Lloyds Banking Group PLC

LSE:LLOY

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by, and welcome to the Lloyds Banking Group Q1 2019 Interim Management Statement Conference Call. [Operator Instructions] There will be a presentation by George Culmer followed by a question-and-answer session. [Operator Instructions] Please note this call is scheduled for 1 hour. I must advise you this conference is being recorded today. I will now hand the conference over to George Culmer. Please go ahead.

[Mark George Clifford Culmer, CFO & Executive Director]

Hi there, and thanks for that. Good morning, everybody, and welcome to the call. I will give a short presentation and then we'll open it up to Q&A.In Q1, we've made a good strategic progress and delivered another strong set of results with statutory profit and EPS up 2%. Starting with strategic progress on the first slide. Last February, we set out an ambitious plan to build on the progress of recent years to transform the group for success in a digital world. We have made a strong start. Our transformation is accelerating and we've already invested around GBP 1.2 billion out of our target of more than GBP 3 billion over the 3 years of the plan. In terms of the key deliverables, it's only been 10 weeks since our 2018 results, but since then, the migration of our prime MBNA credit card portfolio has been completed one quarter ahead of the original timetable and we'd expect it to [ carry ] financial returns.We're also on track to stand-up our joint venture with Schroders in the second quarter subject to usual regulatory approvals. We've had some propositions, including the launch of self-serve business banking loans, the new digitized SME lending tool and the digitization of our insurance claims process with over 50% of the claims already being managed digitally. We continue to roll out Open Banking and now have around 60,000 users, who continue to benefit from our unique banking insurance Single Customer View. Customer satisfaction continued to improve, and our Net Promoter Score has increased by 2 points to 64 driven by improvements in both the branch and digital channels. Finally, we also continue to make progress on simplifying our systems and driving further cost efficiencies in the back office. These include introducing new HR system and removing 60 legacy systems. And we've also extended our use of e-auctions to include professional services, with the cost of contract renewals down 10%. So a busy start and much done, but there are more to do. Turning now to Slide 2 and the performance update. In Q1, the group again made strong progress and drove increased profits and market-leading returns. As mentioned, statutory profit after tax is GBP 1.2 billion and up 2%, and the returns remained strong at 12.5%. These results were driven by an 8% increase in underlying profit with a 2% increase in net income, lower costs and the cost/income ratio of 44.7% and the expected higher net AQR of 25 basis points. Capital also remained strong with a build in the quarter of 31 basis points. And as you've seen yesterday, we have reduced our capital requirement.Looking at income on Slide 3. NII of GBP 3.1 billion is down 3% on prior year due to slightly lower average interest-earning assets, while the margin remains robust and is in line with guidance at 291 basis points. Other income increased by 7% driven by strong results in Insurance and Wealth, including a GBP 136 million benefit from a planned change in investment management provider. We've also seen a further 13% reduction in operating lease depreciation mainly due to robust car prices and lower fleet volumes. We've also recognized a GBP 50 million performance related earn-out from the VocaLink disposal. On costs, total costs are 4% lower year-on-year, with operating expenses down 3% as a result of continued cost reduction and a significant decrease in remediation charges. Withdrawals in the quarter were positive 6%.Turning to Slide 4 and credit. Asset quality remained strong with a gross AQR 30 basis points, in line with Q4 and a net of 25, up due to expected lower releases and write-backs. Despite Brexit uncertainty, we continue to see no deterioration in portfolio, and mutual arrears remained low across key products such as mortgages and credit cards, while our diversified, high-quality commercial portfolio also continues to see very low impairment.Looking below the line on Slide 5. Restructuring cost of GBP 126 million includes redundancy and MBNA integration costs and are 9% lower than prior year. These are offset by the increasing volatility and other items, which also includes an estimated charge for exiting the Standard Life Aberdeen investment management agreement. We've also taken out a further GBP 100 million for PPI, reflecting the operational costs of dealing with higher gross complaints and information requests, while net complaints are in line with our assumptions of around 13,000 per week.Our effective tax rate is also marginally better, 25% compared to 27% a year ago, due to the increased proportion of insurance profits and is in line with our longer-term guidance.Turning briefly then to the balance sheet on Slide 6. In the current external uncertainties, we continue to adopt a prudent stance with pricing and underwriting discipline, targeted growth and business mix optimization. Total loans and advances of GBP 441 billion are down 1% on both year-end and Q1 2018. This mostly reflects a reduction in the open mortgage book of GBP 2.5 billion in the first quarter largely due to disciplined pricing and expected increase outflows. And we're still targeting the open book being flat at the year-end against 2018.Our plan was to continue to target SME and asset finance growth. SME balances are up GBP 0.7 billion in the last year and Motor Finance GBP 1.5 billion, both growing ahead of the market and supporting margin. On liabilities, we continue to target growth in current accounts, which were up GBP 6.7 billion on prior year with increases in both Retail and Commercial. And finally, the RWA of GBP 208 billion are up GBP 2 billion on the year-end despite the lower loans and advances. And the RWA reductions on low-density mortgage book more than offset by a GBP 1.5 billion increase in the implementation of IFRS 16 as well as consumer model changes. And given our ongoing optimization, we would expect a fairly low level of RWAs at year-end.Finally on Slide 7, we have set out our usual capital walk. Our build for the quarter of 31 basis points is after the expected one-off 11 basis points of IFRS 16 as well as the PPI in Standard Life charges, and is in line with our ongoing target of 170 to 200. And as you have seen yesterday, the group has now received confirmation from PRA of the systemic risk buffer, which will be 200 basis points for ring-fenced bank and 170 at the group level. This is less than the 210 basis points we have previously included in capital guidance following actions to manage the size of the ring-fenced bank. This also follows a net 30 basis points reduction in the group's Pillar 2A that we announced in July last year. And given these decreases, the group will now target a CET1 ratio of around 12.5% rather than the previous 13% while continuing to hold a management buffer of around 1%.So to conclude. We continue to deliver on our ambitious strategic plan to transform the group for success in the digital world. While Brexit uncertainty persists and continued uncertainty could further impact the economy, given the strong current performance, we are reaffirming all of our financial targets. This includes NIM remaining resilient around 290 basis points, operating costs below GBP 8 billion in 2019 and the net asset quality ratio below 30 basis points. We've also continuously targeted loan growth and customer deposit balances. And finally, we continue to expect a return on tangible equity of 14% to 15% in 2019 and capital build of 170 to 200 basis points.That's all I have to say upfront, and we can now go to Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Raul Sinha, J.P. Morgan.

[Raul Sinha, Analyst]

A couple of questions, if I may. But firstly, on the underlying NII trends. Can you unpick a little bit in terms of how much of the weak performance this quarter is really going to stay with you as you move through the year and try to grow this open mortgage book back to flat? And obviously I'm looking at consensus, which is broadly flat to slightly down on NII for the year. Given where you started the year, obviously it looks like running below that run rate. So if you could give us some thoughts on what should we think about the full year.And then maybe a similar question but from the other side on other income. Obviously, headline has got insurance benefit and the VocaLink earn-out. But if you take those 2 out, you've got a softish sort of run rate there. And perhaps, you'll get them back through booking new deals or higher gilt gains. But if you could talk through the underlying run rate, that would be really helpful.

[Mark George Clifford Culmer, CFO & Executive Director]

Raul, yes. Okay. Look, first of all, on the -- dealing first with the mortgages. I mean our overall strategy has not changed and we continue to adopt a prudent and a disciplined -- as I said in the presentation and as you've heard many times before. In Q1, what we've seen is that, as I said in the presentation, we expected larger levels of maturity. So in Q1 2018, we have maturities of roundabout 10-point-something billion and that's up a couple of billion in Q1 2019, so an expected larger maturity. So that's sort of when I look at Q1 versus Q1, immediately, I saw a seasonal type effect. As I said in the presentation though, we remain committed to and expecting to getting mortgages back on track in terms of closing the year in line with where we've opened it, so basically making up that ground. And we'll do that through a combination of continuation of focus on retention and referral. Also, what we're seeing is, in terms of campaigns, whether our Great Rates campaigns and some of those application pipelines, which we're actually seeing is about 10% up at the end of March and about 15% up at the end of April. So there's now fulsome expectation that we will move through the sort of seasonality and the phasing of the Q1, and we'll get mortgages balances back in line with where they were at the start of the year, and we will do that. But at the same time, it's not stepping off NIM because we'll do it in a disciplined way and we'll stay in, as you would have seen, our guidance, reaffirming that guidance of around the 290. So we fully expect them to be able to get back in terms of the mortgages, the open book back to where we've started the year. So if you take that big mortgage movement and alongside with that, I would expect -- and again, you've heard this many times before, those areas that you've seen grow in Q1, things like SME, asset finance, again, I would sort of expect to see them grow as we move through the year. So I would certainly expect -- I mean, I think loans and advances are down to the sort of GBP 440 million level, having come in at GBP 444 million or something like that. I would certainly expect to see us moving back towards that opening year position as we move through the rest of the year. So from an asset strategy, the overall strategy isn't changed. I think you're seeing the sort of low point at Q1, and our expectation is that we will build that back as we move through the second half of the year. But what I would stress is, well, within that, that we are sticking with our margin guidance as well around the 290. And that's not about buying growth, that's about staying disciplined on price and underwriting but leveraging our multi-distribution, multibrand approach, et cetera, et cetera that you know. So that's where we sit on the asset strategy. On OOI, yes, look, what -- we've been very clear and transparent and called out what's driving OOI. I think I said at the year-end a few weeks ago, 2 weeks ago, whatever it was, that other income will remain challenging, that we continue to aim for around about GBP 6 billion of other income for the year-end. And I'll repeat that now. That remains our position. That remains our aspiration for this year. In terms of what's driving -- firstly, in terms of the main challenges. I mean essentially the -- it has been a standout performance for Insurance, and perhaps we're to blame in calling out the GBP 136 million. But we called it a one-off. But the reality is that comes from good business management. The way the Insurance business works, if I take out -- if I reduce my expenses, I improve my consistency, I've got things like longevity improvements coming through as well this year, which you might have read about across the insurance sector, you will get those benefits -- the health and they're slightly accelerated by the Insurance accounting. But we said a few years ago that we were putting effort and time in building that Insurance business and improving its performance. And you've seen that coming through costs are coming down and the investment management agreement is a key part of that part, persistency is improving. We have some tailwinds from longevity that will come through as well. And they may appear to people as one-offs, but what these represent is an improvement in business performance. And we've seen the benefit of that in Q1, and perhaps it's slightly distorted because it's just Q1, but you will continue to see insurance continue to perform. So when I look across the group, I've got a strong Insurance result. Yes, we'll stay tough in Retail for reasons we talked about previously. You've got lower levels I think at consumer card fees. I've got some mortgage-related business down as well. I've got some default fees, which are running at slightly lower levels. So I have combination of things. Commercial, it's a tough market, slightly low volumes and some thinner margins. We -- we talked about a GBP 100 million gain. We know there's going to be less gains this year than the last, and we've seen most of those in Q1. So that will -- but we -- that has come through. But we'll continue to see a strong performance from the likes of LDC. The things that are worth looking at are things like -- I think going back to Retail, where some of that is down to a lower seasonal [ x ] as you get an offset in things like operating lease depreciation. But as I said -- this seems to be a rather lengthy answer. But as I said at the year-end, I said if mortgage [ stands and we're not ] hiding away from that. But our aspiration is to be in line with the sort of around about GBP 6 billion. And that's very much remains the case. And without boring you on the sort of 176, what you are seeing is the financial consequences of an improved and performing Insurance and Wealth business coming through into our results.

[Raul Sinha, Analyst]

Okay. If I could just follow up on the NII point, what have you done with the structural hedge in the quarter, if I may ask? Because if I look at the slide we saw [ operating ] was obviously it's down through the quarter, it's recovered a little bit since in Q2. But have you been rolling the balances or expanding them in Q1?

[Mark George Clifford Culmer, CFO & Executive Director]

Look, on structural hedge, yes, I think it was said at year-end given -- we don't adopt an automated approach for this, we will do what we think is right in the best interest of shareholders on this. And at certain times, if we don't see value and we don't see any merit in basically hedging our noninteresting-bearing balances, we won't do so. While our natural position is to be fully hedged and we have capacity up to about GBP 185 billion, and we have a duration on there of around about 4 years. But given where rates are, as you said and as you know, we've stood off that at the sort of year-end point and we're still basically more out of the market than in. And the equivalent would be now that I think we're on invested balances around about 172 and we've got a duration of about 3.5 years. So I think we have uninvested capacities that is sitting there which we're able to deploy, both from a volume, from a [ summation ] amount and from a weighted average life. So that's the position that we're at, at the moment and that's what we think is the right thing to do in terms of current economics in how we deploy shareholder money. So that's where we are.

[Operator]

Next question comes from the line of Joseph Dickerson, Jefferies.

[Joseph Dickerson, Head of European Banks Research & Equity Analyst]

Most of my questions have actually been answered. So if I look at card loans, they were down about 2% year-on-year. That's an area where you've been growing in the past. If there's any color you could provide there, particularly with regards to the trajectory of that book over the course of the year, that will be useful. Because presumably, one of the drivers of your margin strength has been the unsecured products. So any color there will be helpful. And then in terms of thinking about the capital -- the lower capital threshold that you announced yesterday. Can we tack on that 50 basis points into whatever buybacks we have penciled in for this year? Is that something you'll hold back as you think about things like Basel IV in the future? How to think about deployment of that or uses of that benefit would be also helpful.

[Mark George Clifford Culmer, CFO & Executive Director]

Okay. If I deal with the second one first. I mean this is [indiscernible] I'm obviously delighted of the news, and we'll be able to communicate that. It wasn't that something happened unexpectedly, the combination of those, what happened in Pillar 2A last year and the reduction in the systemic risk buffer from what we had previously included in the guidance reflects deliberate management actions in terms of managing the ring-fenced bank. And I think it's -- well, first, I mean it's important onto itself because the only route for capital changes have been ever upwards. And it's important onto itself as an amount, but also as a symbolism. That says actually if you manage your business, you can invert that direction. So it's good unto itself, and I think just good in terms of bucking that trend and demonstrating the art of the possible. In terms of utilization, as you said, 50 basis points is best part of a billion. But look, the group is not going to change its approach through -- either through dividend or distribution strategy. And by that, I mean you know that from the dividends we have a sustainable progression, and I think it's quite clear in terms of the sort of growth rates the market should be looking to for that. But in terms of distribution of any capital above our requirement, which is now the -- essentially the 13.5%, the 12.5% plus around the 1%.-- 13.5%, that will be a decision for the Board that they will take at the end of the year. And so all I will say is that, that decision will fall as part of the normal decision-making process as to how we run the business. So what we do with surplus capital above our requirement, above our target will be a determination, as I said, for the Board at the end of the year. And we will deal with that then and we will make that decision at that point. But there is certainly no change in our distribution policy and how we apply that. So that's -- the second bit, on the car loans. Yes, they're slightly down and I would expect this to be slightly higher come the end of the year. The overall strategy -- having -- we're looking to grow market share, et cetera, essentially achieve that with the acquisition of MBNA. And perhaps there'll be slightly more choice in terms of where we target the growth, and you particularly see that in things like balance transfer, where you'll see in terms of some of the months out of [ options ] have come back quite severely and were part and parcel of that. So a slightly different strategy in terms of acquisition versus overall book management. And slightly down at Q1, but I would expect to see a slight growth in terms of -- by the time they may move back in full year.

[Operator]

Your next question come from the line of Fahed Kunwar from Redburn.

[Fahed Irshad Kunwar, Research Analyst]

Sorry, I'd sort of come back to NII, if you don't mind. On the structural hedge point you made -- so I appreciate obviously the NIM guidance are the same and hopefully volumes grow for -- or they will grow according to guidance from here. But you didn't invest in structural hedge this quarter because of the low swap rates it sounds like. So if the Bank of England stays pretty dovish and the swap curve just stays pretty low, then would you invest that structural hedge capacity to meet NIM guidance? Or would you say, "Look, we don't think it's economical," or we won't do it or you're happy to miss the NIM guidance. Because I think you would reinvest that hedge -- I mean I just wanted to understand because obviously other banks are very mechanical with the hedge, but you guys do it differently. So how do you think about using that capacity on the hedge? And there's more deposit growth in the current account space given if swap curve stays low, that will be very helpful. And the second question I had on NII as well is your back book front book. Your front book is still obviously below your back book. Your SVR book is kind of moving down at the same kind of pace, but it's moving down. So what kind of mechanisms do you have right now to offset that back book pressure on a kind of 2- to 3-year view? Obviously, you use the unsecured market. A lot of the banks have gone towards 5 years, but it looks like a lot of those things are -- the capacity to keep on doing that is slowing down. So if rates don't rise, how do you offset that kind of back book pressure that doesn't seem to be going away? And third question, which is a very easy one, is the RoTE target is 14% to 15%. But obviously, if you pay down the 13.5% core Tier 1 ratio, should we then expect a higher RoTE now because you don't need to hold as much capital as you did when you kind of set those targets?

[Mark George Clifford Culmer, CFO & Executive Director]

In terms of the reverse order, I mean, as I said in the previous question, any action on distribution vis-à-vis the 13.5% will be taken at the year-end by the Board consistent with our policy, et cetera, et cetera. But I would also say the 14% to 15% is quite a broad range in terms of returns and in terms of pounds that sits behind that. So there is quite a spread of financial outcomes that would fall within the 14% and 15%. So I'm not sure I'm -- and my answer around -- suggestion would be formulaically run things through. I'm just saying that there's quite a spread between the 14% and 15%. And any decision on what we do would be only taken at the year-end.The mortgage bit, yes, it's a good question. I mean as we said to you numerous times, when we plan and when we talk about our long-term guidance, we don't plan on the presumption that the asset pricing rise like the Seventh Cavalry and just come back to save everybody by suddenly getting a whole lot less competitive. We assume the market stays competitive. And within that, without publicly airing all our strategies and tactics moving through the durations in terms of being able to refinance in terms of targeted campaigns within the mortgage book. And then everything we talked about previously in terms of offsetting it in flows in some of the higher-margin areas: the unsecured, the SMEs, the midmarket, the ongoing management of the liability side of the balance sheet and savings deposits. I mean the quid pro quo competitiveness of the asset side is that the business is competitive on the liability side of things and still being able to take action there, and that is despite new entrants, [ marketers ], et cetera, loans that have come to pass, so sustainability. And then going back to your structural hedge-type question, you've seen today we continue to grow our current account balances are up quite meaningfully on a year ago. Retail is up on -- where we were at Q4. Commercial is slightly down, but that's partly a phase and partly a tax payment timing issue that comes through that as well. Continue to target that as well. So your question -- I mean as you go out long enough, we're in [ bread ] type stuff. But we are -- I think we've proven over the last years our ability to manage that spread. And again, in that -- and I know we talked about this before, there's this obsession with managing the bank for the totality and making sure we are managing the spread and making sure we do it on the weekly basis is critical to all of us as well. So I'm not going to through the course of this call say to you a sort of secret silver bullet that we haven't spoken about before. It is the ongoing close attentive detail, utilizing the distribution centers, utilizing the differential brands that we've got, utilizing the skills and expertise in terms of product development, in terms of retention strategies, et cetera. And then to your first question, look, I -- this is going to sound slightly trite, but we would like -- we will always do what is right for the business. And it is our current view -- the structural hedge essentially exists to take -- protect us from volatility and particularly downside risk in terms of where rates might go. And I do that by locking up money. Now if I don't see that there is actually significant downside risk and I'm not really being rewarded for locking out that money, then I'm staying out of that market. And I don't think that it's right to manage that on just on autonomous or automated basis. Absolutely do not trade. We have a natural position which will be to be fully hedged, to deploy the 185, to be [ the force ]. So that is always our -- sort of our natural tendency to move to that position. But I absolutely do not manage it for -- in the very, very short-term time basis. It's around what we think is right for the business, and that's how we go about it.

[Fahed Irshad Kunwar, Research Analyst]

Very helpful. Could I just ask you for one quick follow-up. You mentioned the current account. Obviously, that has been one of the reasons that overall deposit costs have been falling. Q-on-Q, what's happened to the overall deposit costs? Has it continued -- has it decreased or has it...

[Mark George Clifford Culmer, CFO & Executive Director]

No. It's pretty flat actually when I look at things across the board. And when I look at -- I mean the slide we had in Q1 '18, Q1 '19, where we had some 12 basis points loss on our assets and then clawed back through some liabilities development. If I'd show you the Q4 and Q1, Q4 '18 and Q1 '19, it would be a pretty dull slide. I think it's just 1 basis point off of that. So I think the cost of the savings, for example, is around the sort of low to mid-40s and it stayed around about that level Q1 versus Q4.

[Operator]

Your next question comes from the line of Chris Manners, Barclays.

[Christopher Robert Manners, Co]

So just sort of 2 linked questions, if I may. The first one was just on Basel III impact and the mortgage flow. I guess we've got 1 Jan 2022, we've got the 50% output floor coming in. Looks to me your risk-weighted density on mortgages is sort of roughly 10% from your latest Pillar 3. How much RWA inflation you're expecting on that mortgage book?And then the sort of linked question on that is how do you think having higher risk weight density is going to impact front book mortgage pricing? Are you actually starting to price those as higher risk weights? I mean if you're at a 5-year fixed, it's going to be held on your book until 2024. And so are you thinking about that in pricing? And if you are, do you think your competitors are thinking about that in their pricing? And so I'm just trying to link in that RWA inflation and what that might mean for price reaction on the mortgage market.

[Mark George Clifford Culmer, CFO & Executive Director]

Well, Chris, yes. Look, in terms of RWA inflation, I mean as you put -- if I answer the question you didn't ask. I mean before we get sort of Basel III and all that types of stuff. I mean in terms of the sort of broader base, you've got the sort of foothills of -- actually the first thing was the IFRS 16 which you've seen today and you saw the 11 basis points in terms of capital, it went ahead of me. As you know, I've got the -- more of the sort of PRA, EBA inspired one. So I've got the definition to [ fills ] I think in terms of '20. I've got the playbook PD calculation 2020. I think I've got the EBA repair program, which is 2020, 2021. And I've got sort of [ securitizations ] I think which is sort of 2020. And those could add anywhere between about sort of GBP 6 billion to GBP 10 billion or something like that in terms of RWA. And when we talk about our -- as you've heard lots of times before in terms of our capital guidance, that's why -- what grows that profit, et cetera, and some of the -- a number of things like that RWA inflation which just keeps that capital guidance pretty static over that period as I seek to do that. We -- I mean the Basel III which is sort of 2020, yes, it comes in, in 2022, but a lot of it is back end in the outer years of that. So '25, '26, '27. So in terms of pricing, when we price products, we'll look at current RWA requirements. We are cognizant of stress capital requirements. We're cognizant of leverage ratio requirements. You don't explicitly put in the new floors just yet, but I don't feel that is derelict in that given the other things we look at and given the timing that would come in. We haven't actually given an explicit estimate in terms of Basel III. Your estimation of sort of 10% is pretty correct. By the time you get to Basel III coming in, you would've been through the foothills of the definition, the fault of the hybrid PD coming through as well. So I would imagine by the time you come into Basel III type of stuff, the 10% could be anywhere up to 12%, 13%, something like that. So I'm already starting to tune into that. But those are the sort of the numbers. And then, as you say, [ you can gain of 72.5 ] over that period, then you can do some sort of simple math to work that out. But I -- this is going to sound complacent in those sorts of things, and I definitely won't be here. But the actions that one takes and how one responds to that, there's plenty of time to give absolute thought to in terms of what's the overall approach to this. And as you know, it throws up a whole load of interesting dilemmas in terms of how you approach such a relatively crude yardstick. So anyway, so partially answering your question.

[Christopher Robert Manners, Co]

Yes. So I guess the thought was, as the risk weight density goes up, that will mean it's much harder for mortgages to hurdle. The intense competition that you've been seeing from your competitors may then abate to a degree and so maybe just, if you could, is that a fair thesis? And also, I'd be interested in just how you've seen maybe over the last sort of 2 or 3 months mortgage pricing evolve.

[Mark George Clifford Culmer, CFO & Executive Director]

I don't know. I missed your sort of punch line. I mean it's a very fair. It's a very rational thesis in terms of risk weighting. We would also say that in terms of deploying them could be by leverage ratios against ring fenced bank will become very relevant in terms of how people should be. If you are looking to make economic returns on these products and not just deploying excess liquidity, for example, you should be very pertinent in asset pricing as well. So there is a very rational case as to why asset pricing should move and not necessarily rates above [ 3 ] as well, but just in terms of some of the PRA moves. As you say, the imposition of ring fencing, the imposition of leverage ratios as they come through, as people refinance, some of the challenges in particular, some of the Bank of England-sponsored funding to market-originated funding and just given some of the travails, some of them are probably getting through at the moment. All those cost of liabilities should feed through into a higher cost on the asset side. I agree with that, with you entirely.And in terms of recent observations, the market remains tough. There has been a slight easing. So prices have still come up a bit. The market is in the sort of 2- and 5-year type. I think that's where about 90% of the action is at the moment. But swap rates haven't moved. The swap rates haven't all been priced through which is good. So there's been some alleviation in the sort of 10 to 15 basis point range. And so we've talked about prices on new business margins of about 1%. And so I'm going to say it's slightly ahead of that. So there has been some easing. However, much as I'd love to, I'm not going to stand here and say, I'm calling a turn in market, but there has been some recent easing. There's no doubt.

[Operator]

Next question comes from the line of Andrew Coombs of Citi.

[Andrew Philip Coombs, Director]

Two clarification points. The first is, can you just remind us please what you have assumed in terms of base rate hikes for your guidance for the full year?And second question, which looking at your return on tangible equity target at 14% to 15%. You've obviously printed 12.5% for Q1. It would be 17% on an underlying basis. So a delta in terms of whether you can get there or not seems it will be down to the below-the-line items. So if you could just give us an idea, particularly on the volatility in other items line, the split of that first between SLA and other and then where you think that goes going forward and then also thoughts on restructuring?

[Mark George Clifford Culmer, CFO & Executive Director]

Andrew, I'll deal with your second question first. Yes, there's other things to talk over that. But you're right, the underlying shows a consistently strong. The 12.5% seems to be the 14%. We annualize. So essentially, we take the sort of below the line in Q1 and it gets annualized up. So the extent of this one we suffered for Q1 then you get -- that does get that -- that hurts you in terms of the methodology, the calculation. I certainly hope and I don't expect to be taking SLA increases to quarter 2, 3 and 4 as we go through this. So you're right. It is around the sort of below-the-line items. I mean within them, as I called out in the presentation, we've got about 120 or so from restructuring, of which about 40 or so was for redundancy. I had about 40 or so from the last part of MBNA which is essentially done now, as I said in the presentation, so that should drop away.Within the banking volatility, I'm afraid I'm going to be somewhat opaque. And that's all due to, as you'll know, within there, we have included the estimated charge for exiting the Aberdeen Standard Life investment contract. And that will not be disclosed into the market in terms of the amount that is included in there.The other in terms of volatility that sit within those just to clarify is that you have insurance volatility. And as you know, both insurance and banking, we essentially look to hedge the capital position, which sometimes you get disconnects between capital positions and P&Ls. And what I can say is that having suffered a large negative delta for insurance in Q1 -- sorry, not Q1, in Q4 of last year, and that was equity market-led as well as credit spreads, credit tightening, equity market recovery, we've got a better performance in insurance, and again, we have a banking volatility where we essentially hedge out our purely -- first of all, apologies, our foreign currency, RWA exposures. And we also pick up our cross-currency basis, and that's gone negative in Q1 as well.But in terms of precise components, precise elements of the math, in disclosing a part of it or revealing the other part, I'm afraid I'm going to have to sort of frustrate you. So that's sort of the theme. But in there, I've got the estimated charge for Aberdeen Standard Life. I have a positive in insurance and I have a negative from my banking for those reasons. And those are the components that sit within that. So that's the elements of that.And then in terms of rate hike, sorry, yes, we assume I think it was just one per year over the course of the plan. So this year it was the back end, sort of November time or August. I can't remember which one we've assumed. As you've seen from our previous disclosures, I think it's about GBP 86 million per sort of 25 basis points. And I think I might have said this before. I'd say it does not have a material impact on -- if there is no rate increase on 2019. And thereafter, if it stayed flat, what we do is what we always do, is we will hunker down and we'll go back. And if I'm looking at a rise in income, I would look at what else I can do across my business in terms of mix, in terms of pricing, in terms of expense actions to see what I can do to make sure I hit my return targets. And I know you've heard this many times, but the business model that we operate and the management processes and structures that we operate give us early line of sight on that stat and give us a better chance than most of being able to deliver that. So there you go.

[Operator]

Your next question comes from the line of Jonathan Pierce, Numis.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Three number ones and they're quite quick. The first one is TNAV. And you went up about 0.4p in the quarter and I think the dividend went up in April. The earnings is about 1.5p and there wasn't much in the way of buybacks. They should be broadly neutral anyway. But was there something going on that we can't see because we don't have sort of full balance sheet out in the conference.

[Mark George Clifford Culmer, CFO & Executive Director]

In pensions, we've seen a -- because the tightening of credit spreads I've lost about GBP 0.5 billion on the pension valuation in the quarter. So that's the piece that you're missing there.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Okay. Again, that's helpful. Second one on the share count. I think there's about 170 million of buybacks in the first quarter in terms of millions of shares. The share count went up 10 million, 20 million. So I guess the awards were something in the order of 200 in the first quarter. Can you give us a sense as to where you think that award number will end the year? Is it a similar level to last year at 700 million, 800 million?

[Mark George Clifford Culmer, CFO & Executive Director]

And that's the third. Do you have 3 questions or I'll come...

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Okay. The third one is the poky book.

[Mark George Clifford Culmer, CFO & Executive Director]

What's that?

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Is the poky book, the credit impaired HBOS.

[Mark George Clifford Culmer, CFO & Executive Director]

Oh, okay, poky, sorry.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

I think we're seeing quite a lot in -- I mean, as we have historically quite a lot of reduction year-on-year on that book, as you will expect. I guess that is where that book is at in a closed mortgage book. What sort of margin are you generating on that book, if I can ask?

[Mark George Clifford Culmer, CFO & Executive Director]

You can ask. Well, I can give you a straight answer. I may have to come back to you on that one in terms of the margin. It is coming down to, again, I'm not sure if I can be less generic, it's about [ 160 billion, 180 billion ]. I can't remember the number. But in terms of spreads on that, I do not have that in hand, so we will come back to you on that.On the awards bit, yes, my expectation will be -- I think last year we issued something like 700 or something. Now I would imagine if you assume it will be a consistent amount over this year. And then obviously, my buyback depends on the price. There are a lot of things, but it's somewhere shy of 3 billion or so shares. I would have thought over the course of the year, 2.7 billion, 2.8 billion, something of that order. So you're probably looking at a sort of net 2 billion, 2.1 billion kind of reduction over the period will be my expectation.

[Operator]

Your next question comes from the line of Guy Stebbings, Exane BNP.

[Guy Stebbings, Analyst of Banks]

Firstly, a couple of very brief clarifications on RWA. I think you said earlier in the call you thought the RWAs are going to fall from a Q1 position this year. So just trying to understand what's driving that. And then also just to check the GBP 6 billion to GBP 10 billion guidance, does that capture mortgage default, mortgage rate changes, securitization changes and the EBA repair program, so all those 3?

[Mark George Clifford Culmer, CFO & Executive Director]

Yes, there is some sort of ones up to sort of the launchpad of Basel III. So all those things that was -- slightly big, slightly enlarged, slightly enlarged range because these things have yet to be fully fleshed out. We're still to get final papers on this. Who knows whether EBA repair program will come in as one hit or will be staggered and also transition really part of that. So there's an element obviously of variability around this, but that's just sort of an indication.And then, yes, you're right. In terms of RWAs, we are going to be about sort of GBP 208 billion at the end of Q1. I think I said we expect rather be slightly lower than that come the end of the year. So I would expect to see -- this sounds slightly counterintuitive, you've got some loans and advances moving forward and RWAs going back. But part of that is composition. I would expect mortgages, going forward, obviously there's assets but low risk-weighted density. So you don't get much RWA inflation off the back of that. And at the same time, as you know, we've got a continuation of our optimization program, particularly around the high yield and the high density type RWA and this is particularly within the commercial business what I would expect to see some benefits and further ongoing optimization which would take me down. So I would look to be growing loans and advances, but the RWA is shaving slightly as basically I've got growth in low density and I'll be looking to optimize and taking out some high-density elements of the portfolio.

[Guy Stebbings, Analyst of Banks]

Okay. Perfect. And also, can I just check on the new capital guidance that you've given in terms of how permanent you view that. Presumably, on the 2- to 3-year view, there's a possibility of moving back to the threshold, the 2.5% of the SRB given the limited gap currently. Is that fair? And if so, are you assuming that you will see offsets elsewhere like Pillar 2A through lower pension risk and op risk. That means that using 13.5% is kind of long term even if the SRB was to go back up?

[Mark George Clifford Culmer, CFO & Executive Director]

Okay. Look, on the go forward, yes, there are a number of moving parts. And if I start with the sort of negative, the countercyclical or whatever in terms of where that might move to, there's something like Pillar 2A. The flip side, for example, of I'll be making some substantive pension deficit contributions over the next few years, and the way the Pillar 2A is calculated, the starting point is the position of your accounting surplus on your pension scheme. So as I put money into the pension scheme, for example, I will move that from a capital perspective, but if I'm increasing my Pillar 2A starting point for pensions, I should be getting 55% or 57% of that back theoretically, all things being equal, on the Pillar 2A.The systemic risk, look, it's a very simple calculation. It's around calibrated to the size of assets, and the 250 down to 200, the magic number is 610. We closed last year well below that, below the 600 level and deliberately so. We know kind of what we're doing. And as we plan out, we see ourselves staying below that level. And if you think about it, I'm not quite sure what business, what piece of business you can write me that tips me over from 609.99 to 610 and still make a decent return on capital. So the margin crosses that last piece. I would expect to stay below is what I would say to you.

[Operator]

Your next question comes from the line of Edward Firth, KBW.

[Edward Hugo Anson Firth, Analyst]

Apologies. Probably just 2 points of clarification. I think you probably touched on both already. Just on Basel III, you were saying you think that's a 10% incremental after you've had the 2020 changes? Is that right?

[Mark George Clifford Culmer, CFO & Executive Director]

No, I didn't necessarily say that. All I'm saying is, we are currently at around 10%. We have to try and look at -- we've got the PRA changes, definition of default, probability of default da di da. And I imagine we'll be sort of 12%, 13%, something like that. But by the time you come to the start of the Basel III implementation. And then the Basel III implementation in terms of 2020, but I mean, the main thing is going to kick in at the back end of that. So let's see where that gets us.

[Edward Hugo Anson Firth, Analyst]

Okay. So as of this stage, we don't really have any guidance on Basel III in terms of total? So just...

[Mark George Clifford Culmer, CFO & Executive Director]

We said what we said.

[Edward Hugo Anson Firth, Analyst]

No. That's fine. And the other question was consumer, gilt gains in Q1 both this year and last year and the equivalent period last year. And what -- do you have any visibility or what you would expect us to be putting in for this year as a whole?

[Mark George Clifford Culmer, CFO & Executive Director]

Yes. So for this year, it was roundabout GBP 100 million and was slightly less than that, GBP 80 million, GBP 90 million last year. I think as we guided the full year, we expect to be about GBP 100 million or so less than last year. I would have thought going forward the gilt gains would be slightly about the same as we see before in Q1, but less than that in terms of the rest of the year. So less gilt gains and most of them have been taken in Q1. So that would be my estimate there.

[Edward Hugo Anson Firth, Analyst]

Okay. So basically that's it for the year, the GBP 100 million you got in Q1, we should expect that to be 0 for the rest of the year?

[Mark George Clifford Culmer, CFO & Executive Director]

I'm sorry, I was not completely clear. What I was saying was, probably just less than, about the same again through the next 3 quarters, yes.

[Operator]

Next question comes from the line of Robert Noble, RBC.

[Robert Noble, Equity Analyst]

General question on the sort of the economic outlook and what's happening with your books and things like that. And have you seen any slowdown in the mid-market, corporate growth going down, you said it was due to tax. Was there any signs of pulling back in investment in the corporate book? So you point to strong underlying credit quality, but the presentation does show a pickup in credit card arrears. Is there anything going on there at all or is it just normal volatility?

[Mark George Clifford Culmer, CFO & Executive Director]

Yes. No, no, yes, if you look at that slide, you'll see a little pickup in terms of cards. No, that is not underlying deterioration trend. That is sort of operational factors. So that's, for example, things like as we moved over the MBNA book, as we migrated that onto the Lloyds book, basically customers aren't able to pay off for a period of time, and there's also a lot of operational reasons in terms of drop-down in outbound calls, et cetera. So we see that as operational factors. So that will kick up at the end of that. It's operational, and that's not the beginning of the turn. We're just seeing the start-up there.Elsewhere, as you say, look, I think you can see it in the results in terms of business investment. Remember, in Q4 of last year and continuing to this year, you are seeing a step-up in terms of levels of business investment. That is undoubted. At the same time, we are not seeing any deterioration in trends in usual arrears, et cetera, we've just been speaking about. And the consumer stays relatively robust and resilient, and you see that in the most recent data around levels of -- better levels of unemployment and employment. There's something recently like 200,000 new jobs created already this year. And you'll see wage growth now moving measurably ahead of inflation and coming through as well.What we do look at, though, and this is when you still talk about our outlook, we're reaffirming our forward metrics, but we are looking out at things like HPI and stuff like that where again you will have seen the various stuff, VIX, et cetera, and whether we should be tempering that. That's something that we're thoughtful about necessarily will the Brexit uncertainty persist. So that's something that we are thinking through. So we are seeing slightly different things. Businesses standing off, still resilience among the consumer. Obviously, we're predominantly a consumer-led bank, but things like HPI, et cetera, we are thoughtful about where that's going and what the latest data is showing and also what's the geographical dispersion of that as well vis-à-vis London, for example, where we're underweight and ex London where we're slightly overweight. So those are things that we are mindful of and we are looking carefully at.

[Robert Noble, Equity Analyst]

Just a follow-up. On house prices, just what's the sensitivity of your models to a change in house prices if they were to fall across the country by 5% in the future?

[Mark George Clifford Culmer, CFO & Executive Director]

We used to talk about -- let me try if I can remember now. There was GBP 1 billion in terms of -- 10% was GBP 1 billion of RWAs. So that was what we used to talk about and I think that's still relevant. So the first 10% is RWAs. Now how that plays through -- I forget whether -- so what's the sort of RWA type sensitivity. And I think that is true. We still got 10%, usually about GBP 1 billion, GBP 1.5 billion of additional RWAs. There was also a little bit around, as I pay through into the wonderful world of IFRS 9. And if I'm dropping my HPI and my economic scenarios and how that plays through in my book as well, so that's something that's worth considering.

[Operator]

Next question comes from the line of Martin Leitgeb, Goldman Sachs.

[Martin Leitgeb, Analyst]

I have one quick number question and 2 follow-ups on earlier comments. And the number question is just whether you could comment on what level of attrition you have seen within the, either the SVR or your variable back book in the quarter as some of your competitors have flagged that attrition has gone up somewhat in the quarter. And then just in terms of your comment with regards to mortgages and mortgage strategy going forward. I was just wondering what do you see currently in the market? Do you see a couple of players being overly aggressive or not sensible that they're writing business which is potentially below their cost of equity or do you think the market is generally at such level that it's getting closer to cost of equity that the upcoming changes in terms of risk weight, capital density and so forth are likely to be supportive for pricing going forward or is there 1 or 2 out there which might destroy the broader pricing? And the final question just on scope for liability optimization. So just wondering if you'd comment on whether you see scope, it is mostly now in the deposit side or is there some other instruments potentially out there which could be helpful?

[Mark George Clifford Culmer, CFO & Executive Director]

Martin, so yes, on attrition, it's still around the 13%. I mean, it's been -- while I was about to say remarkably consistent, it's probably in that 13% about the last 18 months, something like that, of that order. But the in-quarter attrition is still around about 13%. So that is the size of the book that we're seeing. And I mean the Halifax book, I'm going to say it's now about -- I think it's about GBP 35 billion. That's smaller, I think, in size, I think. There was around about, yes, the 13% attrition is what we see. And it's about GBP 35 billion is the Halifax book.The mortgage stuff, look, it's a very much -- there is no one lender leading the market. And this isn't just sort of being polite or a step stone. In previous times, we see lenders and obviously either Nationwide or HSBC, but at the moment, all major lenders are competing strongly. Our response is -- and this sort of touches on some of the tactics, how we face things. Halifax is a competitive brand in sort of house purchase. And they use Lloyds, for example, when they do mortgage. We take different brands in different spaces. In terms of 10-year, I think, as I mentioned to an earlier question, it's a 2 and 5-year gain between the 2 of them. And they've got almost 95%. You got more of the market going through with those elements. So it's still tough out there. As I said to the earlier question, we've seen a slight alleviation and limited to TFS, the leverage ratio, et cetera, pricing. They're all rational factors as to why you should get some underpin, I think, in terms of the mortgage market. But the presumption is it stays tough. And to your cost of equity, it sort of fit in -- I'm sure these banks will sit in front of you and justify and explain, et cetera. All I would say is, we struggle to see how some make cost of equity and whether it's people are simply earning more than cash, whether it's people are not putting on the full cost of funds and what the market rate really is as opposed to simple margin and banking margins we're slightly suspicious of, but we struggle to see with some of the rates out there. Of course, you might assume about rollover and continuation and tenure and all those sorts of things, but we struggle to see how current rates make a decent cost of equity.

[Martin Leitgeb, Analyst]

And on the liabilities side in terms of liability optimization.

[Mark George Clifford Culmer, CFO & Executive Director]

Oh, sorry, apologies, my apologies. The liability side of things, yes, as I said to an earlier question, a pretty sort of stable going on. I think there's still a bit of room around the fixed book. I still got some GBP 20 billion or so in my fixed book which I'm going to be able to price down, still being able to pair elements of some of our variable branch rates, et cetera. I think there's still opportunities to do that. So both costs of fixed and variable. I still see opportunities to be able to price down to offset some of that margin pressure.

[Operator]

Your next question comes from the line of James Invine, Societe Generale.

[James Frederick Alexander Invine, Equity Analyst]

Just wanted to ask about PPI. The net claims you've been running around to [ high ] on your provision, but of course, we're all expecting a bit of a surge. Are you just taking the view that it will be what it is and then you'll take a provision in the second half to clean it up or you're just not that worried this time around? Do you think the CMC is just generating spurious claims rather than real ones?

[Mark George Clifford Culmer, CFO & Executive Director]

Okay. I'm never not worried by PPI. I guess how that sounds. Look, PPI, GBP 100 million will be taken basically. What we're seeing is, yes, this is your net complaints are pretty much where we expected them to be. So we allowed for 13,000. I think the precise average for Q1 was 12,800. What we have though seen is a vast increase in gross complaints in PIRs. So those are basic information requests. And those are up by about 30% to 40% as we approach the time bar. And the issue is that each of them has to be dealt with. And near term requires effort in terms of searching databases, searching records, et cetera, et cetera. So we were expecting at this moment in time to essentially be running down, for example, the workforce or colleagues that we have working on PPI, but we currently have something like 6,000 people. And that's simply because that gross level that are coming in is requiring work and effort in terms of validating or determine that there is no case to answer, so to speak.So it is that. It is that surge in increase. And the GBP 100 million is not a pay as you go. That's basically us assuming through to -- it's a bit beyond the sort of August time, because if something comes in before you've got to sort of deal with it. And that's just assuming that we keep those elevated levels of colleagues deployed dealing with that surge in gross complaint.

[James Frederick Alexander Invine, Equity Analyst]

Okay. Lovely. When do you think we'll finally have the actual total number? Does that come with the Q3 numbers or do we have to wait for the Q4?

[Mark George Clifford Culmer, CFO & Executive Director]

I think it will probably be Q3. So you might have to ask William that.

[Operator]

Due to time constraints, we have one final question. It comes from the line of Chris Cant, Autonomous.

[Christopher Cant, Partner, United Kingdom and Irish Banks]

If I can just come back to the RoTE target questions and your remark that 14%, 15% is a broad range. Just mechanically, the shift down to 13.5% from 14% might add something like 50 bps to whatever you thought you were going to be within that range. But as we discussed at full year '18, your definition excludes intangibles amortization. And if I look at what that was adding in the quarter, that's adding about 95 basis points now versus what at least I would consider to be a more typical definition that your peers are using. You indicated that you might revisit that definition now that, that intangibles impact is getting quite large. So are you perhaps simply going to offset those 2 factors in terms of the return? I.e. lower capital positive but actually including the intangible amortization as an offsetting negative? That would be one question. Just trying to understand what's happening to guidance, I think.And on capital generation, you said you're sticking to the 170 to 200 for the year and you view the first quarter performance consistent with that. How much capacity in terms of basis points of capital do you still have to come through over the next year or 2 from further optimization of the Widows capital position? How much do you sort of have in your back pocket there and how much of that likely deployed this year, please?

[Mark George Clifford Culmer, CFO & Executive Director]

Okay. All right. Chris, those are 2 good questions. The second one on Widows, I'm not going to give you a precise number, but there is more we can do. It is an ongoing piece of work in terms of derisking that business. So I would still expect there to be supplements to the normal dividend streams that come through us derisking the Scottish Widows business and be able to upstream capital. So I'm not going to price that in and give you a number, but the principle is right. And they're doing a great piece of work in that business in terms of both growing it and making it more capital efficient. And we see some more opportunities there and being able to derisk that.And then to your first question, I haven't thought of that actually. But look, on the RoTE calculation, yes, I mean, I agree with what we said last time. I think we will look at it. That we actually might -- that we will look at it. For the purposes of the go forward, I think it's simple everyone we stick with what we've got because it's clear and it's transparent to what we do, and we can take a subsequent look as to the right way of actually calculating that. But I don't think we're going to do anything for this year because we've got -- you pointed out some way it diverges from our peers and we're looking at that. But looking at those, what it is, and I think we're not going to change it for this particular year. We'll stick with it. And we'll work out if and should we move in terms of 2020 onwards. But at least it's clear. We know how it's calculated and we're transparent about it.But again back to the sort of first part of it, we are very pleased with that revised capital requirement. And how we deal with it, the Board will decide as part of its normal process at the end of the year. So that's where we are.All right. Thank you, everybody, for taking part. I think that's the end. I being waved motions to me. So many thanks for that and thanks for all the questions. Cheers, everybody.

[Operator]

Ladies and gentlemen, this concludes the Lloyds Banking Group Q1 2019 Interim Management Statement Conference Call. For those of you wishing to review this conference, the replay facility can be accessed by dialing 0 [phone] within the U.K., 001 [phone] within the U.S. or alternatively use the standard international on 0044 [phone]. The access code is 89406841. Thank you for your participating.