Lloyds Banking Group PLC

LSE:LLOY

Earnings Call Transcript 2020-Q1

[Operator]

Thank you for standing by, and welcome to the Lloyds Banking Group Q1 2020 Interim Management Statement Conference Call.[Operator Instructions] Please note this call is scheduled for 1 hour. I must advise you that this conference is being recorded today.I will now hand the conference over to António Horta-Osório. Please go ahead.

[António Mota de Sousa Horta-Osório]

Thank you. And good morning, everyone, and thank you for joining our Q1 presentation.In light of the coronavirus outbreak and the exceptional circumstances that we find ourselves in, I thought I would give a brief overview of how we are supporting our customers and colleagues in these difficult times, supported by our balance sheet strength and multichannel distribution model. But first, I would like to express my gratitude to my colleagues across the group, who have shown exemplary dedication and professionalism, often in response to near-impossible demands. I know that many of my colleagues will be anxious about the health of loved ones and the impact of coronavirus on their communities, but they remain focused on serving our customers every day. I, therefore, want to thank each of them for the remarkable contributions they are making to this national effort at work, at home and in their communities. With their support, we are also committed to helping our customers manage through this crisis. None of us can be certain how long and how severe the impacts of this pandemic will be, but we must recognize that our support for customers is already and will continue to impact our profitability and capital build. I will outline some of these measures in a moment, but as a responsible business, we recognize that it is the right thing to do in supporting our customers and helping Britain return to prosperity. However, I am confident that the strength of our balance sheet and our resilient business model mean we are well placed to underwrite these commitments and play our part in helping Britain recover from this crisis.I will summarize some of the measures we are implementing. And I will then hand over to William, who will run through the financials before we open up for questions at the end. I will start in Slide 2 by looking at how we are supporting customers and colleagues through this unprecedented social and economic challenge.Coronavirus is having a significant impact on people and businesses in the U.K. and around the world. Our core purpose is to help Britain prosper, and this is now more important than ever before. We fully recognize that shareholders as well as our customers will judge us by how we live up to that mission. We are treating our retail customers flexibly and sensitively, including granting around 880,000 payment holidays to date while implementing dedicated support channels within just 2 weeks of the start of the lockdown for our elderly customers and those customers who are doing such a wonderful job for the NHS. We also remain focused on how we can support our colleagues and communities. This includes suspending all head count reduction programs while committing to pay all of our staff in full regardless of how their work has been impacted. This is important as it removes uncertainty for our colleagues and leaves them free to focus on supporting our customers and serving their communities. We have also enhanced our financial support for our charitable partners and the group's independent charitable foundations. I believe it is vital to further increase the support we give to mental health charities in these challenging times.As mentioned, we remain fully focused on supporting our customers, and our operational resilience is a key element of our ability to do this. Around 90% of our branch network remains open. And importantly, our digital banking proposition has remained fully operational throughout the lockdown despite the significant increased registrations and daily log-ins we have seen. We also have around 45,000 colleagues working from home, having increased it from around 15,000 within just 3 weeks.I will now turn to Slide 3 and look at how we are actively supporting our customers. We have further enhanced our support for customers, including through the various government initiatives which have been put into place over the last few weeks. We have granted around 400,000 mortgage holidays to date, helping customers through short-term financial difficulties. We have also granted payment holidays across our other retail lines while increasing the limit for contactless card spend to GBP 45 and giving our customers interest-free overdrafts of up to GBP 500. Insurance and Wealth has also adopted payment holidays whilst implementing a simplified claims process, ensuring that customers have their claims paid sooner and reducing the strain to process places on the NHS. Our commercial businesses have supported clients with around 37,000 overdrafts, capital repayment holidays and deferred payments, all backed by our GBP 2 billion COVID-19 fund for SMEs and mid corporates.As I mentioned previously, we are fully behind the government's various schemes and have worked closely with the government to make them work. Lending under these schemes will involve extending our risk appetite during the crisis. And despite the protection offered by government guarantees, there will inevitably be some additional losses in due course. At the end of last week, we had approved over GBP 400 million in CBILS loans, and this has already increased to over GBP 500 million at the close of business yesterday. Our CLBILS proposition is also now fully operational, and we have registered as a commercial paper dealer so we can support our larger clients to access the CCFF.The government and the Bank of England have both acted swiftly and decisively, and their actions will help to mitigate the impact of the crisis. However, there is also an important role for all of the banks to play, and we are committed to putting the group's full strength to work in support of the U.K. economy. By doing this, we will help to reduce the negative impact on the U.K. economy and speed the recovery.I will now turn to Slide 4 and look briefly at the economy. As I said in my introduction, there is significant uncertainty ahead and the outlook is challenging, although the final impact on the economy will depend on the severity and duration of the economic shock. Economic forecasts have recently turned sharply negative. In finalizing our results at the end of March, we assumed a base case for GDP of minus 5% in 2020, with the recovery beginning in 2021, although we have to recognize that the outlook may deteriorate over the coming quarter. We have also seen customer activity fall significantly since the end of February, and William will talk about the impact that this has had on our financials. As William will explain, alongside our central assumptions, we are, as previously, also providing our current estimates of how we might be impacted in a more adverse scenario. Clearly, given the lower activity levels and the significant change in the rate environment, among other factors, the operating environment is now very different to when we reported in February, and our previous guidance is no longer appropriate. The outlook is likely to remain uncertain for some time, and we will update the market once there is greater clarity. However, as I have said, despite the challenging outlook, we are well placed to play our part, and I will now turn to Slide 5 and look at how our strengths and capabilities will enable us to support the U.K.'s recovery.The group benefits from several core competitive strengths, including, as you have heard me explain many times, our prudent approach to risk, our capital strength, our market-leading efficiency and our multichannel distribution model. Together, these strengths mean that we face into this period of uncertainty with continued confidence in our financial resilience.Our prudent approach to lending supports our low-risk balance sheet, which has seen no net loan growth over the last 10 years, and over 80% of the group's total lending is now secured. Although the economic outlook is uncertain and the impairments will inevitably be impacted, our strong balance sheet is benefiting from our prudent approach to lending. We have a clear strategic focus on prime U.K. retail business, which includes over 75% of our loan portfolio. Our commercial portfolio includes around 35% exposure to SMEs and mid corporates clients, which is over 80% secured. Importantly, we have limited exposure to the most at-risk sectors of the economy and -- at this stage, and William will give you more details on this shortly.Our liquidity and funding position remains strong, including no net wholesale debts. The loan-to-deposit ratio has reduced further as a result of strong deposit inflows across both individual and corporate customers to our trusted brands, more than offsetting the increase in our loan book over the quarter. On capital, our CET1 ratio of 14.2% means that we have significant resources available to support our customers, especially after the reduction in the U.K. countercyclical capital buffer. I have talked to you many times about our relentless focus on efficiency, and this will now give us even greater capacity to support our customers and to absorb additional costs associated with the coronavirus outbreak such as enhancing homeworking capabilities. Finally, our multichannel distribution model includes the U.K.'s leading digital bank, and this is playing a vital role in continuing to serve customers throughout the lockdown. We have gained 217,000 additional digital users since the end of March alone, including 33% of new registrations from customers over 60 years old, up from around 13% previously.It is these strengths that will form the core of our response to this crisis. Coronavirus represents an unprecedented challenge for the group and the whole of the U.K., and we will be tested over the weeks and months ahead. However, I have great confidence in the resilience of our business model, the strength of our balance sheet and, most importantly, the professionalism of our staff.I will now hand over to William, who will run through the financials in more detail.

[William Leon David Chalmers, CFO & Executive Director]

Thank you, António. And good morning, everyone.I'm going to give an overview of the group's financial performance in Q1. After a decent beginning, in the first quarter, we started to see the emerging economic impact of the coronavirus crisis. We are well placed to face an uncertain future, but this will, of course, impact our performance going forward.Turning first to Slide 7. We have a summary of the financials. Pre-provision operating profit of GBP 2 billion is down 19% on the prior year. Supported by a net interest margin of 279 basis points and a continued focus on costs, pre-provision operating profits were solid. However, statutory profit before tax of GBP 74 million and the return on tangible equity of 5% were both heavily impacted by the impairment charge of GBP 1.4 billion in the quarter. The results also included GBP 387 million of negative below-the-line insurance volatility relating to the exceptional market movements we saw in the quarter. This stems predominantly from falling equity prices and rising credit spreads. It's worth noting that this volatility is market-led, and we've seen some of it reverse in April, but it's clearly too soon to make a call on Q2. TNAV per share of 57.4p is up 6.6p in the quarter, including 4.9p of support from the increased net surplus in the group's defined benefit pension schemes. This is again driven by widening credit spreads and has also seen some initial reversal in April.As you've heard, the balance sheet remained strong. The loans-to-deposit ratio has reduced to 103%, and the strong corporate loan growth has been more than offset by deposit inflows, largely from those same corporate clients. We've also completed GBP 6.9 billion of wholesale funding year-to-date. Alongside the term funding scheme, this means we now have only a small residual funding requirement in 2020. Our capital build has clearly been impacted by the statutory performance in the quarter and the limited RWA increase. However, benefiting from the 83 basis points we account from the 2019 dividend, the CET1 ratio is now very strong having increased to 14.2%.I'll now turn to pre-provision profit on Slide 8. Net income is down 11%, impacted by an exceptionally low rate environment and a slowdown across all of our key markets, both of which we expect to continue in Q2. The net interest margin is down 12 basis points from prior year at 279 basis points. We expect to see the full impact of these lower base rates, changes in the balance sheet mix and fee forbearance landing in Q2.Other income in the quarter was GBP 1.2 billion. Post the coronavirus outbreak, this was impacted by lower activity levels across the group as well as a market-led write-down in the assets of Lloyds Development Capital and a business growth fund of approximately GBP 100 million. We'll maintain our focus on costs, and indeed we'll absorb additional coronavirus-related expenses in 2020 while continuing to see absolute costs reduced. Now it's fair that I should stress that this benefit will, of course, be significantly outweighed by the revenue headwinds that we're anticipating.Turning now to Slide 9 and the impairment charge in a little more detail. Total impairment charge of GBP 1.4 billion reflects our updated economic assumptions as well as the impact of coronavirus-related disruption on existing restructuring cases. As you can see, the underlying impairment charge of GBP 368 million in the first quarter is higher than last year, but this comparison is impacted by the very low commercial net charge in Q1 2019. Indeed, the underlying credit quality we're actually seeing in the first quarter remains robust.On IFRS 9 economic scenarios. They have deteriorated significantly, and they drive the GBP 844 million forward-looking model charge that you can see on the slide. As you know, we run multiple economic scenarios around the base case and have maintained the probability weightings on our 4 cases. The severe downsides, which we attribute a 10% weighting, now generates an expected credit loss of over GBP 7 billion, a pickup of GBP 2.1 billion compared with base case. Although consensus is expecting a V-shape recession, in our base case we've prudently assumed that GDP grows by only 3% in 2021. We've also assumed that house prices fall 5% in 2020 and unemployment stays above 5% in both 2020 and 2021 and rises much higher in Q2 2020 in particular. These are all important points to consider when you look at the expected losses that we model under IFRS 9. Together, this means that our stock of ECLs now stands at GBP 5.2 billion, a cushion that is over GBP 1 billion higher than at the year-end. The outlook statement in Q1 is based on our analysis at the quarter end and our view of the economic situation at that point as we look forward.Clearly, the economic situation remains very fluid and uncertain, and it's possible that there will be changes to our outlook in the coming quarters. As António mentioned, in the current economic situation it is inevitable that both the existing book and our new lending will be impacted, but this will be partially offset by government guarantees. The extent of the final impact, however, will depend upon the severity and the duration of the shock and how economic data and behaviors evolve.Looking at Slide 10. The group's balance sheet is well positioned for the current environment given the group's prudent approach to lending and a clear strategic focus on prime U.K. secured lending. Secured lending, as António said, makes up over 80% of the group's balance sheet, with GBP 310 billion in retail and GBP 30 billion in SME and mid corporates. The rest of the loan book comprises our prime U.K. consumer portfolio and our prudent exposure to U.K. large corporates.Looking at the AQRs by division. They have increased significantly in the prior year, although as with the total P&L charge, this is predominantly driven by the forward-looking ECL uplift associated with a worsening economic outlook. At an underlying level, the total AQR of 33 basis points and the write-offs of GBP 393 million are both in line with our through-the-cycle expectations, an evidence of the group's underlying credit quality. Again, we will not be immune from loan losses in the coming cycle, but we do start from a good place.Let me now turn to the strength of the portfolios, starting with the Retail book on Slide 11. Retail, as you know, has a deliberate focus on high-quality mortgages, with an average loan-to-value of 44% and 90% of the book with an LTV below 80%. As you'll be aware, our 2006-to-2008 vintage mortgage book drives outsized losses in the Bank of England's annual stress testing exercise, but this portfolio is reducing at around 12% per year. In addition, much of this portfolio originally had LTVs over 100%, but the average is now slightly below the rest of the mortgage book at 43%, while over 90% of these loans have an LTV below 80%.More generally, we've seen a significant interest in repayment holidays from mortgage customers and have grown to around 400,000 to date. The average LTV of these customers is about 50%, and there is no particular correlation to vintage. Our prime credit card book has seen limited drawdowns, with balances down 6% since the year-end largely driven by the over 20% reduction in customer credit card spending levels in March. We currently have around 220,000 customers benefiting from payment holidays, having introduced them in April.And finally, our motor finance book is predominantly secured and subject to risk-based pricing assumptions and residual value provisioning. Having said that, there are uncertainties given the used car market is effectively closed right now.So if we turn to Commercial Banking on Slide 12. The commercial portfolio benefits from a diverse client base and effective caps and limits across the book. The significant derisking undertaken in recent years means that around 75% of exposure is through investment-grade clients. We have limited exposure to riskier sectors, including only GBP 2 billion to leveraged finance and low average LTVs in our commercial real estate book. Less than 3% of group lending is to the sectors seeing the greatest impact from coronavirus and the associated lockdown, and we're working closely with those affected clients.We saw around GBP 8 billion being drawn on revolving credit facilities and other corporate institutional facilities in March. This drawdown was more than matched by commercial deposits as clients sought to preserve liquidity. We will continue to work with clients to understand their needs, though it's interesting to note that RCF drawings have slowed significantly in April. Alongside this, while lending balances in Commercial Banking have increased by GBP 5.3 billion in the quarter, RWAs have increased by much less. This is because undrawn facilities are already risk weighted at 75% of the level of the drawn balance. As António mentioned, we're enthusiastic participants in the government-sponsored lending schemes as we believe that the schemes are of the utmost importance to large sections of the society. There will inevitably be some losses from these schemes in coming periods, although the final amount will depend upon the severity and duration of the economic shock.Let me move on to Slide 13 to look at liquidity, funding and capital in a little more detail. The loan-to-deposit ratio reduced to 103% as a result of the flight to safety we have seen within commercial deposits, as I mentioned earlier. We've also taken an opportunistic approach to wholesale funding as the markets have remained open for us. We've completed nearly GBP 7 billion of funding to date across the holdco and opcos since the year-end. Given our funding to date and our access to the new term funding scheme for SMEs, which we estimate to be up to GBP 39 billion, we will now have only a small residual funding requirement for 2020.On capital, our CET1 ratio of 14.2% is comfortably above our requirements, particularly since the reduction in the U.K. countercyclical buffer to 0. The headroom over the current requirements of 11.3% of nearly 300 basis points or GBP 6 billion, plus our solid pre-provision profitability that I mentioned earlier on, gives us significant capacity to absorb potential credit risk while continuing to lend in support of the real economy.As I mentioned a moment ago, we've seen limited risk-weighted asset expansion in the quarter. RWAs were up GBP 6 billion, of which GBP 2.3 billion is due to the previously flagged securitization rule changes in January of Q1, while a further GBP 2 billion relate to currency and CVA. Our stance on large corporate lending means that we have so far seen very limited ratings migration, although clearly there may be some further impact in future quarters.And finally, if you turn to Slide 14. In conclusion, the U.K. faces an uncertain outlook. However, we remain absolutely focused on supporting our customers whilst protecting our colleagues and remaining present in communities across the U.K. Our multichannel distribution model with the U.K.'s leading digital bank is enabling in the group to continue to serve customers throughout the lockdown. Our efficient low-risk business model and enhanced capital strength give us even greater capacity to absorb potential impairments while continuing to support our customers.Looking forward, we will come through this crisis together. In the meantime, we're learning a lot. During and after the crisis, we will further build on our connectivity with customers, adapt our product range and continue to build the group's strategic cost advantage through new ways of working. We will all, of course, be tested, but I have every confidence in the strength of our business and dedication of our colleagues. And with this, we will maintain our focus on supporting customers and the U.K. economy.That concludes the presentations for this morning. Thank you for listening. António and I are now ready to take your questions, so I'll hand back to the operator. Thank you.

[António Mota de Sousa Horta-Osório]

Thanks, William.

[Operator]

[Operator Instructions] Your first question comes from the line of Joe Dickerson, Jefferies.

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

I just have -- is there a way to dimension the downside on impairments to take kind of the severe scenario and then add a remaining kind of quarterly run rate, call it, a couple 100 million to a couple 150 million a quarter over 3 quarters and think about that as kind of the downside of a range, assuming that we don't have -- assuming some sort of recovery in the back end of the year? That's the first question. And then secondly, on the, call it, roughly GBP 2 billion credit allowance on other retail. Can you give us some color on how much of that is allocated towards the card book versus other portfolios?

[William Leon David Chalmers, CFO & Executive Director]

Thank you, Joe. I'll take your questions in turn. Maybe just to start off and to give you some context on the IFRS 9 charge that we've taken. The IFRS 9 charge is, by design, a forward-looking charge. The charge of GBP 1.43 billion that we've taken this quarter is predicated upon 3 inputs. One is the underlying charge, which as you know is GBP 368 million. Second is for restructuring cases that have been blown somewhat off course by coronavirus-related difficulties, which is GBP 218 million. And then the third is the modeled forward-looking charge, which is GBP 844 million. So the total charge is a combination of those 3, and the last of which is forward-looking. By definition and by design, as I said earlier on, it's a front-loaded charge, so as we look forward, there are 2 factors that we need to pay attention to. One is whether the economics change and whether our base case changes with it. And clearly, if it does, then you will see that forward-looking charge be modified accordingly. And the second is the absence of perfect foresight. When we look forward, we don't have perfect foresight about what will happen to our restructuring cases, for example; about what will happen to our Stage 1 cases, for example, including the payment holidays; and about the success or otherwise of government schemes that we see. So as we look forward to Q2, Q3 and Q4, I'm not going to give you a precise number, but I will say that the IFRS 9 charge again is, by design, front-loaded. I would not suggest that you annualize that charge. And then as we look forward to Q2, Q3 and Q4, we'll have to take both the economic factors and the absence of perfect foresight points I mentioned just now into account.On your second question, as to unsecured. The charge today -- perhaps this is the better way of addressing your question. The charge today has, as you know, a component that is related to Retail, which is close to GBP 900 million, and a component that is related to Commercial Banking, which is about GBP 550 million. If you look at that spread in the commercial for -- in the -- sorry, Retail charge today, much of that, probably 2/3 to 3/4 of that, is around the unsecured book. And that's not surprisingly, because the unsecured booking is likely to be first hit by unemployment, whereas our secured business, as long as we see some sort of recovery in the context of 2021, should be proportionately less hit. So I hope this gives you a sense as to the elements of unsecured and secured in our overall Retail component, Joe.

[Operator]

Your next question comes from the line of Aman Rakkar, Barclays.

[Amandeep Singh Rakkar, European Banks Analyst]

I have 3, please. First was on capital, 14.2% CET1 ratios. I'm just interested in how much IFRS 9 transitional relief you may have benefited from in Q1. And to that effect, are you able to disclose a kind of fully loaded, a proper fully loaded for IFRS 9 CET1 ratio? That will be the first one. Second, thanks for the disclosure on ECL coverage. Forgive me if I have looked on the wrong page, but I'm unable to find it. I was wondering, have you told anywhere what your coverage is on Stage 2 loans? That would be really helpful. And I guess the third is a kind of follow-on to the prior question about the ECL charge, just about how likely you think you are to take that additional GBP 2.1 billion charge that you've laid out on Slide 9 if the severe -- sort of the downside scenario were to manifest. I totally appreciate the comments regarding that you're not thinking about a V-shape recovery in 2021, but I guess when you do look at things like your assumption around unemployment, you could argue that it looks a little bit less conservative than perhaps what we've seen at some of the other banks. There was a bank that reported a base case which looks fairly similar to what your downside scenario is for unemployment, which would suggest that there's a pretty decent chance that perhaps we could get that charge in Q2. I mean do you think that's a fair observation? I'd be interested to get your thoughts on that.

[William Leon David Chalmers, CFO & Executive Director]

Okay. Thank you. Maybe I'll address your first point last because it's an important point. When we look at our economic -- or rather, when you look at our economic assumptions and when we look at them, it's important to bear -- to take into account both the assumptions in year 2020 but also the assumptions in year 2021 because both are very important drivers of the IFRS 9 impairment charge that we take. And if you compare them to the outside world -- and I'm obviously not going to comment on other banks, but if you compare them the outside world, it is very important to take each of those 2 years into account, both the deterioration in 2020 and the pace of the recovery in 2021, and look at that on a net basis. I'd also add that if you look at our base case, right, while we've got 5% down -- GDP down year-on-year average in 2020, within the year there are significantly worse outcomes. So if quarter 2 GDP, for example, is 7.4% down, HPI and unemployment similarly are down below the averages that are stated in the numbers that we have given you today. So look within the year, if you like, again for comparative purposes. Then I would also add to that the weightings. We have weightings in our MES, which are 30% for base case, 30% for downside case and 10% for severe downside case. And each of that downside case and severe downside case have some, frankly, pretty pessimistic assumptions built into them. So severe, for example, has 7.8% down year-on-year 2020 GDP and within that has 11% down within Q2. We're taking a weighing for that within our overall MES charge, so it's important when you look at our charge and when you look at the assumptions on which it is based that you take into account not just the base case projections but also the downside and the severe downside because that's what's informing our charge. So there are a couple of points there which, hopefully, are helpful. And again, maybe just to finish off on that, don't just look at GDP. Look at HPI as well, and look at unemployment as well. And again, build that into your comparison.To come back on 1 or 2 of your other points, the capital -- the first of your question is capital. The IFRS 9 incremental benefit that we took in the first quarter was about 3 to 5 basis points or so. The IFRS 9 component of our overall CET1 element, it's not terribly much. It's about 20 to 30 basis points, but as you know, it diminished in 2020, down to 70%; and it's expected to diminish further in 2021, down to 15%, in accordance with the regulatory guidance to phase out reliance on transitionals. And then finally, your third question, actually your second of your list, on Stage 2 coverage. The way in which we construct the MES modeling is we do it from a bottom-up basis at all times with an overlay approach. That overlay approach during the quarters does not change Stage 2, does not change Stage 3. Rather, the progression -- or deterioration, I should say, of loans into Stage 1, Stage 2, Stage 3 is assumed within our overall GBP 1.43 billion impairment charge. So we don't, as a result, disclose to you the Stage 2 and the Stage 3 numbers. It is assumed and built up. The deterioration of the asset is assumed and built up in our overall [ GBP 1.3 billion ] charge.

[Amandeep Singh Rakkar, European Banks Analyst]

Okay. All right. Just one quick follow-up on -- so if you were to take the GBP 2 billion top-up in Q2 from the macroeconomic assumptions, would you expect significant transitional -- IFRS 9 transitional benefit with regards to capital on that GBP 2 billion?

[William Leon David Chalmers, CFO & Executive Director]

Yes. I mean, again, I think the first thing to say is, when you look at our assumptions within IFRS 9, please pay attention to the earlier points around the base case, the downside case, the severe case. Please pay attention to the fact that the IFRS 9 charge is deliberately front-loaded by design. So again, do not annualize it on an annual basis -- on a quarterly basis, I should say. And so when you're reflecting on that point, I will just draw a bit of caution to the way in which you reflect upon it. As of Q2, if we see a deterioration in our economic base case and if we see any kind of impairment change to that, then needless to say that will impact upon our ability to take advantage of transitionals, but as said, we're only very modestly reliant upon them right now. And it will be phased out according to the plans that are currently applicable as -- or partly phased out as of 2020, moving into 2021. So I hope that answers your questions.

[Operator]

Your next question comes from the line of Raul Sinha, JPMorgan.

[Raul Sinha, Analyst]

Maybe if I can have a few questions, maybe starting on the guidance. You'll appreciate there's a lot that's unknown in terms of the outlook, but I was wondering if you might be able to help us on the drivers for both the NII as you see it and other income as we head into the second quarter. And in particular if you could draw upon within NII, is the sensitivity to interest rates going to increase as selling rates have sort of hit the lower bound? And so is there any change? Could you update your sensitivity if there's any change in terms of what you've talked to us about previously? And then on the other income line, if you could address the impact of the high-cost credit review as well as the sort of impact of the measures, the relief you are providing to you customers such as free overdrafts. How much of that is going to impact the other income in the second quarter? And perhaps a run rate. That would be really helpful.

[William Leon David Chalmers, CFO & Executive Director]

Thank you, Raul. There's a lot of questions there, but I'll do my best to answer each of them. The first point, on guidance. Our approach on guidance is that we can give you a picture as to how the business operates in a lockdown environment, but we can't give you a picture as to how long this crisis is going to last. And so we deliberately stepped away from giving you full year guidance, but we're happy to comment on how the business is operating in the current lockdown scenario, and hopefully, that can allow you then to make a judgment as to how long you think the crisis is going to last and plug in whatever numbers you would like to from that basis. So just to give some context to your questions, Raul. The NII point, first of all. NII, as you know, ended up in Q1 at 2.79%. That did not include much of an impact from all of the various coronavirus-related disruption that we've seen, including the base rate change. That wasn't -- it was in evidence, if you like, in the last couple of weeks in March, but obviously the weighting of that in the overall Q1 results was not significant. As we look forward, there's a couple different things going on in NII. First of all, the rate change. We've moved down from 75 basis points to 10 basis points. In doing so, we've experienced liability-related floors. We've also reduced the ability for the structural hedge reinvestment to make us money. That, in turn, is sensitized in the annual report, as you're aware. So we see in the annual report parallel shift of 25 basis points costing us GBP 150 million, parallel shift of 100 basis points costing us GBP 700 million. I would stress that, that is not a linear relationship, and so by the time you get to a 65 basis point cut, you've already absorbed most of that hit. So that's one piece going on. Second piece going on is mix change. We've got a mix change here whereby retail unsecured balances are lower. You've got mix change here whereby the new mortgage market is largely closed, and as you know from the year-end discussion, we were experiencing new mortgages coming on at more favorable prices relative to the old mortgages that they were replacing. And then finally, we've got a mix change going on which is around the commercial bank and the drawing down of RCF portfolios, which is dilutive to margin. That's the second area. The third area, interest-free overdrafts. Interest-free overdrafts, as you know, are -- we are giving interest-free overdrafts to the extent of GBP 500 to help tied people through this crisis, which is an important job that we can play or a role that we can play to helps this crisis be easier for many of our customers. So that's the third area. And then the fourth area is that we've also got natural progression of the book. I mean we've talked about that a bit at year-end, the natural way in which the book churns over time. So there's a lot of things going on there, the 4 points that I've made in relation to what's going on within the net interest income.To give you some sense, in a lockdown context, what does that mean for our Q2 margin? It means around 30 to 40 basis points. Now we're not going to give you an annualized margin off the back of that because, again, that would imply that we have a knowledge of how long this crisis is going to last, but we can tell you that in Q2 the impact on the margin is around 30 to 40 basis points coming off that starting point of 2.79% that I mentioned earlier on. And it's a function of those 4 inputs that I just commented on.OOI. OOI, a couple of points to make. One is there is a core stability to OOI, and then the second is that there is some variability around the margins. So if you look at OOI in Q1, first of all. If you took away the market volatility that we saw and in particular in relation to LDC, the net OOI would have been about GBP 100 million higher, which is pretty much what we told you at the year-end results just a couple of months ago. The challenges that we see in OOI in Q2 -- and again these are lockdown comments. So this is what we may see in Q2 rather than necessarily what we will see for the full year, but the challenges that we see within OOI for Q2 are at the margins, on top of that core stability, we're going to see less payments revenues within Retail, so less interchange fees. We're going to see less car sales, so less Lex-related fees, which as you know comes in our other income line. Moving down, Commercial Banking. We're going to see fewer transactions. So some of that market softness that, frankly, we've been talking about for a little while now, unfortunately, that's going to continue. We're also going to see less transaction mandates. Global transaction banking was one of our growth areas as a business. We're not going to see so much movement within Q2 as long as the lockdown persists. And the third area, Insurance. Insurance has a few gives and takes in it. But just to give you some context, we're going to see -- in a very low interest rate environment, we're going to see less bulk activity than we're expecting to see. Trustees, not surprisingly, are going to be reluctant to place bulks in what is a low-reward environment for them. Workplace, another growth area of ours. We're going to see less transfers and schemes and therefore less opportunity. However, there are some areas in Insurance that are core products and they don't go away. Home insurance is a good example. And by the way, we are seeing and hope to see further mitigation of some of the claims experience within that area. Protection is another example. Again, these are products that don't change. People need them, and most of them are accessible even in a lockdown environment. So in other income, the way I would look at it is to say there is a core stability to it, but we are going to enjoy a -- we're going to enjoy is the wrong word, obviously, but we're going to steer in, say, a degree of pressure in the margins beyond that. So we're going to see less growth than we might have hoped within OOI. We may see some pressure at the margin around it, but it shouldn't be particularly significant versus where we start today. So again, these are lockdown comments, and they're not comments that's -- that persist once the lockdown is lifted.Now, well, I was just going to move to your impact of HCC, high cost of credit, question, Raul, as the final point you raised. I'm not going to comment too explicitly on that. What I will say is that overdrafts, roughly speaking, are down 15% by quantum, but I would also add to that, that the chargeable balance -- by virtue of that GBP 500 interest-free component, chargeable balance of overdrafts is down about 50%, 5-0. So you can see that chargeable balance, again in a lockdown period, for the 3-month duration that those things last, has a significant impact, which is coming back to the high guidance that I gave earlier on for the II -- NII sensitivity, rather, than I gave earlier on. It gives you an idea as to where we get to where we do.

[Operator]

Your next question comes from the line of Andrew Coombs, Citi.

[Andrew Philip Coombs, Research Analyst]

Yes. Perhaps a couple of follow-ups. Firstly, just coming back to the previous question on NII. Obviously, some of -- the 4 points you made in terms of the hedge rollover and the rate sensitivity, the mix effect, the interest-free overdrafts and then the churn on the book. Some of it is obviously very temporary in nature during a lockdown. Other parts are you can extrapolate to a greater extent. So perhaps you could just provide us with some idea of how much overdraft income that was contributing to the NII previously. I would thought it was in low single digits, but that would be a helpful start. Secondly, on the OOI, there's this GBP 100 million charge that you've also drawn out on LDC from a private equity mark. Can you just give us a feel there for the size of that portfolio and any additional risk that you see there? And then finally, on the economic measures, I think you've alluded to this already, but I just wanted to clarify. Obviously, majority of the charge you've taken thus far has been on cards and commercial. When you do look at the difference between your probability weighted and your severe, that GBP 1.8 billion increase, GBP 1 billion of that is on mortgages. And I think you alluded to it earlier, but I'm assuming that's because of your 2021 assumptions in a severe downside more so than your 2020 assumption. Is that fair?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Thanks, Andrew. I'll take each of those in turn. The first one, I'm not going to disclose much more than what I've already said. The only point that may be useful to you as you think about this is to give you one indication within that overall sensitivity on NII. And as I said before, it is subject to many uncertainties. I hope I gave you that impression earlier in my comments, but subject to those uncertainties, the rates component is probably around half of that overall 30 to 40 basis points that I mentioned earlier on. And then the incremental points that I mentioned, mix change, interest-free overdraft, natural progression of the book, that's kind of the other half, if you like. So that's on that point. On the LDC point, LDC experienced, as I said in my script, around GBP 100 million charge that came in through the other income line. I would also add that there is a further cushion for LDC within the PVA charge that we have taken. And so we have undergone a revaluation of the assets that LDC has, and that entered into the other income line. We also have a further cushion within the PVA charge, which takes it to the 90th percentile of certainty, as you know; and that provides a further capital cushion, if you like, against further potential adverse experience in that area. The point on LDC that you ask is around the size of the portfolio and the risk. Size of the portfolio, it varies, obviously, but it's typically between GBP 1.5 billion to GBP 2 billion. The point I would like to stress with the LDC is that clearly the decline in equity values presented some challenges. The lockdown environment may present some challenges to some businesses, but we hope we've embodied that in the GBP 100 million charge that we've taken because, again, we did it on a look-forward basis. But equally, LDC is presented with many opportunities in this environment. It is an environment which we would help -- which we would hope the LDC is able to take advantage of going forward, and we have no doubt that they will.Finally, your question on the charge and the probability weighing of severe and why does it gravitate towards secured. Your observation is exactly right. When you move from the base case to severe case, what you're looking at is a continued negative GDP environment and indeed HPI environment in the course of 2021. If that happens, and obviously we very much hope it won't, then what it does is it pulls down asset charges. And as asset values come down, so the ability to restore asset values in the context of secured assets gets worse. Again, we are on a average LTV within the portfolio of 44%, so we have a very considerable cushion before we have to worry about that. But as in line with every other mortgage provider, it does get impacted if HPI comes down. And in our adverse case -- or our severe case, I should say, you do get a longer and more protracted downside, which in turn drives asset values down through the HPI change.

[António Mota de Sousa Horta-Osório]

Yes. And, Andrew, just to complement what William just said. So we have 90% of our mortgage portfolio with an LTV lower than 80%. And this is the outcome of many years, as you know, of having underplayed on the mortgage market because we were concerned about -- especially in London and the South East, about high-value properties. And that's why we have 90% still with LTV below 80%. On the downside scenario, we are assuming over the 2 years a 20% decrease on house prices. So as William was saying, you will have an impact on the margin. And those properties, if repossessed, would increase the losses that we will have to incur. So you're absolutely right on your point.

[Operator]

Next question comes from Jonathan Pierce, Numis.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

I've got 2 questions, please. The first, sorry to come back on this transitional relief points. The Pillar 3 shows that your IFRS 9 add-back went south by only about GBP 71 million in the quarter now. I guess it would have fallen GBP 100 million, all else equal. But in the context of what looks to be about an GBP 800 million, GBP 850 million Stage 1, 2 charge, it does suggest that you had very little transitional relief in the first quarter on the EL build. So just to confirm that's right. And again to come back to what would happen if there were to be further Stage 1, 2 builds in the second quarter and beyond. Have we rebuilt the IFRS stock now to a level where any additional Stage 1 and 2 would get the full 70% relief? So that would be question one. Question two is on car finance. I mean 85,000 holidays strikes me as quite a lot given these were only launched a few weeks ago. And I don't know what the average balance is, but the securitization data suggests maybe in the order of GBP 27,000 per customer, which would suggest maybe over GBP 2 billion of the car finance book is already under some form of payment holiday. Is that correct? And if not, could you give us a number by balance, please?

[William Leon David Chalmers, CFO & Executive Director]

Thanks, Jonathan. Maybe I'll take the last and then the second of your 2 questions first. On the motor finance book, it's an important business to us. And it's one that we have targeted effectively over the last few years in a cautious and prudent way, but nonetheless it's an important business to us. In terms of the numbers that you mentioned, the motor business that have taken payment holidays by number of customers, I'm not going to give you balances, but I'll give you number of customers, is about 8%. So it's considerably lower than the type of number that you were talking about. And hopefully, that gives you some basis for figuring out the answer to your question. In terms of risks there, a couple of points I would make. I mean one is it is a secured asset. Two is that the pricing assumptions for the motor business have been and continue to be very much through-the-cycle and risk-adjusted pricing assumptions that we're making. And then third is, before we came into this situation and certainly again in the GBP 1.43 billion charge that we have taken, we have increased the provisioning level within the residual value component of the motor business that we have. So we had some coming in. It is also a component of our forward-looking model charge, and that, hopefully, gives us a further cushion to work with on the motor book. So we feel comfortable with where we are on that. On the IFRS 9 charge -- sorry, IFRS 9 transitionals. As you know, it's complex and something which deserves a more detailed conversation in due course. But to give you some idea, if we take out IFRS 9 relief in -- and it's disclosed, I think, in the Pillar 3 document, then we're looking at a CET1 ratio of about 13.9%. That's about 30 basis points lower than the 14.2% that I just mentioned earlier on, which is consistent with my earlier number. Hopefully, that gives you an idea. And then as we look forward into the context of 2020, the change to provisioning that we may take if we have cause or recourse to change Stage 1 and Stage 2 should come into the transitional relief, but we'll see how that progresses at that time.

[Operator]

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

[Martin Leitgeb, Analyst]

I just wanted to touch on the payment holidays. And it seems like one of the industry bodies is suggesting that as many as 1 out of 9 mortgages has been impacted by those payment holidays, and I was just wondering if you could shed a bit of color. Are you surprised by the quantum of takeup? And what is the expectation from here in terms of how many of those clients might potentially struggle going forward with their mortgage payment? And the second question is just related to the government guarantee schemes, so the various government loan guarantee schemes, but I was just wondering if you could give us a sense on what portion of the loan book going forward might potentially be covered by those schemes. Looking at the volumes we have so far, it seems like that a comparatively small proportion of them might be covered, so I just wanted to check whether that is right. And related to that, how much an impact, though, can those schemes have in terms of the NPL side? I was just wondering, looking at your severe downside scenario with the GBP 7 billion expected credit loss. That seems, compared to Bank of England stress test losses, comparatively mild. Is the reason for that those guarantee schemes?

[António Mota de Sousa Horta-Osório]

Yes, thank you, Martin. I'm going to take your first question, and William will take the second and third. Look, just to start by saying we are very comfortable with our mortgage portfolio as a whole. As I just mentioned in a previous question, we have an average loan-to-value of 44%. And we have 90% of the portfolio with an LTV of less than 80%, which as I said results from our prudent stance in the last several years in terms of participation in the mortgage market and the different segments. So this is the first point I wanted to raise. The second point I wanted to raise is, if you think about the customers on the Retail side as customers, which is the way we look at them, and not as customers per product, you will realize that mortgages is no doubt the best product on average. I mean each case is obviously a case, but on average, mortgage will be the best product to help customers go through shorter-term financial needs. Why is that so? Because as I just said, we have an LTV of 45% on average. That means that our customers have more than GBP 300 billion of wealth on their homes unencumbered. So if they have a short-term financial need either be in credit cards or a personal loan or the mortgage itself, the best way and in our advice to them is mortgage is on average, I repeat, the best product for them to consider in terms of addressing shorter-term financial needs. Third point, we have on our portfolio of the 880,000 payment, repayment holidays that I mentioned to you. On the mortgage side, the percentage of our book in terms of customers, as William was saying, in relation to motor finance is 17% of the customers. So 17% of the customers have asked us to do this. We think this is, as I said, the right products to help them with the most secured as well for the bank in terms of facing potential short-term financial needs.

[William Leon David Chalmers, CFO & Executive Director]

Martin, on your second and third questions as to the potential emergence or evolution of payment holidays, it's just too early to say really with any conviction as to how this fares. What I would say is reiterate some of António's comments there. The stance that we're taking is to facilitate customers through what we see as a temporary income interruption, that clearly some customers who have asked for payment holidays are those that are affected or those that are worried, but also many customers are doing so out of precautionary concern. And likewise, some of the government policies that are being adopted, in turn, will help address any payment holidays issues that may occur in the context of mortgages. So there's a number of offsetting factors. It's also fair to say that the income split and the vintage split of payment holidays within mortgages shows no particular bias or skew. And so we feel pretty comfortable about that, combined with the fact that the LTV of those payments holidays is 50%. So as we look forward, it's clearly early days, Martin. And everything is going to depend on the severity and the duration of this situation, but the mortgage payment holidays are an area where we feel comfortable doing what we're doing, and we believe that it's the right thing to do.Your final question was around stress tests. There are -- I think it's important to note there are some quite big differences between the ACS stress tests in the Bank of England and what we're experiencing right now. And just to draw a couple of those out, first of all, the Bank of England stress test was a high-rate stress test, and that has very different consequences for much of the customer base and the borrowing that we have in our portfolio. This is clearly a low-rate stress. And as a result, again, we expect to see different asset price performance off the back of it. Two, the government activity is now very significant. We've just been talking about one aspect of it, but that really should lower the consequences for unemployment, lower the consequences of corporate defaults and accelerate the recovery that we would hope to see in 2021. And that's the third point, that the longevity of this stress, we hope, will be shorter. And as you can see in our cases, it is shorter versus the Bank of England stress, which is a multiyear stress that are in the assumptions. And then finally, conduct. Conduct in the ACS was a big part of the stress. That in turn, you can know where we are on PPI, we hope, is substantially at least behind us. And so that is another difference between this stress test -- sorry, between the ACS stress test and the stress that we're experiencing right now. And the final point I would make is that the Bank of England stress test is predicated upon perfect foresight. We don't have perfect foresight. And so there's a methodological difference and difference in approach that is there, but I think the substantive differences between the Bank of England stress tests versus what we're going through right now are really very considerable and worth taking account of.

[Operator]

Next question comes from Claire Kane, Crédit Suisse.

[Claire Kane, Research Analyst]

Two questions, please. The first, on the NIM guidance you've given on the call. Of the 30 to 40 basis points impact, which suggests a low point in Q2 of about 240 to 250 basis points for NIM, the 15 to 20 basis points from rates, do you see that improving as you reprice deposits later in the year so that, that should ease up? And then regarding the other 15 to 20 basis points, can we also see that -- the majority of that ease up if you do then start to charge customers on overdrafts, providing that doesn't get extended by the government? That's the first question, please. Then the second question, just to follow up on the ECL around credit cards. Of the GBP 889 million Retail charge you took, and GBP 729 million for other retail, could you split out the GBP 729 million, please, for credit cards and explain to us really the overall driver you think credit cards will be for the ongoing outlook for ECL charge going forwards, please? And can you just clarify that all your payment holiday customers are still in Stage 1?

[William Leon David Chalmers, CFO & Executive Director]

Yes, yes. Thanks, Claire. Just dealing with each of those questions. First of all, on the net interest income. The 30 to 40 basis points I mentioned earlier on, whether or not that the component of it that is relating to the rate pressure is alleviated by repricing of deposits later on in the year, it may be is the answer. I think it's just too early to call exactly how that will come out. The 2 factors that I think would be important there, one is the competitive environment and, clearly, how does that evolve, number one. And number two, you've seen our loan-to-deposit ratios today, and they've come down. And so we feel very comfortable from a loan-to-deposit funding perspective, which in turn gives us the ability just to think carefully about how we might price the liability side of the balance sheet going forward. As we do that, it may create opportunities. We'll see, but I think we'll just have to see how the market evolves.The second part, how will the other pieces of that interest income, net interest margin comment that I mentioned earlier on evolve? Again, it's early to say. And as I said, what we've tried to do is give you a picture of how the business in lockdown works and therefore in Q2 but not do too much work about estimating how long that lockdown and the associated social distancing measures will last. What I think is fair to say is that the reason why we're experiencing that pressure in Retail, less spending, for example; the reason why the mortgage market is closed, for example, largely closed; the reason why corporates are drawing on RCFs is all because of the lockdown. As you see the lockdown ease and provided that the social distancing is not too aggressive, if you like, then one should expect to see some alleviation in that pressure. How substantial that is and how quick it is, I think, is very much going to depend upon what the government allows the economy to do and allows people to do. The further point I would make on that net interest income comment is I've talked very much around the 30 to 40 basis points in terms of the margin effect. Just bear in mind there's another piece of the puzzle here, which is around average interest-only assets and what they do in quarter 2. And we've seen some expansion in that regard off the back of the drawing from corporates in particular. We just have to see how that fares in the context of quarter 2. That is an outstanding balance right now. You can see it in the numbers. Whether there is further corporate drawing or not, it's uncertain. I guess it will depend in part upon how the economy fares. That corporate drawing has slowed down in April. I think we have to see whether or not it picks up again at the quarter end in Q2. It may or may not do. So just bear in mind the average interest-only assets at the moment are a little ahead of where they were because of that change in activity.The ECL in cards. I think the one point that I will make on cards without going into too much precision is, as you see the ECL play out over the course of the year, the ECL in respect of the unsecured balances has a relatively linear relationship to the variables that are within the MES. So you would expect to see that has a very -- a relatively linear relationship to unemployment, for example. It also has a relatively short life, which in -- which means in turn that if you have a more protracted economic scenario in regard -- in respect to this recession, i.e., if the recession is more protracted, then you should start to see unsecured play a relatively lesser role in the overall ECL charge, partly because it has a short life. So hopefully, that gives you some context, if you like, as to how it plays out in the context of the charge. And then, Claire, forgive me, but I -- your third question, I didn't note properly or at least I can't read my own handwriting.

[António Mota de Sousa Horta-Osório]

All payment -- payment holiday are still in Stage 1.

[William Leon David Chalmers, CFO & Executive Director]

Yes is the answer, Claire. There is, as you know, a general practice amongst all of the banks that a taking out of a payment holiday in and of itself does not cause a stage deterioration in respect to that asset. Now I should say before being too categoric, if there are other signs that do indeed suggest that there is a impairment in the asset, then now it's treated just as we would normally treat it. It doesn't matter whether there's a payment holiday or not, and it's treated just as we would ordinarily treat it and take it from Stage 1 into Stage 2 in the ordinary course of business. And that isn't changed by payment holidays.

[Operator]

Next question comes from Guy Stebbings, Exane.

[Guy Stebbings, Analyst of Banks]

I have 2, please. Firstly, on risk-weighted assets, we haven't really seen too much negative credit migration as yet, so I'm just trying to understand how much of a headwind that could be for the rest of the year. I know your mortgage book is quite through-the-cycle in terms of modeling, so hopefully that helps. And you've called out the fairly high-risk weight density on your undrawn commercial balances. But if, say, the base case or the downside scenario were to hold true, sort of what expectations are for RWAs over the course of this year? And the second question, on costs. I'm just trying to understand the balance between the headwinds from COVID-19 actions like lower head count reductions, et cetera. With potential flexing in the investment spend. I think you had about GBP 1 billion of discretionary investment spend last year, of which around about 40% of that was expensed. So can we assume a large chunk of that is pulled on? And then there was a quite sizable noncash spend for the regulatory issues last year as well. With some of the regulatory announcements in terms of delays on various model changes, et cetera, does that help much this year? That would be very helpful.

[William Leon David Chalmers, CFO & Executive Director]

Yes, thanks, Guy. Take each of those questions in turn. RWAs, the RWA experience that we have seen in Q1 is nothing to do with procyclicality really, so far. We've seen securitization changes which are regulatory-inspired as of January. That's about GBP 2.3 billion out of the GBP 5.3 billion that we have seen in terms of RWA increase. We've also seen counterparty credit risk and CVA risk. That is market-determined and has impacted every bank, obviously, including ourselves, but because we're a smaller market player, it's probably lesser from a proportional point of view. And then we've seen 1 or 2 things, like the threshold deduction in respect of insurance assets has moved to a risk-weighted asset basis because our CET1 base has expanded. So I guess that's a good thing, but it does increase our RWAs. So that's the RWA picture to date so far in this quarter. The -- moving forward, how do we see it? It obviously depends upon the extent of the downturn. We don't know how long it will be and we don't know how severe it will be, but having said that, we've got a range of models within the business. Those go from through-the-cycle to a hybrid to point in time. As you pointed out, the main mortgage model is through-the-cycle. The -- some of the other retail businesses, rather, retail models are point in time, but importantly, all of those retail models are set to a regulatory calibration of downturn on the loss given default, which in turn makes them less procyclical than they might otherwise be. The commercial business is, as you probably know, built upon a foundation IRB, and that means typically less sensitivity versus other advance models. And if you look at it in the context, as you just said, of the RCFs, it means that we have a weighing for undrawn facilities. And so we're proportionately less impacted by that.Moving on from the models. The other piece of the question on RWA as we look to the year looking forward is what happens with client demand. So far, we've seen Retail contract a little bit. We've seen Commercial Banking build a little bit. We're very much planning to be there for our clients in the context of this downturn. And so we'll just have to see how client demand fares, but you've got a bit of a picture of it, I think, as of the close of Q1. So if you wrap all of that up in terms of the range of models, the client demand, what happens with the downturn, I -- we may see some modest movement in RWAs, but we really don't expect to see it be significant. We don't expect it to be particularly material in the context of the balance sheet as a whole.

[António Mota de Sousa Horta-Osório]

Right. And I will take the question on costs, so to let you know, as you mentioned several of the drivers. So what do we have versus the previous situation and again, as William said, assuming the lockdown situation continues? We have -- on the positive side, we have been supporting customers through the lockdown, as we said on our speeches, in terms of addressing the needs that they have, evolving needs, at pace as they need it. So we have been putting more people to have and processing civil loans. People have been working extra time in terms of designing and implementing the proper products and supporting customers at pace. So that has obviously a cost to us, as we mentioned. And on the other side, we have -- as I mentioned on my speech as well, we have stopped any job losses, which we thought was absolutely the right thing to do in these circumstances and which we will keep. So both of them, versus our previous guidance to you, have additional costs, for the right reasons, to the benefit of our customers and our colleagues. What do you have on the other side? As I have mentioned before and you alluded to it, we have the discretionary investment spend, very significant, GBP 1 billion a year. Again, we are assuming that this lockdown is temporary, and therefore we have taken action in terms of decreasing the discretionary investment spend. And we are assuming at the moment a 2-, 3-month lockdown, so we have decreased the investment spending accordingly and also given the less capacity that we have of implementing change, working from home. So that has a positive impact on costs. And I would remind you that has a full impact on capital because all of the investment spend either cash or even through P&L goes out of capital immediately given it's most intangibles. The second positive point on costs is travel costs, which by definition are decreasing very significantly, and they are important. And the third one is variable pay because as our results, as we showed, go down, obviously variable pay adjusts accordingly. So all of this will, in my opinion, reasonably balance out each other, so you should not have any significant difference to our previous guidance.And a final point I would add is that you know very well our culture of full attention to costs and our track record in this dimension. This will absolutely continue. And I would also add that this is very helpful in the sense that it allows us to have a GBP 2 billion pre-provision profit as a consequence of the low cost of income that we have, which is an additional buffer in terms of the support we are giving to customers and in case adverse scenarios, not our best-case scenarios, indeed materialize.

[William Leon David Chalmers, CFO & Executive Director]

And, Guy, just to pick up on your final question. You asked about regulatory delays in terms of -- I think it was in terms of RWA changes and so forth. We don't expect any regulatory impact on RWAs during the course of this year. We had our initial GBP 2.3 billion in respect to a securitization in January, but on a look-forward basis we don't expect impacts from any regulatory RWA-inspired changes this year. If we look forward beyond 2021, it obviously gets less certain, but I would note the commitment to delay the phasing in of some of the so-called Basel IV changes in the years thereafter. So let's see precisely what comes out of that, but that suggests a fairly benign regulatory view on the RWA environment and a determination on behalf of regulators to ensure that banks do not feel under pressure on an RWA basis going forward. And as I say, certainly for this year we don't see any pressure. For the years ahead, I think we'll just have to see how things evolve.

[Operator]

Next question comes from Edward Firth, KBW.

[Edward Hugo Anson Firth, Analyst]

Yes. By the way, I've just got a very quick one, and apologies if it's a slightly dumb question. But just to be clear on the impairments and the ECL charge, so if your assumptions are correct, your base case is correct, then for the rest of the year, we should assume a quarterly charge of around GBP 300 million to GBP 400 million a year. Is that correct?

[William Leon David Chalmers, CFO & Executive Director]

Okay. I don't want to put precise numbers on it, Ed, so I'm going to be a bit careful in terms of what I say. If we -- I mentioned that the charge was subject to 2 factors. One is any change in base case economics, and the second is the absence of perfect foresight that we have. Your question says let's assume that the first of those 2 is stable, i.e., no change in base case economics. And then what are the perfect foresight issues that come about? And I mentioned 3. One is any change in restructuring cases that we have. Two is progression out of Stage 1 and into Stage 2 and 3 of assets, both corporate and retail. And three is the extent to which government schemes and our assumptions around government schemes, as to their success in mitigating the economic outcome, is correct. Those assumptions are correct. The -- I'm not going to put precise numbers on what we'll see in Q2, Q3, Q4. All I will say is, again, you should not annualize the GBP 1.4 billion, that the GBP 1.4 billion is closer to 50% of the overall charge than it is to 25% but somewhere in between those two, with the point being closer to 50% than it is to 25%. And hopefully, that gives you some idea.

[Operator]

Next question comes from the line of Chris Cant, Autonomous.

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

Two, please. I understand your reluctance to guide on 2020 given the uncertainty around the duration of the lockdown, but perhaps I could invite some comments on the shape of the business longer term given the shift to low rates and the pretty dramatic impact on NIM that you've talked about in 2Q just from the rates piece. So on ROTE, I know you've dropped the guidance, but for 2020 you've talked about 12% to 13%. That included about 1.1% add-back from your amortization, so basically you were looking for an 11% to 12% apples-to-apples ROTE versus peer definitions but with a far more bullish rate outlook than we now see. If we're now stuck in a lower rate environment for the foreseeable future, what do you think the medium-term, say 2022, ROTE looks like for this business? It feels like it could be dipping below 10% as the structural hedge rolls over the coming years. And second question related to that, just trying to think about the NIM development. Throughout 2019, you talked to us about the structural hedging. You told us that about GBP 30 billion of the structural hedge would roll in 2020. Now that we're in 2020, could you please give us a number for how much will roll in 2021?

[William Leon David Chalmers, CFO & Executive Director]

Thanks, Chris. As you say, we're not giving guidance on 2020 because it would imply that we know exactly when this crisis and the lockdown and any social distancing associated with it change or end. Your question as to the shape of the business longer term, 2022 is obviously quite a long way away. I would -- without giving guidance, if you like, as to the expected ROTE at that point, I would say that the business has never been satisfied with sub-cost-of-equity returns, has never been satisfied and has never delivered on a consistent basis sub-cost-of-equity returns absent market aberrations. And I really can't see a scenario where we're in 2022 and that assumption changes. So I think that's probably all I can say in terms of the outlook. The business will adapt to the circumstances that it finds itself in to produce a consistently superior return and certainly one that is above the cost of equity.The NIM development point that you mentioned, the structural hedge question. We've actually taken advantage of some upturn in the markets earlier on in the year to take account of some of that structural hedge roll-off within 2020. So within 2020, as you can see from the slides, we're about GBP 173 billion invested. And we have about GBP 16 billion, 1-6, roll-offs during the course of 2020 having done the action that we took in the course of the first couple of months of this year. So it's down from that GBP 30 billion that you mentioned. It's looking more like GBP 16 billion. I'm not going to give you a roll-off assumption for 2021. I think you have a sense of the profile of both the invested structural hedge and the weighted average life of just shy of 3 years, and I'll kind of leave you to work it out from there.

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

If I could just check on the numbers then. Could you remind us how much of the structural hedge rolled last year? Because I think it was relatively modest in the context of the GBP 170 billion, GBP 180 billion notional, and obviously relatively small numbers rolling this year in the context of the notional given the 3-year duration. So could you just remind us how much rolled last year? And maybe that can help us fill in the gap. It feels to me like quite a large chunk of your hedge rolls next year, noting that it's the first year beyond the GSR3 planning period for which you gave us that resilient NIM guidance, so I do wonder how much the 3-year hedge you put on sort of 2017 is coming off next year.

[William Leon David Chalmers, CFO & Executive Director]

As to how much exactly rolled off last year, I don't have a number in front of me, but we can certainly get back to you on that...

[António Mota de Sousa Horta-Osório]

Yes. And, Chris, I think you should bear in mind that, as you know and we have been very open with you over every quarter when we discuss this, we do this in a dynamic way. And therefore, for example, as William just said, of the GBP 30 billion that we're going to mature this year, we have already rolled in the first 2 months of the year GBP 16 billion of those. And we rolled them to maturities that we thought were the most appropriate given the interest rate environment. And this is just an example. This is a dynamic process, so what needs to mature next year is not necessarily the difference, in terms of your 3 years, from what matured last year and this year because we are doing this dynamically according to circumstances. We are a very big bank operating in the retail and commercial banking space in the U.K., and we think we have an advantage in terms of sterling. And that's why we believe we provide and we can provide our shareholders with a sustainable advantage. By the way, we manage the structural hedge over time instead of just doing it mechanically.

[Operator]

Next question comes from Robin Down, HSBC.

[Robin Down, Co]

I guess this is one of the disadvantages of coming on late, but most of my questions have been answered. But can I just ask you a couple of quick ones? Firstly, in terms of the margin guidance, I -- what are you assuming there in terms of TFSME drawdown? Are you planning on drawing down the full kind of GBP 39 billion? And is the benefit of that kind of almost free money included in that 30 to 40 basis points? And the second question, probably a slightly cheeky one, and I appreciate you probably won't answer this, but if I look at your Slide 18, the economic scenarios that you've got, the base case assumption for 2020 is minus 5% GDP and unemployment at 5.9%. That seems to be the same numbers that you've got in your upside case. And my understanding was that your base case is built on a sort of -- effectively you're kind of looking at sort of probability-weighted versions here, but your base case does seem to be the same as the upside case for 2 of the most important numbers. And I don't really quite understand why that should be.

[William Leon David Chalmers, CFO & Executive Director]

Yes, thank you, Robin. On the first question, TFSME drawdown assumptions, the point that I would make there is that, as you've seen, the loans-to-deposit ratio for the bank is now very healthy at around 103%. So we are seeing a high level of deposits in the current environment come into the bank. That's both from Retail, where we've seen current accounts go up by GBP 3 billion during the quarter. And it is also in the context of commercial, where we've seen them come up by about GBP 15 billion in the quarter. So we're seeing a very healthy deposit inflow into the business, which in turn means our desire or our need, if you like, for further money from TFMSE (sic) [ TFSME ] or any other source really is quite limited. We will be asset-led. I mean that is to say, if our customer needs are such that we need to build upon the balance sheet in Retail or in commercial, then we know that we have the TFSME there and available to fund that at, as you say, relatively low cost. We also will take that into account in terms of our overall wholesale funding strategy, where we have typically annually around a GBP 15 billion, GBP 20 billion need. As I mentioned in my earlier comments, we've taken care of a decent chunk of that in the course of the first quarter. With TFSME there, you would expect us just to be judicious about how much we use in wholesale markets versus how much we use TFSME to fund the balance sheet and ultimately client demand, client and customer demand. So we will take a view on TFSME based upon each of those 2 points, Robin. Your second point, the question is to the upside versus the base case. You're right to point that out, and we have had a discussion with our economists on that particular point and any particular reason why that. I think the key point to bear in mind there, Robin, is the GDP is only one of a number of factors in the overall forecast. And the scenario take account -- takes account, rather, of severity across all of the impairment drivers, whether that is unemployment, whether that is the bank rate, whether that is CRE prices. GDP in isolation is just not the most important driver in every case. And so when you look at the discrepancy between the upside and the base case, it is at least as important to look at some of the other drivers in the context of the comparison as it is in the GDP number.

[Robin Down, Co]

Yes, I totally agree with that. The unemployment rate is one of the key drivers and particularly, as you say -- said earlier, for consumer credit. So I'm just slightly surprised that the base case, if you like, isn't worse than the upside case...

[William Leon David Chalmers, CFO & Executive Director]

Yes, but I think that's because you're looking at it on the year average basis, Robin. So if you actually take the quarterly numbers within the year average, you will see that there is a significant difference within a quarter between the base case and the upside case. I mentioned earlier on, for example, in 2020 base we've got Q2 GDP of down 7.4%, in Q2. We've got unemployment of 7%-plus in Q2. That is not the case in the upside. And so I don't have the quarterly upside in front of me to quote to you now. I'm not sure that I would do if I had them, but there is a difference there within the year, which is hard to see in the current scenarios for the year averages that you have here. The second point that I would make is you also need to look across the years. So don't just look at 2020. One of the points that we've been trying to emphasize in this discussion is, when you look at our IFRS 9 impairment charge, you have to look at '21 as well as '20. And there when you look at base case versus upside, you will start to see some of the differences. GDP, unemployment, for example, in '21, base case versus upside are different. But more importantly, the point at the beginning of the call, when you look at our IFRS 9 assumption, again look at it versus others, so the macro forecasts not just into 2020 but into 2021 as well.

[Operator]

Final question comes from the line of Rohith Chandra-Rajan, Bank of America -- we have no questions.

[António Mota de Sousa Horta-Osório]

Okay. Well, it's time to end our call.

[William Leon David Chalmers, CFO & Executive Director]

Thank you very much to everybody for joining the call.

[António Mota de Sousa Horta-Osório]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, that concludes the Lloyds Banking Group Q1 2020 Interim Management Statement Conference Call.For those of you wishing to review this conference, the replay facility can be accessed by dialing 0800-032-9687 within the U.K., 1 [phone] within the U.S. Or alternatively, use the standard international on 0044-2071-369-233. The access code is 53291055.Thank you for participating. Have a good day.