheet to commodities? That is something which has been full front in terms of risk for investors around the world on banking. Just your exposure.

Yes, we can give you that it's very small, it's [indiscernible] of the book, we can give you that it's very small and diversify.

The next question is from Andrew Coombs of Citigroup. Please go ahead.

A couple of follow-ups and then one new question on mortgage pricing, please. First follow-up would be on the dividends. I note that there's a footnote on Page 13 of your release stating that you've not accrued for a dividend in the core Tier 1 capital because the Board has not yet considered the appropriate level of payout for full year ‘15. With that in mind, is that just an issue that the Board has not discussed the guidance that you gave at Q2 of paying out anything above the 13% ratio? Or is it a case that we should take that that's not firm guidance that you gave at Q2? The second question would then be on the global corporates book. Can you tell us how much that balance is now in absolute terms? And I appreciate your comments that it's quite lumpy, but you seem to infer that you plan to now grow that book on a three-year basis in line with the wider loan book. So is it a case of the contraction in that book has now finished and we'd expect it to grow again? Perhaps you could just clarify that? And then the final question would just be on mortgage pricing. You obviously put through some quite sizeable cuts to a range of your products. I think it was 50 basis points on some of those products in July, but you then reversed the larger part of that reduction in August. Perhaps you could just elaborate on the rationale for that change, and what you're seeing in terms of competition now as well? Thank you.

Yes, on the first question, look our dividend position policy remains absolutely the same and I think as Antonio to another question. So the disclosure we put on page whatever it was, I mean when it's actually in the same position where we didn’t accrue for anything in the final dividend at the half year so absolutely nothing has changed, it's simply a reflection where we are as a group and how we interact with that particular requirement. So please do not read anything [with that].

As you asked the Board has not discussed this further since H1. We had only Board in September that we haven't discussed it, we'll discuss in November and going forward into January and February for the final results. So, that is also the reason why we are not giving any additional inputs because there's no additional information since the H1 communication and the information we gave you. Relating to corporates, I mean I did not say that exactly, you can infer it like that but what I just told you is we don't target loan growth in large corporates because large corporates can get loans, they can go to the capital markets, securitizations. We don't really target it, we see them as customers, we do whatever they prefer to do, it would be loans or capital markets it doesn't make any sense to target loan growth but I think and I would expect that's what I was saying and that's happened year-to-date so far that given the major restructurings we did in the large corporate book finished last year that they should evolve reasonably in line with the rest of the -- as the corporate segments going forward but of course it can be volatile but I think the best estimate is probably in line with the rest of the portfolio but it's an estimate, it's not a target and it's the best I think estimate you should assume given we don't target loan growth. In terms of margins, mortgage prices that you mentioned, I'm not aware of those specific details, I would not read much into that, but we have several brands, several channels, we do mortgages through all of our brands, including the tactical brands. And the strategy that we have overall which is what matters, because we manage this bank top to down in that respect, is that we will continue to [privilege] margin versus volumes. And, therefore, in terms of the mortgage markets, that the market should continue to grow by the end of the year around the same level, around 1.5%, we are slightly below and we should continue to do so, because I repeat in a low market growth environment such as the mortgage market and which is competitive it makes much more sense to preserve margin and which does not occupy capital that just fight for the market share when the market is not growing in any case. We do exactly the opposite in consumer finance because the market is growing a lot and we are performing the markets very significantly so I think you should expect in mortgages that the numbers will follow the guidance that we are giving you and I think George has the number for you on large corporates here.

It was about I think was 27.7 billion I think is the balance of Q3. And I think it's down from it was like [29] I think of Q2. So, that's the balance which is growing up in the year.

Your final question today is from Joseph Dickerson of Jefferies. Please go ahead, Joseph.

Could you please go over the spec on the trading income issue? Can you please go over some of the product areas, say within, for lack of a better word, fixed income that were weak in Q3? Was it rates, was it FX, really what drove that weak performance on a product level? And then, what are the sources of the recovery that you see to date in Q4 on a similar basis by product, if you would? That would be very helpful to me, given the move was quite sharp in that line item. And then I have a second question, which is a conceptual question. You talk a lot about giving up market share in the mortgage business to preserve your margin. Why is there not a greater focus on, say, the marginal return of these businesses? Because presumably, for you guys, the marginal return on equity of a mortgage must be somewhere in the range of 30% to 45%, which is probably 50% to 100% higher than the marginal return on a consumer finance product, given the different capital requirement. So I was just wondering if a focus on return on tangible equity might be more useful than trying to preserve the net interest margin. Thanks.

Well, George will answer your first one the OOI product evolution, and then I will take your more conceptual question.

Look, I'm not going to say that you guys through product by product and sort of focus of your question is on the commercial business. As we were describing earlier in some answers, there were of reasons for the reduction in income in Q3, insurance, runoff, etc., remains tough within the retail bit. What I will say to you yes it was tougher in commercial and commercial in Q3 was down on Q2 but [what we] normally give to the divisional information at the Q3 stage, I would say that commercial Q3 [indiscernible] was actually ahead of where they were a year or so ago. So, commercial was less in Q3 and Q2 but we're not an investment bank, we trade on behalf of customers, it's a sort of balance sheet relationship led business that's what we're about there and you see that in the numbers and say well if so Q2 as Q3 when I look at Q3 '15 versus Q3 '14 commercial was up, so I'll just give you some sort of formal context for that. Apologies, I won't go product by product but it's not particularly relevant, it's a relationship, it's a customer, it's a franchise business and you see that robustness in the year-on-year position.

On your more conceptual question, that's a very interesting question and I would tell you it depends on how you look at it, first I would suggest that when you look at the marginal return I think you should include the cost of funding associated because as a prudent retail bank we want to keep our loan to deposit ratio as you know around the 110%, we're at 109 and therefore for every mortgage we give we have to fund it so I would suggest that you should include the marginal return including the marginal cost of funding, number one. But secondly and probably more important you cannot look at the marginal return of mortgage per se because you have to understand the whole impact it has on the book in terms of SVR impact people that stay on SVR, people that move into new products by internal transfers and therefore there is a whole series of equations that make it much more complicated than the fewer marginal return of that specific mortgage. And therefore we think this is absolutely the right thing to do as we think the marginal return on consumer finance more than exceeds our cost of equity but that’s for the total cost of equity of the bank. On the mortgage side, we see exactly the right strategy and for that it is very important to bear in mind the first point which I have said in the past which we did not yet clarify by the regulator, which is the binding restriction. You are assuming the binding restriction to be the CET1 ratio from mortgages which we believe will change in the near future as the ring-fenced bank is a fact in the UK. And if the ring-fenced bank -- when the ring-fenced bank will become a reality you will have the mortgages in size of ring-fenced bank. And therefore, they will have the -- they will have the cost of equity determined by the leverage ratio and not by their CET1 ratio. So the binding restriction will become the leverage ratio and we strongly believe although this has not yet been confirmed by the regulators, but we believe that the leverage ratio of the ring-fenced bank will be higher than the group's already announced leverage ratios. And therefore if the leverage ratio is going to be higher number one and secondly, if by definition the leverage ratio immediately increases, the cost of equity on mortgages we do believe that it is absolutely the right thing to do what we are doing. Because as you can see -- for example we are at the 5% leverage ratio that it more than doubles the cost of equity for mortgages, if you think that it's the binding restriction. So those are the type of strategic considerations that we use when we decide the right strategy to fall on the mortgage markets and this is why we are doing what we are doing.

Thanks.