Lloyds Banking Group PLC
LSE:LLOY
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
41.185
62.2
|
| Price Target |
|
We'll email you a reminder when the closing price reaches GBX.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Lloyds Banking Group PLC
You don't have any saved screeners yet
Thank you for standing by, and welcome to the Lloyds Banking Group Q3 2020 Interim Management Statement Call. [Operator Instructions] There will be a presentation by António Horta-Osório and William Chalmers followed by a question-and-answer session. [Operator Instructions] Please note this call is scheduled for 1 hour. I must advise you that this conference is being recorded today. I will now hand the conference over to António Horta-Osório. Please go ahead.
Good morning, everyone, and thank you for joining our 2020 Third Quarter Interim Management Statement Presentation. I will give a brief overview of our encouraging business recovery in Q3, with a return to profitability in the quarter, followed by how our digital transformation is creating new opportunities for the group and being recognized as market leading by our customers. All these, while we continue to strive for a more inclusive and sustainable future. I will then hand over to William to run through the financials, and we'll have time for questions at the end. I will turn first to our business recovery in the quarter on Slide 2. Despite a challenging operating environment and while significant uncertainties remain, we have seen the open mortgage book grow by GBP 3.5 billion in the quarter and with a 22% share of approvals. This represents the highest volume of growth in approvals in a quarter since 2008. We have also continued to see retail current accounts growing ahead of the market through the third quarter, and group deposits are now GBP 35 billion higher than at the end of the year. We have seen a significant change in financial performance in Q3 with a return to profitability. This is largely due to impairments, but also to an increase in business volumes, and has enabled the group to deliver a return on tangible equity of 7.4% in Q3. Given the better-than-expected macroeconomic conditions over the quarter and our ongoing optimization of the commercial book, we are able to enhance our 2020 guidance for both impairments and risk-weighted assets. William will go through this in detail shortly. The group is also benefiting from our long-run investment in the business and continued focus on strategic execution. The benefits of our GBP 2.6 billion of strategic investment can be seen in our record digital engagement and satisfaction scores, as I shall outline on the next slide. So turning to Slide 3 and how our recognized digital leadership position is creating new opportunities for the group. We are the largest digital bank in the U.K. with 17.1 million digital active users, of which 12.1 million use our mobile apps, up 1.4 million in the last 9 months. We are very pleased with this continued customer growth, and this is a clear strategic advantage as those customers log on to that app 25 times per month. That is a total of 3.1 billion log-ons so far this year. This has enabled us to serve more customer needs digitally throughout a challenging period, and we have seen a 19% increase in products originated digitally this year. Importantly, this is not at the expense of quality, and our digital Net Promoter Score is up 8% over the same period. As you have heard me say many times before, our unique single customer view capability enables the group to leverage our deep Retail banking relationships in order to support customers' long-term savings needs. We now have over 6 million customers, who are able to use this unique functionality. Those customers view 16 million of their insurance and investment products alongside a bank account every month, including pensions, home insurance, protection and share building. This is up 8% in the quarter, and over 70% of those views came through our mobile apps. Our long-run investment in digital transformation positioned the group well to continue to serve our customers through the pandemic. I have great confidence in the future of the group and in its competitive position. We will maintain our relentless focus on supporting our customers and the U.K. economy, while we will continue investing for the future and developing our competitive advantages further. I will now turn to Slide 4 and outline how the group is continuing to strive towards an inclusive and more sustainable future. We have adopted a proactive response to the coronavirus pandemic, and we are working closely with the government, our regulators and other stakeholders to support customers and businesses up and down the country, as we help Britain recover which is at the heart of the group's purpose. We have particularly focused on mental health and well-being, while also committing GBP 25.5 million of funding to our independent charitable foundations for 2021, which will enable them to continue their vital work. We have all been deeply moved by recent events around the world, which have highlighted the vital importance of diversity and how much we still have to do. We have announced our Race Action plan, which will drive cultural change across the organization, while ensuring diversity of recruitment and progression. We have quantified our target to increase Black representation in senior roles, and this is in addition to our existing diversity targets. This is clearly the right thing to do for our colleagues and for the benefit of the group, but it is also important to note that Moody's has recognized the Race Action plan as a credit positive, given improved diversity and reduced social risk. Finally, on sustainability, we have announced an ambitious goal to reduce the carbon emissions we finance by over 50% by 2030. At the same time, we have already met our internal carbon reduction target for 2030, so we are working on developing new targets. These actions and more are the right things to do, as supporting diversity and sustainability will directly aid the recovery of the U.K. economy, from which we will benefit. This is fully aligned with the group's long-term strategic objectives, the position of the franchise and the interest of our shareholders. That concludes my opening remarks, and I will now hand over to William to run through the financials in more detail.
Thank you, António, and good morning, everyone. I'm planning to give a run-through of the group's financial performance. As usual, we'll then open up for Q&A at the end. Turning first to Slide 6 with an overview of the financials. The group's resilient business model and the reduced impairment charge in the quarter has driven a return to profitability in Q3, with a statutory profit before tax of GBP 1 billion. Net income of GBP 3.4 billion in Q3 is down 2% on the second quarter, largely due to the performance in other income, which I'll come back to in more detail later on. NII is supported by a net interest margin of 242 basis points and small increase in average interest-earning assets to GBP 436 billion. Costs remain an area of intense focus for the group. The 4% reduction in total costs is largely derived from 5% lower BAU costs. The group's cost income ratio performance meanwhile has clearly been impacted by the challenging revenue environment. Pre-provision operating profit of GBP 5 billion year-to-date includes GBP 1.5 billion in the quarter. And while this is down 6% on Q2, it still gives very substantial loss-absorbing capacity. The impairment environment in the third quarter has been benign relative to expectations. The charge of GBP 301 million reflects a relatively stable macroeconomic environment and the significant reserving undertaken in Q2. I'll come on to this in more detail in a few minutes. TNAV is up 0.6p the quarter at 52.2p per share. CET1 ratio has increased to 15.2%, or 14%, excluding transitionals, both comfortably ahead of our target and regulatory capital requirements. I'll now turn to Slide 7 and look at how the group's customer franchise performed in Q3. As António mentioned, we've seen strong growth in the mortgage book in the quarter. The open book is up GBP 3.5 billion with a 22% share of approvals, building a strong pipeline looking into Q4. Based on that, we expect the open book performance in Q4 to be stronger than in the third quarter. Consumer Finance has performed at the better end of expectations, but I mentioned at the half year that we expected balances to be down around 5% to 10% in the second half. Given the performance in Q3, we now expect balances to be closer to 5% down in H2. In Commercial, we continue to see SME lending driven by the government support schemes. We've now delivered about GBP 8 billion of guaranteed lending with a market share of 18%. Going the other way, Corporate & Institutional balances are down GBP 4.8 billion in the quarter, as we continue to see clients pay down their RCF, while we've also continued our work on low-returning relationships. Commercial RCF drawings are now back to the February's level, having seen significant drawdowns early on in the crisis. Average interest-earning assets are up GBP 1 billion on Q2. And as mentioned, looking forward to the fourth quarter, I expect continued support for AIEAs from the strong growth in the open mortgage book. As you've heard from António, in total, deposits are now up over GBP 35 billion in the year, a very strong performance. This growth has continued in Q3, indeed ahead of the market in Retail current accounts. Meanwhile, Commercial is benefiting from around 50% of support scheme lending remaining on deposit. Turning now to net interest income on Slide 8. NII is GBP 8.1 billion year-to-date, or GBP 2.6 billion in the quarter. The Q3 margin of 242 basis points is in line with half year guidance and up a couple of basis points from Q2. In addition to better Consumer Finance balances versus expectations, we have also seen a full quarter's benefit of deposit repricing and the benefit of significant low-cost deposit growth as well as overdraft charging starting to come back into the margin, consistent with the outline that I gave at the half year. I've already mentioned the strong mortgage performance. New business mortgage margins are attractive and higher than maturing front book business. That attractive asset growth will continue to support AIEAs in the fourth quarter, and is thereby supportive of group interest income, albeit slightly dilutive to group margin. The current low rate environment is also impacting the structural hedge, with the 5-year swap only around 7 basis points above 3-month LIBOR, we've been replacing maturities with shorter-dated hedges. This strategy allows us to achieve income protection of preserving flexibility. You see the consequence of that approach in the now roughly 2-year weighted average life of the hedge. In that context, hedge earnings of GBP 1.1 billion or 0.8% over average LIBOR year-to-date will likely continue to reduce gradually over time if the curve remains flat. Taken together, the better-than-expected real economy lending is currently offsetting the flatter yield curve and is supportive of interest income. Based on this mix, we expect AIEAs to be up and expect the margin to remain broadly stable at around 240 basis points in Q4, resulting in a full year margin of around 250 basis points. Turning now to Slide 9 and other income. OOI of GBP 3.4 billion for the 9 months includes approximately GBP 1 billion in Q3. This is clearly below our aspirations and is due to the continued relatively low levels of activity across our key markets. We've also seen an GBP 80 million charge in respect to the asset management market review following the FCA's review of pricing across the investment industry. With respect to divisions, Retail has benefited from a pickup in card spend and Q3 OOI is in line with Q2 in an environment of relatively subdued levels of customer activity. Commercial saw lower markets income versus Q2, given our U.K. focus and transaction banking activity remains subdued. Insurance continues to be impacted by reduced levels of new business, the AMMR charge and the nonrepeat of the illiquidity premium benefit of Q2. Overall, I expect other income to remain subject to similar pressures in the fourth quarter, less the AMMR charge, but potentially impacted by the annual review of insurance persistency assumptions. However, we're now around the base level from which we would expect activity to start to recover in 2021. We are investing in both resilience and in diversification in other income, including, for example, in our markets platforms and payments propositions in Commercial as well as our products, platforms in the traded personal wealth joint venture within Insurance and Wealth. Now moving on to Slide 10 and costs. You've heard about our intense focus on costs many times before, and this remains as important as ever. Total costs have come down by 4% year-on-year, including a 5% reduction in BAU costs. This has been achieved despite deferring all role-based restructuring activity for a number of months this year, resulting in higher-than-expected average headcount, albeit with lower bonus [ roles ]. Remediation of GBP 254 million for the 9 months has increased by GBP 28 million year-on-year. This reflects charges across a number of existing programs. I expect this to be higher in Q4 given various small historic conduct programs coming to an end. Overall, the cost in 2020 is likely to end up above our ongoing expectation of GBP 200 million to GBP 300 million per annum. Our track record of ongoing sustainable cost savings has enabled continued investment in the business. We've invested a total of GBP 1.6 billion so far in 2020 and made a strategic investment of GBP 2.6 billion over the life of the GSR 3 program to date. Investment spend has been adapted due to the pandemic situation, but we remain absolutely committed to investing in the long-term success of the group, especially in our digital capabilities. The benefit of this investment has been particularly evident during the pandemic, as you've heard from António earlier on. While investment will remain a priority for the group, we continue to expect operating costs to be below GBP 7.6 billion for the year. I'll now move on to impairment on Slide 11. The impairment experience in Q3 has been benign, given the better-than-expected macroeconomic environment and the continued presence of government and bank customer support schemes. The impairment charge of GBP 301 million for Q3 recognizes this benign picture and overall holds the expected credit loss steady. This is consistent with our updated economic outlook and the front-loading of our reserving taken in Q2. The Retail charge of GBP 398 million in the quarter is only a little above the pre-pandemic run rate. And in Commercial, we've not seen any significant charges this quarter. Importantly, the Retail charge includes a management overlay of GBP 205 million. This is taken to offset provision releases that our model generates as a result of benign arrears experience in Q3. We have taken the judgment that arrears and losses have been kept low by the range of customer support measures available, and hence it would not have been appropriate to recognize larger provision releases at this point. As mentioned, we've also updated our forward-looking economic assumptions, forecast a reprofile but unchanged in the longer term, essentially maintaining our view of a significant slowdown in activity, but delaying much of it by about a quarter into 2021. It also recognizes some of the better performances that we've seen in Q3. This update results in a modest release of GBP 105 million, largely reflecting the benefits from higher HPI in 2020. It's also worth adding that we slightly refined our triggers for staging in cards leading to GBP 1.4 billion of up-to-date balances, moving to Stage 2 and an associated increase in provision of GBP 40 million. Given all of this, our stock of ECL has remained broadly stable at GBP 7.1 billion, a pickup of GBP 500 million on our base case CCL and providing significant protection against potential future credit impairments. The ECL continues to reflect the range of economic scenarios, including our severe downside weighted at 10% and incorporating peak unemployment of 12.5% in Q2 2021. Assuming no further changes to our economic scenarios, the front-loading of our provision under IFRS 9 in H1 means that we now expect the full year impairment charge to be at the lower end of our GBP 4.5 billion to GBP 5.5 billion range. The caveat of no material change to our economic scenarios is important, given the obvious uncertainties. Now moving to Slide 12. I'll touch on how we have maintained our reserving across business lines. As I mentioned, the GBP 3 billion increase in the expected credit loss provisions in the first 9 months means that we now have an ECL provision stock of GBP 7.1 billion. This provides significant balance sheet resilience, while currently write-offs remain in line with precrisis levels. Overall balance sheet coverage of 1.4% is in line with the half year. Within that, mortgages of 0.6%, and we've increased coverage on the cards book from 6.3% to 6.7%, including 44% on Stage 3. We maintain our proactive charge-off policy on cards at 4 months in arrears. Indeed, if we charged off after an additional 12 months in line with some of our peers, our pro forma overall cards coverage will be closer to 9.1% with Stage 3 at 69%. I'm now going to look briefly at the group's exposure to certain commercial sectors on Slide 13. The Commercial portfolio has been subject to careful risk management in recent years. Around 70% of total medium and large corporate exposure is to investment-grade clients, where around 90% of SME lending is secured. Within this, our exposure to the sectors most impacted by coronavirus is modest in the context of the group. It's only around 2% of group lending or around 12% of Commercial lending. There's been a small reduction in the exposure to these impacted sectors during the quarter. As mentioned, commercial RCF drawings have fallen by around GBP 2 billion in Q3. This means that the full GBP 8 billion, which was drawn down at the beginning of the crisis, has now been repaid, and RCFs are back to precrisis levels, further reducing our balance sheet risk. Finally, on Commercial. Our Commercial real estate portfolio has reduced by GBP 400 million since the half year, whilst maintaining its average LTV at 49%, with over 2/3 below the 60% LTV. And then we go on to payment holidays on Slide 14. The vast majority of payment -- first payment holidays have now matured with around 82% of customers now repaying, up from around 70% at the half year. In total, payment holidays have been granted around GBP 69 billion of retail lending, with today less than GBP 15 billion outstanding, including GBP 2.4 billion, having missed a payment. Our market share of mortgage payment holidays is now below our natural market share. Around 30% of extended mortgage payment holidays have also now expired with around 90% resuming payment. As mentioned at the half year, the cohort of extensions across products is of lower credit quality with higher balances, but it's also worth noting that around 35% of outstanding payment holidays are already in Stage 2. Indeed, moving the remaining population of extensions across all assets to Stage 2 would generate an incremental ECL of less than GBP 100 million. Arrear is low at just under 4% of matured payment holidays. This includes missed first payments. And notably around half of the mortgage and motor finance arrears were already in arrears at the start of their payment holiday. Briefly on SME capital repayment holidays, over 90% is secured lending, and while maturities remain at low levels, we're seeing a similar picture to Retail. Now moving down the P&L to look at the below-the-line items on Slide 15. Restructuring is broadly in line with prior year-to-date, but up significantly on Q2 as the group resumed previously halted severance plans and property rationalization work in Q3. This will continue, and we expect another quarter of relatively higher restructuring charges in Q4. Volatility and other items in the quarter include positive banking and insurance volatility, partially offset by the normal fair value online charge. PPI provisions are again 0 in the quarter, and we remain happy with the circa 10% model conversion rate and with the unutilized provision of GBP 328 million. Year-to-date tax credit of GBP 273 million reflects the DTA remeasurement benefit in Q1 and taxable losses thereafter. As a result of all of this, we ended with statutory profit after tax of GBP 707 million for the year-to-date and GBP 688 million in Q3. The return on tangible equity, as António said, is 7.4% in the third quarter. Now moving on to capital on Slide 16. Our CET1 ratio of 15.2% is comfortably above both our internal capital target and our regulatory capital requirements of around 11%. It acts as a substantial protection against potential credit impairment. CET1 continues to benefit from the temporary addition of 121 basis points of IFRS 9 transitionals. We have previously expected up to half of the in-year increase to unwind with staging movements in H2, but this is now looking unlikely. We still expect to see this unwind, as assets move into Stage 3, but this is now likely to be more of a 2021 story. We've also added 16 basis points benefit in Q3 from lower RWAs, partly because we've managed RWAs better and partly because we've not seen expected credit migration. Again, while we still expect to see this migration take place, we now expect this to be a largely next-year event. Therefore, on the basis of our macro forecast for 2020, we now expect RWAs at year-end to be broadly stable on Q3. In total, CET1 is up 64 basis points in the quarter, which is strong, albeit it's clearly helped by the RWA reduction and further transitionals benefit in quarter. Looking forward, and subject to regulatory approval, we see a circa 50 basis point benefit from the potential change in treatment of software intangibles in Q4. This is higher than our previous expectation, given the change in prudential amortization for over 3 years. From capital requirements, we will hold to our ongoing CET1 target of around 12.5% with a management buffer of around 1%. This means that we're comfortably above both our internal target and regulatory capital requirements. As usual, the Board will consider any capital return at year-end when they look at all available information, including and in particular the economic outlook as well as capital levels and regulatory requirements. Finally, turning to Slide 17. Strong growth on both sides of the balance sheet has enabled us to offset the impacts of the challenging rate environment. Together with a stable economic environment, this has contributed to a return on -- return to profitability in Q3. The group's solid pre-provision profitability, prudent reserving and enhanced capital strength give significant loss-absorbing capacity. It also means that we're in a strong position to support our customers despite the ongoing uncertainty. As mentioned in the relevant areas, and based upon our economic assumptions, we've updated guidance for 2020 impairment and risk-weighted assets. You can see a summary of our guidance on the slide in front of you. In conclusion, we have great confidence in the future of the group. And we will emerge from this crisis having learned a great deal about the organization, our customers and new ways of working. Whatever the future brings, we will maintain our focus on supporting our customers and the U.K. economy. This is the right thing to do and is in the best interest of the group and our shareholders. We remain well-positioned to deliver long-term superior and sustainable returns. That concludes the presentation for this morning, and we're happy to take your questions. Thank you for listening.
[Operator Instructions] Your first question comes from the line of Raul Sinha, JPMorgan.
A couple of questions from my side, essentially the same topics that we've been discussing on the calls over the last few quarters. You've started NII. Obviously, pleasing to see the recovery in the quarter. And I hear you on the pickup in average interest-earning assets. Can I just ask how much of this recovery is driven by your intention to take a greater share of the mortgage market given pricing trends have improved versus just the sort of pent-up demand-related boost that you're seeing in the mortgage market right now, which might peter out next year? So I'm just trying to understand whether you think structurally pricing might have improved now sufficiently that you can actually operate with a higher share. And if you could give us some numbers around what sort of share you're comfortable with, that would be really helpful. And then the second one, just on non-NII. I'm still struggling with the consensus of about GBP 5 billion of non-NII for 2021, looking at what you've delivered, and I do accept you have called that it has probably bottomed out now. Could you help us in trying to understand what are the growth drivers from here, even if you assume a sort of GBP 1.1 billion run rate? What bridges the gap from that sort of run rate to the sort of GBP 5 billion plus that consensus [ that starts at '21 ].
Raul, maybe I'll start to give you an overview of the mortgage market to explain the environment of your question, and then William can build up on the specific numbers you mentioned also on OOI. So in terms of the mortgage market, and you will remember, as you said, we discussed this many times before, that we have adopted in the last few years a prudent strategy in relation to the mortgage market. We thought that prices were not where we would like to see them. And we have, therefore, privileged capital and margins and risk versus volumes, and we basically held our open mortgage book stable. The prices have improved from the start of the year, as we discussed previously, and they have continued to improve. And therefore, given our absolute focus on helping Britain prosper, or recovery in this case, and being the largest mortgage lender in the country, we have been supplying the needs of our customers on mortgages. And this has been very, very strong on Q3, as you heard. And it has been quite strong across the board, to your question. So this is both on first-time buyers and on home movers. And I think that this basically is an outcome based on 3 factors. The first, as you mentioned, there was some pent-up demand to satisfy. Secondly, it is also a fact that we have strong incentives on people to buy ahead, as you said as well, of the stamp duty expiring next year. But thirdly, there is a significant change in customer behaviors. People have been, on one hand, saving more as they have spent less on traveling, hospitality, and they have saved more in general. And secondly, they have, as you know, most people spend much more time at home. And therefore, the home became, if you want, more valuable to them. And they are strongly moving homes across the board and wanting to go into larger homes outside cities with gardens, if possible. So it's both the first-time buyers and the home movers that are driving this significant demand in mortgages. And that is, in my opinion, a structural change in behaviors from people. So you have all of these 3 effects and -- and this is quite important. Our market share of approval has been 22% at August, which is the highest we have had since 2008. So within these conditions and with a very strong customer demand, we have been absolutely meeting those customer needs. To give you an idea on first-time buyers, our market share has been even higher at 24%. And given that there is, as you know, a time lag between applications and completions of around 3 to 4 months, we already know that we will have an even stronger growth in the open mortgage book in Q4, given we already know the applications that we got. And therefore, this is a changing trend. We are the largest mortgage lender in the country, as I said. We have a very strong capital position. Therefore, we're absolutely supporting our customers and supplying the mortgages that they need. And this is very important to sustain NII, and it has more than offset, as William said, the impact of the lower yield curve. William, shall you...
Should I comment on the other income question from Raul? Thanks, Raul. Other income, first of all, on other income in Q3, what did we see? As you can see from the release today, we had GBP 988 million, which included an AMMR charge of roughly GBP 80 million, which in turn means that we're around GBP 1.070 billion if you take out that AMMR charge. I think in terms of answering to your question, I obviously won't comment on consensus for next year. That's a matter for next year, not for today. But it's important to give a little context about what's in the OOI charge and to agree what's not in there. What did we see? We saw a relatively flat performance in Retail. Retail continues to be subdued off the back of modest activity and, in particular, limited travel. We saw Commercial Banking performance relatively affected by our U.K. focus on markets, which was down on the quarter 2 performance. And we saw Insurance modestly performing off the back of not just the AMMR charge, but also some GI claims from weather events in August, an absence of bulk activity and very limited new business in terms of some of our areas, such as workplace where the coronavirus impact is clearly taking its toll on new business schemes as well as things like protection activity. So when we look forward for OOI, it is very activity-sensitive. And to the extent that you see things like return to travel in Retail for example, things like a bit more activity in U.K. markets for example, things like a bit more activity in some of the insurance value streams that we have, then you would expect OOI to respond to that. I think added to that, on a secular basis, we're making a number of investments, as I mentioned in my comments earlier on, in the OOI stream in order to build the noninterest streams within the business. So examples of that might be packaged bank account propositions in Retail, might be the transaction banking platform in Commercial and cash management. Likewise, a protection platform, the GI platform within insurance. And those investments over time will build this income stream. I think the final comment, Raul, is, as I said before, this will be gradual. It's not going to change overnight, but it is activity-sensitive. And it is also the subject of ongoing investment.
Next question comes from the line of Aman Rakkar, Barclays.
Could I ask a couple, please. So first on mortgages. Interested in what your application experience has been in October. Is it OEM? Are we seeing a similar level of robust performance as you've observed in Q3? And does that give you any indication on drawdowns and completions in Q1? I'm just trying to work out how much of this kind of volume dynamic is a tailwind into next year. As part of that, could you help us understand the kind of front and back book margin dynamic on the open book. Presumably, it's a nice tailwind now. But if you're able to quantify, that would really help. Another one on capital, if I may. So it's good to see the upgraded guidance in RWAs, which is good. It might be a matter of timing. I just wanted to come back to the regulatory headwinds that you guys have called out before, about GBP 6 billion to GBP 10 billion. I think you've nudged that number lower. I was interested in what's your best estimate of that and how much of that is captured in this year versus is expected to come through next year? I guess I'm just trying to get a sense on the RWA inflation that might be coming next year as a combination of RWA procyclicality, but also the RWA regulatory headwinds that might be coming?
Right. Thank you very much, Aman. I will elaborate on your first question in terms of the Q1 and applications, and William can take the second one on front and back book and on capital. So just to complement what I'm saying to how -- we haven't seen any significant different behavior in October from customers. We always, as you know, we constantly adapt our prices and strategies according to our multi-brand strategy, depending on demand. And especially on the intermediary channel, we are quite agile in terms of adapting. But from a demand point of view, we haven't seen any significant change in behavior in October. I think relating to my previous points that as the stamp duty incentives deadline gets closer, you might have an additional rush into people that want to take advantage of that. And for people to take advantage of the stamp duty, they will more or less have to submit their applications by the end of the year, as you know, in order to take advantage, next year from the deadline. And then after that, of course, that incentive will disappear. So you should expect that to disappear, but a bit later on. On the other hand, the structural impact, I told you about the customer behavior and people structurally investing more on their houses and wanting to have better houses, given they spend more time in the houses, I think it is a more structural demand point. So this would be the additional feedback and color I could give you on these points.
Thanks, António. Thanks, Aman, for the question. On the mortgage margin question, first of all, what we're looking at there is completions taking place at around 160 basis points versus 140 basis points on maturities. But also having said that, applications are more like 190 basis points and above in Q3. So that gives you a sense as to the margin and the trends on the mortgage front. You asked about RWAs. The RWA's picture for next year, again, is really a matter for next year's guidance, which we're not giving on this call. But 2 or 3 factors that are perhaps worth bearing in mind in that context. When we look at RWAs going forward, I called out credit migration as a point in my comments earlier on. We haven't seen that in Q3. We don't really expect to see it on the basis of what we've seen so far in Q4. So it's perhaps more of a next-year event, contingent upon your view of macroeconomics. You asked about regulatory headwinds there. The only significant regulatory headwind that we see in 2021 at the moment is counterparty credit risk, which we will call out in the early part of next year. That's modest, but it's there. Then offset against that, we'd expect our Commercial business, in particular, to continue with its ongoing optimization, just as it has done this year. And that will then lead in combination to our picture for RWAs during the course of '21. But again, we'll give more guidance on that in '21 rather than today.
Perfect. Can I just clarify then. So does it sound like that GBP 6 billion to GBP 10 billion isn't happening in the way that you thought it was before? Or is it that actually you digested a decent chunk of it this year, and there's only a little bit more to come next year?
I think -- again, it's a matter for guidance probably at the beginning of next year, but it's more a question of timing, I suspect, and the particular issues that are being referred to.
Next question comes from the line of Guy Stebbings, Exane.
Can I come back to NII, actually, please. And just on NIM quickly and sort of the exit rate this year and thinking into next year, I mean it's just about the multiple references you've made today on stability in the margin. I think if we look into next year, clearly, the hedge will be a meaningful drag based on prevailing rates. Looks like, obviously, much more secured than the over unsecured lending. And then we got the interesting dynamic on spread widening on mortgages, which maybe dissipate somewhat, but probably is still a net positive into next year in terms of back to front book. I mean is it just that mortgage back to front book, which is enough to provide stability into next year? Or is there something else going on? Or we're -- actually are we looking at 240 exit rate and maybe a bit of pressure from that sort of level as we think into next year? And then on volumes and average interest-earning assets, we've ended the quarter about GBP 2 billion above the average for the quarter. Consensus this year is GBP 433 million and then GBP 435 million next year, and we're somewhere above that already and you've got the good pipeline into next year. So I'm just trying to work out, is there anything you can see that should persuade us from thinking that actually we're running somewhere above that into 2021?
Thanks very much, Guy, for the questions. Maybe dealing first of all with the margin picture. I'll start off with what we've seen in Q3. As you saw, the Q3 margin ended at 242. That's consistent with the guidance that we gave at the half year. Within that, we saw a couple of positives and a couple of negatives. The positives that we saw were deposit repricing, number one, and the removal of interest-free overdrafts. Chargeable balances, for example, were up 65% in the context of Q3. Against that, we saw a couple of negatives. The structural hedge was one of them. And the second was around asset mix, which is to say unsecured balances came a lot -- off a little bit, as I called out in my comments earlier on. And mortgages, while they are very good for net interest income, by virtue of the comments that I made earlier, are a little bit dilutive to the group margin. The margin picture looking forward into Q4 is going to be subject to similar factors, and that's why we're calling out margin stability into Q4 with the positives being a full quarter of deposit repricing, a full quarter of the interest-free overdraft coming to an end and indeed to reduce funding costs from things like [Audio Gap] drawdown in TFSME. The negatives, again, weren't surprising, they're very similar. The structural hedge has about GBP 10 billion of maturities in the remainder of 2020. Again, we'll see a little bit more attrition in unsecured volumes, albeit that's slowing down. And we'll see a boost in mortgages, just as António was commenting on earlier on, which, again, is great for NII, but a little bit dilutive to margin. That gives you a picture as to the margin. I think looking beyond that, again, guidance is really a matter for 2021, but you can see the factors at play in Q4, which are going to be not totally dissimilar. The important point here comes to your second question, which is what's going on in AIEAs and the driver of that to net interest income. We've seen in the context of Q3 the strength in mortgages. We have seen the -- that offset, if you like, the unsecured balances from an AIEA perspective. And we've seen Commercial, a combination of Bounce Back Loans going up and RCFs coming down, which more or less nets out. When we go into Q4, we're going to continue to see the mortgage growth based upon what we're seeing today in the pipeline, and that continues to grow. We're going to continue to see a little bit of unsecured attrition, just as I commented on the margin earlier on. Overall, that leads us to the view that AIEAs will continue to increase from what they are today into the year-end. To the extent that we see those patterns continue in the course of 2021, and again that's a matter for 2021 guidance, but you can see where we head off at the end of this year. With a stable NIM, that is good news, obviously, from an NII perspective.
Okay. Very clear. And perhaps it's an obvious point, but I get the sense that in the past, there was perhaps more emphasis placed on net interest margin, whereas given the environment we're in, it feels like NII should really be what we're a bit more focused on rather than just simply the headline NIM. Is that a fair way that you're thinking about it more these days?
Yes. I think it is. But I think it is important to say that it's in the context of making sure that we do things that are in the best interest of both customers and shareholders and we are in the context of relatively attractive mortgage margin pricing.
Next question comes from the line of Chris Cant, Autonomous.
Just on the structural hedge. You mentioned in your remarks, you talked about the net contribution for the 9 months being GBP 1.1 billion, I think it was. If I look at your hedge disclosures for 3Q and the equivalent disclosure at the 2Q stage, in the 9 months, you say GBP 1.1 billion; in the 6 months, was GBP 600 million net contribution. So we're at about GBP 500 million net contribution for the third quarter, specifically annualizing to about GBP 2 billion. And if there is any rounding there that I'm misunderstanding that would be -- it would be a helpful clarification. But if we say the GBP 2 billion, 2-year average life on the hedge, are we basically looking at a headwind of about GBP 500 million per annum from the 3Q NII level? And if you could also give us a number on the hedge maturities next year specifically, that would be helpful.
Yes, sure. Thanks for the question, Chris. The structural hedge, it's important, first of all, just to make sure that we refer to the right benchmark. So there is the structural hedge and absolute income, if you like, which is around -- so far year-to-date is around GBP 1.8 billion. There is some structural hedge contribution above and beyond LIBOR, which is obviously a lower number because you have to subtract LIBOR from that GBP 1.8 billion number. So just by way of reference, it's important just to, if you like, benchmark against the right context. In terms of the look forward, the -- I mentioned that we have GBP 10 billion maturities in the context of 2020. What we have been doing, as I mentioned in my comments earlier on, is in the context of very low rates, we have been trying to preserve earnings stability and to preserve value, just as we always do with the hedge. And that has led us to a strategy of short-dated hedging, which protects against further downside, for example, should, not our base case, but should we see negative interest rates emerge, we are protecting ourselves against that downside by virtue of the short-dated hedging, but at the same time we're preserving optionality, if you like, if the curve kind of resumes back to normal by, again, making sure that the hedging is appropriately short-dated. Looking forward, this is your second question, but it's part of my answer to the first -- looking forward, because of that short-dated hedging, we see slightly more maturities in 2021, and we're now looking at a number of around GBP 60 billion in 2021 maturities for structural hedge. As you look at that on a roll forward basis in terms of the headwinds, as you're referring to it, that we have over the life of the hedge, just over a 2- year weighted average life, but importantly an average life of the hedge that is more like 5 to 6 years. And so when you think about the structural hedge, as it rolls off, if we see a flat rate curve, then that's the type of -- it's that 5- to 6-year parameter that you should be thinking about. In terms of the headwind on an annualized basis, a couple of things that I'd caution against really. One is that the hedge profile is relatively lumpy, number one. Number two is that we will, in the interest of preserving earnings stability and shareholder value, be, just as we always are, careful about when we deploy the hedge in order to ensure that we achieve those objectives, which one would hope would abate some of the headwinds that you're referring to. The further point that I would make and more kind of strategic structural, which is that we're in a low interest rate environment, I suspect that we are seeing some pricing moves. We've been talking about mortgages quite extensively this morning that are offsetting some of the effects of that low interest rate environment. So you have to think about the industry response, I think, to the low rate environment that we have, which is driving the structural hedge, but it's also driving some benefits in other product markets. We're in a rational, relatively well ordered market, and I think when you think about the dynamics in our P&L, that's important context.
Understand completely on the other moving parts. And if I could just come back to the numbers point, though, I understand you did give the gross numbers as well, and perhaps I missed that, perhaps you were speaking to the gross. But if I'm thinking about the contribution of the hedge NII, it's about GBP 2 billion annualized in 3Q, the NII generated from the hedge. I think that's right. I mean the gross number you give is GBP 1.9 billion. For the 6 months, it was GBP 1.3 billion. So the gross contribution in 3Q is GBP 600 million. The net contribution is GBP 500 million. The LIBOR component is about GBP 100 million, which checks out versus your average hedge balance. But if I think about how much NII you would lose if the entire hedge just rolls into this very flat curve environment, which is essentially GBP 2 billion annualized over the life of the hedge with, by the sounds of it, quite a chunk of that hitting in next year.
I think the numbers that you've given for the performance year-to-date, Chris, are not terribly different to the numbers that I see. They're slightly different, but not much. Obviously, we won't comment on next year beyond what I've already said.
Next question comes from the line of Martin Leitgeb, Goldman Sachs.
I just wanted to ask you on the potential impact of negative rates and how you see negative rates. I think the Bank of England had that bank to comment on whether they're ready for a negative rate of the system. So the first question, is Lloyd's ready? And do you think the broader market is ready as of now? Meaning that anything could at least operationally come in the near-to-medium term? And then maybe to the question on mortgage pricing, but related to mortgage pricing, what are the levers banks have left to address the impact of potentially lower rates? Is there anything left in terms of repricing on the liability side? Or could there be a scenario where banks increasingly look at asset pricing in order to try to find an offset to potentially lower rate?
Thank you very much, Martin. Look, in relation to negative rates, I think we should bear in mind 2 factors. So there is an operational side and the financial side. What the Bank of England said and the governor and Andy Haldane just last week is that the bank wants to have negative rates in their tool kits. And for them to be in their tool kits, obviously that has to be operationally feasible. So we are in discussions with the Bank of England about how to make that feasible, how long does it take and what are the steps to make that part of their tool kits. So that's one point. The second one is about, financially, is the bank -- has the bank changed their mind about their view on interest rates. Both the governor and then Andy Haldane said, they haven't changed their mind. Andy Haldane just said last week that most likely the bank, if the bank decided to do something else, they would resort to additional QE before thinking about anything about negative rates. And so I'm just repeating what the governor said and what Andy Haldane said. And we are on that phase, where operationally we are discussing with the bank what it would take to enable the tool kits to be available for the Bank of England. In terms of pricing and William will want to comment, I'm sure. Just a comment I would advance you to make. I mean, as you know, and as I said in one previous question, we have been prudent throughout the last few years in terms of the mortgage market, as we thought pricing was not where we thought it should be sustainably, considering capital, risk volumes and other considerations. And now that mortgage margins are more stable and in a more rational environment almost for 12 months now, I would see it's frankly very difficult why that environment would change. While we still have significant uncertainties out there, there is significant demand, as we discussed. And there is a different risk premium going forward, especially for high LTVs. So I would see that difficult to change in the current economic environment. William, I don't know if you want to add.
Well, just to address the second of your 2 questions there, Martin, which is around liabilities, and it was inherent in what António said as well. The liability margin is -- won't surprise you, relatively modest right now, not just for us, but I'm sure for the sector as a whole, given where interest rates are. In that context, it is interesting actually that some of the support to Q3 margin was indeed through liability repricing, as I mentioned in my comments. Looking forward, it's more about asset repricing. So that's a point looking forward, if you like. I think one point that is worth making is that liabilities pricing being low is a function of where we are in the rates curve. That, in turn, means that I suspect most of the opportunities going forward from the asset side of the balance sheet.
Next question comes from the line of Andrew Coombs, Citi.
Perhaps if I could stay on the same theme, looking at mortgage dynamics, and thank you for the numbers on the margin on completions versus maturities and applications. Just on that theme. In the discussions you have with the Bank of England, it's been quite interesting in the dynamics this year, in that really the mortgage rates have been a function of supply and demand, whereas in the past we've really seen the pass-through of lower rates on to the mortgage market. You've just indicated you think that the scenario or the environment is likely to remain similar. So a big picture question here that in the discussions you have with the Bank of England, when they are talking about the prospect of further rate cuts potentially moving to negative rates, what we've seen this year is that hasn't passed through to the mortgage market and hasn't passed through to the end consumer. In fact, it's going the other way, mortgage rates are higher. So did that disincentivize the Bank of England from introducing negative rates? [indiscernible] discussions you've had with them on that transmission mechanism. And then a second question is more of a boring number one. At the first half stage, you gave the aggregate gross margin on consumer and on customer [indiscernible] on consumer and 20 bps on customer deposits. Could you just give us the updated number, please?
Okay. Andrew, I will comment on the first, and William will comment on the second. I mean, just to point, I would add to what we have been discussing, Andrew. In terms of conversations with the Bank of England, the conversations have not been about implementing negative rates themselves, as I said to you, but they are about what it would take for us banks, in general, all of us, to be ready to operationally implement them, should they decide to do it. So we are on the operational phase, as I said. The Bank of England wants to have this available in the tool kit. For it to be available, it has to be feasible, it has to be implementable. And we are on that phase that if they were minded to discuss additional monetary policy measures, they would probably first resort to additional quantitative easing. So our conversations, to be very clear about that, are about implementation and driving the tool available, not about the change of mind of the bank in terms of whether they want to implement it or not. On the second point, which connects to the first, I understand, Andrew, about passing that to consumers. Well, they have been passed to consumers. I mean, as rates went from 75 basis points to 10 basis points, we and most of the banks have lowered their FCR rates exactly by the amount that base rate has passed. And that is an immediate very substantial impact, which was passed to consumers. New business price has fluctuated over the years. It has increased a little bit from the beginning of the year in terms of margins, but given the decrease in terms of base rates, prices for consumers are lower than at the beginning of the year, but you have to look at the different segments, et cetera. But on average, you have to distinguish which was the impact on absolute prices, which has into consideration the decrease on the base rate and what the dynamics of the market. There is very substantial demand, which I think will continue and will continue both because of the incentives for the -- taking advantage of the stamp duty, lower stamp duty, until the beginning of next year, that is going to continue. And apart from that, there is a structural shift in customer behavior, which is also driving demand up very substantially. I mean, we have never had so many approvals, as I told you, since 2008, and we are the largest player in the segment. So that's quite important. The mortgage prices, in general, are in -- more rational opinion, in our opinion and -- more rational position, in our opinion. And I really don't see given both the demand factors I mentioned to you, the uncertain results there and the risk factors that high LTVs, I don't see that changing in the next one or 2 quarters.
I'll just maybe add one comment to António there, Andrew, and then go on to address the second of your 2 questions. I think it is our view that the regulator realizes or the Bank of England more appropriately realizes the profit impact, if you like, or the concerns around negative rates from a financial sector point of view as a general matter. I think, therefore, the -- as António says, we have passed on mortgage rate -- in mortgage rates, rate reductions that we've seen so far. Going forward, I suspect that the Bank of England will be sympathetic in terms of the form in which negative rates might get introduced. In order to ensure that, if you like, bank sectoral profitability concerns are addressed. We'll see, that's obviously in the realm of slight speculation. But I suspect there is an understanding and a desire to avoid necessarily significant negative impact from introduction of negative rates if they get that. Second point, on your gross margin point on consumer. The -- we won't give that just because I don't want to get into the business of giving detailed 3Q disclosures along the same lines as we give at H1. We'll save those for the half. There's been, as a general matter, as a trend matter, there's been a very modest amount of pressure on the Consumer Finance margin, but I won't go into more detail beyond that.
Okay. Just a quick follow-up then on that consumer margin. Given the dynamics you're seeing in the credit card market, and obviously it's probably -- it is largely a mix shift effect that have weighed on that gross margin on the consumer book. Do you think that will now stabilize in terms of mix effect going forward?
Well, I think our margin, as I mentioned at the half year, is very dependent upon activity levels, in general, and what that does to the unsecured book. So if one sees a resumption in activity during the course of 2021, which would be our expectation, then you would expect to see that feeding through into the margin.
Next question comes from the line of Jonathan Pierce, Numis.
Two questions, please. The first is just a clarification on that hedge maturity number. Did you say GBP 60 billion next year? And if so, is that relatively smooth set of maturities through 2021? That's the first question. The second question is on capital. I mean everything you're telling us suggests we get a small profit, probably again in Q4. You got software benefits. Risk-weighted assets are flat. It feels like the equity Tier 1 ratio probably ends the year up towards 16%. And even if I fully load to your severe downside scenario, would only be at sort of 13%. I know it's difficult to comment on, but can you see any good reason now why the regulator wouldn't let you turn distributions back on, particularly given you've been lending into the important markets as well through the course of 2020?
Yes. Thanks, Jonathan. On the first of your 3 questions, the hedge maturity, I won't give a detailed breakdown as to the timing of that during the course of 2021, but the number of GBP 60 billion is the right number, roughly GBP 60 billion for next year, but again I won't go into detail about how exactly that breaks down. The second of your question is around capital performance. The capital performance for the remainder of the year is obviously macro-dependent. I mentioned how you might see our P&L and 1 or 2 of the trends within that in the course of my prepared remarks. We would expect to see continued capital build, but with that macro dependency. You mentioned the software exemption. I think we need to see where the PRA goes on that and what it decides to do. What does that all mean for the distributions question, the third of your questions. The organization, I think, entirely recognizes the importance of dividends to investors. We also see ourselves, as you've commented. And we've also agreed with, we have a very strong capital position, both with and without transitionals. That is clearly appropriate given the uncertainties that we're in, the macroeconomic uncertainties, the ones that we know about. The distribution ultimately is a question for the Board at the end of the year based upon -- and I'm sure a number of considerations, but the types of things I would expect it to consider would obviously be the capital strength and the evolution of that position, would obviously be the macro outlook and where we stand and would obviously be the regulatory position and what the regulator would like to see us as a sector do. So again, that's a question for the Board at the end of the year, but those are the types of considerations I would expect it to debate.
Next question comes from the line of Frederique Sleiffer, KBW.
Yes. I think my name has been changed. So it's Ed Firth here. But I'm happy to go under Frederique if that helps. The -- no, I just had a question about the economic environment because it seems we're in a, sort of, slightly several world at the moment, where all the banks, not just you, are delivering very low impairment numbers. And yes, if I'm reading my newspaper, we're reading that France is going back into lockdown, Manchester in lockdown, Nottingham in Tier 3, et cetera. So I guess my question is, insofar, as you can, in those areas of the U.K. that you have seen in lock -- that going back into some form of lockdown, and I think in places like Manchester, I guess, is the most obvious one, how has the book performed in those areas? And can you see a sort of marked differential between those areas versus the rest, which might give us some indication of what would happen if the whole of the U.K. goes back into some form of lockdown? I suppose that's my first question. And then my second question related to that is if we do see some form of sort of greater lockdown in Q4, would we expect that to be reflected in Q4 provisioning? Or would your first call be to utilize some of the impairments you've already made rather than adding to them further?
Okay. So I will take the first question and then William will take the second one. Look, it is -- very frankly, I mean, it is still too early to see, to your example, whether, for example, the Manchester lockdown would have had any significant different impact on the book because I mean we are speaking about weeks. So it is really difficult to know about that. What I would say are probably 2 things. The first one is I mean the government measures of support to the economy are absolutely the right ones there. First, because as we have discussed in previous quarters, obviously it keeps a productive structure ready, that whenever the pandemic effects dissipate, that productive structure can immediately be used and not have to be reset. Of course, as we move into the pandemic, the government has then rightly so again, driven more targeted help to the sectors that will continue to operate post pandemic and has looked differently at sectors, which has structural impact from the pandemic. But overall speaking, the impact of supporting the sectors with a very significant external and expected shock is the right thing to do. If you have not spent that money in that way, you would spend it through unemployment benefits, lower taxation from corporations that kept operating, et cetera, et cetera, and you would not have the flexibility of going this quickly after the pandemic into production. That's the first important point. But the second important one, I think, which has been less discussed is that this support, not only to businesses as I was just mentioning, but to individuals as well, through the furlough scheme, has also enabled people and businesses to adapt with the transition period, if you want, and to plan. And that's what you see by unsecured debt having decreased. So individuals have decreased their leverage as they save more and as they spend less, which is reflected in the balance sheets of the banks by lower and secured balances. And that makes those individuals more resilient to an expected -- to the fact that they might lose their jobs going forward, and some will, unfortunately, lose their jobs going forward. But they have had, number one, they are in a stronger situation financially. And secondly, they have -- they are having time to plan ahead for those uncertainties, which is also really important in terms of not having an unexpected shock. So I think that is -- those are 2 important points that I think you should bear in mind. A third one I would add, relating to us specifically, because you're mentioning impairments, and I'll ask William to comment in a moment, is that you should bear in mind that us being a retail and a commercial bank, it is not really important what we do in the 6 months previously to a shock like this one or doing the shock itself. What is really relevant for retail and commercial bank is what you have been doing for the past 5 years and the cohorts of loans you have been putting into the books. And as you know, we have -- since the start, we have always said we wanted to build a low-risk, simple, digital financial institution based on the real economy in the U.K. So we wanted to build a low-risk bank. And we have, as we have discussed with you through several years now, we have taken that view sustainably. For example, to give you an example, on mortgages, it was already 5 years ago that we had decided to lower our activity in mortgages in London and Southeast by decreasing the loan to incomes from 5 to 4 in order to deemphasize our focus on that part of the market. And when you look at the slides we gave you in the appendix, the situation of our mortgage book, again, just to give you a factual example, is completely different than before. So if you look at 2010, you see that the bank had GBP 145 billion of mortgages above an LTV of 80%. And after 10 years, we only have GBP 25 billion. And if you look above 100% LTV, when prices have gone down in certain areas of the country, we have less than GBP 1 billion of mortgages over 100% LTV, in spite of that, when 10 years ago, we had GBP 45 billion and our equity is around GBP 40 billion to give you an example. So I think it's really important to bear in mind in our specific case that we have been building a low-risk bank that's focused on prime businesses over many years now, and that's what most of our book is now after so many years. William, would you like to go to the second question?
I'll address your second question, Ed. The start point is probably just to better understand what's in and what's not in the IFRS 9 provision as we see it today. So our forecasts currently include some measure of localized lockdowns, but also an end to government support as it was articulated at the end of Q3. Now if you look at what we're seeing today, it could be that the lockdowns get a bit worse. We'll see how that transpires over the coming weeks. But it's also the case that government support is a bit better than we have previously anticipated. So there's a bit of a net effect there and some positives and negatives going on. As we look forward into the future, you asked if we end up in a more adverse macroeconomic situation, does that cause a change in our IFRS 9 impairment provision? Or do we dig into the provisions that we already have? It's perhaps just important to step back and say our IFRS 9 impairment provision is constructed based upon the macroeconomic forecast that we have given you. If those macroeconomic forecasts change, then so will our IFRS 9 impairment provision. Now having said that, it is important to recognize that the macroeconomic forecasts are a net forecast based upon potential future impairments driven by coronavirus scenario, but offset by whatever government measures may be taken to soften those blows. So our macroeconomic forecasts rest upon a net of those 2. And we'll have to see if there are any changes going forward, what the net impact, if you like, of those 2 is. Coming back to Q3, within Q3, as I said, we've seen pretty benign arrears experience. We have more or less maintained our ECL, now at GBP 7.1 billion. And indeed, within that, we've had to work pretty hard to offset releases driven by the model to maintain that prudent stance. So our position right now, we feel very comfortable with, based upon macroeconomic assumptions as given to you today.
Due to time constraints, we have one final question. It comes from the line of Benjamin Toms, RBC.
Two, please. Firstly, in relation to the PRA consultation paper that was published last week, which includes a proposed change to the rules in MDAs, if the paper would be implemented in its current form, does that have the potential to change the way the management thinks about its 1% management buffer? And then secondly, do you expect to recalibrate your property cost footprint following the crisis? Or is it still too early to say?
Sure. Thanks very much for the question. I think on the first of those 2, our ambition with capital, as we've demonstrated today, is to stay very comfortably ahead of any MDA or other regulatory constraints. As we stand today, we've got a BAU regulatory requirement of around 11%. The capital ratio today is 15.2%. So there's obviously a very substantial buffer there. I think we would always look to manage the business comfortably in excess of whatever regulatory hurdles there may be. On the property portfolio, I think that as we look forward, one of the things that we've done in our restructuring charge, and we'll continue to do, is look at the overall property estate. And to the extent it makes sense in the context of new ways of working, in the context of some of the learnings that we're taking out of the coronavirus environment, we will adjust that property portfolio accordingly. Again, we've done a little bit of that in the course of 2020. And as we look forward, we'll clearly be planning on what is the appropriate property network in the current environment.
Thank you. That concludes your Lloyds quarter results 2020. You may now all disconnect. Thank you for joining, and please enjoy the rest of the day.