Operator: Thank you for standing by, and welcome to the Lloyds Banking Group 2026 Q3 Interim Management Statement Call. At this time, all participants are in a listen-only mode. There will be a presentation from William Chalmers, followed by a question and answer session. If you wish to ask a question, please press star one on your phone. Please note, this call is scheduled for one hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.
William Chalmers: Thank you, operator, and good morning, everyone. Thank you for joining our Q3 results call. As usual, I will run through the group's financial performance before we then open the line for Q&A. Let me start with an overview on slide two. In the third quarter, the group again delivered sustained strength in financial performance. We demonstrated continued income growth, improving operating leverage, and strong and stable credit quality. We are on track to meet our 2026 guidance. The group is continuing its strategic delivery, focusing on supporting UK households and businesses while laying firm foundations for Accelerate 2030.
William Chalmers: The business is performing well, and we are excited to execute on the opportunity ahead. Let me now talk to our financials on slide three. As said, Lloyds Banking Group again demonstrated sustained strength in financial performance during the first nine months of the year. Statutory profit after tax was GBP 4.8 billion.
William Chalmers: Within this, we delivered net income of GBP 14.8 billion, up 9% on the previous year, driven by broad-based growth across our businesses. Q3 net income was 2% higher than Q2. We remain disciplined on costs. Year-to-date operating costs of GBP 7.2 billion were up 1% year-on-year, supporting a cost-income ratio for the first nine months of 49.3%. Cost-income ratio for the third quarter was 47.2%. Credit performance remains strong and stable.
William Chalmers: The year-to-date impairment charge of GBP 930 million equates to an asset quality ratio of 25 basis points. Together, this delivered underlying profit of GBP 6.6 billion for the first nine months, GBP 2.4 billion in Q3. Our performance year to date has resulted in a return on tangible equity of 17.9%, strong capital generation of 153 basis points, and a CET1 ratio of 13.3%. Let me now turn to slide 4 to look at developments in our customer franchise.
William Chalmers: We have seen solid growth across both the lending and deposit franchises so far this year. Focusing on the third quarter, group lending balances of GBP 495.5 billion were up GBP 4 billion, or GBP 5 billion, excluding movements in hedge accounting. We saw growth across all business lines. Within retail, mortgages increased GBP 0.3 billion in Q3. We realized slightly higher mortgage completion margins quarter on quarter at circa 75 basis points, although this remains below maturity margins. The market remains highly competitive. Elsewhere in retail lending, we saw continued growth in each of our cards, loans, and motor businesses, as well as European retail, again in competitive markets. Commercial lending balances, meanwhile, were up again in the quarter by GBP 3.3 billion or 3%. As has been the case throughout the year, this reflects strong, broad-based growth in CIB across sectors.
William Chalmers: BCB also continued to grow, with balances increasing GBP 0.2 billion after the impact of government-backed lending repayments. As we look forward across the lending businesses, we believe higher rates, if sustained, may start to slow asset growth. As always, our strategy will be to balance volume and returns. Turning to liability franchise, we saw a solid performance in deposits, up GBP 1.9 billion in the quarter. Total retail deposits were broadly stable, with growth of GBP 0.2 billion in UK deposits and a decline of GBP 0.5 billion in Europe. We were pleased to see PCA growth of GBP 0.6 billion in the quarter, again, increasing our market share of balances in this core product and helping deepen customer relationships. This more than offset a small decline in UK savings of GBP 0.3 billion.
William Chalmers: Commercial deposits increased by GBP 2.1 billion, reflecting growth in targeted sectors across both CIB and BCB and continuing recent strength in this area. As called out throughout the year, we have again seen a competitive quarter in the deposit market. For now, these conditions look set to persist, and we continue to manage for both franchise enhancement and sustainable value. Let me now turn to net interest income on slide five. Net interest income continues to grow robustly. Year-to-date NII was up 10% year-on-year to GBP 11.1 billion. This included 3% growth in Q3, helped a little by day count. Income growth continues to be supported by positive but slowing momentum in the net interest margin at 325 basis points in Q3, up three basis points on the second quarter.
William Chalmers: Driving this in Q3, the growing structural hedge contribution continued to more than offset mortgage refinancing and deposit churn headwinds. Structural hedge earnings were GBP 1.9 billion with an average yield of 3%, still well below current market refinancing rates. Within this, the notional of GBP 246 billion and the weighted average life of around 3.75 years was stable in the quarter. We continue to expect hedge income to grow to greater than GBP 7 billion in 2026 and greater than GBP 8 billion in 2027, based on our economic assumptions.
William Chalmers: NII strength was also supported by the growth in our franchise, with average interest-earning assets of GBP 481 billion in Q3, up over GBP 3 billion on Q2. Based on these developments, we are on track to meet our 2026 NII guidance of greater than GBP 14.9 billion. In the current competitive market conditions, we expect to deliver modestly above GBP 14.9 billion.
William Chalmers: Looking further forward, these same conditions will likely impact 2027 NII growth, partly offsetting benefits from higher volumes and hedge income. While still healthy, the pace of NII growth in 2027 is likely to be lower than in 2026. Let me now turn to other income on slide six. We continue to deliver strong momentum in other income across our franchise. Year-to-date, other income was GBP 5.0 billion, up 10% from the prior year. Q3 OI is up 8% year-on-year at GBP 1.7 billion. Within this, Q3 was very slightly lower than Q2. This reflects continued strength in transport, current accounts, and Lloyds Living. These factors were offset by increased subsidence claims within general insurance, lower markets income within Commercial Banking, and the non-repeat of certain second quarter gains as reflected in July.
William Chalmers: Excluding weather claims, Q3 underlying OI growth was over 10% year-on-year, continuing the strong performance that we have seen in recent periods. Income diversification remains a strategic focus and indeed our base case expectation. We continue to see good progress in our strategic initiatives as laid out on the slide. These include strong momentum within Tusker, as well as the successful launch of new propositions, for example, Lloyds Accept within BCB. Such developments and upcoming plans will maintain our forward momentum. Briefly turning to operating lease depreciation. The Q3 charge of GBP 420 million has decreased from Q2, largely due to the non-repeat of the revaluation charge for used car price adversity that we recognized at the H1. This is partly offset by the quarterly run rate, which is increasing in line with fleet growth. Moving to costs on slide seven. Cost discipline continues to be an imperative.
William Chalmers: Operating costs for the first nine months were GBP 7.2 billion, up 1% year-on-year. Our robust performance reflects business cost growth, inflationary pressures, and costs related to Lloyds Wealth, largely offset by continued cost savings and lower investment at this stage of our current strategic cycle. Q3 costs of GBP 2.4 billion were down 1% versus Q2. As we look forward, Q4 will see higher costs due to the usual seasonal factors, including bank levy as well as investment timing. The remediation charge was GBP 22 million in the quarter, taking the year-to-date charge to GBP 61 million.
William Chalmers: Taken together, this resulted in a cost-to-income ratio of 47.2% in Q3 and 49.3% for the first nine months. Importantly, we remain on track to deliver a full year cost-to-income ratio below 50% and operating costs of less than GBP 9.9 billion in 2026. Let me turn to credit performance on slide 8.
William Chalmers: Credit performance remains strong and stable. This reflects our prudent approach to lending and resilient customer base. Arrears and early warning indicators across our portfolios remain benign. The year-to-date impairment charge is GBP 930 million, equivalent to an asset quality ratio of 25 basis points. Compared to the prior year, the increased charge is driven by retail model updates both last year and this year, and a more normalized level of impairment in 2026, as well as lower one-off releases within Commercial. The charge of GBP 313 million in Q3 also represents an asset quality ratio of 25 basis points and reflects stable underlying development alongside model updates. It incorporates a small MES charge of GBP 8 million in the quarter. Our performance year to date means that we are on track to meet our guidance for a full year asset quality ratio of around 25 basis points.
William Chalmers: Let me now address returns and TNAV on slide 9. The group delivered a strong return on tangible equity of 17.9% for the first nine months and 19.5% in Q3. Below the line, the Q3 restructuring charge and volatility and other items were modest. Tangible net assets per share ended the quarter at 55.4p, down by 1.6p per share both year to date and in the quarter. Growth from attributable profits and the reduction in share count from the buyback were offset by shareholders distributions, and in particular, the temporary impact of higher rates on the cash flow hedge reserve. Looking ahead, we continue to expect material TNAV per share growth over the medium term. We remain on track to deliver a return on tangible equity of greater than 16% in 2026. Indeed, given our current TNAV, we expect to comfortably exceed this.
William Chalmers: Turning now to capital generation on slide 10. Our business performance has driven strong capital generation. Within this, total RWAs ended the quarter at GBP 247.4 billion, up GBP 11.9 billion from the year end. This increase reflects strength in lending and market and other movements, partly offset by optimization activities. Turning to Q3, RWAs increased GBP 5.6 billion, again driven by customer and bank lending growth, but with limited optimization in the quarter. Q4 should be more active in this respect. Looking forward, we continue to expect a GBP 6 billion to GBP 8 billion positive day one impact from Basel 3.1 on 1 January 2027. Note that we are also awaiting finalization of CRD IV secured model weightings. Year to date, strong banking profitability has driven capital generation of 153 basis points, including 45 basis points in the third quarter.
William Chalmers: We remain on track to deliver our capital generation guidance of more than 200 basis points in 2026. The Group CET1 ratio ended the quarter at 13.3%. We continue to expect to pay down to a CET1 ratio of 13% by the end of the year. I will now turn to our updated macroeconomic outlook on slide 11. As usual, we have updated our economic outlook for the performance of the UK economy. We now expect inflation to average 3.1% this year before peaking in the first quarter of 2027. Our bank rate forecast now incorporates a 25 basis point increase in November, although our terminal rate assumption remains unchanged at 3.5%, reaching that level in mid-2028. I referred to the potential impact of higher market rates versus our own forecast in my earlier comments. We expect GDP growth to be 1.3% this year, falling to 1.1% next.
William Chalmers: Unemployment is forecast to peak at 5.3% in the middle of 2027, and house price growth to be 0.7% in 2026, rising to 1.7% next year. While these forecasts represent a modest uplift, our diversified and resilient business model remains well-placed to withstand various economic outcomes. In this context, the budget yesterday does little to change our views. Stepping back, let me now remind us of our 2026 guidance on slide 12. We remain on track to meet our 2026 guidance. We continue to expect net interest income of more than GBP 14.9 billion, a cost to income ratio below 50%, with operating costs below GBP 9.9 billion, and an asset quality ratio of around 25 basis points. Alongside, we expect return on tangible equity of more than 16% and capital generation of more than 200 basis points, paying down to a CET1 ratio of around 13%.
William Chalmers: As always, we remain committed to a progressive and sustainable ordinary dividend. As we have said many times, delivery of our current strategy and financial commitments lays the foundations for the next stage. Let me briefly turn to this to finish up on slide 13. The successful delivery of the current strategy has been all about building new strategic revenue streams, diversifying income growth, and continuing our focus on cost and efficiency. These are the foundations for Accelerate 2030. We are now mobilizing the business at all levels. We have established a new business unit to unlock connected growth opportunities across the Group. We have allocated over 95% of our 2027 strategic investment spend, which is now built into delivery plans. Our core franchise will remain a key contributor to value creation as we deliver new products and build distribution in critical markets.
William Chalmers: We will innovate to further grow and diversify our revenue streams with many new propositions in the coming months, such as Lloyds Smart Wallet. Growth will be led by investment in technology and skills. We are continuing to extend our AI use cases across the group and are on track to deliver over GBP 100 million of AI benefits in 2026. We were pleased to see our continued progress was recognized in the latest Evident AI report. Our strategic ambitions are underpinned by the robust financial framework that we outlined in July. As you know, the expectation is continued income growth, improving operating leverage, strong, sustainable returns, and growing capital generation. Stepping back, as said in my opening comments, the Group is delivering in full on the current strategy.
William Chalmers: Looking ahead, we are more convinced than ever that the opportunity for the Group is compelling, and Accelerate 2030 is the right way to seize it. That concludes my comments for this morning. Thank you for listening. We will now open the line to your questions.
Operator: Thank you. If you wish to ask a question, please press star one on your phone keypad. To withdraw your question, you may do so by pressing star two to cancel. There will now be a brief pause while questions are being registered. Thank you. Our first caller is Benjamin Toms from RBC. Your line is now unmuted. Please go ahead.
Benjamin Toms: Morning, William. Thanks for taking my questions. The first one is on other income. It was a little bit weak in the quarter, albeit you are still trending up 10% on a year-to-date basis. Is Q3 the right base to model off? It sounds a bit artificially depressed. If it is depressed, how depressed do you think Q3 roughly is? Secondly, on NII, you defined greater than 14.9 as modestly above. I think consensus is slightly above 15. Was the modest comment designed to move expectations down slightly to somewhere between 14.9 and 15? Thank you.
William Chalmers: Thank you, Ben, for both those two questions. Just to answer them in turn. OI, first of all, roughly GBP 1.7 billion, GBP 1.68 billion. The performance in OI is something that actually we are pretty pleased with over the course of the year. There were some points, if you like, in Q3. One specifically, the subsidence event off the back of a dry summer. The second is a little bit of weakness in markets, in particular in September, off the back of the volatile markets that we saw. That is occurring in the Commercial Banking business, specifically the CIB business. The quarter-on-quarter comparison, which is down about GBP 19 million over the quarter, is a little bit softer because Q2 was particularly strong.
William Chalmers: What I mean by that is that we saw some securitization gains in Q2, and we also saw some outsized LDC gains. So there is a bit of strength in Q2 that is in turn contributing to the relative Q2 to Q3 performance. Now, as you said, we are up 10% year-to-date, which is very much consistent. In fact, even a touch ahead of our high single digits expectation for the year. We also added into that Lloyds Wealth. I think, Ben, to answer your question, if you strip that out, the two effects that I mentioned in respect of Q3, subsidence number one, markets number two, are we think largely one-off in nature. Subsidence is an event that was particularly acute over the course of the summer.
William Chalmers: We are now seeing rates hardening, i.e. premium price increases in the general insurance market, which is good to see, and I think it is partly in compensation of that. Then secondly, we are also seeing a stronger start to the quarter in the CIB markets area, which is good to see. So I think we expect to see continued growth in OI over the course of the Q4. We do expect to be very consistent with our high single digits plus Lloyds Wealth guidance that we gave at the beginning of the year. We feel very comfortable about the trajectory of OI in that context. To give you one further data point, Ben, which you might find useful is if you strip out some of the Q2 benefits, I mentioned securitization and Lloyds Development Capital as part of that, LDC as part of that.
William Chalmers: If you strip out the one-offs, for want of a better word, i.e. the weather and maybe a bit of the CIB weakness in markets, number two, then actually what you are seeing is more like a 5% quarter-on-quarter growth rate as opposed to the GBP 19 million reduction that we saw in Q3. So that gives you some idea of the underlying performance that we are seeing in OI, and again, expect a decent Q4. In respect of NII, Ben, the second of your two questions, we have, I suppose first wanted to confirm, that we will very much meet all of our guidance in full, and that of course, includes greater than GBP 14.9 billion for NII guidance for the full year.
William Chalmers: At the same time, we wanted to make sure that people were, if you like, aware of our expectation that we expect to be modestly above GBP 14.9 billion for the year. Now, what is going on there, in Q4, we expect to see continued growth in NII, which will be driven by similar drivers, frankly, excluding obviously the day count benefit that we had in Q3. We should expect to see a modest increase in the net interest margin. Likewise, AIEA growth, which will be flatter, but it will be driven up by, in particular, averaging effects. That all delivers as modestly in excess of GBP 14.9 billion. I won't comment on consensus, Ben, but hopefully you can tell by my answer to your question there what we're aiming at.
Benjamin Toms: Thank you.
Operator: Thank you. Our next caller is Guy Stebbings from BNP Paribas. Your line is now unmuted. Please go ahead.
Guy Stebbings: Morning, William. Thanks for taking the question. The first one was back on NII, really on the funding side. It's clearly a competitive market out there for funding, and at the same time you're seeing good lending dynamics, particularly on the corporate side. Given the market's no longer awash with liquidity, if you like, your own loan deposit ratio has been trending upwards or normalizing. Just interested how comfortable you are with lending growth running ahead of deposit growth from here, or does there come a point where you need to either compete harder for deposits or pull back slightly from lending? Or is that just not really an issue for quite a while? The second question, which is partly linked to this, is on capital.
Guy Stebbings: I mean, the Chancellor yesterday made a push again in terms of the Bank of England, ahead of its upcoming capital update to lower sector capital requirements and overlaps, if you want to call them that, on countercyclical and domestic buffers. If we do see that come through, which could have quite a meaningful impact on your regulatory requirements, how do you think you would use that freed up capital? Would it, as the Chancellor would presumably want, go towards incremental lending, which would add to funding needs for the sector? Or might you have other uses for that capital? I guess behind my question, certainly welcome any incremental capital being freed up, but interested how you think about the sort of competitive pressures that might come out of that. Thank you.
William Chalmers: Thank you. Thanks for the questions, Guy. I will answer them in turn, and I might pull apart the first one a little bit. First of all, in respect of lending, as you say, healthy lending growth over the course of the year and indeed over the course of the quarter. If you take each of those over the course of the year and you add back in securitizations, which is just shy of GBP 2 billion, you add back in movement in the fair value hedge. You add all of that together, we have seen roughly or just shy of GBP 18 billion lending growth over the course of the year, and that includes just over GBP 5 billion of lending growth in the course of Q3. So some really healthy lending growth developments there, and they are on both the retail side and indeed the commercial side.
William Chalmers: Likewise, we have seen very healthy deposit growth, too. GBP 6.3 billion over the course of the year, just shy of GBP 2 billion in the course of Q3. That is slightly more skewed towards the corporate banking side, but equally includes growth within the UK deposit book over the course of Q3 of about GBP 0.2 billion, which most notably and interestingly includes increases in PCA balances of about GBP 600 million, including an increase in share. I think all of that is good to see, Guy. When we then look at the balance, if you like, as your question highlights, we have seen faster lending growth than we have deposit growth, and that has ticked up the loan deposit ratio a touch. We are now at about 99% versus year-end, about 97%. to answer your question, we do not see that as a particular constraint.
William Chalmers: We do not really have a loan deposit ratio target. It is relatively easy to reduce it if we were to choose to do so by going out and gathering deposits. We have chosen instead to focus deposit value on those where we have the most valuable customer relationships and to avoid, if you like, gathering deposits in what has sometimes been relatively negative margin fixed-term areas.
William Chalmers: We do not see the loan deposit ratio as a constraint. We do not see, at the moment at least, any inhibition on our ability to continue lending into the economy, which of course is important to us. The best testimony to that is, as said, funded lending of around GBP 16 billion. Then of course you can add in the securitizations, as I did earlier, to get to GBP 17.9 billion in total. The capital point, Ben. The capital point is interesting.
William Chalmers: We see the FPC discussion ongoing, and we will expect to see more in November. So far, the changes that have been brought about by that review in terms of the leverage ratio have not made a significant difference to us because, as you know, we are CET1 constrained as opposed to leverage constrained. Looking forward, the FPC is looking at, as your question pointed out, a couple of topics. One is whether there is overlap in buffers, and two is the question of buffer usability. It will be interesting to us to see what it is the FPC comes back with off the back of that. At the same time, and again, as your question highlighted, as we land Basel 3.1 on 1 January next year, we will see a reduction in our Pillar 2A targets of about 20 basis points. They will go from 1.4% to 1.2%.
William Chalmers: What that will mean is that at the beginning of next year, we have our CET1 target of 13%, but we will have a capital stack of more like 11.6%. Of course, in that context, we look with interest to see what the FPC is going to do on capital buffers that feed into that capital stack. What we will then choose to do beyond that, Guy, at the moment at least, I think is to be determined depending upon where all that plays out, number one, but recognizing that we have a degree more management flexibility in the way in which we run the business. Simply because that management buffer goes from what is currently 120 basis points to what will be 140 basis points.
William Chalmers: I think for now, Guy, without wanting to preempt future discussions or alternatively second-guess what it is the FPC might come out with, we look with interest to how the situation will evolve. We maintain our capital target of 13% CET1, and if we do get more flexibility by way of large management buffers, that is clearly helpful from the perspective of running the business.
Guy Stebbings: Thank you.
William Chalmers: Thanks, Guy.
Operator: Thank you. Our next caller is Sheel Shah from JPMorgan. Your line is now unmuted. Please go ahead.
Sheel Shah: Great. Thanks for taking the question. If I can ask on the asset margin, you spoke about some pressure in the mortgage market, which isn't new, and that continues. What about some of the other markets like the corporate and the unsecured market? Are you seeing pricing pressure? Are you seeing mix change? What's driving this pressure on the margin basis? Secondly, just to follow up on the LDR question earlier, how do you think about the balance between raising more deposits in this competitive environment versus wholesale funding? Considering that LDR ratio is probably going to rise above 100 shortly. Thank you.
William Chalmers: Sure. Thanks, Sheel, for questions. When we look at the environment, I think we've been calling out all year that the environment is a relatively competitive one. Of course, there's been a lot of attention paid most recently to the deposit side of that. Indeed, deposit markets are relatively constrained. That is for a host of cyclical and structural reasons. I might just dwell upon that for a moment. For example, energy prices, increased inflation, higher rates in turn limits disposable income growth. That limits deposit market growth for those cyclical reasons. At the same time, one or two structural factors. QT is one example. Reduction of TFSME is another example. The fact that we've got a number of non-UK lenders in the market taking out deposits from the UK market and not recycling them as UK lending is a third point within those structural drivers.
William Chalmers: And all of that means, Sheel, is that the deposit market is not growing all that fast. I think it was around GBP 25 billion around the middle of the year from the Bank of England figures. Most of that has gone into fixed term, and that fixed term, as you know, is pretty tightly priced. That is the deposit side. But your question was also on the asset side. I think consistent with what we have been saying all year really, we have seen competitive pressures on the asset side. It is not just mortgages, it is across the asset classes too. But I think that is what, as I said, we have been calling out in various different conferences and so forth. Now, having said all of that, we have seen decent volume growth in these areas. We are competing hard in what are still economically very attractive areas.
William Chalmers: Cards, for example, up 7% year-to-date. Personal loans, likewise up 7% year-to-date. Motor up 6% year-to-date. These are important areas for us to grow in. The CB business or CIB business, just that sub-component of Commercial Banking is up over 10% year to date in its balances. All of this lending is healthy, value added, positive returning lending. We are pleased to see it. But I think it is fair to say that there is a dose of margin pressure going on. Again, consistent with what we have been saying through the course of the year. The second question that you posed there, Sheel, in terms of the, I guess the balance sheet, the loan deposit ratio, liquidity coverage ratio. First of all, I think you are right to point out the liquidity coverage ratio.
William Chalmers: When we look at the balance sheet, as I said, loan deposit ratio is not something that we particularly target. We do not feel constrained by the loan deposit ratio. As it is, it is relatively easy to fix, in the sense that we could go out and raise deposits very easily if we were to choose to do so. The issue as we see it is to stay on top of duration and to build the franchise. As I say, to make sure that we are able to continue the type of GBP 6.3 billion year-to-date deposit growth that we have seen across Retail and across Commercial Banking.
William Chalmers: Now, I think it is reality for us, and I suspect most banks in the sector, that actually it is a liquidity coverage ratio that is at least as important, if not more so, versus the loan to deposit ratio. I suspect for most banks, it is the liquidity coverage ratio that is more likely the earlier biting point. Now, we feel very comfortable with our liquidity coverage ratio. It is about 143%, as you will have seen today, and it is backed up by predominantly retail and therefore very sticky deposits, which allow us to operate comfortably at the 143% liquidity coverage ratio. Indeed, I would stress that that is meaningfully ahead of where we were on a pre-COVID basis. So we are holding more liquidity today than we felt necessary on a pre-COVID basis.
William Chalmers: When we look forward, I would make those points on the, if you like, LDR and LCR side. I would also add that what is important when you look at lending is, at least from our perspective, less to be constrained by LDR and LCR, more to make sure that whatever lending we do is value added, is economically value added to the shareholders. We clearly want to present strong customer propositions. As I said, just shy of GBP 18 billion in total lending so far year to date shows that we are doing that from a customer point of view. We want to make sure that that lending is value added.
Operator: Thank you. Our next caller is Jonathan Pierce from Jefferies. Your line is now unmuted. Please go ahead.
Jonathan Pierce: Morning, William. I have two questions, please. First is on deposit competition. I really just want to get your view on what is going on here. Because rates on site deposits have not really changed since the start of the year. The extent to which those at the top end of Best Buy tables are paying above one year swap rates for one-year term deposits has not changed that much since the start of the year. It is very competitive, but not significantly more so than it was.
Jonathan Pierce: For me, what has really changed in the last six to nine months is the whole curve has shifted higher, and that has led to this behavioral change with customers moving more money to term. So, your site deposit base is holding broadly flat. All the growth in deposits is coming from ISAs and term. So your marginal funding cost is essentially at SONIA or above.
Jonathan Pierce: I am just wondering to what extent this idea of higher competition is being conflated with behavioral changes. You may say the distinction does not really matter at the moment, and I would agree, but a behavioral change is transitory. Whereas higher competition may be more structural and therefore a bit more concerning. So if you can break down what the real issue here is in terms of the marginal margin, that would be helpful. Second question, Pillar 2A. The end result of Basel 3.1 for you looks to be a 20 basis point drop in your Pillar 2A requirement, but your CET1 ratio going up 40 basis points. Something the market has been worried about for eight years now is effectively leading to a 60 basis point reduction in capital requirements. If I read the release as it seems to imply this morning.
Jonathan Pierce: I'm just wondering, is there something else going on here? Does this Pillar 2A movement that you're expecting at the start of next year capture anything else other than Basel 3.1? Again, trying to get back to whether the domestic risk add-on changes we may get next month are being somewhat front run in some of the Pillar 2A movements we're seeing this season or whether there genuinely is something else we may get next month that drives your CET1 requirement down significantly further. Thanks, William.
William Chalmers: Yeah, thanks. Thanks for those questions, Jonathan. I'll take them in turn. First of all, on deposits. As said, up GBP 6.3 billion year-to-date, up just shy of GBP 2 billion over the course of Q3. So the deposit performance has been in pretty good shape. Within that, and relevant to your question, Jonathan, you talked about sight deposits there. We've seen strength in both PCAs and also in non-interest-bearing current accounts within the CB area as well in Q3. So we're pleased to see that on both counts. I mentioned earlier on about GBP 600 million gain in PCAs over the course of the third quarter, a smaller number gain in non-interest-bearing current accounts and CB, but nonetheless, going in the right direction. I think that's off the back of strength of propositions. It's off the back of our customers choosing to hold sums.
William Chalmers: It's also noticeable actually, Jonathan, that even in the context of a rising rate environment, not only have we gained market share in the PCA front, but also the amount, i.e. the number of balances in terms of quantum in excess of GBP 20,000, as an example, has gone up even in that rising rate environment, which I think is kind of interesting in the context of your question. I'll add a couple of comments and then come back to the behavior versus competition point that you raised.
William Chalmers: First of all, we think we have seen a bit of rates increase over the course of the year as a whole. As you know, we've been calling out deposit competition right the way through the year. We started in earnest at Q1, but we've been trying to continue that narrative, indeed amplify it, over the course of the remainder of this year.
William Chalmers: I do think at the same time, the curve has clearly shifted higher, especially in Q3 in that context. Your question, therefore, is how much behavioral change has that sponsored? When we look at our book overall, we've seen, I think, a combination of clearly higher rates. We ourselves have been out from time to time where we thought that it's economically value added to offer higher rates. I would say the migration within the book has been relatively limited so far. Specifically, what do I mean by that? I think it's probably just over GBP 1 billion switch from instant access into fixed term in the third quarter. That's in the context of an instant access book, which is comfortably over GBP 100 billion.
William Chalmers: If I track that back over the course of the year, the migration that we have seen over the course of the year, basically from instant access into fixed term, I think over the year as a whole, it has been somewhere between GBP 3 billion to GBP 4 billion in that zone. You can see the Q3 performance is not particularly different to what we have seen earlier on in the year. In the context of an instant access book that is comfortably over GBP 100 billion, that is relatively limited. As we look forward, we expect both aspects of competition on the deposit side to persist, as I mentioned in my script a little while ago. That is partly what is behind, I suppose, some of our outlook comments, some of my outlook comments that I made in my commentary.
William Chalmers: The other point I would say, just to add on to this discussion, Jonathan, is we have seen through the course of this year, not just deposit competition, but also asset competition. This is consistent with my response to Sheel's question just a second ago. There is a bit of asset side competition that has been going on over this year. Let me put it another way. We expect competition to continue in those markets over the course of next year. That is what we are basing our outlook comments on. We will give you further guidance at the end of the year. My point is it is both liability side and do not forget the asset side. I will move on, Jonathan, to the second of your questions on Pillar 2A. I do not think there is terribly much going on there above and beyond Basel 3.1, at least not for us.
William Chalmers: What I mean by that specifically is that when we look at the adjustments for Basel 3.1 that move RWAs into Pillar 1, they are things like the SME scaler, for example. They are one of two other aspects. So CVA and operational risk and so on. These things in turn are leading to Pillar 2A relief of 20 basis points, and that is what we are calling out in the RNS. There is one other modest item that is moving in Pillar 2A. I do not think technically we are allowed to disclose it as such, but there is one other pretty modest item in the Pillar 2A piece that is moving, that is net helpful to us, i.e. beneficial, but it is a very small part of that overall 20 basis point improvement or reduction in Pillar 2A that we see on 1 January next year.
William Chalmers: What that all means, Jonathan, as your question is getting to, and please tell me if this is not fully answering your question, but it means that our capital stack is getting to 11.6% as opposed to where it is today, 11.8%. As mentioned earlier on in response to, I think it may have been Guy's question or perhaps Sheel's. That is good. That added 20 basis point of flexibility or management buffer is helpful to us. Over the longer term, as the regulatory situation gets clearer, maybe as some of the macroeconomic risks play out, we will obviously have a discussion with the board in due course about what does all that mean. I do not think that is necessarily a discussion for this year. I think it is a discussion based upon the maturity of the debates and the issues that I just mentioned.
William Chalmers: But there's no doubt that in the meantime, having 140 basis points of management buffer over 120 just allows us to manage the business with that much more flexibility.
Jonathan Pierce: Okay. Yeah, that really helped. It basically sounds like you're saying that this isn't in any way treading on the toes of what may come next month. Because your ring-fence bank has got probably 460 basis points of domestic risk add-ons within it, if I assume Pillar 2A credit concentration risk of circa 60 basis points or something, it's huge. So the door is still open to that 11.6 going, it may be quite a bit lower depending on what the FPC decides to do next month.
William Chalmers: Conceivably. It's certainly not treading on the toes of what might come, Jonathan. I think you're absolutely right from that perspective. This is really just about Pillar 2A in relation to Basel 3.1. The incremental point that I mentioned that is above and beyond the Basel 3.1 is really pretty small and has nothing to do with the FPC.
Jonathan Pierce: Okay, wonderful. Thanks, William.
William Chalmers: Thanks, Jonathan.
Operator: Thank you. Our next caller is Jason Napier from UBS. Your line is now unmuted. Please go ahead.
Jason Napier: Morning, William. First question, regrettably, is back on the competitive environment. There is no doubt it is the number one issue on investors' minds, and if we did a word cloud of the call so far, competition and competitive is probably going to be the one in the biggest font. In fact, in your own words, you have been seeking to amplify that message this year. A couple of questions around that. Firstly, are things worse than budget in the market or in the outlook? Secondly, when management sit down and war game various scenarios that may come to pass in the next year or so, what are the strategic reactions that you might have to conditions being plausibly weaker than expected? The second question, coming back on slide 7 around costs.
Jason Napier: I think it is clear you are expecting seasonally to spend more money in the next quarter, and as we know from the next plan, there will be an uptick in investment spend. I wanted to focus on the gross cost saves, though. It is a very, very big number. It is annualizing at about 7% of the bank's cost base, 380 million of gross saves and 380 million of growth costs. Could you talk a little bit more about how it is you are delivering that much on a gross basis?
Jason Napier: Something around the composition of those saves, please, just to get a sense as to whether that is something that can persist in the coming years and that we could take as a source of comfort as regards the capacity to keep investing, but managing costs to that guided 3% annual growth rate that is in the new plan.
Jason Napier: Thanks very much.
William Chalmers: Thanks, Jason. We steadfastly refuse to comment on consensus, so I am not sure we can necessarily comment versus our internal budgets. That seems even more of a transgression. Nonetheless, let me address your point. When we look at the outlook, Jason, you could tell from my comments earlier on that when we are looking at net interest income for 2027, we are not trying to give specific guidance. That is very much a job for the prelims that we will do in January. We are trying to give people an understanding, if you like, of the outlook as we see it. The outlook as we see it for NII growth next year is healthy NII growth, to be clear. Healthy NII growth, which I think is a word that we have used a lot over this year to describe NII growth.
William Chalmers: Having said that, our base case is that the pace, the percentage growth within NII growth is going to be slower in 2027 versus 2026. And why is that? First of all, we have this modestly above GBP 14.9 billion for the tail end of this year, and obviously what is driving that will, to an extent, cross over into 2027. The second is competitive asset and deposit markets, as mentioned throughout the course of this call. Your word cloud comment is, I am sure, an entirely fair one. Specifically, you are saying, well, to what extent is that worse than we had previously thought? I think the deposit market is a touch slower than we had previously thought. Again, I referenced the Bank of England July figures earlier on.
William Chalmers: I think at the same time, the fact that that is fixed term, or rather most of that money is going to fixed term deposits, number two, the fact that a lot of it is going to non-UK lending companies or firms, number three, and therefore not getting recycled back into the economy. These things at the edge are probably a touch tougher than we had previously expected for the reasons that I have just outlined. Then on assets, I think it is probably more or less tracking to what we had expected. Maybe there is a bit less interest-bearing balances in cards, for example, than we had previously thought. Overall, not far off.
William Chalmers: Then the final point, as I said, if rates are high next year or as high as they are today, then maybe some asset growth, particularly in areas like mortgages and so forth, might be a touch slower than we had previously expected. We will have to see. I think having said all of that, as said, number one is this NII growth expectation for next year remains healthy, and in that sense, pretty much exactly what we thought it previously was. Related to that, if you think back to the framework that we gave in July, Jason, in respect of the greater than mid-single-digits growth in income for 2027, the improvement in operating leverage for 2027 and indeed every year beyond that, and indeed improving returns, capital generation over the course of the Accelerate 2030 plan, we are still going to be meeting all of those commitments.
William Chalmers: We are still going to be meeting our guidance for 2026, to be clear, in full, and we are still going to be meeting every aspect of that framework that we laid out in July. There is no change to any of that. We are simply shading, as said, around the outlook for NII for the reasons just mentioned. You mentioned slide seven on costs there, Jason, just to move on to the second of the two topics. As I mentioned in my script earlier on, cost savings, or rather meeting cost targets consistently at an absolute level and on a cost-income ratio basis is an absolute imperative within Lloyds Banking Group. It has been an imperative since a long time before Charlie and I came along, and I hope it will remain an imperative for a long time to come.
William Chalmers: When we look at the overall cost performance in the course of the year-to-date and indeed the quarter, we are obviously pleased with how it has gone so far. We are up around 1% over the course of the year to date. We are down a little bit quarter on quarter. I would stress that is all in the context of expecting to meet our sub-GBP 9.9 billion absolute cost target for this year and expecting to meet our sub 50% cost-income ratio target for the 2026 period.
William Chalmers: Again, all consistent with the guidance we set out at the beginning of the year. Your question was around the gross cost saves and what is going into that. I guess two or three things that I would say in connection with that. The gross cost saves are made up of two or three streams of activity. One is what I have described as strategic investments.
William Chalmers: Things like property optimization, for example, things like technology savings, new technology, cloud migration, reduction in data centers, this type of thing. Second stream is what I describe as change saves. What I mean by change saves are effectively the unit costs that we incur, some of which are depreciated in period, some of which are obviously capitalized, that in turn are about delivering change in a more efficient way. Often enough, that is often the differences in processes that we employ, the differences in the setup in the organization, and of course, the differences in the infrastructure that we deploy in order to deliver change. Third strand, perhaps this falls to a degree within strategic investments, automation. Automation in terms of processes internally, automation in terms of customer service ambitions and the like.
William Chalmers: Then perhaps a final stream that I would highlight here is what I would describe as BAU, really, Jason. Sourcing or rather third-party management, organizational design, divisional initiatives, management of the pension scheme, productivity measures, these types of things. I think I would characterize our gross cost savings in each of those four buckets, really. Strategic investment is number one, change saves is number two, automation at every level of the organization is number two, and BAU cost saves. Together, that is what adds up to the gross cost savings as you described it, as we describe it, over the course of the year to date and over the course of Q3. Now, looking forward, Jason, I would expect every one of those cost save buckets to be continued into the next stage of the plan as we look forward.
William Chalmers: I would also expect to leverage more heavily upon some of the new opportunities for cost saves that we see. Some of those, of course, will be technology-enabled. AI is a great example of that. AI is clearly going to enhance our customer propositions from a revenue point of view, but it is also going to improve efficiency within the organization. As you know, we have got a bunch of use cases that are starting to deliver on that. Fraud is one example. Process optimization is another example.
William Chalmers: Then a second illustration, if you like, of new themes which we expect to be able to deliver more on are things like our Lloyds Technology Centre in India, which has been so far at least focused on, very effectively, I would say, focused on technology development, but we see all sorts of opportunities for extending the remit of that going forward. Jason, hopefully that gives you some color, if you like, some context for why are the gross savings what they are today, but also why it is that we look forward to our circa GBP 2 billion of gross cost savings for the next stage of the planning to around 2030 with quite a lot of confidence.
William Chalmers: We think that is going to deliver, I think in the past we have described because of the increased investments, a shade over 3% cost increase in 2027, but then a progressively more controlled picture in the period thereafter as strategic savings come into play based upon some of the initiatives that I have just mentioned.
Jason Napier: Thanks very much. Thanks.
William Chalmers: Thanks, Jason.
Operator: Thank you. Our next caller is Aman Rakkar from Barclays. Your line is now unmuted. Please go ahead.
Aman Rakkar: Hi, William. Thanks for the presentation and the chance to ask questions. Could I ask you about, just to kind of round out the discussion on deposits, is there any chance you could just tell us again what your mix is of term deposits, please? Ideally within your retail business and corporate. As at Q3, I think it is potentially quite a useful data point for us in the market as we think about potential outturns here for deposit dynamics going forward. The second question was, I am just interested about more broadly, I guess we have not really actually talked about the structural hedge really at all. I think your seven-year swap rate is probably tracking 70 basis points higher than I think the level that you assumed at Q2, which presumably has some decent rollover effect into next year.
Aman Rakkar: I note your macro assumptions at the back of the slide deck. You are actually well below market pricing in terms of your rate expectations, one hike and then kind of back to 3.5% as a term rate. I would just be interested in your take on the potential benefits of higher interest rates. I think we are talking quite a lot. You are showing us and front loading a lot of the competitive intensity and some of the downside risks that interest rates pose to your earnings. I wonder if there are some potential upside risks and benefits to realize over time. It would be great to get your take on that, please. Thank you so much.
William Chalmers: Thanks, Aman. I will take each of those separately. On the deposit side, I think we might have said it before, actually, but just give you some rough idea. When we look at the overall fixed book within retail, at least, I think in the past, we have said it is somewhere between 25% to 30% of the savings book. You take UK deposits of, what is that now, GBP 307 billion. You knock out PCAs of about GBP 104 billion, and that leaves the residual of the UK savings book. The UK savings book therefore a shade over GBP 200 billion. Of that, around 25% to 30% is fixed term. Hopefully that gives you a bit of a picture.
William Chalmers: As I said in my comments earlier on, it has risen pretty gently, but nonetheless, it has risen over the course of this year by around GBP 1 billion a quarter, maybe a shade over GBP 1 billion a quarter, something like that. On the commercial side, we do not really break it down in the way that you have asked for. Just to give you some idea there, the overall commercial deposits book is about GBP 180 billion now, GBP 181 billion, I think, to be precise. The non-interest-bearing part of it, which hopefully addresses your question largely at least, the non-interest-bearing part of it is about 20%. I think, again, that is consistent with disclosures that we have given before in terms of just helping you understand the non-interest-bearing current accounts part of the business. Hopefully that is helpful, Aman.
William Chalmers: I am not going to commit to giving you exactly the same update in every single quarter looking ahead, but nonetheless, that gives you a bit of a breakdown. The structural hedge point. Yes, structural hedge clearly is a very significant tailwind for the group. That has been the case through 2026. It will continue to be the case through 2027. Indeed, we see continued growth in structural hedge benefits over the course of the Accelerate 2030 plan to 2030 and potentially beyond. To be clear, that is the case based upon modest increases in notional, which is what we expect, just as you would expect off the back of franchise enhancement. It is also the case even if we do not get any notional increases.
William Chalmers: Just the refinancing of maturing yields itself should deliver growth and structural hedge tailwind, if you like, over the course of 2027 through 2030 and potentially beyond the period. You will have seen that we are earning 3% yield on the structural hedge right now at a time when equivalent market rates might be 4.7% or thereabout. Over the course of next year, based on our economic assumptions, you can expect that yield to go to around 3.3%, so still plenty of room for growth thereafter. That will continue to build as we look forward. We talked about it a bit in the summer, and obviously rates have developed a little bit since the summer. You asked about therefore, what are the benefits of rates?
William Chalmers: They are clearly that they feed through into the income streams of the bank and are manifested through the margin of the bank on a look-forward basis. That is not going to change, albeit the contribution of the structural hedge will vary from one quarter to the other. It is I think about 9 basis points in the course of Q3. I think it will be more like seven in the course of Q4, just to give you some rough idea. But that quarter-by-quarter trend fluctuates, but the overall phenomenon of a strong structural hedge tailwind does not. It is persistently strong. You asked about the benefits of that. Again, clearly at that level, there is a benefit. It is a gross benefit, if you like.
William Chalmers: I think what needs to be weighed against that is one's outlook for how much of that realistically is going to be competed away in what is, as I said, a reasonably competitive market. While it is a competitive market, as I said earlier on, it is still consistent with meeting all of our financial framework that we laid out in July, and indeed, our circa 20% RoTE expectation that we expect to deliver by 2030 and are in excess of 18% that we expect to deliver by 2028. It is a competitive market, but it is still a pretty high returning market, and a big part of that is because the structural hedge is doing what it is doing.
William Chalmers: It is important that we do not get too kind of carried away, if you like, with the competitive dynamics in the market in the context of what is still a sustainably strong returning market, and indeed for the Lloyds Banking Group business, a sustainably strong returning business. As I said, some elements of that structural hedge upside is going to be competed away. Some element of the structural hedge growth is going to be competed away by a combination of primarily product pricing. If we see high rates, some element of it may also be attenuated by slightly slower lending growth. I think we have to see how that develops, but it is not unreasonable to expect things like mortgage growth, for example, to be impacted if rates stay at the current levels that they are staying.
William Chalmers: One final point I will make there on the question, Aman, is that when we look at the dynamics within the market, the dynamics in the market, such as they are ultimately likely to play to the strength of scaled providers. That is what happens in competitive markets. Scaled providers succeed. We at Lloyds would certainly consider ourselves to be the scaled provider.
Aman Rakkar: Thank you.
William Chalmers: Thank you very much.
Operator: Thank you. Our next caller is Chris Cant from Autonomous. Your line is now unmuted. Please go ahead.
Chris Cant: Good morning. Thanks for taking the questions. One on capital and one on NII, please. On NII, the remark about NII growth into 2027 being slower year-over-year than 2026. Just to help us understand what is in your spreadsheet when you are commenting in that way, could you give us a view on what structural hedge yield churn assumption you are embedding there? Conscious you have not revised the terminal rates assumptions, which I presume feed into your swap rate assumptions.
Chris Cant: I suspect this may be something where consensus is a little bit different to what is in your spreadsheet with the management assumptions. Just trying to understand how much of an impact that should have on 2027 consensus, which if I think about your greater than GBP 14.9 billion, modestly above GBP 14.9 billion this year, it looks to me like consensus probably ends up GBP 14.95 billion this year.
Chris Cant: That would be GBP 1.3 billion up on last year. Current 2027 consensus would be GBP 1.4 billion up on 2026. That is obviously not consistent, but part of that may be this hedge. Just want to understand, please, what specific hedge churn assumption are you making there? On capital, just coming back to this FPC letter, beyond the reiteration, I think the Bank of England called out last year that they were going to do some work on these domestic exposure overlaps. But I thought it was quite interesting that the Chancellor yesterday in his letter also called out that he wants the Bank of England to be considering the international competitiveness of the UK capital framework. As you look at things, is there anything that would be on your shopping list, so to speak?
Chris Cant: What aspects of the capital framework in the UK do you think are particularly penal or uncompetitive relative to what you see internationally? Thank you.
William Chalmers: Thank you for that, Chris. Maybe just to deal with each of those in turn. On the structural hedge, I am not sure I will completely answer your question, but hopefully I will give you a bit of information that will be useful to it. When we look at the structural hedge, as you know, it is notional right now that it has been very stable over the course of the year. GBP 246 billion, that has been stable over the course of the year. Indeed, we expect it to be stable over the course of the remaining part of this year. Now, when we look into 2027, we are expecting continuity pretty much on the notional. I should not be so guided. We are expecting the notional to be flat during the course of 2027, to be clear.
William Chalmers: What that means is that whatever churn that we might get in the migration, I suppose, in the deposit book that might be impactful is offset by flows in that we expect over the course of the year. I am not sure that I would necessarily expect our migration pattern to be markedly different next year to what it has been this year, but I would expect some sort of continuation of that migration pattern. Overall, the net of that, combined with the new balances that we attract in the context of what we think will be relatively modestly growing deposit markets for reasons that I just mentioned earlier on, that produces a flat notional on the structural hedge for 2027. The second point that I would make is that
Chris Cant: Apologies. Maybe I did not express that very clearly. I was meaning in terms of your swap rate assumption. So you have not changed the terminal rate assumption.
Chris Cant: Presumably when you are guiding on your expectation for 2027 NII, that is still therefore reflecting a hedge churn yield, the swap rate you are churning into which is below forward market rates. I just wanted to understand what that number was.
William Chalmers: Understand. We don't disclose our swap rates, particularly. What we do disclose, Chris, is our Bank base rate, and obviously swap rate feeds off the back of that. When we look at the Bank base rate expectation, it's 4% in Q4. We remain at 4% for 2027, and then we come down to our terminal rate via two cuts in 2028 to 3.5%. We don't disclose swap rates that we assume in our plans publicly, but the swap rates more or less track that type of Bank base rate pattern with a bit of a term premium on top. What that means, Chris, is that our swap rate assumptions in our plans right now are clearly below where the market is. Again, that's not giving you a precise answer to your question, but it gives you a direction of travel.
William Chalmers: There's then a couple of other points that I'd make, which are worth attaching to what I've just said. One is, as you would expect in the way that the hedge rolls, we are probably about 90%, 91%, 92%, something like that, locked in for 2027 right now. If you took our hedge of GBP 246 billion and looked at it in a completely caterpillar way, you would expect us to be roughly 90% locked in for 2027. That's about where we are. We might be a percentage point or so ahead of that, but that's about where we are. What that means is that the upside in the hedge, based upon market implied rates, is a bit less of a 2027 phenomenon, although it's a little bit there, but it is more of a 2028 and beyond phenomenon, for reasons just mentioned.
William Chalmers: Secondly, there's a very slight tilt towards year-end maturities in the structural hedge. It's not much, but it's perhaps worth mentioning in the context of this discussion. On your second question, Chris, on the capital reforms or potential reforms, I should say, I'll probably just mention two things, really, above and beyond our previous conversation. The areas that we are most interested in are the potential buffer overlaps, i.e., the buffers that are addressing the same risk in our capital stack. For us, of course, that most relevantly applies to domestic concentrations. Therefore, we look with particular interest to what might be said around the O-SII buffer and the CCYB buffer. Those to us look like and feel like they are addressing much the same UK concentration risk.
William Chalmers: That is where we would look to see some sort of unlock of potential overlap if indeed the FPC is going to go there. I really do not want to second guess what the FPC might do, but that is one example of where you might see overlap. Then the second point, which I think is less interesting, but nonetheless we are keeping an eye on it, is the buffer usability, by which I mean banks have rightly been very shy of dipping into regulatory buffers during periods of either opportunity or macroeconomic challenges for fear that the regulator will then turn around and say, "Right, you are to immediately rebuild those buffers," and that then cuts off the continuity of dividends. None of us want to do that. As a result, we have these comfortable management buffers and refuse to dip into regulatory buffers.
William Chalmers: I know that everybody on the call, and certainly my colleagues and I here who have operated in some of these markets for a while, just feel very strongly that that is the right way to manage the business. Now, to the extent that buffer usability is part of the FPC theme, and they can talk about something credible that, if you like, buys time at the very least for rebuilding of buffers in a way that does not interrupt equity holder cash flows, then of course, we will look at that and we will figure out whether or not that is interesting. I do not know whether it will be or not, but it is that type of discussion. I think that is one.
William Chalmers: Then moving on, in terms of international competitiveness, I suspect that if you were to ask this question of some of our peers who are more active in some of the international wholesale markets, they would probably give you a slightly different set of answers to the ones that I would give you. Where I see the most meaningful opportunities are things like mortgage risk weightings. We have had secured CRD IV rebalancing mortgage risk weightings, we think in excess of what is the required economic capital against those same set of risks. We look with interest to what Katharine Braddick said at a Mansion House speech the other day about a review of mortgage risk weightings. Quite what that will mean, I do not know. If we think about the capital agenda, that is quite an important area for us.
William Chalmers: I think then above and beyond that, we might look at some other areas of CB, but the mortgages itself would be a big win.
Chris Cant: Thank you.
William Chalmers: Thanks.
Operator: Thank you. Our next caller is Ben Caven-Roberts from Goldman Sachs. Your line is now unmuted. Please go ahead.
Ben Caven-Roberts: Thanks very much for the presentation and taking the questions. Just one from me, please, on other income, actually. Could you just give some comments on where you are most confident in near-term growth? I think you mentioned Q3 being even stronger quarter-on-quarter if you strip out certain items, and Q4 looking good as well so far. Any color there on where you are confident on near-term growth and maybe elements that are different from the longer-term builds coming through to deliver the sustained high single-digit growth in the guidance. Thank you.
William Chalmers: Thanks for the question, Ben. Maybe again, I will just start off with a couple of comments on where we are year to date and also where we are in the Q3. As said, year to date performance, we are pretty pleased with. GBP 5 billion so far, up 10%. If you take Lloyds Wealth out of that equation, we are up 7% year to date. That is even after the subsidence points that I mentioned and the CB points, CIB markets points that I mentioned earlier on. So, a pretty robust pattern of OOI growth despite, as said, a couple of headwinds in the context of subsidence and CIB markets. Now, what is driving that? What is good to see is it is across each of our different areas of activity.
William Chalmers: Retail, for example, we have seen some overall strength within retail in Q3, in particular in transport, of course, but also in areas like PCA, also in areas like cards. Some decent growth within retail in Q3 is an example of that. Actually, retail year to date is up around 10%. IP&I, we have seen some pretty good growth in workplace. Some pretty good growth in, as I mentioned earlier on, Lloyds Wealth. I will come back to that in a second. Set against this GI subsidence issue. IP&I, despite that GI subsidence issue, is up around 13% year to date. Commercial has been a little bit more weak, but that has been predominantly because of the trading point that I mentioned. Of course, when markets are volatile, the financing opportunities are a little bit tougher to come across in that context.
William Chalmers: Commercial has been a bit down over the course of the year. Our fourth income stream, LBGI, our equity investments, LDC, Lloyds Living, these types of things, the earning streams from those businesses are up just shy of 30% year-on-year when we look at the Q3 year-to-date performance. Some really good performance in terms of that diversified set of earning streams within OOI. What is really going to come back? I mentioned rates hardening in the context of GI earlier on, partly in response to that subsidence event earlier on. Wealth is up something like 12% year-on-year income. It is also up about 9% year-on-year assets, and that is a combination of new flows and also markets-based growth. A couple of examples in that area. I think ongoing strength in the context of our retail streams.
William Chalmers: Again, I would highlight transport, Tusker, which is a very successful salary sacrifice scheme, earning, frankly, very good margins, is proving to be very resilient and very growth-oriented for the business, which is good to see. We get ongoing strands of growth in some of the long-term ambitions. LDC has done particularly well so far this year. I think Lloyds Living is really coming through now. I think putting all that together then, where do we expect to be? I think we are very confident on OOI as we go into the remainder of this year. Market volatility notwithstanding. Let us see what happens in markets. But we feel very confident on OOI performance over the course of this year, meeting our high single digits plus Lloyds Wealth commitments.
Ben Caven-Roberts: Thank you very much.
Operator: Thank you. As you know, this call is scheduled for one hour and we have now reached the end of the allotted time. Please do contact the IR team if you have outstanding queries. With that, our final caller is Perlie Mong from Bank of America. Your line is now unmuted. Please go ahead.
Perlie Mong: Hello. Thank you for taking my question at the end of this presentation. I think we have talked enough about deposits, so just a very quick clarification maybe. It does sound like Q4 is going to be a little bit tougher in the deposit market. I suppose, to what extent is it a choice? As in, are you taking some actions to attract more deposits? Because if I look at Q3, I think your trend is a little bit different versus some of your peers, that you have grown PCAs, but seen some outflows in savings. That, I think, is slightly different to some of the peers we have seen. Is that partly because in Q4 you are stepping a bit more into the market? And I have noticed that you have got this, I thought, very interesting scheme where you pay one-year term deposit interest upfront.
Perlie Mong: Is that a choice to do that? Or when you say deposit competition is persistent, is that deteriorating in Q4 or is it partly to do with choice? Because, I suppose one of the things the market might do is annualizing Q4 into next year, right? If it is choice, then maybe we should not be annualizing into next year. I would just appreciate some thoughts there. Then just very quickly, mortgage completion margin, I think you said 75 basis points, which is a bit of an improvement versus where we were before. Is that sustainable? I think the market, you said, is still very competitive, and I think we might see a little bit of mix shift towards remortgages. Just how does that 75 basis points look going forward?
William Chalmers: Thank you for those questions, Perlie. To take them in turn, on the deposit side, just a couple of points on Q3 performance, first of all. Q3 performance up just shy of GBP 2 billion year to date. That is a performance which has seen strength in Commercial Banking, up GBP 2.1 billion. It has also seen positive movement in UK deposits, to be clear. UK deposits up GBP 0.2 billion in the course of Q3. That is consisting of about GBP 600 million gains in PCA, i.e., up. And then a little bit of modest deterioration, i.e., down, in UK savings of about GBP 200 million. So pretty modest move within UK savings. More than offset, in fact, by PCA positive movements.
William Chalmers: We have then seen a little bit of weakness in European deposits of about GBP 0.5 billion, and that is what, if you like, results in the round picture for the deposits movement. Up just shy of GBP 2 billion with the pattern that I have just described. That is kind of point one. Q3 performance, as said, up in UK deposits, combining PCAs and savings, which is what is as important to us alongside that particular PCA point. Secondly, when we look at the deposit strategy, that is very much a strategy that we are very deliberate about, and it is therefore, to use your words, Perlie, a strategy of our own choosing. What is going on there, overall, as said, very positive deposit performance over the course of the year, GBP 6.3 billion up.
William Chalmers: What we have chosen, if you look at the year as a whole, when we saw Q1 activity within, in particular, the ISA market, we saw quite a lot of negative margin development during that time, and therefore chose to focus upon retention and delivering value to our relationship customers. That is where we have chosen to stay more or less through the course of the year, but occasionally coming into markets where we are seeing value-added opportunities. In that context, if non-relationship money that is on a negative margin does not come to the group, we are okay with that. What we want to make sure of is that relationship money, on a sustained basis where we see good customer value, where it makes sense for the groups, stays with us in the strategy as described. As we look forward, Perlie, what does that mean?
William Chalmers: For both the cyclical reasons that I mentioned a second ago, as well as the structural reasons, we do see this deposit market competition continuing over time. We will seek to continue to build value with our most important customer relationships and to make sure that we enter the deposit markets when it is value added, both for customers and for shareholders. You should expect us to continue that strategy going forward. Alongside that being sufficient, if you like, to deliver healthy lending growth, it in turn translating into average interest-earning asset growth. That is the strategy. I think therefore it is fair to say on the asset and liability side, some of what you see in the context of modestly above GBP 14.9 billion expectations, what that implies for Q4, you should expect to see a little bit of that continue into 2027, as described.
William Chalmers: Your second question, Perlie, on mortgages. We have seen about 75 basis points spread within mortgages. That is probably a touch better than where we were at Q2. It is probably a touch better than where we were at Q1, which is good to see. A couple of points in that context. One is that in an environment of significant swaps volatility, it is quite difficult to tell what the equilibrium set of prices is. We think it is nudging up off the back of some of the trends that we have discussed before, but it is hard to be too precise on the point. Nonetheless, 75 basis points is a modestly positive direction of travel, I would say. In the mortgage market, again, we are running the business so that we can continue to build the franchise.
William Chalmers: If you add back in securitizations, we are up about GBP 4 billion in mortgages this year, which keeps us comfortably above the 17% market share. I think so far year-to-date, we are about 17.6% market share, in completions. In the context of Q3, we are about 17.1% market share of completions. That is all pretty good, and we are pretty happy to stay within that zone. What I would say is that we are constantly looking for opportunities to enhance the margin performance of mortgages by making them part of our holistic customer dialogue. A couple of examples on that. If you are a mortgage customer. Sorry. If you are a Lloyds Premier customer, you are going to get a discount on your mortgage product. That is a basis on which we can enhance the overall margin.
William Chalmers: We have a good understanding of the customer's risk, and we encourage the stickiness, if you like, of the Lloyds Premier relationship. Another example, Perlie, we have talked a lot about how we have managed to get to 20% penetration of protection products in our mortgage product. As an illustration within that, which I think is kind of interesting, we are now at the point where 42% of our first-time buyers take a protection product. That is a number that we are going to continue to grow and build on going forward.
William Chalmers: It gives you a sense of progress, and it gives you a sense of how, in competitive markets, off the back of the holistic customer relationship and off the back of much of what we are trying to do in Accelerate 2030, we can enhance the overall customer value added at the same time as we enhance the shareholder value added.
Perlie Mong: Great. Thank you very much.
William Chalmers: Thank you, Perlie. I think we are at the end of the call. I would just like to say thank you to everybody for joining the call this morning, and thank you very much indeed for all of the questions. Appreciate your interest in the company and the stock and look forward to our continuing engagement. Thanks very much indeed.
Operator: Thank you. This now concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website. Thank you all for participating. You may now disconnect your lines.
