Lloyds Banking Group PLC

LSE:LLOY

Earnings Call Transcript 2018-Q3

[Operator]

Thank you for standing by, and welcome to the Lloyds Banking Group Q3 2018 Interim Management Statement Conference Call. [Operator Instructions] There will be a presentation by George Culmer, followed by a question-and-answer session. [Operator Instructions] Please note, this call is scheduled for 1 hour. I must advise you that this conference is being recorded today. I will now hand the conference over to George Culmer. Please go ahead.

[Mark George Clifford Culmer, Director]

Thanks for that, and good morning to everybody, and thanks for joining today's call. I've got a couple of slides on our results and strategic progress with some more detail in the appendices. We'll then have just under an hour for Q&A, and we've also arranged a follow-up session for next week. Okay. So I'll cover first the financial performance for the 9 months on Slide 1. The group continues to deliver strong and sustainable financial performance. Statutory profit after tax of GBP 3.7 billion is up 18% on prior year with underlying profit up 5% and 11% reduction in below the line charges and an improved effective tax rate of 26%. Net income for the 9 months is up 2% at GBP 13.4 billion, with net interest income up 5%, supported by stable margin of 2.93% with slightly higher average interest earning assets. Other income is in line with last year after excluding the sale of VocaLink, driven by a strong Q3, which was 4% up on a year ago and a strong 9-month performance of Insurance led by new business growth. Operating lease depreciation is also down 5% due mainly to accelerated write-offs in 2017. Operating costs also down on prior year for both the quarter and year-to-date with a 4% reduction in BAU costs for the 9 months more than offsetting higher investment spend. Remediation costs are down 30% year-on-year, and our market-leading cost-to-income ratio has again improved to 47.5%, down 2.5 percentage points. Credit quality remains strong, and we continue to see no deterioration across the portfolio. Gross asset quality ratio of 28 basis points is in line with previous years, and new to arrears remains stable in both mortgages and cards. The net asset quality ratio has increased to 22 basis points due entirely expected lower write-backs and releases, and we continue to expect the full year AQR to be below 25 basis points.In terms of growth, we've delivered targeted lending growth in SME, Mid Markets and Motor Finance with group loans and advances at GBP 445 billion, up GBP 2.3 billion in the quarter. We also continue to optimize our funding with a target growth in Retail and Commercial current accounts, which were up GBP 7.5 billion in 2018. Returns also continue to increase. The underlying return on tangible equity was up 1.4 points at 16.2%, while the statutory return was 13%, up 2.5 percentage points. Capital also remained strong with an increase of 41 basis points in the quarter, comprising an underlying movement of 49 points, offset by 11 basis points for pensions and 5 basis points for market movements. Capital build is now 162 basis points year-to-date, and we are on track to meet our full year guidance of around 200 basis points with Q4 benefiting from the final insurance dividend, but also impacted by further pension contributions on the bank levy. TNAV of 51.3p per share is up 0.3p in the quarter before the 1.1p impact of paying the interim dividend. We also completed a GBP 1 billion buyback in August, and have now returned more than GBP 3.2 billion to shareholders in 2018, equivalent of over 4.5p per share. Finally, we are reaffirming our financial targets for 2018, including a margin of around 2.93% and as I mentioned, asset quality ratio below 25 basis points and capital build of around 200 basis points. We're also reaffirming our longer-term guidance as well. I'll now turn briefly to the progress we've made in delivering the group's strategy. As we set out in February, we're building on the strong progress of recent years to further digitize the group, maximize its capabilities, deliver leading customer experience and transform our ways of working. We made a strong start, having already invested around GBP 600 million out of our target of more than GBP 3 billion over the next 3 years. In terms of digitizing the group, our investment in robotics has driven significant process improvements with around 600,000 colleague hours saved to-date, while our Private Cloud solutions are operational and delivering a more efficient, scalable and flexible infrastructure. We're developing a leading customer experience. We have transformed branch account opening journeys for current accounts, savings, loans and credit cards, reducing average account opening times from over 50 minutes to around 0.5 hour. And within the next month, we'll be launching our integrated API-only solution for Open Banking. For maximizing capabilities, one of our key goals is developing group's Financial Planning and Retirement proposition. Our FP&R business is now delivering real growth with sales of workplace pensions, retirement accounts and protection up between 30% and 40% on prior year, while growth in assets under administration is ahead of plan and up more than GBP 11 billion so far this year, driven by organic flows and the acquisition of Zurich's workplace pensions and savings business. At the same time, we've rolled out our single customer view, enabling more than 3 million customers to see their banking and insurance products in one place for the first time, and this will rise to around 4 million customers by year-end. You have also seen that on Tuesday, we announced an agreement with Schroders. This unique combination of 2 of the U.K.'s strongest financial services businesses and brands creates a market-leading wealth proposition for affluent customers and addresses the growing gap in the advice market to a personalized, advice-led financial planning proposition. We have an ambitious medium-term strategy and aim for the JV to be a top 3 U.K. financial planning business within 5 years. We're also taking a stake in Cazenove U.K. private client business, which allows our high net worth clients to benefit from its leading wealth management proposition. This agreement is an important step in building our customer propositions and our FP&R proposals, and the growth in this initiative is in addition to our existing GBP 50 billion of assets under administration target. So there's much going on. We've made a strong start to the latest strategic plan. We're delivering strong and sustainable financial results, and we face the future with confidence and reaffirm our financial targets. That's all I was going to say upfront. I will now turn to Q&A.

[Operator]

[Operator Instructions] Your first question comes from Raul Sinha.

[Raul Sinha, Analyst]

George, can you hear me?

[Mark George Clifford Culmer, Director]

Yes, I can hear you, Raul. You're live.

[Raul Sinha, Analyst]

Yes. So I hope you're not calling the top of the cycle with your retirement. But I have 2 questions.

[Mark George Clifford Culmer, Director]

Yes. I'm not going just yet.

[Raul Sinha, Analyst]

Just 2 quick ones really. The first one is, just, I was hoping if you could provide us any more color on the other income performance this quarter, which is up 4%? And the second question was, just your broader thoughts on the mortgage market. I'm really interested in, sort of, what are the marginal returns, you think, the market is operating at, at current spread levels?

[Mark George Clifford Culmer, Director]

Okay. Part of the answer to that is what capital you put behind it, but we can come to that. Yes. So the OOI was up sort of 4% quarter-over-quarter, Q3 versus Q3, so that was about GBP 70 million or so, I think, within that. In terms of things like, the usual suspects, gilt, where we continue to be a seller of gilts. I think we had about GBP 68 million or so in Q3 versus about GBP 55 million in the equivalent quarter, so a slight contribution there quarter-on-quarter. I think, gilt, by the way, in Q4 will be at a slightly lower level as we move forward into Q4. Consistent contributor was LDC, you would've seen some of the stuff around NEC sales, et cetera. So NEC were about GBP 60 million up quarter-on-quarter. And then relatively flat in terms of the other businesses. Across the 9 months, though, I should call out, and I said it in the presentation, whilst insurance, which tends to be slightly lumpy through the quarters, was relatively flat Q3-on-Q3. For the 9 months, we've seen a strong performance and great growth in new business, which I called out, which is up -- the sales are up to 40%, 50%. So it's a tremendous performance in line with what we're talking about. But in terms of Q3 versus Q3, relatively stable across the main core businesses in terms of Retail, Commercial and Insurance, as I said in the 3 months there. But we've got things like LDC contribution coming through in Q3. In terms of mortgage market, look, it's kind of more of the same. And as you know, and you've monitored it, having things got a little better in terms of pricing in the third part of the year, it certainly got slightly tougher post-summer. I'm sort of encouraged from what you hear others talk about. It's good to see that reflected in action. In terms of returns, people will talk about some pretty chunky returns in terms of still mortgage front book prices. But that all depends on what capital you put behind them, as I was saying. And I think if you look at sort of leverage-type ratio capital, which is where we will, obviously, go in terms of ring-fencing. And you're all talking about doubling the amount of capital that you have to put behind it, I think you get back to just sort of scraping into the sort of double-digit, that type of return.

[Operator]

Your next question comes from the line of Chris Manners.

[Christopher Robert Manners, Former Equity Analyst]

Yes. So just 2 questions, if I may. The first one was about the sort of benefit of the rate hike, and how much came in Q3 versus how much we should expect in Q4? I guess, yes, we had the rate hike 4th of August, we then -- you then notify your customers before you put up their SVR. So just maybe a bit of color on the phasing of when that benefit comes through, and how might that's beneficial to you in the quarter we've just had? And then the second question was on the loan growth. So as you -- your Q-on-Q loan growth, obviously, you flagged it in the statement, GBP 2.3 billion. That's pretty encouraging. Could you maybe share with us a little bit of color about where you think the loan growth is going to be if you're going to continue at that pace? And if that loan growth is actually going to translate into earning asset growth and obviously that's something that we're all watching.

[Mark George Clifford Culmer, Director]

Chris. So yes, I mean, I would -- if I start here with the second one first. And again, some of these will be familiar things to you. But we continue to target the usual suspects. We continue to be important to the SMEs, which is up in the quarter. Mid Markets will be up. I would continue to expect in the unsecured we will probably track market-type growth with the sort of 3% going forward. We talk about -- again, I think open book mortgages are dead flat, I think, in terms of Q3 position versus start of the year. But I would still expect to close the year marginally up, and I would still expect some marginal growth as we move forward. So all that going other way, I've got a bit of runoff booked on, but some of the big slugs have gone out back, and you've seen the Irish book actually come out of RWAs because we -- cash came in for that during Q3 as we expected. So that's now gone. So I would expect all those pieces together to give you some upward momentum in RWAs as we move forward, as we put those pieces together. The benefit of the rate hike. We're not going to see a huge number. I think I called out 25 basis points sensitivity full year of about -- 12 months sensitivity was about GBP 100 million, I think in Q2, because we've invested some funds, it's probably slightly under that now. So that's about GBP 80 million, and that's just the 12 months number. So quarter-on-quarter, it gives you the sort of indication of the type of impact, which isn't a big number. You're right, in terms of things like liability pricing and savings pricing, we continue to put -- we put a small amount through, and we continue to benefit from our continued management of funds. If I look at, for example, even after the rate hike came through, if I look at my total cost of my savings book, I think, for Q3, it's roundabout sort of 48 basis points, which is pretty much the same as it was in Q2, and that's the other side of the rate hike. So you can see, sort of, what we've done and what we haven't done in terms of passing that through. And on the other side, obviously, we push that through in terms of asset prices. So I won't give you a number. But you won't see a material impact quarter-on-quarter for 25 basis points. It takes further for it to work through. And as you know, it's more around -- it's like 5-year swaps flow through into structural hedge and then through into the results.

[Operator]

Your next question comes from the line of Jason Napier.

[Jason Clive Napier]

Congratulations on the results. So 3 questions, if I could. Two simple ones and then one on the Schroders agreement. First of all, on costs, the trajectory is pretty strong into the third quarter. Just wanted to check whether there is anything to call out in terms of lumpiness of forward investment plans, or whether that's kind of sustainable or indeed a base from which you might improve? Secondly, just to confirm on the impairment line. There's been no changes to IFRS 9 assumptions has been -- as things stand, your assumption set is in line with consensus expectations? Is there anything to call out in terms of timing on when those things are revisited and so on? And lastly, I just -- at a kind of a practical level, I appreciate the JV will be set up and become operational next year. But I'm just trying to picture what the -- how to work from a customer standpoint, referrals, branding and kind of service model for the mass affluent model?

[Mark George Clifford Culmer, Director]

Okay. So in terms of that, no, in the cost, there's nothing in particular to call out. Again, you've seen they were marginally down year-to-date and marginally down in Q3. We're actually sticking by our guidance to be below 8 by 2020 and the low cost-to-income ratio in the low 40s. Q4, you obviously have the bank levy come through, which is always a couple of hundred million in Q4. But that's -- as you know, that's a year-after-year impact. But no, I don't see anything funny in terms of how we've got here or go forward. And we've got very much commitment to continue to lower that cost-to-income ratio. And what you see is a continuation of that which we've been doing, which is investing in technology, our structural approach to driving down these costs, a real industrialized process within the group and just a continued and massive focus upon this. So it's a base on which we will move forward, and it's a base in which we will continue to reduce that cost number. So I don't think there's anything exceptional that I will call out, and you knew about the bank levy, sort of, anyway. On IFRS 9, no material changes. As you know, in terms of a process perspective, you, each quarter, look at your -- the mayors -- of one or more economic scenarios. And so we refresh our outlook as we move through each quarter, which we've done this year as a part of a -- sorry, this quarter, as a part of process. The impact was actually nothing deviated from the mean, and you have a small impact within the tens of millions. So it's a very minor movement. But we continue to look out. Our view is, again, our outlook is we think there will be a withdrawal agreement. What we're seeing in the economy is continued robustness. We call out in terms of no signs of deterioration, et cetera, which you would've seen. We're still in the 1.5% in terms of GDP. You've seen the record levels of employment and the low levels of unemployment. You've seen wage growth outstripping inflation, et cetera, so refueling the consumer purse, if you like. So we continue to see a very resilient economy, which we sort of have called out for the last couple of years. And that's what we see as we move forward. Now finally on the Schroders bit, look we are massively excited by this and our ability to work with them and have a holistic offering to our customer base. And as we go forward, we essentially see 3 groupings. There is, we're building with our own FP&R a sort of digitized, execution-only capacity. But we're building in-house, so very much a sort of mass market-type offering, as I said, digitized, non-advised. We then got within the joint venture this personalized advice-led capability, which we think that this is an attractive part of the market. It's growing, all the reasons you know, demographics and switching DV to DC, et cetera, pension freedom and the consequence of some of the change in regulations is underserved. And we see a big price here. We've got about GBP 13 billion of assets which we'll move over. We'll also transfer over our 300 or so advisers into this. But we think we're bringing together all the Schroders' investment expertise, platform technology with our digital capability, our franchise base, and both our brands into this gives an offering that is hugely exciting. The way it would work is, in terms of -- you have the ongoing referrals from our franchise are sort of 29 million to 30 million customer base and the ability to refer into this JV and then the provision of high-quality advice with high-quality product within that joint venture. So that's got -- and then over to the far right-hand side, we've also got this 20% -- 19.9% stake in Cazenove, which for the high net worth individuals, it gives them access to us. So from our perspective, it gives you, let's say, joined us across the border for an execution-only for the appropriate marketplace, a advice-led proposition for the affluent, and then access to this high net worth. And in working with Schroders, we're massively excited in terms of similar views of culture, similar views of ambition. And we've talked about wanting to be a top 3 within 5 years. We're already about #4, #5 with the GBP 13 billion. To get to that top 3, I think we'll have to be in about the sort of GBP 25 billion type size for assets under administration. We see that as a very viable target. Organic, we'll be open to an organic through this JV as well in terms of getting there. But as I said, we have big ambitions for this, and we have massive excitement about the opportunity.

[Operator]

Your next question comes from the line of Rohith Chandra-Rajan.

[Rohith Chandra-Rajan]

I wondered if I could just come back on your comments earlier on the mortgage market, if you don't mind, given the pricing that we've seen. So based on what you said about your consideration of returns, I was wondering what you can do in terms of positioning the mortgage book, and if there are particular parts of the market that you're finding more attractive at the moment? So that's sort of on the asset side. And are there any additional levers that you can pull on the liability side, sort of, ones that you've sort of already talked about, should these trends continue in order to try and defend the margin over the next few years? So that was the first one. And the second, actually quite a quick one, just in terms of tangible book evolution in the fourth quarter. I wonder if there's anything apart from retained earnings, obviously, that you called out, like the additional pension contributions, for example, that we should think about?

[Mark George Clifford Culmer, Director]

Okay. On the second first, on TNAV. Well, contributions aren't a -- they don't flow into TNAV. They impact, sort of, capital in terms of they are a use of cash. But for TNAV, it's the movement in the pension schemes evaluation, and that's driven by market movement. And in that, you would've seen, for example in Q3, we had a negative, which is the further timing of credit spreads. Now credit spreads are phenomenally tight at the moment, and we have, over the years derisked the pension scheme significantly, and you've seen that in terms of how it's responded to the market movements in terms of how the surface has moved versus some of our peers. So I think we've done, I would say, a good job in derisking. But we remain exposed to credit spreads, and there's a -- for every single basis point, it's about GBP 65 million. And I think, I mean, you can take your view on what happened to credit spreads at the moment, but given the tightness of them, we've seen that impact of that tightness in Q3. It was more likely they'll go out and then come in further. If they were to go out, that would be a benefit to net assets in terms of how that flows through in terms of discounting those pension liabilities. So it's not about contribution. Contributions are much more around capital position, and you've seen from our CET1 walk that there was about 11 basis points of capital deduction in Q3 from our expected pension contribution, which will be repeated. That's our, sort of, GBP 400 million part deficit payment that we will be making in Q3 and Q4. But on TNAV, I talked too long about pensions and credit, anything else, I mean, it's what rates do to -- it's what rates would do to cash flow hedge, and this is where the trade-off I'd rather vote to go up. But immediate impact of rates going up is -- it depresses the cash flow hedge, which flows through TNAV. But I would rather take rising rates than any other. So anything else in Q4, I don't think there's anything else particular in Q4. Then going to your first, the mortgage market. Look, we're not going to give out a lot of state secrets. It's probably -- but in terms of managing, as we've bored you with numerous times before, we have the great advantage of managing things, everything centrally, and everything that we do is coordinated. And everything that we do is deliberate, and it's tied up. So you saw us moving to sort of 5-year new business mortgage origination, and it only gave us a 20 or 30 basis point spread. I think most recent pricing I've seen, others have moved that way, and that's been eroded. So we've got to look at what the next thing we're going to do in terms of just finding that point where you're not cannibalizing your existing book, and you're looking for points of leverage within the system. So that's on the new bit. On the retention, retention has been a big sort of success story. And where most people transfer out of SVRs, et cetera, they will transfer into one of our products, which is attractive for us. So we will continue to work hard on that. There's nothing there that I'm going to tell you is a specific tangible thing because I wouldn't and shouldn't do, I think But on the liability side, again, it's more the same. You've seen, for example, the success in terms of continuing to generate current accounts. And I talked about retail and commercial being up like GBP 7.5 billion in the year. You've seen our structural hedge grow from about GBP 171 billion to, I think, it's now what is now GBP 175 billion at the end of Q3. And I would expect that to be higher still at the end of the year. It doesn't track automatically and what happens in current accounts in quarter, but what happens in the structural hedge, you always get a sort of delay in terms of making sure the accounts come in. You understand that they're eligible, et cetera, et cetera. So I would continue to see us to build those current accounts and continue to see us deploy them within the structural hedge. In terms of management, again, the same things in terms of looking across the book. So trade-offs between commercial versus retail and within retail in terms of tactical relationship, et cetera, et cetera. And going back to some of the things I directly answered to Raul or whatever it was -- or Chris. In continuing to manage the rates on the book and you've seen from the pre-rate increase to post-rate increase, actually, the cost of my savings book hasn't moved very much, and continue to look at opportunities and margin widening, we would assume a 25 basis point hike each year, and that would continue to be opportunity for us. So look, it's -- it stays tough. We continue to do things. We will continue to do things. But we remain confident in our ability to manage that margin, to manage that spread across the business, utilizing the various levers that are under our command.

[Operator]

Your next question comes from the line of Joseph Dickerson.

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

Just a quick question on the capital return ambitions. On my arithmetic, if you get -- if you've accrued a 1/3, 2/3 interim versus full year dividend, and you generate the type of capital you expect, and certainly, we expect you to generate in Q4. Also, you've generated in Q3. If I pay you down to a 14% Common Equity Tier 1 ratio, I get about around GBP 2 billion excess. Could you just discuss the appetite to distribute that number down to that level if you agree with the math, and if there are any hindrances to that? I know that there seemed to be a newspaper article over the weekend about a GBP 2 billion buyback, which seems to tick and tie with that arithmetic. But I just wanted to see what your ambitions were around excess capital return?

[Mark George Clifford Culmer, Director]

Yes, there's nothing wrong with the math in simple speak. Yes, 200 basis points is GBP 4.5 million in pounds terms. And if you put it -- were to put it into a p, it's about as far as 6p type stuff. So that's the basic math. And as you say, I'm currently paying out for the ordinary, was just a bit over 3p. So that's the math. What I would also say, we have to make sure of 2 things. One in terms of confidence around capital generation. You've seen that in the 162 basis points, you've seen that in the 41 basis points, and we are confident of delivering the 200 basis points for the full year. We're also confident in terms of our capital position and our capital requirements. So we've got the 13% plus 1% in terms of management buffer. So those pieces together say that I will come to the end of the year, and that 200 basis points will be over and above that which I need to meet my capital requirements. So therefore, are eligible for distribution. What I will say, and I would stress as well as say, that the board will make its determination early next year, will make that in the fullness of -- we've updated our plan. We've seen various stress tests, et cetera, come through. And the board will decide at that point. But as you know that the current board position is that we will look to distribute any surplus that we have. At the moment, we have a requirement of 14, and as you said, we have a capital position that will take us significantly in excess of that. So there's been reaffirmed confidence in capital contribution, continued confidence in requirement, and absolutely no change in terms of how the board will look at our capital position and surplus usage when we come to that time in early January, February of next year.

[Operator]

Your next question comes from the line of Fahed Kunwar.

[Fahed Irshad Kunwar, Research Analyst]

Just a couple of questions. On the deposit costs, a point of clarification, the 48 basis points you called out, is that including current accounts as well? So I guess, what I'm asking is, are the funding costs still falling quarter-on-quarter if you incorporate the current account growth into that, kind of, overall funding cost that you guys look at? I know it's flat, just what you have paid for deposits. That was question 1. Question 2 is just following up on Joe's point, actually, on the capital returns. You're confident on capital requirement. I assume that confidence is also taking into account any potential IFRS 9 impacts on a PRA Buffer post the stress test? And also, you talked about inorganic growth, potentially, to supplement the Schroders JV. Would you think about kind of holding some capital above 14%, just so that if inorganic acquisition's potential is there, you have a bit of a buffer to kind of fall back on? Or do you think actually staying at 14% is enough to do that for any kind of inorganic acquisition?

[Mark George Clifford Culmer, Director]

Okay. So 2 things. So in terms of cost of liabilities, yes. If you look at the overall retail liabilities, then the costs have fallen marginally. So it was sort of 38, 39 basis points, I think, in Q2, including current accounts. So across the whole of the retail stack. And that's dropped to sort of 36, 37 in terms of -- as at Q3. So you continue to see: a, a reduction in those overall costs of liabilities as we move through that. And that's just within the Retail account and doesn't take any account of moving the funds between the Retail and the Commercial book. So to answer your question, bring in the current accounts, et cetera and the growth we've seen, yes, we've seen -- you can see a continued reduction in those costs of funds. Yes, in terms of the capital requirements, yes, IFRS 9, I mean, we've got the stress tests coming up. We've got the EBA. Obviously, we've got the PRA. And as we all know, IFRS 9, for the first time, as we all know, the wonders of perfect foresight, et cetera, which will introduce some pretty significant volatility into the results. As we also will know, the regulators quite rightly don't want to see any additional capital requirements flow into the system because of IFRS 9. They've been very clear of that. And they've just been talking about ways that might affect that either through changes, in fact, they've required hurdle, et cetera. So in the early years, as you know, we've got the transitional arrangements, which essentially deals with the IFRS 9 through year 1 but then take us off. And what we're looking for is that permanent solution because it's absolutely right and I agree entirely with the regulator in terms that the accounting shouldn't interfere with the capital requirements and trying to find the longer-term solution to that, of which, I'm sure we will get to that place. So I expect to see us in -- and IFRS 9 will make this look pretty ugly. But as I said, we need to look through in terms of the capital position post the IFRS 9. And then, look, on our inorganic, look, and this applies across the group. We're open to opportunities across the group. You saw that last year when things happened with Zurich. There are things that are better to buy rather than build. We're open to that. This isn't signaling any big deal. This is just this -- it's signaling that we're open, and we're flexible and we have the capabilities, and we have the capital. It's nothing of a consequence and/or size that would require me to concentrate hard about what I do with my capital position. Within the JV, look, no, to your question again. I make that comment only because we've got a -- we're going to -- there are big ambitions for this joint venture. As I say, we have the target of being top 3 within the next 5 years, I'd say growing from 13 to 25. Let's see what happens, all these things, we're going in there with a very open view as to how we might make that. But there's nothing that'd be concerning in terms of how it might impact my capital management over the short or even the medium term. The scale is not going to impact that in any way.

[Fahed Irshad Kunwar, Research Analyst]

Great. Can I just quickly ask one follow-up on the current account point? Obviously, you have the structural hedge that you think will need to grow throughout the strategic period. If I look at your total current accounts, the percentage that are positive are sitting at about 30, 35. Where do you think that can get to? Let's say, kind of rates stay pretty low or they raise 1.25 bps a period, do you think that can increase? Is that the missing point around funding cost, and how they continue to fall, and you can keep your margins stable?

[Mark George Clifford Culmer, Director]

Look, I'm not going to give you a number, which might frustrate you. But it is a -- it's essentially -- when you look back, if you look at our, sort of, total group deposits, our group funding, we've been pretty stable around the sort of GBP 422 billion, GBP 420 billion over the last few years. But if I look at the sort of current account, that's the Retail and the Commercial. If I go back to something like 2014, they were only about sort of GBP 70 billion out of that GBP 423 billion. It's now GBP 108 billion out of that GBP 423 billion. So there's been a massive shift as we've deliberately managed composition of those liabilities. Now I'm not going to say it's going to grow by that again, and I won't put a number on it. And as you've sort of said, or inferred, there's a sort of rate dependency on this. And again, we would prefer a rising rate environment. But look, this year, structurally, I think we came in, I think, roundabout GBP 165 billion or something. As I said, we've now grown to sort of GBP 171 billion at the half year, GBP 175 billion. I think we'll pick up again. So I won't give a number, but our strategy continues to be focused on the current accounts.

[Operator]

Your next question comes from the line from Edward Firth.

[Edward Hugo Anson Firth, Analyst]

Just 2 quick questions. One was on costs again. Could you just update us on how much you have capitalized over the quarter, if anything at all? And secondly, in terms of restructuring costs there, I guess, they're now running at about 10% of your cost base. Is that a sort of a number that we should see for the rest of the year? Or would you -- or is this something -- I mean, it seemed quite big in Q3, so would we expect that in Q4?

[Mark George Clifford Culmer, Director]

Oh, sorry.

[Edward Hugo Anson Firth, Analyst]

Yes, so that was the cost question. Do you want the other one as well now?

[Mark George Clifford Culmer, Director]

All right. Go on then. Go on then.

[Edward Hugo Anson Firth, Analyst]

And I guess, the second question would be just about the Citizens Advice. They've obviously made a special complaint about the mortgage pricing. That and a number of other markets. I guess, we would expect the competition authorities to respond shortly. But you've got to imagine there's going to be some sort of investigation. I mean, would you expect to have to respond to that in any way during the process, or would you just leave things as they are and just wait and see where that comes out?

[Mark George Clifford Culmer, Director]

Okay. All right. Okay, to deal with the first bit, on the restructuring, so I think, as we came into this year, I talked about -- on the full year view, I thought that below the line, we thought ring-fencing would be to GBP 200 million to GBP 300 million; property, about GBP 0.1 million; MBNA, Zurich, GBP 0.1 million to [ GBP 0.2 ] million. And then we didn't give a number for severance, but I think we -- at the start of year. But I think we talked about -- it would likely be about GBP 0.2 billion. I would still sort of stick by those. So probably ring-fencing will be about, yes, GBP 0.3 million; property GBP 0.1 million; MBNA, Zurich, GBP 0.1 million or whatever; and severance roundabout GBP 0.2 million for the full year. In Q3, and that's GBP 200 million quid. You probably see 0.1s across all of those. So there's about GBP 50 million for MBNA and Zürich, about GBP 40 million for additional severance, about GBP 50 million for property and GBP 50-or-so million for ring-fencing. So that's kind of where I know. As I go forward, so to your question, MBNA and Zürich falls away, ring-fencing, by definition, will fall away. There's a bit of a tail of cost in next year but nowhere near like what you've seen. So ring-fencing kind of falls away. The property has a finite period. Redundancy will be what we think it needs to be in terms of as we continue to automate within the business. But a number of those that you see this year have a finite life period to them. In terms of the BAU-type costs, and again, as I think we sort of say in the presentation, we're down marginally period-on-period. But within that, the BAU costs, I mean, in all this, the strategies are I invest in technology, and I drive down BAU costs. And what you see is a shift between, kind of, normal BAU into things like revex into sort of depreciation-type costs. So my BAU costs, I think, as I said in the presentation, are -- they're down about 4%. I think they're GBP 4.5 billion or something like that, GBP 4.4 billion, with revex and depreciation about GBP 1.5 billion. So you see about a 4% reduction in BAU and about a sort of 10% uplift in investment associated. There's been no change in our capitalization rates, which I think were roundabout 60%. And I think we disclosed that at the half year. And that certainly has remained constant. And I wouldn't see a reason why it kind of would change. So those would be the numbers there.

[Edward Hugo Anson Firth, Analyst]

Just to make sure I've got all the numbers right. In terms of your -- adding up your 0.3s and 0.1s, et cetera on restructuring, it's about GBP 700 million for the year, as I understand. Just...

[Mark George Clifford Culmer, Director]

That's what I said. It's thereabout.

[Edward Hugo Anson Firth, Analyst]

Yes, okay. And in terms of then the capitalization rate, I mean, I think you capitalized about GBP 400 million in the first half. So it sounds like about GBP 200 million a quarter. Is that -- have I got those numbers right?

[Mark George Clifford Culmer, Director]

As I think, they will be there or thereabout. If I'm clearly wrong, we'll give you a buzz. And then CMA is slightly woolier -- and I've bombarded you with numbers. I would expect to participate. These things come around. We've done an awful lot over the years in terms of enhancing our customer propositions, whether that's combining savings accounts, whether it's the work that we did on overdraft, whether it's the work we do in insurance in terms of -- within general insurance in terms of front book, back book. So we've made an awful amount of progress and made real tangible steps over the last few years in terms of enhancing and already improving our proposition. And part of that is absolutely transparent disclosures and ongoing communications with customers. So we've done an awful lot of that stuff. I can't comment in terms of what our involvement will be as we go forward. I would expect to be involved.

[Edward Hugo Anson Firth, Analyst]

But given that look is, obviously -- well, seems to be focused on the front book, back book spreads and I guess, looking across a number of markets, not just banking. Is that something where -- I mean, clearly in other industries, people have been preemptive to try and effectively head them off at the pass and come up with something reasonable before we get there. Is that the sort of way you look at this, or is this more something where you just stick where it is, you're happy with the pricing?

[Mark George Clifford Culmer, Director]

I'm not going to do anything knee-jerk because they've come out. So if that was the pressure point -- I'm not going to do anything today because they've written their report yesterday. What I'm saying is, we've done an awful lot over the last 2 years in terms of transparencies, disclosures, aggregation of products, already movement on differentials between front book and back book. So there's an awful lot we've done over the past few years which takes us in this direction anyway. But there is absolutely nothing I will be doing today from a product perspective in anticipation of what I think they might be saying.

[Operator]

Your next question comes from the line of Guy Stebbings.

[Guy Stebbings, Analyst of Banks]

Two questions from me. First on U.K. Motor Finance. Pace of growth remains very strong. It looks like it actually accelerated in the third quarter. Yet you sort of see headlines in the broader market starting to slow, and I'm presuming we're starting to reach a point where you would expect maturities just to pick up, given the timing of your growth in the book. Could we get some color around outlook there? That would be very helpful. And the second question was just on PPI. Can you give us an update on what you're seeing for PPI claims, given your comments regarding the pickup in volumes and from the latest campaign and with more being done direct rather than through claims management companies, and what impact the fee cap is having there?

[Mark George Clifford Culmer, Director]

Okay. So on PPI. So the facts, first up, obviously, were at 13,000. We've, obviously, made no addition to the provision this quarter. As you know, I think we came in roundabout, I think, it was 11, wasn't it? Then we moved to 12 and then up to 13. Most recent experience in terms of the reactive is that we've probably seeing roundabout 11,000 to 12,000. So inside our expectations in terms of weekly run rate. That's moved into another FCA campaign, which is a few weeks through. And again, as I previously said, is what you get is very immediate reaction to that. So the sort of 11, 12, which is the sort of undisturbed level that we've seen, goes up to about a 14,000-type number. It then comes down again pretty quickly. So it's incredibly correlated with the ad spend. So it shoots up to the sort of 13,000, 14,000 but then comes back. The fee capping, yet to see strong impacts in terms of -- we are seeing a bit of a mix in terms of additional direct complaints coming through. But yet -- we're yet to see a massively discernible impact from the fee capping. I mean, there is no doubt about that. We'll be -- we'll still wait and see. But as I said, the sort of -- the good news is, the time bar is in place. We've got about GBP 1.5 billion unspent in terms of the provision. That will sort of cover me -- expected to cover me not just the 11 months through to the end of August, but you'll get some tail in terms of dealing with those complaints so probably a couple of months thereafter. So let's assume 13 months. So that's about GBP 120 million spend. First few months of this year were slightly higher than that, right about GBP 150 million. That's because I was doing some Plevin outbound mailing and things like that. So I expect it to come down to that. So for the moment, as I said, it's inside. We've seen the pickup. But that was to be expected. The FCA have actually combined 2 -- there are going to be 4 marked in, and we've now essentially had 3, I think, and -- so there is 1 left to go prior to the end. So that's kind of where it's supposed to be. U.K. Motor Finance, in terms of our growth, would start moving to a period where you get the increased redemptions within the Black Horse book. And I would expect our growth to come back down into mid-ish single digits expectations of growth. The market remains pretty robust. As you know, the main thing we're focused on is the residual value exposures. We have actually seen secondhand car sales pick up. And once you get in terms of flows is also basic supply and demand. But actually, I'm able to focus on the drop-off in new business -- new car sales, yes. But what it actually means is that acts as a boost to second car value, secondhand prices. And we have seen, actually, a pickup in secondhand car prices as we've moved through the year. That's both petrol and diesel. And we still are selling at auction cars with several hundred pounds profit, vans more than that. So we're still staying relatively robust. But I would expect our growth to come back into the mid, sort of, single digits.

[Operator]

Your next question comes from the line of Chris Cant.

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

Congratulations on the retirement. Could I just ask you to give us an update on the SVR book in a way and give a few stats in terms of book size and the pace of attrition? That would be helpful. And then secondly, on mortgage pricing. Obviously, you're confident, still, on your NIM trend out to 2020, but some of your peers are sounding rather more downbeat. How much further would mortgage pricing need to tighten for you to see it as a threat to your broadly stable NIM guidance?

[Mark George Clifford Culmer, Director]

A slightly open-ended question. The -- okay, so on the SVR bit. First up, what you're seeing is kind of, I won't say it's no news, but it's remarkably stable. So you are still in that sort of 13% type attrition rate that we're seeing across the piece. So that's -- for the Halifax book, I think it was about 13.5% in terms of Q3-on-Q3. And so it's been moving around that way. And again, the rest of the book is remarkably stable. We gave you the stats and the composition of the book at the half year. So we're seeing nothing, no major change in the themes or the trends there. Look, to the mortgage bit, look, this is a tough market, and you have to manage it accordingly. And so I'm going to -- it's frustrating not giving you numbers. But it is hard. Unless you're managing both sides, as we go on about endlessly, and unless you're managing the interactions between the front and the back book and looking at the combinations of risk profile in terms of franchise protection, et cetera, it does require work, and it does require effort. If I just go out there and follow one side of the balance sheet and try to stick to a market share-type target, then I'll see the consequence of my NIM and I'll see the consequence in my short term. So it's a bit like going back to the earlier questions. We've worked enormously hard on the developing propositions that don't cannibalize for 5 years. We've worked enormously hard on retention and pushing up potential. So we're up to 70%, 80% in terms of retention, which, I forget the precise number of a few years ago, but it was nowhere near as high as that. And then to sort of bore you with this stuff because we -- as you've talked about, you -- we're working very hard on the liability side. So it is tough. And that toughness is reflected in our submarket growth rates that you've seen. And we've -- we've been shrinking the book, we held it last year. We're looking for slight growth. But it's reflected in our whole strategy to the market. So I'm not going to tell you that another 20 basis point or whatever jeopardizes this or whatever. I'm sorry. It just means we will work harder in terms of seeking offsets and trying to manage this thing.

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

If I could ask it a slightly different way, and I appreciate you don't want to give a specific number. But if one of the levers you're pulling to manage that is submarket rates of growth, and from your comments on an earlier question, it sounds like you're viewing as one of your large peers that recently some of the pricing in the market is irrational in terms of just breaking into double-digit return if you allocate capital properly. Do you think you can deliver growth in interest earning assets and deliver your stable margin guidance, given pricing where it currently is over the next couple of years? Can you give us a sense of how you're delivering growth with stable margins? Is that realistic with pricing where it stands today?

[Mark George Clifford Culmer, Director]

Yes, we believe it is. So as you know, because when you look at the composition of the balance sheet, when mortgages were coming down, and everything else has to work to a factor of 10 to sort of offset that. If I can hold my mortgage book, then grow through the other areas that we've talked to you endlessly about, the SMEs, the mids, the unsecureds, et cetera, enable me to move the assets forward. And I would stick to our stable guidance in terms of the NIM. So again, going back to my earlier comments and I'm not looking for sympathy here. You know that. It doesn't happen by itself. You have to work at this and you have to manage and you have to control every piece of the book, both sides of the balance sheet and try and -- to affect this because those are tough markets. But if I can hold my mortgage position, the targeted growth in the other areas of the book should move those assets forward.

[Operator]

Your next question comes from the line of Martin Leitgeb.

[Martin Leitgeb, Analyst]

Could I ask firstly on the liability side, and you made reference to some of the earlier questions with regards to your ability here, not to pass on the benefit of the rate hike in full and keeping further scope for optimization, what you have seen in terms of competition currently within the deposit market in the U.K.? And I think, previously, some time ago, had a lot of discussion, shifting some of the Retail and focusing more on the Commercial side of the deposits just being there, an attractive pricing differential. Do you see this pricing differential at this stage? And my second question would be just on the stress test from the Bank of England, obviously, in a few weeks' time. And I was just wondering if you could share what your thoughts are going into this stress test because from an external perspective, it seems the amount of stress being applied, if it's broadly similar to last year's exercise, but obviously the methodology in terms of IFRS 9 and the application of that stress is likely to be much earlier compared to before. I was just wondering if you could share what your thoughts are going into this stress test. Would you expect the stress test could be potentially tougher for Lloyds this year?

[Mark George Clifford Culmer, Director]

Okay. So I think a question around the overall competitiveness of the liability market, which it continues to be not as competitive on the asset side. And the ability to shave rate, et cetera, across the book, will you see that evidenced in the numbers that I've spoken to you about. So I'm not saying it isn't competitive but it's nowhere the intensity that exists on, certainly, parts of the asset side of the balance sheet. So that has been the case and that, I would say, that generally remains the case across the piece. And so there's no doubt about that. And look, there is still the opportunity in terms of moving between Commercial and Retail and opportunities there as long as they're the right type of Commercial deposits. Stress test, you're right, essentially, it's a rerun of last year and with IFRS 9 thrown in. I think as I had answered in an earlier question, I think the headline with IFRS 9 and perfect foresight, you could get some big movements. What is important is the -- isn't the P&L noise but the interaction through with capital base and the imposition of the transitionals and then, hopefully, a longer-term, more permanent solution in terms of either adjusting for hurdle rates or whatever in terms of dealing with IFRS 9. But I think both on the EBA, as you know, on EBA, in terms of construction and the artificiality and the constraints around all those such as asset cures and things like that always produces some interesting outcomes. But PRA, in particular, same stress. We are a year further on, though. So I would say, though, things like we are a year closer to, obviously, time bar in terms of conduct. We have also a lot of things like pension schemes in better positions and the surplus position, which is a positive as well. And we've also continued to derisk the balance sheet. So you've seen things like, for example, the sale of our Irish mortgage business, which is a benefit. And you've just got the general seasoning of the book as well. But I still think, post IFRS 9, post perfect foresight, you're going to see some relatively ugly numbers across the piece. But what's important is how the PRA deals with the -- and protects the capital position.

[Operator]

Your next question comes from the line of James Invine.

[James Frederick Alexander Invine, Equity Analyst]

Just got one on your nonbanking net interest income, please. It's been running kind of low single-digit million negative, kind of, on average over the past few quarters. Is that now a sustainable level? And I'm just asking because consensus has got that picking up to pretty much negative GBP 100 million in 2019.

[Mark George Clifford Culmer, Director]

I can't think anything odd any term in terms of the quarterly numbers. You've only got one question, and I don't think we're going to answer it very well. The -- I don't think there was anything dramatic in this quarter's nonbanking net interest income. So we'll have a look. We'll have a look. Sorry, James. We'll have a look and come back to you. But I'm not aware of any change in trends or anything like that. So I will come back to you.

[Operator]

We have dealt with all the questions. Ladies and gentlemen, this concludes the Lloyds Banking Group Q3 2018 Interim Management Statement Conference Call. Replay info for those of you wishing to review this conference: the replay facility can be accessed by dialing 0 [phone] within the U.K. or 01 [phone] within the U.S. or alternatively, use the standard international on 00442071369233. The access code is 98701977. Thank you for your participation.