Lloyds Banking Group PLC

LSE:LLOY

Earnings Call Analysis

Lloyds Banking Group Reports Growth Amid Strategic Transformation

In Q3, Lloyds Banking Group showcased robust financial performance, achieving a statutory profit of GBP 3.8 billion year-to-date and a 14% return on tangible equity. Income growth continued, with net interest income rising 2% to GBP 12.7 billion. The net interest margin hit 2.95%, while operating costs remained in line, totaling GBP 7 billion, up 5% year-on-year. The bank reaffirmed its guidance for 2024, targeting a return on tangible equity greater than 15% and operating costs around GBP 9.4 billion. Growing mortgage balances drove customer lending to GBP 457 billion, and deposits reached GBP 476 billion. The outlook remains optimistic, backed by ongoing strategic initiatives.

A Resilient Performance in Q3

In the third quarter of 2024, Lloyds Banking Group showcased strong financial results, aligning with its strategic goals. The group reported a statutory profit after tax of GBP 3.8 billion for the first nine months, achieving a return on tangible equity (RoTE) of 14%. Notably, net income reached GBP 12.7 billion year-to-date, demonstrating effective income growth, primarily from a 2% increase in net interest income quarter-over-quarter. The net interest margin slightly improved to 2.95%, reflecting disciplined cost management and robust asset quality.

Strategic Transformation and Earnings Outlook

Lloyds has emphasized its commitment to strategic transformation which seems to be yielding positive results. The ongoing improvements in customer propositions and a strong market presence, particularly in mortgages, have positioned the group favorably for future growth. The management reaffirmed its guidance for revenue growth, expecting net interest margin to remain above 2.90% for 2024, and it anticipates a long-term structural hedge income growth of over GBP 700 million in 2024, with significant increases expected towards 2026.

Strong Lending and Asset Quality

The group's lending balances increased to GBP 457 billion, driven primarily by a GBP 3.2 billion growth in its mortgage book. The overall performance in lending reflects the group’s strategic investments boosting its market share, especially in the retail sector. Importantly, the asset quality remained robust, with an impairment charge of GBP 172 million in Q3 resulting in a low asset quality ratio of 15 basis points for the quarter, indicating strong portfolio management.

Cost Management and Efficiency Goals

Operational costs rose by 5% year-on-year to GBP 7 billion, primarily influenced by inflation and investment in strategic initiatives. However, the management remains focused on achieving a cost target of GBP 9.4 billion for 2024, which includes navigating inflationary pressures through disciplined management. The third quarter cost-to-income ratio stood at 53.4%, indicating progress towards improved efficiency in the future.

Tangible Net Asset Growth

Tangible net assets (TNAV) per share increased to 52.5p, up 2.9p in Q3, driven largely by profits and the unwind of cash flow hedge reserves. The management expects TNAV to continue its upward trajectory, bolstered by strategic growth initiatives and share buybacks, contributing positively to overall shareholder returns.

Expectations for 2026

Looking further ahead, management expressed confidence about achieving a RoTE exceeding 15% by 2026, alongside a target for a sub-50% cost-to-income ratio. The combination of sustained income growth driven by strategic initiatives and careful cost management underpins these targets, aiming to yield approximately GBP 1.5 billion of additional revenues by 2026 from strategic investments, hinting at a strong anticipated financial performance.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Lloyds Banking Group 2024 Interim Management Statement Call. [Operator Instructions] Please note, this call is scheduled for 1 hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

[William Leon Chalmers, executive]

Thank you, operator, and good morning, everybody. Thank you for joining our Q3 results call. As usual, I'll run through the group's financial performance before we then open the line for Q&A. Let me start with an overview on Slide 2.

In Q3, we continued to make good progress on our strategic transformation to the benefit of all stakeholders. We are building momentum across our business, delivering for customers and driving higher, more sustainable returns. In the third quarter, the group again delivered a robust financial performance, in line with our expectations. This includes income growth alongside cost discipline and strong asset quality. Our performance as well as the strength of the group's franchise allows us to reaffirm our 2024 guidance, and gives us increasing confidence in our 2026 commitments.

Let me turn to a summary of the financials on Slide 3. As mentioned, Lloyds Banking Group delivered a robust financial performance, both in Q3 and in the year-to-date. Statutory profit after tax for the first 9 months of the year was GBP 3.8 billion, with a return on tangible equity of 14%. Net income was GBP 12.7 billion year-to-date. Pleasingly, Q3 has seen growth in income versus the prior quarter, including net interest income up 2%. This was supported by our quarterly net interest margin of 2.95%, up 2 basis points from Q2.

Operating costs of GBP 7 billion in the first 9 months of the year were up 5% year-on-year, in line with our expectations. Asset quality meanwhile remains strong. Year-to-date impairment charge of GBP 273 million equates to an asset quality ratio of 9 basis points. The Q3 impairment charge was GBP 172 million or an AQR of 15 basis points. TNAV per share increased to 52.5p, up 2.9p in Q3, driven by profits and the unwind of the cash flow hedge reserve given the falling rates.

Our performance delivered strong capital generation of 132 basis points in the year-to-date, in line with our guidance of 175 basis points for the full year.

I'll now turn to Slide 4 to talk through the balance sheet growth that we saw during the third quarter. Our customer franchise continues to grow across the balance sheet. Proved lending balances of GBP 457 billion were up GBP 4.6 billion in Q3. This was primarily driven by strong mortgage book growth with balances up GBP 3.2 billion. Higher mortgage completions reflect both a strengthening market throughout 2024 and the market share of new business that is in excess of our share of stock. Notably, our customer proposition in mortgages is being supported by improvements off the back of our strategic investments.

Elsewhere in the Retail business, we saw continued growth across cards and unsecured loans of GBP 0.1 billion and GBP 0.6 billion, respectively. Motor finance balances were down by GBP 0.6 billion, although this was impacted by GBP 0.3 billion securitization in the quarter and dealers holding lower stock levels than seen in the first half. Commercial lending balances were down slightly in Q3 by GBP 0.2 billion.

Within this, we saw similar trends to recent quarters with targeted growth in corporate institutional, more than offset by net repayments in small and medium businesses, including GBP 0.4 billion of government-backed lending balances.

It's been another positive quarter for our deposit franchise. Deposits now stand at GBP 476 billion, up GBP 1 billion in Q3. Within this, we saw growth of GBP 1.7 billion in Retail with savings accounts up GBP 2.8 billion. Current accounts were GBP 1.1 billion lower in the quarter, an outcome which is a little better than we expected. Deposit churn overall eased slightly as anticipated in a declining rate environment.

Commercial deposits were down GBP 0.5 billion quarter-on-quarter. Growth in targeted sectors within small and medium businesses was offset by an expected outflow in CIB. Alongside these deposit developments, insurance, pensions and investments saw GBP 3.5 billion of net new money year-to-date.

Turning to income on Slide 5. Group delivered income growth across both net interest income and other operating income in Q3. Net interest income of GBP 3.2 million in Q3 was up 2% quarter-on-quarter. This includes a net interest margin of 2.95%, up 2 basis points from Q2. The significant contribution from the structural hedge more than offset the ongoing headwinds from deposit churn and mortgage refinancing. Overall, the margin is a touch stronger than expected given the favorable deposit dynamics mentioned earlier, together with yield curve development.

The structural hedge notional balance remained unchanged at GBP 242 billion in the third quarter after reducing GBP 5 billion in the first half of the year. This reflects increasing stability in our rate intensive deposit balances and generated hedge earnings of GBP 1.1 billion for the quarter.

Looking forward, we continue to expect that 2024 net interest margin to be greater than 290 basis points. Alongside year-to-date AIEAs of GBP 450 billion with healthy growth in Q3 led by the mortgage book. We continue to expect AIEAs to be greater than GBP 450 billion for the year as a whole.

Also within NII, the nonbanking interest charge was GBP 118 million, broadly stable on Q2 and consistent with our expectations. Note that this will tick up a bit in Q4 given expected refinancing and activity growth in the businesses. Overall, the NII performance has improved in Q3. Looking forward, Q4 will be more stable given structural factors, but we expect the improvement seen in Q3 to be the beginning of a gradual trend.

In other income, we saw continued momentum in the third quarter. Year-to-date OOI of GBP 4.2 billion is up 9% year-on-year, with Q3 OOI up 3% quarter-on-quarter. Our performance this year continues to be driven by stronger activity and our strategic initiatives across the franchise.

As you know, we'll give a full update on our strategic progress at the year-end. That said, we're continuing to execute at pace and are on track to deliver the GBP 0.7 billion of additional strategic income in 2024.

Operating lease depreciation was GBP 315 million in Q3. This is consistent with our expectations at the half year based on business momentum and revised depreciation schedules.

Let me now turn to costs on Slide 6. We remain on track to deliver our cost guidance of GBP 9.4 billion in 2024. Q3 operating costs were GBP 2.3 billion, stable quarter-on-quarter. Over the first 9 months of the year, operating costs of GBP 7 billion were up 5% year-on-year or 4% excluding the Bank of England Levy. As noted at the half year, this also includes accelerated severance charges versus 2023 taken to facilitate cost efficiencies. Excluding both the levy and the components of severance, which was in excess of last year, costs were up just 2%. Inflationary pressures are being significantly offset by continued cost discipline and investments in savings.

The Q3 cost-to-income ratio is 53.4% or 52.7% excluding remediation. As said, we continue to expect operating costs of circa GBP 9.4 billion in 2024, including the GBP 0.1 billion Bank of England Levy. Remediation charge is GBP 29 million in the quarter and GBP 124 million year-to-date. There have been no further charges relating to the FCA investigation into historical Motor Finance Commission arrangements.

Stepping back, for the full year run rate remediation charge, we still see circa GBP 200 million to GBP 300 million as an appropriate guide.

Let me move to asset quality on Slide 7. Asset quality remains strong and reflects resilient group credit performance. The Q3 impairment charge is GBP 172 million, equivalent to an asset quality ratio of 15 basis points. This benefited from strong portfolio performance, but also a debt sale of unsecured assets, providing a circa GBP 80 million credit, worth about 7 basis points in the quarter. Year-to-date, the impairment charge is GBP 273 million. This reflects a low underlying charge helped by some one-offs and an improving economic outlook in the first half of the year.

On a pre-MES basis year-to-date, the impairment charge is still low, GBP 597 million, or an AQR of 18 basis points. Our stock of ECLs on the balance sheet remains GBP 3.8 billion. This is about GBP 500 million in excess of our base case and like-for-like higher than pre-pandemic levels.

Looking forward, we continue to expect the asset quality ratio to be less than 20 basis points for 2024.

Let me move on to Slide 8 and address the below the line items and TNAV. Return on tangible equity in Q3 was 15.2%, contributing to a robust year-to-date performance of 14%. Within this, restructuring costs remained low at GBP 6 million in the third quarter and GBP 21 million for the first 9 months of the year. The volatility and other items charge was GBP 24 million in Q3. This was driven by the usual fair value unwind, offset by positive banking and insurance volatility, given recent rate movements. This contributes to a year-to-date charge of GBP 182 million.

Tangible net assets per share at 52.5p are up 1.7p year-to-date and up 2.9p in Q3. The increase over both periods was driven by profits and the unwind of the cash flow hedge reserve, offset by shareholder distributions. In Q3, the TNAV also benefited from the mechanical reversal of the 0.9p per share accrual for the share buyback that we flagged in Q2.

Looking ahead, we continue to expect TNAV per share to grow as headwinds unwind and the reduced share count from the buyback continues to provide support.

We also continue to expect the group's return on tangible equity to be circa 13% for 2024. This incorporates ongoing TNAV growth alongside slightly lower fourth quarter earnings given the usual seasonal factors such as the bank levy and a more normalized impairment charge.

Turning now to capital generation on Slide 9. The group delivered strong capital generation in the first 9 months of the year of 132 basis points. This is in line with our expectations and keeps us on track for our target of circa 175 basis points for the full year. Within this, risk-weighted assets were GBP 223 billion, up GBP 4.2 billion in the first 9 months. This continues to be largely driven by lending growth, partially offset by securitizations and other capital optimization activity.

We remain confident that RWAs will end the year consistent with guidance of between GBP 220 billion and GBP 225 billion. Further lending growth and regulatory inflation will be partially offset by continued active balance sheet management.

Our closing CET1 ratio for the quarter is 14.3% after 71 basis points of ordinary dividend accrual. We continue to expect to pay down to a 13.5% CET1 ratio for the end of 2024.

Looking further forward, since we last met, the PRA has published its policy statement on Basel 3.1. We now expect the impact to be modestly positive, when introduced on the 1st of January 2026.

I'll now move on to Slide 10 to wrap up the presentation. Overall, the group delivered an encouraging performance in the third quarter. This includes strong progress on our strategic transformation. In that respect, we look forward to updating you on this at our full year results, which will represent the closing of the first chapter of our strategic plan. Q3 also represented another robust financial performance, reflecting income growth, continued cost discipline and strong asset quality, leading in turn to strong capital generation.

Our continued strategic execution and consistent financial performance allows us to reaffirm our 2024 guidance. It also gives us increasing confidence in our commitment to generate higher, more sustainable returns for our shareholders.

That concludes my comments for this morning. Thank you for listening. We'll now open the lines for your questions.

[Operator]

[Operator Instructions] Our first call today is Aman Rakkar from Barclays.

[Aman Rakkar, analyst]

I had a question on net interest income, please. I guess, first of all, around the usual NIM and NII drivers into Q4 as you see them would be helpful, I guess I'm particularly interested about the structural hedges, a big, big contribution in the quarter in Q3. And I'm just ultimately trying to work out if there's any upside to the structural hedge this year. I suspect that there should be by virtue of the kind of year-to-date performance that you've achieved is close to the -- I think it's close to the GBP 700 million or in excess of GBP 700 million that you're guiding for the full year.

I also suspect that your structural hedge notional probably isn't going to fall much from here. So I think there should probably be a pickup from this hedge being more stable. And I guess the swap rate environment has been better than expected through the course of this year. I know you're pre-hedged. But it does seem to me like there is upside to that structural hedge. So to be more succinct, should we expect a meaningful kind of sequential pickup in the structural hedge Q-on-Q in Q4? And what does that mean for the NIM, please?

And then I had a second question on average interest-earning assets. So you've pointed to kind of sequential growth in Q4 in your IMS. I can see that averaging is a decent tailwind Q-on-Q, but I think there is some decent underlying momentum in your Retail business as well. So could you help us maybe think about Q4 average interest earning assets? I feel like it should be decent Q-on-Q, and I think you need it to be in order to deliver on your full year. I think that's what you're pointing to, right, that the lending momentum really should drive average interest earning assets quite meaningfully from here?

[William Leon Chalmers, executive]

Thanks, Aman, for 2 questions. I'll take them in order. Net interest margin, first of all, as you know, net interest margin was at 2.95% during quarter 3. The drivers in respect of that were the principal ones that we've discussed before, but to go through each of those, we've seen structural hedge make a good contribution in the third quarter, 10 basis points, as you'll have seen in our numbers.

And then on the flip side of that, the 2 headwinds that we've seen are deposit churn and mortgage refinancing. So to comment on those, respectively, deposit trend we've seen during the course of the quarter as anticipated, actually, that is to say modest PCA outflows in combination with a continued drift from interest earnings -- sorry, instant access into fixed term and limit to withdrawal.

But a couple of points within that, Aman, which are relevant. The PCA outflows are probably a little more modest than we had expected. That is to say the PCA balances are a little better than we had expected. That's off the back of things like inflationary wage settlements, it's probably off the back of slightly more conservative spending patterns, but also things like government or bank gyro credits and the like.

So overall, a more benign picture in PCA, is down GBP 1.1 billion in the quarter, but leading to a balanced outcome that, as said, touched better than expectations, perhaps.

And then alongside of that, the churn taken overall, as I mentioned in my comments earlier on, eased up a little bit over quarter 2. So we're seeing essentially what we thought might happen in the falling rate environment, which is to say that deposit churn eases a little bit as we go through the year.

The mortgage refinancing headwind continues, pretty much in line with where we thought it might do. That is to say we've got mortgages that are refinancing or rather coming off the balance sheet at about [ 110 ] as a margin. They're going on the balance sheet at a completion margin of around 70, maybe a touch over 70 basis points. So you still got that mortgage refinancing headwind paying out, again, in a more or less mechanical way in line with how we expected.

Now when you look forward, on that and pursuant to your question on the structural hedge, which I'll come back to, Aman, we would expect that net interest mechanic, if you like, the principal tailwind allied to the 2 headwinds that I mentioned to continue to play out in the course of the fourth quarter.

Overall, as I mentioned in my comments earlier on, we think the net interest margin has more or less turned for the time being. It looks to us like the net interest margin increased by a couple of basis points in the quarter of Q3. I think we might expect something roughly similar in the course of Q4. Of course, that will be affected by things like deposit behavior, for example, competition in the mortgage market and the like. But overall, taking what we can see into perspective, if you like, I would expect that net interest margin to continue to tick up a little bit in the course of Q4.

Now the structural hedge role within that is clearly important. As I said a second ago, we've seen the structural hedge contributed 10 basis points in the course of quarter 3. That was a particularly strong contribution, simply because of maturities, because of yields on those maturities and the like. And that's the type of, overall, very positive contribution you get from the structural hedge, but it will go up and down a little bit quarter-on-quarter.

When we look forward, the structural hedge expectation for the year as a whole, as you know, I think we mentioned at our half year numbers that we thought it would be growth of greater than GBP 700 million in the course of 2024. As we stand today, it may be that swap curves have been a little bit stronger than we expected, but there's probably not much in it, to be honest, Aman. And so maybe it's a touch stronger than that, but not awfully much and not terribly material.

Your notional comment is interesting. How do we see the notional balances of structural hedge? We thought at the beginning of the year that they will come off by a modest amount. We compared that, I think, at the time to what we saw in 2023, which is an GBP 8 billion reduction. So far, we've seen a GBP 5 billion reduction. And I mentioned earlier on that the deposit churn picture is easing up just as we thought it might.

Where does that take us to? Let's see what depositors do during the course of the fourth quarter. But overall, I think we feel pretty good about the notional balance at GBP 242 billion as it is right now, and we'll report back to you how we fared during quarter 4.

Just taking a step back on your first question, still, Aman, what does that net interest margin picture look like? Rather, what does it imply for net interest income? And I think it's just worth finishing the question on that, which is to say, when you look at net interest income as a whole, as you know, it's composed of net interest margin, AIEAs and nonbanking net interest income.

And I'll come back to AIEAs in a bit more detail in just a second. But to round that off, net interest margin as said, looks like it's turned maybe a bit more progression in the context of Q4 would be our base case. AIEAs, you've got our guidance there. It's greater than GBP 450 billion, and I'll come back to that in just a second. But don't forget during my scripted comments, I did comment that NBNII, nonbanking net interest income, is expected to tick up a little bit in the course of Q4, and that's off the back of greater levels of activity, which in turn go into securing our other operating income growth that you've seen year-to-date.

So consider that point too. Where does that take us to net interest income? Our expectation is that net interest income will be broadly stable Q4 versus Q3, and that's, overall, if you like, the point that I'd finish off that question, Aman.

Second question, AIEAs, Aman, a couple of points there. You've seen the strengthening of AIEAs through the course of the year. In quarter 3, you saw AIEAs of GBP 451 billion. Year-to-date, as you know, AIEAs are a touch below that at basically GBP 450 billion. When we look into Q4, we see the type of growth that we've seen in assets, GBP 4.6 billion lending increase in assets in quarter 3, we would overall expect that growth to continue during the course of quarter 4 and therefore, contribute to the AIEAs build over that time.

But where we think that land is in terms of AIEAs for the year as a whole is in line with our guidance of greater than GBP 450 billion. I don't think we'll be an awful lot ahead of that, to be perfectly clear. But nonetheless, we do expect to meet our guidance of greater than GBP 450 billion based upon that building trajectory of AIEAs, quarter 3, GBP 451 billion, let's see where we get to in quarter 4, but overall, as I said, meeting our guidance of GBP 450 billion. So that's an overall picture. Perhaps I'll stop there for now. Aman. Hopefully that's helpful.

[Operator]

Our next caller is Jonathan Pierce from Jefferies.

[Jonathan Richard Pierce, analyst]

I've got a couple of questions, if that's okay. The first is on this hedge tailwind again. I mean, GBP 450 million annualized increase in the third quarter given there probably wasn't any averaging benefit coming through from Q2, there was no tailwind in that quarter. It is obviously pretty big in the context of the GBP 20 billion maturity number you previously talked to across H2 as a whole. Just really want to clear something up from a definitional perspective here. When you talk about maturities, that GBP 20 billion in H2, for instance, is that number, as I understand it, excluding positions you have already pre-hedged? So we can't sort of look at GBP 20 billion and multiply by a yield delta to get the tailwind in any particular quarter. So that's the first question.

The second question is a broader one on 2026. The TNAV is obviously now moving up at a decent clip. I think if you look at consensus retained earnings next couple of years, get about 10p on the end of '26. The cash flow hedge reserve is still a 5.5p negative, I think, and presume a lot of that will unwind. So TNAV feels like it's moving into the mid-60s plus. If that's a number you recognize, and are you still confident if that is the base, the RoTE will be north of the 15%? And are you still wedded to this idea that you'll do a 15%-plus RoTE even if equity Tier 1 ratio was 13.5% rather than 13% you talked to earlier in the year?

[William Leon Chalmers, executive]

Thanks, Jonathan. I may ask you to just repeat your first question to make sure I followed it. But in essence, from the structural hedge, what we've committed to in terms of the income profile is, as you know, in 2023, we saw GBP 3.4 billion. We believe that we're going to achieve greater than GBP 700 million growth over the course of 2024. We then -- I'll take it further forward for now, expect a step-up from that GBP 700 million growth in 2025 and a further more significant step-up in respect to 2026. So that's the overall income picture, Jonathan.

When we describe that income picture, it takes into account the dynamics of the hedge in terms of nationals, in terms of the extent to which we have pre-hedged, in terms of the yields on maturities that are coming up and so forth. So everything is gathered together. That may or may not answer your question. Perhaps you can tell me at the end if there's anything further you'd like to ask.

On your second question, in respect to TNAV, we've seen pretty decent TNAV build over the course of the third quarter, as you know, up 2.9p per share during the third quarter to 52.5p. We do expect that TNAV per share to increase over the course of the near term and into the medium term. And the primary drivers for that from a business point of view, from a TNAV as a whole point of view, if you like, are business growth, are the unwind of the cash flow hedge reserve, our pensions -- no, pensions contributions, I shouldn't say, but rather asset performance in the context of pensions. And that overall drive TNAV positivity. That is then augmented by the buyback, which obviously reduces the number of shares, and therefore, further boosts the TNAV per share.

You've seen in the -- in respect of the cash flow hedge reserve in particular, Jonathan, you've seen the rate profile that we have. The cash flow hedge reserve right now is about GBP 3 billion, GBP 3.3 billion thereabouts. In the context of the rate profile we have, that unwinds more or less in line with the structural hedge, albeit some of it is front loaded by its nature. That overall leads to pretty decent TNAV growth over the immediate future as said, and over the forecast period.

When we look at the 2026 expectations, Jonathan, we always thought that was going to be the case. There's nothing new there. That is consistent with what we said at the beginning of this year and indeed in the preceding year. So nothing terribly much has changed in that respect. We've had some short-term volatility in rates for sure, but the overall profile hasn't changed terribly much from what we previously set out.

Where does that leave us? That leaves us with greater than 15% RoTE expectation for 2026, and you've seen our capital commitments and likewise, alongside of that. But greater than 15% RoTE expectation for 2026 off the back of what will, in our expectation, at least been undoubtedly materially higher TNAV. It's that combination, Jonathan, yes.

[Jonathan Richard Pierce, analyst]

Okay. And you're still comfortable you'll do that even if the CET1 ratio has been held at 13.5% as it was from the target was put in place.

[William Leon Chalmers, executive]

Well, absolutely, that's what we committed to at the beginning of this year, and that's very much where we continue to be.

[Jonathan Richard Pierce, analyst]

Okay. And sorry, just a follow-up on the hedge tailwind point. I think it's a good point that if I just took GBP 20 billion of maturities in the second half, it's very difficult to see how you're guessing the tailwind in income terms that you're talking about. And I'm just wondering whether the GBP 20 billion is really the relevant number? Or if there are more maturities and you're not including within the GBP 20 million, so that's been hedged?

[William Leon Chalmers, executive]

No, I think the maturities are always slightly difficult to kind of model, if you like, off the back of the hedge expectations simply because you don't have other parts of the puzzle, such as the yield on maturities and the pre-hedging which, as you say, is a further metric. So overall, I think it's that balance. I think I'll pay more attention to the income expectation for the hedge as a whole in terms of modeling expectations.

[Operator]

Our next caller is Benjamin Toms from RBC.

[Benjamin Toms, analyst]

At recent conference, I think you talked about NIM gently rising in '25 and more significantly in 2026. I just check whether you think the current consensus actually reflects that sentiment that you're trying to convey at 301 basis points for next year and 311 for the 2026?

And then secondly, in respect to Motor Finance, I think there's a couple of court cases with you to get judgment on before Christmas. Can you just give us some timing around those? And do those cases have the potential to impact your motor finance provisioning modeling? Or are we really waiting for the May '25 consultation paper for shifting impact expectations?

I think I noticed in your presentation that your remediation charge yesterday is GBP 124 million, but you're guiding still to GBP 200 million to GBP 300 million, which leaves me with a slight feeling you might be giving yourself room to do a top-up at year-end.

[William Leon Chalmers, executive]

Thanks, Ben, for the 2 questions. In respect to NIM, as I said in my comments earlier on, the NIM has effectively turned as of Q3. We expect that to continue over the course of Q4. So when we look at 2025, we obviously haven't given guidance for 2025. We'll certainly do that in February of next year when we meet to discuss full year results. But overall, some comments on the shape there that we might expect.

It is our expectation that the same factors, if you like, will drive the 2024, 2025 NIM outcome as are currently driving the setup right now. Specifically, what do I mean by that? I mean a gathering pace in the structural hedge. As said, we're delivering greater than GBP 700 million growth in respect to '24. Our expectation is that '25 deliveries in the structural hedge will be in excess of that GBP 700 million growth during that year.

And alongside of that, continued slowdown in deposit churn, I think very much consistent with our interest rate expectations. And off the back of that, the incentive, if you like, to move from instant access or PCA for that matter into fixed-term savings. So that reduces deposit churn over time.

And then alongside of that, finally, the mortgage headwind tapers a little bit going through 2025, albeit it will not be done until the first half of 2026. So we'll give specific guidance for the margin in 2025 at the beginning of next year. But the expectation is based upon those dynamics that we do, indeed, to your point, Ben, see an increase but a gradual one during the course of the year.

The only offset to that I would highlight that we have not seen during the course of this year so much is rate cuts. That is to say, we've seen one rate cut so far this year. We expect one further rate cut during the course of Q4, and we expect 3 rate cuts during the quarter of '25 and those do act as -- have a lag effect, a cost effect essentially on the margin.

But still taking that point into account, you add up all of what I've just said, and we would expect to see a gradual increase in the margin over the course of next year. On the motor point, Ben, that you raised, first of all, just to distinguish between the GBP 200 million to GBP 300 million remediation guidance that I mentioned earlier on anything to do with motor. GBP 200 million to GBP 300 million of remediation guidance that I gave, that has been our long-standing guidance in remediation for a very long time, which predates motor. So it's not with reference to anything to do with motor. It's simply to guide you to what we expect on a full year run rate remediation basis.

In respect of the court cases that you referred to, Ben, a couple of points to make. I mean one is obviously the main event here is the FCA Motor Commission review, which, as you know, has been moved into May of next year, which, from our perspective, at least is a timing event rather than anything more substantive than that. So we obviously look forward to getting that motor commission review wrapped up and moving on from that. It's going to be May rather than this year, fine. That doesn't affect our GBP 450 million provision.

With respect to court cases, court cases are obviously a matter of law as opposed to the FCA review, albeit the FCA did say that they would take them into account in considering the overall stance. So we will observe those court cases. We'll obviously consider them in the context of where they might go. I would note a couple of things, the principal one of which is to say that the court cases that have been determined to date on motor have predominantly gone in our favor, not everyone, but mostly got in our favor. So we'll look with interest to the court cases and how they come out, but with that context in mind.

[Operator]

Our next caller is Jason Napier from UBS.

[Jason Napier, analyst]

Two, please. Good momentum in parts of the loan book, in particular. So first question on the mortgage growth in the quarter. Thank you for the completion margins. Presumably, this is strong from a market share perspective if we think about the background, you've got an SVR book that is running down and so on. If you could just talk about sort of your share where it's coming from and what you're seeing on sort of front-end pricing there?

And then secondly, U.K. Retail has done phenomenally well year-to-date, up another 7% in the quarter. If you could just talk about the credit quality of what's going on in the book there, and sort of how you're seeing end consumer credit demand? I mean U.K. savings rate of 10% looks like everybody is very, very cautious, but you're generating really quite good commercial momentum in that portfolio, in particular, if you could talk through that, that would be helpful.

[William Leon Chalmers, executive]

Thank you, Jason. First of all, in respect of mortgage growth, yes, we're pleased with the mortgage growth that we've seen in the context of the third quarter, in fact, in the context of the year-to-date. The third quarter growth, as you know, is GBP 2.2 billion, which represents a good performance. We've always taken a stance with mortgage growth as you know, the mortgage market, I should say, as you know, which is to say that we will aim for a decent, a healthy proportion of share, but we will only do so if it is acceptable on value basis.

It's good to see actually that over the course of this year and particularly in the third quarter, the trade-off between share and value from our perspective at least, has been a constructive one. So what have we seen in respect to pricing and what have we seen in respect of share?

With respect to pricing, we've seen a circa 70 basis points, maybe a touch over, as I mentioned earlier on, for completion margins. So that's a return that allows us to deliver a cost of capital positive return, both on a stock basis and a marginal basis.

What have we seen in terms of share? We've seen around a 21.5% market share inflow within mortgages within the third quarter. Importantly, I think what is delivering for us there is the results of some of the investments, as I mentioned in my script comments earlier on. And specifically, what I mean by that? We've invested heavily in the intermediaries journey, for example, to address the needs of intermediaries to get a quicker result for our customers. And we've invested heavily in the overall proposition, including focusing on certain segment sectors, including, for example, the mass affluent mortgage that we've recently put out.

So it's that combination of investing in end product, investing in journeys, which we think is helping us to achieve a successful market share, again, in the backdrop of what we see to be acceptable pricing.

U.K. Retail, overall, yes, I think we've seen some decent growth within U.K. Retail outside of mortgages too, Jason, which is good to see. A couple of comments within that. We've seen about GBP 0.6 billion increase in loans. We've seen about GBP 0.1 billion increase in cards. That's all in the third quarter. We've seen a modest decrease, actually, about GBP 0.6 billion decrease in motor.

So that motor one, I'll just dwell on briefly. The motor reduction of GBP 0.6 billion is about -- half of that is about securitization that we did in August, which is an important risk management approach in the context of our operating lease depreciation exposure. So half of that reduction in U.K. motor is off the back of a securitization done in August. The other half or a good part of the other half is essentially about dealer destocking.

Dealers had built up their stocks early on in the year. Through the course of the year, they run those down basically as vehicles get sold. We've seen a bit of that during the third quarter. So if you step back, and I think, Jason, to your point, we've seen strong personal loans growth. We've seen strong cards growth, and that's pleasing. You asked about the credit quality. The credit quality, I think, is not just benign, but actually more benign than probably surpassing our expectations.

What is behind that? I think it's a benign macro economy on the whole. I think it's also some of the approaches that we've invested in, in the context of our strategic initiatives. So for example, we've created a your credit score tool, which is a tool that customers can visit and build an understanding of their overall credit performance. We've seen that linked to greater take-up within the personal loans business. And indeed, I think that is probably what's one of the factors behind the good credit quality that we're seeing.

So overall, Jason, I think it's been healthy volume growth. I think it has been very benign credit quality that we've seen behind that, and it's a good combination.

One slight point that I'll make on the personal loans growth, again, GBP 0.6 billion up during the quarter, which is great. Don't forget the fact that we did a securitization on the personal loans tail end of last year. which, in turn, probably slightly flattens that GBP 0.6 billion increase in personal loans is still a healthy growth underneath it, but just bear that in mind.

[Operator]

Our next caller is Chris Cant from Autonomous.

[Christopher Cant, analyst]

Two relatively quick ones, I think. Firstly, you mentioned Basel 3.1 is now expected to be modestly positive upon transition in '26. I was just wondering if you could give us a little bit more quantification there in terms of how we should think about the RWA impact. Obviously, that would be a factor potentially within how you think about distributions for next year, given it hits 1 Jan '26, but any more precise quantification than modestly positive would be appreciated.

And then the other question I wanted to ask was on nonbanking NII. I'm sure we're all going to spend a bit of time today trying to wrangle the generally positive commentary on the direction of NIM and loan growth with the fact that NII is expected to be broadly flat. And you mentioned nonbanking NII will be stepping up into the fourth quarter. Is there any way you could give us a sense of the quantum of that impact?

And I guess, more importantly, how we should be thinking about that looking into 2025? I think the 2025 consensus for nonbanking NII would essentially be flat on roughly where you were as of the third quarter of this year. If it is stepping up into 4Q, should we be expecting sort of a bigger negative nonbanking NII number in '25 than consensus currently has been?

[William Leon Chalmers, executive]

Yes. Thanks, Chris. Take those in order. Basel 3.1, you're quite right to spot a change in language. We do believe that Basel 3.1 is now going to come out modestly positive as opposed to neutral to modestly positive, which is what we have said before. What's behind that is a number of changes that have been adopted in the consultation process, which in turn are marginally favorable versus where they previously were.

So things like scale in the context of infrastructure, things like credit counterparty -- credit conversion factors rather, those types of things, reduction in standardized loss-given default trade facilities being more benign than we had expected. All of these things add up into a slightly more benign RWA outcome or Basel 3.1, Chris.

I shan't put a number on it actually because the Basel 3.1 process is still going through finalization. And as you know, the types of estimates that we're adopting now basically assume a more or less static balance sheet and likewise credit environment. And so we have to see how that evolves over the course of the coming period in order to give you a more precise number at the beginning of 2026. But overall, I do expect it to be modestly positive, which is frankly a better outcome than we previously thought.

Our capital commitments, you asked about that in the context of your question. We remain at 13% as of 2026. Still our ambition to get to that level, and it's our intention to get to that level. So hopefully, that gives you some context to think about.

In respect of nonbanking net interest income, your second question, we've given an overall guidance for nonbanking net interest income of GBP 450 million to GBP 500 million for the year as a whole. And it's the upper end of that, that I would see towards in the context of the overall year, and therefore, hopefully give you some sense as to where we might go during quarter 4. What's going on there, as you know, it's off the back of increasing levels of other operating income, increasing levels of activity often fueled by the strategic investments that we're making. And so that's the main characteristic, if you like, or say a good part of the characteristic of the increase in nonbanking net interest income.

Alongside of that, we've got some areas of activity within OOI that are basically term financing, transport being the obvious case in point. And so there's a bit of a lag effect between, if you like, base rates going up and the refinancing of those term structures, which in turn feeds into NBNII in a slightly lag way versus changes in base rates.

You asked about next year. I would expect that lag effect and a little bit of the activity to slightly tick up NBNII next year. We'll give you more precise guidance at the end of the year, but a modest tick up might be a reasonable expectation. But having said that, Chris, the overwhelming pattern, I think, in the context of our NII for next year, if you like, overcomes that. That is to say the effect of any NBNII increase is offset -- more than offset by the other positives that we're seeing going on in the NII line, by which I obviously mean the developments in average interest earning assets and alongside of that, the development in the margin. That's what prevails during the course of 2025.

[Christopher Cant, analyst]

That's helpful. Just to clarify on the nonbanking NII. When you say slightly tick up into next year, do you mean relative to the implied 4Q run rate of just north of GBP 600 million? Or do you mean relative to the GBP 500 million that you're now pointing to for full year '24 as a whole? Should we be assuming growth on the 4Q level given these continued investments and the lagging effect? Or is it actually coming down sequentially quarter-over-quarter from that 4Q implied number? And I'm taking the top end of your GBP 450 million to GBP 500 million. I appreciate that some give within towards the top end [indiscernible] ticking up year-over-year?

[William Leon Chalmers, executive]

My answer, Chris, referred to the GBP 450 million to GBP 500 million, and that's what I was referring to in terms of slight tick up.

[Operator]

Our next caller is Edward Firth from KBW.

[Edward Hugo Firth, analyst]

Just 2 quick questions. One was actually broadly, I think, answered by Chris, but I -- just to clarify that. So just to be absolutely clear, you would expect net interest income to broadly follow your margin guidance for the next year. Is that -- should we broadly take that? And I guess, sort of supplemental to that, is my understanding correct that in a falling rate environment, that nonbanking charge should go down? I think it went up with higher rates, and I assume it reverses, but just to check that, that would be point #1.

And then the second question is a sort of broader question. You're still buying back shares, but you're obviously now buying them back at above tangible book and at a price that is probably -- well, considerably higher, let's say, than you've done in the past. Is that something you think about when you're buying back shares? Or is it more of a sort of a mechanical process, you've got the surplus capital and you buy it back?

And does it, in any way, influence your thinking about buybacks versus dividends, firstly? And secondly, does it influence your thinking in terms of acquisitions? Because I mean, obviously, you will see that there are a number of banking assets available in the U.K. at the moment at prices materially cheaper than you are. And I wonder if that's the sort of trade-off you think of as a management team strategically.

[William Leon Chalmers, executive]

Yes. Thanks, Ed. On the interest income point, I'll start there first to your questions. Again, just bear in mind that net interest income is a function of margin of AIEAs and of NBNII, nonbanking net interest income. I mentioned earlier on, and again, I won't get any more specific about this, but I will underline the pattern that we expect to see, the shape that we expect to see, if you like.

Our expectation on NIM as set out is that it gradually moves upwards basically from here on. Our expectation around AIEAs is that we've seen the rise to GBP 451 billion in the course of quarter 3. We'll see more modest lending growth during the course of quarter 4 to be sure, but we do expect AIEAs to grow during the course of next year, in line with our strategic ambitions to grow the business and in line with -- I won't put a number on it at all, but in line with the spirit of the growth in balance sheet that we've seen over the course of this year and expect to continue to see next year. So that's an AIEA comment.

And then this probably addresses both question 1 and question 2 of your questions. NBNII, however, is lagged in terms of its growth off the back of rates, and the reason for that as said is because we've got within NBNII financing of things like transportation assets. Both transportation assets will often be on, let's say, 3-year lending facilities, and therefore, base rates can come down, but there's a lagged effect as the higher level of rates versus when these things were financed is put into the NBNII structure.

Alongside of that, and perhaps more importantly, we get growth in activity. And that growth in activity drives OOI. You've seen OOI up 9% year-on-year, up 3% quarter-on-quarter. It's our expectation that OOI continues to grow in next year, and we have to pay for that. We have to pay for that at some level, which is still, frankly, awfully shareholder value accretive, but we have to pay for the financing of that through the NBNII line.

So it's that combination, Ed, which hopefully answers question 1 and question 2.

On the buybacks, the -- I'm very pleased to see that the share price actually is ahead of tangible net asset value for all sorts of reasons, as you can imagine. Starting from the beginning, though, the key point here is that we are very committed as a team, as a Board, as an organization to capital return to shareholders. That's a core commitment of the organization.

You've seen it hopefully manifested in abundance or testified to over the course of the last few years, both in terms of the dividend, which again, we've increased by 15% as of the half year, and also in terms of the succession of buybacks that we have launched. At the moment, as you know, we have a GBP 2 billion buyback out there, which is being completed more or less as we speak, and we remain very committed to that.

As we look forward, we expect the business to continue to be strongly capital generative. We do expect to continue to invest in the business. We also expect to produce surplus capital above and beyond the investment needs of the business even in the context of the strategic transformation that we're undertaking. And so the question of excess capital generation is unlikely to go away, and it will be -- it will drive, if you like, both the growing dividend and also a question beyond that, about what we do.

Now you've asked the question about how does the current share price drive the decision on that excess capital? A couple of points to make there. One is, we still see significant value in the business even at the current share price, significant value. The second point is, our investors, I think, likewise, see significant value, and as a result, like the buyback structure. From a value-based proposition, the buyback makes sense to them. And that's the consistent feedback that we get.

But inside of that, it's obviously an EPS and a DPS driver, which is good to see. And alongside of that, we see many banks out there who are engaging in buybacks at significantly higher valuations. So -- and in short, we think we've got a long way to go on the valuation, which in turn will, I'm sure, be a factor in any Board decision that will be made at the year-end as to what to do with excess capital.

Final point, Ed, you mentioned around acquisitions. As you know, our approach to acquisitions is a pretty cautious one. Where we see the ability to add scale or alternatively add a capability, which is strategically consistent, we will look at them. But on the other hand, it's a relatively high bar before we'll actually execute. And what informs that bar is, is it a faster way of getting to our strategic ambitions, number one? Can it be done with an acceptable level of risk, number two? And most importantly, can it be done with an acceptable value outcome for shareholders, number three? And so although there might be a lot out there in the market, and we do see everything clearly, it is relatively little or the opportunities that pass those hurdles are relatively few and far between.

[Operator]

Our next caller is Guy Stebbings from BNP Paribas Exane.

[Guy Stebbings, analyst]

First was on other operating income. I just wondering if you could give a little bit more color on sort of the drivers of growth there because I haven't spent too much time on that. If there is any sort of standout contributor supporting the positive performance in the quarter. And looking ahead, Q3 was quite strong. There can be a bit of seasonality. So just to confirm whether you're happy for us to start with the GBP 5.7 billion or so Q3 annual run rate and grow that basis into 2025? I think consensus is only about 2% above that figure, which doesn't look particularly stretching versus the sort of recent pace of growth we've seen for other operating income?

And then the second question was just on impairments. Another very encouraging quarter. I'm not expecting you to guide on next year, but you highlighted the 18-basis-point charge ex CMS changes. It's quite adaptive 27, 28 basis points consensus has in future periods. Just wondering if you're seeing anything on the data, which leads you to sort of stay a little bit conservative and expect a slight uptick from that or actually quite the opposite and you're quite sort of comforted by the date you're seeing in your remarks regarding personal lending certainly sort of seem to suggest so.

[William Leon Chalmers, executive]

Thank you, Guy. Just taking each of those in turn. In respect of OOI, first of all, as you saw Q3 GBP 1.43 billion OOI, which was a decent uptick, 3% on Q2. First of all, Q3 underlying is much the same as Q3 headline. There's nothing going on, on an underlying basis that changes that picture. And that, as you know, is up 9% year-to-date, as I said, up 3% quarter-on-quarter. So decent growth within OOI. The headline being much the same as the underlying.

Specifically, what's driving the growth, I think what's pleasing about OOI growth is that over the course of the year, we've got a number of different engines that are driving that OOI growth, Retail, Commercial, IP&I and Central by which I mean basically the equity businesses. There's 4 engines there. And then within each of those, there's a set of kind of sub businesses, if you like, that are diversified and driving growth.

Their contribution in any given quarter is more or less, by which I mean in some quarters, some areas will be stronger, some areas will be weaker and then generally speaking that evolves over the quarters.

What we saw in Q3 was a particularly strong contribution from the Retail business, including the PCA area and including the transport area, and then secondly, also a decent contribution from the equities business, including LDC. So that was a good pattern to see in quarter 3. If you look at the year as a whole, however, it is also complemented by strong contributions from Commercial, particularly C&I, corporate institutional that is, and strong contributions from insurance, pensions and investments from a variety of different engines, including things like general insurance business, home insurance has been particularly strong, very attractive pricing, if you like, alongside of that long-standing business.

And so that combination of businesses within OOI and the diversification that it affords is a good thing.

When we look at Q4, by its nature, Q4 is typically a slightly slower quarter. And the reason for that is simply seasonal. That is to say there are fewer market days, I suppose, which in turn contributes to OOI being a slightly slower quarter. But overall, what would I expect, I'd expect to consolidate the gains that we have seen in Q3, if not necessarily keep up the growth rate between Q3 and Q4 that we saw from Q2 to Q3. Overall, I think that leads to a solid -- a pretty good outcome for OOI for the year as a whole for 2024.

Looking forward to '25, I think it's the same pattern that informs the trends that we've seen, that is to say increasing levels of activity, and as importantly, the continued benefit of our strategic initiatives. Our strategic initiatives, as you know, will deliver GBP 1.5 billion of incremental revenues by 2026, of which we expect about half to be OOI. So there's an engine of activity there in line with our economic forecast. There's an engine of activity there in line with our strategic investments and a good part of that is OOI driven.

Your second question on impairments. You're right to point out, Guy, that the impairment picture has been -- continues to be pretty benign. Q3 impairment charge of GBP 172 million, about 15 basis points. Underneath that, we did do a debt sale, as mentioned in my script earlier on, and that debt sale was across a number of different asset classes, actually, but overall, contributed about 9 basis points in the quarter, which, if you add that back in, means that the underlying impairment charge is about 24, 25 basis points.

Interestingly enough, that is very consistent with what we saw at quarter 2, and I would say it's more or less consistent with what we expect to see in quarter 4.

When we look at 2025, I shan't comment any detail on 2025 other than to say that the overall impairment trends continue to be pretty stable and, on a whole, pretty benign. So that's, if you like, feeding into our expectations for that year. It is informed by, and this goes back to some of the comments on U.K. Retail earlier on, that not just the underlying charge being, again, pretty stable and being pretty benign, but alongside of that, new to arrears being low, write-offs being low, flows to default being low.

And perhaps most importantly, early warning indicators. As you know, we look at an array of early warning indicators across our customer base, within retail, within consumer. And we're not seeing anything there that is anything other than stable. If anything, we're seeing modest declines in new to arrears, for example. But equally, a lot of stability in things like minimum repayments within credit cards and that sort of thing. Similar patterns within Commercial.

[Operator]

Our next caller is Amit Goel from Mediobanca.

[Amit Goel, analyst]

So 2 questions. One, I'm just basically curious to see if there are any kind of customer behavior changes or anything that was even slightly different to what you're expecting post the Bank of England's rate cut? And then secondly, just curious if there's any color that you could share from some of the meetings you've had more recently with Rachel Reeves? And/or how receptive do you think the government is to some of the proposals that you've been putting forward?

[William Leon Chalmers, executive]

Thanks, Amit. The -- I mean, I'll take your questions in order, obviously, the -- first of which customer behavior changes off the back of the Bank of England base rate change. There's nothing in particular that I would highlight, say to -- say the deposit churn comments that I made earlier on, which I think have been reinforced by the base rate changes that we've seen. So overall, we took the base rate change. We passed on an element of it. I would say it was less than 50% that we passed on to our customer base, most clearly within retail.

But overall, I think we were interested to look at how the market responds to those base rate changes. And in turn, I think we saw it as a relatively rational response from the market. So overall, I suspect that played a bit of a role in terms of competitive pricing, in terms of the stability, in fact, reduction, as I mentioned earlier on, that we have seen in deposit churning.

Perhaps it was a factor in our PCA outcomes being a little stronger than expected. And so, forgive the term, but at the margin, I would say, Amit, that the main effect of the Bank of England rates change was we saw a rational market response to it. And we saw it as more or less confirmatory of our expectations and indeed experience in the context of deposit churn, which feed into the margin comments that I made earlier on.

As you know, we've got -- we expect one more Bank of England base rate change during the remainder of this year. That is also a factor behind our expectations for churn continuing to slow into this year and then again into next as the Bank of England continues to cut rates.

The second of your question, just remind me on the second of your question, Amit, if you could?

[Amit Goel, analyst]

Sure. It was just in terms of your conversations with the Chancellor in recent weeks, just curious if there's any additional color you could give from those and/or even with respect to some of the proposals you've made for enhancing U.K. growth? Just curious if there is any color you can share.

[William Leon Chalmers, executive]

Yes, of course. Sorry, I hadn't noted it down. The -- thank you, Amit. The -- when we look towards the budget, I guess a couple of points. One is when we look towards the budget, we note the pro-growth stance the government and we very much hope the budget will be delivered in a manner consistent with that. I'll come back to that in just a second. But I think most importantly, when we look towards the budget, we look at it as an event that will provide some certainty, some clarity on what has been quite a few weeks of speculation, as you know.

And so we very much look forward to the budget in that context is effectively a clearing event that we can then get on with business, get on with the growth ambitions that we have as an organization and that we hope to contribute to in respect to the U.K.

We have no particular insight as to exactly where the government will come out in terms of its various choices it might face into in the budget. We do note, as I said, it's pro-growth stance, and we very much hope that the net, if you like, of all the government does during that budget will be consistent with that pro-growth ambition.

Now you asked about our involvement. I mean, we, as obviously a major player in the U.K. and with our purpose of helping Britain prosper have a strong interest in all of where this comes out, in particular in the context of encouraging growth within the U.K. If it is the case that the government chooses to come out with measures that are positive, if you like, or supportive of housing ambitions, of infrastructure ambitions, of energy transition ambitions, then we will find that obviously presenting opportunities for us to get involved and to promote the growth agenda that we all want to see happen over the course of the coming months and years ahead.

So certainly, we'll look at the budget with interest. We'll look forward to it being a clearing event, providing clarity, providing certainty, and we look forward very much to being supportive of the growth ambitions that we hope the government will launch.

[Operator]

As you know, this call is scheduled for 60 minutes, and we have now reached the end of the allotted time. So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. Please go ahead, Benjamin Caven-Roberts from Goldman Sachs.

[Benjamin Caven-Roberts, analyst]

So just on completion margins for mortgages. You've indicated that a recent activity had been around 70 basis points or a touch above. Just curious, is that broadly consistent with the level you're baking into your returns guidance moving ahead? Or do you see any potential for a further strengthening there?

And then secondly, just in terms of operating costs, looking ahead, your sub-50% cost-income ratio target for 2026 still sits a fair bit ahead of consensus. Do you think there are any elements of your strategic initiatives, which are perhaps a bit more back-end loaded? Or should the progress on mitigating cost growth driven by inflation and investment to be relatively linear from here?

[William Leon Chalmers, executive]

Yes. Thanks, Ben. I'll take each of those in turn. Completion margins, as you say, a touch ahead of 70 basis points or thereabouts. So that's a, overall, as said, pretty constructive picture, which allows us to write EVA-positive economic value-added positive business, both on a marginal basis and a stock basis at that, as said, just a touch above 70 basis points.

Overall -- while overall pricing might have been a bit volatile. It's good to see that, that margin performance has been pretty consistent actually over the course of recent periods, not dissimilar to what we saw in Q2, a little bit stronger, maybe, not totally dissimilar to what we are seeing far at least in the context of Q4.

As we look forward, Ben, we built in a more or less consistent picture in the context of our overall plans. And that is what's behind, if you like, the convergence that we expect to see between new business that we're writing the old business that rolls off, as said, with that headwind more or less completed within the first half of 2026. So hopefully, that addresses the point.

The one point that I would add on to the back end of that, Ben, is to the extent that we see pressure in mortgage margins beyond that, then I think we, just like every other financial services organization or at least every other bank, would expect to manage the margin in a relatively holistic way. So if there is any given mortgage completion margins, you would likely see a bit of an offset to that in respect of other parts of the overall business, which in turn gives us continued confidence in the expectation around the NIM that I set out to '25 and indeed beyond.

Your second question, Ben, around the cost/income ratio expectation, less than 50% for 2026. As you know, we set out ambitions for 2024 and 2026, hoping very clearly. In the context of 2026, we've set out basically 3 main ambitions. One is a sub-50% cost income ratio, one is an RoTE expectation of greater than 15%. And one is a capital return expectation of circa above 200 basis points. So those 3 are the pieces of guidance that we've given in 2026.

And again, as we did today, we have a lot of confidence in those. We reiterated the confidence earlier on today in exactly that commitment that we have made.

What's going on there? It is 2 or 3 things, but the main drivers of which are we see income is growing. We see income is growing off the back of a significantly greater structural hedge contribution as per my comments earlier on. We see income is growing off the back of increased added value from our strategic initiatives investments, GBP 1.5 billion, as you know, by 2026, number two, as well as a stable macroeconomic environment we've put out in our forecast today. So that combination delivers a materially stronger income picture going to 2026.

The second point that we see, Ben, is the overall cost picture starts to lead to a flatter cost base. Now a couple of points to make in respect of that. One is, as you know, we, just like every other institution, have been subject to a bit of inflation in the cost base recently off the back of macroeconomic trends. That's still there. It's still to an extent at least requiring to tightly manage cost measures to at least partially offset that.

The other thing that's going on in our cost base is that we're investing heavily. And as you know, depreciation lags cash investments, which means that a bit of that carries on gains 2025. But then by time getting to 2026, the depreciation pressure, if you like, is starting to slow down.

And so off the back of that, together with the benefits from the strategic investments in savings that we're making, you've heard me talk about severance, for example, today. We're making a lot of technology investments in our ambitions to ensure that we have an efficient cost base. It's that combination, which leads to a flatter cost base by the time we get to 2026. Again, not flat, but flatter.

The combination of the income growth points that I've made, together with the cost points that I've just made, leads us to have a lot of confidence in our 2026 commitments as outlined just now and also earlier on in the session. It does, however, mean though, Ben, that 2025 looks more like 2024 than it does like 2026. So this is not a linear journey. It's going to tick up notably in 2026.

[Operator]

Thank you. This now concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website. Thank you all for participating. You may now disconnect your lines.