And as long as you believe that base rates and forward curves are more or less as we have depicted them, and it is more or less, it doesn’t need to be precisely clearly. Then again, you’ve got a very mechanical building in terms of the structural hedge profile over time within the business as usual earnings profile. And I’ll make one more comment there, which is that at the moment within the structural hedge, we have, because of the legacy of when it was built up in a low rate environment, quite a lot of low-yielding hedges. Those come through at various different points in time. They come through a little bit less in 2025, a little bit more in 2026. So you get more of the low-yielding hedges out in ’26 than you did in ’25, which leads in turn to a bit of a ramp-up in structural hedge earnings in that time period.
So that’s the business as usual picture. It is then supported by the strategic initiatives, where we expect to gather pace. We talked a bit about insurance. And the interaction between insurance and retail is one example. As you know, there are many more across the retail, commercial and insurance spaces that we expect to build to the £1.5 billion incremental revenues over the 2026 time period. Alongside of that, we — I hope people will acknowledge, we try to keep very tight grip on costs. Now as you’ve seen today, we’ve upped our cost guidance from 9.2 to 9.3, but that is in the interest of securing some severance benefits. Those in turn and other cost savings metrics allow us to plan for a flatter cost outcome in the ’25 to ’26 period. I won’t be more precise than that because we’ll come back to you at the end of the year on it.
But that, together with an ebbing of the overall investment program, we’re going to continue to invest heavily in the business. We should do and we will do. But nonetheless, the type of boost that we’ve had in the last few years, that will at least plateau out and potentially at least come down a little. So that gives us a relatively faster cost picture, resting upon a macro environment of the type that we portrayed in our forecast, that’s what gives us confidence in the context of the greater than — than 15% RoTE expectations for ’26. And specifically on your question, Jonathan, therefore, a big part of it, as you say, is a normalization of the deposit margin off the back of the structural hedge maturing. So in short, the answer to your question is yes.
Charles Nunn: Can I just jump in because it’s a really important strategic question. The answer is yes. And we’ve worked and you do analysis across banking markets across the whole world. One of the consequences of a decade or more of very low interest rates. And when we started this journey together, William and I with you, we had a few things that we inherited. We had over £250 billion of the structural hedge, which was returning 1%. We had a £7.3 billion pension deficit. We had a very large legacy mortgage portfolio at margins that you all looked at and said, we knew we couldn’t return. We hadn’t been able to invest in some of the modern technology that we knew we needed to do to compete. And if you think through what’s happening here, if you have a well positioned customer-centered balance sheet, which is leveraged on both sides of the balance sheet with good diversity across secured and unsecured, which we do have, with a loan deposit ratio of 96%, 97%.
Through cycle, and as base rates go up, you will get a rise at the base on that balance sheet. That is what’s happened in every banking market and the U.K. over history. So your simple thesis, I think, is the right one. Now there’s a lot you need to have to be able to do that successfully. And I think Lloyds Banking Group does have those things. And the tenant that we’ve always said is by 2026, we will have got out of most of those problems. We’ve already dealt with the pension deficit, which I thought was a horrible drag on us, and you’ve heard the other things we’ve talked about that we’re doing. And then on top of that, we’re layering on £1.5 billion of additional revenue growth. So we look at the targets, and we think we’re very glad with the strategy we laid out and it enables us to compete whether rates go up or down.
But as the base rate environment increases, it really strengthens our business model.
Douglas Radcliffe: Okay. I’ll just take a couple of more questions. Chris.
Christopher Cant: It’s Chris Cant from Autonomous. If I could just come back to your CET1 target, please, on the 13%. So I know in your fixed income deck, you show a 10.3% MDA, but you do have the ring-fence buffer as well. So just in terms of how credit markets are going to price your debt, are you happy to run with headroom to MDA at the very lower end of what we observe across European banks. I appreciate that there is a countercyclical component to your MDA, which isn’t the case for some peers, but you are going to screen pretty badly on those charts that some of my credit colleagues run. So how do you think that’s going to impact the pricing of your debt, please? And then on a sort of related capital point, you’ve said now EUR 5 billion of further RWA inflation from regulatory change across 2024 to 2026.
I’m just curious if you can give us a little bit of a pointer as to where you expect RWAs to be by 2025, say. So you’ve had that to 225 kicking around for a little while. I get the impression that some of the reg inflation is maybe going to come a bit later now than you expect. I don’t know. But obviously, we’ve got Basel 3.1 in 2025. Just curious as to how your thinking is developing around 2025 RWAs, please?
William Chalmers: Yes. Thanks, Chris. Perhaps I’ll deal with those 2. The CET1 point, first of all, as I said in my comments, we think this reduction from 13.5% to 13% is good news actually for all stakeholders. And I think, Chris, the reason why is because you have to look behind the reasons as to why we’re doing this. We’re doing this because we significantly reduced risk in the business. As I mentioned earlier on, you can look at various different portfolios that we have to testify to that. But perhaps most objectively, you can look at the ACS results to testify to that. So I would hope that debt holders very much welcome the risk reduction measures that we’ve been taking in the portfolio, particularly in the last 5 years, as I mentioned, but also you witnessed it in 2023 securitizations are an example of that.
There are many others. That’s point number one. Point number two is that you’ll be aware because of CRD IV, we are seeing an increase in RWA density over this time. That RWA density means that actually a reduction from 13.5% to 13% is not as much of an equity reduction as you might first think. Because we are expecting CRD IV to continue to give us £5 billion of RWAs over the course of the period between now to mid ’26, that CRD IV add-on continues. So I think, Chris, debt holders will look at not so much the equity Tier 1 ratio, but what is the total quantum of equity that we are holding in the business. And what they’ll see is that against a reduced risk profile for the reasons that I mentioned, we are holding an equity base that isn’t terribly different over this time period.
I would expect, therefore, the type of spreads that we trade out within debt markets, which are typically better than anybody else’s at least in the local markets, will stay that way. The RWAs point, you mentioned it’s a very fair question. We’ve given guidance of £220 million to £225 million, and that’s over the course of 2024. We’ve stuck with that guidance despite some material headwinds within the context of regulatory measures, in particular, again, CRD IV. We thought a lot about that, Chris. We thought about should we be sticking with it in the context of the CRD IV headwinds, and we determined that we would do because we had opportunities in part to offset those regulatory headwinds with NPV positive securitizations and other forms of optimization.
And as you know, from our numbers, we developed those over the course of 2023 and expect to continue that in 2024. That then enables us to stick with the guidance, which I hope from a shareholder point of view is good news. We remain very committed to controlling RWA growth. When we look towards 2026, there are a couple of things going on. One is the organic growth in the business. Charlie mentioned some of the lending ambitions, for example, in that context. And that will clearly add on RWAs. Two is CRD IV. We’ve hopefully given guidance around that of the incremental £5 billion subject to PRA confirmation, but that’s where we expect it to land there or thereabouts. Three is the expectation for Basel 3.1, which at the moment, as you know, from our perspective, at least, we do not expect it to make any difference in the near term.
That might be give or take a few hundred million, but it isn’t necessarily much more than that. So Basel 3.1, we see is net neutral over this time period. And then finally, as I said earlier on, we remain committed to optimization, which is a good thing to do because it’s NPV-positive. And therefore, you ought to do it anyway, no matter what the regulatory situation is. But nonetheless, it also gives us a tool, if you like, or a lever to assess any RWA increases that might be beyond our initial expectations with optimization in mind. So Chris, I’m not answering your question directly. I’m not giving 2026 RWA expectations, but you can see that effectively, we would expect regulatory measures to be either neutral or neutralized by our RWA optimization.
But then at the same time, perhaps some lending growth beyond what we see in ’24 to an increased pattern of RWAs in the period thereafter, but we’ll update you on what that means over the course of the next period.
Charles Nunn: And that is, of course, we’re front-end loaded actually the CRD IV impact in 2023.
Amandeep Rakkar: It’s Aman from Barclays. I’ve got 2 questions. One on deposit pricing and the second on strategic revenues. Deposit pricing, interested in how confident you are in being able to react to base rate cuts in a timely fashion. I do note that the FCA seemingly externally took a keen interest in pass-throughs, particularly towards the end of the cycle. I think you also passed through ultimately less than some of your peers, which is obviously a reflection of your franchise strength, but also arguably gives you a little bit less room to kind of cut on that part of the book on the way down. So interested in your thoughts on your reaction function without giving away your commercial secrets. Relatedly, could I ask about term deposit pricing.
So I think about a year ago, you were originating term deposits comfortably below the relevant swap materially below. So should we be thinking about this kind of repricing headwind on term deposits. So you’re retaining the stock, but at narrow spreads. Is that a material consideration that we should be thinking about this year? So that’s one question, believe it or not. The second — I have to take the chance while Charlie is here around strategic revenue. So interested for your observation about your progress there. It’s remarkable that you’re 1/3 of the way through your £1.5 billion target. I would say it doesn’t feel like you’re a third of way through because we can’t see it in terms of the kind of net impact on revenue. So could you kind of give us a view on what you think is going kind of better or worse than your expectations?
And any color on that residual billion? How much of it is OOI versus NII from here?
Charles Nunn: So obviously, good questions. Thank you for that. Just on deposit pricing, your 2 points, just in terms of can we respond in a timely way? The answer is yes. And obviously, that’s something that we worked on last year. Again, the issue on deposit pricing and like mortgage pricing is mortgage pricing, obviously, it’s just a new price for frontbook customers, you can do that very quickly. Deposit pricing, we normally have to inform 15 million to 20 million customers and give the appropriate level of warning and set that up. So we have the ability to do that quickly, but actually need to give appropriate warning. The one thing I’d say is I think the regulators will be less concerned about timely passing of rate cuts than they were around increases.
So we’re in a good place operationally let’s see how the competitive dynamic plays out around that, which I think is important. And then on time deposits, yes, I even said at this stage last year, I’m never worried of when the rate — when there’s a high yield curve around time deposits because you can price it at a good place for margin. The interesting time, which is the one that’s going to come in this year is when if the yield curve is now lower than your Instant Access or base rates, and you’ve got existing time deposits that are coming off, what happens to the competitive pricing to retain those. And I have seen at other stages in the U.K. and in other markets, people don’t want to retain those deposits, start pricing either at the cost of funding those TDs or even negatively.
That obviously hasn’t happened yet. That’s in front of us. As you know, if the time deposits are — if our deposits are in time deposits, that doesn’t benefit the structural hedge. So there’s no issue around that from a structural hedge perspective. And I think what we’re seeing so far is we’re able, as we’ve seen the yield curve come down and our time deposit rates come down, we’re still competing and winning. So we’ll give you more update as we go into this, but it’s definitely one to watch. I’m not worried about it from our fundamental economics and our starting point is strong. Strategic revenues. So if I can disagree with you a little bit. I think you have seen the benefits of some of the things we’re doing. Other operating income is, as I said, up 10% year-on-year.
We saw growth last year. I think we said last year, it was about 7% to 8% underlying growth. The numbers were a bit noisy last year because of some of the one-offs, especially in the insurance business. So that’s the most — that’s the easiest way for you to see some of the growth. And I’ll talk about where we’re doing well and where there are some challenges relative to what we set out historically. As you’ll recall, today, we’ve said — we’ve delivered £0.5 billion, £500 million, of revenue growth, net new from the investments and £0.7 billion of cost efficiencies, that’s relative to the £0.7 billion and £1.5 billion of revenue growth in ’26. So that’s a good place, and it’s actually ahead of where I thought we’d be when I talk to you in February 2022 starting from new and back building these businesses, it’s always slightly back-end loaded.
We’re actually ahead of gain on the revenues, which is good. Where do I see the progress? It’s across the pitch, and then there’s 2 areas probably that have been more challenging, which is largely linked to the external environment. So in our Corporate and Institutional business, you’ve seen the growth in OOI. You can also then go and look at the market shares, go look at U.K. DCM, look at our share of FX, look at the awards and our growth in transaction banking. We’ve learned — there were 5 big university mandates last year. We won all 5. That’s never happened in our history. So there’s great evidence in that business. In Business & Commercial Banking, that’s been one of the areas that’s been most negatively impacted by the market environment.
