Good day, ladies and gentlemen. Thank you for standing by and welcome to the Lloyd's Banking Group Q1 2018 Interim Management Statement Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation by George Culmer, followed by question-and-answer session. [Operator Instructions]. I'd like to advise the call is being recorded today. Now, I hand over to your host George. Please go ahead.

Thanks for that. Good morning everybody. And thank you for joining the call today. As we outlined in the full year results in February given the simple and more stable position the group we've obviously shortened our Q1 reporting and I'll be leading the call today and will give the brief overviews before we turn to Q&A, which will run until about 10:15. It's been a strong start to 2018. As you know in January, we were the first large UK bank to be ready for open banking. Though in February we announced an ambitious, strategic plan to transform the Group for success in a digital world, by investing and further enhancing our leading customer experience, digitizing the Group, maximizing capabilities and transforming ways of working. We've made a good start to all of these and we'll obviously update you on progress through the year. In terms of the numbers, we've also made a good start. Statutory profit before tax was very strong at £1.6 billion up 23% and profit after tax was up 29%, at £1.1 billion. Both driven by increased underlying profit and a continued reduction in below the line items. The statutory return on tangible equity was 12.3% and up 3.5 percentage points in the year. In underlying profit, we've seen a net income of £4.3 billion up 4% with strong growth in NII offsetting lower other income. Net interest income was driven by an increase in the margin by 3 basis points in the quarter and by 13 basis points year-on-year while other income was impacted by higher weather related insurance claim, lower bulk annuity business, flows in commercial and changes to overdraft charging in retail. Cost income ratio which Union Bank [ph] remediation improved 27.8% for positive draws of 9% again showing the Group's market…

[Operator Instructions] our first question comes from Raul Sinha. Please go ahead.

Good morning, George. It's Raul here from JPMorgan. I'll try and limit myself to one single area, if that's okay. Can we talk about the NIM please, in terms of the improvement in the quarter? I was wondering if you could give us a sense of the drivers of the improvement on the assets and the liability side and also if you could clarify, how much of the improvement in the NIM in the quarter was driven by, any kind of reclassification of the overdraft treatment from other income to NII. Thanks.

The NIIs and - are about 20 million or so, so it's not a big indicator, the more in terms of improvement develop Q1 onto the Q4 were up about three basis points, where assets relatively flat actually. So quarter-on-quarter and it's mainly around the sort of liability spread of mix where we just picked up two or three basis points so that's what's being going on in terms of overall. We're pleased with the performance, it's from the start. We talk about the sort of 290, I would say the market is currently it's trending higher than we were assuming, so we're pleased with the performance. It's very much positive for the full year, but we're not actually going to be changing our full year guidance, we're just a couple of months in so we'll be sticking to around 290, but there's no doubt that it's a positive start to the year and we're pleased with the running, I think ahead of where we expect it to be.

Great. Can I just have a follow-up, just on the NIM point? As you mentioned about any thoughts on the timing of the rates hike. I think you're currently assuming that the rate hike there will be one rate hike this year in your estimate and that's probably towards the back end of this year. Will an earlier rate hike have any kind of impact on the NIM or would it actually not have much impact this year?

Okay, Raul this is not a good start question disciplined.

Sorry.

But as you know, I think we had just one rate rise, we kind of move to the housing of two, but obviously it sort of moves with every statement, that you get out of the bank. But for us, all rate rises are positive. You're not going to see sort of dramatic shift in our numbers, whether it's sort of May and November or whether it's just November in the back end of the year. So I don't see - obviously couple of rate hikes would be in the long-term as they flow through into things like structure hedge, swap rates etc. would be a positive but it's not going to be a big swing faction on the 2018 result.

Thank you so much, George.

Your next question is from Chris Manners. Please go ahead.

Just a couple of questions, if I may. The first one was and maybe just to follow-up on Raul's point on the rate rises, if we do get rate hikes what sort of deposit beat are you looking to sort of pass through and how much of that rate hike would you pass on through to customers and how much do you think could benefit the margin. And the second question was just on earning assets I mean, how am I sort of in momentum from the great initiatives that you were talking about when we had the strategy day, you're seeing and how much and sort of earning asset growth do you think we might get for the rest of this year, plus - that was a little bit light. Thanks.

In terms of the assets growth, in terms - as we said in the call that we're seeing good progress in terms of SME quite fuzz in mid market, continue to progress in consumer finance we don't disclose the numbers, but we're showing based on progress in corporate pensions and we started onboarding the Zurich business, mortgage markets data. We're seeing some recent rate increases and you've seen also some rate through, but they don't really sort of cover things like what's been going in the swap market. So it stays a competitive market and we were waiting to see what actually happens in terms of competitor activity going forward. But I won't give a specific number, but we're pleased with the momentum we've got and got a clear sense of direction and it's a fairly down, slightly down because one thing within the - global corporate is off, but again we only set targets for global corporate as we previously said, there's much so transaction in individual item based. So that's sort of secondary, so what was your first part of the question again, what was it?

The first one was and maybe you could help us think through a little bit, we had one rate hike, how much of that rate hike did you part through your savers and how do you think that was going to sort of develop as we get more rate hikes because there seems to be a pretty benign outcome in terms of I suppose major activity, policy maker sort of [indiscernible] and anything, that we got in terms of customer behaviour, so maybe you could care to share with us, how much you pass through and whether you might be able fair that number going forward.

I think you just used, more than your allocated time. And first with the, bit around - look in terms of - you don't expect me to comment on what we might and might not do. We take those decision based on circumstances at the time and number of things will go into us looking at competitive position. So I'm not going to give you a certain percentage in terms of what we would expect to part through. We will continue to manage the spread as we present across the brands looking at both sides of the balance sheet and so I'm not going to comment on what we might or might not do. It will be a decision for us at the time depending on circumstance, depending on competitor activity. But what I sort of can say, I mean I go back to the comments, that we first gave 22nd February we continue with a very robust view of our NIM progression. We've seen a great start and say we're not changing guidance, but it is a positive for the full year and we would very much stick to wording we used, I think back in February around resilience to the longer term.

Okay, thank you.

Thank you and our next question is from Joseph Dickerson. Please go ahead.

The Impairment line between performance between retail and commercial. I know that there's been, I don't know if you were exposing a couple of corporate event still in the start to the year, so if there's any color you can give on the distinction between trends and corporate versus read that will be greatly appreciated. Thanks.

So Joe, we missed the first part of your question. What was the first half of the question?

I think I just said that I had one question. I just wanted to know the trends between - if you can give us any color on distinction [ph] between retail versus commercial credit.

Look as we say it in the statement, there's no view obviously any side of situation, credit stays strong and so that lies right across the book, particularly strong in credit. We're not standing on any exposures or whatever 20 so fallen angels or any single names, so continuously very strong experience right across SME, mid market, global corporate within the commercial lines. So that's a continuing trend we're seeing that similarly stay strong in the retail space as well. so in terms of secured very strong performance and unsecured very strong performance there were some very minor movement and when I say minor, I really do mean minor in terms of some of the charge offs in unsecured, so I think it's going from £2 million to £3 million, but it's really at the fringes and starts from a very low base and it's still very low. So it's strong across the piece, we have whole suite of severely warning indicators that we use to lookout and we're not seeing any tremors in continued strong development in terms of unperforming and its strong experienced across the commercial business and across the retail lines as well. And thank you for sticking to one, Joe.

That's lovely. Thanks George.

Thank you. Your next question is from Andrew Coombs. Please go ahead.

That's just staring [indiscernible] quality if I look at your growth [indiscernible] ratio 27 basis points, net 23, how do you expect that gap to narrow slightly overtime, you still have four basis points. What's driving those write backs? And in particular how's price growth slowing going forward, do you think that gap will narrow?

Between the growth and the net number, well yes I mean we do expect those to be a closer. We would expect there to be continuing write back just because [indiscernible] of actually reserving upfront. I mean when you look at the numbers, I think the £270 million, roughly we were £120 million last year in terms of pounds, shillings and pence. The delta between Q1 and Q1. There was a debt sale of about £66 million last year and MBNA is falling, I think about £45 million. So those are - that gives you sort of £120 million difference. We don't see in terms of house price, our expectation is still for HPI round about 2%, 3% in terms as we look out, so I'm not expecting that and we're not seeing any form of deterioration whatsoever in the secured book, so that's what we're seeing.

All right, thanks George.

And our next question is from Chris Cant. Please go ahead.

If I could just ask on your other income, please. Could you give us an overview of the moving parts in terms of quarter-over-quarter performance and in particular an update on your guidance from the strategy day about to be flat at totaling year-over-year. It looks like you're running below than the first quarter, which is, if any update on your thoughts.

Yes, no it's a good question. Yes we're slightly behind, going back to the first question I think we're running ahead in terms of NII. We're slightly below in terms of OOI and you're right, we said back in the strategy days that we talk [indiscernible] to be sort of 18 to be in line with - there's no doubt as you look out today. I think that will be tougher to achieve and there's no doubt about that. When you look at Q1 on Q1 I mean we're down about £70 million year-on-year about £35 million of that is general insurance and that's basically the weather claims in Q1 which it will be tough to get that back as we move to the year. Then another £25 million or so is bulk annuity, I think that is more timing. We're still very active in that and we've got a good proposition and I'll be hopeful of getting that back. Bit weakening CD [ph] some of the financial markets start slows slightly off and we'll see how trading develops. As you know, Q1 tends to be lower, Q2 in terms of overall which should pick up in terms of size of OOI, so it's stepping up 1.4 times four, will pick up in terms of subsequent quarters. But as I said whether we won't get back bulk annuities will be volatile as we've always said, commercial a bit weaker let's see how the rest of the year pans out. But coming actually to your question there's no doubt it's going to be tougher to hit the original guidance.

Okay, thank you.

The next question is from John Cronin. Please go ahead.

Just in relation to the Pillar 2A you previously guides last there could be potential for some reduction in the mix in time and so there's anything updates in that plane [ph] and then just secondly PPI a very quick one. We've heard some other companies talk about the run rates slowing considerably since January, is that consistent with your own experience?

[Indiscernible] come back to the 2A. In terms of 2019 we've taken sort of clearly understood what actually relates to is goes back to year in terms of closing and there is a requirement to look at, where you previously defended cases, to go back and say, would you still defend them under the FEBIN [ph] rules in terms of unfair relationships given levels of commission and value shares and we've gone back and we're basically completing that exercise now and the average cost per case is higher than we thought it was going to be, hence the [technical difficulty] invested over there. In terms of reactive on PPI, we assume the 11,000 is over those Q1 slightly about 12,000, we saw coming through couldn't say any sort of dramatic reduction, I would say it's been pretty consistent. We're now into the second phase of FCA campaign. Week one of that and then it went from sort of 10 to 11 up to about 14, this is a net claims per week. It's dropped to about 13, so there's a slight pick up at least. It's well down on what we saw in terms of first campaign coming through. So running around 12, we assume about 11 and as you know, 1,000 out by the end of August, 19 per week it's about 200 million but we'll continue to monitor that. On the 2A, yes look again as we disclosed last year 3% in terms of CET portion. I'm presuming that the PRA will be working for similar timetable so we'll be getting out either Q2 or Q3 in terms of weather [ph] 2A's this year. You probably know there's going to be a dynamic 2A that's used in the stress test results coming out, which will be interesting. As you know it's limiting what we can say but you know the components of that and given the de-risking that we continue to carry out and that includes things like reducing our guilds exposure where we continue to sell down in terms of contributions into pension scheme which we continue to make. I would expect that and all other things being equal there should be good pressure just to as to why, that 2A should come down when we actually receive PRA.

Thank you.

Your next question comes from Martin Leitgeb. Please go ahead.

One question from my side, please. I was just wondering with regard to unsecured credit in industry more broadly and specifically regarding Lloyd and the latest Bank of England the credit conditions have showed liability of unsecured credit to household has decreased significantly in the first quarter and they attribute it to changing risk appetite and title underwriting criteria. Just wondering to what extent this is equally true for Lloyds and how it would impact your outlook for loan growth and risk cost within that segment. Thank you.

Hi, Martin. We didn't see any dramatic shift, we think the actions have been taken related to other companies and you recall from I mean FCA said backend of last year, they didn't see systemic set, but they did see actions needs to be taken on company by company basis and when you look to some of the differentials in growth rate between the mainstream banks and some of the peripherals there were some big deltas and for us, whether it's loans, whether it's cards, excluding impact of MBNA we're running sort of low single-digit and I would expect that level to continue. Now all along we start with the high quality book and we continue to flex in terms of looking to underwriting criteria, scores, cut offs, introducing new credit ratings, gearing control. So as part of B [ph], you're always doing these sorts of things to make sure we maintain the high quality of our book but I don't see that, what is happened on a macro level and whether regulators talked about, will have a particular impact upon our growth rates which I said being in that low single digits and I would expect to sort of continue around about that level because I don't think specific target is at us.

Thank you very much.

And your next question is from the line of Jonathan Pierce. Please go ahead.

Can I just ask a question on residual value risk, please? Particularly given what's going on in the diesel markets? Can you give us an update on your residual value risk being about £6 billion in June of last year, has that changed very much since then? I was wondering if you could give us a bit more color on what percentage of expected residual values that represents and maybe as a quick follow-on to that, what provision do you have against your residual value risk of £6 billion and walk over the numbers for the moment. Thanks George.

Hi Jonathan, yes it's about £7 billion within that. As we said that is sort of the number. First I'm going to just relative to car prices, yes we're seeing sort of obviously you see declines in terms of new car sales, but actually second hand car sale prices are proving very resilient and I think actually just picked up very slightly in Q1, so we're still seeing the sort of £300 profit per unit for a vehicle it's about £1,000 for commercial vans in terms of that. In terms of explicit provisions I think we talk about one or 200 that we do basically as post model adjustment that we hold explicitly over and above the sort of models residual value and provisioning exposures. So we continue to monitor the heck out of it, so you know how quality it continues to perform and the used car values continue to hold up and which we see and the numbers we're getting through auction time.

And what sort of strategy put against that in the stress test because the PRA earlier this year is sort of intimated, it may look to pretty much harsher stress on used car prices in this year's stress test.

We hold a whole range of stresses, in terms of staying down, coming down and then dropping down so sort of 10% per annum. I forget which we exclusively use for the stress test, but it's not just these allocated levels and whole a variety and the magnitude even the most extreme I think just continue to fall, fall, fall. And I haven't got a number, but it's a manageable number in a very extreme scenario.

Brilliant. Thanks a lot.

And your next question is from Jennifer Cook. Please go ahead.

Just one on customer deposit, that came off a little bit on the quarter. Just wondering what drove at and I guess depending on the nature will that impact the structural hedge too.

Hi, there Jennifer. You're talking about very slight movement as you say and so I think we were, if I look at on the retail side I've got something like £247 billion or so in terms of retail savings, which actually was pretty much inline. I think the commercial was slightly down about 146 I suppose 148. The reality is, when you look at the mix, you see what we're really doing in terms of how we manage the business. So if I look at that, if I go back to the retail, the £247 billion. I go back to some of that start the end of 2016, which is about the same number, but within that for example fixed was 45 is down to 28 variables now, 133 was 127 and within that current accounts now at about £52 billion compared with £46 billion so within the retail because it stayed pretty stable, but we've had a specific drive in terms of building current accounts, not just for the relationships but also these are structure hedge eligible deposits and so within that stable book, what we're able to do is continue to build that structural hedge previously disclosed. I think we were 165, I think the full year with a sort of three and half year duration. And what's happened now, we're about 168 and we're about 3.7 and I would expect to continue to be building that structural hedge as I build that current account base towards the back end of this year. I move to that sort of full year duration as well. So what you see in terms of positive is again, is how we're managing the relationship to maximize value and to last it for stable overall retail savings. There are some quite big shifts that are taking place within that not just between sort of tax [indiscernible] relationship between type of deposit and the value of deposit to business and value to the business in terms of that relationship that it also brings.

Great. I'll [indiscernible].

Your next question is from Claire Kane. Please go ahead.

I've a question on cost, so the operating costs were up 2% year-on-year. And I noticed you're now put in the remediation above the line and incorporating that into your cost income ratio, which arguably would enable you to have a better improvement in the cost income ratio, year-on-year. Least I didn't expect such a large remediation cost in 2018 versus 2017. I just wondered whether you could talk about the trends in the underlying operating expenses and given we have a cost cap of £8 billion, 2020. What the trend is towards that? And if also, can you just update on the restructuring guidance around ring fencing an area of MBNA, but all the other things that should we expect that to continue. Thanks.

Hi, Claire. Right. Okay on further the remediation came as a surprise, we called it out at the time of the strategy review and we said we would take a remediation up above the line and therefore it's in the cost income ratio. What we also know, sort of suddenly we're guilty of the charge then you're sort of legging [ph] in terms of annual improvement will just come because your remediation will drop from 860 down to sort of a much smaller longer term run rate and there always will be an element of run rate and that's why we explicitly called out that sub £8 billion and that sub £8 billion is the operating cost excluding the remediation. What [indiscernible] point out, the cost income we've improved and we've got jaws of 9%. The way we disclose it, you can also actually see net income is up 4% actually operating cost excluding remediation is only up 2%. So I've got positive jaws excluding the remediation element as well, so you can see what's going on if you like an underlying basis. In terms of shape and trajectory though, we're making a significant investments that we talked about and automating the business and driving through further efficiencies and yes they're going to drive that number down to below the 8. In terms of shake though I spend before I save and also for 2018 MBNA, now the MBNA the 2% is due entirely to MBNA and ex-MBNA I think operating cost now I know operating costs are down year-on-year, but for 2018 I will have 12,12 MBNA costs as opposed to 512's last year. so that gives us a bit of hedge line operating cost pressure as I said, I'll also be spending before I save and all that…

Thank you, that's very helpful.

Our next question is from Edward Firth. Please go ahead.

I just wanted to check in the non-interest income line, what is your guild sales if anything?

Yes, no there is. As we called out previously that we don't - we're not the long-term holder of guilds in terms of capital, in terms of carry costs. It simply didn't make economic sense, we've got charged for the 2A capital for assets swap risks, and we've since about the end of 2016, we sold about 16.5 billion of guilds or so, but interestingly we've been selling into a timing credit market. Once we've been realizing again actually the residual gains on the book that we've got less is actually exceeded the level of gains that we've harvested, so actually the gains that we're now showing are unrealized are actually in excess of those, that we started. But in terms of the specifics your question I think it's, it was about £81 million in Q1 and that compares to £70 million in Q1 of 2017. And I think the aggregate number for 2017 was about 250 or something of that order and I think we will continue to be a seller and probably will there about this year as well, I would have thought.

Could you tell us what is the unrealized gain? I can't remember what that number is.

It's about £500 million, but there is a pull to par of £200 million but there's bolt-on above that £500 million in terms of the impact of credit spreads coming through that guild book and that's about £17 billion or so left.

Okay, that's perfect. Thanks anyways.

Your next question is from Michael Helsby. Please go ahead.

I got two, it looks like you've got time if that's okay.

[Indiscernible].

Yes, all right I've got loads then. I was just wondering if you could tell me, within your retail savings book, how much of the balances are on bonus rate versus outside of bonus deals. And I was wondering if you could give us an update on the - what the deposit yields were in the quarters like you normally do. And then on the mortgage side, again I was wondering if you could give us an update on the SVR like you normally do and if you could give us a view on your growth lending in the quarter, in mortgages and also if you could expand that by telling us, what type of business you're doing by brand or by type and by through the directi [ph] fair channel and if you feel really generous looking at LTV distributions. The reason for the question is because I've noticed you've got some very wild differences in your pricing by channels at the moment. So I'm very keen to understand where you're doing the flow. And if you could, if you could give us your, the mortgage yield is at the moment. It's really important to understand the mortgage dynamics and obviously the group margin dynamics as we look forward. Thank you.

There's a lot of questions in there Michael. And I'm not going to be able to answer all of those questions and particularly around some of front books and in terms of bonus rates versus [indiscernible] rates. Firstly, in terms of backdrop mortgage market remains tough and there's been some pricing ups, I think as I said to one earlier question but [technical difficulty] simply compensate to things what happened on swap rates. In terms of our management of brand and our management of products obviously we always have to be incredibly aware that being as the market leader the impact on front book, back book though in terms of how we deploy our rates, in terms of how we actually deploy our brands and products, is always with a view to the back book as well, that may be obvious but it's worth reiterating. In terms of some specific, so in Q1 I think [technical difficulty] it was just under £10 billion, I think it was £9.9 billion, which is about sort of 16% market share as I said, we priced up about 20 basis points across the [technical difficulty] but I think swap rates have sort of eaten into most of that, so [technical difficulty]. On the retail side of things so the retail rates around about have a bit of savings rates and totally it's about 39 basis points, I think one is about 41 in terms of Q4 and then in terms of SVR's, we're still around about that 13% rate across the book. So well around looking at mortgage that's where Halifax [ph] rate products, we're in total it was about 13.5%, I think in Q4 and it remains about that rate by in Q1, that's what we're actually seeing. But I mean since in terms of pricing, in terms of swap rates, in terms of competition are moving on mortgages, in terms of deposits, a couple of things but nothing dramatic at the moment but just keeping a watch on that as well.

Thanks George. Just on the hedge thanks for that comment that you gave in terms of how you expect boost the size and the duration. Can you just tell us what the actual contribution from the hedge was in Q1 in billions and also measured over LIBOR like you normally do?

The LIBOR was about a 1%, I think so, I won't give you the billions, but it was about 1% [technical difficulty] but it was a percent over LIBOR. Okay.

Thank you. Your next question is from David Lock. Go ahead.

Just one really on your investment spend, so you said you're going to be investing £3 billion, just wondering if you could call out how much you've spent this quarter and how much of that was in the expenses line and how much went on the intangibles, I know that they've gone up very slightly and it looks like the intangibles are going up very slightly this quarter. Thank you.

I don't have the precise number to hand, but in terms of capitalization we would capitalize anywhere from 50% to 60% and a portion of that capitalization with the intangibles from good old tangible type asset. In terms of aggregate spend, I don't have a figure to in hand in terms of what we've spent in the quarter. But we may have given the indication that H1 perhaps in terms of aggregate spend but to [indiscernible] to end.

Thank you. It'd just be really helpful just to trying on any lumpiness in the expenses line from quarter-to-quarter. Thank you.

I mean we're - it's not just blind, in terms of it may have picked up into the piece in terms of things that we've achieved [indiscernible]. So whether in terms of in branch tablets whether it's about - our base mobile applications, whether it's open banking, whether it's single customer view that we've talked about transitioning customers from SME to business banking, pilot machine learning. There's a whole load of things that are going on that are part of investing for this bank and finally make sure that we continue to win and compete as we move forward into this digital world. So there's been actually there's no slow start to this, this is still on, in terms of transformation.

Okay, thank you.

Thank you very much. And our next question is from Robin Diamond. Please go ahead.

Actually I think Michael's asked my question, I think he's probably asked most people's questions. Can I just make one point? You're limiting the call to 45 minutes of Q&A. I mean this is best options most people in the sell side get to ask questions. And I can tell you, you sound like you're under pressure as well, in terms of answering it. So maybe just in future quarters, can I make request that we, can perhaps have an hour or even slightly longer. I think it will be quite useful for us because it's - well the business is in for now, the rest [indiscernible] detail, I think we have been in skater in terms of movements to CET1 and CNAV [ph] etc. so I'll leave at that.

Right. Robin. Thank you for that. Okay that is actually last question.

It was the last question. Yes.

Okay then. Thank you so much everyone for dialing today and while shorter. [Technical difficulty] and thank you for calling in and thanks for joining the call.

Thank you very much ladies and gentlemen and that concludes the Lloyds Banking Group Q1 2018 Interim Management Statement Conference Call. You may now disconnect. Have a good day.