Lloyds Banking Group PLC

LSE:LLOY

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by, and welcome to the Lloyds Banking Group Q1 2021 Interim Management Statement Call. [Operator Instructions] There will be a presentation by Antonio Horta-Osorio and William Chalmers, followed by a question-and-answer session. [Operator Instructions] Please note, this call is scheduled for 1 hour. I must advise you that this call is being recorded today. I will now hand you over to Antonio Horta-Osorio. Please go ahead, sir.

[Antonio Mota de Sousa Horta-Osorio]

Good morning, everyone. Thank you for joining our Q1 2021 results presentation. I will begin by providing a brief overview of Q1 performance before William will discuss our recent strategic progress and financials in more detail. Turning to Slide 2 of the presentation. We are now more than a year on from the start of the pandemic, and whilst we are starting to see some positive signs, the significant impact on people, businesses and communities in the U.K. and around the world is clear to see. The group remains absolutely focused on supporting all of its customers and on Helping Britain Recover from the financial effects of the pandemic. And we are continuing to support our customers and businesses across the group. For example, through payment holidays and government-backed loans whilst maintaining the excellent customer satisfaction scores, we spoke to you about with our full year results, which are the highest in the last 10 years. Our colleagues across the group continue to demonstrate extraordinary resilience and dedication, supporting our customers and communities in these very difficult circumstances. And I would like to thank them again for it. And in what continues to be a challenging environment, we have seen good momentum and encouraging franchise growth in the first quarter of 2021. Both NIM and AIEAs are up versus Q4 2020 and are better than our expectations, with NII up 2% when adjusted for the number of days whilst our continued cost discipline means total costs were down 2%, with operating costs down 1% year-on-year. Given our prudent low-risk business model and the success of the measures put in place by the government, regulators and the banking sector, the underlying asset quality of our different portfolios has remained strong with credit experience benign. Although uncertainty remains, the U.K. economy is performing better than expected on the back of a very successful vaccination program. As a result, we have seen an improvement to our economic outlook, predominantly in unemployment and HPI expectations, which has resulted in an impairment release of GBP 459 million, which, together with the positive behavior of the underlying asset quality has produced an impairment credits in the income statement in Q1 of GBP 323 million. William will talk more about this later. Relating to the balance sheet. We have continued to take advantage of the strong mortgage markets with GBP 6 billion open book growth during Q1. We are now seeing growth for the third consecutive quarter in a market where economics have improved substantially. Retail deposits were up more than GBP 9 billion in the quarter, including current account growth of GBP 5.6 billion, demonstrating again the strength of the franchise. Another area of strength has been our capital build. And during the quarter, our CET1 ratio increased to 16.7%. And our strong capital base remains significantly above both our ongoing internal capital target of circa 15.5%, and our regulatory capital requirement of around 11%. Regarding strategic review 2021 launched in February, we are already making good progress across a number of areas. Our clear execution outcomes for 2021, underpinned by long-term strategic vision, positioned the group well for future success. William will further elaborate on this. Finally, given the trends we have seen and reflecting the solid business momentum, we are today enhancing our overall guidance for 2021. I will now hand over to William, who will run you through the new guidance, the financials and the strategic review 2021 progress in more detail.

[William Leon David Chalmers, CFO & Executive Director]

Thank you, Antonio, and good morning, everyone. I will run through the Q1 results, including a brief update on the strategic review 2021 before opening up for Q&A. Turning first to Slide 4 with an overview of the financials. Net income of GBP 3.7 billion is down 7% year-on-year, given lower rates, but an increase of 2% versus the last quarter of 2020. NII was flat quarter-on-quarter. But if adjusted for day count, it would actually be up 2%. In particular, both NIM and average interest-earning assets were ahead of our expectations. In a challenging environment, the group continued to demonstrate cost discipline, with total costs down 2% year-on-year. Pre-provision operating profit of GBP 1.7 billion was down 12% year-on-year, but up 21% compared to Q4, given the increased income, lower costs. Asset quality remains strong with underlying credit experience benign. The improved economic outlook has driven a provisions release of GBP 459 million, resulting in a Q1 impairment credit of GBP 323 million. Statutory profit before tax of GBP 1.9 billion was up significantly both year-on-year and versus Q4. TNAV was stable compared to Q4 at 52.4p per share, with profits offset by cash flow hedge reserve movements driven by the upward shift in interest rates in the quarter. Meanwhile, the group's capital position remains very strong with a CET1 ratio of 16.7%, after 54 basis points of capital build in the quarter. Now turning to Slide 5 to look at our Strategic Review 2021 progress so far. As you know, in February, we launched the next evolution of our strategy. Our Strategic Review 2021 is a combination of clear execution outcomes for the coming year, underpinned by long-term strategic vision and supported by significant strategic investments. It is very early days, but in Q1, we have delivered progress against a number of our priorities. In Helping Britain Recover, we have made meaningful progress across all 5 of our priority areas that are embedded in our business ambitions. Achievement to date includes launching the Pay As You Grow and our Recovery Loan Scheme to support clients through the next stage of their recovery where required. We've also lent nearly GBP 4 billion to first-time buyers in the first quarter of 2021. We joined as a founding member of the Net Zero Banking Alliance as part of our commitment to help accelerate the transition to a low-carbon economy and to achieve our net zero by 2050 ambitions. Our customer ambition is focused on further business alignment to help unlock coordinated growth opportunities across our core customer needs. In Q1, in that respect, we've built upon group connectivity of our insurance and wealth franchise by significantly increasing Schroders Personal Wealth introductions and by launching a new Halifax-branded protection products, the latter increasing direct-to-site volumes by 25% year-on-year. For our commercial clients, we have launched new and exciting propositions in line with our investment focus on increasing digitization while also building out product delivery functions. Examples of this are outlined on the slide. Finally, and as outlined at full year, we are investing in our core capabilities to enable sustainable success in the new environment, technology, data, payments and our people. We are encouraged by the progress we're making, and we'll provide further updates on these areas in more detail over the remainder of this year. I'll now turn to Slide 6 and look at how the group's customer franchise performed in Q1. Open mortgage balances were up GBP 6 billion in the quarter, building on the trends that we saw in Q4. Given the continuing strength of activity levels, we expect further open book growth in Q2 with a somewhat slower pace thereafter in H2. As expected, given the continued social restrictions during the quarter, consumer finance balances were down GBP 0.8 billion to GBP 36.2 billion. Modest growth in motor was more than offset by the reduction in the credit card and unsecured loan books. In commercial, balances were broadly in line with December, a small pickup in SME balances was partially offset by continued optimization in large corporates. Given the strong mortgage volume seen to date and assuming a gradual pickup in unsecured balances in H2, in line with our macroeconomic assumptions, we now expect low single-digit percentage growth in average interest-earning assets this year. Once again, retail deposits were a strong growth area, up more than GBP 9 billion in the quarter, including current account growth of GBP 5.6 billion. This continues to demonstrate the strength of the franchise in what is a still subdued environment. In commercial, we continue to see a small tick up in SME and mid-corporate deposits, whilst large corporate balances have stayed relatively stable. Now turning to income on Slide 7. As I said earlier, Q1 NII of GBP 2.7 billion was in line with Q4. Both net interest margin and average interest-earning assets were ahead of our expectations. Q1 margin of 249 basis points was up 3 basis points on Q4, benefiting from continued optimization activity in the commercial book, strong customer inflows and liability management benefits. Lower structural hedge net interest income was largely offset by the strong mortgage book growth at attractive margins. Mortgage growth was also the primary driver of the AIEA growth in the quarter. Following the increase in the structural hedge capacity at the end of 2020 and in the context of favorable yield curve movements during the first quarter of 2021, we have both reinvested and increased the notional balance of the hedge by GBP 21 billion to GBP 207 billion. The group's structural hedge capacity has since been further increased to GBP 225 billion, capturing a part of the deposit growth observed in 2020 and reflecting continued success in attracting current account balances. We continue to take a conservative view on eligible balances for the hedge. Consistent with recent investments, the weighted average life of the hedge has now increased to around 3.5 years, that's up from around 2.5 years in 2020. Given the positive yield curve impact on reinvestment and the increase in hedge size since year-end, we now expect hedge earnings in 2021 to be stronger than previously estimated. The headwind we expect now is circa GBP 300 million compared to 2020. Based on current market rates, we now do not expect to see a headwind from the hedge in 2022 and only a modest headwind in 2023. With the benefit of the developments in Q1 and the improved yield curve environment, we've upgraded our guidance in this area. We now expect the net interest margin to be in excess of 245 basis points for 2021. Other income across all divisions continue to be impacted by the lockdown restrictions in the U.K., will be it up 6% on Q4 given the nonrecurrence of negative insurance assumptions. We continue to expect other income to gradually recover in the second half of the year as activity returns. We also continue to invest in income diversification opportunities over the medium term. Q1 operating lease depreciation was impacted by lower fleet volumes. Q1 charge also included a circa GBP 30 million benefit from the more resilient used car price outlook given recent trends. Let's now look at costs on the next slide. Our focus on efficiency and cost discipline continues to provide competitive advantage and remains fundamental to our business model. In Q1, total costs were down 2%, with a reduction in both operating costs of 1% and remediation costs of 25% versus Q1 2020. Looking forward on remediation costs, the quarterly run rate equivalent is likely to be somewhat higher than Q1. Following the successful start to Strategic Review 2021, Q1 included a GBP 0.2 billion strategic investment spend on track for our target of GBP 0.9 billion in the year. Looking forward, we continue to expect full year costs to be lower than 2020 at circa GBP 7.5 billion. That's despite COVID-related headwinds and expected increased variable remuneration costs. Now turning to Slide 9 to look at impairment. Asset quality remained strong, and the observed credit experience in Q1 continues to be very stable. Retail credit experience remains benign and in line with pre-COVID levels. In commercial, we've seen a release in the quarter given improved outcomes on restructuring cases, lower defaults and reduced balance sheet exposures. Furthermore, the macroeconomic outlook has improved since year-end. The vaccine rollout in the U.K. and additional government support announced in the spring budget results in positive shifts in our economic assumptions. This implies peak unemployment now 1% lower at 7% versus 8% previously, and HPI now expected to reduce by circa 1% in 2021 versus circa 4% previously, both compared to our Q4 base case. The improvement in the macroeconomic outlook resulted in a GBP 459 million provision release in Q1. Together, the benign underlying environment and macro improvement results in a net credit of GBP 323 million for impairment in our income statement. Our total ECL provision of GBP 6.2 billion remains around GBP 2 billion higher than at the end of 2019. Given uncertainties continue, we have increased COVID-related management judgments ECL by around GBP 100 million to circa GBP 1 billion, consistent with our approach at the year-end. This includes the GBP 400 million overlay we took in Q4, given the high level of uncertainty in the current environment, such as risk of virus mutations, and the impact of the coronavirus to our retention scheme when it's removed. It also includes circa GBP 600 million held in retail and commercial, largely to recognize the absence of losses that we would have expected to see had support schemes not been in place during the pandemic. The updated economic outlook has resulted in a modest reduction in coverage, which nonetheless remains conservative and well above December 2019 levels or 1.2% of total lending and 27.1% on Stage 3 assets. Given the update this quarter, we now expect the full year 2021 net asset quality ratio to be below 25 basis points, low needless to say, uncertainty remains on the outlook. Now turning to the next slide to look more closely at credit quality performance. Credit quality remained strong across the book with both retail and commercial portfolios performing well. In retail, we continue to see low new to arrears levels across the business at or below pre-crisis levels. Notably, this is despite the vast majority of payment holidays now ending. 95% of all retail payment holidays have now fully matured, 94% of these customers resuming payments. Of the remaining 6% in arrears, roughly half of those were already in arrears before the payment holiday was granted. Within the commercial portfolio, our exposure to the sector most impacted by coronavirus continues to remain modest at around 2% of group lending. Indeed, excluding government-backed lending through the CBILS and BBLs programs, which, as you know, is leverage exposure given the guarantee, we have actually seen a net reduction in drawn lending across a majority of key coronavirus-impacted sectors when compared to March 2020. Circa 70% of commercial banking exposure is at investment grade. Investment-grade percentage of key coronavirus-impacted sectors remains unchanged from the end-of-year position at 38%. Meanwhile, across the portfolio, our new to business support unit volumes remain in line with precrisis levels. Looking forward, we do expect new to arrears levels to increase later in 2021, consistent with our economic outlook, as support measures subside and unemployment increases. We are well provisioned for this. I'll now move on to Slide 11 to look at below-the-line items. Restructuring costs in Q1 were up year-on-year, largely driven by increased severance costs and R&D technology costs. Volatility and other items are down both year-on-year and compared to Q4, benefiting from positive insurance gains. Both statutory profit before tax and statutory return on tangible equity are up year-on-year and compared to Q4, somewhat helped by the impairment credit. Following the announcement in the spring budget that the corporation taxes to increase to 25% from 2023, we will see a circa GBP 1 billion P&L tax credit and the revaluation of our deferred tax asset at the point this change [ an act in the ] law. This is expected to be in Q3 of this year. Given the improved outlook for both NIM and AQR, we now expect 2021 full year statutory RoTE be between 8% and 10%, excluding a circa 2.5 percentage point benefit from the tax credit that I've just outlined. Moving to RWAs and capital on Slide 12. Risk-weighted assets reduced GBP 3.8 billion in the quarter, largely driven by continued optimization in commercial with limited credit migration seen to date. In 2021, we continue to expect RWA to be broadly stable on 2020. As we look forward into 2022, RWA inflation will impact from regulatory change, starting on the 1st of January 2022. Looking at our capital, our CET1 ratio increased to 16.7% with 54 basis points of capital billed in the quarter, benefiting from 31 basis points of RWA reduction. Our strong capital base remains significantly above both our ongoing internal capital target of circa 13.5%, and our regulatory capital requirements of around 11%. The CET1 ratio includes circa 50 basis points from the change in treatment of software intangibles. Following the PRA statement that they intend to appeal the revised treatment in 2021 and revert to the original full production, we do expect this benefit to reverse out of CET1, potentially as early as Q2. CET1 also continues to benefit from 91 basis points of IFRS 9 transitional relief compared to 115 basis points at December 2020. If our macro assumptions are correct, this relief will run off across 2021 and '22, albeit precise timing remains uncertain. Even excluding both of these elements, CET1 remained strong at circa 15.3%. In the quarter, we accrued 5 basis points in respect to dividends in line with the 2020 payout and consistent with regulatory guidance. As previously outlined, we will update the market on interim dividend payments with the half year results when we have received greater clarity on distributions from the regulator. The Board remains committed to future capital returns and, in 2021, intend to resume our progressive and sustainable ordinary dividend policy at a dividend level higher than the 2020 level. Finally, moving to Slide 13 to conclude. To summarize, we have supported customers since the start of the pandemic, and we will continue to support them throughout the recovery period. We will deliver across our Helping Britain Recover focus areas and contribute to the transition to a more sustainable and inclusive society. We have seen solid financial performance in Q1 as the business continues to deliver with balance sheet momentum and income growth versus Q4. We have also continued to build our strong capital position with a CET1 ratio of 16.7%. Strategic Review 2021 is underway, and it's delivering momentum on key initiatives. During the remainder of the year, we will continue to build opportunities across our core business areas, on retail, insurance and wealth and commercial banking. This will create sustainable shareholder value through revenue generation and diversification, disciplined growth and further efficiency gains, whilst delivering for our customers and for our colleagues. All of these initiatives will support our trajectory to a medium-term statutory RoTE in excess of our cost of equity. Looking at our 2021 guidance. We now expect net interest margin to be in excess of 245 basis points. We continue to expect operating costs to reduce to circa GBP 7.5 billion. We now expect the net asset quality ratio to be below 25 basis points. We continue to expect RWA to be broadly stable on 2020. Given these upgrades, we now also expect statutory RoTE to be between 8% and 10%, excluding circa 2.5 percentage points benefit on the anticipated tax rate changes. With that, I will conclude the financials. Before we move to Q&A, as you know, this is Antonio's last set of results. I'd like to take this opportunity to thank him on behalf of the Board and on behalf of the group. His contribution to our business over the last decade has been extraordinary. I personally have benefited greatly from his experience and guidance during the time I have worked with him. More importantly, the group has benefited hugely from Antonio's leadership both in telling you that for success and allowing it to make the contribution that it does to the U.K. today. I'm sure I speak for all stakeholders in saying thank you and wishing Antonio continued success as he moves on to his next role. Thank you for listening. And we'll now open up Q&A.

[Antonio Mota de Sousa Horta-Osorio]

Thank you, William.

[Operator]

[Operator Instructions] We will now take our first question from Joseph Dickerson from Jefferies.

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

Also echo, Antonio, William's sentiments and wish you the best in your new role starting next week. I guess I had a couple of questions.

[Antonio Mota de Sousa Horta-Osorio]

Thanks a lot, Joe.

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

Pleasure. The -- just a couple of questions on the management overlay of GBP 1 billion and the provisioning more generally. First of all, what are the things you would need to see to start to release out of that GBP 1 billion to a further extent? And then secondly, how sensitive is the underlying provisioning to house price changes? Because I know that in your base case, you've got about 80 basis points decline this year. And I think the land registry is showing growth of closer to 9%. So I was trying to square that, so that's provisions. And then lastly, on Slide 7, you show a 2 basis point quarter-on-quarter benefit to NIM from "funding and capital." And I'm just wondering if there are still legacy instruments that you can call on the capital side to help continue to drive that sort of benefit to NIM in the near term?

[Antonio Mota de Sousa Horta-Osorio]

Yes. Thank you, Joe.

[William Leon David Chalmers, CFO & Executive Director]

The first of your questions relating to the management overlay. As you point out, we have COVID-related management judgments in the ECL of around GBP 1 billion. That is composed of 2 components. One is the GBP 400 million, what I call conditioning assumptions insurance overlay, I suppose. The second is a further overlay COVID management judgment-related overlay of GBP 600 million. And that relates to provisions that we have taken against both the retail and the commercial book to take account of losses that we would have expected to see, but for government further schemes and other forms of assistance in place. As we look at that going forward, Joe, the GBP 400 million, first of all, we have conditioning assumptions, which essentially are setting the underpins for our base case based upon vaccine progress being in line with government expectations, based on reopening being in line with government guidance. And based upon furlough and governance support being in place as the plans have been indicated, including the extensions that were talked about at the budget. So our conditioning assumption, there's a number of conditional assumptions, but those are 3 of the most important. We've taken the GBP 400 million conditioning assumptions, management judgment to ensure ourselves, if you like, against any of those going wrong, whether it be by vaccine -- mutations, whether it be by a slower rate process than we had first forecast. I think, therefore, Joe, in respect to the GBP 400 million, as we see those conditioning assumptions getting hopefully confirmed as we roll through the course of the summer, then we'll take another look at those at that GBP 400 million management judgment in respect of those assumptions. With respect to the GBP 600 million, as I said, that is a management judgment additional overlay that has been taken into account for provisions that would have expected to see, but for the various assistance programs, payment holidays and furlough being foremost amongst them. Therefore, as we see the results of the furlough program as it rolls off, during the course of the autumn, probably going into the third and fourth quarters of this year, possibly into next, we'll take another look at that GBP 600 million and see whether or not our assumptions play out and consider the GBP 600 million and its placement accordingly. With respect to HPI, the -- we don't update them on a quarterly basis but I'll just refer you back to the year-end sensitivities that we gave on HPI, which both show HPI down, the sensitivity given there was if HPI fell by a further 10%, the incremental impact would have been about GBP 280 million or thereabouts. And it's not quite symmetrical, if you look at it from the upside perspective, but it won't be too far off. So I would take a look at those assumptions as of year-end. As I say, bear in mind that we don't update on a quarterly basis for those sensitivities. And then finally, with respect to funding and capital, Joe, we have, as you say, received ton of benefits. One point that I'd like to make there actually is that the funding benefits that we're enjoying are in part because of the strength of the retail deposit inflow that we have seen. You've seen GBP 12 billion in this quarter, you saw GBP 40 billion during the course of 2019 -- sorry, 2020, excuse me. And that is allowing us to effectively fund the business relatively more cheaply than we have historically and indeed, better than our expectations. And so you're seeing some funding benefits flowing through from that. And we would expect that to largely continue through the course of 2021. As regards legacy instruments, there are -- there's always something further that you can do on legacy instruments for sure. But we did undertake activity, as we pointed out, as of the tail end of last year, we are getting through that. As I say, there are always bits and pieces more that you could do, but I would expect those to gradually tail off over time.

[Operator]

We will now take our next question from Omar Keenan from Crédit Suisse.

[Omar Keenan, Research Analyst]

I just wanted to ask a question on the revision of the average interest-earning asset guidance to low single-digit growth. I was wondering perhaps if you could elaborate on your thinking here, are we just seeing a temporary lift from the budget measures and mortgages that is helping 2021? Or do you think that there are other more permanent factors that have changed structurally in the housing market, for example, that might inform us beyond 2021? On the related question, just on the consumer unsecured balances and consumer behavior, which I guess is quite a big topic of debate with investors, especially with high savings levels, I was hoping you could offer your thoughts here on any clues you've seen so far in the very short time, hospitality and nonessential retail has been opened that can help us think about what a modest recovery in the second half can look like.

[William Leon David Chalmers, CFO & Executive Director]

Thanks, Omar. In respect to AIEAs, as you say, we have both experienced a decent Q1 in that respect. AIEAs went to GBP 439.4 billion, as you saw, from GBP 436.9 billion at the end of Q4, so an increase of roughly GBP 2.5 billion. That's obviously very welcome, it's driven by a number of factors, but principally the mortgage growth that we've seen in the course of the first quarter. Looking forward to the remainder of 2021, first of all, we expect to see several elements of the AIEA picture continue into Q2 and beyond into H2 2021. Most obviously, that's the mortgage market where we continue to see strength in Q2. And indeed, we would expect continued mortgage growth into H2 of '21 because we think there are structural factors behind that growth in the mortgage market in addition to some of the more typical factors that we're currently benefiting from. Likewise, in the second half of H2, we would expect the opening up of the economy to lead to a gradual expansion of the unsecured balance, although clearly, that would be activity dependent. And also depend upon the extent to which our customers choose to use deposits versus going to credit. But overall, those are 2 positive factors for the growth in AIEAs in the second half of 2021. I think looking forward, beyond that, I won't give any official guidance as it were, but a couple of thoughts to put into the mix. First of all, as I said, we do think the mortgage market is driven by structural factors. It's driven, for example, by people's preference about where they live. It's also driven, I think it's fair to say, by low rates as well. And therefore, mortgages being relatively more affordable than it might be at other circumstances. Likewise, if you look at other areas of our balance sheet, we do expect the macro growth to continue in 2022. You'll have seen our economics this morning that we expect 5% growth in GDP in 2022, which is a better pattern of growth going forward. And we would expect some form of balance sheet expansion in our business to be reflected, therefore, unsecured, most obviously, the spend pattern starts to pick up, and the macro growth continues. And likewise, over time, we'd expect that to feed through across all of the business lines. So I think, Omar, there are some factors that are structural by nature and certainly encouraged by macroeconomic developments, that we think are encouraging from an AIEA growth perspective. But we have to see how that pans out over the course of this year, and we'll obviously be updating you accordingly.

[Omar Keenan, Research Analyst]

That's wonderful.

[William Leon David Chalmers, CFO & Executive Director]

As [indiscernible] your question, Omar, you asked about spend. The spend trends are pretty encouraging so far. We have seen through the course of the first quarter improvements from January through to March, and those improvements are continuing in the context of April's figures. If we look back at the comparison with 2019, the spend figures for the -- what I said about the second week in April to Wednesday, the 21st, second or third week in April to Wednesday, 21st. And shows increasing spend by about 21% over 2019. But it's worth pointing out that, that is positive, plus 27% within debit card spend and relative to 2019, negative 12% versus 2019 credit card spend. We do expect that over time, as airlines, hotels, travel, that sort of thing picks up, that credit card spend is going to grow accordingly. And that's really what we're waiting for. So positive developments on the spend picture, Omar, and that's obviously encouraging.

[Operator]

We will now take our next question from Raul Sinha from JPMorgan.

[Raul Sinha, Analyst]

Antonio, thanks for everything over the past decade, especially the healthy debate, and I wish you the best in your next role. I've got 2 questions, please. The first one is just -- I was wondering if you can unpack a little bit of the NIM guidance upgrade today for us. You give us a sense of how much of your increased view on the NIM reflects the structural hedging changes that you've made in terms of both the increase in the size of the hedge in the capacity versus how much relates to a more positive view of consumer spending in the second half of the year? I'm just trying to understand what are you assuming in terms of consumer spend in the second half of the year within the sort of NIM guidance. And then I've got a second one, please, on the dividend.

[William Leon David Chalmers, CFO & Executive Director]

Sure. Sure, I'll just take the first one first and, Raul, then we can go in the second. The margin outlook -- as you say, first of all, Q1 has been a relatively benign development in the margin. We've gone from 246 at the end of last year to 249 at the end of this quarter. And that's being driven by headwinds, which won't surprise you, include the structural hedge, include also unsecured balances but also tailwinds, as I outlined in my comments earlier on around commercial banking, around funding, as we discussed earlier, and around some liability management capital benefits. Those benefits stay with us as we look forward. There are 1 or 2 other factors that come into play as we look forward, Raul. From a tailwind perspective, the structural hedge headwind that we have previously seen, as I mentioned in my comments, that structural hedge drag has been reduced significantly by the yield curve improvements that we've seen during the first quarter. And that is clearly a benefit. In terms of the headwinds that we see, it's interesting because they're actually very benign from a net interest income point of view, albeit a little dilutive from a margin point of view. So for example, mortgages volume is benign from an interest income point of view, but slightly dilutive to margin. Likewise, we see some expansion in commercial banking, both RCF and also trade finance balances. And finally, expansion in unsecured, as I mentioned earlier on, which more or less gets us back to where we ended the year in 2020 as we see it unfolding. But we're expanding unsecured at very high levels of the credit spectrum, i.e., very cautious credit standards, which in turn is a slightly more dilutive measure than you might have first think. So all of that gives us our guidance for margin in the remainder of 2021, Raul, and hopefully, that's useful. Consumer spend, I think, we see that as unfolding along the lines as I mentioned earlier on, continuing to grow, in particular, I would expect the opening up measures. And in particular, things like travel, hotels, airlines, that sort of thing, to lead to greater credit card expenditures over time. And obviously, a part of that is going to stay on the balance sheet. And a part of that is margin accretion. So hopefully, that gives you some sense, Raul.

[Raul Sinha, Analyst]

Got it. I guess the second one is just around what we should be expecting in terms of the interim stage on the dividends. And I don't know if I'm reading too much into this, but it sounds like we might get more than the sort of usual interim sort of update on the dividends. Are you expecting the PRA to talk about sort of broader capital restrictions and perhaps should we expect that you might be able to address some of the surplus capital position at the interim stage? Or should we be waiting until the end of the year for this?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Thanks for the question, Raul. On dividend, as you know, we did the most that we could with respect to 2020, that was a regulatory determined standard. We do, as I've said a number of times before, continues to be the case. We recognize the importance of dividends and capital distribution more generally to shareholders. And we also obviously note our strong capital position in that respect. And that will lead us, Raul, to both intend to accrue dividends and also to pay an interim dividend in line with the position that we see at the time. To your question, we are waiting for the regulator to take a view on allowable dividends for the sector as a whole. We very much hope that the regulator will allow the Board to make the judgment that they would like to make and that the restrictions that have previously been in place are no longer seemed to be necessary. So our expectation is that by the time we get to the half year, we will have a better view on that. We're clearly looking out to see what the PRA says. And in subject to that, we'll look at the interim dividend, again, at the end of the year, we'll also look at the final dividend in the context of the macro, the outlook, the capital position and clearly what the regulator says. But full in the context of, as I say, recognizing the importance of dividends and capital distribution to shareholders.

[Operator]

We will now take our next question from Jonathan Pierce from Numis.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

And again, to repeat, good wishes to Antonio. Good set numbers to leave on these. The 2 questions I've got -- of course. And the 2 questions I've got focus on, I guess, start with the structural hedge where suppose a degree of the margin improvement of guidance improvement is coming from. And then I've got a question on operating lease depreciation. On the hedge, maybe you could give us a bit of color on how you scale the approved capacity of the hedge. You've said that there's a GBP 225 billion approved capacity today, but that's only reflecting part of the liability growth over the last year. So do you do what I think that West does and look at the last 12-month average deposit base. So over the next 6, 12 months, we'll get some further rolling through of that averaging effect and the improved capacity will just naturally increase further. So I'm just trying to get a sense as to what the capacity of this hedge could move to based on the spot deposit base today, that would be helpful. And the second question on operating lease depreciation. Last few quarters now ex the profits on the car sales, we've been running at an annualized, probably GBP 700 million, GBP 750 million a year. And that's a lot lower than the GBP 1 billion number we've got used to historically. And is that a sensible base now to be thinking of driven almost purely by the size of the Lex fleet? And hence, that overall operating lease depreciation [ close ] to the GBP 700-odd million moving forwards.

[Antonio Mota de Sousa Horta-Osorio]

Yes. Yes. Thanks.

[William Leon David Chalmers, CFO & Executive Director]

Just if I take the first of those questions first around scaling of the hedge. When we look at the hedge, it's interesting -- of course of the last 5 quarters, our hedgeable deposits have moved from around GBP 200 billion to around GBP 254 billion, so an increase of roughly GBP 55 billion over the course of that time. At the same time, our hedge capacity has gone from around GBP 190 million to around GBP 225 million. And so effectively, the cushion has increased by circa GBP 20 billion during that time. Now normally, we'd expect to run with about a GBP 10 billion cushion i.e., the difference between hedge capacity and hedgeable deposits. Right now, because of the growth last year, we're running with a cushion that was actually trebled from that to around GBP 30 billion or so. And we are waiting to see how those deposits behave over the course of a macroeconomic expansion. And the watch word right now, if you like, is just to look at those balances and to be cautious about how they might respond in the context of a macroeconomic expansion, and therefore, significantly increased the buffer. That gives us the opportunity if those deposits end up being sticky, we do expect that some of them will be to accommodate the hedge accordingly during the remainder of this year. But we're kind of waiting to see, Jonathan, as we see how our 2021 unfolds. The second point is around hedge deployment, which, obviously, when we increase the capacity of the hedges, we just have done to GBP 225 billion, it takes us a little bit of time to deploy that in the course of the year. So we will see the benefits of that increased hedge capacity as we deploy the hedge over the course of the year. It will be gradually deployed into the market in an orderly way. And therefore, our headwind or reduced headwind, gives you some sense of how we expect that to see play out. Second of your question, operating lease depreciation, Jonathan, the operating lease depreciation as I mentioned in my comments, has seen a benefit of around GBP 30 million this quarter from improved used car prices. As we look forward, I would take the quarter 1 operating lease appreciation, take that GBP 30 million, which I mentioned in my comments and just adjust accordingly. And you'll see, relative to previous years, an improved performance, as you say. And that is partly because the size of the fleet is going down. And it's also partly because, as I say, we've taken a cautious view on used car prices. We're not seeing that unfold in a negative way as we had expected. And therefore, that is coming back on to the operating lease depreciation in any given quarter, including Q1.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Okay. That's really helpful, both of those answers. Can I say a very quick follow-up on the hedge because I think this is quite important, these new deposits that are getting deployed, because a lot of them are current accounts? Can I just confirm you're still comfortable putting those out up to 10 years forward because you have got such a big cushion. You're quite happy to still be deploying those at 10 years, is that right?

[William Leon David Chalmers, CFO & Executive Director]

Well, I think I'd say it slightly differently, actually, Jonathan. As I say, in the last 5 quarters, we've basically seen deposit inflows of close to GBP 55 billion. We have increased hedge capacity but only increased it by GBP 35 billion, and thereby significantly increased the cushion that we have of, if you like, deposit flows over hedged capacity. And so actually, I think we're taking a very prudent and cautious view with respect to the movement or potential movement of current accounts. And as I say, that's expressed by the increase in buffer that I just talked through. So when we look at the hedge, we're typically deploying the hedge by way of background at around the 5-year part of the curve. That's typically where we go. That's consistent with our asset side and consistent with roughly moving towards a neutral position from a hedge perspective. But I think we are being extremely prudent with respect to the rate at which we deploy in the deposits and indeed, leaving ourselves a lot of room for even a very, very substantial macro expansion. Before we need to worry about the hedge side.

[Antonio Mota de Sousa Horta-Osorio]

And Jonathan, just to build on what William just said. So you will see we are still below the weighted average life that 100% hedge position would be. And as William just said, we are mostly investing these additional deposits, these current account balances on the 5 years because of the reasons William explained, but also because we do believe that there is a significant probability the curve will steepen further. While we think from the comments that you are hearing from the different central banks around the world that they will not move short-term rates and therefore, there is a significant probability that the curve might steepen further. And we think that also for that reason, the 5 years is the right way to invest these additional balances.

[Jonathan Richard Kuczynski Pierce, Research Analyst]

That's actually really helpful.

[William Leon David Chalmers, CFO & Executive Director]

Perhaps also worth mentioning, Jonathan, in response to your question. We have around GBP 40 billion of maturities this year in the hedge. So again, we've taken an incredibly prudent position vis-à-vis the cushion of the hedge, our eligible deposits have increased much faster than our hedge capacity, number one. Number two, in addition to that, we have GBP 40 billion of maturities in the hedge this year. So it's really quite substantial with buffer.

[Operator]

We will now take our next question from Robin Down from HSBC.

[Robin Down, Co]

I have to confess that Jonathan asked most of the questions I was going to -- I'm going to ask them in terms of that structural hedge. So can I just clarify then, are you -- your GBP 300 million, you're assuming then that you deploy the hedge up to it to kind of full capacity to be GBP 225 billion. I mean it looked like a [ tentative ] quarter to deploy that sort of amount in the first quarter. But that is what you're assuming there. And just sort of linked on the margin side, I was wondering if you could talk a little bit more about the commercial banking side and the sort of optimization that's going on there. I kind of see -- it sounded kind of 2 basis points in the first quarter. Just how much more you've got to go on that front? And if I could be really cheeky, and I appreciate we're only in kind of April 2021, but I think you're signaling that the drag from the structural hedge in 2022 is going to be kind of minimal. That's obviously one of the major negatives in terms of the margin development. I just wonder if you could talk a little bit about how you see margins developing then in 2022? Because I think with rising consumer credit balance and assuming we've got further deployment of the structural hedge coming through, is there any reason why we shouldn't be looking for a relatively stable margin picture in 2022 versus 2021?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Thanks, Rob. First of all, in terms of the deployment of the hedge. In our guidance, around the GBP 300 million headwind in 2021, we are assuming that we gradually deploy that hedge capacity over the course of the year. So that takes into account, as I say, just an orderly deployment over the course of the year as opposed to doing it all upfront. Secondly, in terms of the CB optimization question, there's a couple of different things going on there. One is, as you know, we have a business here which is very strong. But we also want to manage it to appropriate return standards. And so as a result, there are clearly going to be some relationships where it's harder for us to earn a sensible return that makes sense from a shareholder point of view than others. And so with respect to those assets, those relationships, we just seek to manage them in a sensible and appropriate way. And that's really what we mean by optimization. There is also a pattern to this that is partly responsible for some of the margin development, which is around lower performance of demand, particularly in the RTF area. And as you know, that was a feature of our 2020 results and margin development, and that contributes a little bit here. And then finally, the demand from a commercial point of view is relatively muted. In some cases, that's because of the government assistance programs. And so that has some margin substitution effect in terms of what we're seeing within CB. In terms of 2022, I won't go into guidance on the margin per se, but I think you probably have all of the factors that will make a difference during that time. The hedge headwind is, as I said, neutral during 2022. We don't expect a hedge headwind during that time and that's because of the yield co-developments that we have seen. There will be other factors that play in the margin in 2022, which include obviously continued mortgage growth. On the one hand, also include unsecured expansion, I would expect on the back of an improving macro as a further element. Those elements will play out in the context of margin development, Robin. So I wouldn't go beyond that, but you probably have the ingredients to get to a conclusion.

[Robin Down, Co]

Sorry, just to come back on the commercial banking side. So some of it was due to the RCF. I guess, hopefully, kind of at the end of that. How much more optimization do you think there is to know for over the next couple of quarters?

[William Leon David Chalmers, CFO & Executive Director]

I think there is very little. Yes. I mean there is very little. I think it's best seen in the context of the inputs to the margin guidance for the remainder of the year, Robin, really. And that is to say, as I said earlier on, tailwinds, we have the removal of what we previously expected as a significant structural hedge drag. That seems to be going away, following on from the benign yield curve developments. We have headwinds from size of the mortgage volumes to a degree also from the return of some activity on commercial banking front, including things like trade finance balances and so forth. So on a net basis, if you look at the commercial banking influence on the margin over the remainder of 2021, it's more actually from expansion than it is actually from contraction. And so that hopefully answers your question.

[Operator]

We will now take our next question from Alvaro Ruiz de Alda from Morgan Stanley.

[Alvaro Ruiz de Alda, Strategist]

This is Alvaro from credit research and Morgan Stanley. I have a question about your legacy Tier 1, the 12% U.S. dollar bond. As you know, this will be expensive funding after the end of this year. Considering the very high cost of living this useless debt outstanding, are you expecting to use the regulatory par call in early 2022?

[William Leon David Chalmers, CFO & Executive Director]

Alvaro, I might just refer you to the treasury team to get an answer for that question. Not entirely surprised you ask it, but I'll refer you to the treasury team.

[Operator]

We will now take our next question from Aman Rakkar from Barclays.

[Amandeep Singh Rakkar, European Banks Analyst]

Antonio, just wishing you the best of luck with your new role. Just a couple of questions. Can I first of all, ask around mortgages, please? Just interested in, anything you can tell us about the Q2 pipeline. I guess when I look at some of the system-level data, it looks like applications were not far off in Q1 versus Q4. I mean is there any reason why we couldn't see a similar mortgage volume print in Q2? And I guess is there anything about your relative risk appetite? Were you taking share in Q1? And if you can kind of give us in terms of color there? And could you update us on your pricing experience currently? So I know you've seen some narrowing in spreads through the course of Q1. It'd be interesting what we should be expecting in terms of completions in Q2, that would be good. Another one on consumer credit, if I could, actually. Just around your expectations for the growing balances in the second half of the year. I guess, particularly around credit cards, what your experience was on repayment rates and kind of what your assumptions were regarding the rebuild of those balances in the second half of the year, I guess, as well as seeing the recovery in spending, I guess, we probably need to see repayment rates not too elevated. It'd be good to get your thoughts there. And then just finally, on other operating income. I was just interested in -- if you had any kind of updated views on what to expect from that line through the course of this year, given we're kind of 1 quarter further down the line.

[William Leon David Chalmers, CFO & Executive Director]

Yes. Yes. Thanks, Aman. Kicking off on mortgages, first of all, we feel pretty good about volumes in Q2. The market continues to be very solid. We continue to see very attractive volumes and, frankly, very attractive prices. So I think that we enjoy the benefits in Q2 of both secular and typical drivers. It may be that a stamp duty turns off in Q3, then the cyclical driver component of that starts to weaken, but we still expect the structural drivers remain in place. So we feel pretty good about mortgage volumes in Q2 and indeed beyond. But as I say, an accentuated growth in Q2 in particular. Pricing, Q1 completions have been around [ 190 ]. So that's been very attractive and frankly, pretty much in line with our Q4 experience. There has been a little bit of narrowing of prices in the course of the quarter. New business applications are around [ 175 ], to give you some idea. But both the completions in Q1 and the new business applications margin, both of those 2 are significantly attractive margins versus the roll-off that we have seen for the same fixed rate asset. So from a volume and from a pricing point of view, it looks very favorable. Consumer credit, I mentioned earlier on that we're seeing significant expansion in spend. At the moment, at least in March, that is being driven by debit card and credit is coming back, but it's coming back at a slower pace than debit. We do expect that to evolve over the course of the next quarter or so, particularly as restrictions come off and bigger ticket items, including I mentioned earlier on travel, but not just travel, consumer durables, likewise, come into play. That, in turn, start to boost credit spend above and beyond where it is today. And so that will help. But I think you're right to raise the question of repayment rates. Repayment rates so far have been a little higher than we've seen them historically. And obviously, the significance of repayments will influence the extent to which credit spend then stays on the balance sheet. At the moment, we do expect our unsecured assets to increase over the course of H2, and we expect roughly speaking, credit cards, for example, to get back more or less to where we started at the beginning of 2020. So it's kind of a bit of deleveraging in the first half then a bit of releveraging during the course of the second half. But I would stress on that, 2 points, really, Aman. One is our risk appetite in the whole area of consumer credit is very low, we're being very cautious on risk appetite. And so that is driving to an extent our volumes. If we end up getting into a better macro space, our risk appetite adjusts accordingly. And that in turn may impact balances. But for now, it's a very cautious set of standards that we're requiring. The second point is that even if we see a little bit of delay in unsecured expansion versus what we might have thought by virtue of repayments, then I think it's a question of when it comes. It simply gets delayed rather than necessarily put off entirely. Your third question on ROI. The ROI performance in Q1 has been...

[Antonio Mota de Sousa Horta-Osorio]

Just before you go to ROI, William. Aman, about the mortgage volumes and about what's happening on the mortgage market. I mean you might recall that we are saying this already since Q3, but we continue and now it's 3 quarters that we see this -- continue to see a structural shift in the mortgage markets, whereby people are living, as we all know, much longer -- much more time at home. I do believe we will continue to work at least partially from home for the future, and that is a structural change. And therefore, many people that have the capacity to do so, have been moving into larger homes outside cities with gardens, if possible. So you are seeing as much of very high volumes of mortgages of first-time buyers, as you are also seeing from home movers. And it's the third quarter in a row that we see those shifts continuing. And so on top of the step, you see impacts that William mentioned to you, I strongly believe this is a structural shift, which you'll continue to watch as time goes by because people obviously spending more time at home. They want to invest more in that home. And that is going to continue in my view.

[William Leon David Chalmers, CFO & Executive Director]

And Aman, you asked on ROI. ROI has been a pretty solid quarter during Q1. That is to say it's consistent with our -- essentially our run rate lockdown ROI of about GBP 1.1 billion. I think that is also a pretty straightforward quarter. There's not much to draw your attention to in terms of one-off items either way. The [ GBP 1,135 million ] therefore, I would expect to be completed during the course of Q2 and beyond as a base. And then I think we believe that during 2020, we lost around GBP 300 million to GBP 400 million of effectively lockdown-related shortfalls in activity across all of the businesses, across retail by way of interchange, across commercial by way of transaction banking, across insurance by way of new business and indeed even to a degree, across our equities business. Therefore, as we emerge out of lockdown, we would expect that GBP 300 million to GBP 400 million to start to return to the business and start to gradually build back in on top of that GBP 1.1 billion number that I mentioned. That, in turn, will be augmented by our investment, again, over time, on a gradual basis and again, across all of our business areas. So I think, Aman, we see GBP 1.1 billion, as I say, it's a lockdown base. We think over the course of 3 quarters, in total, we lost around GBP 300 million to GBP 400 million. We would expect that to gradually come back in and gradually be augmented by the benefits of investments across our business. So in respect of SR '21 and then sort of longer term. All of the pace of that, Aman, as won't surprise you, is going to be activity dependent.

[Amandeep Singh Rakkar, European Banks Analyst]

Okay. Can I just -- just a couple of points of clarification. I mean that other operating income commentary is really helpful. And I mean it looks like it's pointing to a number that's kind of around probably 4.8, 4.9% for the full year '21. And then hopefully, we can kind of grow that in 2022. So please correct me if you think I've interpretated that incorrectly. And I guess just coming back to the consumer credit point. So did you say that you would expect credit cards to end the year in line with 2020? And if so, I mean, given that it's down 6% in Q1, are we talking about, hopefully, flat in Q2 and then maybe a kind of 6% growth in H2. I mean is that a kind of run rate that we should be looking for in 2022?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Just in response to those 2 points. First of all, on ROI, it's going to be activity dependent. So we've got the engines of growth there, which basically are twofold, i.e., activity returning coming out of lockdown and the benefits of our investments over time, both are going to be gradual, both are going to be activity dependent. So I wouldn't go further than that and giving you much guidance, I'm afraid, Aman. In terms of cards, again, I wouldn't be too precise because it will be very activity dependent. I do think, overall, when the outlook is broadly speaking, for a bit of deleveraging in H1, a bit of releveraging in H2, more or less getting you back to somewhere where you started. But again, that could be faster if we see a rapid macro and an increase in credit usage, it could be a little slower if the repayments of the big deposit base end up being people's preference over taking credit. And if it is a little slower, as I say, to me, that's a question of time. That's not a question of the unsecured business, not benefiting from that. It's simply a question of a slight delay and such. So again, I wouldn't be too precise, Aman, but hopefully, that's helpful.

[Operator]

We will now take our next question from Fahed Kunwar from Redburn.

[Fahed Irshad Kunwar, Research Analyst]

Thanks, Antonio, for your help over the last 10 years, and good luck at Crédit Suisse. I had a couple of questions on. Just a couple of clarifications on the hedge, actually. The hedge duration increased really markedly in the quarter. Am I right in assuming that linked to your earlier comment that essentially you're going -- your hedging current accounts and assuming you 10-year duration, so the reason that we can expect that duration to continue to increase, if you decide to keep on kind of hedging what our current account balance is a longer duration? And the second question I had on the hedge is a bit more kind of high level. I mean I think a couple of years ago, hedge income was about probably sub 10% of group revenues. It is now sitting at about 15%. If you were to put a capacity test, it probably goes higher than that. Do you think about a revenue cap on the hedge in the sense that at some point, if kind of rates stay when deposits keep growing, which we've seen in other country low rates, the hedge income becomes a bigger and bigger portion of income. How do you think about that dynamic? Or is it just purely mechanical on the linking it to the growth in deposits? And my second question was around your impairment guidance. And if I think about kind of your 25 bp or lower than 25 bp guidance, just taking the high end of that, that's about 40 basis points a quarter thereon. It seems very high. Am I -- is that potentially linked to the fact that actually commercially defaults, you see them as kind of artificially low right now? And do you think actually commercial defaults would increase to normalized levels in the second half of the year? And that's just purely on the fact that not looking at the economic provision releases in your actual on the ground defaults. The commercial business has a big right, so is that a factor in your thinking that actually impairments get up to higher levels as we go through the year from the charge we had in 1Q?

[Antonio Mota de Sousa Horta-Osorio]

So, look, I will start with your question in terms of structural -- question about the structural hedge. And then William can add on the point also on the structural hedge on your second question. And what I would say, Fahed, is the following. If you look -- because you were asking about the potential cap of revenues, I mean, the way I think we should look at this is the following. We have a policy like most banks have of hedging all interest rate risks in the balance sheet, back to 3-month LIBOR. And let me just say LIBOR because, as you know, the back phase of program came to -- from LIBOR to the other benchmarks. But the point is, as a bank, you should provide on both sides of the balance sheet, whatever your customers want. So if they deposit current accounts, which have no maturity, is one thing if they deposit with you at 6 months, whatever they want, you should satisfy their needs. In the same way, on the other side of the balance sheet, you -- we provide mortgages which have 30-year maturities or may have lower maturities, so you should do what the customers want on both sides of the balance sheet. But then in order to properly manage the risk of the bank, you should convert everything to, for example, 3 months LIBOR in both sides of the balance sheet. Having said that, so what is happening with our structural hedge is not anything financial other than we have to assess what is the average life of the current account balances. We have been gaining market share of current account balances, as you and I, and we together have been discussing for the last years. We have confidently be gaining market share of current account balances in the U.K. and therefore, what we have to do is to -- in order to have the balance sheet hedge, we have to estimate what's the behavior life of those balances because they are the only part of our liabilities and equities, which don't have a predetermined duration or maturity. And we believe, as we have told you along the way that current accounts should be 10 years maturity, which is 5-year duration. And other rating sensitive balances, 5, which is 2 and above. So the fact is that the revenue proportion of the current account balances is increasing. I would say it's a very good thing because it only reflects, Fahed, the fantastic work that the commercial teams have been doing with our multi-brand model, where we continue to attract balances, which are basically paid 0. So they are convenience and trust balances. And we are just reinvesting those balances as a conservative average maturity, as William explained in the previous question. So there is no reason at all to have the gap. This is our most valuable franchise on the liability side is the current account balances if I repeat, represent the trust of our customers in our brands and our convenience balances, not price-driven balances.

[William Leon David Chalmers, CFO & Executive Director]

I'll add 1 or 2 points to that and then answer your question on impairments. The hedging strategy, as I mentioned earlier on in my comments on one of the earlier questions have basically been moving from about 2 years to 5 years. So if you think about the duration with which we are deploying the hedge, that gives you a sense. Previously when the curve was very flat, there was essentially no transformation margin. We were investing at relatively short end in order to ensure that we maintain some degree of optionality should interest rates change. Where interest rates did change, there's fairly valued at that point and investing slightly longer along the curve, and we've typically moved to around 5 years. It is the case that as we deploy the increased capacity in hedge, then that average life that is currently 3.4 years will increase a little in response to that. It will increase to something that is closer to its neutral position, which is around 4.5, 5 years or so. So you can expect to see as the deployment of the additional capacity within the hedge reaches, as Antonio said, in the success of the current account product and the success of the savings product and the success of the commercial deposit gathering exercise, you can expect to see the weighted average maturity of the hedge move out a little, but it won't be more than about the 1 year, 18-month type indication that I've just given you. And that is on the assumption that we fully deploy the hedge and move to a what we call neutral position. It is worth bearing in mind in all of that, Fahed, that as I said earlier on, we have increased the hedge cushion, the difference between the hedge capacity and eligible deposits from GBP 10 billion to GBP 30 billion over the course of the last 5 quarters, number one; and number two, it's worth bearing in mind that there are GBP 44 billion of maturities still coming on over the course of this year. So that together gives you about GBP 70 billion of cushion or so, either not hedged or alternatively maturities during the course of this year. The impairment question that you had. The impairment language is very deliberately less than 25 basis points, Fahed. And I would just ask you to look closely at that language as you think about what it means. As we stand today, that impairment language is off the backlog and assumption that our macro holds steady, i.e., you look at our macro assumptions. That set of macro assumptions is a slightly more adverse environment versus business as usual, if you like. 7% unemployment is not a through the cycle unemployment charge. We still see a bit of HPI deterioration this year, even though, frankly, current performance makes that look increasingly unlikely, but we'll see how it unfolds. But the point being that we are giving you guidance of less than 25 basis points. That is on the assumption that the macro that we have portrayed is indeed what unfolds. If it is a little better than what unfolds, then that's why we've chosen the language less than 25 basis points. I think that's useful to thinking about how we're looking at the AQR guidance, Fahed.

[Fahed Irshad Kunwar, Research Analyst]

That's great. Can I just ask one question on just on the commercial side. I'm just looking at the actual on the ground business, restructuring, default, redundancies and all kind of bankruptcy, sorry, all-time lows right now. And I'm assuming that's a big function of the government support mechanisms. How do you see that evolving as the government support mechanisms go up? Does it go back up to normalized levels? Or do you think actually there's something else in the commercial book, which is rendering the charges and defaults as low as they are?

[William Leon David Chalmers, CFO & Executive Director]

I think there are 2 or 3 things that are going on in the commercial book default. I mean generally speaking, we're in a benign underlying credit environment across retail and across commercial, Fahed, and that's why you've seen us take the GBP 323 million credit today. That's obviously compounded by the economic outlook and the release that is in spite of that as the second input into that credit. I think when you look at commercial, in particular, there's 2 or 3 things going on. One is that benign outlook, without a doubt, and that is benefiting the performance of the commercial book as a whole. Second is particular restructuring cases are performing better than we had expected. And so you're seeing specific write-backs in terms of some of the cases that we have on the books. Third, you're also seeing, as we discussed earlier on, a reduction in balances within the commercial area. In certain cases, because of our own optimization strategy. And that, in turn, is also leading to a more benign overall commercial banking outlook. It's worth mentioning that during the course of Q1, we only have 1 material movement into Stage 3 in the entire commercial banking portfolio. And that gives you an idea as to just how benign commercial banking position is right now. We do expect, as I mentioned in my comments earlier on, that in line with our macro assumptions are really great if you're going to tick up as we go through the course of the year. The withdrawal of the furlough scheme may well be an ingredient to that. But I think the important point, as you look at it, is that we are already provisioned for that development. That's what IFRS 9 provisioning is about. And despite the credit that we've enjoyed today, we remain very well positioned for the macro that we're forecasting.

[Operator]

As you know, this call is scheduled for an hour, and we have now gone over the end of the allotted time by 16 minutes. So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. We will now take our last question from Rob Noble from Deutsche Bank.

[Robert Noble, Research Analyst]

Just a couple of questions on the capital. How did the Stage 1 and 2 write-backs -- how do they impact capital at the moment, given the current level of transitional relief? I think you previously said, William, that half of the relief this year, I assume that's a lot lower now, given your guidance? And then secondly, in the past, you've taken pension contributions, the majority of them in H1, how much have you taken? How much is there left to do this year to impact capital? And then lastly, Antonio, good luck with the new job. As you're leaving, is there anything that you think Lloyds should do that it isn't doing currently that you think could enhance the business going forwards?

[Antonio Mota de Sousa Horta-Osorio]

I'm just going to tell you that there are lots of things that we can continue to do and do better. I personally think that in life, you should always try to do better, and it is always possible to do better. And as you saw when we launched strategic review 2021 in February, there's a very clear plan with milestones. Everybody is involved. Everybody is committed. And with this single idea, I mean, it's always possible to do better, and we should always try to do better. So I look forward to seeing Lloyds go from strength to strength.

[William Leon David Chalmers, CFO & Executive Director]

Rob, in relation to your first question -- first 2 questions, actually, one, Stage 1 and 2 write-backs. As you see those write-backs, the transitionals associated with those write-backs adjust accordingly is the short answer. In terms of what we saw in Q1, as the statements imply, we currently have about 91 basis points of transitionals left in the books. That's around 70 basis points of dynamic, around 20 basis points or thereabouts of static. Looking forward, those transitionals will potentially roll off, consistent with our macroeconomic assumptions. So transitionals as those Stage 2 migrate to Stage 3, then a transitional has rolled off in that context with obviously no net capital impact given that transition. The dynamic that we've seen in Q1 is interesting because essentially, the transitionals that we previously had there in the capital base, we have thought on our old macro assumptions would then come out of the capital base as Stage 2 move to Stage 3. What we've seen in Q1 is that actually, the macroeconomics have not turned out the way that we expected. It turned out a little better than we expected. So instead of the transitionals running off into Stage 3 and coming out of the capital base, they're actually effectively derisked within the capital base because the Stage 2 is moving back into Stage 1. So that transitional element is a derisked component of our capital. Over the course of the remainder of this year, if we see our macroeconomics unfold as we expect them to, then we're looking at around 1/3 of that total of 91 getting moved -- used up over the course of '21. But again, I would stress that, that is contingent on the macro unfolding in the way that we expect it to, and there's a lot of uncertainties. Finally, Rob, on your pension point, we have a Q1 contribution on pensions, which is consistent with our previous contribution schedule. Going forward, that will adjust to the new contribution schedule. But what it means is that we have provided slightly more than half of the fixed contribution of GBP 800 million in Q1, which obviously means that we front-end loaded the pension contributions for the fixed contribution over the total of this year.

[Operator]

This concludes today's question-and-answer session. I would now like to turn the conference back to Mr. Horta-Osorio for any additional or closing remarks.

[Antonio Mota de Sousa Horta-Osorio]

Well, I just want to state my last investor call here at Lloyd's, it has been a real pleasure to have this interaction with you over 10 years. It was really great to share performance with you, listen to your points of view, have debate, having challenge, very helpful to us, you as shareholders and the people you represent, you are the owners of the bank. And it was very clear for me and the management team, so it's our absolutely duty to deliver to all stakeholders, including yourselves and the clients you represent. So I look forward to keeping in touch with you for -- in my next job, and wish you all the best. Thank you.

[Operator]

This concludes the Lloyds Banking Group 2021 Q1 IMS call. For those of you wishing to review this event, information for the replay is available on the Lloyds Banking Group website. Thank you for participating.