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Edited Transcript of LLOY.L earnings conference call or presentation 27-Jul-17 12:00pm GMT

Thomson Reuters StreetEvents

Half Year 2017 Lloyds Banking Group PLC Earnings Call (Fixed Income Investors)

London Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Lloyds Banking Group PLC earnings conference call or presentation Thursday, July 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Radcliffe

Lloyds Banking Group plc - Group IR Director

* Toby Rougier

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Conference Call Participants

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* Gregory Case

Morgan Stanley, Research Division - Strategist

* Lee Street

Citigroup Inc, Research Division - Head of IG CSS

* Paul Jon Fenner-Leitao

Societe Generale Cross Asset Research - Head of Financials

* Robert Louis Smalley

UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Lloyds Banking Group 2017 Half Year Results Fixed Income Conference Call. (Operator Instructions) Douglas Radcliffe and Toby Rougier will outline the key highlights of the results, which will be followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today. I will now hand the conference over to Douglas Radcliffe. Please go ahead.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [2]

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Good afternoon, everyone, and thank you for joining this debt focus call on the group's half year results. As just introduced, my name is Douglas Radcliffe, and I'm the Group IR Director. And I'm also joined today by Toby Rougier, who's our Group Corporate Treasurer; and Richard Shrimpton, who is Group Capital Pensions and Issuance Director. As per our previous calls, I will briefly cover the economic environment and financial performance and then hand over to Toby, who will cover the balance sheet. Finally, we've then set aside some time at the end for Q&A.

So building on our strong 2016 performance, in the first 6 months of this year, our simple, low-risk, U.K.-focused multibrand business model has continued to deliver. Underlying profit increased 8% to GBP 4.5 billion with a very strong underlying return on tangible equity of 16.6%, while statutory profit before tax increased to GBP 2.5 billion with a return on tangible equity of 8.2%. This financial performance has resulted in strong cash flow generation of around 100 basis points and has enabled the group to announce an increased interim dividend of 1p per share, which is up 18% on 2016.

Before I cover the financials in more detail, I'll first touch on the economic environment. The U.K. economy remains resilient following record employment levels, GDP growth, private sector deleveraging and rising house prices in recent years. As we have said before, a period of economic uncertainty can be expected if the U.K. leaves the European Union, and indeed, consumer confidence appears to have been softening in the first half of this year although it is important to note that this is down from previously elevated levels. Inflation is, however, now rising above disposable income given the recent depreciation in sterling and while this may affect consumption going forward, the economy should benefit from rising exports and earnings from foreign assets.

In terms of the U.K. housing market, house prices have continued to rise in real terms over the past 12 months, although price growth has slowed mainly in London and the Southeast. More importantly, though, affordability of mortgage payments remains better than or close to its long-term average in all regions except in London.

Finally in terms of the U.K. consumer, while consumer credit has drained in recent years, this growth follows a period of significant contraction between 2008 and 2013 as households deleveraged. At the same time, mortgage balance growth has remained very low throughout the whole period and as a result, overall household indebtedness has improved significantly.

Turning to the financials in more detail. Total income of GBP 9.3 billion was up 4%, and operating costs were 1% lower, delivering positive operating jaws of 5% and improving our market leading cost income ratio to 45.8%. Net interest income increased 2% to GBP 5.9 billion with an 8 basis point increase in the margin to 2.82%, offsetting a small reduction in average interest earning assets. This improvements in margin once again reflected lower deposits and funding costs which more than offset lower asset pricing.

In addition, following the successful acquisition of MBNA GBP 7.9 billion prime U.K. credit card portfolio ahead of targets on the 1st of June, there's a small 1 month margin benefit of around 2 basis points. Moving forward, MBNA will drive both averaging interest earning assets and margin growth in the second half of the year, and we now expect the full year margin to be close to 2.85%. Other income was up 8% at GBP 3.3 billion primarily due to growth in commercial banking up 12%, and Consumer Finance up 15% as well as a one-off gain of GBP 146 million from the disposal of the group's stake in Wakelin. Operating cost of GBP 4 billion was down 1% with efficiency savings from our simplification program more than offsetting the increased investment in the business and the impacts of increases from pay and inflation.

Our continued cost focus and successful delivery means we remain confident in delivering our target of a cost income ratio of around 45% as we exit 2019 with reductions every year. On credit, our asset quality remains strong with performance stable across the portfolio. The charge for the first 6 months was GBP 268 million with a net AQR of 12 basis points.

Given this continued strong performance, we are upgrading our 2017 guidance and now expect a net AQR of less than 20 basis points for the full year, including continued write backs and recoveries given our prudent reserving. In terms of portfolio composition, nearly 65% of customer assets are secured mortgages, 20% is commercial banking and just 9% is U.K. consumer finance, even after the acquisition of MBNA. Within this, our motor finance book benefits from both our prudent pricing strategy, which incorporates significant buffers and results in profit on vehicle disposals as well as general prudent provisioning, while our prime U.K. credit card book has a low risk appetite and conservative assumptions, including a small ARI asset on the group's balance sheet.

As previously mentioned, statutory profit before tax increased to GBP 2.5 billion and this reflects strong underlying profit partly offset by further conduct charges in the period. On PPI, we've taken an additional GBP 700 million provision in the second quarter, reflecting current claims levels, which remain above our previous assumption. The group's remaining provision of GBP 2.6 billion will now cover claims of around 9,000 per week due to the implementation of the time bar at the end of August 2019. Nevertheless, the strong financial performance in the first half has enabled the group to deliver strong cash flow generation, and I'll now hand over to Toby, who will cover this and the balance sheet in more detail.

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Toby Rougier, [3]

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Thank you, Douglas. Good afternoon, everyone, I mean, good morning to those dialing in from North America. As Douglas mentioned, the group continues to deliver a strong financial performance. As Douglas provided you with an overview of the full year results, I'll now provide an update on the group's balance sheet covering our capital funding and liquidity positions. I'll also talk to some of the regulatory developments we've seen of late, and finally, I'll comment on our issuance plans for the rest of this year.

So let me start with capital. The group continues to be strongly capitalized with an improvement in the CET1 ratio to 14% at June pre-dividend. The group continues to generate significant capital with a 100 basis points of capital generation over the first half of 2017. This is comprised of 140 basis points of underlying capital generation and a further 40 basis points of capital, arising from a reduction in RWAs and active portfolio management. The strong capital generation was partly offset by circa 80 basis points of conduct charges over the period. As Douglas has mentioned, these relate mainly to further provisioning for PPI.

In addition to the organic activities, the group successfully completed the acquisition of MBNA in June, neutralizing the capital we had retained at year-end to cover this.

Looking ahead to the remainder of the year, we continue to expect capital generation in 2017 to be at the upper end of our ongoing guidance of between 117 and 200 basis points. In addition to the strong CET1 position, the group's total capital ratio also remains strong at 20.8%. This is one of the highest levels globally and continues to provide significant capital protection to our senior creditors. And finally, on leverage, the group's leverage ratio was 4.9% at half year, which was broadly unchanged on the half and well in excess of the minimum requirement of 3%. The group's modified leverage ratio, which excludes central bank deposits, was slightly higher at the end of June at 5.2% and significantly in excess of the proposed 3.25% requirement.

Hence, in summary, the group's capital position remains strong and the group continues to be highly capital generative.

So turning next to funding and liquidity. We continue to maintain a prudent funding and liquidity profile with a loan-to-deposit ratio within our target range of 1.05% to 1.10%. Over the first half, the group has run a small excess liquidity position in anticipation of the acquisition of MBNA. Following completion of this acquisition, the excess liquidity position has reduced. However, LCR ratio remained in excess of 100% and comfortably above the regulatory minimum. We currently hold around GBP 122 billion of LCR eligible liquid assets which is up slightly on the half.

To give this some context, our liquid assets represent over 7x our money market funding and exceed our total wholesale funding, providing the group with essential buffer in a stressed scenario. In relation to our primary liquidity, the banking business also holds around GBP 102 billion of secondary liquidity, the vast majority of which is collateral eligible for use in a range of central bank or similar facilities.

Moving to funding. The group continues to fund its balance sheet predominantly through customer deposits, and we have maintained a loan to deposit ratio of 109% as at the end of June. Customer loans in the first half rose by around GBP 3 billion with the increase from MBNA partly offset by small reductions elsewhere, mainly in global corporates. Customer deposits rose by a similar number as customer assets.

Also, funding in the first half of the year decreased by GBP 8.5 billion or GBP 102 billion given the changes in the underlying customer balance sheets and the availability of the Bank of England's Term Funding Scheme. The group maintains a strong and diverse funding platform, which comprises a number of customer deposit franchises together with a range of secured and unsecured wholesale funding programs. While funding requirements in 2017 will be lower than our steady-state level, we would expect this to rise in the future and we'll continue to maintain our diverse range of funding platforms. I'll come back to our 2017 funding requirement and progress later in the call.

Turning to broader regulatory topics. We continue to monitor the evolving macro, prudential and regulatory environments. As many of you will know, a few weeks ago, the Bank of England published its financial stability report which introduced an increase in the countercyclical buffer to 0.5%. This will take effect from June 2018. There is also the expectation that the buffer will increase to -- further to 1% in November, again, effective a year later.

The group continues to generate significant capital, leaving us comfortably positioned to meet evolving requirements.

Another important development for the U.K. market at the moment is the continued preparation for the introduction of ring fencing at the beginning of 2019. The group's ring fencing plans haven't changed and we continue to make good progress towards implementation. The vast majority that's over 95% of our customer business will remain within our ring-fenced banking group, which will include Lloyds Bank plc, HBOS plc and Bank of Scotland plc. The existing wholesale funding from these entities will remain within our ring-fenced bank. Our normal ring-fenced bank is a new legal entity which will be called Lloyds Bank Corporate Markets, or LBCM for short. It will contain our commercial banking, financing and financial markets business, together with the business undertaken in our branches in the U.S. and Singapore. LBCM will also be the parent for our small subsidiaries and branches in Jersey and Gibraltar. It will be largely funded by customer deposits and internal capital and is unlikely to have a significant external wholesale funding requirement. LBCM was recently assigned credit ratings in line with our expectations from both S&P and Fitch, which will be finalized in the first half of next year.

And finally, on issuance, as I said earlier, the group's balance sheet is broadly stable and hence, our funding requirements are similarly stable over our planning horizon and remain in the region of GBP 50 billion to GBP 20 billion per annum. As we have previously discussed, we expect issuance in 2017 to be significantly lower than this due to continued deposit growth and the availability of the Bank of England's Term Funding Scheme. Over the first half of 2017, the group has completed GBP 4.5 billion of term issuance, about GBP 3 billion of which was holdco issuance from Lloyds Banking Group. As we've discussed before, we continue to anticipate issuing GBP 4 billion to GBP 5 billion per annum of holdco senior as we build our MREL. Most of this will be to replace existing opco debt, and hence, will not result in any material increase in total issuance.

As for the remainder of 2017, we will continue to access markets opportunistically, building on the group's strong liquidity, capital and MREL ratios. This is likely to include some more holdco senior as well as potentially some opco issuance. We don't currently envision to return the 81 or Tier 2 this year.

And so in summary, the group continues to maintain a robust funding liquidity position. Our capital position remains strong in absolute terms and relative to peers. Together with the strong capital generation in our business, this positions us well to meet any future regulatory or other headwinds and to continue to deliver on our strategy.

Douglas, back to you.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [4]

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Thanks, David. So to conclude, we have continued to successfully execute against our strategic priorities and have delivered strong financial performance and capital generation in the first half. Our simple and low-risk business model continues to provide competitive advantage, while our multibrand and multichannel operating model ensures our customers have complete flexibility in terms of how they choose to interact with us. The successful delivery of this strategy can be seen in the significant improvement in profit and returns over the past 5 years. Our strong financial targets reflect our confidence in the group's future prospects, and as mentioned earlier, we have updated our 2017 margin and AQR guidance while all other guidance remains unchanged and on track to be delivered. The remainder of 2017 will see us focused on delivering the final elements of our current 3-year strategic plan as well as preparing our next strategic update for the periods 2018 to 2020, which will be announced with our full year 2017 results early next year.

That concludes today's presentation, and we are now available to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Lee Street of Citi.

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Lee Street, Citigroup Inc, Research Division - Head of IG CSS [2]

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A couple from me, please. Firstly, on credit cards, do you have any former sensitivity now that show, if there's to be a 1% increase in the rate of unemployment, what that might do to your credit card losses or even long falling loan ratio. And secondly, just on you -- when you devise a new credit card, this is -- what type of stress tests or underwriting you actually do, which you keep referring to the lowest nature of the -- but what exactly how is underwritten? That is my question. And then, finally, just on group structure, was it you going through the whole ring-fencing process, but certainly would it make sense at some point to try and contact HBOS and then merge bankers going to the Lloyds Bank opco level. Does that make any sense to any point in time? That would be my question.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [3]

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Right, okay. I'll probably take the first one and then, probably, hand over to Toby. Unfortunately, as you'll probably guess, I'm not going to give you any specific data, first of all, in looking at the stressing of the cards. I mean, as you can imagine, I mean, 2 things to track, as we've highlighted. Clearly, in credit cards, following the MBNA acquisition, we've now gotten an $18 billion portfolio which is very much a prime U.K. block with a low-risk appetite and conservative assumptions. And certainly, if you look at -- for example, on the 0 interest rate balances, the EIR asset that we've got on the balance sheet is much, much smaller than some people have stated for other similar portfolios. So -- and when you look at the acquisition, as you can imagine, when you decide to progress an acquisition like MBNA, the due diligence that you're going to undertake is quite significant. Certainly, in the current environment, whether there is a significant amount of focus on consumer credit as a whole. As we flagged previously, I mean, actually, we think the market conditions actually for consumer credits are actually not as bad as some people fear because clearly, while consumer credit has actually grown in recent years, this growth follows quite the period of significant contraction between 2008 and 2013 as households, have deleveraged. And at the same time, mortgage balances have remained pretty low. So actually, overall household indebtedness has improved significantly with consumer credit as a share of disposable income well below the levels precrisis. As you can imagine, when we're looking at some form of acquisition, like MBNA, the amount of due diligence we're going to undertake is significant. And the fact that there was a significant overlap between the MBNA customer base and the Lloyd's customer base meant we had a really good feel. So all I suppose I could give you the assurance on is that a significant amount of stress testing is undertaken on that portfolio. A significant amount of due diligence, we've done on the MBNA portfolio, and we're very comfortable on our combined credit card book.

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Toby Rougier, [4]

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And the -- on group structure and a question on group structure, it's a good question. It's not currently in our plan at the moment, just around the group structure. We're focused on getting ourselves ready for ring-fencing and operating in a ring-fenced environment. So that's the creation of our non-ring-fenced bank, as I discussed on my -- in my speech. We'll also look at moving within our group structural, we need to move our insurance business out to be a direct subsidiary of the holdco and a similar -- and a little bit of moving around of some of the -- of our small equities business as well. So that's sort of the focus in terms of the group structure at the moment. I'd say that's quite a -- that's a plan of work that we've gotten out between now and the end of 2018.

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Lee Street, Citigroup Inc, Research Division - Head of IG CSS [5]

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Okay, fair enough. And just on that, did [Philip did say you had the balance sheet to actually] do that low at some point in the future or does it not really matter you just keep the structure as it is.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [6]

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I don't -- well, I don't -- the reason there are some advantages for us in having 2 large banks and 2 banking licenses in terms of FSCS coverage and [that's are some, so] there are some customer benefits from having the 2 legal entities and the 2 banking licenses.

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Operator [7]

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Your next question comes from the line of Paul Fenner from SocGen.

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Paul Jon Fenner-Leitao, Societe Generale Cross Asset Research - Head of Financials [8]

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It's Paul Fenner-Leitao from SocGen. You're obviously very well capitalized at the CET1 level, at the total capital level. You've got plenty of AT1 and legacy stuff still outstanding. You've got CRR2, which may mean that some of the stuff that goes beyond the phase in period stops counting even for MREL. I just wanted to get an update from you guys how it is that you're looking at the strength of your capital position on the one hand and quite a lot of this legacy stuff on the other, some of which has very long call dates and how you're perceiving kind of whether you need this stuff and how long it might take for you to do something about it. Just a sense of your core policy CRR2 in context would be very helpful.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [9]

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Okay. Let me take that one. So yes, you're quite right. We do have an amounts of legacy capital securities out there, and there are some variety of different legal entities within our structure. I think -- when I last looked at it, I think we had something like $6 billion of opco sub-debt outstanding. Going forward, clearly all of our new issuance of sub debt and 81s will be out of the holdco out of Lloyds Banking Group. In terms of our legacy positions, I'm afraid giving you to sort of the same answers as I gave at the full year. I mean, some of that will still count for reg cap even though it may not count for MREL purposes. It's still quite a way out and so we've got some sort of time to work out what to do, if anything, to do about it. So it's just something that we will work through between now and 2022.

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Paul Jon Fenner-Leitao, Societe Generale Cross Asset Research - Head of Financials [10]

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But some of these -- but some of the clauses, they are required under CRR2 are not ones that as I understand it from my read of your perspective is, are comments in any of your transactions, which suggests that even some of these nonsteps which would might otherwise in terms of legacy Tier 1 some of these nonsteps that might otherwise have been have counted as Tier 2 after 2021 are probably not even going to count as any form of regulatory capsule. But then you kind of it's -- just quite an expensive funding instrument.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [11]

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So we will pick up after it so they will continue to count. Even some of the legacy books, still continue to count as a direct cap and then the most of it, where you're quite right. And as I say, we'll work through it between now and the various call dates and maturity dates.

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Operator [12]

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Next question comes from the line of Greg Case from Morgan Stanley.

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Gregory Case, Morgan Stanley, Research Division - Strategist [13]

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Just a couple of quick questions from me. One following up from Paul's question on optimum capital stacks. So you guys clearly have an excessive total capital right now running at around about 20%, just over I think. And I know you guys have always been quite firm on the point that you want to have a very high level of total capital but just in terms of where holdco senior as it now comes in terms of spread, would it make sense to run that down? I was wondering if you had a view on where that number might land, to the total capital number. And also, on the core Tier 1 side, I appreciate 13% is the target. I'm just thinking about a world where you may have a 2% to 2.5% systemic risk buffer, a 1% countercyclical buffer. Is there a management buffer type of thing that you are looking at rather than at the hard 13%. Is it kind of a 50 or a 100 basis point number that I should be thinking about rather than a hard 13% at the kind of the end point level?

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [14]

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So I will cover 2 questions, Greg in terms of the CET1 target and then the total capital target. So yes, you're right. Our current guidance on CET1 if -- I think that this is for a level of around 13% and we think that is the right level for a low-risk business like ours. We've obviously reached that conclusion on the assumption that over time, the buffers would transition in, I mean, on account of cyclical buffer. It looks like it's transitioning in between now and the end of 2018. We're also assuming that we would see some reduction in some of our other stuff, and so Pillar 2A and potentially the Pillar 2B buffer. Do you remember the 2016 year-end, we saw a material reduction in our stress buffer on our PRA Buffer although we maintained our overall CET1 target of around 13%. So in effect, our management buffer increased in anticipation of the buffers transitioning. So that's the logic on the -- around sort of 13%. We think it is the right sort of long-term capital level for a business like ours. And we'll have to see how to go in the transition. But in terms of total capital, we currently target a sort of 20% level on total capital. It is -- we're operating slightly above that and have been operating slightly above that for, I guess, the last sort of 18 months or so, if it were -- a few basis points above that today. We -- again, we think it's the right level. We think a decent nonequity capital buffer provides a significant protection to our senior creditors, and we think that has value. Clearly, it's something that we keep under consideration, and we will look at what the appropriate target is from time to time. But currently, we are comfortable targeting it in terms of capital level around that 20% level.

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Gregory Case, Morgan Stanley, Research Division - Strategist [15]

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Okay. So as that number falls down through amortization of material, at least we should expect you to top that overtime back to 20%?

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [16]

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Yes, that would be right. We'll continue -- at the moment, we'll continue to target that 20% level.

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Operator [17]

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(Operator Instructions) We have one more question waiting at this time, and that comes from Robert Smalley of UBS.

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [18]

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Questions have been very good. So most of mine our follow-ups on those that have already been asked, if that's okay. First, I wasn't sure -- I was unclear about the point you were making on the GBP 6 billion of opco sub debt. Will you be continuing to issue some opco sub debt? Will you just let that run off and issue all from the holdco now? That's the first one. Second one, on Lee's point on corporate structure, is there value in keeping the HBOS box separate as you have collateral in there for covered bonds? Do you have tax loss carryforwards in that box still or not? Third, on ring-fencing, 97% at the bank according to the slides sits within the ring-fenced bank. You said that the non-ring-fenced bank is going to be funded by deposits and internal capital. So does that put a -- implicitly a cap on its size? And is it going to be 3% to 5% of the bank overall going forward? And then finally, if you could just touch on the commercial real estate market, what you're seeing now particularly given the macro economic and political backdrop and how you see that going forward.

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Toby Rougier, [19]

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Okay, real quick. First of all, let me take the first 3 and I might ask Douglas to make some comments about the commercial real estate market. Just on your first questions. So I wasn't clear enough maybe. So all of our future issuance of sub-debt and AT1s will be out of the holdco, will be out of Lloyds Banking Group, and we will not be issuing any sub-debt out of the operating companies going forward.

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [20]

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So you see -- so there is that out of choice? Or is there just no -- you've got enough internal equity capital in there that there's no other need, regulatory or discretionary, to do that from that entity anymore?

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Toby Rougier, [21]

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That is the structure. So we are a single point of entry resolution bank. So all of alien capital will end up coming out of our holdco, in line with that single point of entry resolution strategy. Your second question, if I remember correctly was HBOS, wasn't it, was about HBOS?

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [22]

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Right.

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Toby Rougier, [23]

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I'm not sure if we've got any detailed analysis of the points that you raised. And I guess it's just -- at the moment, it's just a question of priorities. So in terms of group structures, we are very much focused on getting ourselves ready for ring-fencing and what we need to do for that. I guess, once we've done that and once we completed that, ex files transfer, we will -- we might tend to think about what else to do with our group structures. So I'm not -- I don't think we have much more information on that currently. Third question was on ring-fencing. Robert, remind me what your question was?

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [24]

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Just in terms of the size of the ring-fence versus non-ring-fenced bank. And do you implicitly have a cap on the size of the non-ring-fenced bank given that it's going to be funded by deposits and internal capital?

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Toby Rougier, [25]

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So there's no expected cap. I mean, what sits within or ring-fence and what sits within our non-ring-fenced bank is largely prescribed. So it reflects the nature of our business. We have -- we are mostly a retail and commercial banking business. We have a relatively small markets operation. So our non-ring-fenced bank reflects that relatively small markets operation and relatively small non-EEA businesses. So there isn't an explicit cap. We don't have an internal cap but it will be -- because there's a relatively small part of our business that sits within the non-ring-fenced bank entity, it will be a small entity. And hence, we give you the guidance, just in terms of the volume of our customer loans and analysis of where that all fits within the ring-fenced and hence, essentially, that will fit within the non-ring-fenced bank at around sort of 3% in total.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [26]

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And I think the final question you had was really about commercial real estate and our exposure and appetite. Is that right?

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [27]

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Yes, that's right.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [28]

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Yes, okay. So if you look at the moment, so I mean, we're very -- as a prudent risk bank, we're very focused on ensuring that sector concentrations across the whole portfolios are very closely monitored and controlled. As you will have seen from this morning's slides in the equity presentation, I mean, our overall loans and advances to customers are just over that GBP 450 billion. And actually, as part of that, the U.K. direct real estate or the commercial real estate exposure is just about -- is just under GBP 20 billion. So as you can see, a really small proportion. That sort of level is probably broadly in line with our risk appetite. So I can't see that, that sort of level significantly increasing from there. I mean, when you look at that commercial real estate, it's very much driven by the group's mid markets and global corporate portfolio and it's focused on clients operating in the U.K. market. So it's a very prudent portfolio which we're comfortable with GBP 20 billion. So it's a small proportion of the overall GBP 450 billion portfolio.

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [29]

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And going forward in terms of the outlook for the market we saw this time last year, call it, a pause and then resumption of reasonable activity. What do you see over the next 18 to 24 months?

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [30]

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I mean, clearly when you look at it -- I mean, despite the physical uncertainties that we've seen and the potential impact of withdrawal from the EU, actually the market in the U.K. real estate in the strongest side has actually continued to be quite resilient with appetite from a range of investors. So from that perspective, I don't think we're projecting any significant changes in that area. I mean, credit quality across the whole of that portfolio remains good with minimal impairments and stressed loans.

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Operator [31]

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There are no more questions in the queue.

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Douglas Radcliffe, Lloyds Banking Group plc - Group IR Director [32]

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Excellent. In that case, that concludes the call. Thank you very much for everybody dialing in. Thank you.

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Operator [33]

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Ladies and gentlemen, this concludes the Lloyds Banking Group 2017 Half Year Results Fixed Income Conference Call. Replay info, for those of you wishing to review this call, the replay facility can be accessed by dialing 0 (800) 032-9687 within the U.K., 1 (877) 482-6144 within the U.S. or alternatively use the standard international number on 00 44 (207) 136-9233. The reservation number is 65079063. This information is also available in the Lloyds Banking Group website. Thank you for participating.