Charles Nunn: Sure. Yes.
William Chalmers: Thanks, Raul. I guess on your first question, I should start out by saying I’m not going to comment overtly on consensus. What I will do is give you the kind of building blocks, if you like, to allow you to build the income profile for the business. As you say, we have got guidance for greater than 290 basis points. We feel very comfortable in that guidance. It is driven by the 3 or 4 factors that I mentioned earlier on. That is to say deposit churn continuing but slowing, number one, the mortgage refinancing headwind continuing through the year, albeit abating through the year, number two. That being somewhat augmented by an expected degree touch more retail asset margin pressure, which you’ll have seen from our slides, we saw in ’23, probably a little bit more of in ’24, but then all of that offset by the principal tailwind of the structural hedge, which builds momentum.
And that’s what gives us comfort in really 2 things. One is the margin guidance of greater than 290, the second is the kind of shape that we discussed earlier on, which is to say a gentle decline during the first half, gentle incline in the second half, certainly confirmed by the time we get to quarter four. That’s our expectation. Things could change. Things could change like activity, things could change like bank base rate expectations and the like. But at the moment, that’s based upon our GDP outlook, and it’s based upon our rate expectations, which look pretty much like the market as far as I can tell today. The AIEA expectation, as I said earlier on, is deliberately greater than £450 billion. And that is partly because of the uncertainties.
It’s partly obviously the call that we make based on how we see the business. I should add, and I didn’t say this in my earlier comments that we had a bit of an overhang from open mortgage book refinancings in quarter 4. They did not refinance in quarter four. We expect that to happen in quarter 1. So if you see some slight nuance to my comments around AIEAs in respect of the open mortgage book in quarter 1, that’s why. We’re expecting some — a reasonable flow of refinancings in the open mortgage book, which will probably attenuate the growth that you might see in that book in quarter 1. So I say that just the context. And ahead, I guess, of reporting to you at the end of the quarter. The OOI, as you say, we haven’t commented on. I guess I’ll make a couple of comments there.
One is, as you know, OOI was up 10% in 2023. I think that was probably a little bit ahead of where the market expected us to be. We do expect OOI to continue to grow during the course of 2024. Now whether it will be ahead of or in line with or below market expectations, I shan’t comment, but we are confident in a reasonable pace, if you like, of OOI growth. Whether it will be 10% or not, let’s see that may be a little bit south of that, but it should be reasonably healthy growth. And it should be, in turn, achieved across all of our business areas, that is to say, retail, commercial, IP&I and also central as well, which include primarily our equity businesses, as you know, Lloyds Development Capital is an illustration of that. So I would expect that to grow over the course of the year.
Again, I shan’t comment on it versus the market. But overall, it leads us to feel comfortable with the overall income profile when set against the cost guidance that we’ve given you and the below 30 basis points impairment guidance, and that below is worth underlining to get to our 13% RoTE target as a whole. So perhaps I’ll pause there, Charlie and hand over to you.
Charles Nunn: Yes. In consumer duty, so it’s obviously a really important question. A couple of thoughts in reaction to it. The first is, obviously, we implemented the first phase of this last July. We worked very closely with the FCO on that. We had strong feedback that the capabilities we bring and the experience that Lloyds Banking Group has had around thinking about good customer outcomes and then dealing with remediations and supporting vulnerable customers, means that we were right at the front of the pack around how we were thinking about consumer duty. And then we’ve got another implementation this summer for the next phase of implementation. So it’s early days. And I said when I joined Lloyds Banking Group, it was one of the areas I really saw the depth of competence, capability and proactive thinking in the bank.
It’s a really important capability for me as the CEO of this group to think we have product, channel and then broader operational teams that really do think about customer outcomes and then put in place effective controls across all of our people and our 26 million customers. Your question around the go-forward and when this becomes clear and what the opportunities are? I think the pragmatic answer is it’s going to take a couple of years to bed in, both for the industry and us is the major — biggest participant to really demonstrate how we’re now measuring outcomes from customers and taking actions and for the regulator to determine how they think about that in the context of their business. You know me well enough by now, I sat down with my teams, some of whom are here on day 1 and said, what are the opportunities to serve customers better?
And there are, there are opportunities. Because if you think simply in the last 15 years, what’s happened in the U.K. is we’ve put lots of constraints on how you interact with customers at the point at which you sell a product to them and wealth is probably the best example. But if you can then move to certainty around looking at how people use our services and products, most of our customers are with us for 10, 20, 30, 40 years and you can get confidence around how to use them, you can actually make it easier for them to upfront, get access to them if they’re still well-designed products. So I think there are — I know that’s conceptual, but it’s really important. I think there will be opportunities for the industry but that won’t emerge for a few years, I think.
One other thought, which I think is important in this context. I’ll let William take all of the detailed questions on motor finance. But having a strong relationship with your regulator is really important. Actually, I think the way you’ve seen the FCA intervene, we have said we welcomed their intervention. It’s different, right? It’s different from prior examples. They’ve stepped in quickly. They understand what the implications could be for customers for the industry. You know actually the biggest participant in this industry is the car manufacturing industry, not actually the banks. We’re not biggest finances. We are the biggest individual financer, but it’s a much broader industry. And the FCA is very proactively leading into consumer duty to make sure they get the balance right, and I think that’s important.
And it’s different from if you go back 15 years ago, what I saw at the start of this journey between the conduct regulator and the banks.
Douglas Radcliffe: Okay. Take the next question from Jonathan.
Jonathan Pierce: Jonathan Pierce from Deutsche Numis. Can I ask you 2 questions? Sorry, I’m back on motor. The market has obviously moved to take circa £3 billion out of the market cap in no small part, I think, because of this. The analysts naturally are going to think about worst-case scenarios and many figures are out there, but £2 billion, £3 billion higher than that in some cases. I don’t expect you to give us your worst-case scenario that’s feeding into that , but it would be helpful to get a little bit more color on how you’re thinking about the worst-case scenarios relative to the market. I mean, naturally, we’re going to assume that of the £42 billion of originations in Black Horse since 2007 to 2020 all of it was discretionary commission arrangement linked, which probably isn’t the case.
But it would be helpful if you could give us some color on that. And I think also if you could just confirm, and this is a matter of fact as much as anything else, the trust documents from Cardiff in the late 2010s suggests that 2/3 of the business was written in APR below 7%. Is that representative of the business that was written more broadly? I mean there’s a good sample size, it’s £4 billion accretive loans in those securitizations. So that would be the first question. The second question is more simple, really about the trajectory to this 15% RoTE in 2026. I mean the market will go away this morning and worry a bit about near-term NIM, operating lease depreciation, those sorts of things. But you’re still targeting an RoTE above consensus a couple of years out on probably a TNAV that’s at least as high as consensus, probably higher than consensus rather.
Is the bottom line here that the deposit margin, one of the most striking numbers this morning, I found actually was Slide 17, where the deposit margin in the second half was 122 basis points, which again is a backdrop of base rate of 5%-plus, is very low, and it’s clearly a function of the structural hedge cost. If we stand back from deposit betas and mix and hedge unwinds and all that sort of good stuff, is the simple message here that in a rate environment when base rate is, I don’t know, 3%, 3.5% a few years forward, you should be making quite a lot more than 122 basis points on your deposit book? And that’s how we get to 15% RoTE.
William Chalmers: Yes. Yes. Thanks, John. Should I take that, Charlie?
Charles Nunn: Yes. I might be able second one because it’s a great question.
William Chalmers: Thanks, Jonathan. On the motor question, first of all, we won’t comment on models that are out there right now. The £450 million provision, as you know, is both operational and legal expenses on the one hand and a variety of redress scenarios and another — on the other hand, which in turn build into the 450. Within that, I mentioned some of the variables that are put into those scenarios. Again, time periods, commission model, 0 versus reasonable commission proactive versus reactive redress campaigns, response and uphold rates, these types of things. Within that, I think there are some variables that are particularly sensitive. And I would highlight the 0 rate versus reasonable rate, as an example, I said that could lead to a circa greater than 50% reduction in any redress provision that might be necessary here.
Likewise, the behavioral versus contractual life is an important one. Likewise, is this a proactive redress campaign if that is what it gets to or is it a reactive one? That’s another big one. And these things make a very big difference to the overall provision that might be necessary. And when we observe the outside market and the assessment that it makes, without commenting on them, we note the absence of that type of sensitivity, if you like, in those numbers. The — you asked a question about the proportion of financings that are linked to discretionary commission models. The reason why we’re not giving further detailed information at this point is because we see the big judgments that will make a massive difference to whatever the redress might come out of this are basically in the hands of the regulator, of the issues that I just mentioned as examples.
There’s also an awful lot of kind of intricacies in the detail that we might give you. So if we start to give you a piece of detail around, let’s say, discretionary proportions, there is a whole load more detail behind that about when they were replied about the extent to which there’s flexibility in the model, about the type of discretionary model and all of these types of things. And so I think at the moment, at least, recognizing that the big judgments that will make a material difference to the provision are in the hands of the regulator and then any detail that we will give you or only kind of nuance around the edges in comparison with that, that’s the reason why we’re sort of sticking with where we’re at. There is, as you say, some publicly available information, and you mentioned the trust documents there in the context of Black Horse.
I shan’t comment on that. Safe to say that there’s quite — I think as you have been doing, if you kind of scratch me at the surface, there’s quite a lot of public information out there that enables you to get to views on these things. But bear in mind that again, the key judgment is not so much that. The key judgment is where does regulator go in respect to some of these big calls that we highlighted. On the 15%, first of all, I can’t resist, but it’s worth just underlying we expect greater than 15%. I mentioned earlier on, that is not contingent upon 13.5% moving to 13%, we would still be saying greater than 15% even if we’re stuck with 13.5% as a CET1 target. So with that in mind, I guess, a couple of building blocks. One is we do expect the business as usual, which, in my parlance, I suppose, includes structural hedge to significantly ramp up in the period between now to 2016 — 2026.
The primary reasons for that are the headwinds I say, go into . The mortgage one is very mechanical. As long as you don’t think the completion margin is going to completely collapse. The fact that our maturity margins are coming down over this time period means that the mortgage refinancing headwind kind of moving out of the picture, that’s a pretty mechanical outcome. The deposit one is a bit more of a judgment call based upon where rates will go, based upon how many people move from Instant Access into fixed term and so forth. But as Charlie said, the incentives for that type of move seem to be kind of disappearing during this time frame. And then the third big driver, the big tailwind, of course, the structural hedge, again, is a relatively mechanical input predicated upon a certain interest rate assumption, base rates, forward curves and the like.
