Secondly, the regulatory uncertainties, we believe have diminished. We — as we look forward, we can see more or less the outlines of CRD IV. We talked about that in the context of our earlier comments. We can see more or less the outlines of Basel 3.1. We can also see our Pillar 2A coming down, as you’ve seen, this is a public number. And so therefore, the regulatory uncertainties, we think are starting to reduce. And certainly, our visibility as to regulatory outcomes is greater than it was a year ago also. And then finally, of course, macro remains uncertain. We all know about that. But that’s why we’ve kept the 1% buffer in our overall CET1 target, even when we move to the 13% outlook. So as a result, as we adopt the 13% target, as said, we see it as a very positive sign for all stakeholders an expression of confidence in the overall business position, backed up by the evidence of what we think is going on in the regulatory space.
When you look at 2026, as you say, we do expect the cash flow hedge reserves to further reduce as it were to build the TNAV in the business. And that is one of the factors driving TNAV. But driving TNAV or other factors, including profit add-ons, for example, including pension build, for example. And driving TNAV per share is also the net of the buyback, which, as you’ve seen today, is a £2 billion addition. And as long as we’re buying shares below book, that’s going to contribute to a constructive TNAV per share outlook. So all of that is positive. But as you say, the key point, Rohith, is that our greater than 15% RoTE outlook is not dependent upon the 13% CET1 target shift. Had we stuck with 13.5% CET1 as a target, our guidance for you in terms of greater than 200 basis points in terms of greater than 15% RoTE outlook in 2026 would have been exactly the same.
All this does is add to the extent that we were able to achieve RoTE in excess of 15%. But the greater than 15% would have stood whether we adopted the 13% or not. The final point that you mentioned, Rohith, is in relation to AIEAs. And just to be clear there, our guidance on AIEAs is greater than £450 billion. That is, as I said in my comments, a touch down on 2023. There’s a couple of things going on there. One is organic business growth. So we do expect the organic business to grow in terms of our core franchise. So on the retail side, on the commercial side, we expect balances to grow. There are 2 mitigants to that. One is around the repayment of bounce back loans, in particular, in respect to the commercial business, most obviously in the BCB or SME franchise.
And then 2 is, as you’ve seen over the course of ’23, the back book within mortgages will continue to pay off. The SVR book is likely to come down. But to be clear, the ongoing look-forward business, whether it’s the open mortgage book, or whether it’s corporate and institutional balances, for example, those will grow. And I’ll make a final comment, which is our guidance is, as I said, greater than £450 billion AIEAs, it is greater than both because that’s the way that we saw it as of December 31, but as testified to by slightly stronger markets that we’ve seen open up during the course of January and so far in February. So it’s quite deliberately greater than £450 billion.
Douglas Radcliffe: Let’s have the next question.
Unidentified Analyst: It’s from KBW. Just — the first one is just going back to the motor. I know obviously, there’s lots of uncertainty within that. But can I just clarify whether you think that the Land Rover portfolio, the captive book is part of the review? And secondly, again, I know the £450 million, we have all sorts of assumptions in it. But broadly speaking, how is the split between the redress and the operational cost? Because obviously, the data going back to 2007, there’s a lot of records that may not be around. So just what are you thinking about the split between the 2? And then I guess, secondly, going back to deposit. Do you have a sense as to what’s driving the slowdown in the churn in deposits. In Q4, is it slowing because it’s typically a higher spend season, so Christmas and everything?
Or is it because there was lack of a rate rise effectively and so just less prompts? And in a falling rate environment, would you see that slow more or less because if rates were to come down, maybe people want to lock in rates sooner rather than later, is that a possibility? And I guess, since we’re talking about assumptions on the NIM, just noticing that you are factoring 3 rate cuts and one of your peers is factoring 5. So if that were to happen, just how would that greater than 290 evolve?
Charles Nunn: Sure. Do you want to take the first one? I’ll give you a rest on the part of the second one and then you can talk about the 290.
William Chalmers: Sure. Thank you, [indiscernible] for the question. First one on Motor, a couple of points that you raised there. One is Land Rover exposure. The second is the split between redress and operational costs. You’re right, Land Rover has been a significant part of our portfolio for a while. The — I shan’t comment on any kind of numerical aspect of that, but it is probably fair to say that Land Rover, both because it’s new cars and because you might imagine, therefore, there’s less scope to discretionary movements within pricing, perhaps has lower redress consequences if that is the direction that the FCA review goes in than other aspects. But I would be just careful about how much you read into that for the £450 million provision because as I was mentioned earlier on, we’ve taken a variety of scenarios in the context of our £450 million.
Second, you asked about redress versus operational costs. We are not specifying exactly how that £450 million is split. The only comment I’ll make, is that there is a decent chunk of each within that overall £450 million. Charlie, do you want to…
Charles Nunn: Great. Yes, let me have a go to deposit channel, and you can talk about the impact on NIM of rate rises. So first of all, as you say, this is obviously a hugely important part of the development through Q4 and into this year. What you saw as you’ll recall, is a lower change in our retail customer deposits, which is obviously the most important deposit base for the bank. So we saw a slowdown in Q4. And as you saw across the year, actually relative to other high street banks, we performed materially better on that churn, and we were winning in the savings market, which is exactly what we wanted to try and do with our broader propositions around our mass affluent base. So it was on a relative basis, good performance.
We think what we saw in Q4 is what we would expect. There were 2 dynamics going on. First of all, we’ve obviously seen the shifts out of PCAs at the higher part of the yield curve or the increase in where time deposits were priced up above 6% in the middle of last summer, which is where the biggest gap was. We’ve seen a significant amount of moves. And so you’d expect that to slow down as you get further into the rate cycle, number one. Number two, obviously, the gap between time deposits and then instant access deposits has narrowed. And so people can actually get the value from liquidity, which we know they value without having to lock up their deposits for 12 months or 24 months. And so we think those are the dynamics that we saw happening through Q4.
And obviously, as William said, we do expect that still as the rate cycle continues to mature so you’ll still see people making choices to put money into savings accounts. But the choice now between putting it into Instant Access versus time deposits, we think will continue to narrow because of the yield curve and what you can price at 12 and 24 months out, which is where most people were choosing to put their deposits. So we think this is a good development. I think importantly for us, we want to make sure, given the nature of our customer base and how we can engage customers on a relative basis, we say performing strongly in this context. Where does this end up? I’ve talked about this a lot with you in the last couple of years. When you look at the longer-term yield curve still being above 300 basis points, we always said, as you get further into the cycle, people would have rebalanced their portfolios into the liquidity deposits that they want in PCAs and instant access.
But as you see time deposits come down and the returns, people will be more comfortable without not growing that further. So we think there will be stabilization through the back end of this year, but it will depend on where rates go, obviously. William, just talk about if there’s sensitivity beyond 3 base rates?
William Chalmers: Sure. Yes, yes. No, I will. Perhaps actually, care to just to add a couple of numbers to the analysis as well on deposits that you might find helpful. One is, as you’ve seen, PCA reductions have gone down from a £3.2 billion level of Q3 to a £1.9 billion level in Q4. Now to be clear, a lot of that was back-end loaded in the quarter, but nonetheless, that’s quite a significant reduction in PCA outflows. Secondly, the non — what we described as a nonmaturity churn within our overall savings book, i.e., savings moving from Instant Access to fixed term for the first time, if you like, has gone down from around £10 billion to around £7 billion between quarter 3 to quarter 4, so quite a material reduction. That appears to be continuing during the course of January and February of this year.
And then thirdly, we retain the vast majority of fixed-term deposits that mature, the vast majority. Of those, we reckon about 60%, percent, are going back on to fixed term versus the rest which are basically staying within Instant Access. So you’ve got that effect as well going on in the overall mix. And I think together, those 3 factors that we witnessed in Q4 and we’re continuing to witness in Q1 of this year, support the thesis at least that deposit churn does appear to be slowing. Now again, it’s early days and we have to see how things transpire, driven by all the points that Charlie mentioned, but the data certainly supports the supposition. Bank base rate cuts and what impact that might have? As you know, our guidance is greater than 290 for this year.
That is predicated upon 3 bank base rate cuts. So we start out now at 5.25%. We end the year at 4.5%. We are also starting those in June and at both the quantum and the timing of those bank base rate cuts makes a difference. But to answer your question, we’ve given some guidance in the disclosures around the impact of a 25 basis points parallel shift reduction, just like we did on the way up, we’re giving the same guidance on the way down. Now that is both base rate inspired, but also it assumes a parallel shift in all associated curves of 25 basis points. And that gives you about £150 million hit to income off the back of that 25 basis points reduction. But it’s worth making a couple of points. One is in that lower rate environment, just as Charlie’s comments were indicating, you would expect deposit churn to slow even further, why bother churning in the context of lower rates.
Likewise, you might expect offsetting steps, if you like, in the context of other prices, including, in particular, in asset markets, you certainly saw that on the way up. It’s hard for me to believe that you don’t also see it on the way down, and therefore, compensating effects or adjustments, if you like, in other asset markets. And possibly, who knows, you might see stronger levels of activity in that type of market, too. Overall, what that means is that while the £150 million number is a kind of crude estimate, if you like, of the effect of a 25 basis point parallel shift, the net number is likely to be lower than that because it is offset by the 2 or 3 factors that I just mentioned. As to the ultimate outcome, I suspect rate reductions above and beyond what we have given in our forecast, they are negative from an income point of view, for sure.
But as said, they are less negative than that £150 million sensitivity might point out. And the extent of that, I think, will depend upon not just the quantum, but also the timing. If things are late in the year, they don’t make much difference to 2024. If they’re earlier in the year, they clearly make more.
Douglas Radcliffe: So next question from [indiscernible].
Unidentified Analyst: Yes. Two then, please. One, so your Britain’s mortgage bank, and nobody is really asking about what seems to be a very significant improvement in the outlook for the mortgage market? I wonder if that’s because you’re not charging enough for mortgages, kind of 60 basis points. It doesn’t seem like very much, right? So the value-added for mortgage growth feels pretty low. So is there any reason to hope that as the largest lender, you can influence that to a level that’s more competitive so that we’re more interested, frankly? And then secondly, insurance. I mean, you don’t seem to make any money in insurance anymore or you certainly didn’t. In theory, you should, right? You sound like you’re fairly growing the business and you’ve got all the CSM now, can that be a driver of earnings because it wasn’t in 2023?
Charles Nunn: So I’ve got that William and then you can come in.
William Chalmers: Sure.
Charles Nunn: So yes, you are right. We are the leading mortgage bank. And as William said, and you know the data, the start of the year has been a good start. I always say to the teams, 1 month doesn’t make a quarter, let alone a year, but it’s been good to see the confidence coming back into market and the margins have stabilized, as you say, just north of 60 basis points. I think the first point is about 50 basis points, which we wrote business at last year and 60 basis points is very accretive business. And it’s important to recognize that. You’re shaking ahead, but I can assure you, when you look at the numbers, it’s accretive. The other point, which just goes back to the last discussion, which I think is really important.
I said to you before, on the way up in rate cycles, we’ve lived through them a long way. What you want is both sides of the balance sheet. You want a balance sheet, which is kind of a 100% loan-to-deposit ratio. You want a good mix of secured and unsecured assets and you want stable deposit bases, which are really grounded in strong relationships in the retail business. And what you’ve seen on the way up is we’re differentiated in the stability of our deposit base and still competing effectively on assets. And on the way down, which is what you’re alluding to, we’ve got the best leverage and the best mix of assets to compete on the way down. And so we do think there will be upside on the way down. You need both sides of the balance sheet to be able to really win relative to our competitors in that context.
And of course, underpinning all of this is still a structural hedge, which, as you know, has significant upside for us in each of the following 3 years and actually beyond, but obviously, relative to our guidance. And we do still think that the longer-term yield curve is going to give us confidence in investing in the structural hedge as it rolls off, that underpins both sides of the balance sheet. Now how you assign the transfer price, capital and cost of funding to both sides of the balance sheet? I don’t know if you were shaking your head about returns. But I can assure you that even if you take a very competitive market price, third-party way of pricing mortgages, 50 to 60 basis points is good. And as you say, there is positive momentum in that market.
In insurance, let me just deal with that one on insurance. What we’ve laid out is a strategy for growth around capital-light parts of the insurance business where we know we have leading franchises and also the broader investment businesses, so the workplace pensions, home insurance and protection. There are businesses where we make money going forward. We’re also growing market share, and we are winning in those markets. And what we committed to in the strategy, and we’ll talk again more about this in the next few years. But again, now what we’re starting to see is the benefits of having 26 million customers through the broader relationships of the bank, being brought together with those very distinctive capabilities in our insurance business.
We talked about our growth in annuities market share. You’ve seen the data, not the full data, but the underlying growth in our home insurance business and you’ve seen the growth in our workplace pensions business and what to say great about those businesses is they’re all capital light and more predictable. And yes, the CSM does become a significant tailwind as we build that business going forward. So we’re both excited about what we’re starting to see is the growth, which we committed to, and the proof points that we’re starting to see our ability to bring those to our 26 million customers and differentiate our distribution. But you’re right, what we need to do is prove that to you in terms of underlying returns over the next few years. There was — we didn’t disclose the insurance dividends, did we?
Yes. There were strong dividends this year, which obviously is ultimately how you get as a shareholder, the returns from that business. They were strong actually for all of the period of time I’ve been here. But this year, we increased the dividend well in the last quarter of the year.
William Chalmers: Al, just to give you 1 or 2 numbers on that as well to back up Charlie’s point, the — we saw insurance income of £1.2 billion this year. That is up 26% on last year, number one. Number two, to Charlie’s point, we’ve seen the dividend be, frankly, extremely helpful from a capital generation point of view for the group. We had £250 million insurance dividend this year. We had £400 million last year, and as over there, now who runs the insurance business, I’ll always take that as group CFO. So we’ve seen really strong performance in terms of profit growth for insurance. We’ve also seen very strong capital contributions to the group from it. And then as Charlie said, we’ve got a strategic commitment to it in the context of the transformation that we launched in ’22, which should grow that further.
Douglas Radcliffe: Okay. Can you just take the next question from Raul?
Raul Sinha: It’s Raul Sinha from JPMorgan. Obviously, lots of detailed questions already on NII. Perhaps if I can invite you to comment on total income in terms of consensus and kind of what people are expecting for Lloyd. So when I think about margin, I think consensus going for 296, you’re very, very clear gentle decline in the first half, gentle upwards second half that’s greater than 290. It sounds like that might be a bit higher than you’ve got the average interest-earning assets number. I think consensus is up on at 455. You haven’t commented specifically on OI. And I think you’ve given us some help on operating lease depreciation. So I was just wondering whether or not you think sort of the £17.7 billion in consensus is broadly correct?
Maybe NII is too high, other income offsets that? Or perhaps there might be some optimism there? And then I guess, the second one, just broader on the agenda of consumer duty. One, how long do you think it takes to get to the other end in terms of clarity that you need for not just the motor finance issue which, I guess, is going to be a live issue, and I guess you’re waiting like everybody else till the end of this year. But also there’s a broader suite of changes that are coming in for the industry. How long do you think this process takes? And when do you think you’ll have enough clarity to maybe, one, give us some clarity on overall provisioning, but two, perhaps make some changes to how you might compete in businesses where it might be opportunities for you against competitors?
William Chalmers: Let me take the second question, sure.
