Lloyds Banking Group Aktie

I think we can get started. Similar to prior sessions, this will be 35 minutes. We'll try and leave 5 minutes at the end for audience questions and answers. So have a think if there's anything you'd really like to ask.

With that, though, may I take the opportunity to say it's a great pleasure to have you here with us, William Chalmers, Chief Financial Officer of Lloyds Banking Group, a role you've held now since 2019, prior to which William held various roles in financial services, including Co-Head of the Global Financial Institutions Group at Morgan Stanley. So thank you very much for being here.

Well, thank you for inviting me, Ben, to this magnificent setting here in Zurich.

Very good. Well, let's start with what's top of mind for the U.K., thinking about macro. How do you see that situation currently evolving? How much change are you observing in client behavior, sentiment, as clients are looking ahead? Is any of that really moving at the moment?

Sure. Sure. Yes. U.K. macro is obviously much talked about, Ben. But I think at a relatively high level, despite the news flow, it's a picture of stability really. And what I mean by that is that, as you know, at Q1, we took a couple of revisions for our macro outlook. Off the back of the Middle East crisis, we thought that inflation would stick around for longer, be a bit higher than we had originally anticipated. And off the back of that, we took rate cuts out of our forecast. And so now we expect none during the course of '26.

That tempers GDP growth a little bit. We took it down to about 0.5% positive during the year. And then unemployment, we took up to a peak of about 5.6%, and that all tempers again, HPI growth during the year, about 70 basis points or thereabouts. Those changes are adverse versus where we started out the year, but to be clear, they are also positive, and it is also stable. And so that's the backdrop, I think, that really counts. As we sit here today, with respect to Q2, our view is really very similar. It's a very similar outlook in Q2 today to what it was that we saw at the end of Q1.

I think you asked about client behaviors in that context, Ben. Overall, I'd say client behaviors are pretty constructive. You saw our lending book grew at about GBP 5.1 billion over the course of Q1. In fact, if you strip out central hedges, it was about GBP 6.3 billion over the course of Q1. And that was spread over retail, about GBP 3.5 billion, and commercial, about GBP 2.8 billion. So growth in all areas of the lending book despite, as I said, a slightly subdued but still positive macro backdrop.

I think when we look at the performance so far during Q2, that retail and commercial growth, we expect to continue over the course of the quarter. It is, for sure, likely to be a little bit slower off the back of rate changes, off the back of uncertainties. But overall, it's consistent with our forecasts. And as I said, positive growth.

I think when we look at the kind of the other side of the equation, are we seeing any asset quality impact from what we have seen so far? The answer is very clearly no. We've seen nothing. We have, in addition to that, very stable early warning indicators, again, across retail and commercial, which is good to see. We're vigilant for sure, Ben. But as I said at the beginning, overall, it's a picture of muted growth, clearly, but it's also a picture of relative stability.

Okay. Good to hear. If we flip next to NII, one of the biggest contributors to revenue. Let's drill in particular, into the margin component of that. So you have the hedge, which is still a positive, the path of bank base rates, which at the moment still looking like it will be a negative year-on-year in 2026. And then you have mortgages continuing to reprice a bit more tightly sequentially. How are you seeing all of that fitting together and effectively how it pans into a multiyear outlook?

Yes, yes. The overall picture in respect of net interest income, the bottom line is pretty constructive, pretty positive, Ben. Within that, you asked about net interest margin in particular. Overall, net interest income, we expect to be greater than GBP 14.9 billion during the course of 2026. In that context, we took a modest upgrade at the Q1 stage, and that was just to recognize the changes that we've seen in rates. But alongside of that to say, well, those same rates are going to have a little bit of a dampening impact, if you like, upon volumes. So it's a net of those 2.

You saw in that context where we had a good Q1. Net interest income, GBP 3.6 billion or thereabouts. That's up 8% year-on-year. It's up 1% quarter-on-quarter. In fact, if you strip away day count, it's actually up 3% quarter-on-quarter. So a pretty robust performance. And to your point, Ben, that was a function of net interest margin in significant part. Net interest margin at 3.17%, 317 basis points. That's up 7 basis points over the quarter. So it's a pretty significant and meaningful move within the net interest margin. But it's also a function of lending volumes, which I mentioned just a second ago.

What's going on within net interest margin? I mean, first of all, it's worth saying we expect that net interest margin pattern, i.e., quarterly sequential increases, to continue through the course of '26. And what is driving that? It's a combination of a strong structural hedge tailwind against a slightly weakening mortgage refinancing headwind, and I'll come back to each of those.

Structural hedge, first of all. Structural hedge is going to contribute in excess of GBP 7 billion this year. That's up over GBP 1.5 billion versus what it was last year. When we look forward into 2027, it will be up and over GBP 8 billion over the course of '27. Now what's going on there? It's effectively the refinancing. There's a modest notional, i.e., quantum increase, but it's basically about the refinancing story. And you've got a yield of about 2.7% in the course of Q1. And you've got that refinancing into markets, which are now, as you know, 4.2%, 4.3%, depends on the day of the week, but a significant uptick in terms of what it is refinancing into.

The mortgage completion margins are around 70 basis points. So dealing with the mortgage refinancing headwind, that 70 basis points stacks up against a book that is rolling off at around the 100 basis point mark. So it's about a 30 basis point headwind in that context. We'll be done with that by the end of -- around the first quarter of 2027. But that is contributing to an overall headwind, but the net of that is, as I said, very positive constructive margin development.

It's noticeable actually in the last couple of weeks or last couple of months or so, we've had slightly stronger margin developments within the mortgage product, slightly stronger completion margins than we had previously expected. While that's good, Ben, it's probably a little early to call a trend. So let's see how that develops. But overall, I think it's a reasonably positive development.

Now having said that, we've got other factors at play. So we've got stronger-than-expected PCA volumes, which, of course, is good. At the same time, we've got some competition in other markets. So competition in asset markets, competition in liability markets. I think the net of those kind of other things that are going on in the margin is pretty much awash. One thing more or less discounts the other. Overall, though, I think it's a positive rate environment for the progress within the net interest margin and very much consistent with the guidance we've given, Ben.

Okay. Very clear. Well, let's dig into the lending component, which you alluded to. Pretty strong start to the year across business lines. How are you looking at lending volumes going through the rest of the year? Any difference by asset class as well?

Yes, yes. Overall, as I said, it's a pretty constructive picture, Ben. So if we pull that apart a bit, a strong start to the year. Lending volumes up about GBP 5.1 billion. Stripping out central hedges, GBP 6.3 billion. That's about 1.2%. So it's a good start to the year. What's also notable that it is across all sectors. So you see GBP 3.5 billion of growth within the retail sector. And within that, growth across pretty much all the asset classes, GBP 1.6 billion of that was in mortgages in what was a strong repayments quarter, but also growth in the other unsecured asset classes, transport and so forth. So pretty well spread.

CB likewise, GBP 2.8 billion within Commercial Banking. And again, that is pretty well spread between what we call the BCB business and commercial banking business, which is our SME franchise, as well as CIB. Within that, we're seeing continued progress within CIB in terms of the infrastructure lending, which has been the pattern actually second half of last year and going into the first half of this. The growth within retail, as we go into quarter 2, it will be a touch slower, and it will be a touch slower partly because we saw March front-end loading off the back of expectations that rates would rise. I think that was a sector phenomenon.

So you saw a strong March and therefore, a slightly more attenuated April. That's just going to be a business flow pattern, not unlike actually what we saw last year. And then we will have an idiosyncrasy in terms of our mortgage lending, which is to say that we did a legacy mortgage securitization just recently, actually, a very successful deal, NPV positive, and all the other things that we look for. But obviously, that has an effect upon the balances that you will see at the end of quarter 2, that securitization. So that's an idiosyncratic factor.

Business and Commercial Banking, I would say decent growth, particularly in terms of the sanction growth that we've got out there. At the same time, you're seeing, I think, some clients at the edges as a function of the uncertainties. Perhaps a little bit slower to utilize some of those sanctions. So I think that's just a characteristic of the environment that we're in.

Looking forward, I think we'd expect to see continued growth across the businesses with those comments kind of borne in mind, Ben. As I said, it's a stable macro, and I think that is then supplemented by the decent share that we have across our product ranges. That decent share is enhanced by the strategic initiatives. As you know, we've launched those really across the business. They're starting to show some benefits in the context of cards, for example, the launch of Ultra, the launch of Advantage. In the context of personal loans, your credit score leads to a good flow of personal lending business. So overall, the impact of rates will have a slightly muting effect upon growth, but some of that should be offset, if you like, by our strong shares in turn supplemented by the benefits of strategic investments coming off the strategy.

So I think, Ben, if you wrap all of that up, what does it mean? It means last year, we had GBP 22 billion growth in lending. That's great. I don't think this will necessarily be a GBP 22 billion year, but we would expect to see decent progress through the course of '26.

Okay. Very clear. So we've touched on lending. Let's move to the other side of the balance sheet, think about deposits. Q2 often has some ISA seasonal impacts. How are you seeing that playing out? And as well, we've had a lot of rate volatility year-to-date. Has that had any impact on how customers are thinking about managing deposits in a higher for longer rate backdrop and any impact on mix there?

Yes. Yes. Thanks, Ben. The business is performing well and very consistent with our plans. That's the bottom line. I think when you look at Q1, as you know, we saw a slight reduction in Q1 deposits, about GBP 0.6 billion. That was in the context of retail down about GBP 3.1 billion and commercial up about GBP 2.3 billion. So that was the pattern in Q1.

Within retail, the balances that really mattered showed growth and indeed stabilization, which is great to see. So PCAs, for example, up GBP 0.6 billion, instant access up during the course of the quarter. And the areas that were a bit softer were the balances within fixed term and within what we call restricted variable, which is limited access. And that was in the context of what was a very competitive ISA season, often straying into kind of negative margin territory, and we chose to step back from some of that activity.

Now strategically, what we really wanted to focus on during Q1 and indeed going into Q2 was and is strong retention, combined with ensuring that we deliver value to our relationship and most valuable customers. That is what it is all about. And that includes people like Lloyds Premier, Lloyds Club, these types of balances. And indeed, I think we basically achieved those goals. So if I think about our '25 ISA season, we landed with a roughly 90% retention of those balances, which is what we set out to do.

At the same time, as my comments earlier on alluded to, we grew our relationship balances. And what we stepped back from was the more rate-sensitive mobile money that you saw during some parts of the ISA season, as I said, often straying into negative margin territory. The recent conditions last few weeks or so have allowed us to step up a little bit in the context of the deposits market. And so what does that mean? I think probably what it means is that we'll see more or less a plateauing during the course of quarter 2. That's my expectation.

You asked about customer behaviors, Ben, and what is going on there more generally. I think outside of the ISA season, there's been not much change. We've seen a bit of a rally in rates, as we all know, and I know it's much talked about, but it's pretty limited compared to what we saw in 2023. I mean, as you can tell from our PCA numbers, our instant access numbers, we are not seeing customer migration. It's more a question of where the ISA balances in any given ISA season may land depending upon who wants to be out there taking the ISA volume and who is prepared to, if you like, suck up some of that margin negativity from time to time. So I think that's what's going on.

It is, at the same time, to be clear, it's a competitive deposit market. I wouldn't want to suggest otherwise. And that's a function of all of us seeing the benefits of structural hedges and the thickening of liability margins that go on with that. It's a function of the Central Bank withdrawing TFSME, the support program, towards the end of this year. It's a function of new entrants in the U.K. market. So it's a competitive deposit market for sure. When we look at our overall strategy, it is really about delivering value for our customers in a way that makes sense for us.

Okay. Brilliant. I think we've covered net interest income and the components pretty well. Let's move to thinking about other income, one of the key components of your recent growth strategy, up 11% year-on-year in Q1. You've had the benefit of consolidating Lloyds Wealth, but also some recent strength in transport and equity investments. What are the key focus areas for you in sustaining that business momentum and then continuing to diversify the top line looking ahead?

Yes, it's an important question, Ben. I might just step back actually and just put it in strategic context, because I think that's where it comes from, and that's the most important point. When Charlie and I came in after a decade of basically low to 0 interest rates, one of the determinations that we made was that we needed to diversify the group. And we used to diversify the group for 2 reasons. One is to, if you like, move away from dependency upon volatile and sometimes very low interest rates. And two is to make sure that we realize the value of a very significant U.K. franchise, both of those 2 things. What that's led to is that OOI has now been up over 30% over the last 3 years, which is great progress. And we expect to see continued further strong growth during the course of 2026.

You saw during Q1 that, that was the first step. We saw strength in Q1, consistent with what I've just said. It was up, as you know, 11% year-on-year, up about 1% quarter-on-quarter. Where was that coming from? A combination of at least 3 out of the 4 main engines that we have. And so specifically, what I mean by that, growth within transport, growth a little bit within mortgages within retail. Growth within GI, growth within pensions, growth within Lloyds Wealth, within the Insurance, Pensions & Investments business. And then finally, growth within LDC and Lloyds Living within our Lloyds Banking Group Investments business, which is basically the equity business. So over the course -- or rather within OOI, some pretty good performance from those areas.

It's a combination of both BAU activity as well as the benefits of some of the strategic investments that I mentioned earlier on. OOI has been a key beneficiary of those. So things like investing in our own channel in GI, for example, things like investing in Lloyds Wealth, for example, things like investing in transport within retail, for example, all of those are areas of strategic investment, which then come through in terms of the OOI performance.

Where we were slower was CB, Commercial Banking, and CIB in particular. And I think that was off the back of a couple of things really, both related. One is volatile sterling markets. We are quite exposed to sterling markets naturally. And the second was partly, because of that, limited new issuance in those same markets. And overall, that led to a pretty muted CIB performance within Commercial Banking, and we obviously need to address that.

Looking forward, putting all of that in around, we expect continued strong growth within OOI over the course of 2026, consistent with the guidance, the nonnumerical guidance in OOI that we have given. And again, Q1 is a testimony to that. What does that mean? That means basically similar to 2025 plus Lloyds Wealth. So overall, I think it's good performance. Looking forward, we do expect to continue to invest in OOI propositions, to continue to invest in areas of what we term GDP plus growth opportunities for the business, and it will be a key plank for the next strategy.

Okay. Brilliant. Well, let's follow up on 2 of the points there. So the commercial angle and the capacity of the business to grow above GDP, as you say. So some of the areas within commercial that I know you've spoken about have been infrastructure and project finance, some of the capabilities you've been building up more broadly in commercial. Can we touch a bit on those and then also how some of the announced changes to the ring-fencing regime and the new growth allowance that's been proposed might fit in?

Yes. Yes, absolutely. Maybe just to step back, those that are familiar with our business will know this, but those that aren't, maybe less so. Commercial is basically 2 businesses. That is to say it's BCB, which is Business and Commercial Banking, which is our SME franchise. And it is CIB, forgive all the acronyms, which is our corporate and institutional franchise. They are both areas of significant investment and opportunity for the bank, and they are both areas that we've been investing in heavily during the course of the strategic cycle. BCB, first of all, the strategy there is about digitizing the platform, but also retaining our relationship manager franchise up and down the country and across all the sectors.

We've seen some decent progress in that respect. So mobile onboarding, to take one example, is now 15x faster than what it was. Digital FX, significant progress. 45% of our key services within BCB are now entirely digitized with all of the customer benefits and efficiency gains that come off the back of that. So that's BCB. CIB, Corporate and Institutional business, that is following a cash debt risk strategy. It is a very deliberately set strategy around those parameters, that perimeter, if you like, cash debt risk. It's important to us that we stay focused. What does that mean? It means that we've been strategically investing in areas that are consistent with that. DCM, for example, FX, for example, cash management, for example, all areas that have received attention.

And again, we've seen some decent progress in that. So OOI is up 35% versus what it was in 2021. Likewise, FX share of wallet up also about 35%. We've been making, for those that watch us carefully, some significant progress in the realm of digital assets in that same space, all of which is good to see. But at the same time, within the CIB business, I think it is too narrow. I made some comments earlier on about it being somewhat subject to the fortunes of sterling FICC markets. That's a function of the cash debt risk CIB focus that we have right now. And I think over time, there's an opportunity just to build that out, not to change the focus, not to change the perimeter cash debt risk, but just to build a little bit around the edges for the capabilities there to make sure that the resilience and the growth opportunity is fully realized.

You asked about growth, Ben, and what does GDP plus mean in this area. What it really means is things like infrastructure. It means things like transition. It means things like enhancing our institutional capabilities in respect of currencies, markets and likewise. All of these things come very naturally. I mean, if you look at the bank and its overall purpose at a high level, but overall setup and franchise, all of these things kind of naturally follow from there. There are areas where we should be able to win and indeed have been making investments in and intend to continue to do so.

Ring-fencing. Ring-fencing is interesting. As you know, we've taken a view, which I think is the correct one, that the banking sector and the U.K. sector and the U.K. banks have moved on a lot since the inception of ring-fencing. And therefore, we welcome the treasury and kind of PRA sponsored, I suppose, review of ring-fencing as it stands. And there have been some changes proposed recently, all of which we would welcome. They are steps, to be clear. They're not necessarily the end of the project as such, but nonetheless, they're welcome steps.

One example of that is the growth allowance. The growth allowance is essentially saying, look, you can have a certain number of your risk-weighted assets that previously would have had to have been outside of the ring-fence, now put within your ring-fence. That is effectively a concession. It's talked about as around 10% of your eligible ring-fencing risk-weighted assets can now be enhanced by previously non-risk-weighted eligible assets. From our perspective, that's welcome. Why is it welcome? Because it should allow us to reduce client frictions in terms of moving between ring-fenced and non-ring-fenced entities, and off the back of that, enhance our ability to better serve and grow the client proposition.

More materially or more quantitatively, it should also lower our funding costs. That is to say we can put assets into the area of the lowest cost funding from the bank's perspective. And of course, that will be beneficial. And ultimately, the intention from the government's perspective is for it to be beneficial to the growth of U.K. financial services and service propositions to clients. From our perspective, we should be able to neatly fit into that. Having said all of that, it will reduce client friction. It will reduce our funding costs. That's great. I'd like to see the final form of the growth allowance and the ring-fencing reforms before, if you like, becoming too, if you like, convinced of the merits of it and the strength of it, but it is a positive development and one that we seek to benefit from.

Understood. Let's flip to costs. You're targeting below GBP 9.9 billion in 2026. That's pretty limited cost growth year-on-year. What are the biggest sources of inflation that you're absorbing within that? And then how are you balancing that against investment?

Yes. Yes. Good question. I have to start off at this point, of course, which is that cost management is an absolute imperative for Lloyds Banking Group. For those who know us well, it's been a hallmark of the group for some time, and it continues to be so. When we look at our 2025 operating cost commitment, it is less than GBP 9.9 billion. That is about a 1% increase year-on-year, and that includes a couple of acquisitions, i.e., Lloyds Wealth and Curve. So actually, the underlying is even tighter cost management than that 1% would imply.

Where is that coming from? It's coming from the benefits of strategic investments. It's coming from tight BAU cost management, and it's a little bit coming from the plateauing of investment flows as this strategic cycle comes to its finishing line, I suppose. Those investments, those strategic investments that I mentioned so far at least have delivered about GBP 1.9 billion of gross cost saves. By the time we get to the end of 2026, they should have delivered in excess of GBP 2 billion of gross cost savings. So that's a material help.

The focus, though, in addition to an absolute cost number, as you know, Ben, is a complete focus on, a complete commitment to a cost-income ratio that is below 50%. That has been a key point of our guidance for some time and it continues to be so. That sub-50% cost-income ratio is coming from a combination of income growth, we talked a bit about that, but also obviously cost containment. And in that respect, at least, Q1, as I hope you saw, was basically on track. So GBP 2.47 billion of costs in Q1, 3% down year-on-year. There's some timing in that, but nonetheless, overall, pretty tight cost performance consistent with guidance.

What are the sources of inflation? What are the sources of saves, Ben, to your point? Each of these 2 folds into a kind of BAU point and, I guess, a strategic point. And so inflation, first of all, where are we getting the inflation from on a BAU basis. We're getting it from things like pay settlements, clearly. We're getting it from places like suppliers. We're also getting it from benign sources. So volume growth. I mentioned the lending growth earlier on. That naturally incurs OpEx. And that's an example of a kind of benign BAU cost pressure.

The cost pressure is also coming from strategic choices. And what do I mean by that? I mean, investments in things like IT, investments in things like Lloyds Technology Center out in India, investments in Lloyds Wealth, investments in Curve, which we have just completed, digital wallet capability. These are very deliberate strategic choices. They lead to cost pressure, but it's good cost pressure, because it's what we want to do. It's how we want to develop the business.

The saves, Ben, again, similarly break down into BAU and into strategic choices. And I think they're kind of interesting. So BAU, third-party saves, the regular management that we apply to our third-party suppliers. That's principally a contractual type initiative. Alongside of that, organizational design, we constantly think about how to set the organization up in an efficient way. Divisional initiatives, these types of things, they're very BAU. Every year, we think about them. And then strategically, there's 2 or 3 areas. And again, I think they're kind of interesting.

Technology, first of all. So migration to cloud, data center migration, likewise, decommissioning of the business. These things ultimately all give us structural benefits. Digitization and automation, including obviously the much heralded AI as part of that, second strand. Third strand, property. As you know, HQ and branches are things that we've been looking closely at over the course of the last several years and continue to do so. And then finally, change saves, making that change process that we have, which consumes an awful lot of our investment capital that much more efficient. We've been relatively successful.

Now looking forward, Ben, as we go into the remainder of '26 and indeed beyond that, our focus really is going to be upon operating leverage and upon continuing to improve cost-income ratios. That's going to be the focus, probably slightly more than trying to repeat the 1% trick of 2026. It's going to be about continual improvement in cost-income ratios and indeed operating leverage. Overall, the strategy is, the intention is to say let's be really tight on BAU cost management, operational cost management, so that we can then afford the investments that we want to make as a business. And we'll talk a lot about that during the course of July.

Okay. Brilliant. Well, I'll ask one more question before we open up to audience Q&A. So let's think about Motor. You have a GBP 1.95 billion provision that's scenario-weighted. You left that unchanged after the FCA's finalization of its redress scheme earlier in the year. Since then, though, there have been a few legal challenges to the FCA scheme. How are you thinking about that playing out?

I didn't think I'd get away through the session without a Motor question coming up at least. So thank you, Ben. The provision, as you know, is unchanged at GBP 1.95 billion. That very much remains our best estimate of operational costs, of legal costs, of redress costs. And it is, as I think everybody in this room knows, a scenario-based provision. Now the first step in all of that scenario-based provision is obviously what the FCA put forward. And what the FCA put forward just recently had a bunch of puts and takes versus what it put forward in October. And so what I mean by that, de minimis constraints, for example, remediation caps, for example, those are positives versus where we were in October. And at the same time, we had APR floors, which are negatives versus where we were in October. And you put all of those through and it's more or less awash, i.e., the puts and takes iron each other out.

There are some other uncertainties beyond that. So take-up rates, let's see what happens. We've got a relatively toppy take-up rate, i.e., we expect quite a lot of take-up that may or may not actually come through. I think we probably provisioned to the upper end of that. At the same time, operational costs. We're trying to, not surprisingly, exert downward pressure on our operational costs within the context of the exercise. But those uncertainties are out there. We don't quite know how they're going to play out.

And then Ben, as your question highlighted, we've got some risks outside of the scheme in the context of challenges to the scheme, in the context of potential litigation. And the first point is to say, because our provision is scenario-based, not surprisingly, we constructed scenarios around precisely that, i.e., challenge and litigation that could come at the back end of that. So those are in our GBP 1.95 billion provision, although to be clear, they are relatively low probability-weighted in the context of our GBP 1.95 billion provision, but they're there.

I think in this context, it's interesting to note that the challenge to the scheme has come from both sides. And the reason why that's interesting to note is because the FCA has pretty wide discretion in the context of the scheme that they are allowed to introduce and impose, if you like, upon the industry. And so the fact that challenge has come from both sides is just kind of interesting in trying to figure out where this might go. Let's see.

The second point in relation to litigation is, as you know, it's our view, at least, that the scheme is not perfectly aligned to some of the Supreme Court decisions. And indeed, as an example of that, the definition of unfairness that the scheme adopted we think went outside of the Supreme Court determinations. And that is interesting in the context of litigation, because it suggests that litigation is not all about risk. That is to say litigation may actually also go the other way.

And so stepping back from all of that, what does it mean? I think what it means is that overall, of course, there's a little bit of uncertainty. But GBP 1.95 billion very much remains our best estimate. Litigation, it's possible. It might drag things out a little bit, but it does not change our view of what the right provision is, and that remains GBP 1.95 billion.

Okay. Very clear. Well, we've got 2 minutes left in case there's anyone in the audience who has a question. If anyone is brave enough? Perhaps not. Well, I'll very happily keep going. So let's close with asset quality. Q1, your impairment charge, 25 basis points, bang in line with the full year guidance. That did, though, as you mentioned, include a scenario change for a more challenging economic outlook. So how are you thinking about the trajectory from here? What gives you confidence in maintaining that 25 basis point trajectory?

Yes. Yes. Yes, good question. AQR guidance remains 25 basis points, I should say, circa 25 basis points, I think the precise way we put it. The Q1 impairment charge, as you say, was bang on that. That is to say, 25 basis points, GBP 295 million. And therefore, very confirmatory of our full year guidance. Now within that, 25 basis points, we had 2 components. One is the observed charge, which is actually what's going on in the book, if you like, and that was 16 basis points. That was low, partly because of calibrations within models, which happens every quarter.

Sometimes it goes for us, sometimes it goes against us. This time it went for us. Alongside of that, a very low charge, in fact, a release within Commercial Banking. We really saw no material defaults. And so if you strip all of that away, the underlying observed impairment charge is probably somewhere between 20 to 25 basis point mark. It's in that zone.

Now in addition to that, we had an MES charge, multiple economic scenario charge, which takes account of our forward forecasting. And that, in turn, was 9 basis points, just over GBP 100 million, which was a combination of the unemployment and HPI changes that I mentioned earlier on, offset against us taking out a PMA charge for the U.S. tariffs from last year, which have now worked their way through the models and indeed performance and so forth with no noticeable effect. So we took that out.

So Q1, very much according to plan. Q2 so far, we haven't finished our forecast for Q2. But everything that we can see is more or less in line with the stance that we took at Q1. Of course, there are uncertainties, but at the moment, that's where it stands. And so no material change. And then when you say what's going on within the book, you would say basically the same. So retail, very robust across asset classes, not just in terms of performance, but also in terms of early warning indicators. So things like new to arrears, things like cards repayments, things like overdraft utilization, stable.

Commercial Banking, we are pretty vigilant in Commercial Banking. When you look at sectors like housebuilders, clearly under a bit of pressure right now, we're keeping an eye on the situation. But again, no material defaults that we are seeing within Commercial Banking. And again, early warning indicators, revolving credit facilities, for example, liquidity levels, for example, again, stable. So our expectation is that the observed performance in the course of quarter 2 and indeed for the remainder of this year is showing promising signs in line with our guidance. By definition, well, actually, I guess I just mentioned it, the MES outlook, not awfully different to Q1.

And then behind that, Ben, what is all of that based upon? It's a prime portfolio in terms of the mortgage business, in terms of the retail business, in terms of the commercial business. It is stress tested at rates that are well in excess of where we are with the market right now. And then if things do go wrong, there is plenty of collateral. We've got a 45.5%, 45.4% LTV within the mortgage portfolio. We've got something like 90% of our SME business secured. We've got something like 80% -- greater than 80%, I think it is, of our CIB exposures investment grade. So there's plenty of recourse should things go wrong, Ben, but we don't anticipate it. And absent a material change within the macro, we are very confident in our AQR guidance.

Okay. Perfect. Well, I think, unfortunately, we are out of time, but thank you very much, William for joining us. That's brilliant.

Thanks very much indeed.

Thank you for standing by, and welcome to the Lloyds Banking Group 2026 Q1 Interim Management Statement Call.

[Operator Instructions]

Please note that this call is scheduled for 1 hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining our Q1 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 of our key messages on Slide 2.

In Q1, we continued to make progress on our strategy as we enter the final year of our current plan. As you heard in January, we have a busy year of delivery over 2026 with momentum building across the business. In the first quarter, the group once again delivered sustained strength in financial performance. This means continued growth in income, ongoing cost discipline and strong asset quality.

We have a resilient business model that positions us well in the context of the current macroeconomic environment. Our financial performance gives us confidence in the outlook for our business. We are reiterating our 2026 guidance, including a modest increase in net interest income.

Let me now talk to our financials on Slide 3. Lloyds Banking Group continues to deliver sustained strength in its financial performance. In Q1, statutory profit after tax was GBP 1.6 billion, equating to a return on tangible equity of 17%.

Within this, we delivered net income of GBP 4.8 billion, up 9% on the previous year and 1% higher than Q4. Income growth was driven by further progress in net interest income, supported by a net interest margin of 3.17%, up 7 basis points in Q1 as well as healthy volume growth.

Alongside other income grew by 11% year-on-year, continuing the positive and broad-based momentum being delivered by our strategy. Operating costs for the quarter were GBP 2.5 billion, down 3% year-on-year. This reflects our disciplined approach supported by continued efficiency savings and lower severance costs in the quarter.

The remediation charge for the quarter meanwhile, was GBP 11 million with no additional provision for Motor Finance. Credit performance remained strong with an impairment charge of GBP 295 million in Q1 and asset quality ratio of 25 basis points.

Tangible net asset value per share ended Q1 at 57.9 pence, an increase of 0.9 pence versus the prior quarter despite the impact of higher rates on the cash flow hedge reserve. Our performance has driven strong capital generation of 41 basis points with a CET1 ratio at the end of the quarter of 13.4%. Let me now turn to Slide 4 to look at movements across the balance sheet. We saw continued strength across our lending portfolios in Q1, whilst we maintain discipline in our deposit strategy.

Lending balances closed the first quarter at GBP 486 billion, up GBP 5.1 billion or 1% versus Q4 '25 with growth across all business lines. Within this, mortgages grew by a net GBP 1.6 billion. This is in the context of a significant quarter of maturities and what remains a competitive market. Completion margins, meanwhile, were again around 70 basis points in the quarter.

Commercial balances were up GBP 2.8 billion in Q1. Pleasingly, this included growth across both our CIB and BCB businesses, the latter after GBP 0.3 billion of government-backed lending repayments. Looking at the liability franchise, total deposits were down slightly by GBP 0.6 billion.

Within this, retail deposits were down GBP 3.1 billion, mainly driven by outflows from maturing fixed-term savings deposits given our participation decisions. We maintained price discipline in an increasingly competitive and at times negative margin market at tax year-end. We focused on retaining and attracting high-value customers with broader product holdings within the group.

Alongside, PCAs were up GBP 0.6 billion, supported by the strength of our franchise and our propositions. Looking forward, as the tax year-end finalizes, we will continue to invest in our relationship customers and expect deposit balances to reflect that.

Commercial deposits were up GBP 2.3 billion, driven by growth in corporate and institutional banking. Insurance, pensions and investments saw open book net new money flows of GBP 2.2 billion, supported by inflows from our workplace franchise alongside a good start from Lloyds Wealth.

Let me turn to net interest income on Slide 5. Net interest income continues to grow robustly. NII for the quarter was GBP 3.6 billion, up 1% versus Q4 and up 8% year-on-year. Strong growth in customer lending and hedge income continues to more than offset mortgage repricing headwinds.

Average interest earning assets of GBP 473.5 billion for Q1 were up 1% compared to the prior quarter. Alongside, our net interest margin increased 7 basis points to 3.17%. The nonbanking NII charge in Q1 was GBP 129 million, down slightly on Q4.

For 2026, we now expect net interest income of greater than GBP 14.9 billion. This represents a modest increase versus our prior guidance, mainly driven by higher rate expectations. In particular, we now expect structural hedge income to be slightly stronger than previously anticipated, rising by more than GBP 1.5 billion in 2026 to greater than GBP 7 billion before growing to more than GBP 8 billion in '27. The structural hedge notional balance now stands at GBP 246 billion.

We've increased it by GBP 2 billion versus Q4, given strong and persistent performance in hedge-eligible deposits. Let me turn to other income on Slide 6.

Other operating income continues to show momentum. OOI was GBP 1.6 billion in the quarter, up 11% on the prior year and up 1% versus Q4.

Growth continues to be broad-based. In particular, Q1 saw further strength in transport and our equity investments business as well as a quarter of strong performance of Lloyds Wealth. This was partly offset by a lower CIB result with the business impacted by macro uncertainty and volatility.

We expect the CIB results to be stronger in Q2. We are seeing continued progress in our strategic initiatives. We've listed some recent developments on the slide, including further momentum in Tusker and Lloyds Living. Strong demand for our new Ultra Card in retail and industry recognition for our scale, cash management and payments platform in commercial.

Operating lease depreciation was GBP 389 million in Q1, up GBP 10 million quarter-on-quarter, driven by fleet growth and higher value vehicles alongside some price weakness and disposals.

Moving to costs on Slide 7. Cost discipline continues to be an imperative. Q1 in operating costs were GBP 2.5 billion, down 3% from the prior year driven by continued efficiency savings and a lower severance charge versus Q1 '25. The cost income ratio for the first quarter was 51.9%. We remain confident of delivering a 2026 cost-income ratio of less than 50% as income builds through the year, and our investment in this strategic cycle culminates.

We will update on our investment plans and associated growth objectives for the next stage of the strategy in July. The remediation charge for Q1 was GBP 11 million. Following the FCA announcement on the final rules of the Motor Finance redress scheme, our assessment is that no change is required to our GBP 1.95 billion provision.

Note that the provision continues to be a scenario-based approach, meaning that while it represents our best estimate, uncertainties remain. Let me turn to credit performance on Slide 8. Credit performance remains strong, reflecting our resilient customer base and our prudent approach to risk. Retail and Commercial both continue to see low and stable impairments and new to arrears and other early warning indicators remain benign.

Although we have downgraded our economic forecast, we have as yet seen no impact on the portfolio from the conflict in the Middle East.

In this context, the Q1 impairment charge was GBP 295 million, equating to an asset quality ratio of 25 basis points. The pre-MES asset quality ratio was 16 basis points, benefiting from a stable underlying charge and some model calibrations.

Reflecting the weaker macroeconomic outlook, we have taken a GBP 101 million net MES charge in the first quarter. This incorporates a GBP 151 million charge based on revised forecasts, offset by a GBP 50 million release of last year's tariff PMA in commercial.

We continue to expect the full year asset quality ratio to be around 25 basis points. I'll give further detail on our updated macroeconomic outlook on Slide 9. The implications of the conflict in the Middle East that led us to revise our economic outlook.

In essence, we see a higher inflationary environment, leading to higher rates, slower GDP and HPI growth and slightly higher unemployment. CPI average is 3.4% in 2026 versus our prior assumption of 2.6%. Higher inflation means we now forecast no reductions in the bank rate during this year.

We continue to expect a terminal rate of 3.5%. This reduces GDP growth to around 0.5% in '26 from 1.2% and house price growth to around 1%. Finally, this gives a slightly higher unemployment peak at 5.6% in the fourth quarter of this year.

Clearly, there remains significant uncertainty. In particular, our current economic expectations are conditioned on a gradual easing of disruption over the course of the year, similar to market assumptions.

As you know, our business model is well placed to endure macro challenges and around higher rates may lead to some income benefits. However, in 2026, it's likely these are largely offset by slower activity levels.

Alongside, we stick with our AQR guidance of circa 25 basis points. Let me now turn to our returns and TNAV on Slide 10. Based upon strong business performance, the group delivered a return on tangible equity of 17% for the quarter. Below the line, the restructuring charge was GBP 18 million, which includes integration costs for Curve and Lloyds Wealth.

Volatility and other items was positive at GBP 38 million, largely due to insurance-related gains. Tangible net asset value per share meanwhile increased to 57.9 pence, up 0.9 pence or 2% in the quarter. The increase was driven by strong profitability and a higher pension surplus, partly offset by the impact of higher rates on the cash flow hedge reserve.

Looking ahead, we continue to expect material TNAV per share growth in both the short and the medium term. We also continue to expect RoTE of more than 16% in 2026.

Turning now to capital generation on Slide 11. The group continues to be highly capital generative. Risk-weighted assets closed the quarter at GBP 241 million (sic) [ GBP 241 billion ], up GBP 5.3 billion from the prior quarter. This increase principally reflects strong lending growth in a quarter of limited planned optimization.

Across Q1, we generated 41 basis points of capital, consistent with our expectations at this stage of the year. And following this, the group's CET1 ratio ended the quarter at 13.4%.

Looking forward, we continue to expect 2026 capital generation to be more than 200 basis points and to pay down to a CET1 ratio of around 13% at the end of the year.

So let me now wrap up on Slide 12. To summarize, in Q1, the group is delivering on its strategic ambitions in the final year of our plan. We are demonstrating sustained strength in our financial performance, meaning strong growth in income, ongoing cost discipline and strong asset quality.

As we look ahead to the remainder of 2026, we are confident of meeting the financial guidance, as laid out on the slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. We look forward to updating further with our strategic review alongside our half year results. That concludes my comments for this morning.

Thank you for listening. We'll now open the line for your questions.

[Operator Instructions]

Our first caller is Aman Rakkar from Barclays.

Thanks very much for the presentation to ask questions. I was going to ask about other operating income. I just wanted a bit more color. It looks like CIB was affected by kind of market dynamics in the quarter.

I do note that we saw a pretty significant move higher in sterling rates in the quarter. So I don't know if you can just kind of lift the lid on what exactly happened there and if there's any kind of mark-to-market impacts.

And obviously, you've alluded to expecting better performance in Q2. So it would be great to kind of get a bit more color on that line item because I think this time last year, that number was down year-on-year from a tough comp the year beforehand. So it would be good to kind of get a sense of what the clean run rate is in CIB.

And then the second question I just had, I was just noting your comments around the fallout of the Middle East, you're kind of referring to higher rates, offering some income benefits, potentially offset by slower activity levels. I was wondering if you could just give us a little bit more color in your mind exactly what you're referencing there again? Is it other operating income? Is it lending balance sheet momentum, whatever you're referring to, which really helpful.

Thanks, Aman for both the questions. I'll take them in turn. First of all, on OOI, just a step back. I mean, the year-on-year performance, 11% up is obviously pretty creditable. Within that, we've seen, as I mentioned in my comments, some decent growth within the retail area, transportation, in particular, some decent growth in terms of the investment businesses, LDC, Lloyds Living as part of that.

And then ongoing growth in IP&I. As you highlighted, we've seen slightly weaker performance in commercial, and that is primarily off the back of difficult interest rate markets, in particular, during the course of the first quarter alongside limited issuance activity.

Now the business within CIB is a great business, and we've been growing it solidly over the course of the strategic plan, as you know. So other operating income in commercial, in CIB in particular, is up 35% since we started the strategy. We expect that to continue to grow, and we intend to continue to build out the focus of that business, so that it's a little more diversified.

As it stands right now, as impacted, it was -- as mentioned rather, it was impacted by U.K. rates, and it was impacted by relatively modest issuance activity in the first quarter.

And we do not expect the rate impact to repeat in quarter 2, and we've already seen issuance activity picking up. So as I mentioned in my comments earlier on, that CIB performance in quarter 1 is unlikely to be repeated in quarter 2.

Indeed, we'll see some strengthening there. I would also just highlight that we've seen some very successful product launches in retail over the course of the first quarter. And those, in turn, have been partly incentivized, and that's probably led to a slightly slower performance in retail as a whole in the first quarter than we're likely to see in the second as those product incentives work their way through and indeed deliver the income benefits, we would expect to see from the success of those product launches. So that's the second factor.

And then thirdly, as is typical with the first quarter, IP&I has a slightly more subdued performance in quarter 1 off the back of weather in GI. That's just a natural cycle of things, if you like.

Stepping back on OOI, Aman, we're not changing what we said at the beginning of the year actually, which is that we expect OOI growth for '26 to be ahead of '25. I think from memory, '25 growth was about 9% and we would expect more of the same plus Lloyds Wealth, which is, I think, similar to what we said or equivalent to what we said at the end of the year.

We're not changing that expectation. You asked about income and activity, Aman. Nothing specific there that I would really highlight is simply that we have seen obviously, an increase, a modest increase in our net interest income expectations off the back of rates developments, also off the back of a slight strengthening of the notional and the structural hedge as you'll have seen, a couple of billion up because we've seen very steady hedge eligible deposit performance.

And that has enabled us to be more confident about the net interest income for this year, as expressed in our guidance.

At the same time, as you know, and as we commented, our macro assumptions have come in a little bit. So rather than in excess of 1% GDP growth, we're now expecting about 0.5% GDP growth. We're expecting a slight pickup in terms of the unemployment rate peaking at around 5.6% in quarter 4 of this year, probably slightly more modest HPI growth just a shade below 1%.

None of this stuff is particularly dramatic. But nonetheless, it's a slightly more subdued growth picture than previously. And of course, one would logically expect that to feed through into expectations around economic activity in general. As you can see from my comments on the answer to the previous question, that doesn't affect our guidance in respect of OOI, that doesn't reflect too much on our expectations, but it's just more a general point off the back of those economic assumptions that we are making. Hopefully, Aman, that gives you some insight as to your questions.

Our next call is Jason Napier from UBS.

First of all, I think those watching the group closely can see a real sort of high cadence around strategic issues, some of the hiring that you've done in AI and wealth and risk sort of being in front of my mind.

At the third quarter of last year, you said that your strategic update may well include targets to a round number year or words to that effect. Given that the market, I think, is going to want to be focused on the sort of strategic update from here.

I wonder whether you could give us a sense as to sort of how you're thinking about that event how the group is going about setting targets and so on. Basically, if you could give us a forthcoming attractions advert for that.

Secondly, I mean clearly, sentiment around U.K. domestic economics is very, very poor and entirely at odds with the fact that your C&I loans are up 10% year-on-year. and that the Bank of England data has got them up 9%.

So given that commercial has a margin that's nearly double that of retail and that you're growing this book really quite well. I wonder whether you could just sort of unpack first of all, where the volume growth is coming from? And then secondly, sort of what it means in your mind at a high level for revenue growth in that business? I mean, is it a double-digit revenue growth business, it did double digits last year even as rates fell and despite its low LDR. So it just looks perhaps like a much better story than investors are assigning to it. So if you could just talk a little bit about what you're seeing in that division in particular, that would be helpful.

Thank you, Jason. Sure. I will -- I'll do my best on the first one without wanting to steal the thunder obviously, of the event in July. And then separately, I'll come to the commercial banking points. The strategic update in July so far, all that we said about it is that we do expect beyond 2026 continued growth in income, improvements in operating leverage and strong and sustainable returns and, indeed, capital distributions off the back of that. That is the financial picture, if you like, for the strategic update. And I won't talk too much about the content beyond that from a strategic point of view. Safe to say, you talked about round numbers. It's likely that we'll go towards the end of the decade in the context of the strategic update, the time frames that we'll give.

It's reasonable, I think, to expect us to deliver a degree of continuity and a strategic update. That is around finishing the job that we have embarked upon from 2022 onwards. It is also reasonable to expect us to consider how can we extend beyond that in the context of capturing the unique capabilities and strengths and market presence of the group, both within areas and across areas.

And then I think it's reasonable to expect us to build upon the operating model of the group to ensure that we are able to deliver customer propositions tailored and efficiently. And then finally, that is all put together in the context of wanting to and expecting to deliver sustainable returns to shareholders.

So I won't go beyond that, Jason. But hopefully, that gives you some sort of sense of direction, if you like, and then we can talk about it more fully during the course of July.

Commercial banking. Commercial banking is, as your comment suggests a terribly important area from our perspective, and it captures both the CIB and also the BCB, i.e., SME part of our franchise. So CB should be viewed in that context. What have we seen, first of all, it has been a big part of our investments over the course of this strategic period. We talk about digitizing the SME bank with the BCB business, for example, that's in the context of a digitized offering with relationship manager advice attached.

We've also talked about building out the strength of the CIB franchise, and I commented upon that just a second ago in the context of the OOI performance. That is really a story of ensuring that we capitalize upon what is our right to win. That is to say, we are the leading U.K. bank. We have a very strong franchise amongst U.K. corporates, and we expect to deliver more fully upon all of the needs of those U.K. corporates both here within the U.K. and indeed in the adjacent geographies as well as investors looking to make inward investments within the U.K.

So building on that CIB offering in the context of, as I mentioned earlier on, broadening out in terms of diversification, nothing particularly radical still with a cash debt risk focus. That has always been our focus from a strategic perspective and it's likely to continue to be. But that's a sort of strategic tenor, if you like, both the BCB and for CIB.

Now a couple of comments beyond that. One is you highlighted lending growth in the context of your comments there. And in the respect of each of those, I'll maybe make a couple of points. BCB, first of all, BCB has been seeing some success in terms of going into some of its core sector areas and improving the lending proposition off the back of, as I said, a better infrastructure.

It has been held back from a presentational balance sheet point of view by the fact that we've consistently been seeing customers making repayments on their government-backed lending, i.e., bounce back loans.

What was interesting about this quarter is that for the first time, over the course of recent periods at least, the new lending to the private sector outweighed those government-backed lending repayments.

And so as a result, you saw BCB balances growing by GBP 0.6 billion over the course of the quarter, which is great to see. That, in turn, is a pattern that we expect to see going forward as the BCB lending continues off the back of strong propositions.

CIB. CIB has been a business, as you say, that has built balances, mainly in target sectors like infrastructure, institutional activities, trade, that type of thing. That's really where we concentrated the efforts.

And then I would add a further comment, Jason, beyond the lending picture that I've just portrayed that this is also and significantly about other operating income. Both within the context of BCB, where our customers require a lot of services, if you like, on activities that are basically other operating income in orientation, and likewise in the context of CIB, where as you know, it is often about the relationship that you're building with the customer and lending is only a relatively small part of that. It's about building the other operating income streams in the areas that I mentioned earlier on.

So Jason, hopefully, that gives you a sense. CIB is an incredibly important part of our business. We have been investing heavily into it. We expect to do so going forward. It's a lending proposition for sure, but it's a very important other operating income stream too.

Our next caller is Benjamin Toms from RBC.

The first one is on margin. You show on Slide 5, the building blocks for NIM. Maybe you could just give us some color about what you'd expect the moving parts in NIM to be similar in Q2 versus those that we saw in Q1.

And then secondly, you've made no change to your Motor Finance provision. If the high court accepts the judicial review application from consumer voice, does that have the potential to lead to a couple of hundred million top-up as you'll need to add a new scenario to provision calculation, which describes the probability weighting for the judicial review challenge being successful?

Yes. Thanks, Ben, for those questions. I'll take them each in turn, obviously. First of all, the margin performance in Q1, as you pointed out, is pretty robust, pretty good. It is essentially in line with our expectations, where we described at the beginning of the year, the expectation of material growth in net interest margin over the course of this year.

Up 7 basis points is not far away from what we expected. And it's being driven by the usual kind of compilation of tailwinds offset somewhat by headwinds that we've discussed before.

So specifically, within that, we've seen the benefit of the hedge come through quite significantly in the course of quarter 1. We've seen some benefit from funding issuance a little bit from commercial banking to the margin and so forth.

So those are the primary tailwinds, if you like, as I said, hedge being foremost amongst them.

And then the headwinds, we've seen the mortgage refinancing pressure and a little bit in deposits. Now looking forward, a couple of points to make, really. One is we do expect those tailwinds to continue to play out over the course of the year. And we do expect those tailwinds to continue to be materially greater than the offsetting headwinds.

So the kind of the characters, if you like, will be the same. That is to say, structural hedge will remain strong. We continue to expect a little bit of benefit from our funding issuance activity and so forth. And on the other side, mortgages will continue to be a refinancing headwind for the remainder of this year, but the overall pattern is one of positive progress in net interest margin, and you should expect to see progress pretty much in every quarter for the net interest margin.

So progress in quarter 2, 3 and 4 going forward, steady progress towards a materially better margin at the end of this year when we came into it.

I would add actually in that context and as you know, when we talk about our guidance these days, we're really talking about net interest income, Ben, as opposed to net interest margin. And in that net interest income context, we should talk a bit about the lending growth that we're seeing, we should talk a bit about the deposit picture and the like. And lending growth, as you know, in the course of quarter 1 has been some 6 -- just over GBP 6 billion, GBP 6.2 billion, GBP 6.3 billion.

So pretty solid lending growth across the piece in terms of retail and commercial. And that is a big part of the net interest income built too. The motor point, Ben, the motor provision of GBP 1.95 billion remains, from our perspective, the best estimate of how this thing is going to come out. Maybe just take a step back and comment briefly on the position with Motor. We are, as you know, disappointed in, and we don't necessarily agree with the conclusions of the FCA scheme that's been launched.

There are various reasons for that. We think the proposals are disproportionate. We think that it produces or they may produce anomalous outcomes for customers. But having said all of that, we think that it is in the best interest of customers and indeed, the group and its shareholders to just move on at this point. We have a strong finance -- sorry transportation and financing business, and we want to make sure that there is a functioning consumer finance market, which for us is an important growth business.

So that's how we see the overall picture. The GBP 1.95 billion, as said, is the best estimate. But as I mentioned in my comments earlier on, is also a scenario-based estimate. And what that means is that we've taken the FCA scenario, including its take-up rates and all the other component parts of it as our base within the overall provision modeling.

We have also looked at scenarios around that, including things like different response rates, different cost levels. But pertinent to your point or relevant to your point, Ben, we have also looked at challenged scenarios.

And indeed, litigation through the court as part of our overall assessment of that GBP 1.95 billion and the GBP 1.95 billion, therefore, takes account of those types of challenged scenarios attached to the probability that we think there is of success.

And I will make the final point, Ben, is that the challenge scenarios aren't only going in one direction. You've got a challenged scenario from a consumer group, the one that you mentioned, you've also got the potential for challenged scenarios from others.

And therefore, what the net of that is from a challenge perspective, we have to see. But I think it's important to bear in mind that there may be challenges to the FCA scheme that go in both directions, upwards but also downwards. Overall, GBP 1.95 billion is our best estimate.

Our next caller is Sheel Shah from JPMorgan.

Just one on the structural hedge, please. You've previously said that you would expect the hedge to grow the notional slowly through the year. You grew it by GBP 2 billion this quarter, should we expect this level of growth going forward considering we have seen some stability in the deposit environment, particularly around the current account deposit base.

And alongside that, could you talk about the shape of hedge reinvestments in the year? And how much pre-hedging you would have done in the first quarter? And would we expect any more pre-hedging in the second quarter?

Yes. Thanks for that, Sheel. Maybe to start off again with the overall objectives of the hedge, as always, as you know, about stability number one, stability of earnings and therefore, stability of capital generation and indeed repatriation to our investors.

And then also shareholder value. Now your question there was around the notional around the look forward. In the context of the notional, we have increased the notional by GBP 2 billion over the course of the quarter, GBP 244 billion goes up to GBP 246 billion.

And as you rightly say, that is essentially driven by the significant stability and indeed buildup of buffers that we have seen in hedge eligible balances. That comes from PCAs to a degree, it comes from instant access. The PCA performance, as you know, in quarter 1 of this year, really positive, i.e., GBP 0.6 billion up.

Instant access has been very solid over the course of this quarter. Actually, that has been the pattern over the course of quarters preceding that, and it's the buildup of buffers that we have seen in hedge eligible balances because of continued persistence, if you like, and indeed growth in those hedge eligible balances over the course of last year and coming into this that has caused to say, actually, now is the right time to modestly increase the notional of the hedge.

Now it's safe to say that the types of buffer and maturities that we keep in mind going forward, if you like, are still well in excess of our internal guidelines.

So there's quite a lot of buffer still in place well in excess of our internal guidelines despite the fact that we've increased the notional by a couple of billion. And that's kind of as it should be, and we feel very comfortable with that.

We talked about the look forward. As we look forward, I think any further progress on the structural hedge for this year will entirely depend upon how the key elements of the hedge eligible balance has performed.

And we've got a lot of successful propositions out there. I mentioned some of them in the context of the other operating income question that we discussed a second ago.

But we just kind of have to see how the balance sheet shapes up over the course of this year. I don't want to set too many expectations over the hedge notional build. I do think we are seeing a period of, as I say, strong performance in terms of those hedge eligible balances, number one. We're also seeing a picture of strong rates. So our reinvestment rate, for example, over the course of quarter 1 was just shy of 4% in the context of the hedges that were being reinvested over the course of the quarter.

But coming to the final part of your question, Sheel, how much is that going to feed through into benefits in '26? Because of the nature of the hedge, which by and large, is very similar to a caterpillar with a bit of flexibility here and there.

We are currently pretty much locked in to about 95% -- 90% to 95% for '26. So much of '26 is locked in. And then consistent with what you would expect if you saw a caterpillar hedge, we're around 80% or thereabouts locked in for 2027.

And so that gives you an idea as to how much these hedge benefits, if you like, will feed through in the course '26 and in the course of '27, largely locked in for '26, about 80% locked in for '27. And in the context of higher rates, the benefits, if you like, will roll through in accordance with that.

Our next caller is Perlie Mong from Bank of America.

Can I just ask a follow-up question on the hedge and maybe the NII guidance because volumes have been pretty good this quarter and obviously, reinvestment rates are higher.

So you have increased guidance but probably not by as much as we could get to if we were to apply today's swap rates and maybe the rate outlook that we can all see on our screens.

So I know you probably don't want to comment on exactly what the roll-off assumptions are. But maybe if I put it another way, if we use today's numbers, as we can see from our screens, would there be upside to guidance is probably the first question.

And then second question is about capital distribution at the half year. So given the uncertainty, probably a little bit more prolonged than we might have expected a few weeks and months ago. Does that change your thinking in terms of how you want to run your capital at the half year? Like I suppose what I mean is, would you like to hold slightly more capital in light of the uncertainty on the horizon?

And also on the RWA side of things, this quarter, a lot of it was just driven by lending growth without that much optimization activities. Should we expect more of that coming through in the second quarter?

Thank you, Perlie, for those questions. There are, in a way, 3 questions there, actually, one on the hedge, one on capital distribution and one on RWAs. And so I'll take them, respectively.

First of all, the hedge. We've seen a period, as we all know, of rate increases. We've also seen just as I mentioned a second ago in response to Sheel's question, a period where we increased the notional balance of structural hedge because of the underlying eligible balance activity.

The natural response to that is to see how that flows through in the context of net interest income. And that's why we've moved the guidance from circa GBP 14.9 billion, greater than GBP 14.9 billion.

Why have we stopped short of being more ambitious or necessarily giving a number? It's simply because, as you know, there is a fair amount of uncertainty out there. The uncertainty is around rates. So as you know, the rates levels oscillate quite a lot from -- on a day-to-day basis, number one.

Number two, there's a bit of uncertainty as to activity. I don't think we see any dramatic downside. In fact, we have not seen any, to be clear, we have not seen any downside in terms of our lending activity over the course of the first quarter or as we look forward to it, in the context of April and indeed beyond.

So it's not like we have seen a dampening of activity, but we have revised down our economic forecast, and therefore, one might naturally expect a little bit of that at least to follow. To be clear, we have not seen it yet. But that's what's kind of built into the expectations.

So an uncertainty over rates, a little bit of an uncertainty over our activity, even if we haven't seen anything so far.

And then in terms of the numbers, if you like, as you know, we've given guidance on the impact of upward changes in the context of rates. And I think at the year-end is around GBP 100 million or so for a 25 basis point shift.

Now we have previously built into our forecast, the expectation of a couple of declines in interest rates, which are now no longer going to be happening. So how does that relate to our guidance? Well, those declines were built in at various points in this year.

I think one might have been in quarter 2, one might have been in quarter 3. Therefore, that GBP 100 million per 25 basis points, if you like, it's only being arrived at as of around halfway through this year.

At the same time, we've got those uncertainties around activity and so forth. And that hopefully helps you square greater than GBP 14.9 billion with the type of guidance that we have given.

One further point there, Perlie, to make is we don't normally guide as of Q1. We don't normally update guidance, I should say, as of Q1. We've given the guidance that we have simply because what is evidently happening in the market, and we felt it appropriate to do so, but we don't normally guide as Q1.

And hence, we've taken the approach that we have taken. You asked about capital distribution, Perlie. As you know, we're in the midst of a significant buyback program right now. We've done about GBP 700 million of the GBP 1.7 billion buyback. That's obviously proceeding exactly as we had planned it to.

We have committed to looking at the capital position twice a year going forward as opposed to previous once a year. We're not going to strengthen that commitment. That is to say we're going to keep that commitment. Now how do we look at that in the context of management and uncertainty. I would say a couple of things.

One is that we are operating in excess of our capital targets right now. Two is that, as you know, we have built into our capital target, our long-term capital target of 13%, about 100 basis points, in fact, now slightly more than 100 basis points of management buffer designed to accommodate any particular uncertainty. Three is that we have a very capital-generated business. You've seen it in the context of Q1. You'll see it more over the course of this year. You've seen it repeatedly over recent years.

So a very capital-generative business. And then further, fourthly, it is also a very low-risk business. It is a high-quality prime customer portfolio. As you can see repeatedly in the context of the AQR. And as you can see in the first quarter, once you get beneath the surface of the 25 basis points AQR, the underlying being 16 basis points.

So management buffers built into our capital targets, a very capital-generative business, a low-risk book gives us confidence in sticking with our 13% ambitions for the end of the year.

And as I said, we have a commitment to look at the capital position at the half year, and that's exactly what we'll do. Nothing changes Perlie.

RWAs, as you say, up slightly over the course of the first quarter. GBP 5.3 billion, I think it was versus quarter 4. A lot of that, as you highlighted, has been driven by lending. So if you take out the hedges, you've got lending of about GBP 6.3 billion over the course of the first quarter.

That's really healthy growth. And as I said earlier on, we have not seen a slowdown in lending appetite amongst our customer base during the course of April.

And so we expect that lending to continue. But lending over the first quarter, GBP 6.3 billion.

And what else is going on in RWAs? We've got a bit of SRT amortization during the period. We've got a bit of undrawn activity also during the period, which is a sign of healthy future growth. So for example, the mortgage pipeline has been very strong during the course of March that's led to commitments and therefore, undrawn, which will draw upon and complete during the course of the second quarter. A little bit of undrawn increase also in the CB portfolio, too.

And then alongside of that, some rotation out of bounce back loans, as I mentioned earlier on, and into private sector and therefore, RWA weighted lending. And then further, growth within the LBGI investments business, LDC, Lloyds Living that sort of thing has brought us a bit of RWA growth that is not lending related.

Final point, as you said, Perlie, and as is right, this is a very limited optimization quarter. The first quarter usually is. I think we got about GBP 0.6 billion, GBP 0.7 billion of optimization benefits within RWAs. That will ramp up as we go through the year.

And so that GBP 5.3 billion RWA growth that we've seen in quarter 1, Perlie, is very unlikely to be anything like the same level as we go through the course of the year for all the reasons that I just mentioned. Perlie, hopefully, that addresses your queries on hedge, on capital distribution and on RWAs.

Our next caller is Jonathan Pierce from Jefferies.

I maybe just press you a bit more on the distribution outlook in the nearer term. And the interim is obviously only a quarter away now. The buyback at its current pace, at least, is going to finish in August.

And obviously, you didn't get Aegon U.K., which according to media, you were looking at. So it does feel increasingly likely that we'll get a top-up at the interims. Can you give us a little bit of help as to how you're thinking on calibrating this judgment at the half year stages, not just this year but moving forward. I mean, I guess, if you get a 50, 60 bps capital build in the second quarter, a bit of dividend accrual.

Are you going to be exiting June at, I don't know, 13.7%, 13.8%. I mean, would it be sensible to think about that coming back in towards where we were at the start of the year, 13.2%, 13.3% and then progressing down to 13% at the end of the year. I accept you may not want to be drawn on this, but it would be helpful just to get a sense as to how you are thinking of that.

Secondly, on the mortgage headwinds, the average margin across the second half last year on the book was 85 bps, I suppose it was closer to 80 as we exited the year.

And it's clearly come down again in the first quarter. What's the stock margin on the mortgage book today. I don't know if you've got that number ex the SVR portfolio as well.

I'm just wondering when does this headwind genuinely finish? Should we be assuming there is no headwind at all, going into 2027. In the past, you've talked about H2 '26 as being the end of the headwind, but a bit of an update on that would be useful.

Just to deal with each of those in turn. The commitment on capital ratios, as you know, is and continues to be 13% at the end of the year. As mentioned to Perlie, we have every confidence and every intention of distributing down 13% at the end of the year, but it will, of course, be subject to Board decisions at that time.

So I shouldn't get ahead of myself in terms of pre-committing as it were, but there has been no change in terms of our ambition vis-a-vis 13% at the end of the year.

You mentioned there the buyback current run rate is pretty much as we had expected. As you know, it tends to accelerate well. It is built in to accelerate at times of relative share price weakness. That is the way in which the algorithm works, and that is very intentional.

Currently, we've executed just over GBP 700 million of the GBP 1.75 billion buyback that we have in place. And as you observed, Jonathan, it is on track at the current run rate to conclude in Q3, precisely when, I guess, will depend in part on the strength of the share price as indicated.

If the Board decides to do a second half buyback off the back of the excess capital position, then, of course, the scope is going to be there. I don't want to, again, precommit the Board. It will be up to them to make the decision that they make with me, obviously, as part of it, when that decision is right to be made.

But there will be scope to do the buyback in the second half, should they decide to do so. And if the current buyback executes and concluded during the course of August, then of course, you've got that kind of calendar year as well as the capital capacity to execute.

You mentioned the particular M&A situation, which I might just take the opportunity to comment on simply in the context of M&A broadly rather than anything more specific than that.

We do look at opportunities in M&A. And occasionally, some will be strategically interesting to us. You mentioned a particular headline there. I don't want to comment on specificities, but some on occasion will be strategically interesting to us. We will subject those opportunities to test around value, around speed and around risk. That hasn't changed.

Those value considerations will include concerns like dilution, will include measurements of return on invested capital as well as the NPV or otherwise of any given M&A opportunity. The risk would include considerations of things like integration and migration concerns. And when we've looked at opportunities, including those recently, they have, for us, at least not passed those hurdles. They have failed those tests. And so we think that even if something is strategically interesting, it's very important to be disciplined.

Having said that, if an M&A opportunity is attractive and if it passes those stringent tests, then we will execute. And you've seen in the context of recent periods, we've done SPW late last year. We are in the process of doing Curve. We've done Tusker, a very successful M&A transaction. We've done Embark in the savings area. We did a mortgage portfolio when I first came in.

So again, where something is strategically consistent, number one, and where it passes the value speed risk hurdles, number two, then we will execute. But we take those hurdles seriously, and they have to pass. The mortgage margin point, Jonathan, the overall mortgage margins, as you said, have been about 70 basis points completion margins over the course of period.

We've had a Q1 maturity out of just shy of 100 basis points. So you've got, therefore, a headwind, if you like, of about 30 basis points for a new mortgage being written against an old one, that hasn't changed too much over recent quarters. It's probably been nudging down maybe a basis point or 2 every quarter. So while it still fits the description of circa 70 basis points completion margins, just bear in mind that it has nudged down by a basis point or so.

I think overall, I mentioned the maturity out margin there of about just shy of 100 basis points, just shy of 1% for Q1. I think that's going to be more or less a picture over the course of '26 based upon the book that we have.

And so if you think the completion margins aren't going to budge too much, then you're going to see that type of headwind over the course of the year. You asked about the kind of termination, if you like, of that headwind, Jonathan.

And we have, as you say, in the past, talked about H2 '26, I think it's been kind of nudging a little bit outside of that over the course of recent quarters. And right now, look at that hedge -- sorry, that headwind basically petering out at the beginning of next year.

So it may not be exactly 0 during '27, Jonathan, but it will be very largely taken care of by the first part of '27. I won't be too precise on it. We'll have to see kind of how things fare over the next couple of months. But certainly, by the first half of '27, potentially within the first quarter, you're done with it.

Our next caller is Guy Stebbings from BNP Paribas.

The first was on the mortgage market, more really from a demand perspective as you probably got a good visibility as anyone. And I guess Q1 was a good quarter for volumes, seemingly, there's been elevated approvals around the end of the quarter and the start of Q2 for the industry.

So certainly a good start to the year, but perhaps a pull forward of activity and rates may dampen activity from here and you talked yourself about lower HPI assumptions. So just interested really to get your view on what you're seeing on demand today, what your expectations are for the rest of the year? And if there's anything to call out in terms of mix effects, whether we might see more refi activity over the first-time buyer activity, which could have an impact on spread dynamics as I guess, was the case back in '23 when rates went a bit higher.

And then the second question was on deposits. A little bit output outflows on retail savings seemly a conscious decision around term deposit market. I know you talked about competitive dynamics in that market back at the start of this year. So is that sort of playing through as expected? I know we've got sort of steady to positive trends in current accounts and instant access. So I just sort of checking that everything is running through as expected there.

Yes. Thanks, Guy, for both of those questions. Just to take them in turn, mortgages, as you say, a pretty decent quarter, GBP 1.6 billion up and that was actually in the context of a significant maturity quarter.

So the gross lending was particularly strong. That was offset by a lot of repayments. The net of that being GBP 1.6 billion up and we think our market share over that period was about 18.5% to 19%. So pretty much in line with what we would hope for in the context of strong lending growth.

I think the other point that's worth making about the first quarter, Guy, is because rates rallied in the way that they did, we saw quite a lot of application activity from a customer perspective, i.e., potentially some bringing forward of applications that might have otherwise happened in quarter 2 into quarter 1. And so a sharp uptick in applications, which in turn will feed through into completions for Q2, at least a good part of them will do.

And so on the back of that, the pipeline for mortgages is probably a touch stronger than we had expected it to be going forward into the remainder of this year, Q2 and potentially beyond. Now 2 points to add to that. One is we've recently done a securitization on the mortgage book that will be -- that was within April and therefore, will qualify within Q2.

And so you may see a slightly flatter performance in mortgages in Q2 than would otherwise be the case, simply because the securitization activity is offsetting what is otherwise good, healthy new lending activity or net new lending activity. So just bear that in mind.

And then the second point is this -- the effect of higher rates on housing activity maybe a little bit to be felt. Again, we're not trying to suggest that we've seen it so far. We certainly haven't. We've seen strong secured. We've seen strong unsecured continuing into this quarter. But maybe the effective rates takes a little bit of an impact in the course of the second half. Let's see, let's see.

So I think strong activity in Q1, expect a continued strength into Q2 at the back of what I've just said. Bear in mind that cosmetic point that I just made around this securitization and then we'll just see how the rest of the year proceeds, if you like, off the back of what has been an encouraging start, frankly. You asked in that context about margins. Margins consistent with my comments to Jonathan just that, margins continue to be generally in pretty good shape.

And probably, I would say, they end up typically in slightly better shape than we think they're going to be when we start the quarter. That's been the pattern over the recent quarters. Let's see whether that carries on or not. I do think a couple of points worth bearing in mind. One is the standalone returns for us on those types of margins given our scale is perfectly respectable.

But also, as you know, we seek to augment it and supplement it in the context of our consumer or customer relationships. So for example, we've been working hard on ensuring protection take-up rates, likewise, home insurance stands alongside the mortgage offering in the context of our strategy, and that's been a big part of our investment process over the course of the '22 through '26 period. So we're trying to augment the overall relationship. That's 1 point.

The second point is, as I'm about to go on to, we have seen a pretty competitive fixed term market over the course of the first quarter. And I would have thought that as that competition reflects itself, it may be that some of that comes out on the lending side because people like us see their margins in a very holistic way.

So possibly a more competitive deposit market finds its way through into a slightly more benign mortgage margin market. Let's see. Guy, you asked about deposits. And as you say, we've taken a very kind of conscious decision, as you rightly pointed out in terms of our overall participation decisions within the deposit market.

But maybe just to take a step back. Overall, as you know, a modest reduction of GBP 0.6 billion over the course of the quarter. Stepping back further, actually, there's an GBP 8 billion increase, 2% increase over the course of the last year. Behind that, there's decent CB performance, GBP 2.3 billion up and it's then slightly slower in retail. Within retail, the areas that really matter to us, PCA has shown strength, GBP 0.6 billion up off the back of strong propositions, very important to us for all the reasons that you know about.

Likewise, instant access really solid over the course of the quarter.

And so within savings, where we have chosen not to participate so aggressively is in the fixed term market, and in the fixed term market, we have, as I mentioned in my comments earlier on, seen a very competitive market, probably a touch more competitive than even we expected at the beginning.

And indeed, at times, a negative margin market. And so we've chosen not to go forward. And if you like, extend negative margins, but rather focus on retention off the back of what was a very strong ISA season in '25, we aim to retain about 90% of that.

And then alongside of that, invest in our customer franchise, invest in our most valuable relationship customers. And we're achieving those goals. And you can see it come through in the context of the other activities that I mentioned a second ago. So I think Guy, what we're looking to do is to deliver good value for the customer franchise in a way that makes sense without spending too much money on what is often relatively mobile nonrelationship money in the fixed term market. And that's what's behind the deposit outcome.

Our next caller is Ben Caven-Roberts from Goldman Sachs.

Just one follow-up, please, on your comments around activity versus rates and the trade-off there. So you've removed the 2 rate cuts that you previously had in your forecast.

But if we look at market pricing, to some earlier comments, market has got about 2 hikes in at the moment. If we were to see those hikes materialize, which segments of the book would you be looking at most keenly whether in terms of changing activity levels or in terms of changing asset quality?

Yes. Thanks, Ben. Look, just one point to be clear on upfront, really, which is that the activity levels that we have seen in the first quarter and the activity levels that we continue to see in the second quarter have been, I would say, at least as, if not better than our expectations.

Point really around activity is simply to say, as we look out, we've got slower GDP expectations, and therefore, one would expect that to have some impact.

To be clear, not totally offsetting the beneficial impact of the rate picture that we've seen, which is why we have increased the guidance to greater than GBP 14.9 billion as we have done this morning. Then you asked about if rates were to be hiked, as the market suggests or implies rather, versus our expectation that there will be no cuts in rates and rates will stay exactly as they are.

The overall expectation we've given sensitivities on in the past. And that in turn, suggests, I think at year-end, we said that a 25 basis point shock across the Curve was about GBP 100 million or so of benefit from net interest income point of view.

Where might that weigh, it's a little hard to say precisely the sectors upon which that might impact, but one can think about long-term investments potentially as an example of that. One can think about potentially HPI acceleration being dampened down a little bit by that type of thing.

I think it's those types of points really. You asked about asset quality. I wouldn't expect -- I would not expect those types of rate increases to have any meaningful impact or any discernible impact on asset quality, frankly, Ben. We've seen a period of incredibly resilient asset quality off the back of what is a very prudently positioned book that is rigorously stress tested for rates that are much higher than anything that we see in the market right now and anything that we respectively see going forward. And you can see that manifested in the context of the performance of the book today.

You can see that taken account of, to the extent that it causes any impact in the context of our MES that we put in place today, i.e., the GBP 101 million net MES increase.

Ben, when I think about on the retail side, for example, our mortgage borrowers, they're typically in excess of -- well, the average is in excess of 85,000 household average income, the loan-to-deposit ratio is about 45.4%.

It is -- every mortgage is rigorously stress tested, as I mentioned, for rates that are well in excess of where we are today. So I don't see much stress there. I can work my way through the other parts of retail portfolio and say much the same. When I look at the CB, the Commercial Banking business, 81% of CIB exposure is investment grade. 90% of the SME exposure is secured, roughly 70% of that is less than 60% LTV. This is a robust book and it's not going to get troubled by 25, 50 basis points of interest rate increases.

Our next caller is Christopher Cant from Autonomous.

If I could just come back on deposit competition, please. It's obviously been an area of concern for some investors looking at U.K. banks. And I guess people think back to second half of '23, which was the last big negative surprise with regards to customer behavior and churn into fixed versus expectations at the time. I'm conscious that your rate assumptions are some way below market for the previous question.

What level of rates or in particular forward swap rates do you think we would need to see to generate an equivalent sort of negative surprise around customer behavioral churn. So conscious that in mid-2023, I think the 2-year swap peaked about 6%. But we have had a move up, meaningful move up so far this year to mid-4s, I guess.

Is there a level you have in mind where you would start to get nervous that we could see a further wave of kind of fixed migration at a system level because it feels like at the moment, you're standing back from that fixed term market and accepting minor volume attrition, but it's not really impacting book.

And on a related point, in the past, you've given us some color, not necessarily a specific number, but some color around the proportion of your book, which is in fixed term or, I guess, limited access now is quite big for your products. If you could give us an indication of where we are now on that? Some of the other U.K. names do give more clear cut disclosure on x percent of the book is fixed term, it would just be helpful as a point of comparison.

Yes. Thanks, Chris. I'll answer your question, probably not as fully as you would like, but I'll answer your questions to the extent it's kind of consistent with our approach.

In respect of the fixed term stance, it is, as you say, just a rational way of looking at the market. It's the right approach from our perspective to ensure that we get strong retention from the very strong ISA participation that we saw last year and indeed focus value upon our relationship customers.

So that is very consistent with the previous comments and indeed your comments in the question. From that perspective, at least, we don't think it makes sense. It's not rational to necessarily focus on what I described earlier on is mobile non-relationship money. And so we've taken that decision while at the same time, seeing very strong performance in the context of PCAs and indeed instant access performance.

You asked about where -- whether there is a level at which rates move where we start to become worried about churn, I wouldn't want to put a precise number on it. It's safe to say that I think it is a very different picture now versus '23 on the basis that in '23, we saw rates go from 0 to in excess of 3%.

And that is a meaningful jump. And all of a sudden, you see people think, well, maybe it is worth putting something into term deposits and the like versus rates going from, let's say, 3% to 4% obviously, rounding numbers, but I think there is a meaningful difference between what we saw in '23 versus what we're seeing today.

So I wouldn't put a precise number on how high rates have to go before we see an equivalent shock '23, I suppose. But I think it's a long way beyond where we have gotten to so far.

Chris, was there another part of your question, which I have missed in terms of my answer. You asked about the proportions of books, didn't you? We haven't typically given proportions of books. As you know, we've got about GBP 496 billion of deposits. We've got about GBP 322 billion of those in retail and about GBP 104 billion, GBP 103.4 billion to be precise in PCAs.

And then we haven't really broken down the savings book much beyond that. Safe to say that what we've seen over the course of the last period or so has been -- has reduced slightly the overall fixed term. And indeed, limited withdrawal or restricted variable as we often call it, book. Not by terribly much as said, it got significantly increased over the course of quarter 1 '25 because of the strong ISA season that we saw.

And we simply ended up in the space that we intended to end up, which is roughly 90% retention of that. We haven't split the book before, Chris. I don't think we're going to necessarily start now. But you can see from our approach at least that it's still making a lot of sense for us, still making a lot of sense for customers, and it still makes a lot of sense for shareholders.

Our next caller is Andrew Coombs from Citi.

I'm going to try and ask a couple of cheeky questions ahead of the July strategy update. Firstly, on loan growth, you're seeing very constructive trends in the quarter. You've talked out the strength, particularly in what you're seeing in commercial.

It's obviously notable that Barclays an explicit loan growth target into their strategy update. NatWest has come out with this 4% CAL growth ambition as well. So I think you're the only 1 of the of large domestic banks not have a specific volume growth targets. Is that something you would consider with your strategy update? And then the second question, just on rate assumptions. You talked about being a very uncertain world.

And certainly, your last Capital Markets Day was a case in point, I think you had the Russia-Ukraine conflict starting a month after your Strategy Day. But if I go back to that strategy update, I think you used great assumptions that at the time were actually below the forward curve. Is that something you would do again? Would you use the forward curve? How do you think about your forward-looking rate assumptions in any long-term strategic plan that you are making?

Yes. Thanks, Andrew. I won't talk too much further about the strategy update, not least because my boss will probably fire me if I went into too much elaboration on it.

But maybe just to comment briefly upon your points. Loan growth, first of all, as you say, we've seen healthy loan growth in the quarter. Quarter 1, we saw GBP 22 billion loan growth, lending growth that is last year. We've seen GBP 6.3 billion over the course of the first quarter, that's after knocking off hedges, and that's about 1.2%.

That's good to see. I don't think we'd necessarily expect to see GBP 6.2 billion repeated over the course of -- GBP 6.3 billion, sorry, repeated over the course of quarter 2, quarter 3, et cetera. I think we did see some activity in the first quarter, which is pretty strong.

And as I say, not necessarily going to be the same number over the course of quarter 2 through quarter 4. That's across the book at retail and commercial too.

When we look forward, we'll obviously come to talk about it more in July, we'll consider what the overall ambitions are. And indeed, what it makes sense to give you our guidance in respect of those types of asset expectations.

But I would say, Andrew, and hopefully, this won't surprise you that we manage the business for a combination of constraints. And those constraints are not just around expanding the balance sheet, but they're also around profitability. And so we'll measure or we'll calibrate carefully what we think it is sensible to talk about with you in the context of the set of round of constraints that we try to maximize.

The second question in respect of rate assumptions. We -- if we set out the assumptions that we had at the beginning of the year, they were obviously below the rate assumptions -- or sorry, the rate outcomes that we have seen as of now.

And that is maybe not surprising in the context of our upping our net interest income guidance from circa GBP 14.9 to greater than GBP 14.9.

We started out the year with a set of rate assumptions. It is now the case, those rate assumptions are in excess of where we are today.

As we plan, we typically take a relatively prudent approach to our overall rate assumptions because we do not want to build in, if you like, overly or rather significant degrees of optimism into our net interest income guidance to ensure that we are able to deliver what we say that we're going to deliver.

So I think in general, you should expect us to err on the conservative side vis-a-vis rate assumptions versus what the market may necessarily be expecting. There is this particular anomaly going on right now whereby the market is expecting hikes.

And we're not -- I think that is as stretched as I've seen it over the course of the time that I've been doing this job. But typically, we will be erring on the conservative side of where the market might be coming out for fear of otherwise building in too much optimism in the guidance that we give you, when our intention is to fully deliver on our guidance. Andrew, I might stop there, but hopefully, that gives you some insight.

Our next caller is Ed Firth from KBW.

I just had a slightly broader question really around the Iran conflict and the fallout from that because if I look at that, it seems that both you and I guess, Barclays yesterday, what we're saying is that the U.K. economy takes a WACC, but for banks, of profitability goes up and growth goes down.

But actually, the profitability growth increases will be more than any growth slowdown. So I'm just wondering, you all met with Rachel Reeves last week. How comfortable are the government, do you think with that as an outlook, for the bank sector.

And could you -- I don't know how much of these meetings are private or not, what you can sort of elucidate to us about what their thinking is about how they may see the bank sector helping the economy in what is clearly a very tough time?

Yes. Thanks for that question. Maybe I'll take the 2 points somewhat separately. First of all, in respect to the Middle East impact, as you know, and it won't surprise you, we have very limited direct exposure to the Middle East. That is to say, sovereign exposure to a very limited extent, and that's really about it.

So very limited direct exposure and certainly nothing that we would expect any impact from off the back of the Middle East conflict. It has, as I mentioned earlier on, had no discernible impact yet on the level of lending demand from our customer base, either on the retail or the CB side.

And so we haven't seen that in Q1. We haven't so far seen it in Q2. And by extension, neither has it had an impact on our asset quality. If we look at asset quality for the first quarter in terms of the observable performance and certainly what we've seen so far in the second quarter.

But we also look at things like early warning indicators, either in the retail space, or alternatively in the commercial space, we do not see the impact of the Middle East conflict coming through.

Early warning indicators, as you know, they're pretty extensive in terms of the types of things that we look at, but things like sentiment drivers, savings withdrawals, refused payment notifications, unarranged overdrafts, these types of things in the retail space, no impact.

Likewise, mortgage term extension. Within the CB space, SME loans and arrears, overdraft utilization, RCF utilization, no impact, the liquidity levels still look pretty healthy. So we're not seeing any impact there either. But we have embodied it in the context of our MES expectations as we talked about a couple of times on this call, and that feels appropriate.

And therefore, consistent with those MES expectations, you see some indirect impacts on confidence or on activity just as a feedthrough, if you like. We haven't seen them, but that's what's built in effectively to our MES. That's the kind of first part of the discussion.

The second part around how does that impact upon discussions that we have with various other stakeholders in the economy. And as you say, there are conversations that happened, which I won't talk about in great detail. But I think overall, the intention of Lloyds Banking Group is very much to be there for our customer base.

We have every intention of ensuring that we are able to support the economy, both in terms of lending so that we can help the economy grow. And in terms of any customer support that might be required if the economy gets slower.

And so I think that diffuses the tension really. There's no -- from our perspective, at least, there's no tension between trying to drive profit in the bank versus trying to drive support for the economy. In fact, one leads to the other. That is our purpose. That's what the business is set up to do. And the more that we can work with government in terms of opening up new fronts for customer propositions, investing in some of the key sectors that they are interested in, whether it's infrastructure, housing or any other areas the more that we're going to do that.

And alongside of that, as you know, we have a lot of discussions with the government and other stakeholders around the capital regime within the U.K.

Our objective in having those conversations about the capital regime with the government, with other regulators is to ensure that we're able to simultaneously secure prudential stability but also sponsor growth within the economy. It is always about trying to make sure that we can lend more effectively into the retail and the commercial economy.

And again, Ed, I think that diffuses attention. To us, the profitable banks succeed in successful economies. That's what we want to do.

Our final caller is Amit Goel from Mediobanca.

I've got 2 follow-up questions. One is just coming back to a comment earlier on the call. I think you mentioned that. In terms of retail products, there's some new products and that should have some positive contribution.

So just curious again what those products are and how much contribution or when that comes through. And then secondly, just to clarify, just checking the latest on CRD IV, is that basically fully done and/or if there's any kind of review that could be relevant also for Q2? Just double checking on that.

Yes. Thanks for the question, Amit. On the retail space, as I think we have commented our retail growth over the course of Q1 was around 6% or so year-on-year. That's showing very strong growth within the transportation sector, likewise, a little bit of benefit within the mortgage sector.

But it is being slightly held back by essentially product incentives within the retail space, which is a combination of things really, Amit. And it's packaged bank account incentives, the type of offerings that we give to customers in the context of packaged bank accounts.

Likewise, some Lloyd's Wealth benefits and likewise, some current account benefits. And in turn, we expect those to essentially accrue income gains over the course of future periods. I won't put a kind of precise date on it because actually it gradually accrues over time.

But we should expect 2 things to happen really. One is those switches or those benefits, if you like, have been concentrated somewhat in Q1 versus where we expect them to be over the course of the year. And so that headwind, if you like, attenuates going into quarter 2.

And then second, the income benefits from that because we've seen very strong account growth off the back of those offerings, those start to build from now on, really.

There's a little bit of that in quarter 1, but it builds solidly over the course of this year and indeed into next. I mean you asked about CRD IV. CRD IV, as you know, is something that is culminating over the course of this year.

We've now submitted our models to the PRA. have a range of what we believe to be very robust assumptions in the context of those models that we are going through with the PRA. The final impact of CRD IV is, of course, subject to their agreement, and we'll see where we end up on that.

Overall, at the moment, at least, we're not expecting a significant or material hit to CRD IV in the remainder of this year, but we have to see whether PRA lands in respect of finalizing the model outcomes.

Thank you. There are no further callers.

Just to say, thank you very much indeed for taking the time and joining the call as usual today, and we hope you have a good rest of the day. Thanks very much indeed.

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

Good afternoon, ladies and gentlemen, and welcome to the Lloyds Banking Group plc Investor Presentation. [Operator Instructions]. Before we begin, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the team from Lloyds Banking Group plc. Rohith, good afternoon, sir.

Thank you very much for that, Jake, and good afternoon, everybody. I'm Rohith Chandra-Rajan, Director of Investor Relations at Lloyds. And I'm joined here today by my colleague, Tom Grantham, who's a Senior Manager on the team. We're very happy to be running another of these briefings with Investor Meet. They're a great way to engage with our shareholders. So thank you very much for joining us. In terms of how this hour is intended to run, we've got a short presentation covering our financials and our strategy. That should take about 15 minutes, and then we'll spend most of the time on your questions. So with that, then let's move on to the first slide.

So as you all know, Lloyd's is a U.K.-focused bank with a simple operating model split across 4 reporting areas. Those are retail banking, commercial banking, insurance pensions and investments, and equity investments & central items. Within these divisions, we offer a comprehensive product suite to meet our customers' ever-evolving financial needs. And one of our core strength is our portfolio of trusted and recognized brands. Those include, in particular, Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows. The breadth of our franchise means we're uniquely placed to meet more of our customers' needs as well as understanding them better to provide more tailored offerings that deliver value for both customers and to the group and its shareholders.

And just on to the next slide, before I hand over to Tom on the financials, I just wanted to highlight a few of the things that we're really focused on. Firstly, our purpose, purpose-led strategic delivery, which is accelerating, benefiting customers and wider stakeholders. Secondly, we're delivering our sustained strength in financial performance and meeting our 2025 guidance. And the financial performance delivered strong capital generation, enabling another 15% dividend growth and a GBP 1.75 billion share buyback. Finally, we upgraded our guidance for 2026 financial performance and are confident in our outlook beyond this year.

With that, let me hand over to Tom on the numbers and an update on our strategy.

Thanks, Rohith, and good to speak to you all, and thank you for joining. So first of all, I'll touch on the financials. And then as Rohith said, I'll give a brief update on our strategy before I hand back to Rohith to close off the presentation. So in terms of the financials, as just said, we delivered sustained strength in our performance in 2025 and in line with guidance.

Statutory profit after tax was GBP 4.8 billion. That was up 6% year-on-year. And this resulted in a return on tangible equity of 12.9% or 14.8%, excluding the motor provision that we took in the third quarter of the year. Within this, we delivered robust net income of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively. We retained cost discipline over the year with operating costs in line with guidance at GBP 9.8 billion.

Remediation of GBP 968 million included GBP 800 million as a result of the aforementioned motor charge. Asset quality remains strong. The impairment charge of GBP 795 million represented an asset quality ratio of 17 basis points. And finally, as Rohith said, we delivered strong capital generation of 147 basis points or 178 basis points, excluding motor, in line with our guidance. After distributions, which I'll come on to later, this resulted in a CET1 ratio of 13.2%.

So let me quickly turn to movements in the balance sheet. So pleasingly, lending and deposits both grew strongly in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 billion or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. In Commercial Banking, lending was down GBP 0.2 billion in the fourth quarter. This represents further growth in targeted areas within our corporates and institutional business, offset by business as usual performance within BCB that included continued government-backed lending repayments.

Turning to deposits. We saw a strong performance across both Q4 and the year as a whole. Total deposits were up by GBP 13.8 billion in 2025. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs with deposit churn continuing to ease as we have expected. Commercial deposits, though fell by GBP 1.5 billion, driven by actions on low-margin funding as well as by seasonal outflows in BCB.

Let me now move on to income on the next slide. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year with Q4 up 2% versus the prior quarter. Hedge income in 2025 was GBP 5.5 billion, a material step-up from last year and a little above our guidance. Our net interest margin increased 11 basis points to 306 basis points. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024, with Q4 AIEAs just over GBP 470 billion, up GBP 4.8 billion. For 2026, we're guiding to net interest income of around GBP 14.9 billion.

Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial. This also includes continued growth in hedge income, rising to circa GBP 7 billion in 2026 from that GBP 5.5 billion I mentioned earlier before increasing further to circa GBP 8 billion in 2027 and continue growing towards the end of the decade.

Turning now to other income. 2025 was another year of encouraging and broad-based growth in other income. We expect this pattern to continue. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported by the full acquisition of Schroders Personal Wealth or Lloyds Wealth, as it will soon be rebranded to. Growth over 2025 has been broad-based. Retail is up 12% year-on-year. Commercial was up 1%, insurance, pensions and investments grew by 11% and our equity investments business was up 15%.

Turning to operating lease depreciation briefly, which is the depreciation charge for our operating fleet business. This was GBP 1.45 billion in 2025, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles and to an extent, electric vehicle price movements. However, altogether, it was essentially in line with the other income growth generated by the vehicle leasing business.

Let me now move to costs on the next slide. Operating costs of GBP 9.76 billion were in line with guidance. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth and inflationary pressures, partly offset by further efficiencies. Looking ahead, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. We wait to see the detail of the FCA's final proposals on motor post their consultation on Monday.

Let me now turn to credit performance. Credit performance remains strong, and that reflects our prime customer base, prudent approach to risk and healthy customer behaviors. Across retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In commercial, after some idiosyncratic cases in H1, such as fiber, the H2 picture was very constructive. Taking all of that together, the full year impairment charge was GBP 795 million, equivalent to an asset quality ratio of 17 basis points.

Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026. That's similar to the underlying run rate that we've seen during 2025. Let me move now to the macroeconomic outlook. So it's worth saying that these are the economic assumptions as of full year results at the end of January. And so clearly, we're prior to the recent geopolitical disruption. It's also worth saying that we review economic forecast every quarter. However, as at full year, our expectations were that GDP will be 1.2% in 2026 in terms of growth.

Unemployment was expected to peak at 5.3% in H1 2026. We assumed two 25 basis point cuts in U.K. bank rate in the year and house price growth was forecast at circa 2% in 2026 and 2027.

Let me now turn then to our capital distributions. We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board recommended a final ordinary dividend of 2.43p per share, taking the total dividend for 2025 to 3.65p, up 15% year-on-year. In addition, we announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024. This hopefully demonstrates our commitment to shareholder returns. Indeed, the 2025 dividend is now up more than 80% versus 2021. Given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward.

Let me now quickly wrap up the financial update section. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and a culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. We will give far more detail on this in our strategic announcement with our half year results this year. On that note, let me speak briefly to strategy on the next slide.

We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency whilst significantly derisking the business and establishing a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits. In particular, let me talk about how we're thinking about AI on the next slide.

In 2025, we scaled 50 GenAI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue target of GBP 2 billion by 2026 and over 60% of the total gross cost savings, GBP 1.9 billion, realized since 2021. This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit, capturing both revenues and costs with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we'll talk far more about our plans in this space as part of that strategic update that I mentioned in July.

So let me close out then on Slide 18. So as you've heard, we're successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan in July. We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We'll, of course, share more detail on our medium-term financials at that stage, too.

So with that, I'll hand back to Rohith.

Thank you, Tom. I hope you found that useful. To summarize, we're very pleased with the progress so far. We're confident in meeting the objectives of our current strategy, and we're excited about the next strategic phase, supporting a compelling investment case with continued growth, improving operating leverage and stronger sustainable returns. As promised, we've left plenty of time for questions.

So let's now hand back to Jake for the Q&A.

Perfect. That's great. Thank you very much indeed for your presentation this afternoon. [Operator Instructions] Just like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can all be accessed via your investor dashboards. Guys, as you can see, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But at this point, if I may just hand back to you to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great. Thank you.

Brilliant. Thanks, Jake. So I think the first question then, which I'll hand over to Rohith. What is the dividend policy for the group moving forward?

Yes. Thank you very much for the question. So the dividend policy is progressive and sustainable. As Tom mentioned, we grew the dividend 15% last year. It's been growing at that pace for a while. And whilst we don't have a payout ratio, that is one of the benchmarks that we think about, particularly in terms of that dividend sustainability. So we want to grow it, but we want to keep it at a sustainable level. We think there is plenty of room for continued strong dividend growth as earnings continue to expand and also as we gradually increase the payout ratio over time. So the policy is progressive and sustainable growth, and we think that gives us lots of space for continued strong dividend growth.

Thanks, Rohith. So we've had another question. How does the group measure ROI on digital investments, particularly in customer acquisition and retention? And is there evidence that digital engagement is deepening product penetration per customer? So maybe I'll start on that one.

So in terms of how we measure, I guess, the return on investment in general, I'd probably point to the strategic targets that we set out '22 to '26. So as mentioned in the presentation, we invested over GBP 4 billion over the period of time. We are planning on generating over 2 -- well, circa GBP 2 billion of strategic of income related to those strategic initiatives and circa GBP 1.9 billion of gross cost saves as of '25. We haven't given a target for '26.

In terms of your question on digital and specifically, so digital and AI underpinned essentially 70% of those revenues and about 60% of those costs. And so from our perspective, there is a strong return on those investments. And we do have stats internally to back those up, but we haven't disclosed those. But clearly, when we come to our next strategy, we will talk about essentially the ways that we'll measure and continue to make sure that we're generating sufficient ROI on those investments.

In terms of any evidence that it's deepening product penetration with customers, I think there is. So one of the key tenets of our strategy was deepening relationships with customers. We actually set out a target of increasing products per customer by 5% out to 2024. We achieved that. And we have a target '24, '26 to increase products per customer by 3%. And so we'll obviously update that as we get to the end of this year. But maybe some other stats to justify it. So clearly, being able to utilize the fact that we have an insurance business and make sure that our retail customers can fully take advantage of that. One product in particular is protection insurance. Previously, with new mortgages for Lloyd's, we sold less than 10% of protection insurance products to those mortgage customers. We now sell more like 20%. And so you can see that that's one example, but there are other examples of where we are getting much better at deepening those relationships with customers.

So next question here on wealth. Given the rise of free-to-trade share dealing services, do you expect a reduction in revenue? And maybe, Rohith, you can take that one.

Yes. Thank you, Tom. So we do have one of the top 4 platforms in Halifax share dealing. So we operate in that space. As Tom mentioned, we've also now just recently brought Schroders Personal Wealth, which was a joint venture with Schroders back into the group. So it's now fully integrated into the group. And as Tom mentioned, will be rebranded Lloyds Wealth. And that's part of a broader investment franchise, which spans -- that's very much advice-led, so face-to-face. But we are also in the process of -- and as I mentioned, we've got Halifax share dealing.

We're also in the process of developing an AI supported investment tool, which will provide much more tailored guidance to customers in terms of not just understanding their risk appetite, but also a bit more about their personal circumstances and their goals to help tailor portfolios of low-cost investments for them. So that's where we think there's significant growth. We are developing that in conjunction with the regulator, with the FCA in a sandbox or regulatory environment where they have oversight of the testing. It's being tested with friends and family, so internally at the moment and something that we expect to launch later in the year. And we think that tool in particular, is really important in terms of democratizing, if you would like, investments for the public in the U.K., where the government obviously is keen to move people out of cash savings and get people investing a lot more. We think those types of tools can be very helpful.

And then there's a combination then of all of those 3 platforms that will give you potentially some hybrid operation where if you're doing something that's slightly more complex that you don't just want to rely on the AI tool, you're happy to let the AI tool guide you, but you want to speak to a real person before you actually execute against those plans, that's potentially also part of that offering. So yes, it's a very competitive space. It's an area that we are expanding where we think there's a big customer need, which the government also seems to be in favor of. So we think this is a long-term trend that we are uniquely positioned to benefit from and to support customers with.

Brilliant. Thanks, Rohith. And I think there's probably another question for you. Are there any signs of competitive pressure on mortgage margins or deposit pricing?

Short answer, yes. So the U.K. is -- it's a fairly consolidated banking market, but by the same token, still a very competitive one. So in terms of new mortgages, we are writing new mortgage business at above 0.7% above what it was costing us to fund that business through last year, that was actually coming down very marginally, so 0.01% or 0.02% per quarter.

We started the year also very competitive. There are -- there were a lot of mortgages written in late 2020, early 2021, and those were on 5-year fixed rates are in the process of maturing. Those were very profitable mortgages for us, and we took an outsized market share of them, but the market is now jockeying to win that refinancing activity as it matures. So it's a very competitive market. It's also quite a tricky market at the moment in that as you will have seen from the news flow, interest rate expectations have moved -- are moving around a lot.

They're not moving day-to-day. They are moving intraday, which makes it very difficult to know. We can see where our competitors are pricing. We don't know quite how much they're making when they are selling new mortgages today because we don't know what their funding costs are.

So at the moment, it's quite a volatile and quite a tricky market. We're looking to be there to support customers, but also to win good market share at good value for the group and for investors.

And on the deposit side, I think there are really different segments to the market. So the current account market is, number one, very sticky but also very competitive in a way, certainly in terms of new account openings, the likes of the neobanks or the digital banks, the likes of Monzo's, Chase, et cetera, have been very competitive. They have been winning a lot of new accounts. However, what I would say is that we've been winning share in balances quite consistently over recent years despite that very elevated competition. I think the same also to a degree, is true of instant access accounts, although, again, there are some very competitive offers there.

I think what is particularly stark at the moment is as we head into ISA season, where ISAs and time deposits are being priced, that is an extraordinarily competitive market again this year. Now we don't yet know whether that pricing pressure is going to persist or whether it's a peculiarity of this being the final year that you'll be able to put all of your GBP 20,000 ISA limit into cash savings compared to GBP 12,000 from next year. So it's unclear at the moment how the market is going to evolve. But certainly, for the time being, it remains a very competitive market where we are competing selectively looking for value rather than needing to drive volumes in terms of deposits.

Brilliant. Thanks, Rohith. We've had one question of what is the share price target for year-end 2026. Maybe I'll just briefly answer. So we obviously don't have a share price target or give an expectation. I guess it's worth saying that what we do, we obviously concentrate on our own performance. We have a commitment to a greater than 16% RoTE and growing returns beyond this year as well in terms of what we've given for our outlook and what we're saying about our next strategy. And we also expect tangible net asset value of the business to grow as well. So that's our, I guess, commitment to improving returns and generating sustainable returns, which will ultimately deliver capital generation and therefore, capital returns to investors. Clearly, though, the share price is impacted by a number of different things, particularly the external environment and the geopolitical environment. So very difficult to say what we expect the share price to be at the year-end. Rohith, if you want to add?

Yes. Maybe I'll just add to that. As Tom said, we -- the management team here is focused on running the business and running the business for good shareholder value. Our belief is that those aspirations and expectations are not yet fully embedded in the share price, obviously, at the moment, particularly impacted by geopolitics. But it's you as our investors and the broader market that sets the share price, not us, but we are -- the business is absolutely being run for shareholder value.

And maybe a question now on capital allocation. You touched upon it earlier in terms of the different choices we can make. But one question of, will you be considering special dividends this year?

So the Board -- so in terms of how we think about capital allocation, number one is the ordinary dividend. And as we discussed before, the policy there is a progressive and sustainable dividend. So that is the #1 priority. Historically, the Board has then reviewed what to do with any surplus capital each year-end. What we've announced now, given we are more confident on both profitability, the broader environment and particularly the regulatory environment is that the Board will now think about those surplus capital distributions every half year. Typically, that's taken the form of a share buyback, but special dividends and other forms of distribution or other uses of capital, including occasionally M&A are also included in those Board discussions.

Brilliant. Thanks, Rohith. One quick question, which maybe I'll address. So what is your net shares in issue target given buybacks offset by staff share allocation? So you're correct. That is essentially the function for what determines the net shares in issue is the buybacks, which ultimately leads to a reduction in shares offset by some staff allocations. It's probably worth saying here that we -- because we have been committed to share buybacks, and we've done a succession of buybacks over the last few years, we've reduced shares in issue as of full year '25 by about 17% versus the end of 2021. So that gives a sense of the direction of travel. That now takes us to, I think, under about 60 billion shares in issue. We don't give a target for where we'll go from here. But clearly, the fact that we announced a further buyback with the full year '25 results of GBP 1.75 billion will be supportive of that continued reduction in shares in issue, but we don't have an absolute target.

Another question was what measures have Lloyd's put in place to avoid issues like the recent breach of data, car loans and other expensive remediation issues. I'd like to see more stability with the news being more positive, rather negative and potentially expensive. So Rohith, do you want to maybe start on that and maybe I'll add if there's anything to add.

Yes. So we -- so number one, we share your sentiment. We don't want those issues to persist. I think a lot of them are legacy issues, notwithstanding the recent issues with the app. Motor Finance, as an example, we will find out from the FCA on Monday how -- if and how it expects to run a remuneration scheme or remediation scheme for affected historical customers. We have raised a GBP 1.95 billion provision in relation to that. We will have to take a view how the final proposals compare to the provision that we've raised.

Our expectation is, given that the FCA's proposals back in October were the highest weighted scenario that we used in coming to that provision. We're not far off unless there's very substantial change in what the FCA proposes or enforces, there should not be a significant change or a material change in the provision, but it could move up or down to some degree, we expect relatively modestly. But more broadly, I think from a conduct perspective or a regulation perspective more broadly, actually, the government has tasked both the regulators who look at conduct, so the FCA, but also capital liquidity in terms of the PRA to support competitiveness and growth of the U.K. economy as well as their primary remits in terms of regulation.

I think you see that most clearly from a conduct perspective, where actually what you've seen from the FCA, I think, over the last year or so has been much more inclusive. So I think the conduct agenda in the U.K. is evolving in a positive way. And whilst it doesn't always feel like I think the FCA has been focused on trying to manage the motor finance process to resolve it expediently and to have control of that process. So actually, I think they're trying to do something that's positive for the industry.

In terms of how we manage the business, as I said, a lot of those issues are legacy. On the recent app issue, it was an incident that was -- whilst very regrettable, was one that was short-lived. As soon as we're aware of it, it was corrected within a couple of hours. There was a relatively small number of customers impacted and we reported it to the regulator very promptly. We put a lot of updates through the app in terms of new releases, new functionality. So this is very much an isolated incident, but one that we are looking at in a lot of detail to ensure that doesn't -- it's not repeated.

Brilliant. So next question, what is the process for ensuring you don't pay too much for share buybacks? And Rohith, do you want to take that one?

Yes. So share buybacks, so we take a view at the beginning or the Board takes a view at the beginning of the year or as I said, going forward every half year as to whether, number one, that's the right use of capital. And if we have surplus capital, should we be retaining it, spending it or returning it. If the view is that we are going to return it, there is numerous mechanisms that can be used to do that, of which the share buyback is one. And that is driven by -- that decision is driven by a number of things, including whether we or not we see continued value in the shares.

So if we continue to see upside, it makes sense to buy the shares at below fair value. Also, we have an ongoing dialogue with our investors in terms of whether they think that's an appropriate tool to be using. So it's a combination of things in terms of what the right capital allocation is, where the valuations are and what investor appetite is. I guess in terms of the way the share buyback is structured, it is in part programmatic. And in part, there is some flex around that where the broker that executes it for us is incentivized actually to buy -- to accelerate the share buyback when the price is low. We report every day, and you will have seen a pickup actually in the recent share price weakness. So we look to take advantage of points of share price weakness to accelerate the buyback selectively during the year.

Great. Thanks, Rohith. There's one more question -- well, not one more question, there's a question I'll answer in a moment. But the question is, how will Revolut impact your plans? So I guess the first thing to say, Revolut has been around for a while, and it has impacted -- has clearly been a major competitor alongside other fintechs that we all know in the market. And so them getting the banking license clearly gives them optionality and allows them to do additional things. But from our perspective, it doesn't change our view of ultimately where the competitive landscape is heading.

And I think, if anything, emphasizes the direction of our strategy. And maybe I'll just talk a little bit about what I mean by that. Ultimately, when we think about what we've done over the last few years, we have been keen to invest in the app and invest in the customer-facing elements of the group, but also invest in the back office. What that has meant is that we can now be far more agile, and we can be far more agile in line with some of those leading fintechs. So for example, for customers that want to onboard onto our app for a current account, it now only takes 7 minutes. And that is in line with some of those leading fintechs. And actually, it's far better than we were a few years ago.

Likewise, when we onboard customers on to deposits and loans, we onboard them onto our core banking platform that's a cloud-based platform. So again, it means that we can access that data much more efficiently. It also means we can change things much more quickly. And so we have advantages now that are now in line with some of those leading fintechs. And I think to your point, to the point of the question, the fact that Revolut have their full banking license only emphasizes the importance of doing that. I think the other point to say here is that if we think about why customers choose Lloyd's, there's a multitude of reasons. And I think those are things that we will emphasize and lean into when it comes to competing with the likes of Revolut.

Firstly is the trust element. I think people trust Lloyd's and it's a trusted brand, and that gives us an advantage, particularly when we install maybe new products, things like Agentic AI, things like digital assets. Having a brand that you trust is really important there. Secondly, we have scale and we have that data, and therefore, we have advantages in terms of how we are able to utilize that and make sure we can come out with good propositions for customers.

And then finally, I guess, most relevant to competing with the likes of Revolut and other fintechs is we have that breadth. And so I think the importance here is that we need to lean into those things so that when customers choose us, we can make sure that we introduce them to the full breadth of the franchise and make sure that we can deepen that relationship to ensure that we can continue to win against those types of fintechs. So to answer your question very quickly, it emphasizes the need to continue with our transformation, but it also means that we need to continue to deal with high levels of competition, which we're used to dealing with, and we need to lean into our strengths.

So I think that hopefully answers the question. We've had one other question here on AI. Does the AI push drive your energy costs? If so, how can you mitigate this? So I can't answer that specifically. What I will say is that, obviously, we've dealt with inflation over the last few years. And that's not just inflation in energy costs, it's inflation in people costs, it's inflation in other aspects of the business. Clearly, like you say, there will be impacts of some of the investments that we put in. I can't answer your question to what extent the push into AI impacts energy costs. But clearly, there will be offsets there because we've decommissioned some things such as legacy data centers and reintroduced things like the cloud. So there will be some offsets, some puts and some takes.

Overall, though, how do we mitigate those increasing costs? Well, we do it by essentially being more efficient by generating gross cost saves. And you heard earlier, me talk about the GBP 1.9 billion of gross cost saves that we have generated as a business. That is by, for example, investing more efficiently, being more agile. It's also by reducing some of our property, consolidating some of our property. It's also by automating customer journeys. And so one good stat actually is that customer-facing colleagues can now serve 45% more customers than they could before the start of the strategy. So I can't speak specifically to energy, but overall costs have clearly increased over the last few years in line with inflation. And definitely some of the investments have increased costs as well, but we continue to mitigate that to make sure that we can continue to invest in the business.

I think we've got one more sort of Motor adjacent question, Rohith. So with Motor, the question is, and you touched upon it a little bit earlier, has something changed in the way that we look at motor finance products to eradicate the possibility of a similar occurrence? And are there any penalties applied to those that have maybe benefited from the previous sale of those products?

Yes. Thank you, Tom. So there are a few things that have changed in the motor finance industry. So I guess just going back a few years, this is all about the commission arrangements with motor dealers. And that was something that was reviewed by the FCA between 2017 and 2019. They had a look at it at the time, and they said they didn't really like these adjustable commission agreements, which were prevalent in the market at the time. They were by no way -- by no means Lloyd's specific. That was standard market practice.

So in 2020, they came to the decision that they -- that would no longer be allowable. And we and our competitors changed the way that we sold motorfold, changed the remuneration for the dealers on motor finance from 2021 onwards. So that has been a change in the market. Then also the year before last there was a case that came to the Court of Appeal around whether the customer knew that the -- whether the customer really knew that the dealer was receiving a commission.

In response to that ruling, we withdrew the product for about 2 weeks, redrew all of our contracts, which now require customers to explicitly indicate that they understand that the dealer is receiving a commission and then we reopened the product. And to be frank, that's made very little difference to the volumes of business that we've been writing. So there has been a change in the way the industry operates. We all through this have complied with the law and the regulation, but the regulation has now changed. The law has now changed, and we've made sure that we kept up to date with it.

Brilliant. Thanks, Rohith. I think that gets us to the end of the questions that have been submitted. Jake, would just to double check if that's the case from your side.

Absolutely, guys. And thank you very much indeed for being so generous of your time then addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you after the presentation has ended just for you to review. But Rohith, perhaps before really now just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

Yes. Thank you. So thank you again for joining us. We really do appreciate your time and your interest and would welcome your feedback. I hope you found that a useful session. And thank you very much also to Investor Meet for hosting us, and we look forward to updating you on the next phase of our strategy later in the year.

Brilliant. Thank you.

Perfect. Rohith, Tom, that's great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback. On behalf of the management team of Lloyds Banking Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.

Thanks, everyone, for joining this second session of the conference. I'm delighted to welcome one more year, Charles Nunn, CEO of Lloyds Banking Group. We were discussing it it's your 5th or 6th year?

My 5th year. And there's events happening just before every year. So, it's fun to be here again.

It's a feature, not a bag of the conference. Let's start with the usual polling question. As you know, Lloyd's is going to present a new phase of its strategy in July. What RoTE can achieve in the medium term, do you think? 15% or above? 15% to 16%? 16% to 18%? 18% to 20% or above 20% RoTE?

[Voting]

16% to 18%. I think that's -- you can do more than that according to our stats, no pressure. Anyway.

This is a new high. So instead of asking me for guidance, you're not just giving us the guidance, which is great.

Idea sharing. Let's start there. This is the last year of your strategy plan you laid out when you arrived. Let's start with your -- maybe with your reflections on what you've achieved so far? And what do you think the main challenges and priorities going forward are?

Yes. So look, I'll look back relatively quickly, but we kind of laid out 3 big priorities, grow focus and change. The first thing is about getting the bank and the group more broadly back to growth. Feeling good about that. We've seen GBP 2 billion of revenue growth through the end of '25, net of all the NIM changes. So we obviously saw significant reflation of liabilities, but we saw headwinds around mortgages that more than offset that. So that's real aplha, that through our performance.

That's underpinned by really 2 things: market share gains in our biggest businesses, so increasing personal current accounts, market share, business current account market share, maintaining or even growing mortgages through that period, which is the first time, obviously, in 15 years. Which has been great. But also then a whole set of other businesses, so growing share in our Pensions business, in all of our bancassurance products and bringing those to our retail customers, growing our Corporate and Institutional business. And as a result of that, we grew other operating income by 9% or more each year. And so we feel really good about that. It gives us the momentum as we look to the future.

Focus was really about efficiency, operating leverage and capital returns. So GBP 1.9 billion gross cost saves through the back end of '25. We originally committed to GBP 1 billion by the end of '24, we exceeded that. GBP 24 billion of RWA optimization, that's obviously been an important story for many banks and organizations. But we think that discipline around being able to rotate our capital and our risk into more differentiation and growth and syndicate risk that's not good for our shareholders is a really important capability.

And then change, which is less directly compelling in terms of the investor story, but is fundamental to our future and our fitness to be able to compete. And a few things there. We increased the size of our digital bank by 50%, and we've got now about 23 million digitally active retail customers looking on 7 billion times a year, with the biggest digital service in the U.K., hired 9,000 new engineering and tech colleagues to bring the capabilities inside the organization. And then I'm sure we'll talk about this later. We're right at the forefront of applying AI, Agentic AI and then using digital to transform the organization.

So look, it's -- from our perspective, it's been good in terms of the last few years. We've been able to grow our dividend of 15% progressive and sustainable basis and with significantly increased our capital. And as you know, we're confident in our guidance for 2026, which is to deliver more than 200 basis points of capital generation greater than 16% RoTE and a cost income ratio of 50%. And then that, we think tees us up really well for the future -- that's a sales pitch done.

Sure. We have to talk about the current environment. In the U.K., sentiment has been pretty subdued. And despite that, it does look like investment has been getting better, I would argue globally as well. And you've seen good growth both in corporate and mortgage lending last year. How would you describe the environment in the U.K. and obviously, more sort of with the current state of events in the Middle East, how would you describe the operating environment at the moment?

Yes. So look, it is complex at the moment. And we were smiling just before this. Obviously, we announced our strategy on the day, Russia invaded Ukraine, and we've been adjusting our economic scenarios and then building Lloyds Banking Group so that it's resilient for these kinds of changes. And hopefully, that's what you've seen given the level of volatility we've had over the last few years.

I suppose a few key messages that are true. The first is the last few years and as we entered this year, we have characterized it as a very resilient economy, but with a slower growth ambition or slower growth outcome. That was certainly our forecast that we had 3 weeks ago and as we did the year-end results. And when we look at what's happening at the moment, obviously, there's a number of scenarios that we think could end up happening, but it does seem likely that there's going to be ongoing conflict for a period of time in the Strait of Hormuz, that will create more inflationary pressure and will potentially slow things down a bit in countries like the U.K. and Europe and globally.

But that doesn't concern us in terms of the basics that the U.K. economy has. And that's because when you look at households and businesses and obviously, to some extent, the government, based on the latest headroom they've given themselves but households and businesses have got the strongest financial resilience they've had since before the financial crisis. They've got the highest savings levels, the lowest levels of indebtedness for households and businesses also have got strong cash flows, not all sectors or all businesses, obviously. But on a relative basis, strong cash flows and strong capacity to borrow.

The weakness is, as you say, is sentiment has been lower on the consumer side. That's very different actually by age group. It's really quite positive in younger people, and it's very negative relative to history in those older than 55. I've got one more year until I get there, become really depressed. So consumer sentiment has been relatively low. Business sentiment has actually been relatively positive. The issue on the businesses is they haven't been really investing for productivity and growth, and that's one of the areas we've been trying to get behind.

So look, as you step back and look at the uncertainty we're seeing in the world and the potential scenarios, you'll all have your view of them. The core thing for us is actually households and businesses remain very strong financially. There's clearly going to be some pressures as we go through this year, but we don't see that as taking them off track. There'll always be individual customers and businesses that we need to support. And as you know, that's what we do. That's where we're best. We come out at our best.

But in terms of the overall economic progress and then the conditions for Lloyds Banking Group, we don't see it materially slowing us down because it's actually still a very good environment for us to be investing -- continuing to deliver the strategy and the growth that we just talked about. And even if economic growth slows down and we have to support customers in certain areas, I don't think it stops our progress over the next few years.

Obviously, in your case, the repricing of the structural hedge gives you pretty decent visibility on the NII, but it's also true we're seeing pretty stiff competition on mortgages, and it's also very competitive on the deposit side. How much of the hedge gains do you see competed away? And how do you see both sides of the balance sheet?

Yes. So going back to the strategy, we're still executing this year, which we're very focused on landing in 2026. There were 2 kind of things directly relevant to this that we knew or 3 things. One was, we inherited a very big legacy mortgage book with higher margins. And I think, Alvaro, you've noted this, and I just mentioned it just now. We've seen about GBP 3 billion worth of revenue headwinds from our mortgage margin compression over the last 4 years. We do think that will continue to be a smaller headwind going forward, but we have massively traded out of that position, and it gives us a very good starting point when we look into the future.

So the Mortgage headwind has been -- continued to be competitive in that market, but we don't see it being anything like the headwind we've had previously. Now during that period, the second area is obviously the structural hedge. We did see about GBP 3 billion of growth in the structural hedge in the last 4 years. So that's been netted off by the Mortgage headwind, excuse me.

The good news is because of the differentiated deposit franchise we have and the way we've been managing that with a longer weighted average life, this is going to be very supportive for Lloyds Banking Group this year. We've guided to GBP 1.5 billion of net revenue increase this year from the structural hedge, over GBP 1 billion next year. And based on our view of the market, which is we tend to be conservative, we think it will be supportive through the back end of this decade.

And that's great because we don't see the headwinds from both Mortgages or Deposits being at the same level. And therefore, we do think the structural hedge will give us upside on our NIM going forward. And that's in a very competitive market that we've seen in the last few years and that we are expecting as we look forward as well.

And then the final part is obviously the growth on OOI. The reason we've been really focused on it and one of the key tenets of our last strategy was to diversify more into businesses that can grow other operating income, is when you're building an organization like Lloyds Banking Group, which is the scale player in its home market with the most differentiated and broad set of products and services, you know there's going to be points in the cycle where net interest income challenged. So you need to build the best leverage on both sides of the balance sheet between assets and liabilities and then have a source of growth for our investors that can just power through the interest rate cycle. And that is what the collection of business is, we've characterized as other operating income are focused on. And so that 9% CAGR around those businesses that we've delivered, we are really excited by it's broad-based. It's diversified across different segments and parts of our business, and that will continue to provide diversification as we go forward.

We have to talk about AI. It came up last year. Obviously, it's dominating a lot of the debate in the last few weeks and the last couple of months, as well the share price, you held the digital AI event, not that long ago. How do you see AI playing into the business? I know there's a lot of things you're doing to leverage data, client engagement is also getting better. What would you say to investors that believe AI is a disruptive force?

Look, obviously, it's a hugely important question. I'll just start and say, when we think about AI, we often characterize it as digital and AI. And the reason I say that is, we, for example, have had 800 AI models live before generative AI came around. And it's a big part of our operating model. And obviously, when you think about digital and digital technologies, digital and AI have been a disruptive force in this industry since I started transforming this industry in the trading floors in the early 1990s, which is where I started digitizing trading floors and exchanges.

So disruption of our industry with technology is what we do. That's the basis of it. And actually, one of the things we shared in that Digital and AI seminar is that 60% of the cost -- gross cost savings of about GBP 1.9 billion and 70% of our revenue growth from strategic initiatives for GBP 2 billion were delivered by digital and AI. So that's what we've been doing, and that's what we'll continue to do.

And we think it's a hugely important part of both driving improved operating efficiency, but also differentiation for growth. In terms of generative AI and Agentic AI, we've taken a pretty narrow definition so that we can communicate with our shareholders, with our customers around what we are doing. And we are and we will be a leader in the deployment of those technologies as well.

We talked, for example, last year about having deployed 50 scaled use cases across tens of thousands of colleagues in customer experiences that delivered in-year benefits of GBP 50 million. The same number for this year is GBP 100 million. Look, if you scale those and multiply them by 5 years, you get into the billions, but we're just going to stay focused on defining those technologies narrowly, so people can understand them.

And yes, I'm personally and then we are organizationally extremely excited about them. Look, I spent 30 years trying to do certain things for customers and to differentiate experiences and the technologies didn't enable us to do that fully and these technologies are enabling us to do things we haven't been able to do for the last 30 years. And so we see the benefits in 2 ways, very simply.

The first and probably most important is around differentiating what we do and enabling new growth. So for example, we're launching 3 customer-facing experiences this year. One is around taking investment advice to the mass market, using agents to provide very personalized targeted conversational support to customers to take more risk in their portfolios. That's done in a very safe way in a regulatory sandbox with the FCA, but it's going to be for the first time in my career, you could really talk about bringing advice to the people that most needed it bluntly, i.e., not people that look like us that have the experience to do that themselves will have a good conversation with an IFA.

We've got another experience launching, which is around being able to have a conversation with your money and get advice on how to make better decisions around your spending, savings, use our loyalty and rewards better, protect yourself from fraud and that's going to start to really give a different level of experience around our everyday banking, which is so core to our differentiation, our personal current accounts and our positions in the U.K. And so we just see a huge opportunity to take that to our Mortgage business, our Homes business, our Transport business, into the personal current accounts. And as you said, helping businesses provide offers to our retail customers and then start to transform how we support entrepreneurs and businesses.

The second area is obviously around efficiency, let's call it that, what we tend to talk about is better, faster, cheaper, which is how do we really support our colleagues and transform how we operate as an organization. And the technology, again, continues on the journey we've been on around using digital and technology to make ourselves more efficient, better at making risk decisions and better at deploying and using our capital. And I just think that runway is going to continue with this technology and that's certainly what we're teed up to do.

On -- you've already touched on with AI and on the other income line, very strong momentum there. You've grown 9% CAGR over the last 3 years. And it looks like 2026 to be potentially even stronger or at least the strong momentum seems to be continuing. With initiatives you've talked about and advise rules, which also you referenced, you can do more there. How should we think about the revenue mix of Lloyd's in the longer term?

Yes. So we haven't given a guidance between net interest income and other operating income, partly because I think you don't want to constrain net interest income. And as you know, we've had very strong trajectory around that as we've been rebuilding the structural hedge and then maintaining the confidence our customers have in us around the really big businesses, personal current accounts and mortgages. Savings is more complex and you may want to go there in a second. It's always a different trade between how much volume we want versus how much margin you want to make on savings, which is different.

So we do expect strong progression in net interest income. Independently from that, we're also expecting to continue to grow our other operating income. As you've seen, and I think you should expect other operating income will continue to grow faster than net interest income. But both lines should show strong progression. We were very aware at the year-end results that we didn't have guidance beyond 2026 for our investors, and we're doing our new strategy update at the half year results in July. And we'll give you guidance at that stage.

But we did say 3 things in the year-end, which hopefully gives you some confidence to how we're thinking about the next strategy. The first is that we expect that we'll continue to grow the top line, and that's driven by both NII, net interest income as well as other operating income. The second is we should continue to see improving operating leverage, and you can take that as code for cost income ratios and then a capital efficiency and generation.

And then the third is we'll continue to strengthen our ability to originate and then distribute capital from a capital generation perspective. And that's because of the confidence we have around the momentum we've built through the last few years and our confidence in the 2026 targets. So I won't give you guidance on the split of NII and OOI where you should see both lines continue to grow, and you should see OOI continue to grow faster.

Obviously, you touched on operational efficiency when you discussed AI, the guidance this year is to have cost income below 50%. Can you help us through sort of how banks think about the cost base and how you can leverage these tools years from now? What percentage, for example, what percentage of your workforce is in central services, maybe we can think about it that way? Some banks in Europe are now at 35% cost income ratio. How do you think about cost income ratio? How low can they go longer term?

Yes. So it's obviously a really important question at the moment. I think a couple of starting points, and I'll talk about us a bit more specifically. Obviously, the mix of businesses makes a massive difference. And I've run businesses which operate at a 25% cost income ratio in Asia, very sustainably, largely typically because of the revenue side of the business model and also the scale and the structure of the market, so how much infrastructure you need to serve the market and how competitive it is.

And then there are some run businesses, which operate at a 70% to 80% cost income ratio, typically, Wealth businesses and often in Europe and North America. They're generating incredibly strong capital returns and a very, very attractive investment opportunities. So I think the starting point is the mix of businesses, which is obviously an obvious point, but some of the Southern Europeans are clearly playing to their strength either in Latin America or in big scaled wealth businesses, which have a 20% cost income ratio.

The second thing is you want an organization that has cost discipline and cost recycling, I like to think about it, inherent in their DNA and certainly Lloyd's Banking Group has that. I was very fortunate to inherit an organization that really understands cost discipline. Within that, each of the businesses, the mindset I have is whatever business you have and whatever you've inherited, there's an opportunity to recycle costs that aren't adding value to our customers or shareholders into areas that are -- now that's completely different by business and even products. So how you think about that in the SME business versus the Mortgage business versus the Current Account business is very, very different, and it differs by market for that matter, but let's stay with Lloyd's.

So that's the second most important part. And so when we have made commitments around gross cost saves, that's been our commitment. We've been looking at areas where we saw parts of our cost base. We could either just reduce the absolute costs or build efficiencies and where we were looking to reinvest it, we're reinvesting it in areas that give differentiation or growth. Then 2 more things that really do impact cost income, obviously, when you look at this, how transformational are you being on change and how much you're investing for the future.

You asked about people costs. And it's one of the things that William and I really decided we wanted to do for our investors. We put all of our costs into our cost income ratio. And so for example, restructuring and redundancy is obviously quite a material number in -- certainly in the European markets and some Asian markets. So if you're looking to really reposition and restructure your organization, accounting for those is a material part of what we've been doing, and that's been part of what's in our numbers, as you know, Alvaro, and we've been continuing to both hire new talent and restructure the existing talent.

And then how much you're really aspiring to grow a business and invest in growth. Again, it's actually very easy to reduce costs by giving up market share, not acquiring customers or booking growth as a negative revenue, which you can then delay. And a lot of banks play that game. We don't play that game. And so cost/income ratio gets impacted by that. If you're looking to build growth and growth for sustainable long-term returns, which is definitely our view, we want to be the best at sustainable capital generation through cycle. You also need to be investing in that growth. And as you know, in the last cycle, William and I came to you and said we wanted to invest GBP 4 billion above our run rate investment level to transform the organization and get it back to growth. And that's what we've done, and that's always a big part of the cost/income ratios you need to look at.

Now how far can they go? It depends on the mix of business, your ambition for growth and then what -- how much of a leader you are around scale and the use of technology. We certainly think it has an opportunity to go lower in our markets and businesses and across the world to the leading franchises. And as I said, the only guidance we've given yet beyond 2026, obviously, our 50% cost/income ratio, we think will be really important to deliver this year. But beyond 2026, the only guidance we've given is you should expect to see it to decrease as we go forward. And we'll come back and talk more about it in July.

I'm going to ask you a last question. I've got a few, but I'm going to ask the last question and then open it up to the audience. But last question for me on capital. You're going to have a lot of capital this year. You're already above the target. You've guided to over 200 basis points capital generation. Basel IV, 3.1, you're going to reduce -- you guide to a reduction in RWAs between GBP 6 billion and GBP 8 billion. What are you going to do with all that capital? We've obviously seen some M&A in the sector. How are you thinking about deploying that that capital generation?

Yes. So I mean, the first thing is this is what we wanted to be in a position to have, and we've been guiding to it for a while now. We've delivered very strong capital generation and distributions for the last 4 years. So I do feel like now at the start of this journey 5 years ago, I said our intent is to develop lots of capital and then distribute it where we don't have a better use for it. And I feel confident that we have done that. And this is exactly the problem statement we wanted to have, which is have a very strong capital generation, a set of businesses that we'll generate through cycle, strong capital and then have this problem.

As you know, just in terms of how we think about it, the starting point, I know it's an obvious statement is what is going to maximize shareholder return. And what do our shareholders and our bigger shareholders and retail shareholders most want. And that's our starting point. What you've seen as a result of that is if we can see opportunities to invest in the business, growing the balance sheet, for investing in our core business, which obviously then impacts cost-to-income ratio because of investment, we have now evidence that that's a very strong return for our shareholders.

We didn't talk about it, but last year, we did achieve GBP 22 billion of asset growth, GBP 13 billion of liability growth. We know that's going to provide a really strong return in terms of the capital deployed. And then the investment in the businesses that's driving the alpha we've talked about, the GBP 2 billion of revenue growth above the net interest changes and then the 9% CAGR and other operating income. That's the starting point.

The second thing, as we've said, we always -- and our Board is very committed to this, want to make sure we have a real focus on return of capital to our shareholders. As you know, we've done that through 2 means. We've had a progressive and sustainable dividend with a 15% CAGR for the last 4 years. When you look at what -- where we're at on that, we don't target a payout ratio. We don't think we need to. We still operate though at a very low payout ratio relative to some players. So we think the words progressive and sustainable really do apply and they remain going forward. And that's great.

And then obviously, if we have spare capital, we've been using the buybacks. Obviously, we've had an impact through the latest conflict geopolitically in our share price, but we're still trading significantly above where we started. I started at 41p. We've had really good debate with our investors around at this price point is the buyback still one of the best ways for us to distribute any capital over and above a sustainable and progressive dividend. The majority of our investors really like it. And we certainly believe there's significant value in the stock as a management team. So that remains a really important tool for our Board to consider at the end of the year.

And in terms of M&A, as you know, we've done kind of what we've called 3 infill -- 3 or 4 small infill acquisitions. The latest being -- it's not quite completed yet, but this acquisition of this digital wallet provider called Curve. We have a pretty high bar on what acquisitions need to deliver. They start by needing to be strategic and actually providing either increased capability or very significant repositioning of the businesses that, that acquisition is going to support. And of course, they need to meet a pretty high bar on shareholder returns given everything I've just said about the alternative uses of capital. And we'll certainly look at M&A that accelerates our strategy, give us a more differentiated position and meets a high bar. But that's what we've been doing for the last few years. And you've seen Alvaro, because we've had a number of discussions there are a significant number of acquisitions we could have done in the market that we decided not to do for those 2 reasons.

Great. We want to take questions from the audience acquired in the previous session. Hopefully, there's one there in the back.

Two questions on my side. First, with all the volatility we have seen on rate and potential finally for no rate cut from the Bank of England. What does it mean for your NII going forward? Can you share your view about Lloyds finally having a banking license in the U.K. and what does it mean for the competitive environment?

Yes. Brilliant. So just first thing, on when we entered this year, we were predicting 2 rates this cut this year, one in April and one in August towards September, I can't remember exactly. Look, we haven't guided to our updated guidance, but it's very clear. It's most likely that that's going to slow down.

In terms of the impact on us, I think there's an immediate impact, which is not having a rate cut gives you a little bit of upside because we typically have a delay on passing through the rate cut to our customers. It's a small impact, but it's a small positive impact. And of course, the strengthening of the yield curve more broadly will give us upside on our structural hedge. It will be marginal, but it will be upside this year and it would build depending on how the yield curve changes over time. So that's good.

On the other side of it, we'll have to see how rates impact economic activity and the overall growth in the market, and we kind of don't know that yet. So we'll have to see how that plan pays out. This is exactly why we spend a lot of time as a management team thinking about how is our balance sheet, our structural hedge and then our trust from our customers on the business as they do business with us, how is that positioned so that we can continue to progress whatever happens.

And at this stage, obviously, I think most people will think the changes will be marginal, i.e., there may be a delay in rate cuts or even those that believe that rates will go up, they might go up in a small amount. And obviously, that won't therefore, massively impact our customers negatively or the economy massively negatively. So at this stage, it all feels incredibly manageable within the context of our current strategy.

But that's the way I think about it. There's upside for us given the nature of our business. There may be some downsides based on the scale and growth of the market. At this stage, we remain very confident in our 2026 guidance and our trajectory looking forward. So that's important.

The second question was about, I think, about Revolut, fintechs and banking licenses. Obviously, I won't talk about any specific individual firm in detail, although just one thing to say around banking licenses, by itself, it doesn't give you any additional capabilities. There's nothing that they can do today that they couldn't really do previously if they wanted to. As you know, on the asset side, which is one of the weaknesses in their businesses, you don't need a full banking license to be an asset business.

And so we'll see what they do with that banking license. I think the more important part is, look, fintechs have been around now for a significant period of time. And when I look at Lloyds Banking Group, we have, by far, the biggest digitally engaged customer base. When I look at the scale of what we do, some of the fintechs, at least 2 within the U.K. claim to have about half the customer base that we have. We have 28 million customers. But they have somewhere between [ 1/30th and 1/50th ] of our deposits and [ 1/50th and 1/200th ] of our lending.

So there's a long way for them to go to build the trust and confidence in their customers. And actually, in the businesses we care about where we think there's sustainable returns, especially through cycle for our investors like personal current accounts. We've grown our market share in the last 4 years from 21.5% to 24.5%. So yes, it's a very competitive market. you have to be brilliant at digital services, but then you have to compete in a way that builds trust and actually creates value. And that's what we've been doing, and that's what we're going to continue to do going forward. I mentioned always in these meetings, and it comes across like a light comment, growing our digital -- digitally engaged customer base from about GBP 17 million, GBP 16.5 million to GBP 23 million and increasing from about GBP 4 billion to GBP 7 billion log-ons a year, is a massively important strategic achievement and it's really important when you look forward as to how you're going to continue to meet the needs of customers.

And of course, we're just playing different games, right? We serve the whole of society with a very broad range of products. We're able to do things that most of those fintechs haven't got any capabilities to do and no ambition to do. They do some other things that we don't do brilliantly compared to them. But in terms of what we're trying to do, which is be a meaningful trusted financial services provider that can join up for customers across a broad set of needs that then delivers a very strong platform for growth and for our investors, we're playing a very different game.

So we need to stay very relevant and aware of what they're doing. I look at what they're doing. Obviously, our mystery shot the market a lot. But the data shows that we're competing well. And I'm really excited about the combination of generative AI, Agentic AI and digital assets. and how we can bring those to our customers and drive additional differentiation and growth going forward.

Next question. I've got a question on U.K. politics. Obviously, the situation remains fluid. How do you think sort of any potential changes can impact the reform agenda that's been laid out? Obviously, there's a lot of things on the review, the ring-fencing, leverage ratios, advice, et cetera, and the messaging from the today's government has been relatively supportive for financial services. Do you see any risks around central change in poitical landscape?

Yes. I mean we're talking about the last 5 years. And I think the first reflection is since I've been in this seat, we've had 4 prime ministers and 6 chancellors. And so look, I think it's really helpful that the current government has provided a point of stability and it's very clear that financial services is important for enabling economic growth for the country and the financial services reform is part of that. But actually, we've navigated that uncertainty in the past, and we'll navigate the uncertainty in the future. I think that's the first important point from a kind of a shareholder and then thinking about Lloyds Banking Group's position. And we invest a huge amount of time to be relevant to and have relationships with whichever political party is in power. So I think that's the first point.

Second thing is a number of the reforms that this government has taken on were actually started by the last government and the realization of the reality, I think, is anyone in government who looks at the U.K. and the potential for the future recognizes that a growth and productivity, which have been huge challenges and then the role that financial services can play is critical if they're going to create a bigger pie, which is they're then depending on their political choices going to split between the population of the U.K. and the businesses and individuals and households. So I think that is true. Any government that we get is going to realize that financial services is really important.

And when you look then at the regulatory context, and what we hear from the PRA and the FCA and then other regulatory bodies, I think what we have seen and what we will continue to see is the most positive environment we've seen since the financial crisis. So they've all now indicated they've met once Basel 3.1 comes in, in January 2027, they've put in place the reform agenda that they wanted to complete post the financial crisis and they are now looking at their secondary objective, which is the competitiveness and growth, both for the industry and how that supports the economy.

And I think that reform is going to continue whatever happens. Actually, the treasury and the FCA and FOS yesterday announced the next plank of the conduct reform agenda, which was announced at the Mansion House a year ago, November '25 maybe -- '24, sorry, just over a year ago. That's now going into primary legislation. That's another example of the reform agenda that will be taken forward. And I think you'll see there's quite broad support across the house for that. And it's a really good indication that I think the political agenda is going to continue to be relatively focused and stable and enabling financial services to support the real economy.

As I say, Alvaro, you've been doing this a long time. I've never seen such a positive environment in the U.K. since the financial crisis. And I see the political parties have been supportive of that agenda as we go through. One more thought, which maybe on the more negative side, we get a lot of questions from investors around what if the bank levy were to be increased or what if reserve remuneration were to be changed in the way it has in Europe.

Look, I won't do it in the public setting. I do have more specific discussions, but we obviously are highly aware of those potential changes. There'll be a matter of choice for the government or the Bank of England, but neither of them are that material. When you look at how it impacts our profits, our capital generation and then our trajectory. They just aren't material. And so I wouldn't recommend those things because it will slow down the ability of the financial services sector to support customers and businesses. But it won't take us, of course, if there were a government that came in and decided that was the right thing to do.

Questions from the audience. I can ask one more, if not a theme that's definitely come up in the last few weeks and the spot -- more than private credit, which I know is not something that is relevant for Lloyd's. But with the whole -- the broader asset quality picture has been started to be discussed, when you -- when the management team think about sort of potential disruption risk around AI, sort of and potential risk for the down the line where you've seen private credit, how do you think about the asset quality risk in what is a very benign market at the moment? What are your discussions look like internally?

Yes. So look, let me give you the lens on the U.K., which is different, I think, from North America around private credit and private markets. But if you just look at it since the financial crisis, basically 100% of the growth in lending in the U.K. since the financial crisis, about GBP 450 million, I think it is. I had that in my head for a treasury spec committee, has been delivered by private markets. The banking sector has basically been flat since the financial crisis in terms of its extension. So it has become very important in the U.K. market for corporates, for institutions.

And as you know, there is some interplay between some banks and those markets. We are very active and a very material partner around providing support to sponsors, especially private equity, but we do it in a very simple and focused way where we always have some call back on the ultimate investors. So for those in the middle of this, we are very focused and very limited in terms of how we do NAV lending on the private equity side, and we don't really participate in the asset-backed lending for private credit.

And the reason for that, by the way, is when we've looked at it and how the market matures, most of the banks that do support it don't do due diligence on the underlying loans and we don't feel comfortable with that. That's kind of been our positioning. So actually, the sponsors business is a really important counterparty for us, and we really have supportive of some of the big players and how that -- those markets have enabled the U.K. to continue to grow and prosper around big infrastructure, large corporates, but it's how you participate in the market that's really important.

Now in terms of credit quality and what we're seeing around them. Again, I think the different countries have different standards around how they originate. Typically, we tend to see there are certain players, and I won't give you the names of them, but you'll have your views of private credit firms that do have very strong origination standards, and we are particularly concerned around what we're seeing around the lending they've been doing and there's others that tend to have less experience and less diligence around their lending, and we are highly aware of who they are and who the counterparties are.

There's nothing we see at this stage in specific sectors or in specific parts of the economy in the U.K. that worries us particularly. Obviously, top of mind for everyone will be MFS, which was the one that in the U.K., obviously, has just come up. But again, we weren't -- we had no credit exposure to them. And actually, that was a name that was well understood that we wouldn't have credit exposure to them. So I don't think that is yet an indication of a broader read across.

And of course, I'm going to be U.K. centric for a second because I'm sitting here as the CEO of Lloyds Banking Group, although I've tracked carefully I recognize the concern around software companies and the potential impact of AI and then how is that's embedded in private credit and those private credit companies with leverage. Those just aren't names we're exposed to in Lloyds Banking Group. That's much more of a North American issue than it is a U.K. issue. So it's definitely worth to watch. We've taken some very deliberate decisions. But for what it's worth has slowed down our commercial, our corporate and institutional banking balance sheet growth.

You'll see our balance sheet growth has been slower than some of our competitors, and that's a deliberate choice because we especially didn't want to go straight into the asset-backed lending businesses. But I don't see it yet as in the U.K. as an indication of any broader concerns in Jamie's language, the cockroach is I don't think are going to start swimming out of the bathroom anytime soon, but we're very vigilant about it. And it is obviously hugely important in the context of the development since that kind of financial crisis that I just talked about.

Yes. Opportunity for the last question or we can ...

Too early in the morning, I think, Alvaro.

Yes, we've got a lot of people were very quiet. Okay. With that, I think we've covered all the main topics. So thanks very much for coming one more year, Charlie.

Thank you for having me. Thank you, everyone.

Good morning, everyone, and thank you for joining our 2025 full year results presentation. It's great that the move to prelims has allowed us to update you earlier than prior years. This means that our organization can make a fast start and increase our focus on the year ahead as we enter the final stage of the strategy that we laid out in early 2022.

I'm very pleased with our ongoing strategic transformation, and 2025 was another strong year for the group. We're building significant momentum that sets us up well to deliver upgraded 2026 commitments and stronger sustainable returns for the period. I'm very excited about the plans we're developing for our next strategic phase, and you'll hear more about this in July alongside our half year results. As usual, following my opening remarks, I'll hand over to William, who will run through the financials in detail. We'll then have plenty of time to take questions.

Let me begin on Slide 3. I'd like to start by highlighting the following key messages. Firstly, our strategic delivery is accelerating and building momentum across the business. We're on track to meet or exceed our 2026 strategic targeted outcomes, delivering clear benefits for all stakeholders. Secondly, our continued strategic execution underpins sustained strength in financial performance and growth in shareholder distributions. We've announced a 15% increase in the ordinary dividend alongside a shareback (sic) share buyback of up to GBP 1.75 billion. And finally, we're confident in our outlook. We are upgrading our guidance for 2026 and are committed to further improvements in financial performance beyond this.

Turning now to a performance overview on Slide 4. We delivered strong outcomes for all stakeholders in 2025. Our clear purpose of Helping Britain Prosper continues to drive attractive growth opportunities. This includes supporting our customers during a record ISA season and funding the growth ambitions of businesses that create opportunities across the U.K. These actions drive healthy franchise momentum, delivering growth across both sides of the balance sheet and market share gains in key focus areas such as personal current accounts.

Taken together, the group is delivering sustained strength in financial performance. We returned to top line revenue growth during 2025 with increases in both NII and OOI, the latter up 9%. This supports a return on tangible equity of 14.8% and 178 basis points of capital generation, excluding the motor finance provision taken earlier in the year.

On Slide 5, I'll provide a brief update on our outlook for the U.K. economy. As you've heard from me previously, we're constructive on our outlook for the U.K. We continue to forecast a resilient but slower growth economy with interest rates falling gradually in 2026. In addition, the financial position of both households and businesses continues to strengthen with emerging signs of growing capacity to spend and invest.

Combined with the government's focus on regulatory reform and driving growth in key sectors, we believe the economy has the potential to move to a higher medium-term growth trajectory than is forecast today. We are well positioned against this backdrop with our strategy focused on faster-growing high-potential sectors such as housing, pensions, investments and infrastructure. We're already driving growth in these areas, leveraging our competitive advantages as the U.K.'s only integrated financial services provider. As a result, we expect the group to continue to grow faster than the wider economy over the coming years.

I'll now turn to highlight our strategic progress, starting on Slide 6. We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency while significantly derisking the business and established a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits.

We've generated GBP 1.4 billion of additional revenues from strategic initiatives to date and are today upgrading our 2026 target to circa GBP 2 billion. As part of this, we expect the other income contribution to be circa GBP 0.9 billion, ahead of our original '26 guidance. At the same time, we've now realized circa GBP 1.9 billion of gross cost savings, having met our upgraded 2024 target of GBP 1.2 billion last year. As you'd expect, we remain committed to driving further improvements in operating leverage.

To bring this to life, I'll now spend a few minutes discussing our progress in more detail. Let me begin with our growth areas, starting with Retail and IP&I on Slide 7. In Retail, we are the leading provider across key products in our own and third-party channels. We further strengthened our position through growth in high-value areas and continue to develop our product range and capabilities to meet more customer needs. Mobile app users are now up circa 45% since 2021. In '26, we'll roll out in-app AI agents for these customers with these currently in [ colleague beta ] testing.

In IP&I, we're deepening relationships as an integrated bancassurance provider, expanding our product offering through exciting partnerships. We're also transforming engagement through our Scottish Widows app with further growth expected in 2026 as we launch to the open market. Complementing our strategic delivery, we announced the acquisition of Schroders Personal Wealth in the second half of last year. It's early days, but we're really pleased with our progress, and we'll rebrand the business to Lloyds Wealth in the coming months. The acquisition is an important enabler to delivering our ambition for a market-leading end-to-end wealth offering, providing us with an opportunity to deepen relationships with our mass affluent customers and workplace clients.

Let me continue on Slide 8. Our Commercial Banking division captures both BCB and CIB businesses. In BCB, we're building the best digitally led relationship bank, building upon our strong deposit franchise and rolling out new mobile-first journeys to support growth in targeted sectors. Our BCB gross net lending increased by 15% in 2025, and we are committed to further growth this year.

And in CIB, we're driving revenue diversification through growth opportunities aligned to our simple cash, debt and risk management model. For example, FX volumes increased by over 20% in the year, supported by the launch of a market-leading algorithmic trading solution. We were also awarded a landmark U.K. Government banking services contract, a testament to the investment we've made in our award-winning cash management and payments platform.

Finally, equity investments is a growing contributor to the group, now representing nearly 10% of group OOI. Lloyds Living has now grown to nearly 8,000 homes since launching in 2021, whilst LDC generated more than GBP 600 million of exit proceeds during the year.

On Slide 9, I'll now talk about the ongoing drivers of OOI more broadly. Since 2021, we've delivered strong OOI growth across each of our business units, reflecting a resilient and diversified portfolio. For example, our Retail business has benefited from growth in our Motor franchise, whilst Commercial Banking has been supported by renewed focus in our Markets business. We've also realized the benefits from improved cross-group collaboration such as increasing protection take-up rates across mortgage journeys and leveraging the full breadth of the group to meet the ancillary needs of commercial clients. We delivered 9% growth in 2025, consistent with prior years and are confident in our outlook. Going forward, other income will also benefit from the full impact of the Lloyds Wealth acquisition, and we expect to unlock more value from this business over time.

Turning now to cost and capital efficiency on Slide 10. We remain focused on delivering an organization that drives continued improvements in cost efficiency and capital intensity. As I mentioned earlier, we've now delivered circa GBP 1.9 billion of gross cost savings since 2021. This has been supported by the ongoing shift to mobile first and consequent refinement of our physical footprint as well as actions taken to reduce both the size and complexity of our legacy technology estate.

These savings reinforce our confidence in delivering a cost/income ratio of below 50% in 2026. On capital efficiency, we've now delivered GBP 24 billion of gross RWA optimization since 2021. We continue to target more than 200 basis points of capital generation in 2026 and we'll now consider excess capital distributions every half year, reflective of our increasing confidence.

I'll now move to Slide 11 and focus on our enablers of people, technology and data. As you heard in our digital and AI seminar in November, we're making strong progress against our clear strategic priorities. We have significantly enhanced our infrastructure, actively managing our legacy estate and increasingly building on modern technology. The ongoing investment in our people is critical to our success with circa 9,000 technology and data hires since 2021. These actions have created the platform for increased innovation. Digital-first propositions such as your credit score are driving clear benefits for both customers and the group. Our strong execution to this point means we're well positioned to take advantage of future opportunities.

We're innovating and leading across new and emerging technologies, launching industry-first use cases at scale in the U.K. These areas will be critical to driving further enhancements to operating leverage in the future. I was incredibly proud to see that our efforts were recognized across the industry during the year. But importantly, we're not done. I see further significant potential in the coming years.

Now turning to Slide 12, where I'll provide more detail on how we're thinking about AI specifically. In 2025, we scaled 50 Gen AI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue and over 60% of the total gross cost savings realized since 2021.

This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit in 2026, capturing both revenues and costs with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we will, of course, talk more about our plans in this space as part of our strategic update in July.

I'll now turn to Slide 13 and bring this together with a view on how we're building operating leverage in 2026. We've increased our net income by GBP 3 billion over the last 4 years. During this period, we have mitigated several headwinds, including those from the mortgage book and deposit churn with these partially offset by the structural hedge earnings growth of more than GBP 3 billion.

As a result, the majority of this growth has been linked to management of the BAU business and the GBP 1.4 billion of strategic initiatives revenue, including a significant OOI contribution. We expect to deliver continued improvements in net income in 2026. Whilst headwinds will persist, these will be more than offset by an additional GBP 1.5 billion of structural hedge earnings and continued growth within the core franchise. This accelerating income growth, combined with flattening costs will further improve operating leverage and underpin the delivery of a cost/income ratio below 50% in '26.

Let me now close on Slide 14. So as you've heard, we are successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Indeed, reflective of our momentum, we are today upgrading our return on tangible equity target to be greater than 16% for 2026. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan with you in July.

We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We will, of course, share more detail on our medium-term financials at that stage, too. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns.

Thanks for listening. I'll now return briefly at the end. But for now, I'll hand over to William to cover the financials.

Thank you, Charlie. Good morning, everybody, and thank you again for joining. As usual, I'll provide an overview of the group's financial performance, starting on Slide 16. Lloyds Bank Group delivered sustained strength in its financial performance in 2025, in line with guidance. Statutory profit after tax was GBP 4.8 billion, equating to a return on tangible equity of 12.9% or 14.8%, excluding the Q3 motor provision. Within this, we delivered robust net income for the full year of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively.

In the fourth quarter, net income was 2% higher versus Q3. This was driven by a 4 basis point increase in the net interest margin, continued balance sheet growth and further momentum in other income. Operating costs for 2025 were GBP 9.76 billion, up 3% year-on-year as continued investment, business growth and inflationary pressures were partly mitigated by further efficiency savings. Remediation charge for the full year was GBP 968 million, GBP 800 million of this relates to the additional motor finance charge in Q3. Credit performance meanwhile remained strong with an impairment charge of GBP 795 million for the full year, equating to an asset quality ratio of 17 basis points. Tangible net asset value per share ended the year at 57p, up 4.6p in 2025.

Our performance for the year included capital generation of 147 basis points or 178 basis points, excluding the motor provision. This enabled a 15% increase in the ordinary dividend and a GBP 1.75 billion buyback while maintaining a 13.2% CET1 ratio.

Let me now turn to Slide 17 to look at Q4 growth in lending and deposits. We saw a healthy balance sheet momentum in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 million or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. Mortgages were up GBP 2.1 billion, strong but slightly slower than Q3 given higher maturities. Highlights elsewhere in Retail include credit cards, which grew GBP 0.5 billion with continued market share gains and European retail also up GBP 0.5 billion in the fourth quarter. Commercial lending was GBP 0.2 million higher. This represents further growth in targeted areas within CIB and business-as-usual performance within BCB, partly offset by continued government-backed lending repayments.

Turning to liability franchise. Total deposits increased by GBP 13.8 billion or 3% in the year. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs, with deposit churn continuing to ease as we had expected.

Commercial deposits meanwhile, were down GBP 1.5 billion in Q4, driven by actions on low-margin funding as well as by seasonal outflows in BCB. And alongside these developments, insurance, pensions and investments saw open book net new money flows of GBP 7.9 billion for the year, including GBP 4.2 billion in Q4. This, of course, now includes inflows from Lloyds Wealth.

Let me turn to net interest income on Slide 18. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year, with Q4 up 2% versus the prior quarter. Across both the year and Q4, strong hedge income and business volume growth were partly offset by mortgage repricing and deposit churn headwinds. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024. Q4 AIEAs were just over GBP 470 billion, up GBP 4.8 billion.

Our net interest margin increased 11 basis points to 3.06%. This included a Q4 margin of 3.10%, up 4 basis points on Q3, driven by a significant pickup in hedge income, again, as we had expected. The nonbanking NII charge in 2025 was GBP 515 million, up GBP 46 million or 10% year-on-year, supporting growth in OOI. For 2026, we are guiding to NII of around GBP 14.9 billion. Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial.

Our guidance incorporates further hedge income uplift of circa GBP 1.5 billion, partly offset by mortgage refinancing and easing deposit churn. Alongside, we also expect some growth in nonbanking NII charge consistent with associated business growth in OOI. Let me turn to mortgages on Slide 19. Mortgages grew by GBP 10.8 billion or 3% in 2025 to GBP 323 billion, supported by a growing market and a flow share of around 19%. We've continued to benefit from our strategic investment in the Homes ecosystem, enabling us to build customer relationships, including in higher-value direct lending and to retain more balances. It remains a competitive market.

Q4 completion margins were again around 70 basis points with a further 1 or 2 basis points of tightening during the quarter. We continue to enhance the customer journey by integrating protection and home insurance. In 2025, we saw protection take-up rates in mortgages increase by 5 percentage points to 20%. There is further to go.

I'll now turn to Slide 20 to look at developments in consumer and commercial lending. We saw a strong performance across our consumer portfolios in 2025 and a strengthening performance in commercial. Combined, cards, loans and motor grew GBP 4.1 billion or 10% year-on-year. We are taking market share in all 3 segments, driven by leveraging better data to add personalization and by launching innovative new products such as Lloyds Ultra within credit cards.

Turning to Commercial Banking. Lending was up GBP 2.7 billion in the year or GBP 4.1 billion, excluding government-backed lending repayments. We saw encouraging progress in CIB, particularly in strategic areas such as infrastructure and project finance. This was partially offset by BCB lending, which held steady when excluding government-backed lending repayments or down GBP 1.4 billion if they are included.

Let me turn to developments in the deposit franchise on Slide 21. Our deposit franchise continues to perform well. Total deposits ended the year at GBP 496.5 billion, up GBP 13.8 billion or 3%. Retail deposits were up GBP 5.5 billion or 2% in the year. Within this, current account balances grew by GBP 1.5 billion, representing growth in our market share of balances during the period. Retail savings meanwhile, grew by GBP 4.3 billion or 2%. This was driven by targeted participation throughout the year with a strong ISA season in the first half, followed by slower growth in H2 as we managed our portfolio.

In Commercial, deposits grew strongly by GBP 8.5 billion or 5% on the back of growth in our targeted sectors. Notably, noninterest-bearing deposits stabilized and indeed grew a little in the second half. The performance and stability of our deposits are what underpin the structural hedge, which I will now talk to on Slide 22. The structural hedge is a strengthening tailwind to NII. The hedge notional stood at GBP 244 billion at the year-end, up GBP 2 billion over the year, supported by our high-quality deposit franchise. Hedge income in 2025 was around GBP 5.5 billion, a material step-up from last year and a little above our guidance.

During Q4, the weighted average life increased to about 3.75 years built off continued strength in our deposit balances. And as previously guided, we expect a roughly GBP 1.5 billion step-up in hedge income to circa GBP 7 billion in 2026. We then expect hedge income to reach around GBP 8 billion in 2027 and to continue growing to the end of the decade as yields converge with market rates and as the notional slowly builds.

Let's now turn to other income on Slide 23. Other operating income performance in 2025 was once again strong. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported, of course, by the full acquisition of Lloyds Wealth. Growth over 2025 has been broad-based. Retail is up 12% with strength in motor leasing as well as growth in cards and banking fees. Commercial was up 1% with solid growth in our Markets and Transaction Banking businesses, offset by lower loan markets activity. Insurance, Pensions and Investments meanwhile, grew by 11%, driven by strong performance in general insurance and workplace as we continue to focus on our strategic choices in this area. And our equity investments business was up 15%. This was particularly driven by Lloyds Living more than doubling its OOI during the year.

Operating lease depreciation was GBP 1.45 billion in the year, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles and to an extent, electric vehicle price movements, altogether, essentially in line with the OOI growth generated by the vehicle leasing business.

Moving to costs on Slide 24. Cost discipline remains critical to the group. Operating costs were GBP 9.76 billion in 2025, in line with guidance, excluding the impact of the Lloyds Wealth acquisition in Q4. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth and inflationary pressures, partly offset by further efficiencies. As Charlie highlighted earlier, since 2021, we have now delivered cumulative gross cost savings of circa GBP 1.9 billion, thereby creating capacity for strategic investment across the business. The 2025 cost/income ratio was 58.6% or 53.3%, excluding remediation.

And looking ahead, as you know, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. This is in line with the flattening cost trajectory that we have previously indicated as our investment in this strategic cycle culminates. On top of that, inflation moderates and cost benefits are fully realized. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. There is no update on motor in Q4. We wait to see the detail of the FCA's final proposals post the consultation in the next couple of months.

Let me turn to credit performance on Slide 25. Credit performance remains strong, reflecting our prime customer base, prudent approach to risk and healthy customer behaviors. Across Retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In Commercial, after some idiosyncratic cases in H1, the H2 picture has been very constructive. The 2025 impairment charge was GBP 795 million, equating to an asset quality ratio of 17 basis points. This incorporates a small MES charge, but also benefits from model calibrations and refinements. Indeed, we consider the underlying charge to be just below 25 basis points.

The Q4 impairment charge is GBP 177 million or 14 basis points, including a GBP 47 million MES charge to reflect a slightly higher unemployment peak. Our stock of ECLs on the balance sheet now stands at GBP 3.4 billion. That's around GBP 0.4 billion in excess of our base case and leaving us well covered. Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026, similar to the underlying run rate that we've seen during 2025.

I'll now turn briefly to our macroeconomic outlook on Slide 26. The macroeconomic outlook remains resilient. In the fourth quarter, we've made only minor changes to our base case versus Q3. We now forecast GDP growth of around 1.2% in 2026. Against this backdrop, our unemployment forecast increases marginally, now peaking at 5.3% in the first half of the year. Easing inflation meanwhile, allows for two 25 basis point reductions in the bank base rate during the year to 3.5%. This reflects a slightly lower rate than we previously expected, albeit we still expect a modest pickup later on in the forecast period. And in Housing, we assume growth in house prices of around 2% in 2026 and '27. That is supported by the slightly lower interest rate environment.

Let me now turn to our returns and TNAV on Slide 27. In 2025, our return on tangible equity was 12.9% or a robust 14.8%, excluding the motor provision. Within this, restructuring costs were low at GBP 46 million, including GBP 30 million in Q4 with integration costs relating to Lloyds Wealth and Curve. The volatility and other items charge was GBP 70 million. This includes an GBP 87 million benefit in the final 3 months, incorporating a fair value uplift from the Lloyds Wealth acquisition. Tangible net asset value per share meanwhile, increased to 57p, up 4.6p or 9% in 2025.

The increase was driven by profits, cash flow hedge reserve unwind and the reduced share count from our buyback programs, offset by shareholder distributions. And looking forward, we continue to expect TNAV per share to grow materially driven by these same factors. Given the momentum across the business, as Charlie said, we are upgrading our expectation for 2026 return on tangible equity to greater than 16%.

Turning now to capital generation on Slide 28. The group remains highly capital generative and will become more so. In 2025, we generated capital of 147 basis points or 178 basis points, excluding the motor provision, in line with our guidance. Within this, risk-weighted assets closed the year at GBP 235.5 billion, up GBP 10.9 billion. This was driven by strong lending growth as well as GBP 2 million related to the implementation of CRD IV taken in Q4. This reflects our model outcomes, which are subject to PRA approval and therefore, of course, risk of modification. As planned, we paid down to a CET1 ratio of 13.2% at the end of 2025.

And looking forward, we continue to expect 2026 capital generation to be more than 200 basis points. Beyond that, as you know, Basel 3.1 implementation is now scheduled for the 1st of January 2027. We expect this to result in a day 1 RWA reduction of around GBP 6 billion to GBP 8 billion on implementation. Our strong capital generation supports healthy and indeed growing shareholder distributions. So let me talk to that on Slide 29.

We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board intends to recommend a final ordinary dividend of 2.43p per share, taking the total dividend to 3.65p, up approximately 15% year-on-year. In addition, we've announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024 and equivalent to around 6% of our current market capitalization. Dividends have grown consistently over our strategic plan with the 2025 dividend now up more than 80% versus '21. They remain at a payout ratio that allows for continued strong growth.

Over the same period, our consecutive buybacks have also reduced share count by more than 17%. We remain committed to paying down to our target CET1 ratio of around 13% by the end of 2026. In addition, given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward.

Let me wrap up on Slide 30. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and the culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns.

That concludes my comments for this morning. Thank you for listening. I'll now hand back to Charlie for closing remarks.

Thank you, William. So as you can see, our strategic delivery is accelerating, and we're building significant momentum. We're creating a stronger, more diversified, more efficient and more capital-generative group. This, in turn, supports increasing shareholder distributions. We have today upgraded our return on tangible equity guidance for 2026 to be greater than 16% and are confident in the outlook beyond this. I look forward to providing much more detail on the next stage of our strategy and the associated medium-term financial plan in July. Thank you for listening this morning. We're now very happy to take your questions, and I'll hand over to Douglas, who will manage the Q&A. Douglas?

Thank you, Charlie. We will, as normal, be taking questions -- written questions online as well as questions in the room. [Operator Instructions] Okay. Why don't we start with Guy?

It's Guy Stebbings from BNP Paribas. The first question was on deposits. I think it's probably fair to say over the past year, if not longer, deposit flow has been better than expected, but Q4 was a touch softer mainly on the commercial side. I don't know if you could talk to any more in terms of whether that's just seasonality and then your expectations into 2026 in terms of pace of deposit growth, whether you're assuming kind of static mix effects and anything you might be able to elaborate in terms of deposit pass-through assumptions?

And then the second question was on costs. Very reassuring performance in '25. The guidance for '26 in terms of limited absolute cost growth is encouraging. Just wondering how much we can sort of read into that, your ability to continue to run the business with limited absolute cost growth? Or is it more a function of the fact that it was a plan that was always expected that in 2026, you would see less growth in that particular year. Obviously, I'm thinking into beyond '26. So appreciating you're not going to be too specific.

Excellent. Thanks, Guy. I think both deposits and costs are probably questions for yourself, William.

Sure. Yes. Thanks for the questions, Guy. In relation to deposits, the deposit performance, as you say, over recent years has been really very strong, and that's obviously what supported the structural hedge amongst other things within the balance sheet. So a good franchise with some good financial effects. When we look at 2025, we saw deposit growth of almost GBP 14 billion, GBP 13.8 billion over the course of the year, about 3%. So a really pretty good deposit performance during the year. Within that, we saw Retail up GBP 5.5 billion. We saw Commercial Banking up GBP 8.5 billion. So good to see deposit growth in the various different parts of the business, including within the subcomponents of each of those divisions, Retail and Commercial, some pretty healthy deposit performance in respect to the different components. So that's the way in which we see the year.

Now within any given quarter, of course, we are going to be managing the deposit base as appropriate based upon making sure that we make the most of the franchise, offering, of course, good customer value and respecting the funding needs of the business. And so within -- on a quarterly basis, you're going to see variations in deposit performance, which reflect each of those imperatives. But over the year, at least, you should expect to see healthy deposit performance as you did in '25. I think in respect of your particular point on Commercial, the 2 points that I would make are seasonal outflows. We see those kind of every quarter or every fourth quarter, I should say, in respect of certain subsectors, education was one over the course of this quarter, indeed, a bit of a mix effect there, too. Alongside also a bit of management in terms of very low-margin deposits, which, as you can imagine, occasionally collect themselves within the Commercial Banking part of the business.

So we'll manage that in the interest, as I say, of customer value of the funding position of the bank and of making sure that we make the most of the franchise. The other point I would make in respect of quarter 4, Guy, which is good to see is stability in NIBCA across both the retail and the commercial businesses. And within that, within retail businesses, PCA balance is up GBP 1 billion, which, as you know, is a crucial customer relationship product for us, and therefore, we pay very close attention to it. So it's good to see that being so strong in the course of the fourth quarter.

You asked about 2026. I think overall, when we look at '26, we're expecting to see deposit performance, not too dissimilar really to what we saw during the course of '25 in terms of overall volume. There may be some gives and takes in that in terms of the different divisions. We'll obviously manage the business as appropriate. What I would expect to see within that overall deposit book is a slowing down in churn, just as we have seen in the course of '25, including in the latter part of '25. And that is simply off the back of bank base rates, if you like, coming down to lower levels and therefore, deposit churn easing off the back of it. At the same time, we'll also see the effect of 2 bank base rates. That's more of a financial point than a volume point, if you like, but worth bearing in mind. So good performance in '25. We do expect to see continued good performance in '26 of roughly speaking, the same type of proportions.

In respect of costs, cost discipline, as I mentioned in my comments, absolutely critical to the group. Cost discipline remains an absolute imperative. When we see our cost performance during the course of 2025, first of all, GBP 9.76 billion in total, that's about a 3% cost growth over '24. Within that, if you exclude severance, which, as you know, bumped up a little in '25, then it's 2.4%. And actually, if you exclude severance plus Lloyds Wealth in the fourth quarter, it's 2.3%. So stripping out those 2 elements, if you like, it's a 2.3% underlying cost rise in '25 versus '24.

When we look forward, you'll see from our numbers that we're looking at a cost base, which is expected to be less than GBP 9.9 billion. That is in total about a 1% rise, '26 over '25. And that represents a number of things. It is worth saying actually before going into them, that obviously includes the added costs of Lloyds Wealth, which I think we mentioned at Q3 around GBP 120 million. And then also the added cost of the Curve acquisition as well, which we haven't put a number on, but that obviously is an incremental cost base that we have to absorb. And so the cost increase, if I can call it that, to sub GBP 9.9 billion in '26 takes into account those additional headwinds and effectively absorbs them in our ongoing cost management.

Now to your point, what is leading to that cost outcome in '26? A number of things really. We're obviously being helped by inflation coming in a little. That affects things like pay settlements. It obviously affects third-party contracts and the like. So that's all helpful, declining inflation. Alongside of that, that bump in severance that we saw in '25 irons itself out a little bit. So we're seeing a little bit of a benefit from that. But then more importantly, we are seeing the landing of our strategic initiatives or at least those strategic initiatives that are focused on cost benefits. Added to that, the full year benefit of the cost initiatives on a BAU basis that we took in '25. So those 2 factors, the landing and benefit of strategic initiatives, number one, and the full year benefit of '25 initiatives in '26, they're pretty helpful, too.

And then I mentioned earlier on that as we come into the final year of our strategic plan, the investment plans, if you like, the investment expenditures are slowing off a little bit. That gives us a little bit of benefit as the cash investment slows. It's about GBP 100 million, put that in the -- if you like, in your considerations. But that is the natural culmination of the strategic initiatives and the investments that we've made, both from the revenue customer proposition side as well as the infrastructure of the business over the course of the '22 through '26 period.

You asked about looking forward. You'll have seen in both Charlie's and my presentation that we talked about our commitments beyond '26. And we talked about them in the context of income growth, number one. We talked about them in the context of increased -- improving operating leverage, number two. And we talked about them in the context of improving returns, number three. The second of those 3 points, improved operating leverage effectively means a commitment to reducing the cost-income ratio.

When we look forward, we are going to continue to invest in the business, you would expect us to because it's absolutely imperative to maintain the primacy of the franchise and the strength of the franchise today. And that will require investment in the type of sectoral evolution that we're seeing. But you have that all done being committed to within the context of an improving operating leverage, declining cost/income ratio environment. We'll obviously talk more about specifically what that means when we get to the summer of this year, but we felt those commitments were important to make. So you have some sense of direction from us in advance of that. Thank you.

It's Ben Toms from RBC. The first question is on NII. I mean you guided for 2026 of GBP 14.9 billion. Just to clarify, should we expect NII and NIM progression every quarter as we go through the year? And is there any lumpiness in the structural hedge maturities that are worth calling out? And then secondly, on capital, you talked about reviewing your capital distribution now on a half yearly basis going forward. How should we think about that for the half 1 of 2026? Will you come down to that 13% by the half year? Or should we think about that as a straight line, so halfway there by the time we get to the half year results?

Thanks, Ben. Again, I suspect that those are very much questions for William.

Yes. Thanks, Ben, for both of those questions, and I'll answer them in turn. In respect of NII, you asked specifically about the shape of NII over the course of '26. So I'll come back to that, but I just want to make a couple of comments in respect of the overall guidance of 14.9% to put that in context, if you like. When we look at NII performance over the course of '25, we're obviously pleased with the outcome off the back of margin expansion and indeed AIEA growth, including that GBP 22 billion of incremental lending that we did during the year, up 5%. That led to NII growth of 6% during '25.

Now we put forward guidance, which shows a further 9% increase in 2026. So a pretty solid growth expectation, if you like, for 2026 going forward. And again, that's built off of similar things. That is to say net interest margin expansion, probably a step more in '26 versus what we saw in '25 actually, plus, of course, AIEA growth expectations. We do expect net interest income to continue to grow in the years beyond that. And that is indeed partly what's behind the first of the 3 comments that both Charlie and I made about expectations after '26.

When we look at that, we obviously calibrate the guidance in the context of what we are highly confident in delivering, and that's where GBP 14.9 billion expectation comes from. Within that, there are headwinds and tailwinds in the margin and perhaps we'll come back to that in the course of this discussion alongside AIEA growth expectations, as said. And we've, of course, absorbed a further bank base rate reduction in the course of '26 in calibrating the guidance that we've come up with.

In respect of the pattern during '26, I would say, should you expect NII growth or should you expect NII and net interest margin expansion in every quarter over the course of the year? I won't guide too precisely to it. But broadly speaking, yes, you should do. That is going to accelerate and slow down from one quarter to the other for sure. But over the year, you should expect a steady growth in NII off the back of margin expansion quarter-on-quarter. Some quarters, however, will be faster than others. And behind that, of course, is, to your point, the -- a little bit the kind of the ebbs and flows, more the flows clearly of the structural hedge, but flows at different paces, I guess, of the structural hedge. So that's partly what will be behind that net interest margin expansion.

The other point I would make is if you're looking at the quarters, just bear in mind that quarter 1 has a lesser day count versus quarter 4. So you need to take that into account in the context of NII expectations for that quarter in particular, simply because we're coming up to it.

In relation to the buyback, as you say, we've moved to a buyback of 2x. Why have we done that? Over the last couple of years, at least, we felt that 1x per year buyback was appropriate in the context of giving you clear guidance as to what we expected and in the context or rather appropriate as we reduce the capital ratio of the business down to ultimately 13% at the end of this year. As Charlie said in his comments, as we increase our confidence in the capital generation of the business going forward and as the regulatory picture gets clearer, we feel it is now appropriate to move to 2x per year. And indeed, that gets us to, on average, being closer to our capital target of 13% over the course of the year. So there's good reasons behind it, and it gets us to an outcome that is more consistent with our overall 13% capital target.

You asked about timing and how we'll look at it at the half year. We'll obviously let the Board deal with the buyback as appropriate at the half year. We will take into account clearly the position of the existing buyback and where we are at that point. The one point that I would make in that context is that in the past, as you know, we have seen buybacks end in August. We've also seen buybacks end in December. This year, we have a buyback that is a little higher than it was last year. We obviously had a much bigger -- or a much larger market capitalization of the overall company. And therefore, one would expect the buyback to -- if it's constrained by things like average daily traded volume, which these things typically are, to proceed at perhaps a slightly faster pace than it might have done previously.

Overall, we will look at the buyback consideration at the half year. We will decide on what the quantum of the buyback should be at that point in time, taking into account the available capital stock of the company, taking into account the business needs on a go-forward basis and of course, ensuring that we preserve the position of the company.

You asked specifically about how close we get to 13% at that point. Our objective right now is that we will get to 13% at the end of 2026. That's been our objective for a while now, and we maintain that position as we stand today. We'll take a look at it again at the half year.

Excellent, why don't we take the next question from Jason in the middle row here.

Jason Napier from UBS. Perhaps one question for William and one for Charlie. William, just coming back to the earlier question on deposits. I think you did a great job of handling the volume side of things. Commensurate with the bigger market cap that almost everyone now has, there's a lot of investor sensitivity around commercial intensity and what's happening to competition. So -- and particularly on the deposit side, I wonder if you could perhaps add a little color on that.

And then, Charlie, the firm has done an admirable job of dealing with a really volatile macro environment over the 5-year period of the plan. One of them is the emergence of Gen AI as a thing that we all talk ad nauseam about now. What do you think has happened to the efficient frontier of cost/income ratios for banks over the period of the plan. Where do you think a modern Lloyds -- a fully modernized Lloyds, I should say, ought to operate from that perspective?

Thank you, Jason. William, I think obviously, deposits is for yourself and then Charlie, the AI side.

Sure. Yes. Thanks for the question, Jason. I think you have to judge us by our results in some respects, at least. So the way in which we respond to the competitive environment is hopefully by delivering sustained franchise growth. And once again, you've seen that in 2026 with GBP 13.8 billion growth in deposits. I mentioned earlier on that we expect continued deposit growth during the course of 2026 and indeed beyond. So I think that's probably the base answer. What would I say in terms of competitive environment? Yes, to a degree, at least, it is increasing in its competitive intensity. I do think there are various different reasons for that. Some of them will be present for a while, i.e. they're more systemic. Some of them may be a little more transitory.

We've seen, for example, quite a lot of competition from some of the fintech challenges, and there's much talk about that and the market share that they may be gaining or accessing. How do we respond to that? We respond in the context clearly of enhancing capabilities of our offering. That obviously includes things like app capabilities. Alongside of that propositional improvements, which you've seen a consistent flow of over the course of the last few years. Alongside of that, very competitive pricing in the markets that we want to be when we want to be in them. So we won't necessarily, if you like, be there all the time in every single case, we'll be there where we need to be.

And in the context, obviously, of the systemic security that Lloyds offers, the branch offer that it offers, the brand and marketing and so forth. So overall, we see our competitive position versus some of those other factors within the deposit market is gradually strengthening, as said, endorsed by the deposit performance that we've seen across the franchise.

One good indicator of that, going back a little to the earlier question is the PCA performance, which for us, as said, is the absolute critical relationship product. Balance is up GBP 1 billion in the course of quarter 4, balance is up GBP 1.5 billion during the course of '25 as a whole. And that is in the context of continuing market share gains from a balance perspective, which is good to see. So Jason, the competition is relevant. It's clearly something that we take very seriously. I do think the results that we show up against that competition withstand scrutiny.

I might just add one thing to that. I don't want to jump on all of these questions because it's a really important question, obviously. We made the point around market share gains in personal current accounts. We've also done that in business current accounts over the life of this cycle, and those are 2 very important areas for any organization, but especially given our strategy. When you get to savings and investments, we performed very well on Instant Access money, which is money for liquidity purposes.

And last year, we had a very strong ISA tax season, but as you get into time deposits, obviously, the margin for shareholders will depend on the pricing and the competitive context. They don't support directly the structural hedge. So we typically compete there from a customer proposition and a broader relationship perspective, but we won't chase market share for the sake of chasing market share where it's not relevant to our customers and where it's not relevant to our shareholders. So we really look at quite a differentiated view of the deposit base. And you're right, it's a competitive market. That's good for customers. Last year, we traded very well and offered great offers. Let's see where the market is this year. The really core part of this is really competing where we have the stable funding and stable deposit base that shows trust.

Just on your second question, wow, we could spend the whole of the morning. Thank you for asking me a question, Jason. And look, I'm not going to give you the complete answer because it's -- I think it's partly one of the discussions we'll have in July. I think a couple of thoughts that are very helpful. The first thing is -- we've said a few times now, and we did it in the seminar back in November that about 60% of the GBP 1.9 billion gross cost saves we've delivered over the last few years has been linked to digital and AI, put generative AI aside for a second. And so this ongoing trend around driving very significant lift in efficiency and operating efficiency for financial services, we've been doing that for our whole careers, but it's a significant opportunity at the moment, and it has been what's driving a significant amount of our benefits in the last 3 or 4 years. And when we look at Agentic AI, we think that will enable us to continue that trend of efficiency. So that's the first thought.

Second is when you look forward, and we're really quite excited this year, we announced -- we just announced today that we see for just the generative AI use cases we're deploying this year on top of the ones we deployed last year, the 50 use cases that generated GBP 50 million of P&L, we see greater than GBP 100 million of benefit in year. And those benefits will be both revenues and costs. And of course, when you look at our industry, what's more differentiating is our ability to differentiate our services and build broader relationships on the revenue line than driving efficiency. We will do both, but efficiency, if we can do it, other people can do it.

What's really exciting for us is some of the differentiation that we're building in through the services we're doing this year. We're launching a couple of examples later this year, which we are currently in testing with our colleagues, one around providing investment advice to the whole market. So you don't have to have a certain size of investments to get that investment advice. [indiscernible] team is leading that. I can see them at the back, which is going to be really interesting. It won't drive massive revenue short term, but it will be very sustainable long term.

And then the second one is around really changing how customers have access to their everyday banking and providing a conversational interface to get more out of their everyday spending. And we think that's going to be very, very important for the whole everyday banking personal current account business. Jas is leading that, and he's sat here as well. So we really think there's as much on the revenue as there is efficiency.

And then going forward, I won't give you answer on kind of how we see the industry playing out. But those -- that does underpin the confidence that William said we've given you that we see the cost-income ratio continuing to progress positively over the next phase. We'll come back into this. It is also really important to think about, as you know, the mix of businesses. So we happen to have a mix of businesses with a very large retail business, a significant insurance and wealth business, which, as you know, is very good from a returns perspective, but typically historically has been a higher cost/income ratio and then a smaller commercial bank. And I think when you look at Lloyds and other institutions, obviously, the mix of businesses will affect how cost/income ratios progress. We're very ambitious on this, and we are very confident we have the right talent, and we're starting at a fast pace, which is great. So let's see how it develops. We'll come and give more guidance back in July.

Let's stay on the front row and let's go to Ben first, and we'll go on.

Ben Caven-Roberts from Goldman Sachs. Just wanted to follow up on the lending. So you mentioned within the NII guide, very strong franchise volume growth in 2026. Could you elaborate a bit on the split between Retail and Commercial and how you see the trends evolving there?

Yes. Thanks, Ben, for the question. Loans and advances GBP 481 billion, as you know. That is a pretty good outcome in respect to '25. So I mentioned earlier on GBP 22 billion growth in lending for the year, which is up 5%. And if you think about where GDP is, it's quite a markup on GDP. So we're pleased with that. I think it is more balanced towards the Retail part of the business over the course of the year. I talked about GBP 10.8 billion in mortgages, for example. We also saw sustained growth across cards, loans, motor and so forth. So a bit of a tilt in that direction.

Within the Commercial Bank within '25, decent growth within, as I mentioned in my comments, targeted sectors within CIB. But within BCB, you effectively had a swap out of government repayments off the back of bounce-back loans for a swap in of private sector lending. And those 2 roughly equaled each other out.

So that's the pattern for '25. Again, some strong franchise growth in both areas, particularly in Retail. When we look forward, first and foremost, we'll also -- we'll obviously be conditioned by the markets in which we operate. We have taken some relatively prudent assumptions in terms of the expected expansion of those markets. The mortgage market, for example, we are suggesting that lending will be healthy in '26, but maybe a touch down versus what it was in '25. That's a market comment as opposed to a Lloyds Banking Group comment.

So we've deliberately taken some relatively prudent assumptions in that space, which means that our Retail lending, we still expect to show healthy AIEA growth to be clear. Will it expand at 5% -- well, will it expand by the same order of magnitude as it did in '25 in Retail? Let's see. I think our market assumptions are a little bit more cautious than that. And therefore, I would expect to see a bit of that reflected in our overall growth within Retail banking balances growth, but maybe not quite at the same pace as we saw during '25.

However, within Commercial Banking, I think we see it as a bit of a different picture. That is to say we see sustained growth across the commercial bank. And maybe just to comment on that briefly. First of all, within CIB, the strategic initiatives, the focus on certain areas and so forth, I would expect CIB growth to continue to be healthy just really as it has been during the course of '25 actually. But within BCB, we're now at the point where there's only GBP 1.4 billion or so of bounce back loan balances in place. We are also at the point where we are investing heavily in the proposition there, whether that is sectoral expertise, whether it's relationship managers, whether it's customer journeys and the like.

And therefore, the expectation is that the pace of organic growth within BCB should pick up a little bit. Meanwhile, because the bounce back loan stock is now only at GBP 1.4 billion, the headwind that is presented by those repayments should ebb a little bit. The net of that is probably more constructive growth within BCB, which in turn, I think, Ben, when you look at the overall balance, therefore, for '26, you should expect to see healthy loans and advances group -- sorry, healthy loans and advances growth within Lloyds Banking Group for sure. It may be a percentage point or 2 -- well, percentage point, let's say, inside of what we saw in '25. And the balance might be slightly shifting. That is to say, slightly stronger within Commercial, slightly weaker within Retail. But overall, as I said, healthy loans and advances growth with those comments attached.

And very impressive, Ben. Just one question.

Perlie?

Sorry to disappoint I have two. So it's Perlie Mong from Bank of America. Can I ask about mortgage margin competition? So as completion margin is still about 70 basis points, and you mentioned that there's maybe 1 or 2 basis points of tightening in the quarter. I think we've all been hearing about the COVID era loans maturing in half 1 this year. So how are you seeing competition at the front end of the book in January so far? And especially in the context of the budget perhaps having less change to cash ISA than may have expected. So does that change the funding profile of some of your competitors, especially building societies?

And then also the mix in the book as well because this year looks like it will have a lot of remortgages coming through. So does that change in mortgages -- remortgages versus first-time buyers change the margin picture as well? So that's number one on mortgage margins.

And number two, on NII and non-NII split. So the GBP 14.9 billion is perhaps a touch below consensus. But obviously, the cost/income ratio guidance does imply an even bigger step-up in noninterest income growth versus expectations. So is that a conscious decision to put more resources behind noninterest income growth? And which area within the noninterest income growth are you feeling especially positive about?

Thank you, Perlie. I think both of those questions will originally come to yourself, William.

Yes. And maybe, Charlie, you want to add.

Mortgage competition dynamics, and then I can talk about that.

Shall I kick off on mortgage margins briefly and then come over to you before getting to the second of the 2 questions. The mortgage market really as said Perlie, it has been competitive in '25. It continues to be competitive in '26. I mean that's the simplest way to look at it. We've talked about 70 basis points completion margins within mortgages. That's actually been the pattern pretty much quarter-on-quarter. I mean you'll remember quarter 2, I think I said the same thing, quarter 3, I said the same thing, and here we are in quarter 4 saying the same thing again. So 70 basis points throughout the year. But having said that, underneath that headline, you're probably seeing a chip of 1 basis point or so away in each and every quarter.

So that's a reflection, if you like, of the competitive mortgage market that we are seeing. What is going on behind that? I think what is going on behind that is that everybody is enjoying the benefits of widening benefits from structural hedge, widening liability margins. And off the back of that, we and everybody else is looking at the margin as a whole. And in that context, we're pleased to see, obviously, the margin expanding by 11 basis points in '25. I mentioned earlier on that we expect to see a more material increase in net interest margins in '26. So I think everybody is looking at it in a fairly holistic way. And therefore, there's a bit of a trade-off going on between being more competitive in the mortgage market, which is being allowed for by the overall widening of our margin and the rest of the sector as a whole. I think that's what's going on.

When we look at '26 in response to your question about kind of blocks of activity, yes, we have a mortgage headwind during the course of '26. We've been talking about it, I hope, very consistently over the course of recent years. So that's nothing new for us. We've been, I hope, telling you that for some years now. It is, first and foremost, because of the effect, as you say, a pretty thick 5-year margins that were written back in the, I guess, now the COVID era. That mortgage headwind is slightly compounded by the fact that completion margins, as just said, have come in a little bit versus our expectations. To be clear, we do not expect a heroic recovery in completion margins. We've taken a pretty prudent view on what those completion margins will look like over the course of this year. And of course, in doing so, we, therefore, build up the mortgage headwind a little bit in respect to '26.

Now let's see what actually plays out. We might be proven wrong. Completion margins may be a little bit more steady than they are, but we've taken a relatively conservative view of how we expect competitive conditions to play out during the course of the year. And that combined with the '26 maturities means that the mortgage headwind is certainly there for '26. Again, consistent, I think, with what we've highlighted before, but maybe stretched a little bit beyond because of that completion margin pressure that I just highlighted.

Now strategically, and Charlie may want to talk more about this, therefore, it is particularly important to us that we develop the franchise proposition, the customer relationship around the mortgage product. The mortgage product stands on its own 2 feet, and it meets its cost of equity. So we're perfectly happy with that on a fully loaded basis. It actually is a very attractive return on equity on a marginal basis. So the product itself stands on its own 2 feet from a financial perspective, but it is so much the better if we can develop the relationship with the customer off the back of it.

And I mentioned in my comments earlier on that the protection take-up rate is now at 20%. That's gone up dramatically over the course of the time since I've been here. And indeed, as I mentioned earlier on, we think there is much further to go in that. That is only one example, but it's quite an important example of how we seek to build the customer relationship in the context of the mortgage product. You'll have noticed other examples are in the context of our PCA mortgage combination offering that we give to people. Likewise, GI is another string to the bow in terms of building that relationship.

So that's what we do, if you like, to offset some of the pressure that we see within the overall financial point from the mortgage product. And then as I said, we look at the margin in its totality, which is undergoing a very benign and positive transformation right now, as you know.

I'll just comment very briefly on the cash ISA and hand; over to Charlie for the question as a whole. I think overall, the pressure that may be induced by cash ISA changes may be felt by others a little bit more than us. That may be because of their deposit funding structure. It may be because of the overall way in which they maintain customer relationships. At the moment, at least, the loan deposit ratio within the business is 97%. It is a very successfully deposit-funded business with a lot of room to grow lending in. From a cash ISA strategic point of view, being obviously the combined Lloyds Banking Group Scottish Widows business that we are, we see actually the cash ISA movement as at least as much of an opportunity to build relationships in the savings space as we do see it as a source of concern in the deposit space. So from our perspective, we're fine with it.

It's a pretty full answer. Look, maybe just take a step back. Obviously, when we started this strategic cycle, the mortgage business was hugely important, but we've been losing market share for a long period of time. And we kind of set out that we wanted to prove that we could trade at 18% to 20% market share and do it profitably for our shareholders. And that's what we've done. And last year was a very good year in that context. And I think just overall, we'll continue to have that mindset. This is about being relevant to our customers, bringing leading products to market, but we're not going to chase margins in any 1 month or quarter. The market has started competitively in January, but January doesn't make a quarter and a quarter doesn't make a year. So let us trade through that. So that's the first thought.

The second one, which is William talked about what we can bring alongside our mortgage products to enhance returns from an overall relationship. The other thing that we've been very focused on, and we've done successfully that has helped us to change what you'll see as the mortgage margin dynamic is think about how we provide our existing mortgage customers or current account customers access to a remortgage or a product transfer and how we use our indirect channel. And those are great when we can do that because we don't pay a product fee or procurement fee to a broker, and we can share some of the value with our customers, and we can target our customers in a way that really brings the best of our products to market.

So we've increased our share of direct mortgages to 26% of the market last year. And we think that's a really important point of differentiation. It enables us to compete differently from our competitors. And we've invested heavily. I'm being watched by the leader that's done a lot of this. I'm nervous now what I'm saying. We've invested heavily in our digital capabilities around our home hub, around remortgage journeys, and that really helps customers get a simpler, quicker and good value product, and that helps us. And we've invested heavily in our relationship with our mortgage brokers. And we typically see our completion rates being above the application rates because we provide a very, very good process and journey. And again, that helps us compete in the market.

So look, it's a very different market from first-time buyers through buy-to-let through prime mortgages. One other fact, which I've talked about before, we did increase our share of mass affluent mortgages from 9% to over 20%. And again, we know the value of those relationships and the broader relationship in that context. Just on NII/OOI, maybe put it the other way around, I'll say the strategic and then you can add in some of the value because it's a really important question. But when we started this strategic cycle, we laid out very clearly that we wanted to grow more diversified income distribution across the group and get more bias towards other operating income, recognizing we were still looking to grow NII ambitiously as well.

But it's been always part of our strategy to do that. And we've now got 4 years consistently of growing at 9% CAGR on other operating income or more actually in '22 because we bounced off a low start in '21, we grew more than that. But I think the real quality of the franchise, the other operating income businesses is starting to show differentiation as we come through this.

So we always thought strategically the right thing for our shareholders was to drive that bias towards OOI. The NII, William has gone through, we'll always have a certain conservatism around how we think about NII, but that's our right ambition. So we like the idea of OOI growing faster and giving more differentiation and diversification around the revenues.

You asked around which businesses, and maybe I'll pause. I'll do that relatively quickly. And I think we'll do more of this as we look forward in the July strategy. But as William laid out, and hopefully, you've seen this additional disclosure today around our equity investments business and Lloyds Living. We always had a strategy to build quite a diversified set of businesses so that in any one quarter or year, one business may not have the best year. Actually, William explained why because of a very strong year last year and then actually U.K. sterling DCM activity was suppressed this year, our corporate OOI grew slower last year.

But the whole point is we know that with the diversification and breadth of businesses, we'll be able to drive strong growth across those businesses over the next few years. And what you saw this year, and you should expect again next year is strong growth in Retail, strong growth in our Insurance and Wealth business and Lloyds Wealth specifically will help that again next year and strong growth in Commercial and in our equity businesses. The growth rates might vary quarter-on-quarter, but the pillars of that growth are well established now and they're moving at pace. So we think that's a really important part of the strategy. William, do you want to flesh out any of the detail?

Sure. Thank you, Charlie. I think I'd probably make 2 points. One is, of course, to flesh out the detail, but I'll come back to that in just a second. The second is I really do not think it is an either/or between NII and OOI. To be clear, we would expect to see meaningful growth in both. So when we look at NII, for example, as you know, we're looking at 9% growth in 2026. We are also looking at sustained NII growth in the period thereafter in the period beyond, fueled by structural hedge as the current headwinds of particularly deposit churn in '26, but also deposit churn and the mortgage headwind in '27 ebb away. So you should see 9% growth in '26 and then sustained growth in the period beyond that.

Now just focusing briefly on '26, as I mentioned earlier on, and Charlie just highlighted it, we calibrate guidance to be highly confident of hitting it. That, of course, means a degree of conservatism in the way in which we look at things, including things like market rates and so forth. The headwinds and tailwinds in respect to the margin, they're familiar ones, the ones that I've just highlighted, for example, AIEA growth, as I mentioned in conjunction with the lending question just a second ago, is built off of relatively conservative market assumptions. Let's see how they fare over the course of the year.

And then, of course, as I said, we've absorbed a macro -- a further macro change of now 2 bank base rate reductions versus previously 1. That all means that we're highly confident again in '26. It also means that we're highly confident of continued growth in the period thereafter. So, I don't think this is either NII or OOI subject to the resourcing decisions or capital allocation of the business. I think it's very much both.

In terms of the detail, the 1 or 2 points I might just add just kind of fill in, in that respect. Retail up 12% during the year, 2025, that is driven by 2 or 3 factors in particular: transport, banking fees of PCA, cards, likewise. So that's a kind of, I suppose, a multipronged engine. Likewise, commercial a bit slower for the reasons that Charlie just mentioned. I would expect that growth rate to pick up in that business during the course of '26, not least because those '24 one-off effects that Charlie just highlighted drop out as well as what we've seen so far, at least a decent start to 2026. Let's see if that continues.

And then Insurance, Pensions and Investments, the same drivers as '25, which is to say GI drivers, long-standing the unwind of the CSM being part of that, Workplace pensions continuing to build the business. But again, as Charlie mentioned, the embedding of Lloyds Wealth as it will be called. I think we talked at Q4 about that Lloyds Wealth income stream being an incremental circa GBP 175 million of income in the course of 2026 versus what it delivered during the course of 2025. So a meaningful, if you like, addition from that space.

And then Lloyds Living -- or rather LBGI more generally, we've got a combined effect of LDC of housing growth partnership of BGF, but also Lloyds Living within that context. I mentioned Lloyds Living had doubled its OOI during the course of '25. You add together all of those LBGI businesses, and they're up 15% versus where they were the year before. You should expect meaningful growth in the OOI contribution of those businesses going forward. That hopefully just kind of fills in a bit of the blanks. But again, we would expect to see -- expect to deliver sustained growth in NII along the lines just mentioned, OOI growth for '26 ahead of what we saw in '25.

Excellent. I'm going to take a couple of questions online, then I'll come back to the audience here. Firstly, this question from Aman at Barclays. You are set to generate increasingly significant amounts of surplus capital from here. What should the market's base case expectation be for what you are likely to do with this surplus, buybacks, specials or potentially M&A?

Shall I kick off on that, and then Charlie may want to add. Thank you, Aman, first of all, for the question. I think the start point and perhaps the endpoint for this question is that we are in the business of maximizing the long-term value of the group. That is really what the management team is focused on and indeed the Board. Looking forward, as it has done in the past, that is going to encompass business growth, balance sheet growth as an example of that, GBP 22 billion lending and advances growth last year, for example. Alongside clearly organic investment. We've invested, as you know, GBP 3 billion over the course of 3 years in the strategic cycle, GBP 4 billion over the course of 5 years, in fact, a touch above that as I think we talked about in Q3. That's in pursuit of improving customer propositions, making sure the franchise really progresses.

At the same time, building the operational resilience of the bank as examples of other expenditures, if you like, of that cash investment. It also, from time to time, will include looking at least at M&A. But ultimately, it is all underpinned by capital distributions. And that is, as I said before, about maximizing the long-term capital distributions that we're able to give to shareholders.

Now just a word on M&A. The M&A bar is pretty high. There's a couple of points to make there. One is it clearly has to be strategically coherent. I guess that goes without saying. But you've seen in the context of the last couple of years or so, a couple of M&A pieces, if you like, that we've undertaken, one being Tusker, one being Embark. Both of those 2 have enhanced capabilities of the business at a rate that was faster, at a risk that was lower and at a price that was cheaper than the organic alternative.

When I first came in, we also did a scale add-on, which was the Tesco mortgage book. But it's that type of strategic, if you like, complementarity that we're looking for, either capability enhancement or alternatively scale add-ons. And then as I said, it has to be put through the filter of, is it going to get us to the target zone -- strategic target zone that is -- in a way that is faster than the organic alternative, in a way that is at least lower risk than the organic alternative and in a way that is ideally cheaper than the organic alternative.

So we're looking for speed, low risk and value in the context of the M&A that we would choose to undertake or choose to look at, if you like. Only when we meet that high bar, would we choose to divert any money from what would otherwise be distributions to the shareholders to M&A. You've seen the type of things that we've done before. I think the concern is, does it tick all of those boxes. That's the way that we'll look at it. But as I said, any capital allocation, whether it's about balance sheet expansion, whether it's about organic investment in the business, whether it's about M&A, whether it's about capital distributions, is about maximizing the long-term value generation and indeed, ultimately, capital distribution in the business over time.

The second question online is from Rob Noble at Deutsche. When considering full year '26 distributions, will it be pro forma for the Basel 3.1 reduction in RWAs as of 1st of January 2027? Are there any other regulatory moving parts of RWAs in 2026? Or will they grow in line with loans? I expect both of those for you, William.

Sure. I will kick off and Charlie may want to add about some of the strategic ambitions, if you like. The -- it's obviously far too early to talk about full year '26 capital distributions. We've just gotten to the point of offering GBP 3.9 billion in respect of '25, which in turn, as you know, from both Charlie and my comments, is a 15% increase in the dividend and a GBP 1.75 billion buyback. So we think that's a respectable outcome in terms of '25. To be clear, we do expect to grow capital distributions in respect to '26. That comes off the back of the increased capital generation of in excess of 200 basis points. So there's no debate about the direction that we're going in. But as you can imagine, Rob, I'm going to stop short of making any commitments about it. That will be a question for the Board at the right time.

I might just pause for a moment on Basel 3.1. A couple of points to make really here. One is, as you know from our disclosures this morning, we do expect Basel 3.1 to be a positive from the company's point of view. That is to say, to reduce RWAs by the range of GBP 6 billion to GBP 8 billion. We'll see depending on the evolution of the balance sheet and indeed evolution of economics that drive some of the factors behind Basel 3.1, exactly where within that landing zone it ends up, but that's the range that we expect. Why is it that we expect that benefit? It's largely off the back of the commercial business and the fact that we are currently operating on foundation IRB, whereas other commercial businesses that we see in the market are typically on advanced ARB.

And therefore, as Basel 3.1 gets implemented, there's less -- or rather maybe put it another way, there is some benefit for us because of our start point. That's where the majority of benefits come from. There is a little bit from retail as well, but that's the overall pattern of the Basel 3.1, as I say, RWA reduction. It's also worth briefly straying off Basel 3.1 for a moment on this, which is to say we have now landed our models for CRD IV. That is consistent with our GBP 2 billion RWA add-on in quarter 4, to be clear. We are now in the process of gaining PRA approval. Until we gain that PRA approval, there is obviously a little bit of risk around the PRA taking a look at it and if you like, entering into discussion with us. So let's see where that lands. We are where we are for good reason, but I just want to highlight that in the context of the Basel 3.1 benefits that we see.

Finally, in terms of distributions, Rob, as said, I'm not going to comment on the quantum. I have commented already on the direction. I do think it's important to say in that context that Basel 3.1 is going to give us RWA relief. You can figure out how many basis points of capital that RWA relief equates to we certainly have done. We will look at investments in the business, to be clear. We will clearly look at maximizing long-term value of the company, and that is in the spirit of maximizing long-term capital distributions to shareholders for sure.

But we will look at in the context of the overall capital position of the company, where we might deploy investments in the shareholders' best interests rather than necessarily automatically pay everything out in the minute that we get a pound in. That is not to say that we will not pay any element of that Basel 3.1 benefit out. It's not to say that. But it is to say that we will look at the round in the overall capital position of the company, and we will make the appropriate investments to ensure that the franchise stays as strong tomorrow as it is today and is capable of delivering shareholders what they want and need.

The thing I might add is, William and I were really conscious as we came in today that we weren't able to give you financial guidance beyond 2026 until July. And so what we've tried to do today is do a couple of things. One, give you some confidence in the momentum in the underlying business direction and efficiency that we are delivering over this period, and that momentum will continue. The second thing was to give you some specific numbers where we felt guidance was appropriate.

So the structural hedge in '27 and then some of the language William has used around that remaining supportive through the back end of this decade, even with our assumptions around how rates the yield curve will evolve. And then the RWA release we just talked about, again, you can see that we have the capacity to continue to really drive this business forward.

And then obviously, the third thing is those 3 statements that we've both repeated a couple of times that we see beyond 2026, the opportunity to increase revenues, increase operating leverage and increase shareholder returns. So we'll come back in July and give you that broader view around what that really means. But you can see we were just trying to sow the seeds for you to really understand why the confidence that we have around this business in '26 and going forward is grounded.

Thank you. Let's return to the room. Let's take a question from Jonathan at the front.

It's Jonathan Pierce from Jefferies. I've got 2. The first one is just a modeling question really. The fair value unwind and the amortization of purchase intangibles. Consensus has those broadly holding moving forward. My suspicion though is those are going to come down quite notably, certainly by '27, '28. Can you just confirm where that number will be, those 2 items in aggregate, please, a couple of years forward?

The second question, I'm sorry to come back to this point on capital generation, but it is clearly a major part of the story. And the guidance for this year for free capital generation of over 200 basis points obviously incorporates RWA growth and all these sorts of things. So we can see there's about GBP 5 billion of free capital from that. You've got another 20 basis points reduction in the equity Tier 1 to come, which is another GBP 500 million. And then you've got the day 1 Basel 3.1 of circa another GBP 1 billion 1st of Jan '27. That's GBP 6.5 billion taking into account organic investments and RWA growth at least.

How should we think about the mix of buybacks and dividends moving forward? And in particular, I'm interested in the dividend payout ratio because, William, you've been keen to flag several times in the last few months that the dividend payout ratio is too low, yet again, consensus doesn't really have it moving over the next few years. So is there scope here for that dividend to start growing by somewhat more than 15% a year over the next 2 to 3 years?

Thanks for those questions, Jonathan. I'll take both of them in the first instance. It may be that Charlie wants to expand also on the second in particular. On the fair value and amortization component, that has seen, as you know, a Q4 charge, I think, about GBP 34 million -- GBP 35 million actually. That is more or less consistent with the run rate, primarily related to businesses, many of them going back to the HBOS days and so forth, which in turn are amortizing over the last couple of years and indeed into the foreseeable future.

We did see a bit of a step down during the course of the year, and we do see expectations of a bit of step down consistent with your question, actually, Jonathan, over the course of the coming years. And that is as certain instruments that are getting effectively amortized in the context of that line coming off. The HBOS debt instruments are one example of that. And so you should expect, if you like, downward pressures to come from that. The only point I'd make in addition to that is that we are -- as Charlie mentioned, we've done a couple of acquisitions this year, SPW being one, Curve being another. And so that will add to the pile of stuff, if you like, that then needs to be amortized in the future periods.

So all being static, I would expect that line to gradually come down for the reasons mentioned, much of it relating to HBOS amortization. Having said that, we've added on a little bit in the context of '25 off the back of those 2 acquisitions. And therefore, we look at the net of those 2 rather than just one point in isolation.

The second point I would make on that fair value unwind intangibles point is that, as you know, the bulk of it has nothing to do with capital. So while it may actually help, if you like, the overall build in RoTE over time, not by much, but it will make a positive difference. Nonetheless, don't expect that necessarily to feed into the capital generation of the company. And so just worth bearing that in mind.

The second point, the capital generation, without commenting too specifically or directly on your numbers, I can see how you get to them. Maybe that's the best way of putting it. That relates to the capital generation of the company. It relates to the 13.2% down to 13%, which I said we've got a commitment to getting down to at the end of 2026. The Basel 3.1 basis points, you can tell from the GBP 6 billion to GBP 8 billion range that we've got what type of capital contribution that might make.

Just as I said earlier on, though, just bear in mind that we're not completely settled on CRD IV until the PRA is signed off, just bear that in mind really. And then what does all that mean for the capital generation of the company and dividend payout ratio and so forth. One point that I'd make at the outset there is that the payout -- the dividend, if you like, needs to take into account recurring earnings streams within the company whereas the buyback is more capable of taking into account lumpy benefits. And therefore, the buyback is more attuned to dealing with things like Basel 3.1, whereas the dividend is more attuned to dealing with the ongoing earnings for the company. And that's an important start point for the way in which we look at it.

When we look at the buyback versus dividend equation, we are committed not to a payout ratio within the dividend, as you know, but more to a progressive and sustainable dividend policy. And that, of course, means growth, but it means growth in a sustainable way, which for those of you who are long in the tooth like I am, will remember that is particularly important to Lloyds having the history that it has. So both growth but growth in a sustainable manner for the dividend. You've seen that over the last 2 or 3 years, that's meant 15% dividend growth, which now is 80% above where it was in 2021.

And the point of emphasizing the payout ratio is not to say that we're changing our policy or that we have a payout ratio policy, but rather to say that there is a lot of room for progressive and sustainable dividend growth in the periods going forward. And what we'll end up debating with the Board, I'm sure, is do we take a step jump in one period of time for that dividend, i.e., see a sharp growth in 1 year and then, if you like, attenuate the growth in the period thereafter? Or do we keep the 15% or thereabouts growth rate going for some years into the future.

And I think the good thing about where the business is right now is that based upon the guidance and expectations as to continued business growth, we have the scope to do one or other of those 2. And that's the point of, if you like, emphasizing the fact that we are on a low payout ratio. It is hard to put a finger on exactly where that changes, but we obviously pay attention to payout ratios that other banks, not just in the U.K. but beyond get to. But again, progressive and sustainable dividend policy is what it is all about.

In that context, it's worth just briefly commenting on the buyback and how do we look at the buyback and what's the impact of the price and so forth on the buyback because that's an inevitable part of the equation. First of all, I'd say the buyback in respect of '25, the GBP 1.7 billion that we bought back was bought back at an average share price of 77p per share. So when we look back on it, that obviously looks like good value now. And we very much hope we'll be saying the same thing this time next year, of course. We are committed to the buyback that we have today. We also see significant value in the current share price. And so that commitment to the buyback makes sense in the context of the share price that we're at today.

That's in the context of expected earnings growth, expected TNAV growth. It is also in the context of investors who basically see it the same way as we do. That is to say they have a preference for the buyback, and we obviously have to respect that as our owners. Alongside investors and owners who prefer income have it, and they have it from that 15% dividend growth, number one. They also have it because the buyback reduces the number of shares and therefore, helps us accelerate dividend growth on a per share basis, number two.

We look at the buyback also with the EPS, the DPS, the TNAV per share benefits that it gives. And then in the round, therefore, we are still very much behind the buyback. We think it's a very sensible thing to do for all the reasons emphasized. That means, I think, Jonathan, looking forward that dividend progressive and sustainable growth is an expectation, certainly a core expectation of us, as I said in my comments, an attractive pace. But I think excess capital distribution, both for the reasons that I just mentioned, also to accommodate, if you like, lumpy capital benefits, Basel 3.1 being the best example, with buyback is a good way to do that.

It's a pretty full answer. I think we said in the last few years, this is the problem we wanted to have that we get to a place where we have very strong capital distribution and our valuation more fully represents where we are today. And as William said, we think there's more value to come, but this is the right debate for us to be having, and we'll really value input from all of you and our shareholders as well as part of that as we go forward.

Excellent. Good. We run out of time, but I'll take a couple more questions. I think, Sheel, you had your hand out and Chris. So we start with you, Sheel, and then we'll finish with Chris.

Sheel Shah, JPMorgan. Two questions from me, please. First, on the IP&I business. The other income has grown strong at 11%, but one area where maybe the strategic initiatives have been a little slower to show there is maybe the net flows. Net flow rate of growth has been maybe at the low single-digit percentage. How much of that is a function of the market? And what do you think is the natural growth rate of this business?

And secondly, coming back to AI, the GBP 100 million that you've spoken about, there's a lot of focus on the ROI of these investments. Is that on a gross basis? Or is that including the cost of these investments that you've made?

On the strategic investments, in particular, Sheel?

Sorry, the AI.

The AI. Charlie, shall I kick off, please?

You can and I'll add on the...

In terms of IP&I, the business, as you say, has been really successful in terms of growing some of its core activities. You'll notice that the IP&I business recently last year, maybe actually '24, it might be the tail end of, effectively focused the business on 2 or 3 core strategic areas. These include things like GI, it includes things like workplace pensions, for example. At the same time, it sold the bulk business. That was a reflection, if you like, of the strategic focus of the business and a very deliberate capital allocation decision upon those areas where we frankly felt we had a right to win and indeed a path to ensuring that we did so.

So that's what's behind the positioning of the business. That's also what's behind the 11% OOI growth in respect of Insurance, Pensions and Investments in 2025, and that added to the acquisition of Schroders Personal Wealth now to be Lloyds Wealth, should add to greater growth, i.e., faster growth in OOI from IP&I going forward into 2026. That's the earnings story.

You talked about book growth there. I would just distinguish in doing so between what we describe as the open book growth versus the closed book growth. And what we mean by that is that we're very interested in growing assets fast in the context of those businesses that we are strategically focused on, just as I mentioned a second ago. And if you look at open book AUA new money in 2025, it's almost GBP 8 billion. It's about GBP 4.2 billion in Q4. Of course, we would expect to see that build over the course of time. And off the back of the strategic focus and investments in the businesses that I've just mentioned, Sheel, you should expect to see that.

I won't give you a precise run rate that we expect to target the business at. Safe to say that it's strategically focused and concentrated. And in addition to that, with that type of investment, with that type of background and context, we would expect those open book AUAs to grow at a faster base than necessarily or faster pace than necessarily the totality of assets under administration in the entire IP&I business might do.

The second of your question, ROI, ROI always takes account of the investment.

So just any other thing I'd add on the Workplace business is the benefit here of being a joined-up group is really helpful. We have all of our 1 million BCB customers and all our corporate institutional customers. And so the joined-up connectivity between the Workplace team and our Commercial teams is very strong, and you should continue to see us winning mandates, although the percentage of mandates in any 1 year is quite low. As you know, it's only about 2%. The pensions market is switching, workplace pensions, but it's a source of competitive advantage for us.

And then the Lloyds Wealth acquisition, we said it both pretty quickly, I think. We see that as an opportunity, obviously, for our retail customers and especially mass affluent, but also our workplace customers and for all big workplace pensions businesses, and we're #2 today. As you know, attrition and consolidation as we get near a deaccumulation phase for people is one of the choices where people decide where they're going to consolidate their pensions. And we now have an advisory proposition we can bring to bear for our customers in the workplace business. So it helps us have another tool for supporting customers when they're making those really important choices and can help us manage attrition on that business. So we do think it's a really attractive business. Now it's at scale, good returns and does have the potential to continue to grow healthily.

Excellent. Chris?

It's Chris Cant from Autonomous. Just trying to round things out, I guess, with regards to the commentary on AI and kind of digital leadership, the comment you made about reaching the end of this investment cycle and that being part of what's, I guess, helping control costs in '26 specifically as you look out to the next planning cycle, is it really a case of just redeploying the sort of investment spending that you've been doing over the last 3, 5 years?

So changing the focus to focus more on this digital AI leadership angle or should we expect some kind of lumpiness? Like do you feel like you need to have a front load of investment in relation to this Gen AI opportunity that you see? So should we expect that progress towards operating jaws to be gradual? Or should we expect it to be, I guess, back-end loaded? Is there anything you want to say there? That would be helpful.

And then just kind of reading between the lines a little bit. I get a distinct impression that you see one of the key opportunity sets within this AI revenue opportunity that you were pointing to as being the fact you have the captive insurer, you have this Workplace business. Could you comment on your inorganic appetite in that space? So you've been linked to Evelyn Partners. I'm not expecting you to comment on a specific transaction, but I'm sure you've seen the same headlines we all have -- I asked you about Schroders last summer, and you bought that. There's the Aegon U.K. workplace business potentially up for sale.

I'm just curious, is -- am I right in inferring that that's the key area that you see the next leg of the strategy for OOI growth. The last few years has been a lot about the leasing business, and that's been a huge driver of the overall other income growth. As we look forward, is it more about the fact that you're this joined up group and you can cross-sell and you can deploy AI to do that? And is that where we should be directing our attention because I think we probably all under analyze your insurance business, frankly.

Do you want to try the first one? We can both do both again. You want to try the first one, I have the second one and then...

Yes, absolutely. Absolutely. Thanks for the question, Chris. In respect of the AI opportunity, it is obviously gathering pace, as Charlie has mentioned in his comments. We've seen some foundation building during the course of '25. We're seeing scaling during the course of '26, and Charlie mentioned the 4 or 5 blocks of activity that, that relates to. When we look at the impact on that in the next strategic plan, if you like, in the period beyond 2026, that opportunity is going to grow meaningfully. It will grow both across the revenue opportunity and just as you said, not just within businesses, but in terms of linking businesses up together for sure. It is also -- you asked about the nature of the operational leverage and whether that is back-end loaded or whether that is, if you like, a continuous commitment.

I think it is fair to say, well, maybe make 2 comments. One is the improvement to operational leverage is intended to be about momentum. That is to say that we are delivering sub-50% cost/income ratio in '26. We expect that momentum to be sustained in the years thereafter.

Now inevitably, when you make investments early on in the strategic cycle, just as we are in this one, you will see that momentum accelerating towards the end of the strategic cycle. But don't make -- if you like, don't misinterpret that as being a lack of momentum in the years '27, '28 and so forth. So that's the way I would look at it. It is sustained momentum. It will inevitably because of the nature of investments and the way in which they mature, accelerate towards the back end, but that's just the way of things, and you've seen it in the course of this cycle.

The final point that I'd make on that perhaps before handing back to Charlie is that I hope that when people reflect upon this strategic cycle, people will believe that we've invested the money wisely. That is to say, we've invested GBP 3 billion over the course of 3 years, just over GBP 4 billion over the course of 5 years. That is starting to yield returns of the type that we're describing today.

That is also what is behind our confidence in improved income growth, continuous operating leverage improvements in the period beyond '26 and indeed enhanced RoTEs and therefore, capital generation expectations in the period beyond '26. So when we look at the overall investments in AI, just to mention one class of investments, amongst others, you would expect us to invest wisely. And I very much hope this strategic cycle at least gives confidence in that respect.

Great. You're close to getting us to talk about beyond 2026, which we are vehemently against because that will be July. Just in terms of your second question, a couple of things. And obviously, you wouldn't expect me to talk about individual companies despite the fact that you pointed out Schroders Personal Wealth last summer. Look, the first thing, again, on OOI growth, it's enhanced, not an old strategy. So we expect to see growth in all of those OOI pillars that we talked about.

We're excited about the future of transport. We're excited about the future of our payments business, and we just bought Curve. We've captured market share in credit card payments, something as old-fashioned as that during the cycle, gone from less than 15% to 17.5%, one of the targets we said we would deliver. We delivered that last year, 2 years early. We're excited about the opportunity to continue to grow our commercial businesses that underpin OOI.

William talked about the momentum in Lloyds Living as an example. So it's an and strategy. Yes, we are excited about the opportunity to continue to grow our Insurance, Pensions and Investments business. And so we see that as a really significant opportunity, not least because they're great stand-alone businesses themselves, but they are unique in our ability to bring them to our broader group, the connectivity into our commercial franchise, our retail franchise specifically. No one else in this market can do that. And we see there's lots of opportunity to innovate.

In terms of acquisitions as a path for that, look, I think William laid out very clearly how we think about those, both our track record, yes, we will do them where they have -- they accelerate our ability to deliver distinctive capabilities strategically and scale that makes a difference for our customers and our shareholders. But we do have a high bar for those, and we'll continue to look at it in that context.

I know, Chris, you'll remember back in '22 when we laid out this phase of the strategy, we laid out which businesses we aren't operating at the kind of 20-ish percent market share range. And as you know, there's still a number of these businesses. Actually, our Workplace Pensions business is pretty healthy in terms of its market share, but investments and then some of the associated areas around that, we're not operating at that level. That's also true in some parts of the payment space, in some parts of SME banking. And so we see opportunities to really grow in a number of businesses. And yes, IP&I is definitely one of them.

Chris, just to perhaps finish off on your SPW example, it is worth saying that we acquired their full control of what is a great business that will extend our wealth proposition to the customer base, alongside GBP 18 billion of assets under management, assets under administration as well as an addition of circa GBP 180 million of earnings, and it was all for GBP 0 capital cost.

And actually, just one more thought on that because we'll look and without doubling down is getting to the end, 300 great advisers, which is quite a material team that we can then apply into our broader group who are advisers we know, we love, some of them worked at Lloyds and we are confident in their conduct outcomes. So for a group like us, that's a hugely important part of making an acquisition like that. So well spotted last summer.

Excellent. So thank you. That concludes the questions. I don't know Charlie, whether you want to just briefly summarize and conclude the event.

Well, no, just as always, first of all, thank you, Douglas. Thanks for hosting the questions, and thanks to everyone who's joined in the room. And offline, we really appreciated the questions. Thank you for bearing with us as we've got this gap between this year-end and our July new strategy and financial guidance. We're really already looking forward to July, but let's stay in the moment for a second. I know it's a busy moment. We've brought our results forward, but I think there's 9, 10 other European banks live. So thank you for prioritizing Lloyds over the rest.

I don't know if you're going to be able to get the half term if you've got families, but that's hopefully a benefit from all of this. Obviously, our IR team is around for any further questions. As always, we'll be here for a few minutes ourselves. I'll look forward to seeing you in July. As I said, I'm really looking forward to that. William will do the Q1 results. As a team, we're going to be very focused on delivering 2026, and that's what we're going to be doing for the next few months until I see you again. So thank you very much for joining today, and see you very soon.

Great. We can get started. So I'm happy to open the U.K. Leaders Conference. We've got William Chalmers here, CFO of Lloyds Banking Group. Great to have you here as always.

Thank you for inviting me, Sheel. I used to work in this building, in fact, sometimes in this very room several years ago. So great to be back.

Not much has changed. Now the stock trades at 8.1x P/E -- 1.3x price to book for RoTE of 18% in 2027 on our numbers. Unfortunately, the valuation doesn't really reflect the earnings. We have political overlay, fiscal risk that's priced into the stock. It will be good to get a sense of what you're seeing on the ground. We've got the budget coming up next week. What are we seeing in terms of individuals and corporates and how are they acting?

Sure. Yes. I mean, I think despite the political confusion, the underlying reality is actually pretty strong. And in a way, that's a little frustrating for all of us, but it's the way it is right now. So we just hope the underlying reality gets to show through before too long. What do I mean by that? Macro economy, first of all. If you look at the macro, it's pretty unspectacular for sure. But nonetheless, it is supportive to the business.

And so what do we mean by that? In turn, we've seen GDP growth, which will be modest, but nonetheless positive this year, about 1.3%, likewise, around 1% over the course of next year. We see unemployment peaking at around 5%, not far from current levels. We see interest rates 4% maybe coming down a touch during the course of 2026. And then similarly, constructive HPI, constructive CPI. And so that combined backdrop is actually a pretty constructive backdrop for banks to operate in. That is to say, it allows us to grow income, both net interest income and other operating income.

It allows us to see really quite resilient asset quality performance and it allows us as a business to generate decent RoTEs and indeed decent capital return. So all of that is pretty good. And then if you look at that against the lending backdrop, you can see we've had circa 4% lending increase on the balance sheet year-to-date. That's pretty strong, about GBP 18 billion. GBP 6.1 billion of that was in the context of Q3. So it's kind of keeping pace, if you like, through the course of the year.

And overall, therefore, pretty good performance. Asset quality ratios, as you know, Sheel, really very benign. We've seen 18 basis points year-to-date. Our expectation is around 20 basis points for the year as a whole. We have been somewhat supported by the likes of calibrations in our AQR ratios. Run rate is more like 20 to 25 basis points. But overall, that's a pretty benign and indeed stable performance. And then finally, when we look at the behavioral indicators, the so-called early warning indicators as we look at them, whether it's new to arrears, which are stable, even falling in many of our portfolios, whether it's things like early repayments within cards or alternatively other similar consumer behaviors or for that matter, things like RCF utilization on the SME front.

The behavioral indicators again indicate really very benign outlook from an asset quality point of view. So a decent and constructive macro, decent and constructive lending growth off the back of that, decent and constructive AQR performance. And again, it lends itself to strong ROEs, and it lends itself to strong capital generation within the business. And ultimately, obviously, capital distributions alongside of that.

That's very clear. And I won't draw you on any potential bank tax and where that lands. But we've had 2 mention house speeches. We've had some actions by the government, the regulators to look at the competitiveness of the sector and work on that. Where do you think we will land on that? We have the Bank of England's capital review coming up. We've had some user ring-fencing, various areas of redress framework as well. Where do you think we're heading with this?

Sure, sure. Yes. The start point there is that the government and indeed regulators have been very and increasingly clear on the importance of a healthy bank sector to sponsor U.K. economic growth. So that's the kind of underpin, if you like, or the backdrop against which we're operating. In that context, Sheel, we've seen multiple positive statements from regulators, from the government itself. We've seen reviews. We're seeing reviews. We're seeing consultations and the like. Things like the legal reforms come to mind, things like the Mansion House speech come to mind, things like the FPC capital review likewise come to mind.

What matters to us is essentially 3 areas: conduct, prudential and fiscal regime. When we look at each of those, what we're looking for within conduct, and indeed, I think this is recognized by the government and regulators is the importance of a predictable, stable conduct regime. And so we've seen statements that effect. We've seen recognition of a point by indeed government and regulators. We are, I think, seeing a meaningful appetite for change. So you see statements, for example, coming out of the FCA to that effect.

And I think we're also seeing the building blocks being put in place for change. So if you look in the conduct area at FOS reform, for example, there is a consultation going on right now, which is about limiting look-back obligations. It's about limiting read across obligations, really important steps in terms of bringing the FOS back to what it originally was, which is a complaint resolution authority limited, if you like, to the context of that complaint.

I think off the back of those reforms, we'll see what ultimately gets implemented. But the direction of travel, I think, is very clear. And if you then pair that with the implementation or utilization of existing regulation, consumer duty being the best example of that, then you have a conduct regime, which, as I say, is the beginnings of something that is much more stable, predictable and conducive to the kind of the appropriate regulatory regime that we want to see as banks.

The prudential regime, similarly, a positive direction of travel in respect of the prudential regime. I think that is backed up by the PRA and indeed its secondary growth objective, which is informing the direction of travel here. Where do we see evidence of that? I think the FPC review is one piece of evidence. We're looking at the FPC, and I'm sure that it's looking at various different aspects of the capital structure, whether it is buffers, whether it is Pillar 2A, it seems to us very unlikely that nothing comes out of that FPC review.

What it is, let's see, we obviously don't know. But nonetheless, it seems very unlikely that nothing comes out of it. Likewise, the ring-fencing review. It's a long time since ring-fencing was at its inception. And since that time, there has been an awful lot of funding of liquidity of capital, of recovery and resolution change. Again, it seems to us almost inconceivable that a ring-fencing review concludes that there should be no change to the ring-fencing regime. And so again, we don't know what the precise answer is going to be, but the direction of travel is positive.

And again, it seems almost inconceivable that nothing comes out of this type of reform. And then finally, fiscal. In the context of obviously this morning's headlines, I suppose it's difficult not to smile a little bit, but really what we're looking at or what we're looking for, I should say, is just a stable, predictable and indeed competitive bank tax regime. And indeed, that is what should enable us to play our role in sponsoring growth through the U.K. economy.

In terms of looking at those 3, which is the most important, I think to be clear, all 3 have a role to play. And as I say, I think the direction of travel in respect of all 3 is positive, it's constructive. And so that's a good thing to see. It's a measurably different space to where we were a couple of years ago.

No, that's very clear. And the backdrop is definitely more supportive today. Now focusing a bit more on the business. You're 4 years into the 5-year strategic plan. You've got a strategy or should I say, a target refresh up in September. What do you think are the areas that you will be concentrating on, without preempting any of this?

Sure. Yes. Thanks for the question. A really important topic, and it will be obviously increasingly important as we go into '26. The first thing I should say, Sheel, is that, as you know, '26 is a really important year of delivery for us within the bank. It's a really important year of both strategic and financial delivery, and we are very focused on doing just that. And indeed, we have a very high level of confidence that we will be able to deliver in line with all of the guidance and commitments that we have made to the market.

So before talking about the post '26 strategy, we should be clear that we are delivering on '26. I think then when we get there, Sheel, we'll talk about it around the middle part of next year, that is to say, the next chapter of the strategy. And I think it will be composed of a continuation of existing initiatives, whether those are business unit focused or whether they're enabler focused. So for example, the extension of the wealth initiative that we're currently embarked upon, the continuation and the completion of the data transformation that we're undertaking right now. That type of stuff is underway.

The next phase of strategy is going to see us complete that. It will, of course, be accompanied by a series of kind of extensions, if you like, or new propositions. Again, whether those are customer-facing propositions or new capabilities, and we'll talk more about that at the half year. But my point is that it will be a combination of completion of what we've got on the table right now, plus obviously, an extension of the franchise and capabilities that we have as an institution.

I think within that, the much talked about digital and AI will clearly play a role. We gave a seminar a couple of weeks ago, which for those that haven't seen it, I thoroughly recommend you take a bit of time with. Charlie and Ron van Kemenad, I think, gave a decent articulation, if you like, of what we're trying to do in the transformation and in particular, the digital and AI space. It highlighted things like the address of legacy that we are embarked upon. It highlighted the delivery of the customer outcomes, which we are doing in a way that is better for the customer and much more efficient from a bank point of view.

It highlighted some of the advances that we have made to date in terms of things like mobile onboarding and BCB, 15x faster than it used to be, in terms of product delivery in that case in the context of the Lloyds Premier proposition, 60% more efficiently and indeed faster than it used to be. These types of things alongside enabler change, so 50% of the applications are now on cloud. We've had a 40% reduction in data centers since the inception of the strategy. These types of things we talked about last week in the seminar, but they show signs of material progress in the context of the transformation agenda that we're pursuing.

And the next strategy is going to take that a step further. So I think those are the points. Financially, I realize I've talked here a lot about strategy and data transformation. Sheel, the point financially that I would make is that obviously, we'll articulate -- we'll put that forward next year. What you should expect from us is to continue upon the progress or continue to deliver upon the progress that we deliver in '26. So specifically, what do I mean by that? I mean a continuation of operating leverage, number one; a continuation of sustainable and strong RoTEs, number two and a continuation of strong sustainable capital generation, number three. So you should expect that to develop from 2026 onwards.

And the cost outlook looks to be flattening in 2026. You've got less than 50% cost-to-income ratio for next year. But with the operating leverage that we're expecting to see out of Lloyds in the next few years, do you think a mid-40s cost-to-income ratio for this bank is possible?

It's a good question. I'll get to the answer, but I'll do it slightly around that way as you would expect. The first point that I would make is that the focus on costs at Lloyds, as I think everybody knows, is an absolute business imperative. I mean it has been that way since Pitman was in charge, which, by the way, is one of the events that I saw in this room several years ago. And it was inherited by Antonio and it was then inherited by Charlie. And it hasn't gone away.

And the adherence to rigorous cost discipline remains an absolute prerequisite and absolute imperative within the business. That's in turn, what allows us to deliver on -- articulate and deliver on absolute cost targets within any given year. As many of you in this room will know, we have committed to circa GBP 9.7 billion this year. We'll have a little bit of add-on of SPW now renamed Lloyds Wealth costs on top of that, not much. But that circa GBP 9.7 billion target will be hit. So that's about 3% cost inflation versus last year.

But actually, if you strip out severance, it's more like 2%. When we go into 2026, we're expecting, as you said, Sheel, to see flatter cost growth over the course of '26. And indeed, that should be some inflation. So that's the expectation that enables us to deliver a sub-50% cost-income ratio in '26 alongside obviously income growth aspirations and expectations that we have within the business. When we look at it, it's driven by 3 main strategies, if you like or 3 main drivers. One is investment led. One is increasingly efficient change function -- change saves as we call them. And one is the implementation of just business as usual cost strategies.

Investment-led things like branch and property rationalization. We'll be sitting -- at the end of 2025, we'll be sitting on a headquarters estate, which is 45% less in its footprint than it was at the end of 2021. Likewise, the investment saves, technology-driven saves, whether they are decommissioning, for example, whether they are a reduction of data centers -- I said earlier on, a 40% reduction in data centers over the course of the strategic period, whether it's cloud migration, whether it's decommissioning of existing legacy systems and so forth.

These are kind of technology-led investments, if you like, that lead to better cost outcomes. And then finally, still in this bracket of investment-led cost outcomes, automation. Automation is a big part of the transformation of the business from which we realize tangible cost synergies, but it requires investment often enough to get there. Change saves for a moment, the second of the 3 planks, we have invested heavily in the change process at Lloyds and the manifestations of that are, we've set up something called Lloyds Technology Center in India, a much cheaper and often more productive way of implementing change. We're probably late to the party in terms of that type of operation, but now we're there, and we're developing faster in that context.

Likewise, we've replaced much of what was previously a nonpermanent workforce with a permanent workforce, which in turn is more productive and more efficient in terms of achieving the goals. So that's kind of change program. We've realized about GBP 300 million in terms of change saves off the back of those types of initiatives. And then finally, BAU. I mean, BAU is the kind of bread and butter of the business, organizational design, matrix management, divisional productivity initiatives, these types of things, which are run rate type cost benefits. Procurement is another example.

If you add all of that together, Sheel, we've seen about GBP 1.5 billion in terms of gross cost saves since 2025 -- since 2021 rather as of half 1 2025. So a meaningful progress, if you like, in terms of gross cost saves, and there's a lot more to come as we look forward. When we look forward, I think the much talked about AI opportunities will play a role in those cost saves going forward for sure. I think it's important to put those in perspective. That is to say we are at a foundational point now of implementing many of those AI-driven potentials, if you like, possibilities. I think realistically, it takes a little bit of time to scale that up, and that's what we'll be doing over the next couple of years.

Final point here, Sheel, is that, as I said, this all delivers operating leverage and meaningful operating leverage in the course of 2026, which gets us to our sub-50% cost/income ratio. As we look forward, these types of cost initiatives off the back of the 3 planks that I mentioned, supplemented obviously by the potential of AI, which we can talk more about. That effectively allows us to manage the cost base much more efficiently, much more reliably, much more, as I said, effectively.

That is in the context of us continuing to invest in the business, us continuing to see, if you like, OpEx costs off the back of the new propositions that we introduced to customers and us continuing to see good upward pressure in costs off the back of enhanced volumes from expanding the franchise. So I think the right way to look at this overall cost piece is that, as I said, efficiency is absolutely at the heart of Lloyds Banking Group. But at the same time, we want to do so because we want to fuel the growth of the franchise and keep costs balanced in that context. So Sheel, that's the way to look at -- we look at it.

No, that's helpful. And if I look at the denominator of this equation in the income side, NII for the U.K. banks and Lloyds is expected to be an outstanding performer for the next 3, 4 years, probably even up until 2030. Within there, you've got the structural hedge that is growing in terms of a tailwind, particularly next year. You've got balance sheet growth running at 4%, which is a return to market share gains, which we haven't seen for a long time at Lloyds. How are you thinking about some of the other moving parts outside of the structural hedge going forward?

Sure. Yes. Yes, it's a good question. I mean this -- the question is very net interest income focused. So maybe I'll spend some time there. The progress in net interest income has been, I would say, solid this year. As you know, we're expecting GBP 13.6 billion. We upgraded it slightly as of Q3. And then we're expecting material net interest income growth over the course of 2026 and indeed beyond. Fundamentally, that rests upon 2 engines. One is net interest margin improvement and then the second is volume growth for your question.

Net interest margin, 3.06% as of Q3, we expect that to step up in Q4. We then expect it to materially step up again in the course of 2026. What's behind that? 3 main points, as you know, structural hedge number one. For those that are less familiar with the concept, structural hedge is basically the means by which we invest the deposits and equity of the business in the term rates market. The structural hedge will yield about GBP 5.4 billion this year. It's up about GBP 1.2 billion over what it was last year. It will then grow by a further GBP 1.5 billion next year, so in total, delivering about GBP 1.6 billion, at which point that GBP 244 billion of deposits and equity is still going to be yielding below 3%.

Now that's interesting because actually term rates that are similar to the weighted average life of that structural hedge are significantly above 3%. And that suggests that we should see meaningful growth -- expect to see meaningful growth in structural hedge earnings, not just in '26, but actually in '27 and '28 and beyond as the structural hedge refinances into that term rate market. That's a structural hedge driver.

I haven't talked so much about deposit growth, which in turn contribute to structural hedge volumes over the course of the look-forward period. We're not setting great store by massive volume growth in the context of deposits, but it would be realistic, I think, to expect some. And to the extent that we do, then that's obviously a positive from a structural hedge earnings point of view. Still on the topic of margin, the 2 main headwinds, if you like, that we see as abating over the course of the next couple of years are also important contributors to the strengthening of the margin.

So the main tailwind there is structural hedge. But at the moment, at least, it is being impacted by 2 headwinds, one relating to deposits and one relating to mortgage refinancing. The deposits point is driven by deposit churn, meaning migration from things like instant access, things like PCA into fixed term rates. And then there is a further element of pricing lags, which in turn are caused by bank base rate reductions, which take a little bit of time to catch up in terms of our customer pricing.

As base rates come down, there is less incentive to turn over deposits to put them into fixed rates. And likewise, by definition, there are fewer bank base rate reductions. And therefore, that headwind stemming from deposits abates over the course of 2026 and beyond as bank base rates come down and normalize. The second headwind that we've seen is the mortgage refinancing headwind, which is to say, at the moment, we are putting new mortgages on the balance sheet at about 70 basis points completion margins.

The maturing mortgages that come off the balance sheet are at 90 basis points, and therefore, a headwind there of about 20 basis points, as that mortgage book turns over. And of course, as the mortgage book normalizes, that headwind too starts to go into a base. And as a result, we see that second headwind effectively abating over the course of '26 and indeed beyond, which in turn means structural hedge really takes over. Tailwind of structural hedge really takes over, as the headwind of deposit churn and bank base rate changes allied to mortgage refinancings start to come off.

And indeed, on net interest income basis, on a margin basis at least, Sheel, that represents a very material driver of margin enhancement for the bank. Briefly on volumes. Lending up 4%, as I said earlier on, GBP 18 billion year-to-date, which is a strong performance. We'll see continued growth in the course of quarter 4. Likewise, volumes and deposits up 3% year-to-date, about GBP 14 billion across retail and commercial. Again, a strong volume driver for net interest income composition. On a look-forward basis, I would have thought the balance sheet should grow at nominal GDP #1, plus reflecting our strategic and market share ambitions, maybe a touch above that, which in turn, to your point, represents the market share gains we've been seeing recently and intend to capitalize on going forward. Overall, that's a pretty good picture for net interest income growth.

I agreed. And other income for Lloyds is an area where it's been growing 8% to 10% annually for the last few years. This is against the backdrop of consumer confidence, business confidence being relatively low. So it's surprised against my expectations. And it's quite diverse. You're looking to build a whole ecosystem for the customer in terms of the retail, the transport business, the commercial side as well. Can you talk through some of the initiatives you're looking at within this business that's been driving that growth?

Sure. Yes. Yes, absolutely. Sheel, I'd like to start by taking a step back, which is say why is this important to us? It's important to us because Lloyds has historically been quite an interest rate-dependent bank -- interest income dependent bank, which in turn means that when interest rates are low, then the earnings profile margins, particularly, are somewhat subdued as a reflection of that. What we set out to do in 2022 is actually to diversify away from that.

After 10 years of low interest rates and as a result, somewhat subdued margins, we wanted to move away from the dependency on interest income and diversify the earnings stream of the bank. Alongside of that, with a 28 million customer franchise, there's just a tremendous opportunity to make ourselves much more relevant to customers going forward. And indeed, that was also behind the other income -- other operating income diversification strategy for the bank. So that's the thinking, if you like, that lies behind much of the work that we've been doing in OOI.

Second point, we put forward significant investment into developing OOI propositions, and that will come into the context of what I'm about to say. That is delivering so far 9% growth in other operating income so far year-to-date this year. Likewise, if you compare quarter 3 of this year to quarter 3 of last year, similarly 9% growth. That is a very similar pattern to what we saw over the course of '24 and indeed '23 before that.

So this is not a flash in the pan. This is sustained other operating income growth that we're seeing off the back of the investments that we've made. As I said, investment led, we are seeing growth of -- or I expect to deliver growth of in excess of GBP 1.5 billion incremental revenues off the back of our strategic investments. 50% of those are going to be OOI oriented. Where are we seeing it particularly? At retail. Retail is up 13% year-to-date in OOI, driven by transport and PCA.

Insurance pensions and investments is up 5% year-to-date, driven by workplace #1 and general insurance proposition #2, which, by the way, is up 15% year-to-date post claims. Likewise, in our equity investments area, growth in Lloyds Development Capital, growth in Lloyds Living, our rental proposition. We've seen some slower areas to be clear. So for example, commercial banking has been a little bit sluggish for us this year off the back of a strong comparative in '24, number one, but also off the back of what for us has been relatively slow loan markets.

But in a sense, that just demonstrates the strength of the proposition because what it shows is that when one of the engines is a little bit sluggish, the other engines are more than capable of taking up the slack and delivering in turn that 9% growth. A couple of further points, if I could, Sheel. One is, what does this look like on a look-forward basis? We would expect that type of growth rate to be replicated during the course of the following year and indeed, during the course of quarter 4 for the remainder of this year.

It should also be supplemented by the acquisition of Lloyds Wealth, which for those of you that have been watching, you'll have seen that we did just a few weeks ago. So you should see a little bit of enhancement off the back of the Lloyds Wealth acquisition, quarter 4 this year and indeed going into 2026. Specifically, 1 or 2 examples that I thought might be interesting to highlight in this context. We're developing something that we term -- forgive the term ecosystems. So if you look at homes, for example, we have a concept called the Homes Hub. What these ecosystems are about, are about increasing customer familiarity with the proposition that we offer, increasing customer acquisition to the proposition that we offer and off the back of that, developing a much more holistic customer relationship.

So Homes Hub, the example that I just mentioned. I might also mention the mobility hub in the context of transport. Specifically, what is it doing? In the context of Homes Hub, you are developing direct mortgage relationships, number one, which, by the way, are a much more efficient way of distributing mortgages than through the IFA network for us. But you're also doing in the context of helping customers think about their general insurance needs and likewise, their protection needs. And off the back of that, early on in the strategy, we were at probably mid-single-digit penetration rates in terms of protection coming alongside a mortgage product.

As we sit together today, that's more like 20%. So it's effectively quadrupled over the course of the last 2 or 3 years, and we think there's much further to go. Likewise, general insurance in the context of the mortgage offer, similarly increases in penetration rates. The transportation hub is an interesting or the -- what we call it, the mobility hub within the transportation area is also an interesting example. We've got 23 million mobile app users. The mobility hub effectively opens up all of the transportation-related capabilities to those 23 million mobile app users.

Specifically, what do I mean by that? It's a day-to-day stuff for sure, which is mundane, but we've all got to do it, which is things like parking fees, for example, or alternatively for those that are unfortunate enough to incur them paying a fine. You can do all that stuff through the mobility hub. But actually, more interestingly, from the proposition point of view, it also opens up customer relationship with general insurance. It also opens up customer relationship with refinancing of automobiles.

And so as a result, the mobility hub is a -- means a set of accessing of enhancing understanding of building the customer relationship in what is termed an ecosystem. Final point here is that I've talked there about a couple of hubs for a better word. It's that much more than that. So if you look at the synergies across the divisions that we're trying to create right now, Tusker, which is a salary sacrifice effectively car scheme that we bought a couple of years ago. One of Tusker's biggest distributors now is our CIB division.

Likewise, workplace, same thing. Likewise, you'll see a lot of integration looking forward between wealth management and savings proposition. So across the business, we are trying to take what was previously a relatively siloed proposition of Lloyds Banking Group into a much more integrated proposition of Lloyds Banking Group. And so far, at least enjoyed some success in that spirit.

Yes. You mentioned Tusker, Embark is another acquisition that you've undertaken, Curve more recently...

We haven't done that.

Sorry, recently announced at least. Where do you think the group is underrepresented that could maybe be supplemented by inorganic growth? And maybe to attach on to that, Charlie spoke about the potential for international expansion. What sort of regions or product areas could you be looking at there?

Yes, sure. The start point for me there is to say, as you are aware, Sheel, when we look at the markets that we operate in, we either have a very strong market position already. For those who are familiar with Lloyds, you'll know that we have, let's say, 20% to 25% market share in all of the key retail markets -- all of the major retail markets or alternatively, those areas where we don't have such strong market share, we have pretty strong capabilities to grow it looking forward.

Workplace might be an example of that. Likewise, the wealth proposition, in particular, post the acquisition of Schroders Personal Wealth, now Lloyds Wealth as a further example of that. So we're pretty well served. We're either well served because of the market presence that we have or well served because of the capabilities that we have to grow that market presence. And I think that's the start point, which in turn dictates the outcome that our strategy is predominantly an organic strategy. That's how we get there.

Having said that, as you highlighted, Sheel, we've done 1 or 2 acquisitions. They've all been pretty modest in size, but they've either delivered us with capabilities that we didn't previously have or enhanced capabilities or alternatively, they built scale. And so those are the 2 areas in which we would consider acquisitions. And when we do see them, we will subject them to some pretty rigorous tests, if you like, which my previous background prior to Lloyds was essentially in M&A, and therefore, much of my views on M&A are conditioned by that, if anything, at the harsher end of the spectrum.

So the tests that we'll subject M&A to are threefold. One is, does it deliver an outcome faster than our organic alternative? Two is, does it deliver an outcome that is within acceptable risk parameters, at least as good as our organic alternative? And three is, and most importantly, does it deliver an outcome that is value-added versus our organic alternative. And those are the 3 things that we will look for in the context of any given M&A. Not to say we won't do it, but to say that those 3 together represent a relatively high bar to which M&A is going to be subject.

Now you asked about international in that context, Sheel. I think Charlie's comments around international in the context of that AI digital seminar from a couple of weeks ago, where effectively he was saying, look, if we can build capabilities within digital and AI, why would we limit them to Lloyds Banking Group. Those are capabilities that could be relevant to a number of our peer group, potentially in Europe and possibly beyond. It's that type of forward thinking. I don't think it's a commitment that is much more than that.

It is important to say in this context that we are and will remain a U.K.-focused retail financial services group, no doubt about it. In that context, if we are able to deliver technology capabilities that have relevance to others, for sure, we'll look at it. But it isn't our primary purpose. As you can tell from my comments, our primary purpose is to do more of what we're doing today right here. The next stage of the strategy, as we look forward, really isn't going to change any of that. And anything that we do kind of around the edges for those that are not aware, we have a small Dutch mortgage business, for example.

It delivers returns in excess of 20% ROE. 50% of the mortgage book is guaranteed by the government. The rest of it -- in fact, the entire thing has very low LTVs. So it's great returns on a low-risk business. It's been a business that we've had for years, and we've just kind of kept it on the balance sheet, and we've allowed it to invest to take advantage of its competitive advantage, to exploit its competitive advantage. That doesn't change our overall profile. In this strategy and in the next chapter of the strategy post 2026, we are going to remain a U.K.-focused financial services organization, and I hope a highly successful one.

Great. And if I focus in on wealth for a second, you've got Lloyds Wealth, you've acquired the Schroders JV. The FCA has clearly opened up the advice gap. You've got a strong retail franchise with the opportunity to cross-sell into that. When I'm thinking about growth going forward, is this going to be more of a restricted adviser approach? Or would you consider an IFA approach similar to maybe St. James's Place that you previously owned many years ago?

Yes. Yes. Yes, that seems like a long time ago, Sheel. A couple of thoughts maybe. First of all, I think it's important to say how pleased we are with the Schroders Personal Wealth, Lloyds Wealth acquisition. For us, that is a fantastic acquisition. I'll come back to it in just a second. But it gives us essentially 60,000 clients. It gives us GBP 17 billion AUM. It gives us in excess of 300 advisers. That's the beginnings of a fantastic franchise. We want to build it, we want to scale it, but it has the seeds of a fantastic franchise.

It allows us to take on and indeed build upon and accelerate what is for us a really important area of strategic focus, i.e., the wealth proposition. I mentioned earlier on the need to the desire to the strategic ambition to exploit the franchise that we have, to build the franchise that we have. Wealth is a key part of it. Specifically, I think it allows us to develop, and forgive the cliches, but a seamless customer journey off the back of that, an integrated set of propositions alongside that should allow us to improve conversion of customers.

These are really important facets to retain customers as they move from potentially savings products, cash savings products into wealth and investment products. We should be able to retain much more of that flow off of the type of changes that I've just been highlighting. I think alongside of that, pretty obviously, you would expect to bring the benefits of the group's scale and efficiencies to that wealth proposition to enable it to have a better cost base and indeed to ensure that the customer pricing is at the sharp end of customer pricing, as indeed it should be to ensure customer value.

How does it fit in, in terms of the wealth proposition? What we're trying to do is build a 3-pronged approach. That 3-pronged approach. First of all, is direct-to-consumer execution-only stuff. We're well underway with that, really attractive customer demographic, utilizing that in a big way. We are actually replatforming it right now in much the same way, as we replatformed the GI business, and it led to very successful outcomes, and we're hopeful that we'll do exactly the same here.

But it's -- this is a good business that is currently operating very effectively today. So that's kind of plank one. Plank two is the building of the digitally assisted capability. And of course, there's various models of that operating around the world as we speak. We've got one, it's incipient that is being built upon. And then finally, the Schroders Personal Wealth acquisition, the Lloyds Wealth acquisition, as it's now called, allows us to complement that with a fully owned, 100% owned face-to-face proposition as one of those 3 fairly contiguous planks.

When we look at the opportunity here, Sheel, I think the important thing is to realize that it's kind of multifaceted and the 2 most important opportunities that stand out. One is the 3 million mass affluent customer base that we have, that we can effectively point this out in, as I said before, a much more -- hopefully, a much more successful way off the back of those proposition enhancements that I highlighted. So that's one big opportunity for sure. But the second opportunity, which sometimes goes kind of unnoticed, let's say, is the workplace proposition.

We have about GBP 120 billion or thereabouts in terms of workplace pension assets. Every year, somewhere between GBP 5 billion to GBP 10 billion of those workplace pension assets effectively leak out of the system. And they leak out of the system because the pensions come up for maturity, the customer then transfers those assets to a St. James's Place, to a Hargreaves Lansdown, whatever it is. And to date, at least, our ability to counter that has been somewhat limited.

With the wealth proposition that we're building off the back of the Lloyds Wealth acquisition, we have the ability to put in place a much more effective way of stopping that leak and retaining the customer relationship and indeed the associated value within the group. And that's exactly what we're going to be doing. So there's a second big opportunity there. And as I said, it sometimes goes unnoticed, but it's a material one and an important one.

What does it take us to -- where it takes us to is an expectation of other operating income of around GBP 200 million from this acquisition over the course of next year. That's about GBP 175 million more than you would have previously seen. By the way, I'm afraid don't miss the cost. It's about GBP 120 million of added costs too in order to access that GBP 200 million of OOI. So bear that in mind, and that's introduced because of the accounting changes over the previous structure.

And then the final point for geeks like me at least, which is interesting is, that this was all done at a 0 capital cost. Because it was done in exchange for our stake in Cazenove, it was all done at a 0 capital cost from the group's perspective, which, of course, is helpful in terms of capital generation and ultimately capital distribution. You asked about IFAs, Sheel, which [indiscernible] but the start point is what is most important from a customer point of view? What does it take to deliver a strong customer proposition. For that reason, we'll never say no in terms of considering these types of things. But I think it's safe to say that at the moment, we are very focused on the integration and indeed the growth of Lloyds Wealth.

Great. I'll open up for any questions.

It's [ Gigi Sparling ] from JPMorgan. Charlie had hinted a little bit about potentially a change in capital distribution next year with potentially not going to annual share buybacks. Could you comment on moving away from annual share buybacks. Can you comment on that, please?

Sure. Yes. Yes, I'm very happy to. Start point, of course, must be that the commitment to excess capital distribution is an absolute imperative from the Board's perspective. I hope we've demonstrated that amply over the last several years actually, but it is an absolute commitment from the Board's perspective. I think we're fortunate in a sense that the business is very capital generative. So it provides a good backdrop for fulfilling that commitment. And so specifically, what do I mean by that? 145 basis points expected to be generated this year.

If you put aside the GBP 800 million most provision, it's 175 basis points. And looking forward, a material step-up into '26 of in excess of 200 basis points capital generation. So a really quite strongly capital-generative business, both today and also on a look-forward basis. We've led testimony to that by increasing the dividend successfully over recent years, 15% increase at the half year. That's a pretty good indicator as to where we're going to go at the full year.

And I say all of this because it is -- as I say, it is the backbone of and lends testimony to that full commitment around distribution of excess capital. You mentioned buybacks there. A couple of points maybe to make. One is we've seen some very strong and consistent buybacks within the group. If you look at buybacks over the course of the last 4 years, 2025 included, we have now bought back in excess of 18% of the stock of the banking group. That's pretty significant. And indeed, the commitment to do more is absolutely there.

When we look at the CET1 ratio, and this informs the way in which we look at buybacks, we've committed to a 13% target CET1 ratio to be delivered in 2026. 2025 will be a staging post on that journey. During that time, as we move towards that 13% CET1 ratio, we have thought it appropriate just to do one buyback a year. And it is to an extent at least linked to the gradual achievement of that 13% CET1 ratio. But the reality is that the Board looks at the regularity of buybacks at the end of every year. And indeed, it will do so again at the end of 2025 for sure.

When it does so, I'm sure we will look at it in the context of -- well, if we were to move from, let's say, 1 to 2, it would allow us to operate closer to our target CET1 ratios. It will allow us to distribute capital faster to our shareholders. At the same time, it does come at a bit of a cost. That is to say, it reduces operating flexibility for the business either to deal with exigencies, let's say, or tends to be seizing opportunities. So I think those need to be taken into account. But I think there is clear recognition and an understanding, if you like, of the benefits of the buyback policy as a whole, but also the regularity of that buyback policy being potentially a step-up from where we are today.

Hopefully, that answers the question around the buyback. We'll look at it at the end of the year. We recognize that there are some gains to be had from thinking about the -- forgive the term cadence of that buyback. One more point maybe to make is around the dividend policy. I mentioned that it's been stepped up by 15% as of the half year, a pretty good indicator of where we'll go as of the full year. What do we think about that looking forward? As you know, we're very committed to a sustainable and progressive dividend policy.

When we look at the dividend payout ratio, as if you like, a function of that dividend policy, it is, as you will have seen, a pretty low levels. That is in the context of a group which expects its earnings and indeed capital generation to materially step up in 2026. That in turn means that there is plenty of room to ensure material and healthy and meaningful dividend growth in the years going forward. So we talked a lot about buybacks or I've talked a lot about buybacks in responding to your question. I just don't want to miss the point that dividend is also an important part of our capital distribution strategy and a materially growing one with the capacity to do so, not just in '25, but also importantly in the years ahead.

Great. Any other questions? We've got time for a quick one. No? Otherwise, thank you for your time, William. It's my pleasure. The outlook for the growth of the group looks strong, and let's hope the valuations can reflect that going forward.

Hope so. Thanks very much indeed.

Well, good morning, everybody. My name is Jason Napier, I run financial research on the equity side at UBS. Welcome to the UBS European conference. We're thrilled to have so many people with us today. We're thrilled to be in this new venue. And we're very pleased that William Chalmers, the CFO of Lloyds is opening this particular stream for us today. William, thank you for joining us.

Thank you very much for inviting me, Jason. It's a pleasure to be here. Thank you.

So you've been CFO for 6 years now, it feels like maybe more than 6 years potentially on some days. The market is already focused on the next strategic plan, which we get next summer. I wonder whether you wouldn't mind sort of setting us off by reflecting a little bit on what it is you saw in the group at the outset of the last plan, what it is you are looking to change and how you think that process is going?

Sure. Yes, very happy to, Jason. As you say, there are definitely some days when it feels more like 6 to 10 years, let's say, and some days it feels much less. So it goes up and down. But overall, it's been a fantastic journey for the management team and for the bank, but we've got a lot more to do. Jason, in respect to your particular question, I guess, what would I say?

I think the inheritance that Charlie and I had was, of course, a fantastic bank with a fantastic customer base, but also a bank that had spent essentially 10 years being optimized post the financial crisis. And so it was really incumbent, I think, upon both Charlie and I to set out a growth agenda to allow the bank to capitalize upon the opportunity in front of it and indeed to put up a much more resilient franchise for the future.

I think within that, as you know, we set out a strategy that was U.K. focused that was in turn digital-led, that was in turn about an integrated financial services proposition and that allowed the bank to capitalize on opportunities with the scale that it has. That's what the strategy was focused on.

Three elements to that. We described them as grow, which shows obviously about revenue growth and diversification. We described it as a focus, which is around cost and capital efficiency. We described it as change, which is around maximizing the potential of people, of data, technology. So grow, focus, change is what was behind the strategy as a whole.

Where have we gotten to in respect of that? Growth, first of all, we've obviously benefited from the rate cycle, for sure. That has been supported by some pretty decent franchise growth. But at the same time, it was important for us to diversify that growth and to reduce the net interest income dependency. And you can see that coming through in terms of the other operating income, 9% year-to-date, similar pattern in 2024, supported by a broad base of businesses.

When you look at change, the change agenda -- or sorry -- the focus agenda maybe is around cost efficiency. At the end of 2024, we delivered in excess of GBP 1.5 billion of cost efficiencies versus where we were in 2021. Those gross cost efficiencies are now running at in excess of GBP 1.9 billion. And we'll see more of that as we unfold the remainder of the strategy going through into 2026.

Capital efficiency, we've seen RWA growth off the back of lending growth, but also off the back of regulatory calibrations. But we've also optimized against that now in excess of GBP 21 billion of RWA efficiencies since we started out in the strategic journey. Alongside of that, the growth has been focused on those areas, which are capital light, if you like, i.e., can produce efficient and indeed return generative components of the business, i.e., insurance pensions and investments in businesses like workplace for examples of that.

And then finally, on the focused agenda, we have tried to remove capital blockers to distributions. The pensions deficit was the best example of that. GBP 7.3 billion when we came in, it's now 0. And so as a result, what was previously a significant capital blocker has been removed.

And then finally, on the change agenda. Jason, you'll be aware and we talked a bit about this in the context of the digital seminar last week, but we've invested heavily in talent. We've invested in the Lloyds Technology Center out in India to allow us to enable an efficient change process. We've invested in removing legacy, data centers down by 40% since we started. And we are engaged in the building of product efficiently. So for example, the Lloyds Premier product was built with 60% less time resources versus similar product builds earlier on in our journey.

So all of this allows us to deliver a more efficient change process, which, of course, is behind the kind of continued fulfillment of our strategic ambitions. So there's a lot to reflect on when we came in. There's a lot that's been done since then, but as said, there's a lot more to do going forward.

I mean, yes, exactly. And I guess, none of those themes are time-barred or ever done, really. And so I guess the expectation in the market would be sort of more of the same next summer, but I guess we'll have to wait and see for that.

One of the issues that is unfortunately continuing front page news in the U.K. is the sort of legacy product refund issue. The banks that we track have paid GBP 69 billion in refunds so far. That's 20% of today's NAV. Just government have said they want motor to be the last one, notwithstanding the disquiet that we have with the FCA's first proposals around how to repay people around motor. What is it that from the outside we should be looking to see delivered so that we can have any confidence that this will indeed be the last one?

Yes. It's a fair question, Jason. And obviously, something that we are acutely aware of as a management team. I think the first point that I'd make is that we agree with the premise of the question. That is to say, there is no doubt that conduct risk is impacting or has impacted investability and therefore, something on which we should all be focused.

The -- your question, Jason, is around what should the market be looking out for, for signs of change in this respect, i.e., for change, for signs of lasting improvement, I suppose. I guess I would make 3 or 4 points. The first off is when we look externally, we should look for signs of acknowledgment of the problem. And so what I mean by that is when you look at things like the government and regulatory statements, Mansion House is an example of that, the Leeds reforms is another example of that. There is, I think, a clear acknowledgment of the issue. That is to say the conduct agenda needs to be addressed in order to secure U.K. investability as a whole. So that acknowledgment point is the first sign.

I think then you would hope to see some appetite for change. And again, you look at things like statements, the FCA statement on the motor issue being the last mass redress event has been pretty clear and unequivocal actually. So you look for appetite for change as reflected in governmental and indeed, regulatory statements.

I think then third and perhaps most importantly, you look for signs of meaningful reform, not least in the conduct agenda in respect of the financial ombudsman, the so-called FOS. And we're seeing there signs of reconsideration of the read-across obligations, which FOS has previously imposed on the financial services sector. Likewise, reconsideration of the look-back period. Both of these 2 topics are really up for debate and potential reform right now, and we see very realistic chances of the situation being improved. And so meaningful reform.

The third element, I think, is starting to come through. More to see for sure, but nonetheless, we think the direction of travel is good. I think then we would also look for what I'll describe as appropriate implementation of existing regulation. What do I mean by that? Most specifically, you might refer to things like the consumer duty.

When we look at how the consumer duty is being implemented right now, we see it as basically being appropriate. There is no sign that the consumer duty is being used in an obstructive or difficult way from the FCA. Rather it is a constructive ingredient to producing sensible and appropriate customer outcomes. So you're looking at existing regulation being implemented in an appropriate way.

And then the final point, which is really on us, is to ensure that we and all the other banks behave in the appropriate way. And so in reference to that, since 2012, we've implemented something called conduct risk appetite metrics, which in turn allow us to look carefully at things like product pricing and disclosures and make sure they are absolutely appropriate. Likewise, we have very extensive customer contact programs when we do things like change prices on products. Likewise, we trial products in the FCA sandbox, and you'll have heard a bit about that in the context of the AI seminar last week.

So banks have to get it right, too as part of this. And I think there is significant progress that has been made certainly by us, and I suspect by the sector as a whole. But those 4 or 5 things or themes, if you like, Jason, I think are the types of things that you look for. And as I said, from our perspective, at least, we are seeing meaningful signs of progress here. Again, more to be done for sure, but nonetheless, the direction of travel is positive.

Interesting. So the other area of I guess some gathering interest as to whether we might see a change in capital requirements, the review that we get the results from on the 2nd of December. If you watch the U.K. banks as long as I have, one feels that RWA density is up, risk is down, data is better, conduct risk is lower. Should we have any expectation of a sort of a more competitive capital setup, do you think out of that process?

It's a good question, Jason, and obviously, one that we look at with a great deal of interest. I think it for me, it falls into the broader context of what is going on in terms of the governmental straight regulatory agenda that is conducive to or supportive of the U.K. financial services sector.

I think the first point that I'd make in that context is that the government has been pretty clear about the importance of a competitive sector to drive U.K. growth. And that's a helpful backdrop to have in the context of any of these exercises, if you like. I think then you say, well, how can that be driven? And I think 3 directions of travel, I suppose. One is around the prudential agenda, one is around the conduct agenda and the other is obviously around the fiscal agenda.

In respect to the conduct, we just made some comments a second ago, which hopefully are helpful. In respect to the prudential, you highlighted the FPC review there. When we look at that, there are a variety of areas that the FPC review could consider. You mentioned risk weighting there. One might also mention the calibration of buffers, which are relatively high by international standards, at least if you look at the countercyclical buffer. Sure, absolutely.

There are other aspects, if you like, within that, the leverage ratio is, for example, an inclusion or exclusions from that. These are the types of areas that the FPC review could look at. It's hard to be too specific at the moment about exactly where the FPC review would go. But I think based upon the commentary that we see externally, based upon the discussions that we and others are having, it feels like it is unlikely that nothing is going to come out of it.

Why is that? I think it's coming back to those points that I made earlier around the appetite for change around the constructive statements, and these types of things give you a lead into what might be arriving, if you like, in December. Allied to that, I think the secondary growth objective that the PRA has now been given alongside the FCA is constructive in that context. So we'll wait and see.

I mentioned the fiscal agenda there. And I think there, it's about a stable and predictable and competitive tax regime that we'll be looking for. So I think if you add up all of these things, you have a conduct agenda, which hopefully is making progress. You see a prudential agenda where the FPC is a review, if you like, is a piece of evidence that we may see some progress. You might also add to that, things like the ring-fencing review that is going on as a further example. And let's see what happens with the fiscal agenda in the upcoming budget. But overall, I think a relatively constructive backdrop for the sector, probably better than we've seen for at least the period that I've been in charge.

So if we turn to sort of more Lloyds-specific, mercifully more Lloyds-specific factors, the U.K. domestic banks are going to produce the best revenue growth in Europe driven by the hedges. Then the market as is its habit is looking to interrogate what happens beyond that already even though that may be 3 or so years from now. If you talk about the capacity of the organization to deliver positive jaws ex-hedge for a second because it's -- I mean it's interesting, considering the tailwinds we've had around growth in rates and so on the cost-income ratio of the bank now is the same as it was before rates went up. And so if you could just talk to the capacity to keep the jaws between the 2, which are going to be like 9% next year, can you sustain that ex-hedge is the first question, I guess.

Sure. Sure. In short, Jason, the answer is we look forward into 2026 is that, yes, ex-hedge there should be positive jaws. Now a couple of points in respect of that. Why is that, first of all, people in this room will be aware of the strength in OOI growth that we've seen over recent periods. 9% year-to-date follows a similar pattern in respect to 2024. It's based off of a set of broad-based and diverse drivers across the business units.

And we do expect that to continue going forward into 2026. It will also be bolstered by the acquisition or the full acquisition, I should say, Schroders Personal Wealth, now renamed Lloyds Wealth. And so that is all helpful on the income side. And that is allied with as you would expect from Lloyds rigorous cost discipline.

So specifically, what do I mean by that? In '25, we'll see costs up 3%. If you exclude severance, it's up 2%. We've talked before about a flatter cost expectation for 2026, and indeed, that remains our expectation, off the back of maturing investments, achieving a full year run rate off the back of the usual BAU cost discipline that we apply kind of across the piece.

But I think coming back to your question, Jason, removing the structural hedge, I think, is the wrong way to look at it. And the reason for that is because the structural hedge for us and for everybody else drives their income profile. That, in turn, drives the sector's ability to reach returns and indeed drives the sector's ability to meet targets. That means in turn that structural hedge drives pricing decisions. And if you remove the structural hedge, then those pricing decisions elsewhere in the asset and the liability profile change.

The best example of that is in respect to mortgage pricing. Mortgage pricing completion margins right now are around 70 basis points. It's not far off the cost of equity, i.e., there or thereabouts. If you remove the structural hedge, that mortgage pricing changes. If you look back at the pre-COVID and indeed the COVID period, you saw mortgage completion margins double or more what they are today. And that was in a period when we had much flatter curves and therefore, much less structural hedge growth.

And so there's kind of concrete empirical evidence there, if you like, is that if you remove the structural hedge as a driver, you then affect other pricing elsewhere in the balance sheet. And therefore, the removal of the structural hedge in the context of pricing decisions, Jason, should not be seen in isolation. It is rather part of a holistic picture.

When we look at the structural hedge, with that in mind, with it in place, we're delivering about 2.3% yield on GBP 244 billion of deposits and equity over the course of '25. It is still below 3% by the time we go into '26, and that is below -- well below churn rates. And therefore, the structural hedge should continue as it refinances to deliver meaningful growth through the P&L. As said, I don't think removing it is the right way to look at it, but if you do remove it, you can be pretty sure that all other pricing within the business will change with it.

And of course, the further out you sort of project, the more important, the product pricing becomes in what NII actually is, which sort of brings you back to a fairly philosophical, but an important question, which is what is the clearing RoE for U.K. domestic banks? Without the hedge, we might have earned more on mortgage spreads and so on, but it does feel like we're going into a Q4 and in your case, summer '26 outcome, where it's going to be very hard not to promise a higher RoTE than in the last plan. How do we sort of think about the right return for financial services in domestic U.K.? It's a tricky question. I appreciate that.

No, I think it's a fair question. I think the -- when we look at the business and its return objectives, I mean, first of all, there's a lot of data out there in terms of the returns that us and others expect to earn in the business. This year, next year and indeed, by the course of, I guess, end of year next year and indeed into the summer, you'll see a bunch of new targets from us and other providers.

But I think at a more fundamental level, Jason, the right way to look at it is to look at the industrial structure, to look at macro expectations and then to look at each individual's competitive position. And it's those 3 things that I would really look at in answering your question. And specifically, what do I think that delivers? What I think it delivers is a sustainable RoE that is at least similar to what we expect to achieve next year accompanied by an appropriate growth rate. I mean that's the bottom line that I think those 3 ingredients deliver.

And maybe just take a moment on each of those. If you look at the industrial structure, first of all, it's a competitive industrial structure for sure. You see it from the incumbent, you see it from the neobanks, you see it from big tech, you see it from stablecoin providers increasingly. But it is also a relatively stable industrial structure. And why is that? I think it's because of the investments that we make. It's because of the competitive moats that we all have, it's because of the regulatory supervision of the sector, too, to be perfectly frank, and that produces a relatively stable industrial structure, albeit quite a competitive one.

The second point, I think, Jason, is you have to look at the macro and the set of macro expectations. And when we look at the macro, we see pretty unspectacular, but nonetheless, a stable macro outlook. And if we look at rates in particular, going back to the earlier comments around structural hedge, we are still refinancing, as I said, GBP 244 billion of deposits and equity at rates that are meaningfully below term rates, meaning that there is quite a lot of growth still to come through structural hedge.

And as long as you think that rates are going to be more or less stable in the period thereafter, i.e., a bit of variance for sure, but more or less stable, then you're seeing a relatively stable contribution from that part of the balance sheet. So I think overall, that is also long-term supportive. And then I think you have to look at the competitive position of any given bank.

And speaking for ourselves, at least, we have an outstanding brand. We have the trust of around 28 million customers on a daily basis. We have around 20% plus of key asset and liability markets. This is a very strong competitive position. And as everybody in this room knows, we are investing very heavily in the business right now to make sure that we maintain that competitive position.

So I think when you add those things together, you've got an industrial structure which is competitive but stable. You've got a macro outlook, which is inspiring at some level, but nonetheless stable. And you've got a competitive position of Lloyds Banking Group, which is really very strong and being continually invested in to maintain that strength. And that, in turn, leads us to a strong conviction in the sustainable RoE of the bank, as I said earlier, looking towards '26 and beyond.

Right. Now, one of the things that I'm not sure receives enough attention was one of the things you said earlier around the gross cost savings that you've delivered in the plan, massive number. But because we're guided to higher costs every year, we're not sure whether that produces a Lloyds that's much better invested. Is it a coiled spring that can be much more efficient in the future, or whether this is just the nature of modern banking, fewer branches more engineers. When you think about the right sort of cost income ratio for the bank or the right kind of cost structure for the bank, is the NVIDIA market cap an indicator of a bright future for banking efficiency? Is there a step change to come, do you think, for the way that you run?

It's a good question, Jason, and obviously pointed towards AI, in particular as a driver of the cost base. I mean, I think overall, start point for me would be cost discipline is an incredibly important ingredient of the Lloyds story. It has been since Pitman took over, it was inherited by Antonio, it was then taken on the mantle by Charlie, and it remains absolutely critical to the success of the story going forward. That, in turn, is what allows us to deliver the absolute cost target circa GBP 9.7 billion this year, plus a little bit of SPW or now Lloyds Wealth costs. But that is what gives us confidence in the Lloyds absolute cost targets.

And then behind that, you've got 2 or 3 particular drivers. Strategic investments, for example, in property and technology and automation, decommissioning these types of things. Alongside of that, efficiency of the change program. I mentioned the investment in Lloyds Technology Center in India as an example of that earlier on.

And then finally, the BAU savings, sourcing, matrix management, organizational design, and these types of things. These 3 strands are pieces of, if you like, solving the cost puzzle, and in turn allowing us to deliver what we would expect to see.

When we then overlay the potential of AI on top of that, I mean, it comes into the first of my 3 strands, that is to say, it is a source of meaningful strategic investments for the group going forward. And when we look at that, I think there is a number of points to make. I mean, first of all, we see this as a really quite significant opportunity within the group. You heard all about it with Charlie and Ron last week in the digital and AI seminar, but 2 or 3 points to make there.

A lot of work going on, around 50 major use cases, for example, greater than 35,000 co-pilot licenses within the group, for example. More than 800 machine learning and AI models within the group. All of these things are signs, if you like, of serious implementation within the business. But I think we have to do a couple of things. We have to put this in context, in the context of time to maturity and indeed allow this progress to build up from the foundations to scale as we look forward.

Specifically, what do we mean by that? The opportunity is large, therefore, and it cuts across both revenue potential and indeed cost opportunity. Personalization is an obvious example in the context of revenue potential, customer interactions, AI assistance. You probably heard last week about the use of generative AI and SME, where we're effectively allowing generative AI to do much more than processing, allowing the relationship manager to free up time to deal with customers.

The cost opportunity is much talked about, colleague assistance in the case of things like KYC and AML, for example, customer help likewise, engineering solutions much more effectively and efficiently sponsored with the help of AI. So a lot of stuff going on and a lot of potential in the context of revenue and cost opportunity. But as I said, put it in context in the sense that there is a need for a little bit of time to maturity. Because essentially, what we're doing right now is we've organized ourselves into 5 domains, if you like, key areas of focus for AI. They are having the foundations built this year. We will be scaling them up over the course of '26, '27 and beyond, and therefore, meaningful benefits from the revenue and from the cost side, you should expect to come through, as I say, a scale way in the course of '27 and beyond.

We're getting benefits from this year. From this year onwards really '25, '26, Ron and Charlie talked a bit about that last week, but it is in the kind of GBP 50 million to GBP 100 million type zone. When we get to '27 and beyond, you should expect a meaningful scale up in that context.

But Jason, coming to the bottom line of your question, what does that mean for the cost ambitions of the bank going forward? For sure, it allows us to scale more efficiently within the bank. For sure, it allows us to manage costs more efficiently. But don't forget 2 facts. One is that we will be investing heavily in the bank at the same time. And that includes, obviously, AI as part of that investment. But alongside of that, it also includes investment kind of across the piece within the bank.

So you'll for sure see cost benefits and indeed effective cost management off the back of AI and related technologies, but also expect us to continue investing in the success of the franchise going forward because ultimately, that's what we'll -- that's what we'll deliver that sustainable RoTE that we talked about earlier on, which in turn will allow us to deliver an attractive capital return for shareholders.

Any questions from the audience? We've got time for maybe 1 or 2. Over here in the middle. Is there a microphone? Go for it, [ Ian ]. Yes.

Who knows what stablecoin will bring to the bank, but it's definitely on the radar, and potentially disruptive. My question is, how do you think about the role of a structural hedge in a banking world where stablecoin has meaningfully disrupted deposit franchisees? Because I worry that deposit duration or your ability to behavioralize the duration might change in a meaningful way.

Sure. Shall I answer that first, Ian, and then come to the second. It's an interesting question, particularly right now when stablecoin is changing so fast. I think when we look at stablecoin and where it is, if you like, gaining momentum versus where it is more slower, if you like, to make progress. The areas where it gains momentum is the areas where there are greatest friction costs, if you like, and greatest times to execution.

And so examples of that are things like international payments, where stablecoin is really making inroads into international payments business because you can effectively transfer money instantaneously at next to 0 cost. If you look at the application of stablecoin within the U.K. domestic payment system, however, it has to come up against competition such as faster payments, where already payments are effectively instantaneous and also 0 cost.

And so the competitive advantage of stablecoin in that context in the U.K. domestic scene is much less than it is in the international scene for those very reasons. And that's important because it will impact, if you like, the take up of a stablecoin.

Now alongside of that, we recognize that the whole context, if you like, of digital programmable capabilities is a really interesting context. And that's why we're looking to solve this and address this through something called GBTD, Great British Tokenized Deposit. And that is a solution which is a digital programmable payment source which allows all of the advantage of, as said, programmable payments. I'll come back to use cases in just a second, but also preserves the singularity of money, and therefore, gives customers assurance that their deposits are 100% safe, meeting all of the KYC obligations that we already meet and a deposit is freely exchangeable between what's in their bank account in an analog form and what is a GBTD, a GB tokenized deposit.

That, from our perspective, is a much stronger competitive proposition versus stablecoin, which is not on the bank's balance sheet, for which the customer has no protection and for which as said earlier on, doesn't offer an obvious competitive advantage versus what's already available in the U.K. domestic scene.

Now as I said, we do think that there are use cases, whether it's account to account payments, so for example, payment on proof of delivery or whether it's in the context of mortgage conveyancing, greatly reducing funding and indeed settlement times, or for that matter in the wholesale area, digital gilt. We do think there are benefits from implementing digital programmable currencies in each of those 3 use cases, and that's, from our perspective, the areas in which we are developing pilot use cases.

We think that more than offsets the stablecoin risk. And so in a sense, I think the premise of your question is one that we would challenge. What is it that stablecoin has to offer? And by implementation of things like GB Tokenized Deposits, we should be able to offer the customer much more value than either stablecoin can offer and indeed even to make progress upon what we already offer them in the domestic payment scene.

Do you want to ask the second one?

Last week, I heard being introduced to the debate for the first time, the thought about taking the franchise beyond the U.K. and a reflection of your confidence in the digital capabilities that you've built. Could you just contextualize that for me a little bit, please, because that is something quite new.

Yes. The start point, Ian, is simply to say that the strategy is and remains, very much a U.K.-focused strategy. We have a purpose of helping prosper, as I replied to Jason earlier on, our strategy as set out in 2022 was around U.K. focus, increasing digital interaction, taking advantage of opportunities at scale. And that has not changed, Ian. And there is no prospect, if you like, of that changing in substance on a look-forward basis.

Now having said that, what we do want to make sure is really 2 things: One is that we have a fully fledged and serious franchise in pursuit of that strategic agenda. So for example, areas like corporate and institutional, for example, will demand our ability to compete in things like U.S. dollar currency, which in turn will demand a degree of U.S. presence, same thing within the euro.

So in order to get an effective corporate and institutional strategy, you have to have a dose of non-U.K. presence for sure. And that indeed is what we will do and make sure that we inform the strategy with. We also have -- in a similar vein, we also have, as you know, a decent Dutch mortgage business, which at the moment is about GBP 20 billion in assets. It's a very attractive low-risk, high-returning business, which we've had for a long time actually within Lloyds Group, and it's always been an interesting option for us to develop.

It is, as I said, relatively modest in the size of the overall balance sheet. It is, at the same time, low risk and high returning. So we're very happy just to kind of keep that turning over. I think then when we look forward -- and this is the second point, when we look forward, if we are able to build real capabilities that have a competitive advantage that we believe that will then benefit from further scale, then of course, there is a possibility that we see -- we will seek to plug those into other areas.

But at the moment, at least, that is based upon our ability to build those capabilities in due course because we are very focused, as I said, in executing our strategy informed by the purpose of helping Britain prosper, within the perimeter, if you like, of the strategy as laid out in 2022.

And going back to Jason's question about what you should expect to see thereafter, it is effectively completion of the projects that we have taken on and then gradual extension from there. It's not really about geographic transformation.

William, thank you so much for joining us today.

My pleasure. Thank you very much indeed. Thank you everybody.

Well, good morning, everybody. My name is Jason Napier. I run financials research on the equity side at UBS. Welcome to the UBS European Conference. We're thrilled to have so many people with us today. We're thrilled to be in this new venue, and we're very pleased that William Chalmers, the CFO of Lloyd's, is opening this particular stream for us today. William, thank you for joining us.

Thank you very much for inviting me, Jason. It's a pleasure to be here.

Thank you. So you've been CFO for 6 years now. It feels like maybe more than 6 years potentially on some days. The market is already focused on the next strategic plan, which will be next summer. I wonder whether you wouldn't mind sort of setting us off by reflecting a little bit on what it is you saw in the group at the outset of the last plan, what it is you were looking to change and how you think that process is going?

Sure. Yes, very happy to, Jason. But as you say, there are definitely some days when it feels more like 6 to 10 years, let's say, and some days when it feels much less, so it goes up and down. But overall, it's been a fantastic journey for the management team and for the bank, but we've got a lot more to do.

Jason, in respect to your particular question, I guess, what would I say? I think the inheritance that Charlie and I had was, of course, a fantastic bank with a fantastic customer base, but also a bank that had spent essentially 10 years being optimized post the financial crisis. And so it was really incumbent, I think, upon both Charlie and I to set out a growth agenda to allow the bank to capitalize upon the opportunity in front of it and indeed to put up a much more resilient franchise for the future.

I think within that, as you know, we set out a strategy that was U.K. focused, that was in turn digital-led, that was in turn about an integrated financial services proposition and that allowed the bank to capitalize on opportunities with the scale that it has. That's what the strategy was focused on. Three elements to that. We described them as grow, which is obviously about revenue growth and diversification. We described it as focus, which is around cost and capital efficiency. We described it as change, which is around maximizing the potential of people, of data, technology.

So grow, focus, change was what was behind the strategy as a whole. Where have we gotten to in respect of that? Growth, first of all. We've obviously benefited from the rate cycle for sure. That has been supported by some pretty decent franchise growth. But at the same time, it was important for us to diversify that growth and to reduce the net interest income dependency. And you can see that coming through in terms of the other operating income, 9% year-to-date, similar pattern in 2024, supported by a broad base of businesses.

When you look at change, the change agenda -- or sorry, the focus agenda maybe is around cost efficiency. At the end of 2024, we delivered in excess of GBP 1.5 billion of cost efficiencies versus where we were in 2021. Those gross cost efficiencies are now running at in excess of GBP 1.9 billion, and we'll see more of that as we unfold the remainder of the strategy going through into 2026.

Capital efficiency, we've seen RWA growth off the back of lending growth, but also off the back of regulatory calibrations. But we've also optimized against that, now in excess of GBP 21 billion of RWA efficiencies since we started out on the strategic journey. Alongside of that, the growth has been focused on those areas which are capital light, if you like, i.e., can produce efficient and indeed return-generative components of the business.

Insurance, Pensions and Investments and businesses like workplace are examples of that. And then finally, on the focus agenda, we have tried to remove capital blockers to distributions. The pensions deficit was the best example of that. GBP 7.3 billion when we came in, it's now GBP 0. And so as a result, a, what was previously a significant capital blocker has been removed.

And then finally, on the change agenda, Jason, you'll be aware, and we talked a bit about this in the context of the digital seminar last week, but we've invested heavily in talent. We've invested in the Lloyd's Technology Center out in India to allow us to enable an efficient change process. We've invested in removing legacy data centers down by 40% since we started. And we are engaged in the building of product efficiently.

So for example, the Lloyd's Premier product was built with 60% less time and resources versus similar product builds earlier on in our journey. So all of this allows us to deliver a more efficient change process, which, of course, is behind the kind of continued fulfillment of our strategic ambitions. So there's a lot to reflect on when we came in. There's a lot that's been done since then. But as I said, there's a lot more to do going forward.

I mean exactly. And so, I guess, none of those themes are time barred or ever done really. And so I guess the expectation in the market would be sort of more of the same next summer. But, I guess, we'll have to wait and see for that. One of the issues that is unfortunately continuing front page news in the U.K. is the sort of legacy product refund issue.

The banks that we track have paid GBP 69 billion in refunds so far. That's 20% of today's NAV. Just government have said they want motor to be the last one, notwithstanding the disquiet that we have with the FCA's first proposals around how to repay people around motor. What is it that from the outside we should be looking to see delivered so that we can have any confidence that this will indeed be the last one?

Yes, it's a fair question, Jason, and obviously something that we are acutely aware of as a management team. I think the first point that I'd make is that we agree with the premise of the question. That is to say there is no doubt that conduct risk is impacting or has impacted investability and therefore, something on which we should all be focused.

The -- your question, Jason, is around what should the market be looking out for, for signs of change in this respect, i.e., for change -- for signs of lasting improvement, I suppose. I guess I would make 3 or 4 points. The first off is when we look externally, we should look for signs of acknowledgment of the problem. And so what I mean by that is when you look at things like the government and regulatory statements, Mansion House is an example of that, the lead reforms is another example of that. There is, I think, a clear acknowledgment of the issue. That is to say the conduct agenda needs to be addressed in order to secure U.K. investability as a whole.

So that acknowledgment point is the first sign. I think then you would hope to see some appetite for change. And again, you look at things like statements, the FCA statement on the motor issue being the last master address event has been pretty clear and unequivocal actually. So you look for appetite for change as reflected in governmental and indeed regulatory statements. I think then third and perhaps most importantly, you look for signs of meaningful reform, not least in the conduct agenda in respect of the financial ombudsman, the so-called FOS.

And we're seeing there signs of reconsideration of the reinforced obligations, which FOS has previously imposed on the financial services sector. Likewise, reconsideration of the look-back period. Both of these 2 topics are really up for debate and potential reform right now, and we see very realistic chances of the situation being improved. And so meaningful reform, the third element, I think, is starting to come through. More to see for sure, but nonetheless, we think the direction of travel is good.

I think then we would also look for what I'll describe as appropriate implementation of existing regulation. And what do I mean by that? Most specifically, you might refer to things like the consumer duty. When we look at how the consumer duty is being implemented right now, we see it as basically being appropriate. I mean there is no sign the consumer duty is being used in a obstructive or difficult way from the FCA. Rather, it is a constructive ingredient to producing sensible and appropriate customer outcomes. So you're looking at existing regulation being implemented in an appropriate way.

And then the final point, which is really on us, is to ensure that we and all the other banks behave in the appropriate way. And so in reference to that, since 2012, we've implemented something called Conduct Risk Appetite Metrics, which in turn allow us to look carefully at things like product pricing and disclosures and make sure they are absolutely appropriate. Likewise, we have very extensive customer contact programs when we do things like change prices on products.

Likewise, we trail products in the FCA Sandbox, and you'll have heard a bit about that in the context of the AI seminar last week. So banks have to get it right, too, as part of this. And I think there is significant progress that has been made certainly by us, and I suspect by the sector as a whole. But those 4 or 5 things or themes, if you like, Jason, I think are the types of things that you look for. And as I said, from our perspective, at least, we are seeing meaningful signs of progress here. Again, more to be done for sure. But nonetheless, the direction of travel is positive.

Interesting. So the other area of, I guess, some gathering interest is whether we might see a change in capital requirements, the review that we get the results from on the 2nd of December. If you watch the U.K. banks as long as I have, one feels that RWA density is up, risk is down, data is better, conduct risk is lower. Should we have any expectation of a sort of a more competitive capital setup, do you think out of that process?

It's a good question, Jason, and obviously, one that we look at with a great deal of interest. I think it -- for me, it falls into the broader context of what is going on in terms of the governmental straight regulatory agenda that is conducive to or supportive of the U.K. financial services sector. I think the first point that I'd make in that context is that the government has been pretty clear about the importance of a competitive sector to drive U.K. growth. And that's a helpful backdrop to have in the context of any of these exercises, if you like.

I think then you say, well, how can that be driven? And I think 3 directions of travel, I suppose. One is around the credential agenda, one is around the conduct agenda and the other is obviously around the fiscal agenda. In respect of the conduct, we just made some comments a second ago, which hopefully are helpful. In respect to the Prudential, you highlighted the FPC review there. When we look at that, there are a variety of areas that the FPC review could consider. You mentioned risk weighting there. One might also mention the calibration of buffers, which are relatively high by international standards, at least if you look at the countercyclical buffer.

Sure. Absolutely. There are other aspects, if you like, within that, the leverage ratios, for example, and inclusion or exclusions from that. These are the types of areas that the FPC review could look at. It's hard to be too specific at the moment about exactly where the FPC review would go. But I think based upon the commentary that we see externally, based upon the discussions that we and others are having, it feels like it is unlikely that nothing is going to come out of it. Why is that? I think it's coming back to those points that I made earlier around the appetite for change around the constructive statements. And these types of things give you a lead into what might be arriving, if you like, in December.

Allied to that, I think the secondary growth objective that the PRA has now been given alongside the FCA is constructive in that context. So we'll wait and see. I mentioned the fiscal agenda there. And I think there, it's about a stable and a predictable and a competitive tax regime that we'll be looking for.

So I think if you add up all of these things, you have a conduct agenda, which hopefully is making progress. You see a prudential agenda where the FPC is a review, if you like, is a piece of evidence that we may see some progress. You might also add to that things like the ring-fencing review that is going on as a further example. And let's see what happens with the fiscal agenda and the upcoming budget. But overall, I think a relatively constructive backdrop for the sector, probably better than we've seen for at least the period that I've been in charge.

So if we turn to sort of more Lloyds specific, mostly more Lloyds specific factors. The U.K. domestic banks are going to produce the best revenue growth in Europe driven by the hedges. And the market, as is its habit is looking to integrate what happens beyond that already, even though that may be 3 or so years from now.

If you talk about the capacity of the organization to deliver positive jaws ex hedge for a second because it's -- I mean it's interesting, considering the tailwinds we've had around growth and rates and so on. The cost-income ratio of the bank now is the same as it was before rates went up. And so if you could just talk to the capacity to keep the jaws between the 2, which are going to be like 9% next year. Can you sustain that ex hedge is the first question, I guess.

Sure. In short, Jason, the answer as we look forward into 2026 is that, yes, ex hedge, there should be positive jaws. Now a couple of points in respect of that. Why is that? First of all, people in this room will be aware of the strength in OOI growth that we've seen over recent periods. 9% year-to-date follows a similar pattern in respect to 2024. It's based off of a set of broad-based and diverse drivers across the business units, and we do expect that to continue going forward into 2026. It will also be bolstered by the acquisition or the full acquisition, I should say, of Schroders Personal Wealth, now renamed Lloyds Wealth.

And so that is all helpful on the income side. And that is aligned with as you would expect from Lloyd's, rigorous cost discipline. So specifically, what do I mean by that? In '25, we'll see costs up 3%. If you exclude severance, it's up 2%. We've talked before about a flatter cost expectation for 2026, and indeed, that remains our expectation off the back of maturing investments achieving a full year run rate off the back of the usual BAU cost discipline that we apply kind of across the piece.

But I think coming back to your question, Jason, removing the structural hedge, I think, is the wrong way to look at it. And the reason for that is because the structural hedge for us and for everybody else drives their income profile. That, in turn, drives the sector's ability to reach returns and indeed drives the sector's ability to meet targets. That means in turn, the structural hedge drives pricing decisions.

And if you remove the structural hedge, then those pricing decisions elsewhere in the asset and liability profile change. The best example of that is in respect of mortgage pricing. Mortgage pricing completion margins right now are around 70 basis points. It's not far off the cost of equity, i.e., there or thereabouts. If you remove the structural hedge, that mortgage pricing changes. If you look back at the pre-COVID and indeed the COVID period, you saw mortgage completion margins double or more what they are today.

And that was in a period when we had much flatter curves and therefore, much less structural hedge growth. And so there's kind of concrete empirical evidence there, if you like, is that if you remove the structural hedge as a driver, you then affect other pricing elsewhere in the balance sheet. And therefore, the removal of structural hedge in the context of pricing decisions, Jason, should not be seen in isolation. It is rather part of a holistic picture.

When we look at the structural hedge, with that in mind, with it in place, we're delivering about 2.3% yield on GBP 244 billion of deposits and equity over the course of '25. It is still below 3% by the time we go into '26, and that is below -- well below term rates. And therefore, the structural hedge should continue as it refinances to deliver meaningful growth through the P&L. As said, I don't think removing it is the right way to look at it. But if you do remove it, you're going to be pretty sure that all other pricing within the business will change with it.

Yes. And of course, the further out you sort of project, the more important the product pricing becomes and what NII actually is, which sort of brings you back to a fairly philosophical but an important question, which is what is the clearing ROE for U.K. domestic banks. Without the hedge, we might have earned more on mortgage spreads and so on. But it does feel like we're going into a Q4 and in your case, summer '26 outcome where it's going to be very hard not to promise a higher RoTE than in the last plan. How do we sort of think about the right return for financial services in domestic U.K.? It's a tricky question. I appreciate that.

No, it is a fair question. Yes, I think the -- when we look at the business and its return objectives. I mean, first of all, there is a lot of data out there in terms of the return to us and others expect to earn in the business. This year, next year and indeed by the course of, I guess, end of next year and into the summer you'll see a bunch of new charges from us and other providers.

But I think at a more fundamental level Jason, the right way to look at it is to look at the industrial structure, to look at macro expectations and then to look at each individual's competitive position. And it's those 3 things that I would really look at in answering your question. And then specifically, what do I think that delivers? What I think it delivers is a sustainable ROE that is at least similar to what we expect to achieve next year, accompanied by an appropriate growth rate.

I mean that's the bottom line that I think those 3 ingredients deliver. And maybe just take a moment on each of those. If you look at the industrial structure, first of all, it's a competitive industrial structure for sure. You see it from the incumbents, you see it from the neobanks, you see it from big tech, you see it from stablecoin providers increasingly. But it is also a relatively stable industrial structure.

And why is that? I think it's because of the investments that we make. It's because of the competitive moats that we all have. It's because of the regulatory supervision of the sector, too, to be perfectly frank. And that produces a relatively stable industrial structure, albeit quite a competitive one.

The second point, I think, Jason is you have to look at the macro and the set of macro expectations. And when we look at the macro, we see pretty unspectacular but nonetheless a stable macro outlook. And if we look at rates in particular going back to the earlier comments around structural hedge, we are still refining, as said, GBP 244 billion of deposits of equity at rates that are meaningfully below term rates, meaning that there is quite a lot of growth still to come through structural hedge.

To look at macro expectations and then to look at each individual's competitive position. And it's those 3 things that I would really look at in answering your question. And specifically, what do I think that delivers? What I think it delivers is a sustainable ROE that is at least similar to what we expect to achieve next year, accompanied by an appropriate growth rate. I mean that's the bottom line that I think those 3 ingredients deliver. And maybe just take a moment on each of those.

If you look at the industrial structure, first of all, it's a competitive industrial structure for sure. You see it from the incumbents, you see it from the neobanks, you see it from big tech, you see it from stablecoin providers increasingly. But it is also a relatively stable industrial structure. And why is that? I think it's because of the investments that we make, it's because of the competitive moats that we all have. It's because of the regulatory supervision of the sector, too, to be perfectly frank.

And that produces a relatively stable industrial structure, albeit quite a competitive one. The second point, I think, Jason, is you have to look at the macro and the set of macro expectations. And when we look at the macro, we see pretty unspectacular, but nonetheless, a stable macro outlook. And if we look at rates, in particular, going back to the earlier comments around structural hedge, we are still refinancing, as I said, GBP 244 billion of deposits and equity at rates that are meaningfully below term rates, meaning that there is quite a lot of growth still to come through structural hedge.

And as long as you think that rates are going to be more or less stable in the period thereafter, i.e., a bit of variance for sure, but more or less stable, and you're seeing a relatively stable contribution from that part of the balance sheet. So I think overall that is also a long-term supportive and then I think you have to look at the competitive position of any given bank. And speaking for ourselves at least, we have an outstanding brand. We have the trust of around 28 million customers on a daily basis. we have around 20% plus of key asset and liability markets. This is a very strong competitive position. And as everybody in this room knows, we are investing very heavily in the business right now to make sure that we maintain that competitive position.

So I think when you add those things together, you've got an industrial structure, which is competitive but stable. You've got a macro outlook, which is uninspiring at some level, but nonetheless stable. And you've got a competitive position of Lloyds Banking Group, which is really very strong and being continually invested in to maintain that strength. And that, in turn, leads us to a strong conviction in the sustainable ROE of the bank, as I said earlier, looking towards '26 and beyond.

Now one of the things that I'm not sure receives enough attention is one of the things you said earlier around the gross cost savings that you've delivered in the plan, massive number. But because we're guided to higher costs every year, we're not sure whether that produces Lloyds that's much better invested. Is it a coiled spring that can be much more efficient in future or whether this is just the nature of modern banking, fewer branches, more engineers. When you think about the right sort of cost-income ratio for the bank or the right kind of cost structure for the bank, is the NVIDIA market cap an indicator of a bright future for banking efficiency? Is there a step change to come, do you think, for the way that you run?

It's a good question, Jason, and obviously pointed towards AI, in particular, as a driver of the cost base. I mean I think overall, start point for me would be cost discipline is an incredibly important ingredient of the Lloyd's story. It has been since Pittman took over. It was inherited by Antonio. It was then taken on the mantle by Charlie. And it remains absolutely critical to the success of the story going forward.

That, in turn, is what allows us to deliver the absolute cost target, circa GBP 9.7 billion this year, plus a little bit of SBW or now Lloyds Wealth costs. But that is what gives us confidence in the Lloyds absolute cost targets. And then behind that, you've got 2 or 3 particular drivers. Strategic investments, for example, in property and technology and automation, decommissioning these types of things. Alongside of that, efficiency of the change program. I mentioned the investment in Lloyds Technology Center in India as an example of that earlier on.

And then finally, the BAU savings, sourcing, matrix management, organizational design, these types of things. These 3 strands are pieces of, if you like, solving the cost puzzle and in turn, allowing us to deliver what we'd expect to see. When we then overlay the potential of AI on top of that, I mean, it comes into the first of my 3 strands. That is to say it is a source of meaningful strategic investments for the group going forward.

And when we look at that, I think there is a number of points to make. I mean, first of all, we see this as a really quite significant opportunity within the group. You heard all about it with Charlie and Ron last week in the digital and AI seminar. But 2 or 3 points to make there. A lot of work going on around 50 major use cases, for example, greater than 35,000 Copilot licenses within the group, for example, more than 800 machine learning and AI models within the group. All of these things are signs, if you like, of serious implementation within the business.

But I think we have to do a couple of things. We have to put this in context, in the context of time to maturity and indeed allow this progress to build up from the foundations to scale as we look forward. Specifically, what do we mean by that? The opportunity is large, therefore, and it cuts across both revenue potential and indeed cost opportunity. Personalization is an obvious example in the context of revenue potential, customer interactions, AI assistance.

You probably heard last week about the use of generative AI in SME, where we're effectively allowing generative AI to do much more of the processing, allowing the relationship manager to free up time to deal with customers. The cost opportunity is much talked about, colleague assistance in the case of things like KYC and AML, for example. Customer help, likewise, engineering solutions, much more effectively and efficiently sponsored with the help of AI. So a lot of stuff going on and a lot of potential in the context of revenue and cost opportunity.

But as I said, put it in context in the sense that there is a need for a little bit of time to maturity because essentially, what we're doing right now is we've organized ourselves into 5 domains, if you like, key areas of focus for AI. They are having the foundations built this year. We will be scaling them up over the course of '26, '27 and beyond. And therefore, meaningful benefits from the revenue and from the cost side, you should expect to come through in, as I say, a scale way in the course of '27 and beyond. We're getting benefits from this year -- from this year onwards really '25, '26. Ron and Charlie talked about that last week, but it is in the kind of GBP 50 million to GBP 100 million type zone. When we get to '27 and beyond, you should expect a meaningful scale up in that context.

Now Jason, coming to the bottom line of your question, what does that mean for the cost ambitions of the bank going forward? For sure, it allows us to scale more efficiently within the bank. For sure, it allows us to manage costs more efficiently. But don't forget 2 facts. One is that we will be investing heavily in the bank at the same time. And that includes obviously AI as part of that investment. But alongside of that, it also includes investment kind of across the piece within the bank.

So you will, for sure, see cost benefits and indeed effective cost management off the back of AI and related technologies, but also expect us to continue investing in the success of the franchise going forward because ultimately, that's what will deliver that sustainable RoTE that we talked about earlier on, which in turn will allow us to deliver an attractive capital return for shareholders.

Any questions from the audience? We've got time for maybe 1 or 2. Over here in the middle. Is there a microphone?

May I ask two? [indiscernible] what stablecoin is offering [indiscernible] on the radar and potentially disruptive. My question is, how do you think about the role of a structural hedge in a banking world where stablecoin has meaningfully disrupted deposit franchises because I worry that deposit duration or your ability to behavioralize the duration might change in a meaningful way.

Sure. I'll answer that first, Ian, and then come to second. It's an interesting question, particularly right now when stablecoin is changing so fast. I think when we look at stablecoin and where it is, if you like, gaining momentum versus where it is more slower, if you like, to make progress. The areas where it gains momentum is the areas where there are greatest friction costs, if you like, and greatest times to execution. And so examples of that are things like international payments, where stablecoin is really making inroads into international payments business because you can effectively transfer money instantaneously at next to 0 cost.

If you look at the application of stablecoin within the U.K. domestic payment system, however, it has to come up against competition such as faster payments, where already payments are effectively instantaneous and also 0 cost. And so the competitive advantage of stablecoin in that context in the U.K. domestic scene is much less than it is in the international scene for those very reasons. And that's important because it will impact, if you like, the take-up of stablecoin.

Now alongside of that, we recognize that the whole context, if you like, of digital programmable capabilities is a really interesting context. And that's why we're looking to solve this and address this through something called the GBTD, Great British Tokenized Deposit. And that is a solution which is a digital programmable payment source, which allows all of the advantage of, as said, programmable payments.

I'll come back to use cases in just a second, but also preserves the singularity of money and therefore, gives customers assurance that their deposits are 100% safe, meeting all of the KYC obligations that we already meet and a deposit is freely exchangeable between what's in their bank account in analog form and what is a GBTD, a GB tokenized deposit. That, from our perspective, is a much stronger competitive proposition versus stablecoin, which is not on the bank's balance sheet for which the customer has no protection and for which, as I said earlier on, doesn't offer an obvious competitive advantage versus what's already available in the U.K. domestic scene.

Now, as I said we do think that there are use cases, whether it is account to account payments, say for example, payment on proof of delivery, or whether it's in the context of mortgage conveyancing, greatly reducing funding and in deed settlement times. Or for that time in a wholesale area digital gilt. We do think there are benefits from implementing a digital programmable currencies in each of their 3 uses and that's, from our perspective, the areas in which we are developing pilot use cases.

We think that more than offsets a stablecoin risk. And so in a sense I think the premise of your question is one that we were challenge, what is it that stablecoin has to offer? And by implementation of things like GB tokenized deposits, we should be able to offer the customer much more value than either stablecoin can offer and indeed even to make progress upon what we already offer them in the domestic payment scene.

Do you want to ask the second one?

Last week, I heard being introduced to the debate for the first time, the thought about taking the franchise beyond the U.K., a reflection of your confidence in the digital capabilities that you've built. Could you just contextualize that for me a little bit, please, because that is something quite new.

Yes. The start point, Ian, is simply to say that the strategy is and remains very much a U.K.-focused strategy. We have a purpose of help Britain prosper. As I replied to Jason earlier on, our strategy, as set out in 2022 was around U.K. focus, increasing digital interaction, taking advantage of opportunities is at scale. And that has not changed, Ian. And there is no prospect, if you like, of that changing in substance on a look-forward basis.

Now having said that, what we do want to make sure of is really 2 things. One is that we have a fully fledged and serious franchise in pursuit of that strategic agenda. So for example, areas like corporate and institutional, for example, will demand our ability to compete in things like U.S. dollar currency, which in turn will demand a degree of U.S. presence, same thing in euro.

So in order to get an effective corporate institutional strategy, you have to have a dose of non-U.K. presence for sure. And that indeed is what we will do and make sure that we inform the strategy with. We also have -- in a similar vein, we also have, as you know, a decent Dutch mortgage business, which at the moment is about GBP 20 billion in assets.

It's a very attractive low-risk, high-returning business, which we've had for a long time actually within the Lloyds Group, and it's always been an interesting option for us to develop. it is, as I said, relatively modest in the size of the overall balance sheet. It is, at the same time, low risk and high returning. So we're very happy just to kind of keep that turning over.

I think then when we look forward, and this is the second point, when we look forward, if we are able to build real capabilities that have a competitive advantage that we believe that will then benefit from further scale, then, of course, there is a possibility that we will seek to plug those into other areas. But, Ian, at the moment, at least, that is based upon our ability to build those capabilities in due course because we are very focused, as I said, in executing our strategy informed by the purpose of helping Britain prosper within the perimeter, if you like, of the strategy as laid out in 2022.

And going back to Jason's question about what you should expect to see thereafter, it is effectively completion of the projects that we have taken on and then gradual extension from there. It's not really about geographic transformation.

William, thank you so much for joining us today.

My pleasure. Thank you very much indeed.

Thank you. Good bye.

Good afternoon, everyone, and thank you for joining us today. Having previously covered our growth priorities across our business units, I'm delighted to welcome you to the final investor seminar in this strategic phase, focusing on digital and AI, a very topical subject. These capabilities cover the full breadth of the organization and act as a critical underpin to our strategy. It's an area that myself, the Board and the rest of the management team have been extremely focused on over the last 4 years. And I was proud to see yesterday that our excellent progress has been recognized in Euromoney's latest assessment of digital banks, where we ranked within the top 20 globally out of a sample of more than 300 banks.

I'm excited to be able to share with you some of the actions we've taken since 2021 as well as giving you an insight as to how we're thinking about future opportunities. I'm joined today by Ron van Kemenade, our Chief Operating Officer. As in previous sessions, I'll provide a brief overview before handing over. As always, following the presentations, we'll have plenty of time for your Q&A.

Let me start on Slide 4. We're going to cover a number of topics as part of today's presentation, but the key messages that I'd like you to take away are as follows: Firstly, we're a digital and AI leader today and have distinct competitive advantages that will provide the foundations for long-term leadership. Secondly, since 2021, we've taken decisive action to enhance our infrastructure and underlying capabilities to enable change. The ongoing progress here creates a platform for innovating at scale, both today and in the future.

Thirdly, as a result of this change, we're now delivering leading propositions and extending our digital capabilities right across the group for the benefit of both customers and colleagues. Fourthly, we're extending our leadership position into new and emerging technologies, and we feel well placed to succeed in a period of potentially transformational change for the industry. Taken together, these actions are delivering significant value for the group today, both in terms of driving revenue growth and improving efficiency. We see scope for this to accelerate meaningfully in future periods.

On Slide 5, I'll provide an overview of our strong foundations. With 23 million digitally active users and over 21 million of these also using our mobile app, we are the largest fintech in the U.K, but we're also much more than that. Our scale drives unrivaled engagement with nearly 7 billion annual log-ons, it's also helped to create a unique data asset with the group processing 1 in 4 card transactions every year, equating to nearly GBP 330 billion of annual spend. Given we have relationships with over 50% of the U.K. adult population and more than 1 million businesses, nobody is better placed within financial services to understand their needs.

As you'll hear shortly, we're unlocking more value from our data today and believe this will be one of growing importance into the future. On top of this, we have long since recognized that we must invest to be at the forefront of change, building strong AI foundations that will equip us with the necessary capabilities to continue to innovate at pace and deliver for our customers. Whilst others may be able to demonstrate strength across some of these areas, it is the combination of scale, engagement, data and capability that we believe provides us with a distinctive competitive advantage, reinforced by our strategic priorities.

Turning now then to our strategy on Slide 6. When we presented our strategy in February 2022, we acknowledge that despite strong foundations, there was a significant opportunity to unlock the group's full potential. From a digital perspective, we had scale. But like all large financial services firms, we had a complex technology estate in need of modernization which limited opportunities to truly innovate and deliver at pace for the benefit of our customers.

Our strategic priorities have been focused on addressing these challenges, and we've made great progress. We've further extended our scale leadership position, but have shifted the digital channel from one of purely servicing to one of engagement team. This has been supported by modernizing our technology estate in the areas that are most important to effectively compete. This means we can significantly increase the pace of innovation and extract more value from the unique data asset, unlocking new growth opportunities for the group.

As our legacy becomes less of a headwind, we have also been able to shift our investment toward building future capability, new and emerging technologies such as agentic AI and digital assets, have the potential to significantly shape the future of our industry, reimagining customer outcomes. We're taking proactive action to be at the forefront of this change, cementing our status as the U.K.'s digital and AI leader.

On Slide 7, I'll highlight how digital and AI leadership delivers clear financial benefits. The actions that we've taken during this strategic cycle are creating significant value for shareholders today. Innovative propositions and enhanced experiences are deepening customer relationships and driving revenue growth through both existing and new streams. In addition to supporting our ongoing franchise growth, the benefits of our investment in specific digital and AI initiatives will contribute more than 70% to our strategic revenues target in 2026.

At the same time, we're driving efficiency gains across the group, lowering cost to serve and delivering a more agile organization with a more flexible cost base. More than 60% of the circa GBP 1.5 billion of cost savings realized to date are directly attributable to our digital and AI initiatives. This is great progress and a sizable contribution, but encouragingly, we see additional upside beyond the current plan. Our commitment to investing in new and emerging technologies has the potential to unlock further value, improving operating leverage through new revenue growth opportunities, drastically reduced acquisition and servicing costs and a step change in productivity. We'll discuss some of these areas today, and you will, of course, hear more about these benefits when we update you on our strategy in 2026.

Before handing over, I'll briefly introduce you to Ron on Slide 8. To deliver such a significant transformation, it was critical to put in place the right leadership. I was, therefore, delighted that Ron agreed to join the group in 2023, bringing a proven track record of leading major technology transformations. Ron has a clear understanding of what makes companies best-in-class and is able to keep us honest throughout the journey as you'll hear, as well as providing the necessary expertise and the leadership to drive the change.

Ron has a broad remit at the group, bringing together multiple areas to deliver a technology center of excellence. His teams are a key enabler to our strategic growth priorities with connectivity to our customer-facing business units established through integrated CIOs to help foster innovation. I'll return briefly at the end to explain why I'm so excited about the opportunity that new and emerging technologies present for the group.

But for now, let me hand over to Ron to talk you through the journey we're on. Ron?

Thank you, Charlie. Well, after such an introduction, I probably can only disappoint you. Let me talk you through indeed our digital and AI strategy. And if you can't pay attention for all the 12 slides, just remember 3 things. When I joined, like Charlie said, mid-2023, neither Charlie, nor Robin Budenberg, made it a secret that there was a lot of work to do, addressing way of working people, technology, the legacy estate. But at the same time, they did convince me with the opportunity, because it's an honor to be the technology data, the group COO leader of a bank that is largest financial institution in the U.K., having impacts, like Charlie said, on half of the households, 30% of every payment processed in this country. There is a huge opportunity to become the biggest fintech of the U.K. And that convinced me, right?

And now 2.5 years into the journey, I can confidently say that we are effectively addressing our past that we are delivering on our strategic objectives of the growth focus and change strategy until '26. And then we are laying a solid foundation for innovation and base in the future. And let me elaborate on those things in the succeeding slides.

Let's start at the beginning. There was obviously a legacy landscape, all banks have legacy, we as well. It's a matter of how you address it, right? And dealing with modernization of your infrastructure is critical to lay a foundation for pace, for cost effectiveness and for innovation for the future. And we are making good progress.

On the lowest layer of the stack, we are consolidating our data center footprint from 18 in '21, now down to 9. And by the end of '27, we'll reside most of our tech landscape in 2 hyper modern scalable data centers next to our public cloud usage.

Secondly, if you look at our application landscape, we are simplifying hugely, having taken out 20% of all the applications by pure decommissioning. And at the same time, of the remaining landscape, we have modernized half of it, bringing us to a point where legacy is not in the way of pace nor innovation anymore. And you could say, well, Ron, there is still 40% left, and you're right, but we consciously chose 3 major platforms that we believe are crucial to deliver more value at pace for our customers and colleagues.

First one being our digital platform, enabling our digital channels. Secondly, our data platform, so we can unlock the value, as Charlie said, of our rich wealth of data. And thirdly, our core banking platform, which unlocks new products for our customers.

Second part of our transformation is, of course, about people. And arguably, this is the most important part, one I'm extremely passionate about. We have decided, we want to build a workforce of highly engaged, highly motivated, purpose-driven and above all, highly skilled engineers in data, in cybersecurity, in AI and in tech. And in doing so, we are recognized in the market. We are able to attract top talent from recognized tech companies from Amazon, from Google, and you've seen the announcements of recent appointments of our Head of AI, our CIO for the commercial bank as good examples.

Secondly, we have hired over 900 graduates, people coming in fresh from university with a new mindset who are, I would say, born with technology to whom a mobile app or AI is just something that they have grown up with. And we have hired over 8,000 engineers over the past 4 years, effectively changing the ratio from 30% permanent workers to 60% on our way to make it 80% by the end of next year. Again, a workforce that is committed by signing up as an employee for Lloyds, people who know our purpose, who live the experience of our services every day, either working in the U.K. or in India.

Third part of our transformation is the way we work, and we have effectively moved all of our change and run activities into a platform model. And you've heard words like platform, maybe you've heard of words like Tribes my previous employer, it's one and the same, right? We combine people from technology and business into one organization that fully own, run and change that are joined up by one backlog that is fully product-driven to deliver value that share the same objectives where the business is leading on what we are supposed to do to deliver on our strategy and the tech people worry about how to deliver this.

And a very good example, what benefits this delivers, this platform model, is the recent introduction of a new personal current account for our mass affluent customers called the Premier accounts. And arguably, a personal current account is one of the most complex products to introduce in a bank. It is connected to literally everything to the lending domain for overdrafts to payments, obviously, to the customer well-being or arrears management platform, your channels, both colleague channels as well as digital, it ships data to marketing, risk and finance. So it's probably the most connected product.

And we delivered a fully new proposition just within 5 months, where if we look back to previous introductions, this would have taken us arguably in between 12 and 18 months. And I think 12 is on the more optimistic side of the spectrum.

And next to the pace, the platform model does help us reduce the cost to deliver. In gross savings, we have saved over GBP 300 million annually so far, which if reinvested, adds only to additional capacity to further accelerate our change. Now this is the effort, right? This is what we have done. The question is, what does that actually deliver for our customers? And let's look at our mobile app, and Charlie already alluded to this, highly recognized by Euromoney in the benchmark. I think we're up in the right quadrant at somewhere #5, 6 or 7, close to ING, by the way, that's no coincidence. Yes, it's slightly ahead, Charlie. That's what you get.

Indeed. So it is arguably our most important channel. So that's why it's so relevant to look at the impact there. In terms of engagement, we are now driving over 13 million fully personalized engagements a day. Just imagine that by sending out 20 million notifications that customers react to.

In terms of sales, the channel share for sales has gone up 20 basis points from 55% in '21 to now over 75% of all of our product sales go through the mobile app, which is a huge impact. And in terms of our impact for customers, we are now embedding AI, which makes their interaction with the mobile app even more engaging, it feels more natural because you can simply talk, and it feels you talk to a person that gives you relevant answers, which is arguably a more intuitive and natural way of interaction than just clicking on buttons, going through forms and dialogues.

Now let me give you one example that I'm really proud of. In only 8 weeks or we express this in sprints of 2 weeks, but let's say, for normal people, 8 weeks. We fully redefined our onboarding for new customers. So from downloading the app to having a personal account that is actually reachable, you can fund it and you can withdraw money, you have your card in your wallet, your virtual card in literally 7 minutes, just imagine, right, if you would start this onboarding right now, which I'm sure you will all do, you're eager to open an account with Lloyds, I'm sure. You would be done before I'm actually done with my presentation. And this is on par level with our competitors in the market, in particular, the neo banks.

And the impact of this, again, for the bank, the value is huge, where only 2 years ago, 20% of all the personal current accounts openings were done through the mobile app that has increased to 90% today and still counting. So where we talk about the impact on just one channel, the mobile app, the question obviously is, do all these investments actually scale? Is there leverage to it? And the answer is yes. And let me talk you through this in 3 kind of examples.

The first one is that digital platform that I was alluding to, which is the basis of the successful mobile app. We are reusing this across the group for BCB for IP&I in the Scottish Widows app, which is built on the same digital platform now scaling from 0.7 million customers this year to 1.5 million, which is our ambition next year, again, using the same platform.

Second example is our business current account. I just told you about the beautiful story of onboarding in literally minutes, in the business banking account, this has reduced the time to onboard from an amazing 30 days to now 2 days. And 2 days is still not where we want to be, but it's just an example of reusing the same investments that we did for consumers is paying off in the business banking domain as well.

Another example is in the domain of AI where relationship managers for real estate finance that need to capture these very complex tenancy schemes that they need to kind of take from all kind of documents, which normally takes them hours to do, it's tedious work and it's administrative work, obviously, distracting them from interacting with customers.

By implementing our generic AI capabilities has brought that down to less than 5 minutes. Just imagine what that unlocks in terms of value for our relationship managers in interacting with our customers. Second way in which we are growing our business based on all the investments is how we have introduced ecosystems, something I'm really proud of because there is this question of how do you engage customers that initially apply for a product, you prove them and then what, right?

And in particular, for mortgage customers, this is an issue because customers do not have particular reasons to frequently interact with the bank unless they want to repay or they want to remortgage or whatever. But in between, there is hardly any engagement. And I think we really cracked this equation by introducing our Homes Hub, where we now have over 450,000 new reengaged interactions where customers are benefiting from insights about homes and living where we have offered additional services serving broader customer needs. And in doing so, we have retained GBP 10 billion of mortgages in just over 1.5 years. And GBP 10 billion, as you will all appreciate, is more than many mortgage providers actually have on their books and only this in 1.5 years.

And having built this ecosystem capability, we are now leveraging this across to transport. One of our most important businesses on the lending side, where we are now offering additional car insurance products and more mobility services contracting with other partners in our ecosystem. So a good second example how initial investments pay out across the group. And then to our data, as Charlie already said, we are, you could say, figuratively sitting on a wealth of data. We know more about British households and companies than any other company in the U.K. It's a matter of how we unlock that value and grow our revenues by doing so. And we have enabled this by investing in our new fully cloud-based data platform, unlocking AI capabilities and analytics capabilities.

Two examples here. Personalized offerings. And a good example, again, here is from our mobile app for consumers where your credit score has been introduced, where customers can see what their actual credit score is as it is registered what components of that are, and we offer advice how you could improve your credit rating. It's fully personalized. Again, 12 million customers to Charlie's point of scale, 12 million customers have registered for it and are using it. And it now accounts and this is only the start for 10% of all lending leads.

Second, example of how we are using our data to drive revenues. We are offering data products directly to our BCB and CIB customers in the commercial market, offering products under the name of Market Intelligence, where we are able to tell customers based on obviously anonymized data what their market development and market share developments are actually compared to competition, which drives a huge value for those customers, driving deeper engagement with those customers, and helping us to ancillary your business.

Now all of this is kind of addressing my first point. So what have we done to address the past and do we deliver on our promises today? And as you can see, we believe that we are effectively doing this. Legacy is not in our way anymore. We are leveraging value out of our initial investments across the group and we have laid a foundation for innovation for the future. And let me address this as the last part of my story. What about the future? There are 2 major technologies that we believe will define the next couple of years.

One is generative or agentic AI, no surprise to you. And the second one is digital assets, and I'll talk about them both. We have invested into a generative AI platform, making use of the best available capabilities in the market open to different LLMs in the back, using our data in a safe way with guardrails around it to make sure that we have ethical unbiased propositions for our customers, and we have moved beyond and this is an important message, the phase of beautiful experiments, promising proof of concepts and small pilots. Every investment we make needs to go to production.

So we have committed to deliver 50 use cases into production this year alone, and we're on our way to meet that target bringing GBP 50 million of concrete money in the bank benefits this year only. And that's just the start of it. This will scale substantially, and I'm sure, Charlie will come back to this next year in our strategy update. This will scale substantially into the future. But that 50 million, and I can't emphasize that enough is real money in the bank. It's no future promise. It's validated by our people in finance.

So we do invest in kind of 5 areas, like I said, directly in our customer interaction in our digital channels. Secondly, supporting our customer operations people, our relationship managers, and I gave you the example of real estate. We offer generic HR support through a modern proposition called Prosper to all of our 60,000 -- sorry, colleagues. And we are investing in improving productivity for our engineers making use of GitHub and other tools. So those 5 areas.

And I'm glad to say we are, again, seen by the market as leaders in this domain. One is Microsoft, who has called us out as one of the leading financial institutions in adopting AI, and if you don't believe then, look at the survey of evident AI, which ranks financial institutions globally, where we were #27 last year, now we're ranked #15 and moving up, right, which puts us right at the top of U.K. banks, which is obviously relevant to compare ourselves to.

Now these are cases that I'm sure you're more or less familiar with, but this is not where it stops. We are using generative AI and in particular, agentic AI to reimagine our propositions and there is no limit to ambition here. As you all know, one of the big unsolved equations in financial services is how do you scale financial advice whether that's for pensions, investments or any advice intensive products without adding people. How do you scale this in a digital way, and we are doing this. It's a proposition that in the consumer market actually has been introduced yesterday as a pilot for friends and family. It's called CoachAI, which is more like a broader adviser. In the next couple of months, we will introduce a similar proposition specifically for investment advice called InvestAI, and we are proud that we have been elected one of the just 5 companies to be allowed in the experimentation and innovation environment of the FCA. So they can work with us that we are working on a proposition that actually meets the regulatory requirements as well as meeting customer expectations.

And let me show a short demo of this to be launched proposition.

[Presentation]

So big ambition here for how we want to use GenAI and agentic AI to reimagine our propositions for our customers. Let me finally move on to the second area of innovation, technology-driven innovation that I announced and that is digital assets or and/or programmable money. Two examples here. Again, we believe we are well positioned as a -- not just a thought leader, but a very early mover, and in doing so, we are positioning ourselves as a leader in digital assets as well. We have started a new lab and platform for this. And we are co-sharing, actually, the U.K. finance platform for digital assets and so-called GBTD, which is Great Britain Tokenized Deposits. And for those who think Jesus, what are tokenized deposits, that's a fair question, right?

Let's say, a tokenized deposit is nothing more than a deposit, as you know it, so sterling money, but then deployed as code as smart contracts on a blockchain. And why is that so relevant? Why do we need to digitize money because it gives us the opportunity to put logic to the transaction. For example, in peer-to-peer payments, you can add conditions to it. How do we transfer the money only when the service has been delivered, right, which a good example, and I'm sure Charlie will say a bit more about it, but in the conveyance of mortgages where you need a whole system of solicitors, notary services to actually make sure that there is trust in the system when one customer hands over the money, the other customer hands over the deed to the property.

Digitization of money gives you the opportunity to do exactly that with all -- without all of the intermediary steps, because you can program that condition into the money that it will only be released at exactly the same moment, the digital deed is being transferred. I think that's a great example of how digital money, in particular, tokenized deposits can actually help unlock a lot of value for the larger U.K. economy.

Second example is we did a U.K. first transaction with Aberdeen Asset Management, where we did an FX forward, I think, for 2 months. And then in -- as you're undoubtedly familiar with, in an FX forward, you always have the margin goals, right, if the actual price is deviating from the set price. And to settle those margin goals is a hassle. You need to provide collateral if the margin call is in your favor, you need somebody to repay you and the other way around. There is transaction cost involved, you need to sell the collateral, you need to cash it, then transfer the cash.

And in tokenization, in their case, of a money market fund and on our side, a digital bond, a digital gilt, we have been able to make margin calls real time, so you don't need to sell cash out and pay, but you can simply transfer part of the tokens of that digital asset, which lowers transaction cost for margin goals for the customers, and it speeds up the process from 1 to 2 days to actually instantaneously. So real benefits to customers and real benefits to us. That's why we believe digital assets are such a relevant second area of innovation in the market.

Third element is we are actively working with government, with the consortium of banks to work on digital identity and digital verification services, because, again, we are sitting on a wealth of data, and we are best positioned to verify people's age, for example, of our people's address or even people's affordability of certain things. So again, the third area where we believe there is, again, we are only at the start of a new ecosystem of services where we are in front seat.

And with that, Charlie, I hand back to you.

Thank you, Ron. So Ron has just highlighted some of the exciting things we're doing today. But before closing, it's worth briefly stepping back to explain why we believe new and emerging technologies will present such a transformational opportunity. Some of the examples Ron was just talking about.

Technological change has been a constant over the past 3 decades and has transformed the way in which the financial services sector operates. Looking ahead, as agentic AI and digital assets become increasingly more mainstream, these present the next likely step change for the industry.

Like with all change, this will present both opportunities and threats. However, given our existing leadership positions, combined with broad-based support amongst government, Bank of England and the other industry participants to position the U.K. as a leader for these new technologies, we see more opportunities than threats as we look out today. As an active participant in these discussions, we believe we are well placed to shape a future that drives positive outcomes for our customers whilst at the same time, unlocking profitable growth opportunities for the group and our shareholders.

I'll explain for an example on Slide 25. Agentic AI and digital assets have the potential to be highly complementary with customers interacting with agents as a channel and digital assets, increasing the ease of transaction execution. For example, it's possible to imagine a scenario where home buying experiences could be enhanced by agents, scanning for the best deals and undertaking the transaction on behalf of customers with tokenized records and programmable money, ensuring a seamless conveyancing process.

For our customers, this has the potential to drive a meaningful improvement in experience with reduced effort, greater security and real-time settlement. It also presents opportunities for the group, including lowering costs to both acquire and serve and increasing direct engagement with customers and what is a highly intermediated market today.

It's clear to me what is required to be a leading provider in that future. Firstly, trust established over many years will be hugely important to both customers and regulators. Secondly, a broad offering will be necessary to maintain relevance and remain front of mind. Thirdly, those with the deepest pools of data will be best placed to train models on financial interactions. And finally, targeted investments in capabilities will be critical for leveraging AI at pace.

This group, Lloyds Banking Group is uniquely placed across all 4 of these areas within the U.K. Our scale and breadth of businesses spanning retail and commercial banking, insurance and wealth is unrivaled, and our unique data asset will become of even greater importance than it is today, benefiting from the infrastructure investments that Ron just described in this strategic phase.

Combined, we have a truly differentiated position compared to all other providers. We're going to talk more about these areas more in detail when we provide the next phase of our strategy in 2026, but I'm highly confident that the actions we're taking today will continue to position the group as a leader going forward.

I'll now close on Slide 26. In summary, we're building upon unique competitive advantages to reinforce our position as a digital and AI leader. We've made significant progress since launching our strategy in 2022. This is driving significant value for our shareholders today, contributing more than 70% of our strategic initiatives revenues by 2026, and more than 60% of the gross cost savings realized to date.

Our strong execution to this point means we are well positioned to take advantage of future opportunities, extending our leadership position across new and emerging technologies. This will further enhance operating leverage through new growth opportunities and continued improvements in efficiency.

Thanks for listening. I'll now hand over to Douglas who will facilitate the Q&A. Douglas?

Thank you, Charlie, and thank you, Ron. We now have plenty of time allocated for today's Q&A session. We will start by taking questions from the room, but we'll also cover questions submitted online throughout the session. [Operator Instructions]

Okay. So let's begin. I'll probably just start over that side. And just for fairness with the microphone lady, we'll run across. Guy, why don't we start with yourself.

It's Guy Stebbings at BNP Paribas. The first question was on ready-made investments, which I think is sort of a really exciting proposition. Could you tell us around the sort of expected time line for the full launch of that? And then working with the FCA in Sandbox, how should we think about that in terms of safeguards around any future claims around sort of quality of advice and that sort of thing?

My second question is on the Homes Hub refinancing. Can I check that 15% definition? What that means? Is that sort of 15% of total balances of refi through the Home Hub? Is there other refis that happen outside of that, just kind of keen to understand the definition and how that's evolved over time. Clearly, that could be quite sort of powerful from a value perspective if we see more and more going through that channel?

Excellent. Thank you, Guy. Probably makes sense for you to kick off with those questions, I suspect, Charlie.

I think it probably does. But well, first of all, thanks -- thanks very much for the question. And what's great about these is run teed up. You can see we're trying to make sure what we're doing around digital AI is leading into better propositions and enhancing the areas. Just in terms of ready-made investments. We already have ready-made investment product line, as you know, and it's been part of the success we've had to date. I think I've mentioned in previous sessions, we've gone from 9% or less than 9% share of equity ices up to more than 20%, and we continue to trade at that level of growth in our market share, and it was partly based on our ready-made investments journeys as well as some of our self-directed channels.

The exciting thing, as you say, is the industry actually in the whole world, they've introduced robo advice years ago, but it hasn't really had any intelligence in the advice journey. It's just been a structured logic journey to get through to simple rebalancing ETF broadly.

And the journey that Ron gave you an example of a kind of conversational advice journey, which also uses the existing data the customer has to give them confidence to make the right choices and that will sometimes by the way, not be investing, it would be better to pay off existing, for example, credit card loans. That's the journey we've got in this regulatory sandbox.

We're intending to get it live in the Q1 next year. So we'll be going through, as Ron described, we have a big user base internally with families and friends that we do co-development in a way that all the firms that you've spent time covering do who are not big banks. We've been doing that for a while now. So we'll be working on that basis in the next period of tough time and then going live with customers.

And yes, the regulatory sandbox, we think is really important in this context. Obviously, whatever we do, we want to make sure is endorsed by the regulator. There's been a significant change around the regulation that underpins investment advice, this concept called targeted advice or targeted support, which means we already have a regulatory framework, which is much simpler than RDR, which is the regulation that underpins investment and resulted in this -- the majority of the market not having access to investment advice.

And so we do have a regulatory framework that's clear around that. But as you rightly pointed out, Guy, actually getting the way the conversation on the journey works and having clarity with the regulator that they are comfortable and we are comfortable that gets the right outcomes is really important.

So one thing I think coming out of this is when you see this land, it will be a fully functioning journey, but this is one of the things about agentic AI. It will be based on our data and our training of, in many cases, millions of interactions of customers that will improve the journey and the journey will improve over time.

The other great thing about these journeys that we build and then the technology we now have is we can collect a lot more data around how customers are actually going through the journey where the fail points are and their understanding. And again, it's the engineering team working together with the experts in our investments and advice journey that will then use that data to make these journeys safer. And I say this with a smile having run wealth businesses for a lot of my time, instead of relying on 1% or 2% callbacks in sales quality. We can build agents, monitoring agents and do 100% quality checking, and that's the kind of mindset that we're going to be building into these journeys. So you should see it improve materially over time.

The final thing to say is that, look, it should improve what we're capable of doing today, which is already delivering value for the group. But as we know, if we really start to -- this is not really a phrase by any way, democratize wealth, we get wealth and investments to be something that the mass market really can safely get access to. It's going to take some time for them to engage to decide to put money every month aside for investments and for those balances to build.

So we think it's strategically really important in terms of relationship, trust. And over time, it will build a very attractive bluntly return business but it's not going to happen overnight.

And then your second question around Home Hub, look, I'm going to give you what I think the answer is. But I think, Douglas, we should just make sure offline. I think that's relative to the whole of the refinancing market. As you know, we are, by some way, the largest mortgage provider in the U.K. What's interesting, of course, is, as you know, only 40% of homes have a mortgage and only -- the average LTV is about 50%.

So when you look at the numbers of customers, actually, there's not that many people who are refinancing a mortgage, and we are by far the biggest. So getting to 15% is material. Ron mentioned the over 400,000 customers engaged. That may feel low relative to the GBP 28 million. But relative to the stock of mortgage customers, it's a very, very high level of engagement. And that's why this -- we are very excited about this Homes Hub tool, it really is material in terms of customers engaging with it and then us having an opportunity to build a broader relationship.

The one other point about the Homes Hub when you look at it immediately is we happen to operate in this market with 85% of mortgages distributed through brokers. And so we find our customers who are broker originated may not have a relationship with the rest of the bank, engaging with this Home Hub looking at protection, thinking about our retrofit solutions, understanding the broader offers of the group. So it's actually one of these brilliant tools for helping ensure we give good outcomes to our very important mortgage customers, but engaging them on the group more broadly because the U.K. has got to this place where intermediation has become material, and as you start to think about the future and us connecting with customers and providing agentic AI advice, we're pretty excited about where we could go.

Let's take James behind.

It's James Invine here from Rothschild & Co Redburn. I've got 2, please. The first is that, I think in the presentation, everything was about Lloyds Banking Group products. I was just wondering if there's any scope to combine this with open banking agenda and help customers to manage their finances across a lot of different providers. And if you don't do it, do you think somebody else will?

And then the second question is, it certainly seems like this is a great platform. Do you think it would be -- do you think it would work internationally. Have you considered opening a digital-only bank somewhere else? I know you wouldn't have all the customer data, but you would have the infrastructure?

Thank you, James. Ron, I suspect probably the open banking side will probably be worth you addressing to start with, and I suspect the international element will be Charlie.

Brilliant question actually because as Charlie alluded to this, GenAI is based on LLMs, right, which provides generic insights. It creates generic knowledge. And then you have your own view on the customer based on the product position today based on their channel behavior, based on what you know about their creditworthiness, all of this. Open banking definitely broadens that picture again where you add to the relevant context, knowing more about the customer than you do today.

Now as you're aware, we are offering open banking APIs to the market as well as we offer our customers the opportunity to open their accounts and other products into our digital channels, and we are actively integrating this into CoachAI and further AI-based propositions.

Great. Yes. So it is really interesting. I don't want to take the question further, James, but my guess is you're thinking as we build intelligence that's really supporting customers, how do they start navigating the market. And so we are actually -- I don't know whether we are. My guess is we are -- I should know this data point. My guess is we're the biggest provider of integrated products across providers through our digital app because we've got by far the biggest digital app and many of our customers I can see my head of this over here.

I'm not going to ask the answer to this, many of our customers already open show their other products and other banks in our app, and we see that data today. The really interesting question is what happens next is the intelligence in our app and then through other LLMs in the market start to provide advice to customers about who they're going to shop, how do you provide the best advice and how do you compete? And that's where, again, being at the forefront of this with the best data to get the best outcomes to build the trust, we think is the most important thing. And I'm not being vague and avoiding it, but I think there's an opportunity and a threat in that, that we feel were placed and positioned to look after.

And look, just on the international side, one of the things that I say a lot to our team is we are staying focused on delivering the current strategy for now. And through 2026, we've got some pretty bold commitments that I know many of you and all of you are aware of and you've got real clarity that we as a team are committed to delivering. And at the starting point, when you look at the value of the group and the value coming out of our U.K. businesses, specifically, delivering this agenda, both in '25, '26 and then for the potential beyond is huge. The kind of cash flows, the outcomes and then as you know, our commitments to greater than 15% RoTE 200 basis points of capital and a cost-income ratio of less than 50% by next year is forefront of our mind. So that's where we're focused now.

Definitely, there are options for us to do things internationally. We will be, and we have been having a discussion around that as a team, and we'll come back on the next phase of the strategy. And I think you teed it up well. We know we have one of the best digital platforms and Ron and the team have just gone through an excise of modernizing the infrastructure behind it. There's a bit of a way to go on that. So that could be a choice for us. But we always need to come back to what's our core strategy and what's the best return for our shareholders and we look at our option in that context. So no commitment at this stage. But I think when you become -- we're going to end up being one of the biggest and certainly most successful digital retail and then SME, we're slightly smaller, but digital retail banks in the world. We will have very distinctive capabilities that we could take elsewhere. But no commitments around that because I want to stay focused on the current strategy.

Just go to Alvaro.

And are you comfortable with that answer.

Alvaro Serrano from Morgan Stanley. I have 2 questions, please. First one is on the current account upgrade, which is kind of trying to tie that with the other income initiatives. The vision when Scottish Widows was revamped, my understanding was always that you would be able to access all the current account data and predict when there was an insurance payment coming and offer Scottish Widows an alternative product or any other parts of the product suite that Lloyds Group has to offer.

Is this PCA upgrade sort of can you do that today? If so, how much sort of you alluded to uptick in revenues, I think, or I don't know how you phrase it exactly, but are we there today? What's the revenue opportunity or when do you see that happening?

And then the second question is around tokenization of deposits, and you've mentioned and it's been widely reported sort of the efficiency and the convenience is clear on the lower cost obviously, Lloyds and the banks make money out of the payments. What risk are we seeing from a revenue perspective versus the opportunity? How should we think about sort of tokenization more broadly, not just deposits?

Thank you, Alvaro. Ron, it's probably -- I suspect, on the first bit there about the integration between insurance and banking, it probably makes sense for an initial -- from your side, and then we can move on to tokenization of deposits.

There is 2 opportunities, I think. One is we have these 22 million almost digitally engaged customers on the banking side, where we offer the full breadth and depth of all of our propositions, products and services, including the Scottish Widows products, right? And this is the, the famous bancassurance model. And increasingly, we are successful at that.

On the other side, you have the Scottish Widows app that is unlocking more and more insights into people's products, whether that's their pensions products, protection products, P&C insurance. We are offering those customers the opportunity through open banking APIs to give insight into the banking products as well. Now how that exactly will materialize into additional revenues, either on the insurance or personal current accounts or other products on the bank side. That's a bit of a guess for the future. But obviously, the intention of the whole cross-fertilization across the Scottish Widows digital engagement on one side and the banking digital engagement on the other side is exactly that what you're hinting at.

And maybe, Charlie, wants to add to that?

Well, one other add I think Alvaro, the question was, are we doing it today? And are we predicting for example, someone that doesn't have an insurance relationship with us, but we can see as a relationship with somebody else, and we should be putting in front of them offers of our product. And are we starting to think about providing preferential product and discounted pricing. The answer is yes, we are. It's not as advanced as we can see it could be, and way you've talked to you before about the increase in us bringing -- I'm going to use the word cross-sell, cross-selling bancassurance product to our core customer franchise.

We've increased that very significantly on the back of mortgages on the back of home insurance and the Home Hub, the enhanced mortgage journey and then this personalized messaging, and Ron talked about the data earlier around how many messages we put out. That's been the progress that's helped us do that more successfully, more joined up journeys with better insights and then in the language of the nerds like me the contextual relevant message. It's contextual to the customer at a time that's relevant through a channel that they want to access that channel. That's the intelligence that we have a leading capability in the U.K.

So we do all that, and it's been driving those improvements we've seen. When Ron and I sit together with our teams, and we talk about what's going to be feasible based on how we now have the data and then the use of agentic AI. And then as we move to a more conversational banking engagement through CoachAI and InvestmentAI, I think we're going to become incredibly better, much better at doing this. And so there's a real opportunity for us to really help customers get better outcomes with products that we can then price in a way that gives them more value across the group.

So -- it's been a part of what we've delivered to date, but actually, there's a step change still in front of us that we are positioning for based on these new technologies. So I'll go to the second one. Just on tokenization and deposits. Look, this is a really broad question. So tell me whether this kind of covers it right. Look, there's both opportunity and threat. And to be clear on the way we think about GBTD, which I want to call brickcoin still, but nonetheless, no one else does. I'm told that's for 1990s.

The -- this is largely around domestic payments. And interestingly, of course, we do have -- it's wholesale and retail. We do have some of those payments that have a fee, but the biggest platform by volume by number of payments is faster payments, which is actually free. So interesting, first of all, from a pure transactional payment perspective, there's a combination. And actually, some of the bigger use cases would be the faster payments mechanism.

As you know, we process 20% to 30% of domestic lower-value payments every day. So we are right in the center of that activity. Look, we see it as both an opportunity to grow and also there's a defensive part to it when you think about the future of this. The opportunity to grow, as we just described is we're going to be able to build programmability and embed the payment in broader transactions in the way we said. And if we're better at doing that than other people, we can help people when they're on their online P2P purchases, whatever platform they're using in their mortgage journeys, businesses doing B2B transactions, trade transactions the integration of the digital asset programmability and then how we embed that in the broader journey for the customers, we think -- we do think will be a source of advantage, competitive advantage for those that do it better, and we'll be able to do that as a leader in deploying that technology, and that will give us growth.

And in many of those products, the reason I went more broadly is it won't be the payment that brings the value it will be the broader transaction. And in some cases, there's fees and in some cases, it's around broadening and deepening our lending or deposit relationships. That's the first thing.

The second thing is, and Ron gave a great example in the context of our money market fund and gilt digitization. We do think there's a significant opportunity for efficiency improvement, not just on the payment, interestingly, but also on the associated document sharing and then engagement of the customers and the fulfillment of the transaction. And we've -- many of us have been doing this for 30, 40 years now. The history of financial services through my whole career has been one where the application of technology has resulted in margin compression, and you need to then scale, be more relevant, do more for your customers and get efficiency. So we just see when you look out into the future, this is another one of those opportunities to build efficiency. So those are both opportunities for us and our shareholders.

The defensive side to it is, especially on the back of the stablecoin announcement in the U.S. and the GENIUS Act and the STABLE Act and the derivatives they're coming, is if we saw a significant shift on domestic payments for -- to any kind of stablecoin, you then get the question around, does liquidity start to shift out of the banking system. And so our intent here is to very rapidly because we think we've already got pilots live, and we think we can get this live for the whole system, the whole banking system by H1 2027, Q1 '27, subject to working with our regulators, which would be the first market in the world that's done this. Singapore, China all my favorite ones I always beat us up on, haven't done this.

The opportunity is, I think, for -- to make tokenized commercial bank deposits as good for our customers and better from a programmability perspective than alternatives. I clearly think they should be interoperable with international stable coins at some stage, and we'll work with our regulators on that, but there's a defensive play around that, and we think it's really important to make it a better customer experience and more integrated, and that's one of the reasons we think it's a really important thing to do going forward. So there is a defensive part to it, but it's less about payments transaction fees. It's more about maintaining the role of commercial banking deposits. Does that make sense? Sorry, it's not a very simple answer.

Let's go to Chris next before moving over to.

It's Chris Cant from Autonomous. I have one on sort of the longer view look on the landscape, I guess, and then one about risks. So Charlie, just following up on something you just said and thinking about what you were saying during the presentation around the number of software engineers and how much that's sort of becoming an intrinsic part of the group staff base. Where do you see the U.K. banking landscape going over the next 10 years? I mean, are we just going to see essentially all of the smaller players drop away as they're simply not going to have the scale of customer base to make things work in the way that you're expecting to. Do you see a small -- do you see challenger banks in any meaningful sense existing in kind of 10 years' time? Or will it actually tend to what we see in software markets, for instance, where it really concentrates ever more in the hands of a few large players. So that will be the first question.

And then second, in terms of the opportunities outweighing the risks, obviously, fraud risk is quite a problem, I guess, around AI. And particularly in the U.K., the banks are on the hook for APP fraud in a way that simply isn't the case elsewhere. So how should we be thinking about that? There was a statistic in there that you've saved, I think, GBP 200 million or something in one of the footnotes over the last 3 years I can't remember exactly what I said, but there was a number in there. But how much worse is this getting? And are you worried about it being something that could outpace your ability to kind of protect customers because you can only put out so many tick-box screens, I guess, in the app saying, yes, I'm really sure I definitely want to make this payment. How are you thinking about that risk?

Thanks, Chris. I think the strategic landscape, probably both Ron and Charlie, have probably got inputs onto that one. Should we address that one first.

Yes. So I'll go Ron, and then I'll hand over to you. Look, I think actually, my IR team will say we're going to straight here into our 2026 plus strategy, and I need to be careful. So -- but it's a great question. And of course, whatever either of us say now almost certainly be wrong. I think that's what you need to start with I've been -- as you know, I've been in every major tech disruption geography in the last 30 years, including Silicon Valley '99, 2000 and Asia and various other countries. And what actually ends up happening is almost certainly different. But I will come back to your question.

However, in every situation, I've been in the '90s, 2000s and 2010s and hilariously in London, New York and the '90s around trading floors in Silicon Valley during the dotcom boom and then in Asia when Asia really took off in China and Singapore, it was very easy to work out what the basis of competition was going to be.

And so I think we have a very clear view around what we need to do to be successful, how the industry shakes out exactly, I think, is less clear, and what its worth without going back to it, using -- having data and data at scale around the area you want to provide advice in the context of agentic AI with a very, very strong digital engagement platform that the regulators understand and trust. I won't go to all of them again, Chris, but those are the foundations that I think we are very clear you need.

How do I think the world will turn out in 10 years' time? I think your question is a really good one. And I think financial services may be a bit different from other technologies, partly because the regulator plays a role in this, and they require a level of openness, not just through open banking, and also which will allow probably more competition than you might see in the tech sectors. But similarly, we'll put constraints on the pace and level of innovation because of regulatory obligations, which will be complex for us and other participants in this space.

But I do believe people with the best data and the best talent and teams to be able to use it will have an advantage in that future. I alluded to it, but I think there's an opportunity for players to reposition themselves directly with customers. Again, so the intermediation market and model will evolve significantly during that period, which is an opportunity, I think, for some players. And then to go one step further, which I'm sure you already at, Chris, I know you and your organization are incredibly thoughtful about this. We're already -- we need to get ready for a world where apps and what we think of as the big tech today may no longer be relevant.

And when you look at the way agentic AI, or more importantly, generative AI, but the ChatGPTs and the Perplexities are emerging, they're going to be a real challenge in this next period for the Apple and Google platforms. I think Google is obviously doing a lot to respond to it. So the exciting thing there is that's going to change this dynamic at the front of our engagement with customers, which has been emerging in a pretty duopolistic type way in the U.K., and it's going to provide opportunities for us to be more relevant, but it's going to be more complex.

So I don't -- I won't give you an exact answer. What our view is, is there are very clear competencies and capabilities that will enable us to compete in that world. And I'll tie it back to one thing in this phase of the strategy, if that's right, so to become a bit more real -- in 2022, we said to you on our retail businesses, and it's true on both SME and also insurance, but let's just stay with retail because it's easy. We need to be a leader in both having relationships direct to our customers and building out the best relationship bank, which Ron has talked a lot about and being able to bring the full breadth of the relationship with those customers that want to have a full relationship with us. We know in the U.K., most people have multiple banks, but at least the majority of the relationship. But we're also #1 in every product, which is intermediated.

And so we're #1 in mortgages, #1 in cards, #1 in loans, #1 in transport, and they are highly intermediated markets. And so we are also today the best at integrating our services and embedding them through brokers, sharing our data. If it's our customer that touches us through a broker, we can give them preferential pricing in a number of these channels, we're pretty sophisticated out, right? But it's worth, it's the most sophisticated market in the world, maybe buying Ali and Tencent in China, but even there you did the same stuff as we're doing here.

So in that world today, we said we're going to be the best at both of those things. We're going to have to do that in the future. And the exciting thing is there's almost a new channel, if you like, which is agents talking to agents and without getting too conceptual and that's how we're going to win. Well, if I just take all of the content away from you.

Now maybe just one build, right? Because indeed, it's a very important question, in terms of can all these relatively smaller players follow. Can they lead? Does it scale? The level of investment needed to build a beautiful ecosystem of agents talking to agents that Charlie was alluding to. And this brings me to my one build, and that is there is only so much talent in the market, even if you make use of vast talent pools like India, Philippines, et cetera. There is only so much talent, and we're all competing for that, and people make a conscious choice for whom they want to work.

And I think we can see from both graduates as well as experienced people in AI. People want to work for companies that have a clear purpose and that are winning in the market. And that won't make it easier for smaller competitors in the market to survive. That's my only built.

Ron, do you want me to do the fraud one?

Yes.

Look, this is hugely important. Chris, as you know, actually, the APP fraud is primarily linked to faster payments. It's one of the things that I think is slightly challenging in terms of the way the regulation works. Consumers and businesses get different outcomes depending on what their payment is, credit cards have chargeback and retrievals and fraud built within APP fraud applies to faster payments if you do CHAPS and banks, just use the language, you don't get any fraud protection.

So it is one of the things I think we'll have to evolve over the next period of time. And critically, you pointed to the work we've done, and we're really proud of this for our customers, first and foremost. And then obviously, for our shareholders, we have done a lot to invest in AI tools to manage forward better. And it does create friction for some customers. I feel like I should apologize if I'm in front of the media for that, but we know it's actually saved and materially protected customers from being exposed to fraud and reduce the cost to shareholders and we track our share of interactions and transactions, volume and value relative to our losses on frauds, and we're better than the market.

So it has been a very significant part of what we do. We had a very big deployment what it's worth in the last 6 months this year where we applied all of those very advanced fraud tools also to debit cards. And so we're protecting more customers with more pace and saving money for the group.

Your point, though, which is how does this evolve? And how do we continue to do it? It's top of mind. We do it by continuing to invest and be ahead of how we protect customers. And then I'll do one more link, if that's all right. Ron, it's why we're excited about GBTD, the very first use case that we piloted already, and we proved works between a number of banks in the U.K. was for online marketplaces and actually I know you've heard me say this before about 40% of all crime in the U.K., individual crime is financial crime and about 80% of that has been facilitated by the big tech companies and the biggest facilitation is online marketplaces. It's actually the Facebook marketplace.

So one of the first use cases of the programmable money that we'd like to go live with on a system-wide basis means that you could pay money to someone online on an online marketplace, the money would leave your account. It basically goes into escrow, but you -- and so it's available to the seller of the good, but you only release it once the goods have been received. And the reason I give you that as an example is suddenly, if you have programmable money, which means nothing to anyone until you see the use cases, you can see that we can build use cases into this money that makes it safer, and it's actually a tool for managing fraud. Now that won't solve all types of fraud as you know, better than me, Chris.

But it's -- there's a huge opportunity to use this as a platform to innovate and our intent would be to make this a platform that's available to the whole market. So everyone can start innovating off this. It will be seamless and create a singleness of money if we're here with the central bankers for the whole of sterling. And I think it's a really important tool for us to then be able to innovate and for the whole market to innovate on how we continue to fight fraud. It's not a simple answer -- single answer by itself, Chris, but it's another reason why we're excited about GBTD. Thanks for the question.

We'll take a question from Aman first in the front, and then we'll go on.

Amandeep from Barclays. Look, I appreciate you're not going to want to talk about your new strategy and your new plans and forward look. But clearly, this technology has potentially compelling implications for the operating model and the number of people that work at an organization like Lloyds profile of that workforce and ultimately, the cost base. So is there anything you can kind of give us, perhaps not in terms of numbers, but qualitatively, how you're thinking about the evolution of these from here.

And the related question is just around the role of the branch in this world, particularly if you're opening customer current accounts in minutes, interested to kind of get your updated thoughts on what the value proposition of the bank branch is now?

Thanks, Aman. I suspect it might be quite limited as to how much Charlie can respond on these questions, but I'll let him respond on both of those areas. .

I think it was guidance from [indiscernible] guidance to me about the guidance I gave. Look, I think the first thing to say on your point about operating leverage, whether it's cost efficiency and the mix and type of people is it's actually been a meaningful part, not generative AI because that's still newer, and Ron gave you the numbers. It's been a meaningful part of this phase.

The biggest thing is where you can enable customers to serve themselves, whether their businesses, pensions customers, retail customers and everything in between. And then once you've got that, if you can help them get whatever answer or question they've got right first time in a channel of their preference and increasingly, 97% of our interactions are digital. The U.K. is by far the most out of Western democracies by far the most digital country in the world that way, even compared to Nordics and compared to Australia. It's quite advanced, obviously, U.S. and Canada behind. So that's been a big part.

And as you saw in the presentation, we're saying that 70% of the GBP 1.5 billion of additional revenues by 2026 are being supported by this and 60% of the GBP 1.5 billion gross cost saves to date, we haven't given you a target for 2026. Our original target was GBP 1.2 billion is what we committed to by 2024, have been delivered by those kinds of efficiencies even before we think about the next stage.

So that's the first thing. And so you should absolutely expect that kind of scale of impact. The exciting thing is when you think about the new technologies Ron's talked about on one of the slides, we talked about one of our Agentic AI use cases, which is supporting our contact center and customer service colleagues, that's been live for a while now. Ron, I think it was Q1 this year, end of last year, we went live with Athena.

Q1.

Q1. We've got tens of thousands of colleagues using it, and we can track the minute saved per interaction per colleague. And as you know, in those environments, you can then manage and optimize what you need to support customers or you can take it as a trade and say we're going to materially increase how we serve customers and provide a higher service level. And those are choices that are operating at a scale that we're using today and will be increasingly capable and available to us.

So we definitely see it as a really significant opportunity to differentiate our propositions like in the investment propositions we talked about, drive efficiency right across the organization and manage risk better in the spirit that Chris has laid out. You will forgive me if I won't give you that guidance at this stage because I don't want to go beyond our current targets of 2026, and I want to deliver those.

But the confidence you should have is these are the kind of mechanisms we've been using to deliver that growth and efficiency to date. And we see these new tools now that we've got the technology and the platforms built as giving us the ability to kind of continue that journey and accelerate it in a number of areas.

What I am most excited by for this work is obviously, I care massively about the operating leverage and the efficiency. But our ability to differentiate what customers experience. There's even simple things, right? So why should there be any wait times in IVRs any longer when you've got brilliant colleagues with the expertise that can support around the most difficult transactions and you've got the agentic AI capability to support around the simple stuff. Can you start to eliminate this isn't a commitment by the way, Douglas, don't get worried. It's not a commitment around what we're going to do, but there's even simple things you can materially improve what customers experience. And then when you get into providing truly what we have wanted to do and certainly I've been and committed to for over 30 years, getting down to the customer of one and actually differentiating how we support those customers.

We've finally got the technologies to do what I spent 35 years doing. Ron has been doing it for even longer, but he was in the wrong industry to start with. So I'm sorry, I'm not going to answer that question fully. Just in terms of the role of the branch.

Look, I think, again, you should just see this as a natural extension of what we're doing. The branch plays many roles. And part of it is about community engagement and us being relevant to our communities. And it's one of the reasons we're differentiated. We haven't talked about this, but -- there's a lot of that noise in the market place about market shares, but we have grown our market shares of personal current accounts and business current accounts in this phase of the strategy. And that's where the value is and that's where the trust is at the moment that we're seeing, obviously, neobanks and fintechs take quite a big share of personal current account flow.

And I know there's lots of concerns around, can you compete with what's happening? What we focus on is real customers and value, and we've grown our market share for the first time since financial crisis actually. So branches play a role in that. They play an important role around supporting parts of society that aren't yet digitally active. And we announced today a really kind of exciting but also quite challenging. I don't know if maybe you had a chance to look at its survey around digital engagement and the pace of adoption of generative AI and digital has exceeded even my expectations in the last 12 months, but there are still 5% to 10% of customers who don't engage digitally.

And for what it's worth is when you look at where the value of -- in the U.K. retail market is and in the commercial market, SME, a lot of it still resides with people who aren't that digitally engaged. So that's important to recognize.

And then in the moments that matter, people still do want to go talk to people. So I think you've seen a significant, really significant reshaping of our branch network, ignore points of presence for a second, the stuff that we are most excited about is that we managed to virtualize, if you like, the RMs and the relationship bankers so that they're not stuck with a single branch and they're available to talk to customers and bring the expertise they have in a much more joined up way. And I think that's going to be the really exciting part of the next few years, which is how do you let customers engage with our intelligent agentic AI agents to support them when they are comfortable and that's the best outcome for getting their tasks done or doing what they need to do.

And then when they need to talk to somebody, how do we give them access. And in some cases, I still think a physical presence, which will be very important in this period. So we have got a kind of going back 10 or 15 years, everyone used to talk about multichannel branch banking. I've banned that phrase since I've been here because I don't think it's very helpful. But if you take it truly customer back, that's what's driving our branch strategy. We still believe it's important. It's very important for some customer segments that are valuable for our shareholders. It's a very important moment. It can be a way of providing support in moments that matter. But clearly, we need to significantly modernize and drive the operating leverage out of that infrastructure, and you've seen that happening in this space.

That was actually a much more fulsome answer than I expected.

Or wanted.

[indiscernible]

I know we're at an incredibly early stage, but and it's really connected with the previous questions around challenger banks and branch network. But I was just wondering, and it's kind of a super high level, but just how much more successful the selling machine do you think the app could be then the -- compared to the branch network and the old way of doing things with adverts.

And specifically, I was wondering if you had any data, it would be really interesting to see how much longer people are spending on the app now with all the new offerings that you -- that have been coming on in the last few months. And maybe you have some data about how many -- what proportion of customers are using agents and perhaps how that compares to the time in the branch?

And related to that, it would be interesting again to see just how successful -- what the success rates are like on some of the personalized offerings? And if you've got data, you can compare that with to the old letters of the branch network. And I guess, wrapping it all up, just into kind of longer-term aspirations. I mean what do you hope -- how do you hope to increase the cross-sell or the kind of fees you hope to generate per customer as the app develops?

Charlie, meeting customer needs, do you want to start that question and then we'll probably layer on top?

Yes, Ron, you -- so the first thing on this, I think the first question is, how much better is the app at selling than branch? And how does that evolve? The answer is even today and Ron, you share the data, the majority of our I would like to call it needs fulfilled rather than sales. But a majority of what we do is through the app and through digital services and then through our very important intermediaries, where they remain a really critical part of serving our customers.

And the branch is true actually of most financial institutions in the U.K. The branch has become less focused on sales since the financial crisis, right? And that's the strength, I think, because it gives us much more scalability, much more reach and then we can be very innovative around how we position ourselves, whether it's bundling through social media, through the Internet and pulling people into our journeys or into the app, and all of the above. So the majority is already happening there.

And the second thing is when we do personalization, and we haven't shared this data. But I think what I might just do with this question is we might take it into when we come back on the next strategy, think about how we could share some of this data. So I'm not going to give you the specifics, although I know the actual data. You tend to get -- I'll give you the anecdote 10 to 100x more likelihood that someone will engage on an offer or a discussion and go into a meaningful journey if it's properly personalized and I use those 2 phrases contextual and relevant and relevant and contextual means it's presented to them at the time they're considering they need a product in a channel that they want to engage with you on.

And by the way, even, and I always laugh I use myself, I like to -- I travel on a train at 6:30 in the morning. If someone sends me something as an SMS at 6:30, I might look at it if you send it to me in the rest of the day. I'll try not do it in front of you, but I won't have time. So we can start to personalize at which channel, what time of day, what tone of voice and then based on something you've done. You're searching the Internet, you've looked at our channels. So that's contextual and relevant you get massively, massively higher engagement rates and then you have what's called a funnel fulfillment opportunity.

So these are huge things. We are the leader in the U.K. around this relative to high street banks. The fintechs do this very, very well, by the way, as you know. And we've done a -- it's not for today, but another part of the journey we've been on is to go from basically very limited use and engagement of social media to being one of the leading banks through the transformation of our marketing and data functions.

And if it's okay, just because I'm not going into guidance beyond 2026, I'm not going to give you the guidance on how far we would like to go in terms of either cross engagement, breadth of depth of relationship or revenue growth. However, you know we laid out at the start of this phase, and we'll give you an update next year on depth of relationship as a good example of a metric we said was important.

We gave you metrics at the start of this phase, and we're on track to deliver them around numbers of FTEs per customer from a distribution perspective to give you this feeling of efficiency growth that we're talking about. We gave you some step changes in 2022. We'll continue to report on them, what I can tell you now is we're going to meet or beat those targets. And I think those things should continue to be value levers, horrible consulting world that we will prioritize and focus on going forward. I'm sorry, I can't answer it more specifically, Max, I just don't want to get to guidance, but it's exactly the right question. I love it. Let's come back and make sure we give you more clarity going forward.

Ben, in the front line.

Ben Caven-Roberts from Goldman Sachs. Just 2 questions, please. First, on competition. And then second, a bit of a follow-up on costs more conceptually. So within competition, it sounds as though the greatest part of your competitive moat revolves around quality of relationships, depth of data. So first of all, would you agree with that characterization? And then secondly, if you think around potential for disintermediation or potential areas of your competitive moats that you're trying to reinforce the most to ward off competition. What would you think about there over the medium term?

And then secondly, just in terms of costs, conscious you don't want to give any numbers, and that's completely fair, but more conceptually around the shape of tech investment. Is that changing at all the type of products that you're investing in, the type of tech change that you're trying to achieve? Is that changing in the percentage of OpEx that tech is? Is that shifting as well even if the gross saves might be increasing?

Thank you, Ben.

I'll take the first, Ron. Do you want to do the second one.

Yes.

Is that -- because they're both great questions. Obviously, as always, Ben. Look, on your first one, I think the answer is yes, but I'd say that. I'd need to think about it more. So we definitely think quality relationships and depth of data that underpins those relationships is important. To build on quality because quality is -- it's not just do they trust that? Do they have a relationship with us today? And do we have a channel. I think trust, we do think trust is today, fundamental to who we are, that may sound even less quantitative and quality.

But the reason I think it's important is when we look at where do we have the deepest relationships with people that bring the most value to us and that want to then work with us going forward, trust is at the heart of what they say they care about. And interestingly, as you start to move into an agentic AI world, trust is more complex. And people are already highly aware, again, our digital survey, we've just announced is really, really interesting in this context. They are willing to engage on very emotional personal issues, but they are highly aware that they may not trust the outcomes.

And as we start to talk about regulated financial services outcomes, we think trust really is an important part of this. Now we spend a lot of time torturing ourselves on what trust looks like, how you build trust and then how you manage it, especially in this world that Chris talked about, where fraud is prevalent and where historically, banks have seen that they're not always trying to help you get the best outcome. We spend a lot of out of time helping customers get the best outcome on our basic services today and protect them from fraud to build that trust.

And we do think that's going to be a really important battleground in this next period of time. And Ron talked about a whole bunch of other stuff like our role around ID&V, identity and verification as one of the mechanisms for being a trusted provider of that data. It's particularly important, we will talk about, so I'm sure in the strategy, but we'll have to see how this evolves if you start thinking about agents giving financial advice.

So I think I agree with your question, but the build would be trust, I think, is a really important part of it, and we need to be the best at doing that. And of course, by the way, with breadth and the scale of your starting point, both informs the data, but also your ability to then build and test and pilot things and then iterate at pace. So I think that would be the third one.

And then potential for disintermediation, look, this has been the history of our whole working careers, right, which is you've seen fragmentation in the value chain across wholesale retail payments and insurance, and then domestic and international payments. And you've seen, especially as we've talked about in this market, the emergence of a significant amount of intermediaries on some of the most important products.

So I think there is already a significant amount of disintermediation, and you have to be the best at working with the people that are intermediating you to still succeed and be relevant and to work out where you add value versus them. And I think that will continue. What I teed up earlier is I do think this next phase, and we'll think about it strategically provides us an opportunity to get closer to our customers in a number of segments and product areas, and also to join up for customers in a way that makes it much, much simpler for them.

So that's one of the strategic objectives we will have and we do have today. And without being too theoretical, the Home Hub is just a brilliant example of that. And the question I got earlier around what percentage of the Home Hub customers doing their refinancing with us. Remember, 85% of mortgages today for the market are going through brokers. We actually outperform in our direct channel were up about 24% of our mortgages that distributed ourselves. That's always on the new flow, the remortgage journey and engaging customers and making it really simple and showing them what is value if they remortgage with us, that happens digitally is a great way of broadening and capturing the value from an existing relationship is intermediated. And so that's been part of our strategy today.

Right. I'm going to hand to you, Ron, for the tech and cost discussion, which is a great question as well.

Yes. I think this is spot on, right? And as you heard me speak about the first phase of our transformation, much of the investments went next to, obviously, improving our customer propositions, you saw the examples but a substantial part went into building new foundations literally brand-new data center, our digital platform, our public cloud foundations, our cybersecurity platform, our data platform, all of it, right?

So quite foundational, which I would say has a longer-term return on investments across the group. I think looking forward, and I'm not seeing -- we're not investing in those foundations anymore, but the shape will change. Obviously, investing more in the AI space and investing more into individual propositions, addressing more specific customer needs to Charlie's point, in the end, you could imagine -- in the end, you could imagine that while using GenAI and agentic AI, you would be able to specify and customize your offerings to the segment of one, right? So yes, the shape of our investments and the kind of type of investments will change over time.

And the second element to this is -- and there was a number in the slide saying gross savings on delivery, and that number will increase as we further improve our productivity in the tech and data domain as we improve the skills of our workforce while we implement agentic AI adding further to the productivity, you get more value for the money invested. So even if we would leave the investments at the current level. And again, that's for Charlie to discuss next year, even if you would kind of maintain the same spend, you will get more value for the money that you invest.

Okay. Thank you. The seminar is proving very popular in the fact, I have numerous questions online as well as those in the audience. A number of the questions online have actually been addressed through other questions. However, particularly given your discussion, Charlie, on trust, I think there's one question here that is probably worth addressing at this point. It's probably one that you're quite close to as well.

The question was, how does the executive and the Board ensure ongoing accountability and oversight of AI systems particularly in high-impact areas like credit decisions, fraud detection and customer profiling?

Yes. Maybe I'll say one thing and then Ron, I know we shouldn't double tag questions, but you've built out the team around ethics and oversight and AI, and there's some really good developments in that context, which is like the controls and the capability to do this. But it's a really important question. Look, the starting point is that you have a Board and executive and then below the executive, the people that actually understand technology, data and AI. And as you know, we've done a lot in the group to refresh the talent, Ron is an example. You've met some of the rest of the GEC, my group executive committee and a lot of them have a lot more depth around technology than you'll see in other organizations. And that was a deliberate choice because we knew to deliver the strategy for our customers and for our shareholders, we needed to have that capability.

The second thing I think is you need to invest in the experts who can then oversight and manage the different tools we're talking about, and I'll ask Ron to talk about that in a second and have the PhDs and have the systems and the tools that enable you then to do quality checking both pre-putting AI tools into production, but then critically for the ongoing optimization and review and control of them. I'll talk about that as my third thing.

And as I said, we started -- we start this next phase of AI with already 800 live AI models using large language models and other form of AI infrastructure. So this isn't our first rodeo. We know how to do this. We know how to do it safely. And to give you a feeling for it, one of the things because all AI models have a level of black box outcome is you have to get very good of back testing and the complex part of that is creating a clean data set against which you can back test. So we have significant capability around control testing.

The third thing, which I won't spend more time on now, but it gets -- it floats my boat because I spent my old career trying to do this. But I just teed it up earlier on investments. We've got very good as an industry of dealing with humans, which are black boxes and doing 1% or 2% quality checking retrospectively on their outcomes. What we're already doing with Ron's team's input is creating agents, monitoring agents who then audit themselves produce exception logs, you can have agents looking at those outcomes with 100% fact checking and then presenting data for a human to then oversight.

The world that we have built, the biggest retail and commercial bank in the U.K., where you do 1% or 2% checking with a lot of humans that are black boxes. I love my colleagues and they're awesome to one where you can start to have more data-driven oversight is the one that we are able to start executing today and it will become the model that defines great quality control, whether it's credit decisions or whether it's processes or whether it's customer outcomes. So I think that's the third thing.

Ron, you want to just want to talk about the capabilities that you've been helping us build out?

There is actually 3 layers to this. One is people. The second part is capabilities or technology capabilities. The third one is governance. So on people, we have a specific data ethics and AI ethics center of expertise, like Charlie said, very smart, well-educated and conscious people. Secondly, we, like I slightly explained in the presentation, right? AI use cases require access to data, access to LLMs, and they require guardrails, which translate into real capabilities to avoid data privacy breaches, intellectual property breaches, regulatory compliance breaches, biases, hallucination, unethical behavior, all of these guardrails you need to build into your platform, which is arguably the most challenging part, giving access to LLMs or unlocking our own data, I would argue, are the more simple part.

So that's on capabilities. And as we are building out our agentic platform, these are embedded, crucial and critical elements into that. And thirdly, like I said, to governance, we do have a data ethics committee which is actually chaired by myself with obviously our legal and risk people, business representatives.

Where we do discuss the use cases, we want to bring to production discuss what the ethical dilemmas, potential ethical dilemmas are in there and how we deal with them. And it's not the case that every single proposed use case will survive the scrutiny of that committee. We do actually reject certain use cases that we believe are not sufficiently well thought through in terms of how they deal with ethical dilemmas.

And then the outcomes of all those controls will go back up through governance to both our committee at the top of the banking and the executive and up to the Board, which I think was the question...

Excellent. We've already run out of time, but let's just take one final question. We'll take it from Andrew.

I might find sneaking to, if I can, sorry, about that typical. The first one was just you highlighted the ranking in Evident AI and how you've moved up 12 places to 15th. When I look at that index, I mean I think it's very difficult to rank the banks, they do a very credible job of attempting to do so. But the top 10 is still dominated by the U.S. banks. So is there anything for you to learn from the U.S. banks? Or do you simply think that they are better at advertising what they are doing already?

And the second one, just on costs gross versus net. I think you talked about agentic AI being almost a continuation of what you're already seeing evolving in terms of digital adoption. I mean if you were to go about 15 years ago and tell somebody that the branch network across the U.K., not your industry would halve, I think they'd be surprised. If you were to go back and tell me halve, but costs will be broadly stable, they'd probably be even more surprised. So what do you think about gross versus net costs from here because clearly, the gross cost savings, which it is sizable, but does it just all get redeployed.

So I do the second one. Ron, do you want to do the first one?

Yes. Sorry, Douglas. Sorry, remind me the first question was on...

Evident AI, U.S. banks and lessons to be learned from that.

If you -- and we did study, obviously, the report in depth and then since we participate, we get more detailed insight, a bit behind the curtains, I would argue. Obviously, the U.S. banks are leading. However, if you look at the ranking, the kind of top 3 banks in that ranking and from top of mind, that's JPMorgan, Kepler and RBC, they're clearly leading. They're ahead of us, and we should acknowledge that. From, let's say, the top 3 down to probably roughly where we are, it is more or less we're all on par level. Some may excel in some dimensions, other excel in other dimensions.

I think what we strongly believe is while we continue our efforts, and this is not like we explained a small effort of a small group of people. We are investing in our senior leadership together with Cambridge. We are investing in our data science and engineering community to retrain them using agentic AI. And on the broader colleague base, we are skilling them as well, reskilling them with AI tools so they are better positioned for the future. And approaching this in a more sustainable, broader, and you could argue a democratic way, I believe we are well set up to gain more position. It's not per se spending a lot of money, which arguably the U.S. banks have plenty of.

Do you want to take the second?

Great. Yes. No, thank you. So the second one, we've had this discussion with this group before about gross versus net cost. So it is the kind of question. Obviously, the first thing I'm going to say is one you'd expect me to say, which is we're going to get to our 50% just under, if William were here, just under 50% cost-to-income ratio next year. And obviously, given the market we operate within, remember, you got to remember because cost-to-income ratios are revenue and cost there's many markets where revenue is -- the margins are wider and what you can do as a bank are very different.

So given the scale we've got the market we operate within and then the efficiency level we're delivering, achieving that, we think, is an important stepping stone. So we're committed to that. And whatever your numbers are, that will be having achieved approximately 30% revenue growth since 2021 and having dealt with a very significant margin compression for our mortgage book, which means that revenue growth is showing actually very significant alpha underlying market share growth and underlying business growth and the easiest one for me to describe to you today in that context is the other operating income growth of 8% to 10% CAGR, 9% CAGR now through the cycle, which is very differentiating.

So the reason I go there is that's the first thing. Now as you point out rightly, that has shown growth cost increases. And even though we've saved GBP 1.5 billion -- sorry, net cost increases, even though we've seen GBP 1.5 billion of gross cost savings, we've seen 2 things broadly inflation, which everyone can understand and model number one.

Number two, I asked for permission from all of you to invest GBP 4 billion more beyond our run rate to do the things we've talked about today and to tee up a business that was pivoting back to growth and transforming and being competitively relevant. So that's been a higher impact on our costs.

And then the third thing, which is I always think of as good cost is business growth. And if -- I don't know whether we're going to be able to do this next year, actually. But certainly, when I look at it, I look at the marginal cost income ratio for the business growth I'm getting ex those 2 other factors. And obviously, that's a very, very healthy number given how we operate.

What I think is going to happen going forward, I'm not going to give you guidance, but I do think whatever you look at, you should definitely -- we should definitely as an industry, and we will have very high expectations on our ability to continue to deliver gross cost savings. I can't control inflation, but you'll have your own models or views around that.

Ron talked to you about. I'm not going to give you guidance on it. But our ability to deliver more with the same capacity or less, we think is strategically really important. Asia, we can compete from a pace perspective. But secondly, so we can deliver more for less to our shareholders and investors from our technology capacity. So that will be part of the story that we have going forward.

And then the third part, which we need to come back and be really clear on is there is some, I think, really exciting growth opportunities for this group. We are proving we can now capture market share, be relevant and create value. And so -- and those will require investment in people and capabilities to grow and we should be transparent around how much is actually growing the operating expenses in support of accretive growth. So those things will be true.

What happens on a net basis, I think will depend obviously on the combination of choices we make and for the industry more broadly, the choices they make for us. But as you know, through '26, and we'll come back beyond that, this is a business that you'd want us to be able to invest in because the returns are very, very strong. Sorry, I can't give you the full answer. We will take it as input for next year.

So thank you. So given the time, we'll need to finish the questions at that point. Before we actually finish, if I could just hand over to Charlie to put some brief closing remarks.

Well, thank you, Douglas, and thank you, Ron, for joining. Look, I really appreciate you joining the session. I really appreciate you doing it in person. I hope it's been interesting -- as I said at the start, this is the last of the kind of seminars alongside our quarterly updates for this strategic cycle. Thank you for bearing with us. We knew this one was a bit more conceptual, and the risk was Ron and I are deeply, deeply passionate about technology innovation and we've spent our careers doing it. So thank you for bearing with us with the more theoretical answers, but I hope it was helpful for you.

Obviously, we're working towards the strategy update next year. I know we haven't given you a specific date, but we have said that will be in the summer next year. We'll come back and give you that date probably at the year-end, I'm guessing, which is at the end of January because we're doing prelims to get pace going and get the organization looking forward. So thank you very, very much for attending today and really look forward to the next meeting, I suppose, which will be the prelims in January. Thank you.

Thank you for standing by, and welcome the Lloyds Banking Group 2023 (sic) [ 2025 ] Q3 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.

Thank you, operator, and good morning, everyone. 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 of our key messages on Slide 2. We continue to make great progress on our strategy. In doing so, we are creating value for our customers and wider stakeholders through improved propositions, targeted growth and enhanced operating leverage.

In Q3, we delivered a robust financial performance, supported by healthy growth across the business, driving continued income momentum. We maintained our cost discipline and strong asset quality, reflecting stable credit performance in the period. Taken together, this is driving strong capital generation. As you know, in the third quarter, we've taken an GBP 800 million additional charge relating to the FCA consultation process on motor commissions. Clearly, we are disappointed by this outcome, and I'll talk more about it later in the presentation. Accordingly, we've revised our 2025 guidance to reflect the motor provision. Excluding the charge, we are beating our prior targets. We remain highly confident in our 2026 guidance.

Before turning to our financials, a brief update on 2 important strategic developments. Firstly, I'm delighted to say that we have completed the full acquisition of Schroders Personal Wealth to be renamed Lloyds Wealth. This is an exciting step forward for both our customers and shareholders who will deliver full control of a market-leading wealth management business that has GBP 17 billion of assets under administration, more than 300 advisers and 60,000 clients. Embedding Lloyds Wealth into the broader group will advance our end-to-end wealth ambitions, delivering clear benefits and proposition and journey for our customers. Secondly, we've taken significant steps forward in our digital asset strategy.

Earlier in the year, we partnered with Aberdeen Investment to deliver a U.K.-first FX derivatives trade collateralized with tokenized digital assets. Alongside, we're co-chair in the U.K. finance project to deliver GB tokenized deposits. Retail and commercial pilot use cases in programmable digital money are due to deliver in H1 of next year. These developments will ultimately drive material customer opportunity and maintain our commercial leadership. We look forward to elaborating on this alongside other areas of our technology, digital and AI strategy in an investor seminar on the 6th of November.

Let me now turn to the financials on Slide 4. The group demonstrated a robust financial performance during the first 9 months of the year. Year-to-date, statutory profit after tax was GBP 3.3 billion with a return on tangible equity of 11.9%. Excluding the motor provision, return on tangible equity was 14.6%. Looking at the full year, we now expect RoTE to be around 12% or around 14%, excluding motor.

We are pleased with the group's continued income momentum. In the first 9 months, net income of GBP 13.6 billion was 6% higher than the prior year. This was driven by further growth in net interest income, alongside a 9% year-on-year rise in other operating income, led by customer activity and strategic investment. Within the quarter, net income was up 3% versus Q2. This was supported by a net interest margin of 3.06%, in line with our expectations for a gradual increase, again, alongside ongoing OOI growth.

Looking forward, we now expect net interest income for the full year to be circa GBP 13.6 billion slightly ahead of our previous guidance. We remain committed to efficiency. Year-to-date operating costs of GBP 7.2 billion were up 3% year-on-year, in line with our expectations for this stage. Credit performance meanwhile remains strong. Year-to-date impairment charge of GBP 618 million equates to an asset quality ratio of 18 basis points. Given our performance to date, we are upgrading full year guidance on the asset quality ratio to circa 20 basis points.

Meanwhile, tangible net assets per share increased to 55p, up 2.6p in the year-to-date and 0.5p in the quarter. Our performance delivered strong capital generation of 110 basis points year-to-date or 141 basis points, excluding motor. Our losing CET1 ratio is 13.8%.

I'll now turn to Slide 5 to look at developments in our customer franchise. We have seen good growth across both the lending and the deposit franchises so far this year. Group lending balances of GBP 477 billion are up GBP 18 billion or 4% year-to-date. Focusing on Q3, lending is up GBP 6 billion or 1% versus Q2. Within this, retail lending grew GBP 5.1 billion. This was driven by an increase in the mortgage book of just over GBP 3 billion, reflecting both market growth and a completion share that remains at around 19%. So far, we are seeing no sign of a slowdown in mortgage applications ahead of the budget in November. Elsewhere in the retail business, we saw continued growth across each of our cards, loans and motor businesses as well as growth in European retail.

Commercial lending balances meanwhile, are up by GBP 1.3 billion in Q3. As has been the case throughout the year, we saw growth in CIB across our targeted sectors, including in institutional balances. In BCB, balances were broadly stable with new lending in mid-corporates, offsetting the net repayments of government-backed facilities.

Turning to liability franchise. Year-to-date deposits have grown GBP 14 billion or 3%. In Q3, we also saw a good performance, up GBP 2.8 billion quarter-on-quarter. Within retail, PCAs grew by GBP 1.2 billion, driven by income growth, subdued spend and lower churn during the quarter. Alongside the reduction in savings balances of GBP 0.9 billion, was largely due to some fixed rate savings outflows following our post ISA season pricing decisions.

Commercial deposits are up by GBP 2.4 billion in Q3, driven by growth in targeted sectors across both CIB and BCB. Pleasingly, NIBCA balances were up in the quarter. Alongside deposit developments, we continue to see steady AuA growth in insurance, pensions and investments, with circa GBP 3.3 billion of open book net new money year-to-date.

Let me turn to net interest income on Slide 6. Year-to-date and in Q3, we are seeing sustained growth in net interest income. NII for the first 9 months was up 6% year-on-year to GBP 10.1 billion. This included GBP 3.5 billion in Q3, up 3% quarter-on-quarter. Income growth continues to be supported by positive momentum in the net interest margin. The Q3 margin of 306 basis points was up 2 basis points on Q2, driven by a growing structural hedge tailwind.

Net interest income was further supported by average interest earning assets of GBP 466 billion in Q3, up GBP 5.5 billion versus Q2. The increase was driven by sustained lending growth, particularly in the mortgage book. Looking ahead, we now expect net interest income for 2025 to be around GBP 13.6 billion. This incorporates the healthy volume developments we have seen alongside a slightly more supportive rate environment. We remain very confident in the trajectory for net interest income growth.

Let's turn to other income on Slide 7. We continue to demonstrate strong and broad-based momentum in other income. Indeed, our diversified franchise has supported consistent high single-digit growth over the last 3 years. Year-to-date OOI is GBP 4.5 billion, up 9% year-on-year. In the third quarter, OOI was GBP 1.6 billion, up 3% versus Q2. This was particularly driven by growth in motor and LBG investments. It also represents a good performance in protection, boosted by improving mortgage take-up rates.

Other income growth continues to be supported by investment and strategic progress across the business. I spoke earlier about 2 specific areas of delivery, the slide shows a number of other proof points to testify to our progress, including, for example, the launch of the Lloyd's Ultra card in retail as well as further scaling of capabilities in our commercial franchise.

Looking forward, the full acquisition of Schroders Personal Wealth will further support OOI growth. We see an opportunity to meaningfully grow the business in the coming years as part of our integrated wealth proposition. Briefly turning to operating lease depreciation. The Q3 charge of GBP 365 million was up slightly, in line with growth in the fleet, driving other income.

Moving to costs on Slide 8. The group continues to maintain strong cost discipline. Year-to-date operating costs of GBP 7.2 billion are up 3% on the prior year, in line with our full year expectations. Excluding growth in severance, operating costs are up 2%. Business growth and inflationary pressures continue to be mitigated by savings driven by strategic investment.

Within the third quarter, costs of GBP 2.3 billion are down 1% compared to Q2. This is partly helped by investment timing. And looking forward, Q4 will see higher operating costs due to the usual seasonal factors and added costs from the full acquisition of SPW. We will meet our GBP 9.7 billion full year guidance, excluding these additional SPW costs or modestly above this, including them. Remediation was GBP 875 million in the quarter. This reflects low levels of non-motor based charges alongside the GBP 800 million incremental motor finance provision.

I'll now spend a moment on that on Slide 9. The additional GBP 800 million provision for the potential motor commission remediation costs takes our total provision to GBP 1.95 billion. The recent FCA proposals are subject to consultation and so the final outcome differs. However, as it stands today, they represent an outcome that is at the adverse end of our previously modeled expectations.

Based on the proposals, there are a high number of cases determined to be unfair. Resumptions of unfairness do not apply the legal clarity provided by the recent Supreme Court judgment. And the redress calculation is less linked to harm than it should be. We will, of course, be making representations to the FCA on our points of concern, and we look forward to engaging in a constructive dialogue. Our total provision of GBP 1.95 billion still using scenario-based methodology includes both redress and operational costs. It represents our best estimate of the potential impact of this issue.

Moving on to asset quality on Slide 10. Asset quality remains strong. Usual arrears are low and stable across our portfolios. Early warning indicators also remain benign and again, very stable. The year-to-date impairment charge is GBP 618 million equivalent to an asset quality ratio of 18 basis points. The charge of GBP 176 million in the third quarter represents an asset quality ratio of 15 basis points. This is the result of a low underlying charge, reflecting our prime customers, a prudent approach to risk and stable macro conditions as well as some one-off model benefits.

It also incorporates a small MES charge of GBP 36 million in the quarter. Our stock of ECL on the balance sheet meanwhile, is GBP 3.5 billion, which remains around GBP 400 million above our base case expectations. Given the strong performance year-to-date, we now expect the asset quality ratio for the full year to be circa 20 basis points.

Let me turn to our Returns on Tangible Equity on Slide 11. The Group delivered a Return on Tangible Equity of 11.9% year-to-date or 14.6%, excluding the motor provision. This benefits from strong business performance, cost control and low impairments. Below the line volatility and other items were GBP 157 million in the 9 months or GBP 109 million in Q3. The third quarter charge driven by negative insurance volatility and market developments and the usual fair value unwind. Tangible net assets per share at 55p are up 2.6p since year-end. This continues to be driven by profit build and the unwind of the cash flow hedge reserve partly offset by shareholder distributions.

Looking ahead, we expect material TNAV per share growth in both the short term and in the medium term. Including the motor charge, return on tangible equity for the year is now affected at around 12%. Excluding Motor, the RoTE is expected to around 14%, an upgrade versus prior guidance.

Turning now to capital generation on Slide 12. Our business performance has driven strong capital generation in the year-to-date. Within this, total RWAs ended the quarter at GBP 232 billion, up GBP 7.7 billion year-to-date and GBP 0.9 billion in the third quarter.

This increase reflects strength in lending, partly offset by optimization activity. Q3 also saw the full reversal of the remaining GBP 1.2 billion of temporary RWAs that we have previously highlighted. Note that while we've taken no new additions for CRD 4 secured risk weightings in the year so far, we do expect to do so in the fourth quarter.

Year-to-date, our strong banking profitability has driven capital generation of 110 basis points in the first 9 months or 141 basis points, excluding motor. Expected full year capital generation is now circa 145 basis points or circa 175, excluding Motor. Our closing CET1 ratio is 13.8%. This is after a 74 basis point accrual for the ordinary dividend. We still expect to pay down to around 13% by the end of 2026, with this year a staging post towards that target.

I'll now wrap up on Slide 13. To summarize, group demonstrated a robust performance in the first 9 months of 2025. We are building momentum in income growth whilst retaining cost discipline and strong asset quality. Together, this is delivering meaningful operating leverage. The business is performing as we expected, if not a little better in some areas.

Also motor is obviously unwelcome, the underlying business continues to drive strong, growing and sustainable capital generation. This financial performance results in improvements to our underlying 2025 guidance, including net interest income, asset quality and return on tangible equity ex motor. Alongside, we remain confident in our 2026 targets. Guidance for both years is laid out in full on the slide. Overall, the business is in good shape to deliver for all stakeholders. Third quarter represents another step in this journey.

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

[Operator Instructions] Our first caller is Benjamin Toms from RBC.

The first is Motor Finance. The provision post top-up leaves you with the total provision just below GBP 2 billion. And that's based on a weighted average scenario calculation. If the consultation paper does not get softened and the FCA is correct with their 85% claim rate, how material would the provision top-up be from here? Just some sensitivity around that would be useful.

And then secondly, on NIM, I think before you said you expected NIM to build faster in Q4 than Q3. Is that still the case? And can you give us some indication about whether you'd expect NIM to continue to build through 2026. I think the hedge will continue to be additive and mortgage margin compression deposit mix shift should fade. So it's hard to see how NIM doesn't increase materially next year? Is there a missing moving part like asset mix shift that we need to consider?

Thanks, indeed, Ben. Just to take each of those in order, the start point and perhaps the end point is to say GBP 1.95 billion in respect of motor represents our best estimate of the cost of this issue. It is, as you say, a scenario-based estimate and those scenarios or sensitivities, as you called them, represent what we think are reasonable FCA responses to the issues that we raise, and I assume the issues that others raised. And those will be principally around things like the calculation of redress, which is set, we think is best tenuously linked to harm. The termination of fairness, which we think is too broad. And these types of things will be part of our response to consultations. And when we look at scenarios, that's what's figuring into those scenarios, some slide amendment around those.

But to be clear then, the FCA proposals, as currently proposed, represent the heaviest weighting in our overall scenario analysis, which given that the FCA proposals currently, as I said in my script, at the adverse end of our expected outcomes, i.e., they are all DCAs, most of the commission that we get -- that we receive gets handed back, and it is a very high response rate. That all means that with the FCA being the heaviest weighted component in our overall provisioning analysis suggests that even if the FCA proposals come out exactly as they are today, then our overall position is not going to move by that much. So we are not far off, Ben, in short.

On your second question, Ben, in respect of NIM, NIM, as said, has had a tick up in the course of Q3 by a couple of basis points. We are now at 3.06%. And it is our expectation that we see continued, if you like, growth in that net interest margin over the course of Q4. As I alluded to, I think at Q2 and possibly before that in Q1, we do expect to see a bit of a back-end loaded step-up in NIM in Q4, and that is predominantly because of the structural hedge contribution, which is slightly more heavily weighted in Q4.

It is somewhat offset by the usual headwinds. That is to say, bank base rate and deposit effects, predominantly deposit effects as our first -- or rather our next bank base rate is now not expected until next year, but then also the mortgage point. So the mortgage headwinds, as you know, has a little further to play out. That includes quarter 4 and it includes '26.

But summing all of that up, Ben, you should expect to see net interest margin expansion in the course of Q4. There will be a step-up there. And it will be a little greater than what we have seen Q2 to Q3. In respect to '26, Ben, your analysis is right. We should expect -- you should expect -- we do expect to see continued margin expansion during the course of '26. It is predominantly because of the factors that you've identified, that is to say the structural hedge makes a meaningful contribution. GBP 1.5 billion increase in structural hedge expected earnings for '26 is what we've guided to earlier on this year, and that still remains more or less the case as we go into '26.

And then there is some offset from that in the context of, again, bank base rate decisions and indeed some continued level of deposit churn off the back of a slightly higher rate environment. And then alongside of that, the playing out of the mortgage refinancing headwind. So those factors are still at play. But nonetheless, the net of it for 2026 is continued and reasonably meaningful margin expansion. That is our expectation.

Now Ben, maybe I'll just finish off with the point that, as you know, we have moved from kind of margin AIA and nonbanking net interest income guidance to net interest income guidance in its totality. And we've upped that guidance for the remainder of this year, i.e., circa GBP 13.6 billion. We will be guiding to what that means for 2026 in due course. But it is the combination of net interest margin expansion as well as AIA growth that we expect will deliver meaningful NII growth in 2026. And that, in turn, is what will help us deliver our greater than 15% RoTE.

Our next caller is Jason Napier from UBS.

Two, please. The first, I wonder if you could just talk about how Lloyds sees wealth as a sort of a banking business in the U.K. The Schroders Personal Wealth business today, you might, as you read your slides, think about the 300 advisers and the funds that they advise and look after.

But then the bullet point on scaling to mass affluent and workplace might suggest that this is really just an integrated mainstream client type offering. The backdrop for this is, as you recognize is that the market is quite interested in whether you might be interested in inorganic expansion in IFA-led businesses. And so if you could just talk about what we can learn from the buy-in of the half of the SPW business?

And then the second, I don't want to steal the thunder from your upcoming tech event, but the slide on tokenized assets does, I think, invite further inquiry. At a very high level, I just wondered whether you could talk about the work that you've done so far and where you think things like tokenized assets and deposits, what that does to banking industry revenues in total? At a high level, people are somewhat concerned that we might see compression in things like payments and remittances and a bunch of the CIB revenue lines that we actually can't see from the outside as the sort of technology takes root. So any early thoughts you might have on the outlook for banking more generally, I think, would be valuable.

Thank you, Jason on both questions. First of all, in respect of the wealth question. A couple of comments there on SPW and then a couple of comments on how we see the wealth opportunity. Here it's worth me just repeating that we are really pleased to see the conclusion of the SPW now Lloyds Wealth transaction. It brings us full control of what we think is a great business. So you've heard the statistics, but at the risk of repeating them, GBP 17 billion assets under management, 60,000 clients, 300 advisers. It is a really promising start, if you like, for a business that we hope to grow into, frankly, an awful lot more.

So there is a great business there that we think we can really grow and help prosper going forward. It is part of an integrated proposition as we see it. That is to say it will sit alongside our direct-to-consumer self-serve proposition. It will also sit alongside the building digital proposition that we are currently creating. But it is important to have alongside those more or less self-service facilities an advisory capability. And that's really what Schroders Personal Wealth, now Lloyds Wealth will deliver for us.

It is important in the sense that we can make our customer journey seamless with those other capabilities, e.g., the digital direct-to-consumer offering. Likewise, we can, if you like, bring the benefit of the group to bear here, not just in terms of group infrastructure cost synergies and the like, but also in terms of plugging it into our 3 million affluent customers.

And then there's a third really important part of that integration, if you like, which is around the workplace proposition. At the moment, at least, we have a very strong workplace proposition in the context of our insurance, our Scottish Widows business. But at the same time, we really want to build the advisory component of that as people's pension plans mature so that we can advise them properly on what to do with those proceeds, which at the moment is a source of leakage from our perspective to other third-party providers. We'd much rather keep it within group. And that's what SPW or now Lloyds Wealth will allow us to do.

So there is something with the Lloyds Wealth acquisition, the SPW acquisition, which itself is in good shape as we speak today. And my statistics earlier on have been testimony to that. But hopefully, you can tell from my comments that we think it can be, frankly, a lot more going forward.

You asked in that context about inorganic, Jason. I obviously have shown comment on that explicitly, safe to say that we've got a lot to do with what we've just done. The acquisition of Lloyds Wealth is a tremendous step forward for us and the franchise. It enables us to develop and enhance our existing customer propositions in what we hope will be a very compelling way, which in turn, most importantly, will create customer value. But in doing so, we think create quite a lot of shareholder value, including benefits to our other operating income over the course of Q4 and looking forward into 2026 and growing thereafter.

So I think for now, at least, we're very happy with what we've done. We're going to focus on the organic integration of it, and we're going to build our customer propositions and shareholder value as part of that. The tokenized deposits topic is a very interesting one. It's a topic which I can probably talk forever on, but I won't. I'll try to circumscribe my remarks somewhat. In essence, there's a couple of things going on right now. And first of all, as you mentioned, in respect of our strategic update, I just mentioned that we've done what was a really exciting partnership with Aberdeen, where we effectively delivered an industry-first tokenized assets use case, i.e., using a tokenized assets as collateral for a market-based trade. That was an industry first. It was more or less a proof of concept, but it offers an illustration of the potential.

When we look at the landscape right now as it's developing, there are a couple of things going on. And one is obviously the rise of stablecoin, which is much commented on. And indeed, it seems to us that in the international sphere, it may be that by virtue of speed of payments, for example, and by virtue of low costs, it may have something to offer in respect of international transactions. But actually, if you bring that back to the U.K., much of what is offered by stablecoin is already effectively offered in the context of things like faster payments. That is to say they're instantaneous and they're very low cost.

So really, what excites us actually in the context of tokenized assets is an opportunity that goes well beyond stablecoins, which is around programmable currency. And we're currently sitting as joint chairs with U.K. Finance in a project, which is called GB tokenized deposits, GBTD is the acronym, used to be called regulatory liability network. But GBTD is essentially building of a programmable and exchangeable currency in the U.K. that is part and parcel of the existing commercial money framework. That is to say it is interchangeable between digital money and, if you like, analog money.

We think that has the potential to offer customers tremendous amounts of value in terms of programmable capabilities. And at the moment, we're running use cases in respect of wholesale use cases, particularly digital gilts in respect of mortgage use cases, i.e., programmability around that capability and in exchange of effectively payment on receipt capabilities from a consumer point of view. So there's 3 use cases that will land in early part of next year. The reason for just briefly commenting on that detail, Jason, is because we see that as an example of tokenized deposits, digital assets offering a tremendous customer opportunity. And if it can be brought in the sterling monetary framework, if you like, and be interchangeable with analog money in the way that we're proposing, I think there's a lot more that we can do with our customers to offer them value. And if you like, far from this being a threat, it's an opportunity.

Our next caller is Perlie Mong from Bank of America.

William, so just a couple of questions. One is on distribution. So it sounds like you're pretty comfortable with the motor finance charge or any top-up if necessary. So clearly, you've talked about paying down to 13% next year. But as you think about full year distribution at '25, would you think of it as there is no more uncertainty in your mind regarding to Motor Finance? And then while we are on that topic, clearly, one of your peers have moved on to quarterly buybacks. You're still on annual buyback. So is there any thinking about maybe moving to a more frequent distribution cadence?

And then secondly, on mortgage margins, again, your peer reported yesterday talked about 5-year mortgages rolling off next year. And that cohort had a relatively high margin. So I presume that is already in your guidance and in the way you think about '26 mortgage margins. But as we come into this period, do you expect competition or behavior of competitors to change in any way given this is something that is happening across the board?

Yes.

Thank you, Perlie. There's perhaps 3 questions there, at least that's how I'll interpret it. And you'll have to let me know whether I'm responding appropriately. First of all, in respect of motor, as I said, -- our current provision, GBP 1.95 billion best estimate. To the extent there's a worst case, we can't be far off simply because, as I said, the FCA case is most heavily weighted in our scenario-based planning.

Alongside of that, the FCA case captures a pretty adverse outcome. All DCAs, for example, most of the commission that we received being handed back, a very high response rate. Those 3 things tell us that the FCA case, the proposals, if currently enacted are, as I say, at the adverse end of the spectrum and most heavily weighted in our overall provisioning. So not terribly far off.

When we look at distributions for 2025, a couple of points to make there really. One is we remain very committed to distributing excess capital. Two is, as per the comments earlier on, we are generating strong capital generation over the course of this year. We put forward guidance now of 145 basis points, which that is post motor to be clear.

When we look at our expectations for the full year in terms of distributions, we also have the reduction in CET1 ratio that we have previously advised you of, and we expect it to reduce our CET1 ratio from about 13.5% end of last year to about 13.25% or thereabouts, give or take, towards the end of this year before landing at circa 13% at the end of '26. So that is an additional 25 basis points of capital there, which if you add it to the 145 that we're guiding to is 170 basis points in total.

Further, you'll be able to tell from our numbers today that the dividend will be about 100 basis points of that. We've accrued 74 basis points year-to-date. So therefore, a full year is about 100 basis points of that 170 that I just mentioned, which in turn leaves about 70 basis points of excess against what will probably end up being about GBP 234 billion, GBP 235 billion of risk-weighted assets, something like that. And all I'm doing is simply taking Q3 outcomes in RWAs and adding on a bit for continued lending performance and indeed a CRD IV add-on in the course of quarter 4. So that gives you an idea, 70 basis points against that GBP 234 billion, GBP 235 billion of RWAs gives you an idea of the excess capital that will be available and up for consideration by the Board as to what it chooses to do with it towards the year-end.

Further, you asked about the buyback and whether we should move to a more frequent buyback. They -- I guess what I'd say to that is, first of all, capital distribution, not just the quantum, but also the form, if you like, is always going to be a matter for the Board. And we'll, of course, respect that. What we have done to date, of course, is once per annum. And our view is that, that has allowed clarity in terms of our guidance, number one, and it has been appropriate as we reduce our capital ratio, number two.

As we look forward, there are some advantages from considering a switch, lower CET1 over the course of the year is one of those. The timing benefits, obviously, from a shareholder point of view is another. There are also some considerations to take into account, which is to say a lower capital base implies a slightly lower level of flexibility either for dealing with contingencies or alternatively taking advantage of opportunities. So these are the types of things, Perlie that we'll have to consider when we look at the buyback. But every year, we consider not just the quantum, but also the form in which we make distributions. And this year, in that respect will be no different. And we'll have a conversation with the Board at the end of the year to that effect.

The third of your topics, Perlie, around 5-year mortgages. In a sense, it's welcome to the club. We've been talking about a mortgage refinancing headwind for about 2 years now. Our expectation was that, that will continue during the course of '25 and it will continue into '26. And we said that before, and that remains the case.

What I am pleased to say, though, is that our guidance in that respect has not changed. And when we've talked about in the past, our expected increase in net interest income, including in response to Ben's question earlier on, that incorporates our expected headwind from a mortgage point of view over the course of '26. So we do expect continued growth in net interest income and indeed margin. And that does incorporate the headwind that we see from the type of 5-year mortgages with the spreads written at that time as they mature in '26. So yes, it is all integrated into guidance for sure.

In terms of what effect that might have, it's obviously a little hard to say, but at the risk of speculation, maybe there is a chance that as these higher spreads roll off, people reconsider the spreads that they're currently writing business at today. And maybe, therefore, there is a marginal benefit to spreads being written during the course of '26. Perlie, that is, of course, speculative. But as these higher spread mortgages come off, will that cause people just to reconsider the rate at which they -- or rather the spread at which they write new mortgage business and cause them to revise up what they think an appropriate spread is for mortgage business? Possibly, yes. And if it does, we'll obviously welcome it.

Our next caller is Jonathan Pierce from Jefferies.

2 questions. The first is on the structural hedge. Again, sorry about that. I wonder if you could help us a little bit scale the contribution in Q4. You talked previously about significant increase this year and contribution to the movement has been as low as 4 basis points in the latest quarter and 10 basis points in the first quarter. So maybe you could put Q4 in the context of that for us, that would be helpful.

And just as a supplementary on the hedge, I wondered if you could just talk a little bit again about what happens in '26 in terms of timing because I'm still not entirely sure I understand how you're thinking about that? I mean you already stated that the '27 tailwind is probably more about the full year impact of the '26 maturities and then we get [Technical Difficulty] a lot of the 2021 stuff starts to roll through would be helpful just to get a little bit more feel on that.

Secondly, the strategy update, can you give us an idea what that will be next year and how far forward you'll be looking in the sort of metrics you will be updating on I assume the [ RoTE ] distribution we have seen and so forth. But will this be sort of 2028, '29 look forward?

Thanks, Jon. A couple of questions there. First on the structural hedge, second on strategy and what we'll be talking about and when next year. In respect to the structural hedge, maybe just a kind of a mark-to-market. The Q3 yield on the structural hedge is about 2.3%. As you rightly said, the contribution to the margin of the structural hedge in respect of Q3 was about 4 basis points. And we previously highlighted and maintain still today that the contribution of the structural hedge going into Q4 will be meaningfully greater. We haven't put a precise number on that, but just maybe help the discussion, the expectation for the yield as a whole during the course of '25 will also be around 2.3%. I'll come back to '26 in just a second. But the expectation, as I said, is that the structural hedge contribution to the margin will meaningfully increase in the course of quarter 3. And I would expect in that context, Jon, again, without putting too precise number on it, the structural hedge contribution to the margin will more than double in quarter 4 versus what it was in quarter 3.

And as I said, that will lead in combination with the deposit headwind and mortgages headwind to an expectation that the margin in totality will step up in Q4, will step up in a way that is more significant than what we saw Q2 to Q3. So I know I'm not putting precise numbers on it, but hopefully, that gives you some steer.

When we look at '26 on the structural hedge, the expectation for the yield in '26 is consistent with our previous discussions actually, on average, about 2.9%. You can work that out, obviously, from the circa GBP 6.9 billion guidance that we've given you for structural hedge earnings off the back of about a GBP 244 billion structural hedge, you'll get to 2.9% through that path, too. But that gives you a sense for the year as a whole.

There is obviously a bit of a journey in respect to the structural hedge. At this point in the year, I'm not going to kind of go through it on a quarterly basis, but it isn't all delivered on quarter 1, and it isn't all delivered over the course of quarter 4, and it won't be perfectly linear in between. But overall, that is the contribution to the structural hedge, i.e., GBP 6.9 billion in total, incremental circa GBP 1.5 billion versus what we got over the course of '25 as we look forward.

It is important to say in this context actually that the structural hedge then continues to build over the course of future years. And I won't -- again, I won't give precise numbers on it, but you should expect continued build, most notably in '27 and then continued build in the years thereafter, '28, '29 and so forth, but at a slightly lower level. We'll talk more about that in the course of the year-end to give you more specificity.

In respect to strategy, Jonathan, our focus right now is very clearly on delivering '26. We've set out some very explicit, some very clear and I think some very important commitments in respect to what we're going to do in '26. Cost-income ratio less than 50%, RoTE in excess of 15% and capital generation in excess of 200 basis points. We are going to deliver on those '26 commitments. And so that is very much our focus.

Now it's a very fair question for you to ask, having said that, about where do we go from there. And our expectation is that we will, of course, update in the course of next year as to '27 and beyond. It will probably be around the middle of next year when we come to market with that update. So that gives you a sense of timing. Then in terms of the look-forward period, that's something which we should probably discuss actually over the course of next year. But these things often end in round numbers, and maybe I'll leave it there.

Our next caller is Aman Rakkar from Barclays.

I actually had 2, please. I wanted to query on nonbanking funding costs. I think that's actually probably trending a touch lower than your commentary previously around up GBP 100 million year-on-year. So I was wondering if you can give us an update for that. And I don't know if that's contributed in any way to the slightly firmer outturn for this year. But if you could just kind of update us on that particular line item within NII, that would be great.

Just another one on other operating income, actually. So obviously, the headline rate is good again. It's quite divergent trends within the divisions. So I think it looks like retail has kind of reaccelerated again in Q3. The insurance business, it looks like it's actually tapering off if I look at the year-on-year trends through the course of this year. And then commercial continues to be quite soft. So could you give us a bit of a kind of steer on how to think about these divisional trends going forward? I'm just trying to work out how we arrive at a similar kind of run rate next year? And if there's anything kind of episodic or lumpy that we should think about or one-off elements that might kind of unwind into next year, that would be really helpful.

Yes. Thank you Aman, both of those questions. Taking them in turn, in terms of NBNII, Nonbanking Net Interest Income, Q3, as we disclosed today, GBP 136 million. That is running at about 10% ahead of where it was last year. So year-to-date, I think it's about GBP 372 million thereabouts. That's about 10% up versus where it was. And what's going on there, as you know, it is very much about the funding of the other operating income income streams in so far as they're not related to banking. So LDC is an example of that. Lloyds Living is an example of that. Of course, Motor is an example of that, but so is the insurance pensions and investments division and so is commercial banking activity.

It is probably running a little bit more slowly, i.e., slightly slower growth rates versus what we previously thought. That is, if anything, partly attributable to commercial banking activity, which has been a little bit less in that space, at least than we previously expected. I'll come back to that in a second.

But overall, what's going on within nonbanking net interest income that is most important is that we're seeing the takeover of volumes rather than rate rises driving it. So if you look at the trend last year in nonbanking net interest income, it was probably about half and half to do with volumes number one, but also increased rates in refinancing number two. But if you look at it this year, it's more like 15% or thereabouts in terms of rates and 85% in terms of volumes.

So volumes is really making the running in terms of the increases in nonbanking net interest income that we see over the course of this year. And of course, looking forward, what that means, Aman, is that if you believe in other operating income growth, which we do, and I'll come back to in just a second, you should expect that nonbanking net interest income to continue to grow over the course of 2026, but continue to grow from very much a volume-driven perspective as opposed to a rate perspective. Rates won't be 0 because there is some term financing going on, in particular, in relation to motor, which has got about a 3.5-year average life. So it won't be 0, but it will be predominantly a volume-led story within nonbanking net interest income.

Before moving on, it's worth just wrapping that up in the context of the net interest income guidance that we have given you and will give you for 2026 and beyond. That is including, obviously, nonbanking net interest income in all of that. So that is wrapped up in the guidance that we give you for net interest income for GBP 25 billion this year, circa GBP 13.6 billion now and indeed, for the guidance that we'll give you next year of GBP 26 billion.

In respect of other operating income, maybe just to start off with the core point that, as you know, when Charlie and I launched the strategy in February of 2022, it was very much focused upon trying to ensure that we diversify the business from an undue dependency on rates, looking to avoid being, if you like, pressured by a downward trend in rates during the next cycle and also achieve the benefits of what is a strong and very highly present franchise right the way across the U.K. across the retail, the commercial sector and indeed within insurance pensions and investments. So the other income -- the other operating income strategy was a strategic diversification, which was intended to benefit from the strength of the Lloyds Banking Group franchise.

It's that combination that led us to deploy significant strategic investments in this area. And then we've seen the benefits of customer activity, if you like, picking up on those strategic investments and helping us drive other operating income now for about 3 years of high single-digit growth. And that's again what we've seen during the course of quarter 3, whether you look at it year-to-date or whether you look at year-on-year.

Sorry for that introduction, Aman. But before getting into your question, I thought it was important to kind of highlight those points. The individual business components within other operating income, as said, up 9% in total. What are we seeing year-to-date? We're seeing strength within retail. I've talked about transportation there, but it is also about PCA offering. It is also about protection offering increasingly to mortgage customers, and it is also about cards year-to-date.

So a retail offer that is growing significantly. It's transportation, but it's also those other factors. Within commercial, commercial has been a slightly slower pattern over the course of the year-to-date performance, and that is partly because loan markets performance has been probably slower than we would have perhaps expected, but it has been somewhat offset by things like cash management and payments, number one. It has been also the case that the comparative period in '24 benefited from valuation adjustments on a year-to-date basis, which, of course, inherently don't repeat during the course of '25. So there's a slight comparative issue there, which has meant that commercial has been slower year-to-date versus where you would normally expect it to be. And indeed, our expectation looking forward is that, that is going to change as those comparatives come out of the analysis. I'll come back to that in just a second.

Insurance pensions investments up about 5% year-to-date. That is off the back of long-standing strength. It is also off the back of GI strength and things like share dealing. But to be clear, if you look at it on a quarterly comparison basis, weather in respect of subsidence off the back of dry weather hit us a little bit in the course of Q3. So insurance still growing for sure. But the reason why you're seeing it at 5% in part at least is because of that weather during the course of quarter 3, which, of course, we wouldn't expect to be repeated on a BAU basis.

And then finally, Aman, the strength in investments is clear to see. That is to say Lloyds Living, LDC has been a significant contributor to the business on a year-to-date basis and again, on a look-forward basis. When we put that together, Aman, first of all, we would expect those growth streams to continue to build over the course of the remainder of this year and certainly into next. And that is a combination of strategic investments landing, if you like, and increased customer take-up. Allied to that, we now are adding in Lloyds Wealth, previously SPW. That is going to contribute in Q4, and it's going to contribute during the course of 2026 more meaningfully. We haven't given precise numbers around that, but our expectation is that, that is going to boost other operating income for the course of 2026, at least by around GBP 175 million or so beyond what you would have previously seen in the other operating income line.

Now of course, our ambitions in respect of Lloyds Wealth go meaningfully beyond that. And so we would expect it to build in the years thereafter. But that gives you a sense as to what we might expect it to contribute in '26, which, of course, will be added to the contributions from the other income streams that I've just been highlighting. Hopefully, that's useful, Aman.

Our next caller will be Sheel Shah from JPMorgan.

The CIB business has been particularly strong this year, one of the standout performers, I think, at least when I look at your balance sheet momentum. Could you talk a little bit about this business? What's actually happening? How much of this is market driven? How much of this is an active strategy to maybe target share gains? And what are the margins looking like in this business?

And then secondly, to come back to your less than 50% cost-to-income ratio for 2026. Just looking at consensus, it sits at 51% at the moment. You've just mentioned GBP 175 million coming from the Schroders Wealth business into OOI. What do you think the market is missing either on the revenue line or the cost line to get to this cost-to-income ratio target?

Two questions there. One in relation to Commercial Banking, CIB in particular and one in relation to costs. Just before getting into CIB, just to step back, as you know, our Commercial Banking business consists of both business and Commercial Banking, BCB and the CIB business. And we are engaged in quite a bit of transformation in respect of each of those 2. When I look at the BCB business, as I mentioned in my comments earlier on, we've seen some really constructive signs in terms of BAU lending growth, which is great to see.

When you look at it externally, that is offset by the government repayments that have been going on in respect to bounce back loans. And so the net, if you like, is affected by that. But we are encouraged by some decent positive signs, if you like, of ongoing BAU growth. And that is alongside of creating a much broader digitalized proposition to our customers, which in turn is going to help us drive other operating income growth going forward.

When we look at CIB, again, that is going through a significant period of transformation, but it is about product broadening and product deepening. There have been some areas that have probably been slower than we might like to have been, for example, the loan markets area. There have been some areas that have been successful, particularly successful over the course of this year. I mentioned cash management and payments, for example. Capital markets have shown some signs of strength alongside working capital.

And actually, the indicators that we've got on an early Q4 basis have been really promising in respect of CIB. Now CIB comparatives, as I mentioned a second ago, have been a little bit weighed down by strong valuation adjustments in the course of '24. So kind of bear that in mind. But the underlying momentum in CIB, we're really encouraged by. We think it's really positive, and it's really -- it's a big part of our transformation story going forward.

In respect to your second question, Sheel, on costs, the cost shape for 2026, as said, remains very much a commitment to sub-50% cost-income ratio. Within the cost-income ratio, it is clearly composed of 2 elements. One is to say income strength. We talked a bit about that during the course of this call, so I shall repeat those points. But your specific question is around the cost part of that equation and how we see that developing.

I guess a couple of points really. One is we spent quite a lot of money on various strategic initiatives, which in their orientation are cost focus. As we go into 2026, we see the full year run rate benefit of those investments take place. Whether those are around the business units or alternatively around the functions, including things like our systems and of course, our various other risk, finance and other support functions, those strategic investments engineer or rather help us engineer a lower cost base going forward in '26 represents a full year run rate for a number of those.

The same time, our cost growth in respect of OpEx is slowing somewhat. And that in part is because of some of the investments in things like the FTE reductions that we have made over the course of this year. You'll remember earlier on this year, we talked about our severance budget being higher for '25 than it had been previously. And that has been the case. And in turn, that helps us address OpEx growth over the course of '26.

The result of that is that we expect '26 costs to be flatter than you have seen recently. I won't commit to absolute 0, but nonetheless, you should expect to see them be flatter than they have been previously. And that in turn, rather in conjunction with the income developments that we've talked about is what helps us deliver a cost-income ratio of sub-50%. Now to be clear, Sheel, it is not going to be sub-50% by much. And we said that before, and it's worth repeating. But nonetheless, it will be delivered and it will be sub-50%.

Our next caller is Chris Cant from Autonomous.

I had one on stablecoin and tokenized deposits and one on motor, please. So on the former topic, I mean, obviously, lots going on, and you're involved in this U.K. finance initiative in terms of tokenized deposits. In terms of time scales and relative regulatory burdens, I guess the question is, can the industry move fast enough to deliver tokenized deposits ahead of stablecoin providers potentially trying to get a foothold? And what sort of time lines do you think we're talking about to move beyond the use cases? I know there's a few things that are moving outside the sandbox in terms of remortgage, for instance. What sort of time lines are we talking about to move beyond the use cases currently envisaged by the U.K. finance initiative?

And on programmable money, could you give us an idea of the use cases that you see? I guess it's corporate clients that are more interested in these options. Could you give us some examples of use cases that corporate clients are looking for? That would be interesting.

And then on Motor, the FCA consultation, obviously, you're going to feed into. One of the points from the FCA's perspective, I suppose, is that if we don't capture the majority of cases through a redress program and it goes through the courts, then administrative costs would be potentially materially higher. Is that something that you agree with, i.e., you would be pushing for a narrower scheme potentially or for less redress and taking then some risk that the administrative burden of more cases remaining in the court system would push costs in that area?

Yes. Thanks for those questions, Chris. First of all, on stablecoin and tokenized deposits. A couple of points to make there. One is about the path forward on that. And then the second is around use cases. I said earlier on, the rise of stablecoin has obviously been notable in recent periods, and it's been particularly notable in the context of international payments where, as said, there may be some advantages in terms of speed and cost.

What we think in the U.K. is that the GB tokenized deposits, GBTD that we are constructing together with the industry is effectively commercial bank money in its current form, which allows interchangeability between a digital coin, if you like, and an analog coin, i.e., the current coin that is there in the market. And that has tremendous advantages. It has tremendous advantages from a customer point of view because it is basically one and the same, and they should be able to move freely between digital money and, if you like, analog money. And that makes it a much more kind of customer-friendly approach.

It also means that we, as banks can offer that to customers as our money effectively together with all of the security and indeed insurance benefits that are currently in place. And of course, from a regulatory point of view, together with all of the KYC and so forth that we currently have in place.

So it is -- it goes hand-in-hand with today's money in a way that is, as I say, very user-friendly from a customer point of view. And in that sense, has material benefits over what stablecoin has to offer, which is clearly not interchangeable with commercial bank money. It is not one and the same thing.

In terms of timetable, Chris, I think your point is -- your question rather is a good one. We need to move quickly on this. And indeed, use cases, as I said, landing in the first half of next year, we would expect off the back of that to be able to get something out in a workable customer proposition format, I hope, by the first half of 2027, if not before.

Now what we really need to fall into place in order to secure that progress, if you like, is a regulatory framework that is consistent with the ambitions of the industry and indeed is consistent with how the Bank of England would like to see this play out. As a form of digital money in the U.K., it is important that, that regulatory framework, that regulatory backdrop is in place in a supportive manner. So that's really what we need. But if that is in place, then the speed of this is very much within the sector's hands, and we would expect to play a leadership role in securing that, making progress and indeed getting the customer benefits that we think are promising as a result of this.

In terms of use cases, you mentioned wholesale. And for sure, there are wholesale use cases here, Chris, but I don't think it's just that. That is to say digital money offers use cases both in the wholesale and in the retail space. Wholesale -- we've just done an example with Aberdeen using basically tokenized assets as collateral. That offers meaningful efficiencies in the context of collateral management and indeed speed and pace and indeed cost of collateral alongside transactions.

Likewise, the digital gilt is an innovation that is being sponsored in terms of one of our use cases and again, offers meaningful speed, cost and efficiency benefits from a customer point of view.

And then, of course, transacting with each other. That say corporates can transact with each other in digital asset format. Again, that is going to offer speed and transaction cost benefits. But as I said, these are also retail benefits. So 2 out of 3 of our use cases are in the retail space, one being effectively cash on delivery to meaningfully cut fraud in the retail space and the other being effectively reengineering the home buying journey off the back of programmable money for just that journey.

So I think there are meaningful retail benefits there, too, Chris. We've got a lot to do in this area of digital assets. But as I said, if we get it right, there's an awful lot of customer value to be created.

On the second topic, Chris, on motor, it is our view, as I mentioned earlier on, that the motor proposals as put forward by the FCA are currently disproportionate. And they're disproportionate, as said, for 3 main reasons. One is because we believe the determination of unfairness is too broad. Two is because we believe the judgments that are inherent in the proposals do not align to the Supreme Court clarity that was provided earlier on this year. And three is because we think the redress calculation, as said, is at best tenuously linked to harm.

Now what that all means, Chris, is that indeed, if the proposals remain as broad as they are, in many respects, at least, we would expect to see better outcomes in the context of litigation because presumably, the courts will take into account the Supreme Court rulings in the way in which they were made. And presumably, the courts will take into account the linkage between redress and harm.

So in that sense, at least, I would expect litigation outcomes to be better than much of what is in the FCA proposals right now. Now having said all of that, Chris, we clearly want to move on from this. We clearly want the business to move on and to focus on customer value-creating propositions just as we have been today and just as we expect to be in the future. So as a result, that is why we've taken a GBP 1.95 billion best estimate for the provision, which in turn is not far away from what it would be if the FCA were to enact their proposals in full. It's very much in the spirit of saying, okay, look, we don't agree with them. We're going to do what we can to change them and get them into a better place. But we are provisioning on the basis that a large part of them is going to stay in place, and we want to move on, and that's what this provision is designed to do.

Our next caller is Guy Stebbings from BNP Paribas.

I had a couple of questions back on net interest income. The first one was around volumes. Interest-earning asset growth was quite strong in the quarter, a couple of billion ahead of consensus on average interest-earning assets and the end of period position at GBP 469 billion into Q4 in a good place.

If you could talk about sort of broad expectations for the outlook from here. I made your constructive comments on mortgage volumes following arguably a better-than-expected performance in Q3. So it sounds like you're talking to a positive trajectory, which given your Q4 NIM commentary paints quite a promising picture.

And then related to this, on mortgage spreads, sort of interested in your comments in response to Perlie's questions and perhaps the market reacts to the headwind from mortgage spread churn on upcoming maturing cohorts by lifting new spreads. I wonder within that, your comments signal that maybe current spreads have drifted a little bit lower in recent months on new lending and perhaps you're getting to levels, you're a little bit less comfortable with? Or am I just reading too much into the remarks there? I guess I'm really trying to work out on the upside versus downside on your initial expectations. You've had the visibility clearly on the maturing yields for quite a while, but whether new lending spreads are coming in better or worse than what you'd initially envisaged.

Yes. Thanks, Guy. In respect of AIEAs, first of all, the Q3 performance, as you know, saw a meaningful jump in terms of AIEAs off the back of what has been increased lending over the course of the year as a whole and continued into the third quarter. So maybe taking a step back before getting to AIEAs. As you know, we've had GBP 18 billion growth within the lending book year-on-year, which, of course, contributes to meaningful AIEA growth on a kind of annualized basis, if you like. And within that, we've had cards year-to-date up 7%. We've had personal loans up 13%. We've had motor up 5% over the course of the year. We've had mortgages up GBP 8.7 billion or 3%. It's a really decent loan performance for the business in total GBP 18 billion up, 4% up on assets for the year.

And as you say, that is now translating into AIEA growth, GBP 465.5 million in the course of quarter 3. We're seeing continued growth in the course of quarter 4 across the assets. Of course, it is a slightly shorter period because of seasonal factors. But nonetheless, you should expect to see growth within assets within quarter 4 that will be perfectly respectable and off the back of that, deliver continued strength in AIEAs for the remainder of this quarter and looking into '26.

And it will be that combination, i.e., AIEA growth, together with the step-up in the margin that I mentioned a second ago, which in turn sets the stage for 2026 and gives us a lot of confidence in our 2026 guidance. So that's the picture on AIEAs, Guy, which I hope is helpful.

On mortgage spreads, it's interesting. I mean, we've seen now 70 basis points Q1, Q2, Q3 -- it is fair to say that we've seen perhaps a basis point or 2 of erosion within that over the course of these successive quarters. But we are still rounding to circa 70 basis points in the course of quarter 3 and comfortably rounding to circa 70 basis points in the course in quarter 3 to be clear.

A couple of points to make within that. One is when we look forward, my comments earlier on about whether there will be a bit of repricing off the back of 5-year maturities and therefore, people feeling a bit more pressure in their mortgage books. We're not banking on that to be clear, Guy. When we put forward our guidance for in excess of 15% RoTE and the guidance that we'll be giving you next year for the component of net interest income that will make up or contribute to that outcome, we have never been and are not banking on any uptick, if you like, in mortgage spreads that is driven by that 5-year maturity pattern that we talked about earlier on. So we're not banking on it. If it comes, so much the better, and you'll see that in the context of our net interest income at the time.

The second point that I wanted to make is the business or rather the spreads at which we are writing business right now contribute to ROE attractive mortgages for us. And that's certainly true on a stock on a marginal basis. It is also true, albeit at a lower level on a stock on a fully loaded basis. So you're seeing very attractive marginal returns even at the current spreads. You are seeing, if you like, fully loaded returns that are still above the cost of equity. So we're happy to write them. We're particularly happy to write them bearing in mind a couple of other factors.

One is that we are increasingly able to contribute protection alongside the mortgage product as our insurance and our retail businesses work increasingly closely alongside of each other. We're now up to about 20% protection penetration for mortgage products. And so this is a strengthening relationship that we're seeing, not just a one-off mortgage relationship.

And then the second is that we see an increasing share of our mortgages coming through the direct channel. And that is a more profitable product for us to write. It is also one that more closely aligns us to the customers, to be clear. But at the moment, at least, we're seeing about 24% of our mortgages coming through the direct channel. That is, frankly, more than we've had for a long time, and it is a result of a very deliberate strategy that we're embarking on.

So in that context as well, Guy, we're able to write mortgages which are attractive to us on a stand-alone basis, but off the back of the, if you like, relationship that we're developing and the channels through which we're distributing is a more attractive proposition.

Our next caller is Ed Firth from KBW.

I had 2 questions actually. The first one was just the sort of -- I guess, I don't know what the right word is cadence, I guess, if you like, or the growth rate of NII. I mean if I look at your -- you're talking about around GBP 13.6 billion for the year and year-to-date is GBP 10.1 billion, which would suggest somewhere around GBP 3.5 billion in Q4, even my analysis, I can do that, which suggests actually a slightly slower growth rate than you saw in Q3 rather than a higher growth rate.

So I'm just trying to think, is there something I'm missing there? Is it something about nonbanking income? Or is the GBP 13.6 billion really a number that we should take as a sort of very safe base that actually, all other things being equal, we could see something better than that. So I guess that's my first question.

And then the second one was, I think you were saying that we should put another GBP 175 million in for next year for the buyout in revenue, other income for the buyout of the SPW joint venture. Is there a cost offset on that? Or is that just like straight through to the bottom line? I mean, obviously, you talk about modestly higher for the little bit for this year. I'm just wondering what sort of cost numbers might equate to that GBP 175 million? Or is that just a straight number we should just put in straight to consensus?

Yes. Thanks, Ed. In respect to net interest income growth, first of all, the easiest way to explain it is, I think, the following. As you know, we've upgraded to circa GBP 13.6 billion from circa GBP 13.5 billion. That is intended to be, and I hope very clearly is a sign of confidence in terms of our net interest income trajectory.

It is -- as you pointed out, hopefully, as is evident from the guidance, the circa word, the C is very deliberate. That is to say GBP 13.6 billion is not intended to be a cap. It is saying circa GBP 13.6 billion. So I'll kind of leave you to move around from that, but it is. Now that how things develop will be around GBP 13.6 billion, including numbers that go above GBP 13.6 billion provided that they are within the circa range.

The -- stepping back, net interest income in quarter 3 was, what, GBP 3.45 billion. It's up about GBP 90 million growth versus Q2, which we, as you know, is about 3%. Some of that Q2 growth that we saw in Q3 is day count increase. And so a slightly lower amount of that is underlying increase. If you look forward into Q4, we expect to show continued progress in NII with to be clear, probably a similar absolute income growth in Q4 as we saw in Q3, a similar absolute income growth in Q4 as we saw in Q3.

But to be clear, none of that will be day count benefit Ed. That is to say the day count in Q4 is same as the day count in Q3, which if you translate that, that means that growth is actually strengthening, not weakening. So growth strengthening in Q4 rather than weakening. And that is off the back of the factors that we've discussed before, which is the step-up in the margin, which, as I said, more pronounced in Q4 and then the AIEA progress that I was discussing with Guy just a second ago. And that's coming off the back of the [indiscernible]. So all of that, Ed, hopefully helps kind of illustrate the point. And in turn, we have a lot of confidence in that number.

Perfect.

So hopefully, that's helpful. On the SPW point, when we -- unfortunately, all good things come at a price, I guess. So when we look at the overall GBP 175 million incremental, that in turn comes with costs, which are probably going to be about GBP 120 million in excess of what you saw previously there.

Now you didn't actually see them previously because they were all consolidated in the OOI line. So it's probably about GBP 120 million added costs to procure that circa GBP 200 million OOI, which in turn, that OOI is about GBP 175 million ahead of what we have previously seen. So I hope that's clear.

There's a couple of other points that maybe I should make in the context of the SPW transaction, now Lloyds Wealth transaction, which are important to us. One is we did it at 0 capital cost. As you know, we had to give up our 20% share in Cazenove in order to get that. But the benefit that we're getting from that Cazenove share was a modest annual dividend that you saw in Q4. And frankly, this feels to us like a -- from our perspective, at least, a really positive trade, but it was done at 0 capital cost.

And then the second point is we'll have to work at it to make sure that it comes within our cost/income ratio. But as I said, that's consistent with our sub-50% cost-income ratio guidance. But at the same time, you can probably imagine, as with many of these wealth businesses, this is a materially RoTE positive transaction and will deliver a RoTE that is well above not just our cost of capital, but probably well above the types of RoTEs that we'll be delivering on a kind of group aggregated basis. This is a net positive contributor to the RoTE of the business.

Most importantly, Ed, it's a very important strategic development and indeed a very important part of our customer proposition.

As you know, this call is scheduled for 1 hour, and we have now exceeded 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 Lloyds' Investor Relations team. With that, our final caller is Amit Goel from Mediobanca.

So 2 relatively quick questions from me. One, just on the deposits -- the retail deposits, so some positive trends there on the back of the pricing decisions. Just curious whether that's largely done now or whether we could continue to see a little bit of that shift and whether or not that can benefit the hedge capacity? And then the second question, just curious how engagement with the government is going ahead of the budget and also whether or not they kind of recognize the motor costs when also thinking about banking sector taxation?

Yes. Thanks, Amit. The -- in respect of each of those, as you say, deposit performance has been pretty good over the course of this year, GBP 14 billion up in total, 3% year-to-date increase. So a good performance in deposits. And within that, retail is up GBP 4 billion year-to-date. But what we saw within retail in the third quarter was a little bit of outflow within the U.K. retail savings area, and that was very much within the fixed term product off the back of effectively pricing decisions that we had taken, given the fact that we performed so strongly in Q2, in particular, in the ISA season, which we highlighted at the time. So this was a kind of, I suppose, an inevitable reaction to very deliberate pricing decisions that we've taken in the course of quarter 3.

It was good to see that it was offset by PCA performance in the course of quarter 3, which were up GBP 1.2 billion, which is a good performance. And as you know, leads us to a year-to-date performance within PCAs up around GBP 0.5 billion or so.

I think a couple of things are happening there, Amit, which are pretty constructive on the whole. We're seeing continued wage inflation with respect to our customers. Importantly, we're also seeing reduced levels of churn out of the PCA product into savings products and into fixed term in particular. And so that falling churn is down about 33%, i.e., down about 1/3 in Q3 versus Q2. That's a material reduction in churn, and we expect to see that pattern more or less continue going forward. But it's good to see.

As said, PCA is an incredibly important customer product from our point of view. It's an incredibly important product from a structural hedge point of view. And so the solidity of the PCA performance has been good to see. As we look forward, I think we do expect churn to continue to ebb. Q3 was particularly marked, but nonetheless, we continue to see -- we continue to expect it to ebb going forward.

PCAs, we are seeing other trends, slowing government payments, for example, probably over time, slowing wage growth as well. And so PCA performance, I don't think we expect to see it be particularly exciting, maybe more or less static might be a reasonable way of looking at it. We'll see how it goes. Going into next year, I think that starts to change as things pick up perhaps a little bit more.

Our expectation for the structural hedge to be clear, Amit, insofar as it relates to this issue is we're not banking on significant increases in structural hedge balances. So all of our forecasts for you, the GBP 1.5 billion growth in structural hedge income, for example, going into next year, GBP 6.9 billion revenue in total from the structural hedge, that is built on a steady hedge. And so if we see performance within PCAs, instant access and other hedge eligible deposits, including NIBCO within BCB, which has shown an uptick actually in Q3. If that performs more positively than we expect, that would represent structural hedge upside and opportunity. At the moment, we're expecting flat structural hedge performance.

On your second question, Amit, in respect to budget, a couple of points to make really. One is the business has been really only very modestly affected, if at all, by budget concerns. So I mentioned earlier on that we've seen mortgage performance being very strong. As you know, GBP 8.7 billion year-to-date, GBP 3.1 billion of that in the third quarter. We've seen applications up 19% over the course of the third quarter. We've seen completions up 23% over the course of the third quarter. And so no meaningful sign, if you like, of hesitation because of budget in the third quarter mortgage performance.

And then within the pensions business, another area that conceivably might be affected, we've seen a little bit of an increase in individual pension encashments, but no material change to be clear, within workplace. And in any case, any change in volumes that we have seen in the pensions area have been well below what we saw last year. So really nothing to report effectively in terms of the, I suppose, hesitation that might be induced by the budget overhang in respect to the business as usual.

In respect to tax, Amit, I think those are really decisions for the government, obviously, and we'll leave them to make those decisions as and when they see fit. From our perspective, at least, the most critical thing is that we have a stable and a predictable tax regime and one that is competitive. That is to say, at the moment, we're a material taxpayer, as you know, GBP 1.5 billion of corporate tax, all in, including things like NII and VAT and so forth, about GBP 2.5 billion of total tax paid. We see ourselves as a meaningful tax contributor. We see a stable and competitive tax regime and indeed a predictable tax regime as essential, frankly, to the continued prosperity of the financial services sector and by extension, all of the things that we can do for the U.K. economy as a whole. So I think that's really all we'd say on the tax front, Amit, which I hope is useful.

So I think, operator, we're going to call it a day for now on the questions. I just want to say thank you to everybody for joining the call today and your interest in the stock and the company is, as always, greatly appreciated. Thanks very much indeed.

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

Good afternoon, everybody. As indicated, I'm Douglas Radcliffe, and I'm the Group Investor Relations Director for Lloyds. Sarah has been in my team for a little while now. So welcome on Board, Sarah.

Thank you.

We're really happy to be running another one of these briefings with ShareSoc. We view these events as an important way of actually keeping in touch with our retail shareholders. So thank you for joining us.

During the presentation today, I will talk to our strategy, in particular, our outlook to 2026, and Sarah will talk to the latest financials, including our half year results, which we released in July. We are intentionally using some of the slides from our half year results, so you can see what we presented to institutional investors at the time. The presentation should take about 20 minutes, and we will then leave plenty of time for Q&A at the end.

With that, let's move on to the first slide. As many of you will know, Lloyds is a U.K.-focused retail and commercial bank. We have a simple operating model with the business split across 3 reporting divisions as outlined on the slide here: Retail Banking, Commercial Banking and Insurance, Pensions and Investments. Within these divisions, our customers are supported by a comprehensive product suite. This scale is underpinned by a portfolio of familiar and trusted brands such as Lloyds Bank, Halifax and Scottish Widows, alongside a few newer brands you may be less familiar with, including Tusker, our car salary sacrifice proposition for corporates and Lloyds Livings, our private rental arm.

The breadth of our franchise provides us with a key advantage in servicing more of our customers' needs as well as understanding them better to provide more targeted offerings that deliver value for both customers and the group. As ever, we are guided by our purpose of helping Britain Prosper.

I'll now go on to our competitive strengths, which differentiate our proposition on Slide 4. As many of you will be aware, we are the biggest U.K. bank with GBP 900 billion of assets and 28 million customers. This gives us extensive reach across the U.K. We are also the #1 provider in several of our core product areas, including mortgages, cards, loans and transport. Our capabilities across both banking and insurance are unique within the U.K. and offer a clear competitive advantage. We also have a strategic vision of being a U.K. customer-focused digital leader.

We now have around 21 million mobile app customers, and we are continually leveraging these digital strengths to innovate and improve our customer products and services. We see leadership in this digital area as being critical to long-term success, linked to our track record of investments in digital, AI and data. This enables us to innovate to anticipate and meet customers' ever-evolving financial needs.

I'll now provide an overview of our strategic focus areas on the next slide. In February of 2022, you may recollect that our CEO, Charlie Nunn, set out a 5-year strategy for Lloyds Banking Group. This strategy focused on driving revenue growth and diversification, strengthening our cost and capital efficiency and maximizing the potential of people, technology and data.

Our revenue growth initiatives are focused on 4 key areas: deepening and innovating within the consumer space, creating a new mass affluent offering, building our corporate and institutional offering and digitizing and diversifying our SME business. If you want any more detail on these initiatives, please do look at our website as we have done a separate strategic seminars for each of these areas over the past couple of years.

We are now close to the end of the fourth year of our 5-year strategy and are on track to deliver our 2026 targets, including over GBP 1.5 billion of additional revenues from strategic initiatives by 2026 with over GBP 1 billion delivered to date on an annualized basis. We also continue to focus on increasing productivity and have delivered around GBP 1.5 billion of gross cost savings since 2021. Our strategic delivery reinforces our confidence in meeting our 2026 financial targets, which I shall now turn to.

As said, we are confident in meeting our 2026 financial commitments with significant operating leverage supporting our guidance of a cost/income ratio below 50%, a return on tangible equity of greater than 15% and capital generation of greater than 200 basis points.

On the final slide of the strategy section of the presentation, I'll provide a few examples of how we are successfully delivering our strategy in the first half of 2025. We continue to build a highly differentiated franchise. For example, we have continued to take a leading role in supporting the critically important housing sector, lending more than GBP 8 billion to first-time buyers and supporting over GBP 1 billion of funding to the social housing sector in the first half. At the same time, we are delivering growth through our strategic initiatives in a number of areas. This includes significantly increasing our penetration of protection products for mortgage customers and gaining share in sterling interest rate swaps in the commercial side. This business momentum is underpinning our sustained strength in financial performance in the first half of the year, which Sarah will now provide an overview of.

Thanks, Douglas. As said, Lloyds Banking Group demonstrated sustained strength in financial performance during the first 6 months of the year. Statutory profit after tax in the first half was GBP 2.5 billion with a return on tangible equity of 14.1%. Net income of GBP 8.9 billion was 6% higher than the prior year. This was driven by continued momentum in net interest income alongside 9% year-on-year growth in other operating income.

H1 operating costs of GBP 4.9 billion were up 4% year-on-year, in line with our expectations. Asset quality remains robust. The H1 impairment charge of GBP 442 million equates to an asset quality ratio of 19 basis points. Our performance resulted in strong capital generation of 86 basis points in the first half. This supports our 15% increase in the interim dividend.

I'll now turn to Slide 9 to look at developments in our customer franchise. Our customer balances showed good growth in the first 6 months across both lending and deposits. Group lending balances of GBP 471 billion were up 3% or GBP 11.9 billion since the start of 2025. This growth was largely driven by mortgages, up GBP 5.6 billion in H1 and GBP 0.8 billion in Q2. This is as a result of a healthy underlying market demand as well as our strategic initiatives in this area. Elsewhere in retail, we have also seen growth in unsecured loans, credit cards and motor finance.

Then in Commercial Banking, lending balances also grew by GBP 1.2 billion in H1, including GBP 0.9 billion in Q2. In particular, we saw growth in infrastructure lending within our corporate and institutional business. We have also grown deposits by 2% or GBP 11.2 billion this year so far. This comprised GBP 3.7 billion in retail, driven by inflows to savings accounts and as a result of a very strong performance throughout the ISA season in Q2 with over 375,000 cash ISA accounts opened. Commercial deposits increased by GBP 7.6 billion in H1, including GBP 5.3 billion in Q2. This is driven by growth in targeted sectors.

So now turning to net interest income on the next slide. Net interest income was GBP 6.7 billion in H1, so up 5% year-on-year. NII continues to be supported by positive momentum in the net interest margin with the Q2 margin of 304 basis points, up slightly on Q1. NII was further supported by average interest-earning assets of GBP 460 billion in Q2, which was up GBP 4.5 billion versus Q1. So looking ahead, we continue to expect net interest income for 2025 to be circa GBP 13.5 billion, and that's up around GBP 700 million from last year. This is built on further lending and deposit growth as well as a significant pickup in the income from the structural hedge. Indeed, actually, hedge income is expected to grow by GBP 1.2 billion in 2025 and then a further GBP 1.5 billion on top of that in 2026.

I'll now talk to our continued momentum in other income across the franchise on the next slide. So other income of GBP 3 billion in the first half was up 9% on H1 last year. This included GBP 1.5 billion in Q2, also up 9% year-on-year. This growth is driven by broad-based momentum across the business linked to our strategic initiatives. Within retail, 13% growth versus the prior year was supported by higher income from personal current accounts and also continued strength in our motor leasing business.

In Commercial, year-on-year strength in transaction banking income was offset by lower loan markets activity. And then insurance, pensions and investments delivered a strong performance, up 6% year-on-year. General Insurance did particularly well within this with income net of claims up 35%. Then finally, in equity investments, Lloyds Living is developing well with income up 19% year-on-year, alongside growth in LDC, which is our private equity arm. Looking forward, we continue to expect ongoing growth in other income linked to both BAU growth and also strategic initiatives.

Then turning briefly to operating lease depreciation, which is the depreciation charge for our operating lease business, that was GBP 710 million in H1. And we continue to expect this operating lease depreciation charge to grow in line with profitable fleet growth and higher-value vehicles going forward, with volatility in the charge mitigated by a number of strategic actions that we've implemented this year.

I'll now turn to costs on the next slide. So we remain very committed to cost discipline. H1 operating costs were GBP 4.9 billion, up 4% year-on-year or actually up 2%, excluding some front-loaded severance charges that we took in Q1, and those were taken to accelerate efficiencies. So overall, operating costs are tracking in line with full year expectations with business growth and inflationary impacts, including national insurance, partially mitigated by savings driven from our strategic investment.

Looking ahead, we continue to expect operating costs of circa GBP 9.7 billion for the full year. Remediation remains low at GBP 37 million, and there was no further charge for Motor Finance in the first half. And I'll actually cover Motor Finance specifically in more detail on the next slide.

So our provision for potential remediation costs relating to motor commissions stands at GBP 1.15 billion. The provision is based on a range of probability weighted scenarios to address uncertainties around the number of assumptions. So I'm sure many of you will have followed the Supreme Court judgment on the 1st of August in respect of Wrench, Johnson, and Hopcraft. That judgment overturned the Court of Appeals decision in relation to fiduciary duties and bribery and upheld an unfair relationship claim in the case of Mr. Johnson. So whilst this judgment clearly provides additional clarity, there remain a number of uncertainties.

So the FCA will publish a consultation on an industry-wide redress scheme by early October. This means the ultimate impact on the group will be determined by a number of factors still to be resolved, particularly the outcome of the FCA consultation. However, after initial assessment of the judgment, the group currently believes that if there is any change to the provision, it is unlikely to be material in the context of the group. Clearly, we will continue to review any further information and update as and when necessary.

I'll now turn to asset quality on the next slide. Asset quality remains robust. The H1 impairment charge of GBP 442 million equates to an asset quality ratio of 19 basis points. This reflects stable credit quality during the period with either stable or improving trends seen across our portfolios. Similarly, early warning indicators remain low and stable. We're very confident in the balance sheet given our prime customer base and a prudent approach to risk, and we continue to expect the asset quality ratio to be circa 25 basis points for the full year.

I'll now hand back to Douglas to cover capital distributions and wrap up the presentation.

Thank you, Sarah. So on the next slide, as you can see, capital generation of 86 basis points was strong in the first half of the year. This supported sustained growth in shareholder distributions. Indeed, at the half year, we announced an interim dividend of 1.22p per share, up 15% on last year. As usual, we will consider further capital distributions at the year-end. Dividends per share have grown consistently over our strategic plan, now up more than 80% versus 2021. Alongside this, we have undertaken consecutive and significant share buyback programs. These have reduced the group share count by circa 16% since the end of 2021, supporting growth and value for our shareholders.

I'll now wrap up on the final slide. In summary, the group is showing sustained strength and delivering in line with expectations. In the first 6 months of the year, we saw continued growth in net income, cost discipline and robust asset quality, driving strong capital generation and an increased interim dividend. Looking forward and based on this sustained strength, we feel very comfortable with our 2025 guidance and remain confident in our 2026 commitments. Both are set out in full on the slide. I hope you found this to be a useful and interesting update.

To summarize, we're very pleased with the progress so far and are excited about the opportunity to accelerate as we deliver a highly compelling investment case. So it looks as though that's now taken up about 20 minutes as expected. So we'll now open up the call to Q&A.

There is the ability on the actual drive to submit your questions. We will then subsequently just go through each of the slides, each of the questions as they come through and add further detail. I think it probably makes sense for us to kick right into the questions.

So the first question that came through has actually come through about recent press articles about the unhappiness within the workforce by some of the measures taken as part of maximizing potential of people. The question would really be, what actions are being taken to ensure you obtain and retain the best talent to ensure success in the future?

So obviously, this is an interesting question. There's obviously been an element of speculation in the press with regard to performance management within Lloyds and how we look at structured support as a whole. In essence, this is actually very similar to the way many good organizations around the world actually manage performance. And actually, it's not something particularly new to the organization. Essentially, we want Lloyds to be a high-performing organization. You as shareholders, I suspect, also want us to be a high-performing organization. And our customers, clients and stakeholders all expect that of us.

So basically, what we want -- what we're trying to do at all times is actually ensure colleagues can achieve what they're capable of in our business. And to do that, we just have to be honest with those that need to contribute more, and we have to make space for those with potential to progress and grow. So really, what I would say is the press speculation that you've read about is really about having an effective performance management approach within an organization. And actually, that's the right thing for any successful organization. I think that probably covered that question.

Another question was, how should we think about the future mix of dividends and buybacks in your distributions, please?

That's a really important question and one that we're frequently asked, not just by retail shareholders, but also by institutional shareholders. Our approach has actually been relatively very consistent, in fact, over recent years. We have a progressive and sustainable ordinary dividend policy. That progressive and sustainable ordinary dividend, you'll see that, that's been reflected in the increase in ordinary dividend by 15% at the half year.

In essence, from our perspective, our belief is that we can continue to deliver that progressive and sustainable ordinary dividend over a number of years. In addition to that, what we look towards doing is actually having -- paying out excess capital to shareholders at the end of each year. In recent years, that's been undertaken through a buyback. Last year, it was GBP 1.7 billion. The year before that, it was GBP 2 billion.

So you should fully expect the Board to continue to consider excess capital repayments at the end of each year. What's really important, I suppose, is what it really means for -- or how you then contextualize what the level of that ordinary dividend is and what the level of the buyback is. And that's why we give the guidance around the capital generation. We talked about delivering 175 basis points of capital generation this year. We talked about delivering more than 200 basis points of capital next year.

The other aspect that indicates almost like how much capital will actually pay out at the end of the year is the capital ratio that we pay down to. You'll see that we paid -- well, we've indicated that we will pay down to a 13% CET1 ratio by the end of 2026. We paid down to 13.5% by the end of last year, and we've indicated that there will be a journey to move towards the 13%. So you should fully expect us to pay down somewhere between the 13% and the 13.5% at the end of this year.

So actually, when you look at our approach to mix of dividends and buybacks, that's the way to look at it. What I would say is on the excess capital repatriation is that we're constantly looking and the Board looks at what the most effective way to return excess capital is. In recent years, we very much believe that buybacks is the best way to do that. Clearly, that's something we'll consider as the share price has recovered as our valuation versus our tangible net asset value has recovered.

But certainly, when we speak to retail shareholders, when we talk to institutional investors, the current view is given the significant value that both the market and we believe is still available, the view is still that I think that buybacks are the favored approach. But we continue to listen to all investors to see exactly what the right approach should be going forward.

I can do the pref share one.

Sure.

Yes. So there's a question, you bought back some of your preference shares in 2024. At the end of last year, you still had 5 class in issue, some with very high coupons. Over time, should we expect that you'll retire more of the preference share, please? So we've actually got -- we've got 4 preference shares outstanding at the moment. So to a GDP to a U.S. dollar, we don't actually disclose whether we intend to redeem outstanding instruments in the future. It's very much considered on a case-by-case basis at the time. As you can imagine, we'll take into account a variety of economic, regulatory, legal and practical considerations. But we do continually monitor the market for any opportunities to repurchase or exchange those remaining preference shares outstanding. So we will see.

Okay. Another question has come in, which is unsurprisingly about the economic environment and how we see almost like earnings progressing given a lower rate environment.

It's really quite interesting at the moment because people talk about the U.K. economy and the environment as it stands at the moment. And actually, the environment as it stands, although it may not be necessarily exciting, isn't actually unsupportive to Lloyds Banking Group and how we operate. Certainly, if you get to the stage where rates are where they are at the moment, there's certainly much more of an ability to manage both the asset and the liability perspective.

If you actually look at our economic expectations, and we're one of the few banks to actually update our economic expectations every quarter. You can see them in the slides. You can see them in the news release when we actually produce our results. And actually, what you see is our current projections are probably GDP growth of about 1%, both this year and next year. You're probably looking at unemployment peaking at about 5% next year, and you're looking at slight growth in house prices.

The other area that was specifically referenced in the slides was actually the base rate. At the half year, we were actually expecting a couple of reductions in the base rate over the second half of the year. Clearly, if you look at the market and the market environment, I think the general expectation would be that, that would be less than that now, but we will look towards updating those expectations as we move forward and when we issue our Q3 results at the end of October.

The question though, I suppose, was really there is irrespective of the resilience of the U.K. economy, what does it mean from our net interest margin going forward even though the rates are reducing.

Now in essence, I think when you look at our net interest margin and our net interest income, there are 3 primary factors that are probably influencing net interest income going forward over the short to medium term. One of them which is very much a tailwind is structural hedge earnings. When you look at it from a structural hedge perspective, we have about GBP 244 billion under investment. Effectively, those are interest rate insensitive balances. They've got a weighted average life of about 3.5 years. So in theory, they would roll off over a 7-year period being a weighted average life of 3.5 years.

But essentially, what you'll see at the moment is that, that structural hedge is actually earning probably about 2.2%. But actually, as you reinvest that -- those funds each year, they're actually reinvested into a market that's earning more like about 3.5% to 4%. So you can see that at the moment, you're actually getting a benefit as you reinvest that GBP 30 billion to GBP 40 billion of maturities each year in the structural hedge. So that's very much a tailwind. That's slightly offset by a couple of headwinds, one of which is mortgage repricing. Effectively, if you look at it from a mortgage side, the current completion rate for mortgages is probably around 75 basis points.

If you look at mortgages and the rate that they were written probably about during COVID and the like, it was significantly higher than that. So effectively, we've got business that is coming off quite high rates going on to lower rates, and that's been occurring over the last 3, 4, 5 years. In essence, that is a slight headwind when it comes to both net interest margin and net interest income. At the same time, what you've got is effectively deposit migration, which is effectively current account balances moving to savings accounts where essentially the rate that's achieved is actually -- or the margin that's achieved is less because obviously, the rate payable to customers is higher on savings balances. So that actually becomes effectively a headwind as well.

But the -- basically, the tailwind of the structural hedge more than offsets the benefit that's coming from those two headwinds. Hence, why we expect the net interest margin to increase this year. We haven't actually given effectively guidance beyond that for net interest income or indeed net interest margin. But you can see that the positive trends in those areas are very much driving the increased return on tangible equity. From a return on tangible equity perspective, we're expecting greater than 15% next year. And indeed, the capital generation, which we're expecting to increase from around 175 basis points to more than 200 basis points.

So we're still very much of the belief that actually we can still see positive momentum in the net interest margin despite the fact that the base rate is falling.

So did the M&A one?

Yes, that makes sense.

Yes. So the question is, are there any gaps in your product set that you'd like to close through M&A? And you've made some interesting acquisitions in recent years that have added capabilities.

Yes. So in terms of M&A, first and foremost, our strategy is an organic one. So when we set out our strategy in February 2022, if you think about the scale of Lloyds Banking Group and the fact that we are already kind of #1 market share in a lot of our key product areas, for us, any M&A is really kind of small and around the edges where we see opportunities to improve the customer journey or a customer offering that is easy to acquire versus us doing it kind of organically and building it in-house.

So when you think about the examples of acquisitions that we've made over the past couple of years, Tusker, our car salary sacrifice proposition brings to mind, as does Embark, which is a share investment platform. So the 2 of those are very much kind of small and in terms of capital, it didn't make a lot of impact. But we do look at all of these things in the round. So when you read on the news about bank buying ex portfolio, et cetera, there are always things that we will have looked at, but we will have decided for one reason or another that it didn't make sense for us from a kind of a proposition perspective.

So we'll look at all these things in the round. I'd say from our kind of product set, there's nothing kind of in particular that we'd kind of call out at the moment, but we will obviously look at all of these things very actively as and when they come up for sale or acquisition.

And I think actually linked to that, Sarah, is actually one of the areas that's also touched upon in another question. One of the other questions was talking about the profit associated from ending the A.G. Bell partnership in regard to SIPP management and bringing it in-house. I'm not going to talk about individual profitability or different areas like that. But what I would say is that one of the strategic areas of focus for us as an organization is very much almost like the mass affluent and the wealth franchise.

From our side, there's very much an area here that the customers in that mass affluent have not been able to access investment management in the same way that I think both from a Lloyd's perspective, we would like customers to be able to access and indeed from a regulatory perspective. And a lot of that is effectively from previous regulation that actually meant advice is only really available to those that have got much larger amounts of money.

So it's one of the things that we're trying to look at from a mass affluent side. And one of the areas you'll see how that's actually developed in the last -- since the last year or so is when you look at our representation in ISAs. If you look at it from an equity ISA perspective, I believe over the last 12 months, we're actually almost like the #1 or #2 provider. And actually, that's a significant increase from where we were 2, 3, 4 years ago. And it's a big area of focus about how we look at basically that mass affluent proposition and really ensuring that we've got everything available from execution-only share dealing all the way through to direct access to investments to advisory services. And that's very much where we believe Lloyds can act as a unique provider in the U.K. market with both a banking proposition and indeed an insurance proposition available through Scottish Widows.

So yes, that's very much the way that we're looking at trying to enable that. And one of the reasons that we think that's going to be more successful going forward is actually from a digital side. It's not just the change in regulation that we've seen, but it's also when you look at it from a digital side. The significant investment that's gone into the app is really making a difference from this side. A number of you may well be banking clients of Lloyds, and you can now see that actually on your banking app, you cannot only access your current account, your savings account, but you can also access elements of Halifax Share Dealing Limited, so the execution-only share dealing service.

There are also elements how some people are now able to access their pensions through Scottish Widows through that as well and indeed look at other products such as general insurance that are all available and can be reviewed on the app. So I think that, that whole digital development and investment that's been made really provides a significant differential in the way that people look at the -- almost like the more holistic banking proposition going forward.

Then on -- there's a question around what's happening to loan quality and defaults at present. So as I kind of touched on in the slides, asset quality has been very robust, reflecting both the fact that we've got a relatively very prudent lending book, but also we're seeing very healthy customer behaviors in terms of customers paying off their credit card balances at the end of the month, customers having a relatively prudent approach to lending as well. So what we're actually seeing both on the retail side and the commercial side is that new to arrears are low and are either stable or falling across all the portfolios. And similarly, from an early warning indicator side, whether that be minimum repayment levels in cards are very low and stable.

And similarly, on the commercial side, we're seeing things like working capital utilization levels being very low. So what does that mean, corporate clients aren't drawing down the whole extent of their RCF. They're able to meet their day-to-day payment needs using their own kind of working capital. So what does that mean to asset quality ratio was only 19 basis points for the first half. It was actually only 11 basis points in Q2. So well within our 25 basis point guidance for 2025. So we feel very, very comfortable with asset quality in general.

Yes. And I think just adding to that, I mean, I think that robust asset quality, which I say is driven by not just the prudent approach to risk that Lloyd's has taken over the last few years, but also the economic environment. And the economic environment, as I said earlier, is actually not unsupportive given the fact that although you have GDP growth, which is relatively low, it's actually quite steady. And I think that relates to another one of the questions about actually where we expect interest rates to go to.

One of the questions outstanding was at what level are Lloyd's expecting interest rates to bottom out.

Well, we're probably expecting interest rates to bottom out at the moment, probably around the 3.5% level, somewhere like that. Obviously, rates at the moment are at 4%. Clearly, we'll have to see how things progress and how things change. But I think that sort of level is broadly where our expectations lie. What I would say is at that sort of level, effectively, customers have seen that actually they're really quite resilient.

There was a little bit of a concern in the U.K. as mortgages repriced and as rates were rising and they increased, whether customers would be able to afford their mortgage repayments but -- or the increases in mortgage repayments. But actually, what we've seen is actually the customers have been really remarkably resilient. And actually, at the same time, savings balances have increased, not just on the commercial side, but also with retail customers. So I think actually that the overall economic environment is actually quite good for credit at the moment as well.

And then there's another question on how resilient is the bank to a cybersecurity attack.

So from our side, this is an area where we place a huge amount of investment every year. So if you think about group costs, and as you can imagine, there are always kind of prioritization exercises that we go through. But from a kind of cybersecurity perspective, that is always something where a lot of focus is placed and a lot of investment. And actually, we've been very resilient to kind of cyber attacks in general.

And I'd say that kind of linked to that, and there's another question around digitization. If you think about the investment spend that Lloyds has made over the past few years, GBP 3 billion over 3 years, GBP 4 billion over 5 years, a lot of that has been in technology and also in cyber, and that's starting to have a positive impact from an efficiency perspective and on cost to serve and cost to acquire retail customers.

So I think we gave stats around reduced cost to serve with our full year '24 results. We also said at the half year that actually the strategy and our kind of strategic initiatives have generated GBP 1.5 billion of gross cost savings so far as a result of the strategy, and we continue to see further opportunities to reduce manual back-office processes from a finance perspective, from a risk perspective, from a retail perspective, you continue to see kind of branch closures and using digitization to really improve the kind of cost to serve and also improve the customer journeys as well. And as Douglas was saying, in terms of building things into the app.

From an SME perspective, we've considerably improved our mobile onboarding capabilities. So as you can imagine, it used to be a very manual process for a business banking customer to be onboarded, lots of kind of forms going through the post, but now it's done from a mobile perspective, much quicker and much easier. So that's really an area where we feel really pleased with the progress that we're making on the kind of tech and digital side. And actually, we're going to be doing a specific investor seminar later after our Q3 results, so in November on digital and AI and how we are using both of those to drive a kind of competitive advantage and the opportunities that we see in the future.

Yes. And I suppose linked to that as well, I mean, both on the cost to acquire is really how fundamentally you look at the cost/income ratio for the group as a whole. We probably had the -- for the first half of the year, we had a cost/income ratio of about 55%. We very much believe that there is an opportunity to reduce that. Indeed, one of our core areas of guidance for 2026 is actually a cost/income ratio of less than 50%. So you can see there that clearly, we're very much targeting further improvement during the course of this year and indeed into next year. And that improvement, I think, is very much from both sides. It's both from clearly, the clue is in the title with the cost/income ratio, but that's from both increasing income and very much control over costs. And that's really fundamental to the way that Lloyd's as a group operates.

Cost is very much a competitive advantage and will continue to be a competitive advantage as we continue to progress, not just this year, but going forward and as we continue to invest in the business. So I think that, that whole digitalization and investment will be fundamental, but is very much a priority for us.

There's another question which sort of relates to one of the questions I was talking about earlier, which was really about what's your buyback policy from here going forward. So I touched upon that a little bit earlier. So effectively, we have the progressive and sustainable ordinary dividend. That's very much our approach. And effectively, what we'll do is that we'll then look at the -- or the Board tends to look at the excess capital repatriation at the end of each year. And the Board makes those decisions at that point in time. What I would be very clear about is the fact that actually the Board has made it very clear that returning capital to shareholders is a priority.

Now how that's done? We've been very clear with the progressive and sustainable ordinary dividend. The excess capital repatriation decision is made at the end of each year. The current view is that actually the buyback is undertaking a buyback is the best approach to do that, but that's reviewed each year. Clearly, there are alternatives. You could undertake a special dividend, you might -- or a buyback. Alternatively, you could actually use those funds either for M&A or indeed for further investments. But our view is that we're already making a significant amount of investment prior to actually almost like announcing our capital generation of the around 175 basis points this year, the greater than 200 basis points next year. It will continue to be important, but it's how you repatriate that.

And as Sarah mentioned earlier when she was talking about M&A, look, our strategy is very much an organic strategy. It's very much looked at value for the organization. Any potential acquisitions have to be aligned from a strategic perspective. They have to be aligned from a risk perspective, and they have to deliver value. So from our perspective, there's nothing significant on the agenda at this moment in time. But naturally, as one of the largest financial providers in the U.K., it's right for us to consider those options. But I think from our perspective at the moment on buyback, buyback is our current approach to returning excess capital, but that decision is reviewed at the end of each year.

As then there's a couple of questions around share dealing and in particular, what we are doing to encourage individuals to invest more of their cash rather than saving it.

So I think from our perspective, I'd call out two things. So firstly, around 18 months ago, we launched something called ready-made investments within our app. This is a very kind of simple, easy investment tool where effectively you can put in the amount that you want to invest, your risk appetite to kind of low, medium, high. And the tool will then recommend you an ETF type product. So that's kind of the first thing that we're doing. We're seeing kind of good take-up there.

Clearly, we would also say that if people want to use their money for savings, we've also got a vast range of savings products. So we've got products for all different types of risk appetites and also different kind of macro environment. So clearly, what I'd say over the past few years is because interest rates have been so high, the rates that you can get on term deposits have also been very high, and that has prompted customers to move their money into savings rather than investments. However, there's reason to believe that as and when rates come down, those investment products become more attractive. And so we've been building the ready-made investment products as well.

What we are also doing kind of linked to our mass affluent proposition is also working with the FCA in a kind of a sandbox environment to look at AI-driven kind of money management tools and whether there's more that we can do in that space, kind of particularly linked to investments as well as savings products. So it's definitely an area that we're very much focused on. And as Douglas said, we've significantly increased our market share in stocks and shares ISA. So we were probably about 5% market share a few years ago. And now from a flow perspective, so flow new ISA this and last year, it's been much more like 20%. So it's very much an area of focus.

Yes. And that's very much reflective of the investment that's being made in that area and will continue to be made because we do feel with the customer franchise that we have that we should be able to meet those customer requirements, those customer needs through the services that we provide.

Another question that actually, which is probably just more a general question is what's the best way to register for these digital seminars?

So a couple of things that I would say is, first of all, on the Investor Relations website, you can actually see the seminars that we've already undertaken. We've already undertaken seminars for effectively the four divisions that we were looking at from a strategic perspective. So you can actually see business updates from effectively the divisional and executive teams along with Charlie. And it provides a good overview of both the strategic priorities and progress being made for each of those divisions.

As Sarah indicated, we're going to be undertaking another one on digital and AI, which is the actual date is yet to be formalized, but it was probably likely to be in -- well, probably it will be after the Q3 results, so before the end of the year. We will be announcing the formal date. That will probably be whether we do that pre-Q3 or at Q3. But all the detail will be available on our website. And indeed, you'll probably be able to watch it on the website as well. We normally do it as a live webinar. So through the Investor Relations area of lloydsbankinggroup.com.

There's another question, which is always an interesting question from an IR perspective, which is asking me whether I feel that the current share price is an undervaluation. Asking that over an IR team is always clearly a one-sided view. But I think what I would say there is that actually, you can see currently where we are delivering for 2025. You can see that -- so you look at the returns, I think we had a return on tangible equity of what, 14.1% at the first half of the year. You can see that we are expecting to deliver 175 basis points of capital generation this year. And actually, we're well on track to do that.

But fundamentally, what I would say is actually our guidance for return on tangible equity next year is greater than 15%. So you can see the trajectory that we're expecting from a return on tangible equity perspective. You can see that the trajectory that we're expecting from a capital generation perspective as well. And you can see the trajectory that we're expecting when it comes to the cost/income ratio as well. So our view is very much that if we can deliver against that guidance, we should -- that should continue to be recognized in the share price.

And then kind of finally, we've got a question around digitization. So overall as a population, where are your retail customers on the digitization journey, where 0 is no engagement, 100 is full engagement where all processes are digital. What I would say is that the -- clearly, there's a range as you would expect there to be.

We've got 28 million customers and 22 million mobile app users. So that indicates that a good proportion of our customers are very much digital and using our app on a kind of daily basis. We've got about 7 billion log-ons a year onto our mobile app. So really kind of considerably used app, which is really important for us as it enables us to build better relationships with customers. However, clearly, there are some customers who are not digitally active, and that's why we've still got our -- clearly, we've still got the largest branch provider in the U.K. with around kind of 1,000 branches still remaining.

So yes, there is a range, but I'd say increasingly, customers are becoming more and more digitally active.

And I think that, that can be seen, again, this is the beauty of the digital franchise and the digital operating environment in which we're currently participating. If you look at access to our app, I think that our app is generally accessed. I think it's around 30 times a month by most customers. And actually, that engagement is significant. In fact, it beats the vast majority of digital channels around there. In fact, I don't think there's any other almost like channels that have the access that we do apart from maybe some of the social media apps.

The only other question which we didn't touch directly was relating to share dealing through Scottish Widows. But I think that we've been -- made it very clear how actually Halifax share dealing and the whole mass affluent and wealth management proposition is absolutely fundamental to the way that we're going to undertake business and have an enhanced proposition for customers going forward. So very much a key part of the way that we look at both banking and investments.

I think that actually that completes all the questions. I hope actually having both Sarah and myself answering has not just enabled us to comprehensively respond to all the questions, but also given a bit of a variety from a voice perspective as well rather than hearing my mail voice going on all the time. So hopefully, that's provided a bit of a balance and a bit more interest to you as well. But thank you very much indeed for dialing in. I hope it's been useful. And I think, Mike, you wanted to just conclude.

Yes. Thank you very much, Douglas and Sarah. It was a great double act. You handled it all very well. I didn't think we were going to get through all those questions in time. I was watching the clock ticking down, but it was perfect timing. So well done, quite a variety there as well, wasn't there? Anyway, yes, thank you. And do come along again and update us with more news as and when you've got the opportunity. We'd love to hear from you and love to see both again in the near future. And for the rest of it, have a good evening.

Great. Thanks very much.

Thank you very much.

Today, it's great to have you here as usual. I think most people here know you very well, so maybe you can just dive straight in.

So maybe starting with the macro side of things, I think William said last week, the U.K. macro backdrop is uninspiring, but not unsupportive. I hope I'm not misquoting him, but do you think there is a risk that we focus too much on the uninspiring and not enough on the not unsupportive? Because if I look at unemployment and credit quality, all of that is still looking quite supportive. And are there any other areas that you think are actually more supportive than we give it credit for?

Brilliant. So first of all, thank you for having me. It's great to be here today. Yes, I think William's characterization is good. We've talked for a while about what we call a resilient, a very resilient economy, but a slower growth economy. And our forecasts, as you know, have been saying that we get about 1% to 1.5% GDP growth, for example, in the next period. But as you say, unemployment stays healthy. And actually, we see for Lloyds Banking Group an opportunity to grow faster than the economy. So I'll come back to those opportunities.

And why we have that confidence in the resilience of the economy? It's primarily because of what we can see in households, individuals and then businesses. Obviously, the government's finances is a matter for quite a public debate. And we can see the challenges we've got, which is caused by the GBP 400 billion injection through COVID, Brexit and all the other things, the structural issues we've got. But when you look at households and businesses, they continue to improve their resilience.

For households, the savings rate is actually in quite a broad spectrum from the bottom 20% plus in terms of income and wealth of households, has continued to strengthen. We've now seen 6, 7 quarters of real wage growth. We're seeing strong discretionary spending year-on-year. And there's the ability for households to create more demand if they wanted to. And as you will have known from the data that the households have been deleveraging consistently, pretty much since the financial crisis. So household finances are in a pretty healthy state.

We know consumer confidence isn't at all at the highest levels, but there is a real opportunity for households to move to a different trajectory. And businesses are the same. Actually, we've now seen 6 quarters where business cash flow is different by sector, have continued to strengthen. They're continuing to deleverage post the COVID period. And the issue for businesses is that business investment is lower, which is part of the productivity issue.

So first thing is real resilience in the underlying economy. The second thing is kind of green shoots or areas for higher growth. We always, when we laid out the strategy for Lloyds Banking Group, wanted to expose ourselves to the higher growth parts of the economy. And when you look at the policy and then the government commitments and then the momentum around some of the big sectors, so infrastructure, green energy transition, housing, obviously, some of the advanced and tech sectors, the pensions market and pensions reform, electronification or EVs in transport, we're seeing all of those things have real significant money behind them, very significant international investors that want to continue to invest in the U.K. And there's an opportunity for those areas to grow faster.

And as a result of that, what we're seeing is even our lending and our balance sheet is growing faster than the economy. We saw kind of GBP 5 billion worth of asset growth, 3% growth in the first half of this year alone. So we really do think it's a resilient slow growth economy with the potential to move to a higher growth trajectory.

You've mentioned government finances, so maybe we should address the other elephant in the room. I know you've said in the past that you thought increasing taxes on banks would be inconsistent with the growth agenda. Can you share your thoughts on the autumn budget more broadly? We still have 2 months to go. And is there anything other than bank tax that concerns you?

So I'm probably experienced enough now not to get into a middle of a political discussion around a budget. But clearly, the budget will be an important event. I don't think it will be -- it will change the trajectory materially of the economy or, by the way, our growth story in the next period of time. But it's clearly a really important event, and it's become almost a clearing event, I think, for some investors for the obvious reasons that we know.

Look, on bank taxes, because you raised that, the position that we've had, and you'll hear probably from all of the bank CEOs, is the one that we've seen to date. First of all, both the Chancellor and the governor have come out previously and said they don't think that's the right policy decision for this environment and actually having a chancellor that with the Leeds reforms, the Mansion House reforms and with an explicit statement that says, simply a healthy economy needs a healthy financial system, it wouldn't be consistent with prior statements. So we think it's unlikely in that context, and we've had no discussions with the government or the treasury around the bank tax. Clearly feasible from a political perspective, but not something we've had debates on it, and it wouldn't be consistent with previous messages.

In terms of the budget itself, look, there's going to be a combination of factors that determine how big any hole in the government finances are. The OBR will be important how the government thinks about its own fiscal constraints. The pace and the market's view of quantitative tightening is interesting in this context. I know that all of us will be all over that stuff.

Depending on where they get to, our view is very much they need to stay focused on enabling the investment and the real economy businesses to continue to invest and grow. That's a really important part of this. Incentives to support that would be important.

And then I think what we would hope to see is a balanced agenda between proper reform that enables some level of control on spending alongside whatever they decide from a political perspective on taxes in order to fill that gap. But when you look at the industrial strategy, the regulatory reform agenda, the focus in the economy taking a higher level, but an appropriate level of risk through things like pensions and pensions markets, the government's current strategy really requires a budget that's in line with that. It's going to maintain momentum and get back to where we started, which is get the U.K. back to our higher growth trajectory.

And well, you've talked about the high-growth trajectory and looking maybe a little bit further ahead than the budget, your purpose is to help Britain prosper. Where do you see the best opportunities for the medium term in terms of growth that obviously will be good for the economy, but also good for Lloyds Banking Group?

Yes. So as you know, we are in year 4 or 5 of our 5-year strategy. We announced our objectives in February 24, 2022. It was actually the day Russia invaded Ukraine. I remember that day very well. And our strategy was to get back to growth and then really drive investment in our talent and our people and our technology to be fit for the future. And the great news is we think we've managed to deliver that over the last period, and we still see that as the path for the next period of time.

As you know, a big part of that was our commitment to our shareholders in '26 to get to greater than 200 basis points of capital and greater than 15% RoTE, and we're feeling really confident about that. And the reason for that is when you look at the underlying is how and where we've grown. So we will, depending on where you come out in your consensus, have been able to grow our revenues by about 30% in that period of time. And the biggest driver of that isn't interest margins, NIM, because we've had to deal with some very significant headwinds on NIM. For example, many of our investors will know we had a significant compression in our mortgage margins.

What's been the driver of that? It's been a few things. First of all, a focus on other operating income. We wanted a more diversified, more balanced mix of revenues. And so we prioritize some of our businesses that would grow other operating income. That's businesses like our transport finance business, our pensions business, our bancassurance model of selling insurance to our 28 million retail customers with the biggest digital bank in the U.K., our regrowing our corporate and institutional business, trade and working capital, our equity finance business, LDC, all those businesses really drive other operating income. And we've been driving an 8% to 10% growth per year, 9% in the first half of this year, up again year-on-year, and that's really differentiating and really important.

The second part is what I just described. We built a strategy focused on the parts of the economy that we knew needed to grow, so housing, infrastructure, green finance and transition. I mentioned pensions now a few times, but that's an exciting business because even before the government's current pensions reform, we knew the pivot towards pensions, pension contributions and the ability to consolidate pensions. It means you can grow that business significantly above GDP. And that's what we've been doing for the last few years. It's working, and we can see that trajectory and momentum continuing. And we think there's a really exciting opportunity in financial services in that context in the U.K.

Speaking of exciting new launches, I've noticed that you've recently launched a premier bank account, which should really complement your broader mass affluent offering. Can you talk about the customer opportunity there and the cross-selling potential?

Yes. Thank you. That was one of the initiatives we laid out in 2021, which was to focus more on our -- it's a horrible name, mass affluent, by the way. We knew that, but we knew at least we could explain what it meant. We define that as customers that had either an income or savings of more than GBP 75,000. So that was the definition back in 2021.

Premier has got a slightly different positioning, but it's very much focused on that. And the great news was we are already the biggest mass affluent financial services provider in the U.K., but we knew that, that was an opportunity for us to really deepen our relationships, bring the full breadth of Lloyds Banking Group, including things like investments, pensions, insurance, obviously, our homes business and then start to differentiate further. And so far, we've had good progress.

Premier is the next part around trying to really bring a proposition that's differentiated for customers. But for example, when we started this journey, we only had about 9% share of mortgages, more than GBP 500,000. We've gone up to over 22%. We had less than -- I think it was 6% share of equity ISAs. We've been up over 20% of equity ISAs. We attracted about GBP 25 billion worth of additional mass affluent savings during this period. And so we know that's where customers have more complex needs, where the market is growing fast and we can grow with them. And so it's been a great journey so far. It's very competitive. It's very innovative, and we need to stay right at the front of it, and that's what we intend to do.

Normally, as an analyst, after hearing all about growth, we want to follow up with, and how much is that going to cost? But cost control has always been very strong at Lloyds. And you've talked about a flatter cost profile next year. Can you talk about the efficiency gains you have achieved to make that possible and your investment priorities from here?

Yes. So, as I've said before in this forum, I think it's been a pleasure to join an organization that has a culture of cost discipline and cost control. I've inherited other organizations, which aren't like that, and it's certainly one of the core strengths of Lloyds Banking Group.

Now having said that, and I think this has been one of my frustrations and probably for you, organizations and financial services organizations have delivered significant cost efficiency, but total costs have gone up. And ours have, and I should just explain that a bit. But in terms of cost efficiencies through this period, we have delivered, we announced at the year-end results, now GBP 1.5 billion worth of gross cost savings, that's a very material efficiency and productivity delivery in this context.

And obviously, it's been a massive offset to the inflation we've experienced, but also the high level of investment. And it's been a high level of investment in our growth that's been driving our costs in this last period of time. So when we look forward, we're going to continue to have the cost discipline we expect. The track record we now have around delivering the efficiencies that you've seen will continue.

And of course, in 2022, again, we asked investors to support an additional GBP 4 billion worth of investment over this 5-year period on top of our BAU investment, and that investment is now plateauing, and which is why the combination of ongoing cost savings together with a slowing down in the investment in this cycle, underpinned by growth in the businesses, which obviously brings some level of growth cost is why we see that the cost base will -- we think, will flatten into next year.

Of course, the momentum, though, when we see looking forward, next year, we'll talk more about the strategy beyond 2026, and I think how we look at efficiency and productivity and financial services, there's going to be another wave of it, looking forward, and we're going to be very well positioned for that based on the investments and the capabilities we've built in this last 3 or 4 years.

That's very exciting. So sorry to bring you to a slightly less exciting topic on cost. So motor finance remediation cost. I'm sure you're glad the Supreme Court decision is now behind us. The FCA, however, has estimated a GBP 9 billion to GBP 18 billion cost for the sector from the redress scheme that they will consult on later this year. I know you said that you're not expecting any further material charges. But can you just give us a bit more color behind your confidence around this matter?

Yes. So first of all, what have we provisioned already and why have we made that provision, we've already provisioned, as many of you will know, GBP 1.15 billion. That's a -- these are the hardest decisions I think we make as a Board to make sure that we are doing it in a way that is giving as much clarity and foresight as we can, but knowing that's a big decision for us, for the investors, for the shareholders of the organization.

That was made up of 2 parts: an initial provision we made back in January last year on what was called discretionary commission models, which was a regulatory issue raised by the FOS at that stage. And then an additional GBP 700 million that we put linked to the Court of Appeal, and then, the Supreme Court has just largely overturned the majority of that issue, but not all of it. So that's the provision we have.

That provision is based -- we did it deliberately this way because we knew that many of our investors and analysts would understand it. We did it the same way we do ECLs. We have multiple scenarios around a very broad range of issues that the regulator and the legal system is deciding on. And then we've probability weighted them based on our understanding of those scenarios.

And of course, as you said, we saw a very -- we really welcomed the Supreme Court judgment. We think it gave real clarity around the points of law that enables us to operate safely and support customers. We relooked at our scenarios in that context, and we were comfortable there's no material update needed at this stage.

Now, we've always said the provision we have, by definition, could either be -- need to be reduced or increased. But I think what the FCA has now done, as they come out in the next few weeks with their consultation plan, has materially derisked the range of our provision, and actually, the range that Nikhil has given around this, and I think he's joining here later -- us later here, isn't he, is quite well aligned with our GBP 1.15 billion, depending on where you end up in that range. But I think it really gives us more clarity now to put this issue behind us.

As a management team, we'll work incredibly closely with the FCA to make sure we get a scheme that we think is fully fair and proportionate, and proportionate means on behalf of our shareholders and customers in this context. And I think from a timeline perspective, you're right, they're going to come out with the consultation in the next period of time. It will take a few weeks to consult. And then, we'll need to see if we get to a clearer position.

With respect to Lloyds Banking Group, it feels like we're in a much more certain place as to where we are. And if there's any new information, we'll update you, positively or negatively, but I don't think it's going to be material. The other broader context here, which is important, is this government through the Mansion House reforms and then what they call the Leeds reforms, has really started to create a different framework for conduct risk.

And as always, Banking Group, one of our big objectives when we started this phase was to try and make the regulatory environment more supportive of the real economy economic growth and the financial system as an enabler of that. And we always said one of the biggest areas was to develop a more forward-looking and predictable conduct regime. And I think some of the changes we've seen alongside what's been going with motor finance has been really important. So the FOS now has a 10-year backstop. There's been a review of how we think about interest rates for remediation. It's gone from an assumed 8% to base rate plus 1%, which is broadly 3% for the last 10 years, which is much more, we think, in line with kind of customers, shareholders' balanced interests.

And then there's a whole set of reforms the government has laid out to continue to create a more predictable and forward-looking on that regime. And we think that's really important so that we can invest, we can innovate, we can reach more customers, but our shareholders can actually feel confident -- more confident in terms of what's predictable in terms of returns going forward. So we're going to stay very focused on that agenda as well.

Well, while we're on the topic of regulations, so clearly, this agenda about making remediation especially more predictable is very helpful. But you've also been vocal about your views on the whole range of other rate changes that the government is considering, so pension reform, ring-fencing to name a few. So can you talk about how you think the regulations can help support the sector further?

Yes. So it goes back to the comment I just made. For the first time since the financial crisis, we have a government and a chancellor saying that a healthy economy needs a healthy financial system. There's been a set of statements also then from the regulators to say, including the PRA, I don't think Sam is coming today, is he, but to say that we've reached the level of regulation post the financial crisis that is needed to maintain prudential stability in the economy and for the right level of conduct standards, which is the first time we've heard that in 15 years.

And then the government -- actually, the previous government put it in place, and then, this government has kind of enforced it in a more rigorous way, has put in place the secondary objective for both regulators, and in fact, taking this to other regulators to make sure they have an objective around competitiveness and growth. That's both competitiveness and growth of our sector, and that's relative to other international sectors, other international financial services sectors and companies as well as the competitiveness and growth of the real economy, which we are the biggest enabler of, actually, Lloyds Banking Group, but more than any other financial services company. So that's a really helpful context.

As I say, I think the initial announcements through Mansion House and the Leeds reforms do a good job of teeing up a pretty bold set of changes on conduct regime. On the conduct regime, there's now a commitment to start looking at the capital regime and other forms of prudential regulation. So the PRA through the FPC is now going to be looking at capital in the next few months. And, of course, they're going to have a look at the ring-fencing regime. But based on the interactions that we had over the last period of time, I think ring-fencing is with us for the next period of time anyway. That's not material, by the way, for us.

The reason we raised it as an issue is we thought it would take 5 years for any ring-fencing to be materially changed. And for the 2030s, I think ring-fencing won't help the U.K. economy be competitive with other economies, but it doesn't slow us down and doesn't do anything to materially change what we're doing, certainly this decade.

Right. And you mentioned capital review. The capital flight path is probably clearer now that there is more clarity over the motor finance situation. You've committed to paying down to 13% next year. Is distribution still your priority use of capital?

Yes, we said from the very start, actually, and I hope people, now that I'm over 4 years in, can really see that we've got a track record of analysts. We said we were going to make -- create a very strong and sustainable capital return and capital generation business that works through cycle, and that's where our greater than 15% RoTE in 2026 and greater than 200 basis points of capital is very differentiating.

And we said we thought if we had the additional investment that was already included in that, we would always look to return excess capital at the end of the year in our discussions with the Board to shareholders. And that's what we've done. And you've seen the track record on us building our sustainable dividend every year. We've grown basically at a 15% CAGR. And then we've done a buyback, which based on our discussions with our investors, has been the right combination between the 2. We still think that's a really important part of our investor proposition, and we're completely committed to that next year.

Now 2 builds on that, none of which say that we shouldn't -- won't continue to distribute at the level we're talking about. The first is we also, with that level of growth in capital distributions, are growing our balance sheet. I smile because when I came and joined this organization, I spent a lot of time with analysts in my guarding leave, and a number of people said to me Lloyds Banking Group's TNAV has been 50p at the start of the last decade, and it's 50p now, how are you going to get growth?

And I said, well, if you don't grow the balance sheet, you don't invest in the business and you give your retained earnings back as capital, by definition, the TNAV doesn't move. So we're now proving that we can grow the balance sheet profitably and deploy it. I just mentioned earlier, for example, having grown the balance sheet of 5% in the first 6 months of this year. And we think that's really important and a really important use of capital for our investors so that we can -- because we're generating strong returns on that capital.

And then the second thing is, and we've done a couple of them, we've always said we'll look at what I'd characterize as infill M&A, where it brings distinctive capability or things we can't do ourselves. We're already the scale player in virtually every part of the U.K., but where it brings new capabilities that we can bring to market, we'll do that. So one of the great examples is the Tusker EV financing business that we bought, and we have now -- I'm not sure we made this public, but anyway, we've more than tripled the size of the fleet within 2 years. So it's exactly the kind of distinctive capability, #1 in the sector, plugged into our distribution. We can bring real value to our shareholders and really create synergies that are positive. And so we'll look at those kind of infill acquisitions. But I think at this stage, given who we are, we should continue to see very strong distributions to shareholders.

Well, I mean, now that you've mentioned M&A, I could not help. So what other capabilities would you like to add to your franchise? You have a lot of business footprint. So anything specific in mind?

No. I mean, it's in the areas we've laid out as strategic priorities, I think where we don't start with 15% to 30% market share and the leading capabilities, so what are the kind of areas, obviously, in our insurance and pensions and business and some of our wealth businesses. There's opportunities to look at capabilities in some of our SME financing businesses. There's capabilities there that we don't have relative to the market that we continue to look at.

We've looked at capabilities. We've taken equity positions, not done outright buys of some tech companies that bring distinctive tech capabilities to deliver the next level of innovation. You've heard me say it many times, we're by far the biggest digital service in the U.K., 23 million people with 7 billion log-ons to our digital apps. So how do we continue to be at the forefront of digital and take that forward? We'll continue to look at those kinds of things. But as I say, the key theme for us is a distinctive capability that we can scale. And if we can see those things in areas that we have committed to growing to our investors, that's great. If not, we'll just continue to do it organically because we tend to be the leader in most segments and sectors anyway.

Yes, that's great. So we are now halfway -- more than halfway through your current strategy cycle, as you said, and we've talked about -- a lot about your organic plans. I wouldn't want to get ahead of myself. But when you look ahead to the next strategy cycle, what are the areas that you're particularly focused on? And what can drive returns even higher?

So -- yes, so our guidance goes out to 2026, and my team is here, so I'm going to not give you guidance beyond 2026, otherwise, I get myself into trouble. And I think one thing we will be clear, we will come out with our new strategy before year-end results '27. So we'll do it sometime next year. I'm a big believer that when you've got an organization moving, you want to sprint through the finish line into the next phase of your strategy, not take some weird pause and then slow down before you start mobilizing again. So that's what we'll do.

Now, what do I think are going to be the themes? Look, the first thing was getting the biggest U.K.-centered financial balance sheet and bank growing, maintaining a winning market share and then growing at an 8% to 10% CAGR in our combination of businesses that drive other operating income is a brilliant starting point, and that momentum is momentum that will make a difference to our investors, to our investor proposition, and we need to maintain that. And so I think that's clearly one of the things we see.

The world continues to change. It's a very competitive market. We're proving we can more than compete and win share where we want to win, but we're going to have to continue to invest and innovate in those areas, and we should be able to maintain that growth. A part of that, as you will all know, has been us revaluing our structural hedge.

And the great thing for Lloyds Banking Group is we have a different structural hedge to other players in the market. By design, it's a longer-dated structural hedge. And it's been a significant source of the value creation through this first phase, but not the majority, but it will still be a tailwind depending on your views of the market, as we leave 2026. So it will still give us some upside into '27, and then, depending on your view of the longer-term rates market, for the rest of this decade, it will be supportive of our businesses and our growth.

The second thing, I think, is obviously we're a bank that's great at cost control and has delivered significant efficiencies. I talked about the GBP 1.5 billion we delivered through the first few period of time. When we look at the maturity of our capabilities now, the way the market is operating, and then, how new technologies and the combination of generative AI with agentic, so agentic AI, we think will provide opportunities for another change in the level of productivity, but also support growth, enable us to differentiate and deliver propositions that don't exist in the market today, which we're really excited by. We think that will be a material part of this next phase as well.

And so we're very excited about the phase beyond 2026. We are going to deliver our 2026 results. We have confidence in those, and we really believe, as a management team, that doing what we said we would do is important. As I said, delivering almost a 30% increase in revenues at those greater than 15% RoTEs and delivering the level of capital we're talking about is a material achievement, and we want to deliver that. And then we're going to grow from there. So it's going to be a fun few years.

I'm very looking forward to that. Well, you mentioned structural hedge and the slightly different shape and duration versus other peers. I think one of the questions that we all think about as an analyst community is to what extent will these benefits, if you like, shared with customers versus shareholders. So when your structural hedge get rolled in '27 and '28, and that will probably give you a bit more competitive advantage versus some of your peers who might have already rolled through your -- their structural hedges, is that how you would think about it in terms of competition?

So I think the first point is to focus on competition. I think it's really important. The one thing as a management team you can't control is what your competitors do on pricing. And as you say, the U.K. is a very competitive market. Look, the good news in that context is we've proven in the last few years we can, for the first time actually since financial crisis, either maintain our market share or grow market share without massively compromising margins, or where margins have got tighter, do it in a way that still generates shareholder value. And so mortgages is probably the great example actually. As I said, we've had another GBP 5 billion of growth this year.

Last year, we were trading at kind of 20% market share. Margins are being stable around the 70 basis points, and through cycle, we know that's going to be very attractive for our shareholders. In the 15 years or 12, 13 years before that, Lloyds Banking Group gave up 1% to 2% market share per year, right? So it's really important that we know how to compete and maintain margins even in this very competitive dynamic. I think you're right, our structural hedge will be differentiating relative to some of our peers in that next period of time. But at the same time, I'm never complacent, I spend a lot of time looking at the market.

The nature of competition is getting more complex, right? You're getting obviously some fintechs with greater scale. We've got other U.K. banks operating now with a very clear focus on the U.K., and we've got international competitors, who are increasingly looking at the U.K. and our core businesses. So for us, we just need to raise the game. We've proven we can compete with them, we can win share and we can do it at margins that are very accretive.

We're going to have a differentiated underlying ballast for our structural hedge through this period of time. Actually, what's going to be even more important, which I don't talk that much to the analysts, is the change in the management team, the capabilities and some of the technology that we're using and the pace at which we can then respond to competition and compete, and that's been the biggest change we've made in the last 3 years that gives us some confidence that we can face into the next 3 years as well. Do I think margins are going to get completely competed away? No, I don't.

That's very reassuring. With 10 minutes left, maybe I will open the floor up for questions. Anybody has got a question for Charlie. A gentleman over there, please.

Sorry, it's probably a small technicalities. To pick up a comment you said there that we review the capital distributions once a year. You're the only one in the sector who that, everyone else does at the half year. If I was the Board, I wouldn't change it while motor is hanging over you. I think it would send either positive or negative signals and create unnecessary headaches. So if we think about motor being put behind, is that something you would -- the Board will reconsider into next year?

So -- I mean, by the way, first of all, thanks for the question. It's something I've proactively brought to the Board a couple of times since I've been in this role actually, so it is something we have as a discussion with the Board on a regular basis. A number of our investors have asked us that question. To date, the Board has decided, as you say, that the current plan we have is the right one. So we'll have it open to current review. Again, it is very much a discussion for the Board in that context.

As you say, there's some other uncertainties going at the moment. I also think when we look at the new strategy, it will be a meaningful part of the discussion, and we'll be in those discussions over the next 6 months. So I'm not going to make a commitment either way. I want you to know we do discuss it. We do take investor feedback, and definitely, we'll continue to review it.

Any other questions? Well, if not, then I always have more, and sitting next to the CEO of the largest mortgage bank in the U.K., I can't finish the discussion without asking you to comment on that. So what are you seeing in terms of volumes now that the seasonal effect from the stamp duty change is over? Has there been any changes in terms of price competition?

Yes. So I gave some of the stats around our performance. But obviously, we saw a significant increase in volumes in the first quarter pre the stamp duty changes. We were surprised, and I think the industry was surprised that the volumes stayed stronger in the last quarter than we thought they might do. They did reduce slightly. But overall, the first half of the year has been strong. And of course, there's been some changes from a regulatory and a government perspective that's enabled us, especially for first-time buyers to look at affordability and support customers in a slightly broader way. So that supported some of the volumes in the market. So we're looking at this in a very supportive way.

Our forecast for house prices, by the way, of all the forecasts we do, it's the hardest one to get right, we upgraded slightly to 3% for this year. At this stage, that looks pretty good. So we don't see that there's a massive either spike or increase in house prices, although it differs by house and property and location in the country. But it feels like it remains a supportive market at this stage.

And you're right, competition is hot and it is tight. What you've seen us print in the first 2 quarters is around 70 basis points of margin. That's a pretty complex makeup of both retention business, new business and then all of the different types of the mortgage market, including buy-to-let, but we feel confident in that -- those margins. It is a tighter higher-margin market, but we feel confident around that circa 70 basis points at this stage.

The other thing that's been complex in this market, which you'll have all been seeing is when swap rates move we see that margins and pricing aren't stable for a period, they either widen or narrow, and it takes a while for them to get to some kind of equilibrium. And of course, in the first half, we've seen quite a change in swap rates. So let's see how this stabilizes in the second half. It's a supportive market. We seem to be trading well in that context. We're growing the business. It's very accretive. So we see that as one of the continued growth engines for Lloyds Banking Group.

Fantastic. And I don't want to forget about asset quality. So maybe I'll ask in a slightly different way. I think you've previously noted that 70% of customers have less than GBP 5,000 of savings. So far, customers have been pretty resilient in terms of credit quality and spending. But with autumn budget, as we talked about coming through, maybe more pressure on household finances, especially if we see a further tax rise in a couple of months, what's your expectation for that resilience?

Yes, very much the same. So I think a couple of things in that context. I said upfront that we see the top 80% by income of people in the U.K., remember, we have half households in the U.K. So I have this unique lens on U.K. household finances or individual's finance. The top 80% have been increasing their savings and their cash flows. Obviously, saving rates are a high percent -- high rate and debt ratios broadly have been coming down. So I think the first thing is that's a pretty supportive environment from a credit perspective.

The second thing is, obviously, Lloyds Banking Group has a very specific risk appetite. And on the retail side, which is where you were at, but on both sides, but on the retail side, we basically only do prime lending. And so where we would see the stress is typically in the bottom 20% of society by income and wealth. And obviously, a lot of those people would typically be on benefits or have some form of benefits. By the way, they all have 0 or negative savings. They wouldn't have GBP 5,000. That's very distributed to the top end. And we will support them in different ways. We will support them with everyday banking services and appropriate support where it's needed, but they tend not to be -- we can't lend them. They won't be within our risk appetite.

And of course, on mortgages, again, when you look at it, the average household income is over GBP 70,000, so double the average individual income. So they tend to be families that are more financially resilient. So the real driver of ECLs that would be different from our forecasts is if we saw unemployment materially spike because that then isn't around financial resilience, it's much more around individual circumstances.

And as you know, actually, we've been slightly above the market in terms of our baseline forecasts. The markets come to us, but we are still seeing unemployment in our guidance stay pretty strong, about 4.8%, 4.9%, maybe get ticked to 5%. And all of our guidance, all of our forecasts are on that basis. So we feel good about both the economy, but also our strategy for how we're supporting customers in that context. And we continue to -- we expect and we'll continue to see a pretty benign environment from an ECL's or impairment's perspective.

Fantastic. Unless there are any last minute questions -- that gentleman over there.

Roughly how much this year are you spending on AI? How much do you think that probably increases next year? And are you getting any material cash cost savings at the moment from any of that? Or it's more just kind of noncash productivity improvements?

On AI?

Yes.

So we haven't disclosed the amount we are spending on AI. So let me give you some context on that, and -- but I think it's a brilliant question. So look, we have 800 AI models live at the moment, including a significant number using generative AI and a few use cases combining agentic AI and generative AI. So let's just be -- I'm sure you're all over this. And the traditional forms of AI, which is typically machine learning, as you know, is already driving massive productivity, efficiency and credit decisioning benefits across the bank. And we already have -- 1 of the key use cases we've talked about externally is we use a generative AI tool to support all of our contact center colleagues. It was over 10,000 colleagues, and it saw a very material productivity lift in that context.

So we haven't given specific numbers, but we're already seeing significant value from it, and we are using these tools extensively across the bank. And we definitely see, as I just said earlier, that the opportunity to use specifically agentic AI, as we get into the next few years, is going to create significant opportunities. Again, we haven't disclosed the money around this, but we are investing significantly around it.

I think the really important point is when you try and do this at scale, in a regulated market, is that you do it with the right foundations. And so we started this in the back end of '22, implementing the data environments and the AI tool environments and then building a set of engineering and data scientists who would enable us to leverage, obviously, generative safely, but then also generative combined with agentic. So that's in a very, very good place for us to then start to deploy it at scale across the organization.

And then the third thought around this is I always think the long pole in the tent here for really exciting use cases, which aren't just about faster, better, cheaper, which is what most organizations are talking about, but are actually about extending and changing how we serve customers in new ways and then provide new growth. The long pole in that tent is going to be the regulation. And we are already working with in a regulatory sandbox with the FCA around some use cases that use agentic AI directly with customers.

And so that's exciting because if we can build confidence around how we do this safely with our regulator, it will give us confidence going back to where we started this, around how do we -- how can we then scale out across the U.K. and then be a leader in trying to drive that innovation. So we're going to -- we'll come back. I'm sure we'll talk about this more in our next phase of our strategy, and I'll take that as input that you'd like to see how much specifically we're investing. We'll see if we can give you that number. I know the number, but I'm not going to say it now. We'll think about how we tell the story because we think it's a really significant opportunity for us. And I know we're the leader in this context. So that will be fun.

As usual, much to look forward to. Thank you very much, Charlie, for joining me today. I'll draw the session to a close now. Thank you.

Thank you.

We'll maybe kick it off, but I guess people continue to filter into the room. But yes, just first of all, I want to say thank you, everyone, for attending. Welcome to the European track of the Barclays Global Financial Services Conference. Delighted to have you here.

Obviously, delighted to start today with Lloyds Banking Group. William Chalmers, Group CFO, doesn't really need introduction. So I'm not going to waste any time there. So without further ado, we'll kind of kick off.

So look, first of all, thank you very much for your time, William. I appreciate you making yourself over -- making your way over here. I thought we'd start big picture. So U.K. macro deregulation. The U.K. growth backdrop, it's been sluggish. There's challenges around managing a widening fiscal deficit.

Sure.

But then you've also got a government that has announced a kind of intention to deregulate and make the operating environment better for financial services. You saw the Mansion House speech in July, the Leeds reforms package aimed at reducing the kind of regulatory burden on financial services firms. Given your unique vantage point in the U.K., I was interested in your assessment of the operating environment?

Sure. Well, Aman, first of all, thank you very much for inviting us here. It's great to be here. I can't help but think the absence of an introduction is somehow related to my age and being a bit longer in the tooth. But nonetheless, I'm younger than I look.

Two or three points that maybe are worth making as a kickoff, Aman, to your question. First of all, in reference to macro, the U.K. macro is pretty uninspiring, let's face it. But having said that, it is not unsupportive. So when we look at the macro indicators on a look-forward basis, we've got GDP growth of about 1% this year and next. We've got HPI growth of about 2.5% plus, 2.6%, I think it is. We've got unemployment that remains pretty low, peaking at 5%, a touch below that right now. And then we've got base rates right now at 4%, and our terminal rate is about 3.5%. So that is an environment where to be sure, we'd like to see more growth. But having said that, that is an environment which is pretty stable, and it is conducive to revenue growth, number one, and asset quality stability, number two, both of which are pretty good ingredients for the performance of the business.

As you say, Aman, the government has got an important growth agenda ahead of it. And when it looks to what it's trying to achieve in that respect, it looks to certain sectors of which we're a part. That is to say, financial services is one of them. Likewise, it has housing, it has transition, it has transport. And we'd like to lean into all of those sectors. We think we can play a key role in terms of helping the government achieve its growth objectives.

The Leeds reforms are part and parcel of that. That is to say, a set of reforms or proposed reforms put out by the government earlier on this year, we think overall could be really helpful. We look upon them favorably, both because of the substance that is within them, but also because of the tone and the direction that it sets.

So you look at the conduct agenda, for example. And there is a clear determination there to make the FOS realign much more predictable, the FOS being the Financial Ombudsman Scheme, which is a source of, if you like, customer complaints, to make that a more predictable body going forward, to realign that agenda and at the same time, to put a backstop on how far back you can go with complaints in respect of conduct. Those two ingredients are absolutely key to making the agenda much more predictable, much more stable going forward.

Likewise, in the prudential side, the Chancellor charged the authorities with an FPC, Financial Policy Committee review of the capital structure within the U.K. Alongside of that, we're having a ring-fencing review. These are overall pretty positive developments, and we see them constructively.

So when you add it together, overall, I think more can be done, for sure. This in and of itself is not sufficient to necessarily produce the growth that the government would like to see. But having said that, it is progress, and it is progress in the context of what is a pretty stable operating environment.

Before I switch to the next, I just wanted to alert you to the handsets that you've got in your desk. So we're going to be asking some questions at points during this. We'd love to get your participation. Also, there will be time at the end of the session if you want to ask any questions directly to William, just to let you know.

So let's talk about specific issues that will affect Lloyds Motor Finance, the U.K. Supreme Court ruled last month. You came out and released a statement saying that any uncertainties notwithstanding the existing provision at GBP 1.15 billion, you thought kind of substantially covered the issue. Additional provisions wouldn't be material from here was your best guess.

I guess I'm interested in, first of all, what gives you the confidence to make that statement in the first place? And how do you think about that in the context of the FCA redress scheme, the FCA indicated the kind of GBP 9 billion to GBP 18 billion system level charge, please?

Yes. Thank you, Aman. It's an important question, clearly. The first thing, I guess, I should say is that we welcome the approach of the Supreme Court. We welcomed it and sense that it brought an expedited judgment, number one, and we welcomed it in terms of the substance of that judgment, number two.

Now what the Supreme Court did with its judgment is to eliminate some significant risks from the potential outcomes here. So it took fiduciary duty question off the table. It took a disinterested duty question off the table. These duties are not owed to customers in the context of the motor dealer relationship with their customer. And that, of course, is a good thing because, as you know, our provision is probability weighted, and the elimination of certain outlying outcomes allows us to narrow the expectation around what that provision might need to be.

Now to be clear, the FCA consultation process is still to come on the table. We expect early October as the timetable for that. And of course, there are component parts of the FCA consultation process that could drive that provision up or could drive that provision down, for sure. But when we look at our probability weighted analysis, we can't really see those outcomes leading to a conclusion which is material in the context of the group. Of course, that set off a discussion about what is material in the context of the group mean, and I recognize that. But nonetheless, it is a significantly narrower range of outcomes than we had previously seen or expected or built into our probability-weighted analysis. So overall, I think that is a good outcome, meaning in turn that our provision of GBP 1.15 billion stays where it is.

Now the FCA range, GBP 9 billion to GBP 18 billion, it's not really for us to comment on. I thought this was a consultation. It would seem more appropriate for ranges to come at the back end of a consultation rather than at the beginning, but there we are. But when we do our analysis, there are other data points in the FCA statement that we found basically reassuring. The GBP 950 per customer, for example, is a pretty reassuring number when we look at it.

So that's the way in which we see the range, with the one additional point that the simple analysis here is not always the right analysis, Aman. So what do I mean by that? To simply apply 15% market share to that FCA range doesn't, in our view, at least, get you to necessarily the right outcome. One is where does the range come from. Up to the FCA to comment on, really not me. But two is our 15% market share really only was 15% post about 2015. So there's a kind of an evolution there, number one. And then number two, every book has its kind of idiosyncrasies and particular characteristics. Our book is no exception to that. And off the back of that, Aman, the provision stays where it is at GBP 1.15 billion, again, on a probability-weighted basis, and we'll update as appropriate.

Thank you very much for that. So yes, let's move to the ARS questions, please. Could we start with the first question. Sorry, I can't actually see it on the screen here. Okay. I'm going to read out.

Okay. What would you -- what would cause you to become more positive on Lloyds' shares? One, better NII; two, stronger fees; three, better cost control; four, better asset quality; five, capital return; six, clarity around [ Lloyds finance address ]. Please take part with your handsets.

Can you show the results on the screen? Because I can't see it on here. Okay. Cool. So in terms of responses, we've got 1/3, better NII; 1/3, fees; and 1/3 -- actually, 20%, greater capital return. Okay. Can we move to the second question, please? What are you most concerned about Lloyds? One, weaker earnings; two, weaker capital; three, lower distributions; four, regulatory legal risk; five, [indiscernible] risk, M&A risk.

The one that comes out there, Aman?

So 2/3 of respondents have said political risk.

Political risk?

Political risk.

Okay. Well that goes back to our first question, I guess.

I mean, there's obvious relentless focus on bank taxes this week because it's difficult for the industry to comment, I guess.

It is. I mean, I think the reality of it is that the government's fiscal position is a little bit constrained, as we all know. I think actually, more is being made out of it than it might otherwise be simply because it's not entirely clear whether the government has control of the narrative, if you like, control of the agenda.

Actually, we don't think it necessarily changes much for that narrative to be regained by the government. It would be somewhat surprising if the government relies solely upon tax measures in the context of trying to solve that fiscal situation. And if it doesn't, and if there's just a little bit of light in terms of spending policies, in turn, I suspect they could get hold of the narrative relatively quickly again, and that puts us all into a better place.

I think then, that narrative has been exacerbated by volatility at the long end of the curve, i.e., the 30-year gilt, for example. But let's be clear, a, the government doesn't really rely upon that 30-year gilt price very much, number one; and b, neither do we. So this is more about what's going on in respect of an index, which doesn't actually necessarily make a huge deal of difference to the overall performance of our business, and I suspect the government, too.

So the uncertainty is what it is, Aman, and I just think that there are sometimes headlines attached to it, which portray the underlying reality of the situation. And certainly, when we look at our business, we're not seeing a difference.

Okay. Let's talk about revenue. Your guidance and targets imply strong step-up of revenues from here and into '26. Can you talk to the major drivers of revenue growth from here?

Yes, for sure, and it came up a little bit on your first question.

Yes, exactly.

When we look at the overall revenue expectations of the business, we do expect a strong step-up in terms of revenues on a look-forward basis. We expect it driven -- to be driven by both NII, number one, and other operating income or fee income, if you like, number two.

Where do we see the NII strength from? Two factors, really. One is, of course, volume growth. And volume growth on both the asset and the liability side will lead to improvements, growth that is in net interest income as a function of BAU for sure, but also as a function of the benefits, if you like, of our strategic investment program, which Charlie and I launched in 2022.

The second important point, though, on NII as a kind of mechanics in terms of the balance sheet earnings, which lead to NII growth. And in particular, the three familiar kind of tectonic plates, if you like, remain very much at play this year and indeed next, and indeed beyond that. So the recharging, if you like, the structural hedge as the structural hedge refinances into current rates, it's currently earning 2.2% on GBP 244 billion of deposits. As I think everybody in this room will know, the rate that we're refinancing at is closer to 4%.

Likewise, the mortgage headwind, which in turn is a reflection of the fact that we managed to write some pretty attractive mortgages in the past, has constituted a drag on growth. But that will ebb, that will flow away, and we expect it to be pretty much eliminated by '26.

And then finally, deposits. Deposits have been the subject of migration since the rate cycle started. Likewise, bank base rate changes act as a drag upon deposit revenues. But most of the bank base rate changes and most of the migration is expected to play itself out by the time we get to the back end of '26. And so that combination of, if you like, balance sheet earnings leading to NII growth are -- effectively unwinds within the balance sheet, and therefore, as we see it, highly predictable. And so the NII growth, we feel very comfortable with on a look-forward basis, not just by the way, '25 and '26, but indeed, beyond that.

The second point, OOI. OOI is an important part of the growth story. We can talk about why strategically is important in terms of reducing reliance on net interest income. But we've seen some decent OOI growth in the course of this year. So far, it's up about 9% year-on-year as of H1. And we'd expect that to continue to grow in future periods. Again, BAU driving it, business as usual, driving it for sure. But at the same time also, some of the benefits of the strategic investments that we've been making.

So Aman, in the context of your question, revenue growth is very much a feature of the story. And indeed, going a little further than that, two aspects. One is it goes well beyond '26. And two is, it should lead to very positive operating jaws within the business, which in turn help us deliver the operating leverage that we want to deliver and expect to deliver to meet our financial ambitions.

So one of the revenue drivers you talked to, the structural hedge, you're pointing to increasing confidence in the outlook for the structural hedge as a feature of the results call in Q2. Two-part question. How long do you expect the structural hedge to be a tailwind for? Is the first question. And is there a risk that the benefit gets eroded over time? I think people think about competition, particularly in a highly consolidated U.K. banking center. Is that a potential outcome?

Sure. Yes. Maybe just take each of those parts of the question, Aman. I think, first of all, yes, absolutely, as a short answer. We have strong -- a very high level of confidence in the structural hedge growth as for '25, as for '26, and indeed, as for the years beyond that.

There's a lot of talk about structural hedge, clearly. It's worth just taking a moment to step back and say, what is it. Because it is relatively simple. I mean, effectively, what we're doing is locking in our deposits to essentially fix coupon assets with a weighted average life of about 3.5 years. It's really as simple as that. And why are we doing it is because it's around earnings stability. We want to be able to predict the earnings of this business, and indeed, the capital repatriation off the back of those earnings for several years to come. And that's one of the things that structural hedge allows us to do. It's an important component of why we do the structural hedge.

What it also means, though, is that it takes time for a rate adjustment, a rate rise to play itself through the balance sheet earnings of the business. So at the moment, as I said, we have GBP 244 billion of deposits on the balance sheet earning 2.2%, markedly below where market rates are. And as we refinance those into market rates of more like 3.7%, 3.8%, 3.9% depending on where the market is at any given moment, that produces a significant uplift in earnings that we've talked about.

In 2024, we owned GBP 4.2 billion on the structural hedge. 2025, that will increase by about GBP 1.2 billion. 2026, it will increase by a further GBP 1.5 billion. And you can probably do the math in your head, but that means that in '26, we're earning GBP 6.9 billion on GBP 244 billion of deposits, assuming the deposits remain flat. We hope they don't. We hope they grow, per my earlier comments.

But what it also means is that, that sum produces a yield on the structural hedge which is still below 3%, i.e., still markedly below where market rates are. So if you believe market rates, it should mean that we have a further hedge tailwind into '27, '28 and beyond. Now we haven't given full disclosure on that, but you can obviously figure it out in terms of the overall quantum that we're looking for.

Why are we so confident in this? Essentially, about 85% plus of the '26 hedge earnings are now locked in. And with every day that passes, if you like, more of that is getting locked in. And that's a function of two things, really. First and foremost, just a simple rollover of the hedge. Because of the weighted average life of 3.5 years, we're effectively refinancing, let's say, 1/7th of it every given year. And then we'll also manage it to ensure that we don't have undue concentrations in the context of the hedge profile. So that allows us to say, pretty much done for this year, 85%-plus locked into '26 and progressively locked in in the years thereafter, albeit it gets less though because of that refinancing role that I just mentioned.

Aman, you mentioned competitive pressure, which is a really important part of the equation. Competitive pressure, for sure. Competitive markets, for sure. I mean in a way, at least, we welcome that. There is a sense in which we want to prove ourselves out in the market. And indeed, that's what we hope to do. But it is important not to get too carried away with the extent to which it will actually impact on or dissipate the benefits of the hedge and other factors within the P&L and balance sheet in the business.

When I say that, three or four factors, really. One is all the major banks now have profitability targets out there. So everybody is, if you like, operating to expected profitability parameters, which indeed should make a difference to rational pricing in what remains a relatively concentrated market. Two, some of the, if you like, not new entrants, but some of the people who have more price setters in the market don't necessarily have structural hedges of any size at all. That is to say one of the biggest players in the mortgage market has a structural hedge on, we think, of about GBP 65 billion, GBP 75 billion, somewhere in that zone. That is considerably smaller than us. And what it means is that when bank base rates come down, there is going to be more pressure on that revenue picture. And in turn, that's less ammunition to play with in the context of introducing competition into the market.

So not everybody has a structural hedge, and certainly, not everybody has a structural hedge of the size and composition that we do, any other major incumbents do. Therefore, 1 less competitive pressure in 1 sense to worry about as bank base rates adjust.

Third, different durations. Everybody's got a hedge of different durations. We've probably got one of the longer hedges. It's important not to make too much out of this issue, but it does mean that revenues are entering the P&L at different speeds at different times, and therefore, the competitive implications of that are a bit more complex than one might at first think.

And then finally, look at the whole picture. That is to say, we've seen the effects of competitive markets already on the asset side, for example, mortgage margins about 70 basis points, not bad. We can write a mortgage and about cost of capital off the back of that. But that's an example of a relatively competitive situation in the market already. And so to an extent of these, these forces are coming to bear on the market. It's not a question of waiting for them. So when we look at the overall structural hedge contribution, we expect it to grow. And in short, Aman, we wouldn't expect it all to be eked out through competitive pressures.

That's great. I just want to ask the floor if anyone wants to ask any questions. If you do, feel free to put your hand up. We've got microphones that can be run around the room. If not, then what we'll do is if we can switch to the second set of ARS questions, please, we'll do those now.

Okay. Number three, how do you expect Lloyds' RoTE to develop over the next couple of years? So '27 relative to '25, say? Number one, significantly higher; number two, modestly higher; number three, in line; number four, modestly lower; number five, significantly lower?

I have to say, Aman, I find this a relatively easy one to answer, but I don't want to...

Depends whether the people follow your guidance, basically. Yes. So you'll be pleased to know, almost 70% of the people said, well, actually modestly higher. So I mean, I think the answer is significantly higher.

No, I would -- for sure. I mean, of course, there are always definitions I suppose that one can quibble about. But if it isn't meaningfully higher, I'd be very surprised.

I think you guys should read our research. So if we can go to Question 4. So how do you see the potential risk to Lloyds' capital and dividends? Number one, upside risk on better earnings; two, upside risk on lower capital requirements; three, downside risks on lower earnings; four, downside risks on higher capital requirements; five, downside risk on acquisitions.

Okay. 60% of the people said upside risk on better earnings I don't know if that's an opportunity to talk about distributions. I mean, we can go back to the kind of business drivers in a minute. But yes, I mean, it's part of the upside case that I think I can observe in Lloyds from here from an investment point of view, the combination of strong organic capital generation. You've indicated falling capital requirements. It looks like you are on course to generate pretty significant amount of surplus capital in the coming years. Face value points to potential for pretty significant distributions, which I think are potentially significantly ahead of consensus estimates. I'm just interested in how you see the potential uses of excess capital from here and particularly in the context of Motor Finance because...

Yes. Yes. No, it's a fair question. I mean, first of all, maybe just to deal with that tail end point first. The Motor Finance, again, we're very happy with the probability rate of provision that we put in place, GBP 1.15 billion. Absent a sea change in what we see going forward, that's unlikely to change and is unlikely to change in a material context. So that issue, I think, can be dealt with relatively easily.

When we look at the capital generation going forward, Aman, as you say, we're seeing -- we're expecting 175 basis points , circa 175 basis points in respect of '25. We then grow to an excess of 200 basis points in respect to '26. And that won't be a flash in a pan, that should be a sustainable pattern going forward.

Where is that earnings generation coming from and why do we feel comfortable about it? It is principally coming from the points that I mentioned earlier on. That is to say, it is coming from the earnings strength of the business, driven by the 2 or 3 revenue drivers, combined with decent cost performance, decent cost discipline. That is what gives us the comfort. That is also combined in terms of the levers under our control with strong and continued capital optimization.

And what do I mean by that? What it means is that as we add business onto the balance sheet, That, in turn, is done in a capital-efficient way. So the two levers are under our control are strengthen the P&L contribution, but also done in a capital efficient way. Capital optimization has been a big part of our story.

It comes in the context of what we think is a more stable regulatory regime, per the discussion that we had in respect to the first question, Aman. So again, the regulatory picture from a prudential point of view, the regulatory picture from a conduct point of view, we see that as much more stable and reliable and predictable going forward. And so that capital, if you like, gets brought to the bottom line, it becomes distributable as opposed to being blocked by regulatory actions in between.

When we look at the overall picture, the capital generation is also augmented for the next 2 years at least by us bringing the CET1 down to 13%, which is our group target. We'll get to a kind of halfway house in that respect as of the end of '25, and then we'll get to 13% by the end of '26. But that's the picture, which then supplements the kind of organic earnings generation for at least the next couple of years.

Added to that, when we look forward, to answer your question, Aman, what do we do with that money? I guess three or four points that I would make. First of all, we want to make sure that we invest properly in the business. And that investment is both an operational investment, i.e., enhancing the capabilities of the business as well as building asset base of the business and the TNAV build that we expect to go with that. But of course, our 175 and our greater than 200 basis points is after those have been financed. So this is really free cash flow that we're talking about.

What do we do with that? First of all, progressive and sustainable dividend is a really important part of our story. We've upped the dividend by 15% in '23 and '24 so far this year. You'll be aware that our payout ratio remains really quite low and lower than we would expect it to be on a kind of equilibrium basis. And therefore, there's a lot of healthy space, if you like, for continued decent growth in the dividend.

Alongside of that, the buyback, the buyback is really important. GBP 1.7 billion over the course of this year. That was partly driven by the motor provision that we took. But in the context of the valuation as we see it, we think there is a lot of value to go after, number one, our investors value and like the buyback, number two. And so with that combination, we remain very committed to the buyback.

Final point, much talked about, M&A. As you know, it's probably been a lesser feature of our overall dialogue. Having said that, we're not close minded. I mean if stuff comes along, then if it delivers a strategic objective in a way that is faster, that is an acceptable risk and most importantly, offers greater value than its organic alternative, we'll take a look at it, for sure. But having said that, ideas that kind of meet that threshold that tick all three of those boxes, we would expect it to be pretty few and far between.

Yes.

Yes. And can you just talk about the press release today [indiscernible] maybe just generally fintech. I mean, GBP 120 million is not material, but it's GBP 120 million that I don't get. So maybe it's just like -- I doubt that's going to be ROE accretive. So maybe it's something you were missing, or if you could just talk about that.

Yes, absolutely. Maybe I shouldn't be surprised that question came up in some respects. First of all, I shouldn't really comment on situations that are just speculated on the press. So I'm not going to comment on the direct issue.

But I would say that one of the things that we want to do in the context of M&A is to enhance our capabilities. What does that mean? You've seen us do it in one or two other places. So we bought Embark a couple of years ago or so. Embark is essentially a platform for helping us deliver our investment strategy to our customer base. Two, a second example of that is in respect of the Tusker business in autos, where we effectively bought a salary sacrifice scheme that has been enormously successful in terms of building not just the extent, but also the profitability of our overall transportation business. So where we see a capability out there that again matches or rather ticks the speed, risk, value boxes, then we are interested in going after it.

Because of our scale, we are able to acquire a capability and plug it into circa 28 million customers and off the back of that, get really strong leverage and strong financial performance off the back of it. But again, it has to tick each of those three boxes. And only when it does that and only when we satisfied ourselves, if you like, that all three are clearly ticked, will we go forward with anything. But that's the type of thing that -- or rather, it's the type of way in which we assess these opportunities. And again, we won't shy away from it, but we will ask it to meet some pretty high hurdles.

So I wanted to actually return to kind of key business drivers. Mortgages is obviously a big part of -- important business line for you. It also feels like quite an important moment for the business because I think you're on course to end or exit a multiyear headwind, this kind of asset churn that's weighed on margin for a number of years, which has also coincided with Lloyds ceding quite a lot of market share over the last 10 years. Interested, what do you think this means as you -- this kind of ending of this mortgage headwind? And is it right to think about Lloyds potentially regaining market share from here?

Yes. Yes. It's a good question. Maybe I'll just kick off briefly with the share point. I'll come back to it again subsequently. But on the share point, it's just important to bear in mind that the adjustment, if you like, between share was really a function of the kind of 2010 to, let's say, 2022, when Charlie and I reinstated the strategy. So the share in the last quarter, the last half has been just over 19%. That's pretty much the share that we'd expect to aim for. The giving up of share, the ceding of share was really a function of the kind of era before that, if you like, say, 2010 to 2022, for the sake of argument. But I'll come back to that in a second.

First of all, the headwind, in many respects, at least, is a sign of volume strength at attractive prices in previous periods. That is to say we went out there, particularly during the early parts of the COVID era when we saw margins really being quite wide, we saw other providers struggling to meet demand in the market, and we thought, what a great opportunity. So although the headwind has constituted a drag on growth for sure, it is not a drag on growth that has been unwelcome, because as I said, it's a sign of strength of the franchise, and those are good earnings that are valuable.

So that's the genesis of the headwind. And as I say, it needs to be put in that context. But of course, to your point, Aman, it has constituted a drag on growth in the period since then. And it is a drag that basically works its way through during the course of 2026. Second half of 2026, we expect the front book and the back book margins to be basically the same. What does that mean? It means that the book right now is yielding about 90 basis points. We're writing business at about 70 basis points. It's that, that gets ironed out over the course of the next 12 months or so.

I mentioned share performance earlier on. So just a shade over 19% in the course of the last quarter or two. That is roughly in line with where we'd expect things to be. We might nudge it up a bit. It might in any given period go down a bit off the back of the value volume trade-offs. But a word or two on kind of how we manage that overall performance in the context of a competitive market.

First of all, segments. We're very focused on building into certain attractive risk/reward segments. First-time buyers historically has been an example of that. It's not the only one, but it's an example. Second, direct. We have been trying to make sure that we sell, for want of a better word, far more mortgages direct to our customers as opposed to going through the intermediary channel.

Kind of -- well, one statistic and one example of that. Our Mass Affluent account, which has been one of our recent launches, provides a discount on a Lloyds branded mortgage, an example of how we [ identify ] direct sales. For key evidence that it's succeeding, we've got, of our mortgage sales, about 24% coming direct. The market average for that same channel, if you like, is more at 14%. So we think we're making a meaningful difference in the context of our direct sales, and the reason we're doing it, of course, is because it is a more profitable way to deliver a mortgage product.

And then the third point on mortgage [indiscernible], again, managing volume/value tradeoff is around ancillary focus. So what I mean by that is we have focused on -- we have tried to deliver a complete customer relationship in the context of a mortgage sale. The best evidence of that is the protection product where we are now, again, forgive the term, but selling protection products, i.e., long-term life insurance in the context of about 20% of our mortgage sales. That is at x4 what it was just a couple of years ago.

So a meaningful ramp-up, if you like, in the combined customer relationship approach that we have in the context of a mortgage sale. And these three things, whether it is direct focus, whether it's ancillary focus, whether it's segment focus, are what help us manage the risk/reward relationship in a relatively competitive market and deliver share that we'd aspire to as a group.

Great. Okay. If we can do the final two ARS questions, please. Okay. How -- I think we've addressed this. So how would you view significant acquisitions for the group? One, very positive given the potentially high return on investment; two, marginally positive; three, marginally negative; four, very negative; five, prefer the capital to be returned to shareholders.

This is almost like a [ straw part ] on the strength of the answer that I gave to the question.

Yes, we should have done it the other way around. Okay. 50% of people would like the capital back; 26% of people, marginally positive.

I think we can go to Question 6, please. Interesting. How concerned is the room by the risk of U.K. bank taxes? One, highly concerned given earnings risk; two, modestly concerned; three, not concerned at all.

Okay. That is actually quite a broad spread. So half the room are moderately concerned; 1/4 of the room, very concerned, and of course, 1/4 are not concerned at all, so I don't really know what to do with that.

We've probably got enough time for anyone to ask a question if you want. This to be the last time I kind of offer up to the room, but please feel free to -- yes, we've got a question there.

Yes. So we saw the IPPR report come out a week or two ago. And it seems like there are probably some [ additions ] with their proposal, but do you have any concerns that we might see some sort of tiering or something similar to what we saw with ECB with remuneration of reserves? That could have a bigger impact on -- fills a bigger hole for the government?

Sure. Yes, it's a fair question. I mean, first of all, in the context of taxes as a whole and the speculation around that. As I said earlier on, the government's fiscal position is more tricky now than it was, let's say, 12 months ago. And so naturally enough, you see some speculation off the back of that.

To be clear, we have not been privy to or had to respond to anything more direct than that. That is to say, there's nothing in our dialogues that would suggest that bank taxes are on their way, in any sense. So speculation is just that, if you like, speculation.

It is also to be put in the context, I think, of the government sponsorship of financial services as a growth sector. I mean, if you look at the Leeds reforms, which is something I referred to a second ago, the promotion of the U.K. as a financial services sector is a very big part of that. That is not totally consistent, if you like, with increasing the overall tax burden on the sector, particularly not in the context of the sector already being one of the more heavily taxed financial centers in the world. So one needs to just kind of think about the consistency of some of these messages and speculation with the determination of the government. But let's see.

The reserves remuneration point is interesting, as you say. We've seen evidence of it in Switzerland. We've seen evidence of it in the EU. And so there's kind of examples out there. But having said that, a couple of points. One is there has been a pretty clear steer from the Chancellor and indeed, the Governor of the Bank of England. The reserve remuneration is not part of their plans. Indeed, I'd say it more strongly than that, particularly in the context of the monetary authorities, i.e., the Bank of England, they pretty clearly pushed back on reserve remuneration as a potential tool, if you like, to manage the bank and sector with and kind of kicked it over to the politicians.

Our expectation would be that if there is a reserve remuneration put into place, then there would be, obviously, if you like, bank asset allocation effects off the back of that, which would do a couple of things. I mean, one is it would lead to a little bit of disruption in terms of the transmission mechanism of monetary policy, possibly the pricing of various forms of liquid assets. While it might not be possible to get that out of the system as a whole, nonetheless, that reallocation would be disruptive. And right now, it's hard to see how the government, particularly the Bank of England, would necessarily want to see more disruption in the monetary market than it's already got. So let's see.

The second point is, in the context of declining base rates, the actual fiscal gain from that type of initiative is only going to decrease. And that, in turn, makes you wonder about the wisdom of the policy and therefore, whether or not it would be adopted by the politicians. I think this is -- that's probably where we have to stop in the sense that we don't know where the politicians go, clearly, and it's always open speculation. But the wisdom of the policy in the context of, if you like, money markets, the wisdom of the policy in terms of remedying the fiscal position is certainly open to question. So we'll see.

Okay. Excellent. I think we're just about out of time. So I thank everyone in the room. Thank you, William, for your time. Really appreciate it. We'll bring the session to close. Thank you.

RECONNECT

Thank you for standing by, and welcome to the Lloyds Banking Group 2025 Half Year Results Call. [Operator Instructions] There will be presentations from Charlie Nunn and William Chalmers followed by a question-and-answer session [Operator Instructions] Please note this call is scheduled for 90 minutes and is being recorded. I will now hand over to Charlie Nunn, please go ahead.

Thank you, operator, and good morning, everyone, and thank you for joining our 2025 half year results presentation. I'll start today with an overview of our financial and strategic performance, where we've continued to make strong progress having moved into the second day of our transformation at the beginning of the year. I'll then hand over to William, who will run through the financials in detail before we take your questions. Let me begin on Slide 3.

I'd like to start by highlighting the following key messages. Firstly, we're continuing to deliver strong outcomes for all stakeholders. Our strategy is providing our customers with leading propositions and supporting the real economy, creating attractive growth opportunities and improved operating leverage across the group. We're on track to meet our 2026 targeted strategic outcomes.

Secondly, we continue to demonstrate broad-based and sustained strength in financial funds. This has enabled continued improvement in shareholder distributions with the ordinary dividend up 15% at the interim stage. And finally, we remain confident of delivering higher, more sustainable returns. We are reaffirming our guidance for 2025 and remain confident in our 2026 commitments.

On Slide 4, I'll provide a few examples of how we're successfully delivering for all our stakeholder. We continue to build a highly differentiated franchise. Our purpose is embedded throughout our business and is driving sustainable and profitable growth. For example, we continue to take a leading role and support critically important housing sector, lending more than GBP 8 billion to first-time buyers, and supporting over GBP 1 billion of funding to the social housing sector in the first half.

At the same time, we're delivering growth through our strategic initiatives in a number of areas. This includes significantly increasing our penetration of protection products for mortgage customers and gaining share in sterling interest rate swaps. This business momentum is underpinning our sustained strength and financial performance. We delivered growth across both sides of the balance sheet and a 6% increase in net income, including ongoing OOI strength, up 9% in the first half.

This supports a return on tangible equity of 14.1% for the half and 86 basis points of capital generation. Our highly capital-generative business model is a key enabler to increasing shareholder distributions. Before covering our strategic progress in the first half in more detail, I'll briefly highlight on Slide 5, where we believe the external environment provides a supportive backdrop to our plans over the coming years. Our current forecast for the U.K. remains one of a resilient but slower growth economy. William will provide more detail on our latest estimates shortly.

The economic environment and uncertainty remains difficult for some of our customers. However, the underlying fundamentals continue to strengthen. And alongside new policy measures, we see the opportunity for the economy to move to a higher growth trajectory that is forecast today over the medium term. To elaborate on this, I'd highlight the following key points. Third, the underlying health of the economy remains robust. Households and businesses finances have further strengthened in the first half and business confidence remains above the long-term average. There is scope for increased activity as confidence further improves and rates fall.

Secondly, the government has placed a clear focus on growth. The recently launched industrial strategy will provide significant investment into faster growing and high potential sectors, and we welcome the ambition of the announced financial services reforms. We are well positioned to be an important partner to both sets of plans. And finally, despite significant geopolitical uncertainty in recent months. The U.K. is well placed to navigate any headwinds relative to other economies and remains an attractive destination for foreign direct investment.

Taken together, we are constructive on the outlook for the U.K. economy with our strategy focused on faster-growing areas, such as housing, transition finance, infrastructure and pensions. As such, we see the potential for the group to continue to grow faster than the wider economy over the coming years. Let me now cover some examples of the growth we are driving through our strategic initiatives on Slide 6.

In February, we provided more details on how we're accelerating our transformation in the second phase over 2025 and '26, we've delivered strong progress in the first half of the year and are on track to achieve our '26 targeted strategic outcomes. We're delivering on our growth priorities with meaningful contributions from all divisions and increasing synergies between them. In Retail we're winning market share in lending, deepening relationships and growing high-value areas, such as through our new Lloyd's Premier offering following a successful launch in May.

In Commercial Banking, we are digitizing and driving OOI accretive diversification, gaining share in priority areas. And in IPNI, we are transforming engagement and increasing group connectivity, we now have more than 0.5 million users of our Scottish Widows app and are expanding our product set for retail customers, improving our bancassurance model. We continue to expect to deliver more than GBP 1.5 billion of additional revenues from strategic initiatives by 2026, with over GBP 1 billion delivered to date on an realized basis.

Now turning to cost and efficiency on Slide 7. Alongside growing revenues, our commitment to efficiency is paramount to driving sustained operating leverage. We continue to focus on increasing productivity as our customers shift to mobile first as well as decreasing costs associated with our reducing legacy technology estate. Having surpassed our original target in the first phase, we realized another GBP 300 million of gross cost savings in the first half, taking the total to circa GBP 1.5 billion since 2021.

At the same time, we're continuing to improve capital efficiency through growth in fee-generating cap-light areas and further scaling of SRTs and new origination capabilities. This supported more than GBP 2 billion of additional RWA optimization in the first half, taking the total to circa GBP 20 billion since 2021. I -- our continued strong progress in these areas underpins our confidence in delivering a cost-to-income ratio of below 50% and more than 200 basis points of capital generation in 2026.

Moving on to our enablers on Slide 8. Our track record of digital, AI and data investment is unlocking a competitive advantage with leadership in this area being critical to long-term success. Significantly rationalizing and modernizing our state in the first phase of our plan has created the capacity to increasingly shift our focus to driving revenue growth and further efficiency savings across 3 areas.

Firstly, we're delivering leading experiences to our nearly 21 million mobile app users to drive increased engagement and build deeper relationships. Secondly, we're broadening our addressable revenue base by growing beyond financial services, such as through home and travel ecosystems and our market intelligence data propositions. And thirdly, we're digitizing front to back through improved journeys and increased automation, reducing unit costs and the cost of change. Looking ahead, our multiyear investment in leading engineering talent is helping us to increase adoption of our new technologies that will drive the next stage of our transformation.

To this end, we're building upon our existing AI leadership position with more than 800 AI models live today by developing and scaling a significant number of exciting generative and agentic AI use cases across the group. For example, over 10,000 frontline colleagues are currently using our Gen AI knowledge management tool, to help them support customers better and more effectively. We will share more details on these and our broader technology and data strategy in an investor seminar later this year.

Let me now close on Slide 9. We continue to successfully execute against our strategy and are on track to deliver our 2026 talented outcomes. This reinforces our confidence in meeting our 2026 financial commitments with significant operating leverage supporting a return on tangible equity of greater than 15% and greater than 200 basis points of capital generation. Thank you for listening. I'll now hand over to William to talk you through the financials in more detail.

Thank you, Charlie. Good morning, everyone, and thanks again for joining. As usual, let me start with an overview of the financials on Slide 11. Lloyds Banking Group demonstrated sustained strength in financial performance during the first 6 months of the year. Statutory profit after tax in the first half was GBP 2.5 billion with a return on tangible equity of 14.1%. Net income of GBP 8.9 billion was 6% higher than the prior year. .

This was driven by continued momentum in net interest income alongside 9% year-on-year growth in other operating income. We remain committed to efficiency. H1 operating costs of GBP 4.9 billion were up 4% year-on-year, in line with our expectations for this stage. Asset quality meanwhile remains robust, H1 impairment charge of GBP 442 million equates to an asset quality ratio of 19 basis points. Our performance resulted in strong capital generation of 86 basis points in the first half.

This supports our 15% increase in the interim dividend alongside our closing pro forma CET1 ratio of 13.8%.

I'll now turn to Slide 12 to look at developments in our customer franchise. Our customer balances showed good growth in the first 6 months across both the lending and the deposit franchise. Focusing on Q2, Group lending balances of GBP 471 million were up GBP 4.8 billion or 1% versus Q1. We saw broad-based growth across all of our lending activities. Within retail, loans and advances were up GBP 3.1 billion. Mortgage book is up GBP 0.8 billion since March, reflecting accelerated growth in the first quarter, driven by stamp duty changes. In this context, it's good to see volumes picking up again June.

But we're in retail business, we saw continued and broad-based growth across each of our cards, loans and motor businesses as well as European retail. Commercial lending balances were also up in Q2 by GBP 0.9 billion. Within this, we saw growth in CIB, particularly infrastructure and SPG lending. In BCB payments were driven by government-backed lending balances. Excluding these, it's good to see the private lending business growing in the first 6 months, including in Q2.

Turning to liability franchise. Again, we saw a good performance in deposits, up GBP 6.2 billion or 1% in Q2, now standing at GBP 494 billion. Retail increased by GBP 1 billion. Notably, savings accounts were up GBP 2.9 billion, following significant inflows to ISA products in what was a very strong season, offset by current accounts down GBP 1.9 billion, largely reflecting the same flows. Post tax and ISA driven migration is, of course, slowing Commercial deposits were up in Q2 by GBP 5.3 billion. This was driven by growth in targeted sectors across both CIB and BCB.

Alongside deposit developments in banking, we continue to see steady AUM growth in insurance, pensions and investments. with circa GBP 2 billion of net new money in Q2.

Turning to interest income on Slide 13. Net interest income grew 5% first half to GBP 6.7 billion. This included GBP 3.4 billion in Q2, growth of 2% versus the prior quarter. Income growth continues to be supported by positive momentum in the net interest margin, with the Q2 margin of 3 or 4 basis points, up slightly on Q1. The mortgage refinancing and deposit churn headwinds continue to be more than offset by a growing structural hedge contribution. NII was further supported by AIEAs of GBP 460 billion in Q2, up GBP 4.5 billion versus Q1.

The increase was driven by the impact of strong mortgage growth towards the end of the first quarter. The Q2 nonbanking NII charge was GBP 124 million, slightly up quarter-on-quarter, in line with our expectations for an upward trajectory across the year. As usual, this is driven by business growth in ROI and associated funding repricing. Looking ahead, we continue to expect net interest income for 2025 to be circa GBP 13.5 billion. H2 growth will be driven by gradual margin improvements in the IEA growth from franchise expansion.

Let's turn to the mortgage portfolio on Slide 14. The mortgage book now stands at GBP 318 million. This is up GBP 5.6 billion in H1, 0.8 billion in Q2. increase mortgage balances are a result of healthy underlying market demand as well as our strategic initiatives in this area, helping to support a 19% market share of net new lending in the first half. In Q2, completion margins averaged around 70 basis points, slightly tighter than the prior quarter.

Maturities in the book meanwhile remained higher at just over 90 basis points. Based on current applications, we expect the market to remain competitive and completion margins to be at or around Q2 levels in the second half. Needless to say, this will depend on short rate volatility, competitive dynamics and no doubt, product margins elsewhere.

As Charlie mentioned, we continue to enhance our depth of customer relationships in mortgages, including across business areas. 20% of new mortgage customers now take up protection insurance, an increase of 7 percentage points versus last year. We also recently launched a new digital remortgage journey, delivering increased share of direct-to-bank applications, up 4 percentage points to 25% in H1. Together, these initiatives help offset margin pressure.

Now looking at the other lending books on Slide 15. Consumer lending balances are performing well. Within both cards and loans, our strategic investment in tools such as your credit score used by 4.8 million customers in the last 3 months alone, is enabling us to drive growth by leveraging data to enhance decision-making and personalization. Accompanied by an improved risk scorecard, this is supporting growth in our personal loans business, with balances up GBP 0.8 billion since year-end.

Alongside, card balances were up GBP 0.7 billion in motor finance lending about the same. In the commercial book, lending balances increased by GBP 1.2 billion in the first half. This was driven by growth of GBP 1.8 billion in the CIB business, particularly institutional balances alongside securitized products. In BCB, balances were down GBP 0.6 billion, but as I said earlier, up GBP 0.2 billion when adding back government lending repayments.

Delivery of the initiatives highlighted in Charlie's section earlier, such as mobile onboarding SME clients is clearly having an impact here. Moving on to deposits on Slide 16. I -- our deposit franchise grew strongly in the first half of the year. Total deposits are up by GBP 11.2 billion or 2% to GBP 494 million. Within this, retail deposits increased by GBP 0.7 billion. Continued growth in savings balances more than offset current account reductions. Retail savings were up GBP 4.9 billion, supported by net new money inflows and strong retention activity. This included a strong performance throughout what was a busy ISA season, up 30% on last year. Notably, our existing and new ISA customers are valuable to us with average product holdings of almost 2x the group average.

Current account balances meanwhile fell slightly in the first half by GBP 0.7 billion. Flows were driven by switches to savings, including ISAs, whilst wage growth and spend remains broadly stable. Pleasingly, commercial deposits increased by in H1 by GBP 7.6 billion, driven by growth in targeted across both BCB and CIB. As you're aware, our deposit franchise supports the structural hedge, which I'll now update on.

Our structural hedge continues to provide a significant and growing tailwind to income. The hedge notional currently stands at GBP 244 billion, up GBP 2 billion in Q2. This follows strong deposit performance in the first half. In H1, we saw gross hedge income of GBP 2.6 billion, around GBP 0.7 billion higher than last year. The average earnings rate on the hedge was circa 2.2% in Q2. The reinvestment rate for maturities meanwhile, continues to be significantly higher than this or around 3.5 years, the weighted average life of the hedge provides strong support for income going forward.

Looking ahead, we continue to expect 2025 hedge income to be around GBP 1.2 billion higher versus GBP 224 million. We also continue to expect 2026 hedge income to be around GBP 1.5 billion higher from 2025. Moving on to other income, Slide 18. I -- we continue to build momentum in other income across the franchise. Other income of GBP 3 million in the first half was up 9% on H1 last year.

This included GBP 1.5 billion in the second quarter, also 9% higher year-on-year. Pleasingly, this growth is driven by broad-based momentum across the business and to our strategic initiatives as well as BAU growth. Within retail, 11% growth versus the prior year was supported by higher income from personal current accounts and continued strength in our motor leasing business. In commercial, year-on-year strength in transaction banking income was offset by lower loan markets activity.

Having said that, more recently, we've seen a healthy rebound in client activity levels. Insurance Pensions & Investments delivered a strong performance in the first half, up 6% year-on-year. General Insurance did particularly well with income net of claims up 35%. We Member contributions in workplace pensions meanwhile, also saw good momentum. In equity investments, Lloyds Banking is developing well, with income up 19% year-on-year. alongside LDC growth.

Looking forward, we continue to expect strategic investment and BAU activity to drive ongoing growth in other income. Turning to operating lease depreciation. The first half charge of GBP 710 million included GBP 355 million in Q2, flat in Q1. This is a good result in the context of further adverse movements in used car prices, particularly electric vehicles over the second quarter. As mentioned at Q1, we implemented a number of significant strategic actions, which have improved business performance and helped offset the impact of both asset growth and car price movements.

These include enhanced used car leasing, remarketing agreements and risk sharing with OEMs. Together, we should meaningfully reduce volatility in operating lease depreciation going forward.

Moving to costs on Slide 19, the group continues to maintain strong cost discipline. H1 operating costs were GBP 4.9 billion, up 4% on the prior year or 2% excluding the previously disclosed front-loaded severance charges in Q1. Second quarter costs of GBP 2.3 billion are down quarter on quarter 1, partly helped by investment timing, including lower severance charges. Overall, operating costs are tracking in line with full year expectations, with business growth and inflationary impacts, including National Insurance, partially mitigated by savings driven by our strategic investment.

Continued pace of these investment-driven savings, including reduced cost of change, as Charlie highlighted, alongside in growth, gives us confidence in operational leverage and our medium-term cost-to-income ambitions. Looking ahead, we continue to expect operating costs of circa GBP 9.7 billion for the full year. Remediation remains low at GBP 37 million in the quarter. There was no further charge for motor finance.

Let me move to asset quality on Slide 20. Asset quality remains robust. Credit quality was stable in the period with either stable or improving new to arrears across our portfolios. Similarly, early warning indicators remained low and stable. For example, minimum repayment levels in cards remain modest as due our CF utilization levels in commercial. First half impairment charge was GBP 442 million, equating to an asset quality ratio of 19 basis points. Indeed, the second quarter continued the benign trends of the first for the pre- MES asset quality ratio of 15 basis points.

In Q2, there was an [indiscernible] release of GBP 44 million. This consisted of the removal and integration of the Q1 GBP 100 million charge to cover tariff risks into our base case assumptions. Alongside, we saw a benefit from improvements to the HPI outlook in retail. Together, the observed performance and MES outcome resulted in a low Q2 impairment charge of GBP 133 million, or an asset quarter ratio of 11 basis points.

Our stock of ECLs and the balance sheet is now GBP 3.5 billion, remaining circa GBP 400 million above our base case. We are very confident in the balance sheet given our prime customer base and a prudent approach to risk. We continue to expect the asset quality ratio to be circa 25 basis points for the full year.

Let me briefly update on our latest economic assumptions. We have made minor changes to our macroeconomic forecast since Q1. We now expect 1% growth in GDP in 2025 and a similar level in 2026, slightly lower than previously forecasted. We now expect unemployment to rise a little further, peaking at 5% in 2026. Given this context, we now assume 2 further rate cuts in 2025 and one in 26 to a terminal rate of 3.5%. Our assumptions for house prices meanwhile have improved, largely reflecting FCA affordability interest.

Let me now address returns in TNAV on Slide 22. The return on tangible equity of 14.1% in the first half is a strong performance, turning 15.5% in Q2. Within the H1 performance, the volatility and other items charge of GBP 48 million was driven by negative insurance volatility and the usual fair value unwind partly offset by gains on the sale of our bulk annuities business, which completed in the second quarter.

Tangible net assets per share at 54.5p are up 2.1p since year-end. The increase was driven by profit build and the unwind of the cash flow hedge reserve offset by shareholder distributions, including the full year ordinary dividend payment in April. As usual at this time, TNAV is also temporarily suppressed by an accrual for the share buyback over the H1 close period with no corresponding share count reduction. This is worth 1p per share and will mechanically reverse in Q3.

Looking ahead, we continue to expect further material TNAV per share growth this year and indeed over the medium term. Alongside, we continue to expect the return on tangible equity for 2025 and to be around 13.5%.

Turning now to capital generation on Slide 23. Capital generation was strong in the first half of the year, including in the second quarter. Within this, total RWAs ended the first half at GBP 231 million. up GBP 6.8 billion in H1 and up GBP 1.3 billion in Q2. The increase was driven by lending growth, partly offset by optimization activities and credit calibrations. Q2 also saw a partial reversal of the GBP 2.5 billion temporary RWAs that we mentioned in Q1.

The remaining balance of around GBP 1.2 billion will reverse in the third quarter. Just to note that no new additions for CRD-IV secured risk ratings were taken in the first half. We will revisit the position later this year. Given the healthy banking profitability and the interim insurance dividend, capital generation of 86 basis points in the first half was, as said, a strong result.

Looking ahead, we continue to expect full year 2025 capital generation to be circa 175 basis points. Capital ratios are strong. closing pro forma CET1 ratio after 50 basis points of ordinary dividend accrual was 13.8%. I'll now move on to capital distributions on Slide 24. The group's strong capital generation continues to support sustained growth in shareholder distributions.

Today, the Board announces an increased interim dividend of 1.22p per share, 15% growth on last year. As usual, we will consider further capital distributions at the year-end. Dividends per share have grown consistently over our strategic plan, now ARPU with 80% versus 2021. Alongside this, we have undertaken consecutive and significant share buyback programs. These have reduced the group share count by circa 16% since the end of 2021, supporting growth in value for our shareholders.

By executing on our strategy for the benefit of all stakeholders, we expect the profit distribution to continue returning material excess capital to our shareholders. Therefore, we remain committed to paying down to a circa 13% CET1 ratio in 2026, with the end of 2025 being a staging posted towards that target.

Let me now wrap up the financials on Slide 25. To summarize, group is showing sustained strength and delivering in line with expectations. In the first 6 months of the year, we saw continued growth in net income, cost discipline and robust asset quality, driving strong capital generation and increased interim dividend. Looking forward and based on this sustained strength, we feel very comfortable with our 25% guidance and remain confident in our 2026 commitment, both as you can see, are set out in full on the slide.

Finally, and as you may have seen in the RNS, building on our transformation and consistent with our ambition to move at pace into next year, we intend to move to preliminary reporting this year-end. Accordingly, we'll announce our full year 2025 results on 29th of January 2026, with our full annual report and accounts following on the 18th of February. That concludes my comments for this morning. Thank you for listening. Let me now hand back to Charlie for closing remarks.