Lloyds Banking Group PLC

LSE:LLOY

Earnings Call Transcript 2019-Q3

[Operator]

Thank you for standing by, and welcome to the Lloyds Banking Group Q3 2019 Interim Management Statement Conference Call. [Operator Instructions] There will be a presentation by William Chalmers followed by a Q&A 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 William Chalmers. Please go ahead.

[William Leon David Chalmers, CFO & Executive Director]

Thank you, and good morning, everyone, and thank you for joining today's call. You'll recognize the format of the call from previous quarters. I'm planning to give a brief overview of the Group's performance and then we'll open up to Q&A. Before getting into the presentation, I thought it important to say that since starting, I've been hugely impressed by the customer-focused culture of Lloyds and the strength of the franchise and the quality of the team. I wanted, in that context, to express my thanks for the warm welcome and the very supportive environment we've experienced across the Group. So with that said, turning to the first slide on quarter 3. Financial performance has been solid in a challenging environment. Statutory profit before tax of GBP 2.9 billion for the 9 months is down significantly largely due, as you know, to the additional PPI charge of GBP 1.8 billion in the third quarter. Underlying profit meanwhile of GBP 6 billion is down 5%, while the underlying return on tangible equity remained strong at 15.7%. Revenues are down 3% whereas total costs were down 5%. We've again enhanced our operating cost guidance for 2019.Statutory profit and return on tangible equity of 6.8% obviously impacted by the PPI charge. TNAV of 52p per share is down 1p in the year. Group build 149 basis points of free capital in the 9 months before PPI dividends with the acquisition of the Tesco book. We've also seen, as you've seen, a small reduction in the Pillar 2A requirement in the quarter, although we're currently not revising our capital target of circa 12.5% with the management buffer of around 1%.Given our capital strength, we continue to target progressive and sustainable ordinary dividend. So I'll now turn to a look at the financial performance in a bit more detail.Turning to Slide 2, you see the overall performance. Net interest margin of 289 basis points has fallen 4 basis points year-on-year from 1 basis point in the quarter. This quarter, the NIM has benefited by a couple of basis points from the previously planned alignment of MBNA product turns with the rest of the credit card business. I expect a further benefit into the next quarter. And with this included, we expect to end the year with a full year margin of 288 basis points, in line with prior guidance of around 290 for the year.Looking at the margin, we're maintaining our active approach to management balance sheet, including small tactical acquisitions such as Tesco, to partly mitigate the impact of rates in the competitive environment that we see. Given these rates, we continue to largely hold back from reinvesting with structural hedge, it remains at GBP 172 billion. Our hedgeable balance is around GBP 185 billion, so that gives us a degree of flexibility should rates rise.Other income of GBP 1.3 billion in the quarter remains tough, and we expect the trends behind that to continue into Q4. Turning to the divisional performance and other income, as we mentioned at the half year, we continue to see a challenging backdrop for our commercial markets businesses and lower fee income in Retail than last year, the latter being significantly driven by lower fleet volumes in Lex Autolease. Insurance, on the other hand, is continuing to perform well but it's also impacted by rates. We'll not see a recurrence of the benefit from the change in asset manager, which we experienced in the first half. Likewise, longevity changes have recently been reported in the first half as indeed they were this year. Central items are also down a bit partly due to lower gilt sales as we flagged previously. Given the revenue environment we're seeing, we very much maintain our cost -- our focus, rather, on operating cost reductions. Since arriving, I've been really impressed by the Group's methodical focus on costs, insourcing of contract staff, the implementation of e-auctions are 2 good examples of successful initiatives achieved in this area.In this context, total cost are down 5%, including the lower remediation charges. And within that, BAU costs are down 6%, while the market-leading cost-income ratio has improved again to 46.5%.Our relentless focus on the cost base means that we now expect operating costs to be less than GBP 7.9 billion in 2019. It's the second time that we've updated the Group's cost guidance for 2019, and this is alongside continuous investment in the business.Cost reductions obviously helped to offset for the impact of the challenging revenue environment. It is something that we will continue to concentrate on in the future, and it will remain a source of competitive advantage for the Group.Now turning to Slide 3, I'll briefly take a look at credit. In Q3, the gross AQR was 40 basis points. Net AQR was 33 basis points. Both, as you can see, are impacted by a large single name charge in the quarter, which is a top-up of the 1 of the 2 cases we highlighted at the half year. If you exclude that charge, both AQRs have remained low and stable over the last few quarters. We continue to expect the net AQR to be less than 30 basis points for 2019 as a whole. Despite the ongoing economic uncertainty, underlying credit quality, therefore, remained strong. We maintained our prudent approach to risk. Future arrears, for example, remained low across our key products, mortgages and credit cards, for example. We're also continuing to -- with our conservative approach to IFRS 9 with relatively severe economic assumptions maintained in our [ MES ] modeling approach.In this context, Stage 3 balances have remained stable at 1.9% of Group loans and advances while coverage was in line with year-end at 24%. So to move on and look at below the line on Slide 4. The restructuring charge continues to reduce and is down 54% on last year as the MBNA integration and ringfencing work are now complete. Volatility and other includes FX-related banking volatility and the charge in Q1 for the change in asset manager. PPI charge of GBP 1.8 billion is obviously significant and very disappointing. As we disclosed in September, like the rest of the sector, we received a huge spike in information requests in the days leading up to the deadline. We now completed the work to assess volumes which were at the high end of expectations. Quality remains low, and PIR conversion is still averaging around the 10% mark, we talked about previously. We're seeing some variation across time periods on this front. We've also included within the GBP 1.8 billion a charge for the official receiver.Moving down, if I -- a higher effective tax rate of 33% in the year-to-date reflects a nondeductibility of certain PPI redress costs. Beyond this, we continue to expect a medium-term effective tax rate of around 25%.Looking briefly at returns and s I mentioned earlier, the underlying return on tangible equity remained strong at 15.7% while the statutory return of 6.8% has been clearly impacted by PPI.So to turn to the balance sheet on Slide 5. We've seen good growth in the quarter. The open mortgage book is up GBP 6.1 billion on the half year, including a GBP 3.7 billion Tesco book acquisition. Strong underlying growth of GBP 2.4 billion is the result of increased new business flows, so we took advantage of a more favorable market over the 7 months. We maintain our focus on pricing discipline, and will [ write our ] business, when it looks attractive. This is part of the active balance sheet management, which I referred to earlier on. A strong third quarter and the Tesco acquisition mean that we now have greater participation flexibility. This all included -- we expect the open book to end the year above 2018 levels. Elsewhere, we continue to grow in our other targeted business. SME, for example, is up 2% from the prior year, while Motor Finance is up 8%, 1% above the market. We also continue to attract high-quality deposit balances. Total current accounts were up 3% on the prior year. Within that, there continues to be a material outperformance in U.K. personal current accounts, which are growing about 50% ahead of a highly competitive market. As you've heard, this has increased our hedgeable balance to about GBP 185 billion, of which about GBP 13 billion is currently unused. RWAs are up GBP 3 billion in the year-to-date with the impact of IFRS 16 and the Tesco acquisition largely offset by the ongoing optimization within the commercial portfolio.So finally, we'll turn to capital on Slide 6. Capital build remains healthy as illustrated by the Group delivering 149 basis points of free capital before the impact of PPI and Tesco. Group's organic capital build is supplemented by 34 basis points from the cancellation of the implied buyback and additional capacity from a year-on-year 50 basis point reduction in the Group's capital target to circa 13.5%. Meanwhile, we used 9 basis points of capital for the acquisition of the Tesco book.As you can see, we expect the Group to build circa 75 basis points of free capital in 2019, net of PPI charges, which equated in total to 121 basis points. This implies that the underlying capital build after PPI for the year is likely to be slightly below the guidance that we gave at the half year. We're pleased obviously to see the equity component of our Pillar 2A charge come down by a further 10 basis points this quarter. That came after the Group had announced the lower capital target to circa 12.5,% plus the management buffer of circa 1% at Q1. That said, we're currently maintaining our Group target, and in effect, we now have an additional 10 basis points of capital headroom for regulatory requirements.And so as I mentioned earlier, given the Group's capital strength, we continue to target a progressive and a sustainable ordinary dividend while staying comfortably above the Board's capital target. So if I turn to the last slide, in conclusion, the Group has the right strategy for the current environment. We continue to deliver against our strategic priorities having invested GBP 1.7 billion since the launch of GSR3 in 2018. This quarter, for example, we've launched Schroders Personal Wealth with the ambition of being a top 3 financial planning business by the end of 2023. Our business performance, as you can see, returns remained solid, and resilience of the business model is reflected in the 2019 guidance. We obviously acknowledge the pressure from the external environment. For 2019, we expect a net interest margin of 288 basis points, in line with our guidance of around 290 basis points for the year. For 2019, we now expect operating costs, excluding remediation, to be less than GBP 7.9 billion, ahead of our previous guidance with a lower-cost income ratio within 2018.We also expect the net asset quality ratio to be less than 30 basis points. Given the PPI charge in the quarter, we expect free capital build to be circa 75 basis points for the year. And as I've said, we continue to target a progressive and sustainable ordinary dividend. So overall, the subdued environment is having an impact on the economy and, therefore, inevitably on our business. Continued uncertainty could further impact the outlook. But in this context, and as ever, I will continue to maintain our focus on prudent growth, reducing costs and investing in the business. Even in an uncertain environment, our solid business performance and continued delivering against our demanding strategic goals, mean that we're well placed to support our customers and to continue to help Britain prosper.That's all I wanted to say upfront, and so now I think we have some time for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Raul -- from Jason Napier, UBS.

[Jason Clive Napier]

Two, please. The first, other operating income was a little [ lighter thus ] and quite a lot below market expectations, but the sort of divisional trends that you're outlining, I don't feel like they are the sort of thing that might change in the sort of near term. Is it your expectation we should be annualizing the third quarter run rate? And then the second question, and I guess this is somewhat linked to the first, is around the walk forward for capital generation. The sort of implications of your full year target are that you're expecting to be pretty much back at the 200 bps a year cap gen number. I just wonder, looking forward at 2020, whether that sort of through-the-plan aspiration remains appropriate, whether there are any moving parts around regulatory change or sort of other foreseeable items that might change there?

[William Leon David Chalmers, CFO & Executive Director]

Okay. Thanks, Jason. Maybe I'll deal with them in turn that you asked them. The other operating income, as I said in my comments, the other income, environment remains tough. Those trends -- or factors behind those trends, I should say, we expect to continue into Q4. At the same time, just look at it in a bit more detail, if you look at it it's 4 lines, really. Commercial, it's under pressure again, as I indicated in my comments, from markets. Comparative last year is a relatively tough comparative. The Retail business, which is pretty much steady; and the Insurance business, which no doubt will go up and down in any given quarter, but there's some strong structural support and the benefits from organic changes in the first half, these yields or enrollment and some one-offs, e.g., the change in asset manager benefit, some experience gains, longevity gains, in particular. And then finally, the fourth area, which is other, which benefited in H1 from gilt gains, a little bit from LDC and 2018 is a comparative. I think that gives you some idea, if you like, on the trends behind the numbers. In terms of annualizing for Q3, I'm not going to give guidance on this call for 2020. We'll save that for the year-end results in first part of 2020. But I would be careful before annualizing that other income trend from Q3. The reasons for that I think are in the trend analysis that I talked about earlier on, and that is to say, commercial, as I think, a lot of businesses are right now, is under some pressure in markets. There's not much investment activity going on. That's being reflected in some of our commercial lines. We certainly hope that environment clears up going into 2020, and with it, the commercial and markets business we expect will come back. The Retail, as I said, I expect will be flattish. Insurance, as I said, it has some structural growth drivers. I think, importantly, you also typically see longevity and other experience gains in the first half as we saw this year. And then, of course, the central items, gilt gains and others, they're always difficult to predict, but they'll go up and down. In this quarter, in particular, they were basically nothing. In the last quarter and earlier on this year, they were more considerable. So I would just be cautious before annualizing Q3 into 2020 as a whole.I think the second question that you asked, [ went to ] capital generation of the business, which, as you know, is close to the heart of this business and is an issue, if you like, that we take pretty seriously. The comments that I'll make -- again, I'll steer away from being too explicit on 2020 guidance, but the comments I'll make will hopefully give you a picture. It's a strongly capital-generative business, as you know. The business model is very capital-generative. I think if we look at this year, we've got 75 basis points for the full year that I mentioned. If you add back the 121 basis points that we've consumed in PPI charges one way or another, and you can see the total capital generation, adding those 2 together, is well within the 170 to 200 basis points range that has been indicated. I think next year, there's no doubt, we'll see a tough external environment, and everybody is saying the same thing. But we've also got levers to pull, if you like, that help partly mitigate that. And we've been successful in doing so in the third quarter. It's most obviously cost as you see in this quarter and as the Group has a strong reputation for. So that will help mitigate some of the external pressures. And then obviously, we don't expect the PPI charge to be repeated. I think just adding to that, we are moving -- our base case, I should say, is moving to a better outlook on expected RWA headwinds. I talked about GBP 7 billion to GBP 10 billion range at the half year. We're looking at, right now, at the bottom end or possibly slightly below that. We'll give some more updates at the 2019 full year results. And that obviously helps. So I'll give more guidance at the 2019 year-end and 2020. Or that's when I'll give the guidance, I guess, in accordance with our usual planning process. But I think overall, I don't expect the capital generation of the -- capital-generation characteristics of the business to change too much, and hopefully, that gives you a picture.

[Operator]

Next question comes from the line of Raul Sinha from JPMorgan.

[Raul Sinha, Analyst]

Just to clarify then, William, on the other income line, while we shouldn't be annualizing it, but you do think that some of the headwinds that you've seen in Q3 will persist into Q4. Is that a fair conclusion then?

[William Leon David Chalmers, CFO & Executive Director]

For Q4, I think it is, for the time being, a fair conclusion. Again, if I look at the drivers of that, commercial is an obvious one. We would have liked to see, frankly, a bit more stability in the external environment. It now looks like we're going to go through a period of -- well, a questioning period, I suppose, as the politics get resolved and with it, the nature of the macroeconomic environment that we'll have to deal with. But I think there is evidence in the commercial business and investment decisions have been holding back, and with that, a lot of the market's lines, market activities in our commercial businesses are driven. I think that the absence of investments has a number of tail features around it in terms of hedging activity and other things that our clients would typically do. And in short, we're not seeing much of it. We do think as the macroeconomy settles down, and then we expect to see some of that return. But obviously, the macroeconomy will settle down only when the political questions are resolved. That's one reason why I think it is as it is for Q4, but we would hope that it comes back during the course of 2020.

[Raul Sinha, Analyst]

And can I check if you've changed your appetite around bulk annuities at all, given that's a particularly volatile hard-to-predict line within the other income that tends to go up and down? Historically, we have seen quiet quarters being followed by some strong outcomes. Is there any change in the bulk annuities pipeline?

[William Leon David Chalmers, CFO & Executive Director]

No, not really, Raul, it's a -- bulk annuities is obviously an important area [ of the group ], it's also got some secular tailwinds behind it. I think what you do see with bulks is timing issues. You'll get more in any one quarter or less in any other quarter. And if you look at our Q3, we didn't get much. We are engaged in bulk activity, and we'll expect to see a little bit more of that in Q4. But that's simply just because of when deals get signed. It's not any more precise than that really. The one comment I would make on bulks is that there's 2 sides to them: one is obviously the pricing of the bulk asset, if you can call it that, if you like; and then the second is the actual assets that you get to back up the bulk when you bring them on the balance sheet to earn a return. We typically are quite cautious on both. That is to say, we don't tend to enter the bulk markets when we don't think we can earn a decent return from the pricing of those bulks. Equally, we have quite strict illiquid asset constraints, if you like, simply because of prudent risk appetite, and that allows us to do the bulks when we think they makes sense, and it also constrains us from not doing the bulks when we don't think they do. So each of those 2 factors play into it. But I think no change in risk appetite. You'll see bulks going up or down on a quarter-by-quarter basis simply by virtue of the timing of signing of certain deals.

[Raul Sinha, Analyst]

Can I just quickly clarify the Motor Finance charge in the quarter? Would you be able to give us any sense of how big it was? And is that driven by the growth in the book? Have you got any thoughts in terms of sensitivity of the business, that would be really helpful?

[William Leon David Chalmers, CFO & Executive Director]

Sure. The Motor Finance charge, I won't put a precise number on it, but the Motor Finance charge has been a component, if you like, of the impairment charge that we've seen in this quarter. In fact, we've seen a little bit of it in the earlier quarters of this year as well, and it's driven by basically second-hand car prices. That, in turn, is driven by supply side as much as demand side, which is to say there was quite a lot of new car input, if you like, into the -- flow into the market, about 3 years ago or so. Now, that was all put on 3-year contracts, and it bounced back as a result in 2019 and caused some softening in prices off the back of that supply side. Demand side of the equation, just like any other consumer durable, the commercial investments that we were talking about earlier on, is a little bit constrained in the context of uncertain macroeconomic environments. There's a bit of downside -- sorry, demand-side effect there, too. The only point I would make is that in addition to that is that we've seen that fortunately coming back a little bit just recently. That is to say we saw some downward pressure in the first 3 quarters. The data at the moment is indicating a slightly more positive turn and improved prices. I don't want to call that just yet because it's just too early to say. But it is looking better recently versus what we've seen in the first 3 quarters of this year.

[Operator]

Your next question comes from the line of Joe Dickerson, Jefferies.

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

I guess just a quick question would be on the capital return. The capital-generating characteristics of the business haven't deviated from the prior-underlying trend. What would be the hurdle to you distributing down to your revised capital target plus 100 basis points buffer when we get to full year results, firstly? And then secondly, just on the Lex Autolease comment on the other income. Is there anything going on there that's structural? Is that more of a transitory trend linked to, for instance, the same trends that are driving corporate activity?

[William Leon David Chalmers, CFO & Executive Director]

Sure. So let me just deal with the first of those 2. The capital distribution -- or sorry, the capital generation is, as described earlier on, which hopefully is useful. As we look towards the year-end, as you know, the dividend is incredibly important to us, and I've made several comments today that indicate our commitment to that dividend. We expect -- and you'll be able to sort of do the arithmetic, if you like, from the numbers that I've given you, that we will be comfortably above the group target or the Board's target in that context. And yes, let's see. But to the extent that arises or rather gives rise to excess capital that go beyond the commitment to the ordinary dividend, then that's very much a matter for the Board towards year-end. And they'll take a view on any buyback considerations at that point. But we do feel very comfortable as for the capital position. We have a complete commitment to the ordinary dividend, matters around buyback and distribution of excess capital beyond that. In the light of the current capital target and in light obviously the Pillar 2A benefit that I mentioned earlier on, that's all a matter for the Board towards the year-end. The second point around Lex Autolease, we've seen in Lex Autolease a bit of a reduction, as mentioned, I think, in the RNS around the overall fleet size there. That's a function of 2 things: in the main, it's a function simply of corporates revising their company car strategies, and that obviously drives the Lex Autolease performance or at least stock; and then to a degree at least, we're also making sure that our pricing lives up to our margin expectations and ROE requirements, which allows us to deliver, if you like, a healthy business while also allowing it to grow and succeed in the marketplace. So hopefully, that gives a bit of color, if you like, on that business.

[Operator]

Next question come from the line of Fahed Kunwar, Redburn.

[Fahed Irshad Kunwar, Research Analyst]

A couple of questions. On NII, there was a comment on MBNA alignment, how much did that benefit gain interest income in the quarter? And my second question is on loan losses, again, thanks for the color on the car market. A lot of your peers are taking IFRS 9 charges. It looks like your impairment increase today was about a specific incident that happened in the quarter. There was no change in economic assumptions or models that led to kind of the increase or decrease from an IFRS-modeling point of view. Could you help us understand why is your peers are making these changes, but you don't seem to be?

[William Leon David Chalmers, CFO & Executive Director]

Sure. Dealing with the MBNA change for the moment. As mentioned, it's a couple of basis points in the margin this quarter from the product alignment. You'll see also something similar during the course of Q4. That was an exercise that started in August that will finish in December, hence the fact that it comes across the 2 quarters. Essentially, what it is, it's an alignment between products in Lloyds and MBNA portfolio in the card's area obviously. And when we bring the 2 into line, it just means amending the balance transfer period, which, as you know, is effectively EIR accounted. And that, in turn, means accruing some income into the current period and, hence, a couple of basis points that I described. That's probably as much as makes sense to say really on the point. Hopefully, it gives the color and context that you need in terms of the quantum and also the mechanics behind it.

[Fahed Irshad Kunwar, Research Analyst]

Just so I understand, is that about GBP 40 million, GBP 50 million benefit then over the second half from this alignment [ actually brought forward ]?

[William Leon David Chalmers, CFO & Executive Director]

Well, yes. I mean it's roughly that. We're trying to take a conservative approach to the amount that we put in Q3 versus the amount that we put in Q4, but you're not a million miles off. The loan losses point, IFRS 9, it's obviously an important point. It's in the charge year-to-date here, which is GBP 950 million for the portfolio as a whole. The IFRS 9 approach that we take, we consider it to be a very pure approach and very consistent with the IFRS 9 guidance that has been given. And effectively, what it does is it takes a base case, and then it shocks for that base case, shocks around that, so that you then get a distribution, if you like, of different macroeconomic and, indeed, asset quality implications. Some of those, because of the nature of distribution, are more benign than the base case. Some of those are significantly more severe than the base case. And you've seen that we then put it into base case upside, mild downside and severe downside. We have, off the back of that distribution, probability weighted alignment, which feeds into our ECL. So when we talk about the overall IFRS 9 charge that is put into our accounts, if you like, it already takes account of that spread of distributions, including some fairly severe downside macroeconomic and indeed loan book implications. To give you one example on that, in our severe downside, house prices go down by the order of 35% over the course of the 5-year period. Commercial prices I think, are down a nudge above that between 35% and 40% over that same period. And those, in turn, are fed in, in a probability-weighted basis to our charge. So from our perspective, we have a range of macroeconomic assumptions built into our ECL. And when others talk about putting overlays or others into their charge, from our perspective it's already built-in.

[Fahed Irshad Kunwar, Research Analyst]

Sorry, can I have one quick follow-up on that. As you mentioned it, a kind of spot question, I remember you always had GBP 100 million buffer in your loan-loss charge for residual value discounts on the car lending book. Have car prices fallen though much, that our buffer's been -- has it been utilized? Or have you kind of topped up the charge such that the GBP 100 million buffer has remained?

[William Leon David Chalmers, CFO & Executive Director]

Yes. I'm probably not going to go beyond the disclosure that we provide in the IMF and so forth on this. Safe to say that we typically take a very conservative view on cars. And we build in buffers -- some would say buffers upon buffers in terms of the way in which we assess these charges. The first 3 quarters experienced within second-hand car prices were comfortably within any buffers or expectations that we had. We're obviously pleased to see a bit of a turn in the course of the early -- no, first month, I should say, of Q4. But as I said earlier on, let's call that when it's a trend rather than when it's just a few weeks or months. Safe to say that the buffers that we have are still in significant part there.

[Operator]

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

[Andrew Philip Coombs, Director]

If I could have a couple of follow-ups. Firstly, on the EIR accounting, both with respect to MBNA alignment but also on the mortgage book. On MBNA, I think the reason you've seen the EIR benefit, because you are actually changing the bank transfer period on some of the cards. And you said it's going to repeat in Q4. There'll be another uplift. Is that something that then drops away or because there's actually a change in the duration? Is that something that's now at the status quo going forward? And then with respect to the mortgage book, we saw with Barclays in the second quarter, they changed some of their assumptions to do with the length of period at which customers stay on the SVR and took a one-off charge through an EIR assumption there. RBS have flagged something similar for 4Q. So with that in mind, can you just comment on your SVR experience? What you're seeing in terms of attrition rate, which I think George had previously said were accelerating? And also if that means we would also -- we can also expect an EIR assumption change from you as well?

[William Leon David Chalmers, CFO & Executive Director]

Sure. Again, 2 questions, and maybe I'll take the first one first. The MBNA product alignment, if you like, is a rate alignment, which in turn produces essentially a one-off. In this case, it's going to be spread across 2 quarters, change. And then, to use your language, does effectively drop away. So I wouldn't expect that to be repeating itself into 2020. The second of the 2 questions, the Barclays point, I obviously can't really comment on Barclays' accounting and kind of quite how it works and their SVR. I think to comment on our own book on what we see, we are pretty conservative. In fact, we're very conservative on the EIR assumptions. And so we have a relatively small EIR asset, which is then reviewed every year. Any true-ups that we see from that review typically are immaterial. And I'm obviously referring here to the mortgage accounting specifically, given your question. So we are seeing a little bit of shortening in behavioral lives. It's not dramatic, to be honest. But it's a little bit of shortening. But that isn't causing us any significant EIR implications, if you like. So again, I don't want to draw comparisons against others particularly, but that just speaks for our own situation.Your then sort of question that was attendant to that around the SVR and the attrition and so forth within that book, it's very much as was said at the half year, which I think was around the 15% mark. We're not seeing any particular change from that as we speak today. It's staying around that level.

[Operator]

Next question comes from the line of Chris Manners, Barclays Research.

[Christopher Robert Manners, Co]

Yes. So 3 questions from me. The first one was on PPI. When I looked at the statement you put out in September, it looked like you'd received around 3.5 million PIRs in a 2-month period, which seemed to be quite a lot. Obviously, you gave quite a wide guidance range on how much the charge would be. And you've come in right at the top end of that range at the moment. Would it be possible to just give us a bit more color on what surprised you and why you've come up right at the top end of that range? And the second question was on costs. As I look at consensus for 2021, yes, it's got a 47% cost-to- income ratio. I know that previously you've guided to sort of low-40s cost-to-income ratio exit rate for 2020. You flagged a few more headwinds on revenue. How should we think about that cost-to-income ratio target? And then the last question was just on mortgage competition. I guess you've grown mortgage balances in the quarter. Presumably, that was because you've actually seen what you think is a good risk-adjusted return and a decent ROE because you've had a widening of spreads as swap rates fell. Maybe could you just explore this a little bit how you see mortgage competition and whether you can actually continue to grow at that pace? Or given that now spreads have narrowed and swap rates have come back up again, whether you might hold off again?

[William Leon David Chalmers, CFO & Executive Director]

Sure. Thanks, Chris. Three questions. First of all, PPI, the GBP 1.8 billion provision that we've taken today, as was described in September, as you know, essentially has 3 components to it: the first component is around PIR's direct customer complaints; second component is around the official receiver; and then the third component is around operational charges, including financial ombudsman and other, I guess. When we look at that, what has been interesting to us in the period since we made the announcement in September, I guess, we have now got a very complete picture, I should say, a much more complete picture than where we were in September. It's very complete on volumes where we've now been through the stock available to us, and it's also now much better informed on quality. Those -- that in turn allows us to get a good grip on both of those numbers. I've indicated about 10% in terms of the quality. And within that period, there's been a bit of a variation. Some periods have been higher, some lower but overall they're averaging at about 10%. That piece, if you like, takes up a large chunk of the GBP 1.8 billion overall provision. And we are deliberately, if you like, making sure that we feel comfortable on a best-estimate basis obviously, as to both quantity and quality there. The official receiver is obviously an area that all banks have looked at, and we feel that it's appropriate just to take a prudent view on what might come out of that official-receiver situation, even though it's quite a wide range of outcomes, I suppose, in respect of that one. And then finally, operational costs and financial ombudsman, to a degree at least, those follow the first line, i.e., the volumes and otherwise, the PIRs and direct complaints that you might get. So why have we come out at the top end? I think we've come out at the top end because the further work that we have done has confirmed that coming out of the top end is the appropriate place to come out at. And as said, it allows us to form pretty much a best estimate of what the right provision might be. Now having said that, as with all provisions, there's a degree of uncertainty. I think the last thing that George said to me when he walked out of the office is never say never on this topic, so I'll take that advice. But that's kind of where we are on the PPI if you like. Costs. You're going to the area of guidance now, Chris, which I'm going to be a little bit cautious on just because that's really for me for the year-end in the first part of 2020. It is, as you rightly said, a tough revenue environment today, and it'll take a bit of time before it gets better, no doubt. The cost-to-income ratio is a function, both of the income line obviously and also the cost line. The one point that everybody should draw comfort from, if you like, is as I mentioned before, the relentless focus on costs really that we have around here. I mentioned a couple of examples in the words that I gave earlier on. There are others. For example, 50% of the non-FTE cost base is, if you like, up for renewal every 3 years because of the nature of contracts, that allows us to take a good look at the chunk of the cost base every year or at least to get a good chunk thereof. So I think the cost is a lever that we feel we're good at, and to a degree, at least is under our control. External environment, less so. And the precise implications for that from a guidance point of view, I'll fill in on the beginning of 2020 with the year-end results. And then finally, third question, mortgage competition. You're right, it ebbs and flows in this area. We saw a very competitive market going at the early part of the summer. For one reason or another, and some [ are positive to this ] because of the summer holidays, that then eased off during the course of the summer and worked its way into pipelines and gave us a good organic share, which I think was getting up towards kind of 19%-or-so share of the market at that point. And that was, as you say, based off of a view that we could earn an attractive risk-adjusted return because of margins coming back in a more favorable place. It's a core product for us. So that was welcome to see. At the same time, we've seen a little bit of ebbing in the margins since then. Going into the autumn, it's come away a little bit. It's not yet back to the levels that it was earlier on in the summer. But it's not as attractive as it was when we were participating in full. And so we do step back a little bit in those conditions. And the growth as a result that you'll see at the end of the year would reflect that. We still expect the open book to be in the right place. We obviously have the benefit of Tesco, which allows us to moderate our organic participation in the market, or not as we see fit, and that hopefully works to our advantage. So we'll participate on a flexible basis. Again, that's assisted by the Tesco acquisition in that respect. And we'll be selective about when we enter the market and when we don't based upon what we think returns would be.

[Christopher Robert Manners, Co]

Understood, and could I just ask a sort of small follow-up on that? I think you were talking earlier in the call about your RWA inflation may be coming in at the lower end of where you'd expected it. Would that actually mean that you've got less RWA inflation on your mortgages, though your -- or your spread you would need to meet hurdle might be a little bit lower, making it a little bit more competitive? Or is that RWA inflation benefit coming somewhere else in the book?

[William Leon David Chalmers, CFO & Executive Director]

Sure. The RWA changes it's -- I'll just briefly comment on why. First of all, this is just our current base case and so there is risk around the situation. We'll give more information at the year-end. But our current base is, as I said earlier on -- our current base case, I should say, as I said earlier on, is moving towards the lower end of where we were at the summer. When we look at that, there's a couple of characteristics, if you like, or building blocks within the RWA inflation: one is in retail, and the other is in commercial. The reasons why or part of the reasons why our RWA expectations are evolving in the way I've just described, are -- some of it is being taken in 2019 as our models adjust. A little bit of it may be taken in 2021, i.e., beyond the 2020 time period. And our model refinement, in turn, may take us to the view that the RWA inflation per se is perhaps a little bit less bad, for want of a better word, than it might have been. So it's each of those 3 reasons. Again, we'll update in a bit more detail towards the year-end. I think on your question about pricing and implications for mortgage growth, I must say when we look at it, it is not obvious to us that the market was rationally pricing based upon where RWAs were previously. And so when you say, well, will that encourage us to get into the market much more, impossibly, but it very much depends upon markets. I think the key issue, as I said, is that the pricing of mortgages when they're at very low margins, in our view, did not take account of the existing RWA framework as it was at that time. So as it bounces back, the implications will, if you like, be dependent upon that.

[Operator]

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

[Martin Leitgeb, Analyst]

Could I just have a follow-up on the mortgage question? And firstly, I would just like to ask you whether you could disclose your actual book size at -- as of third quarter? And over the medium term, I was just wondering whether you could give us a steer where you think the yield on the mortgage book will go. I think last disclosed as of half year was that the mortgage book had a yield of around 180 basis points. And I think during the call, it was mentioned that new business is coming in at 100 -- slightly over 100. So I was just wondering if you could give us a steer over the medium term over the next 2, 3 years, where you would expect the kind of gross yield to go? And then the second question is more broader, and it might be a bit early on, given that probably the guidance you give around full year. But I was just wondering in terms of what you think the return capacity of the bank is over the kind of the medium-term just given current condition?And I appreciate a lot has changed over the last couple of quarters, the last couple of years. Obviously, the rates outlook is slower globally. If rates expectation in the U.K. have changed, mortgage pricing remains to be meaningfully below existing book yield and, equally, on fee income and impairment levels trends seems to have slightly changed over the recent past. So I was just wondering, compared to your prior guidance 14 to 15, I think the consensus at the moment is of 13 if things were to stay at current level, could you give us a steer on where returns should be heading?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Okay. Martin, I think there are basically 3 questions in your points there. Yes, we are comparing the book as of 3Q. And I'm not going to put a number on that but we've given -- you know the number as of the disclosure last time around. You know the attrition has been roughly what I've said earlier on in the call. You kind of, I'm sure, get to the number off the back of those 2. And again, you probably wouldn't be a million miles off if you applied those metrics. The yield for the business, if you like, new business pricing, I think what you said just over around 100 basis points, it's probably not far off. It's -- I know it has been commented on by a number of banks during this reporting season. I don't think that their yields will necessarily be hugely different to ours. As I said, we may be a bit more selective than some about when we go into the market and when we don't, and that might drive a bit of a difference in yields for that reason. ROE guidance, I -- again, I'm going to stay away from precise guidance for 2020 and beyond. That will be done at the half year, as I said earlier on. I think I'll just draw your attention back, if you like, to some of the comments that I made earlier on around capital production in the business. And the fact that it's a strongly capital-generative business. We don't expect that to change.

[Operator]

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

[Guy Stebbings, Analyst of Banks]

I had one on the structural hedge and then one on the capital target. On the structural hedge, I think you referenced the GBP 13 billion of excess notional hedgeable balance. And I think there's around GBP 10 billion maturing in the fourth quarter, so perhaps GBP 20 billion to GBP 25 billion of total hedge capacity in Q4 to deploy. So if I check, firstly, are those assumptions valid, and if so, what's your current thinking around the hedge, given where prevailing swap rates are because obviously it's quite a big delta as we look ahead? And then on capital, you talked about the benefit of Pillar 2A but maintaining the target for now in your opening remarks. Perhaps, I'm reading too much into that comment, but were you hinting we could see a favor -- sorry, a future favorable provision there, perhaps if the stress test result in December goes well for you? I appreciate it's a matter for the Board, but hopefully, you could give some color around that, that would be very useful.

[William Leon David Chalmers, CFO & Executive Director]

Okay. Thanks, Guy. On the first issue around structural hedge, I think the GBP 13 billion excess you obviously heard in the comment, and that gives us a degree of optionality to -- if and when rates come back. At the moment, when we look at the shape of the curve, there really isn't much point in investing. You get the same yield back off a 3-month investment as you do off of a 5-year investment, and so we kind of sit tight while that happens. Some of the worry that you have around the structural hedge over the course of the next few months is probably a bit less of a worry on the basis that we've taken some risk off the table as we look towards 2020, and that was done when we saw spreads coming back earlier on in the quarter. So we took some advantage of those widening spreads to take off some of the back-end of 2019 risk that you were referring to. And then as we look forward, having said that, and I think this is consistent with what was said at the half year, we see some attrition in the hedge over the course of the next year. I think it was, in total, around GBP 30 billion, GBP 40 billion over the course of 15 months, which gives you a sense as to how the -- the shape of the hedge, if you like, over the course of the next year. So that's kind of where we are if you like. In terms of checking your numbers, those are the points that I would make. On the second of those 2 questions, the capital point, Pillar 2A, in particular, that really is a matter for the Board. So all I wanted to do is to point out that Pillar 2A revision has obviously come in. It's very welcome. It's in our favor. And it gives us a further 10 basis point headroom against regulatory requirements. But how that is responded to, if you like, it's really a matter for the Board, which I'm sure they'll consider in due course.

[Operator]

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

[Jonathan Richard Kuczynski Pierce, Research Analyst]

I just got one question, really, on the Insurance company. I don't know whether you can give us an update on the Solvency II ratio of Scottish Widows at Q3, obviously, came down in Q2 partly because of the foreseeable dividend but also the movement in market rates. Does that decline continue to any extent in Q3? And similarly, can you give us any sense as to what you're thinking with regard to potential dividend upstreams at the full year stage?

[William Leon David Chalmers, CFO & Executive Director]

Sure. Thanks, Jonathan. The solvency positions of the Insurance company, we don't obviously disclose on a quarterly basis. I don't want to change that, for the time being at least. I think that the Solvency II ratio is obviously over term -- over the period of time, gets driven by rates just as it does with any Insurance company. For the time being at least, the solvency position looks very comfortable. And as we project that forward into the last part of this year and early part of next, likewise, we feel very comfortable on it. There's no doubt that if the long-term rate picture remains depressed, that does eat into solvency over time, and we would expect to see that, just like others would I'm sure. It is -- the solvency position, I'll just make one more comment, it's not a rates comment, it's actually more an equity comment. We have taken quite an active stance in terms of hedging, the Insurance position, particularly in relation to equities, that gives us a bit more comfort over the solvency position of the company as a whole and a bit more conviction in what it would be towards the end of this year. So that's helpful. I think -- was there another part to your question, Jonathan?

[Jonathan Richard Kuczynski Pierce, Research Analyst]

Yes. I was just wondering what we should maybe expect in terms of upstream? At the full year, there were GBP 350 million in February of this year. Will it be that order of magnitude again?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Sorry, Jonathan, I am -- I did write that down. The dividend -- just as a governance matter or a procedural matter, the dividend from the Insurance company is a matter for the Insurance Board, and so I don't want to preempt that at all and it's for them at the right time. I think the comments that I made earlier on around the solvency position of the company hopefully allow us to be confident that the dividend expectations, if you like, that we have at a Group level, should be met because that solvency position is as I've described. But to be clear, that is a matter for the Insurance Board to be -- and a decision to be taken at the right time by them.

[Operator]

Your next question comes from the line of Chris Cant, Autonomous.

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

One quick follow-up or clarification on NIM please and then a couple on other income. On NIM, I think your 288 bps guidance for the full year implies circa 285 to 286 basis points for the fourth quarter. If I understood your comments on MBNA correctly, there's about 2 bps of benefit then in the fourth quarter number, which would imply an underlying exit run rate going into 1Q of next year of 283 to 284 basis points? Is that the correct interpretation of what you've told us today, please? And then on other income, you indicated Retail other income should be flattish into next year. A couple of your peers, including Santander U.K., yesterday have flagged overdraft fee changes -- regulatory-driven overdraft fee changes, has quite a big impact potentially into next year. What is the impact of that for Lloyds, please? If you could quantify that for us going into next year, given how close we are to the end of 2019? And what offset do you expect to that in order to keep Retail flattish into next year?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Okay. Thanks, Chris. On the first of your 2 questions on NIM, I'm not going to be sort of overly precise, if you like, on the point. But your interpretation of the guidance for the full year, the implication of that for Q4, within that, the component of the product alignment that I mentioned earlier on, are all of those building blocks, the right building blocks to be using. And therefore, I'll leave you to kind of draw your precise conclusions on that as you will. But all of those building blocks that you're taking and the inferences that you're drawing are basically right. The second of your 2 questions, Retail ROI. Again, I don't want to comment too much on Santander and what they may be seeing. But the one point I would make is that, as you'll be aware, there's been a change in the product here, on overdraft facility, and that's been -- that actually predates me. But there was a redrawing of the overdraft facility, which essentially did away with an awful lot of the fees that were previously imposed on customers. And although that will need a bit of refinement in the context of the FCA guidance that has come out since then, and that will be done, most of the headwinds, if you like, from a fee perspective, were taken out with that initial product redesign when it was taken. So as a result, the headwinds that others might be seeing, at least in significant part, have come out of the business here already. The business meanwhile on the Retail line, on the other income line, will be driven hopefully by a range of benign factors, no doubt stemming in part from some of the current account guidance that I gave during the comments earlier on where we're seeing volumes increasing. And if the regulators do have anything else in store, then we'll see that in due course. But the specific point you made on overdraft fees, we feel has been very substantially dealt with.

[Operator]

Your next question comes from the line of Benjamin Toms, RBC.

[Benjamin Toms, Analyst]

First just a follow-up on Chris' point around NIM. I know you're being cautious on giving guidance for 2020, but I think you've already given guidance this morning, you expect 2020 NIM to be -- continue to be resilient around 290 bps? What does this assume in terms of rate cuts or rises in the U.K. over that period? And secondly, on acquisitions. You purchased the NIM portfolio from Tesco. Are there other potential bolt-ons that you may be considering?

[William Leon David Chalmers, CFO & Executive Director]

Sure. Thanks. I should be clear then on 2020 guidance for 2020 is going to be given at the year-end results, i.e., the 2019 year-end results when we present them in 2020. Any guidance for 2020 is going to be given then. The arithmetic on NIM, I hope I've been clear on, and that earlier conversation or question from Chris, hopefully, gave insight into the building blocks that I think makes sense from a NIM perspective. And I'll leave you to kind of draw your own conclusions from that. But that's perhaps all I can say on that point.Second point, Tesco and other similar acquisitions. We'll look at acquisitions as they sort of come on the market as it were. And if there are acquisition opportunities that makes sense from a shareholder value point of view, then we'll take them. And the way that we look at shareholder value here is very much a combination of what value can we get from an conventional M&A point of view, to what extent does it allow us to increase flexibility as to our organic strategy, is there a franchise perspective whereby we gain customers that we welcome into the Group? All of those factors, if you like, get taken into account. And our strategy, to be clear, is an organic-led strategy, where a particular discrete M&A opportunity comes up, and we think it makes sense, and we'll look at it.

[Benjamin Toms, Analyst]

Can I just follow-up briefly on that? So just in relation to the e-mail sent to analysts this morning where you say margin resilient around 290 bps in 2020, is there potential for that guidance to be revised at the full year?

[William Leon David Chalmers, CFO & Executive Director]

No. I think the only -- the resilient around 290, just to be clear, and I think we're precise in 288, as a precise number, is a 2019 reference. I'll be very, very clear about that.

[Operator]

Next question comes from the line of Fahad Changazi, Mediobanca.

[Fahad Usman Changazi, Equity Analyst]

Just one quick follow-up on Insurance operation, actually. Could you perhaps give us how much -- tell us how many bulk annuity premiums have you written up to in the 9-month stage, and/or are you still confident of hitting your GBP 2 billion target for the full year? And just to follow-up on the asset side of bulks. Are you saying it's getting more competitive, resourcing higher-yielding assets to find a spot business?

[William Leon David Chalmers, CFO & Executive Director]

Fahad, I'm sorry. But would you mind just repeating the first question? I didn't hear it properly.

[Fahad Usman Changazi, Equity Analyst]

Sure. Are you still on track of your confidence of hitting your GBP 2 billion bulk annuity premium sort of guidance -- soft guidance you've had in the past?

[William Leon David Chalmers, CFO & Executive Director]

Okay. Okay. Thanks. I think on bulks, I don't think we issue guidance as such, it's just too precise really for guidance to be given on. But to give you some idea on our 2019 views, we see it ebb and flow, to be honest. There's quite a lot of supply on the market, and that comes with small bulks opportunities, if you like, and it comes with large ones. Because it is by nature lumpy, you'll see it kind of go up and down on a quarterly basis. But we signed a few -- or we are signing a few, I should be -- I shouldn't prejudge it too much, but we're signing a few in Q4. You'll see therefore perhaps a bit more in Q4 than you saw in Q3. As to the total quantum of that, I don't want to put a number on it. And as I say, I don't want to sort of guide too specifically on such precise items. But we're seeing a couple more in Q4 than we did see in Q3. On the illiquid assets point, it's a good point. I mean the supplier bulk front of the market, for a whole variety of reasons that you're aware of, is a sort of strong, steady flow. And I think that is going to continue because companies just don't want these things on their balance sheet. At the same time, it really makes sense of acquiring a bulk risk if you've got the assets to actually make the margin off of. And those need to be illiquid, and they need to be long term in order to match the responsibility or liability that you're taking on. Those -- we are very careful, if you like, to ensure that any illiquid assets that we bring on to the business, doesn't matter where they're located, in the bank or an Insurance company or anywhere else for that matter, are consistent with our risk appetite. And so when we look at the market, we do so through that lens. And to the extent, at least, therefore, our willingness to take on bulks will be constrained, both by our willingness to, if you like, adopt front-end pricing; and also constrained by willingness to take on illiquid assets to back them. And that will -- I talk about it as a constraint, but that's also the opportunity. But we will apply strict sense of risk discipline around it.

[Operator]

Next question comes from the line of Ed Firth, KBW.

[Edward Hugo Anson Firth, Analyst]

I just have 2 questions. Firstly, just in terms of your cost target. I think if I get my math right, that implies that underlying costs in the fourth quarter of about [ GBP 1,850 million ] something like that if you -- because you've got the -- I guess you got the banking levy coming through in Q4. So that's quite well below the run rate that you've been running so far this year. And I guess 2 questions: one is, firstly, is my math right? And secondly, it always surprises me the extent to which banks seem to be able to cut costs whenever revenue comes up short. And I'm just wondering if you could just share with us some thoughts about where that is. And I'm thinking, particularly, are you having to constrain investment now in order to hit sort of consensus numbers? Or have you just got spare costs that happened to be kicking around? I'm just trying to get a sense as to how it is that you can bring that number down. That was my first question. And then the second question was on capital. I guess we're all now talking and looking intensely at Basel IV. And I think consensus seems to be suggesting you're losing about 200 basis points of core Tier 1, something like that. Can you give some indication, is that the sort of number you're thinking about? What are the sort of variables? When can you give us a sort of more persistent or a more so confident number, I guess? And what might that do in terms of implications for your target?

[William Leon David Chalmers, CFO & Executive Director]

Sure. Okay. Thanks for that. You said it was 2 questions. But I'm sure there are more than 2 questions in there.

[Edward Hugo Anson Firth, Analyst]

[ Just do the capital one ].

[William Leon David Chalmers, CFO & Executive Director]

Okay. On the cost target, the new cost guidance that we're bringing out, if you like, for 2019 is the GBP 7.9 billion for the year as a whole -- below GBP 7.9 billion for the year as a whole. I don't want to go too specifically into what that implies for every given line item within that. The banking levy, you're right, comes into Q4, and that's fair. We'll give more detail, if you like, on exactly how that breaks out at end of the year. But the guidance is for the cost base as a whole in the context that I've given.

[Edward Hugo Anson Firth, Analyst]

But is it -- sorry, just to be clear, is it sort of projects that you can delay into next year? Is that the way you do this? Or is it just that people have spent less money?

[William Leon David Chalmers, CFO & Executive Director]

No. It's simply a function of some of the cost management techniques that I mentioned earlier on, the auctions are an example. Contractor staff is another good example. Contractor staff are kind of all over the banking sector. They're also very expensive. And when you bring some of them in to the bank, you significantly cut their costs. And the IR35 initiative for next year perhaps helps a little bit in that respect as we seek to bring more contract staff in as permanents. The investment point is an important point. And we actually see the investment point as an opportunity from a cost perspective. We have very much maintained and protected our investment line over the course of the GSR3 period and look to do so next year. I mentioned earlier on our GBP 1.7 billion investment to date. The reason I take this opportunity is because there are a number of investments that we look at, both this year and next and then out beyond, that go to reducing the cost line. Decommissioning is one example. There are a number of others. But the point of investments, in part at least, is to allow us to run the business off of a lower cost base going forward. And that's an important point. So no, we're not cutting into investments, and we do, in fact, see them as an opportunity as we manage the cost base going forward. The Basel IV point you mentioned, I'm going to leave that for another day. We're not giving Basel IV guidance. That's consistent with what we've done for some time. It's because it's a little way off, as you know. It's also because there's still a range of uncertainties about how Basel IV will be applied. And so we don't really want to get into a kind of guessing game as to what will happen in Basel IV.

[Edward Hugo Anson Firth, Analyst]

Any idea of when that will be a bit clearer? I mean obviously, a number of European banks now are all giving guidance. And I imagine a lot of them have got quite significantly more complex businesses than yours. And I'm just -- it's just that -- I mean it's not you alone. It's just all the U.K. banks seem to be sort of just like wishing it away. Just trying to get a sense as to when we might have some clarity on that.

[William Leon David Chalmers, CFO & Executive Director]

I think you should go and ask the PRA.

[Operator]

Your final question comes from the line of Robin Down, HSBC.

[Robin Down, Co]

William, long time no speak, hope you're well.

[William Leon David Chalmers, CFO & Executive Director]

Thank you, Robin.

[Robin Down, Co]

Just a couple of quick ones. One, easy one. If you could give us the average deposit rates in the quarter? That will be quite helpful. And the second one, I hate to come back to the fee-income side, but clearly, if we look at this year and sort of pencil something into Q4 and allow for sort of GBP 400 million of exceptional kind of one-off type things in the first half, we're going to get to around kind of [ 5 3 ] or so. It does make the consensus for next year at [ 5 9 ] look a little bit tricky. And I take onboard what you're saying about potentially seeing a better market's performance next year versus this year. I just wondered if you could tell us -- I guess you probably got about GBP 1 billion of other income in Commercial Banking year-to-date. If you can give us some sort of ballpark as to how much of that is markets so that we could sort of try and scale what the upside might be from that?

[William Leon David Chalmers, CFO & Executive Director]

Okay. Thanks, Robin. Average deposit rates, I won't be too specific on in terms of the pricing. I mean, safe to say, there is some elements of the fixed book that are higher, if you like, than aspects of the deposits, and that, to an extent, is helpful. I think that's consistent with what's been said before. The fee income point is really just, as said, a function of 4 main areas. The commercial, what may come back in markets. We've had, frankly, very weak market performance as I think most of the banks have, obviously it affects the investment banks a bit more than us, but it also affects because we have a decent sizable markets business. That, as said earlier on, we expect to come back. It's simply a question of when investment [ sales ] return if you like. The Insurance business is a second point. And as said, that has decent -- strong, I would say, secular growth drivers behind it, not just in Insurance but also in the wealth area. That is supplemented by some of the experience changes, longevity changes, which you saw in the first half of this year. I think you saw in the first half of the year before that. And yes, let's see what that holds for the first half of next year, but the pattern is there, if you like. So that's another piece. Overall, Retail, I described as steady, which I think is fair. We're also seeing a growing Retail business in the liability side, as I mentioned earlier on. And then in other, Q3 has basically 0 or low single digit, let's call it, gilt gains within it. It is also off the back of, as I said before, a relatively tough comparator from an LDC perspective. So there are reasons why one might expect that to be a little different going forward. So without giving guidance, which again is a year-end matter or early 2020 matter, you must do what you want to do. But there are reasons as to why we think, if you like, taking Q3 and annualizing it is -- you should be cautious before you do that.

[Robin Down, Co]

I agree. I fully understand that. I'm just trying to sort of scale the opportunity from markets returning to perhaps a more normal level, whether that's a kind of a GBP 100 million sort of upside, a GBP 200 million upside? And unfortunately, first 9 months this year, I don't think we've got any disclosure on how much of the sort of Commercial Bank fee income is market related?

[William Leon David Chalmers, CFO & Executive Director]

Yes. Well, Robin, I've probably gone as far as I can go on the point really. Safe to say that there is a market opportunity, which is as to the opportunity on its phase. There are also a range of opportunities that stem from that. And I mentioned hedging earlier on as an example of that type of thing. I won't go any further to put numbers on it, but it hopefully gives you a sense of the issue that we're looking at. Thanks, Robin.Okay. I think we're going to wrap up. But thanks again to everybody for taking the time to attend the call. Hopefully, it was useful. And look forward to engaging further with you going forward. Thanks, very much indeed, guys.

[Operator]

Thank you. Ladies and gentlemen, this concludes the Lloyds Banking Group Q3 2019 Interim Management Statement Conference Call. For those of you wishing to review this conference, a replay facility can be accessed by dialing 0800 032-9687 within the U.K.; 1 [phone] within the U.S.; or alternatively, use the standard International on 0044 207 136 9233. The access code is 12722318. Thank you for participating.