Capital Markets Day Transcript - LYG 2026-09-08

Operator

Good morning, everybody.

Amit Vidara, Host

Welcome to the ShareSoft webinar with Lloyds Banking Group. My name is Amit Vidara. I'm a director of ShareSoft and I will be your host for this event. It gives me great pleasure to welcome Douglas Radcliffe and Tom Grantham. And over to you guys.

Douglas Radcliffe, Head of Investor Relations

Excellent. Thank you very much indeed. And good morning, everybody. Some of you may well have dialed into these calls previously, so you may well have seen me previously. but I am Douglas Radcliffe, I'm the Group Investor Relations Director at Lloyds and as indicated I'm joined by Tom who's a senior manager in the team. We're really pleased to be hosting this webinar and to have the opportunity to speak directly with you. This is particularly important to us given the size of our retail register, indeed we've probably got the largest retail register in the UK. We've got a short presentation today covering the group's first half financial performance and also our new strategy Accelerate 2030. We will then spend the remainder of the session on your questions and as indicated please do feel free to actually write those questions on the Q&A element and we will address them as we go through. So with that in mind let's move to the first slide. These are context slides to start with but I thought it would be helpful. Lloyds is a UK focused financial services group with a low risk operating model across four core divisions. Our retail bank, our commercial bank, wealth and investments and equity investments. The breadth of the group gives us a unique opportunity to serve more of our customers financial needs and to make their experience simple smarter and more connected to deliver our purpose of helping britain prosper so turning now to the next slide uk financial services leadership we are the uk's financial services leader with competitive advantages that reflect are scale, digital and AI capabilities and efficiency focus. These competitive advantages underpin sustainable value creation, delivering for both our customers and our shareholders. We have around 28 million retail customers, around 1 million commercial relationships and market-leading positions across our target segments and products. This scale is supported by market-leading digital capabilities. Indeed, we have around 22 million mobile app users and around 7 billion annual digital log-ons every year, making us the UK's largest digital bank. Our customer lending and deposit balances today total nearly 1 trillion. These support a diversified revenue base that's on course to reach around 20 billion in 2026. We expect to deliver a return on tangible equity in excess of 16% this year which we expect to continue to grow in the years to come. So turning to our purpose on the next side. Delivery against our long-standing purpose of helping Britain prosper provides clear benefits for customers and communities across the UK, supports the real economy and creates profitable growth opportunities for the group. Looking ahead we see further opportunities to deliver our purpose with bold ambitions for the next phase. I'll now hand over to Tom who will take you through the first half financial performance before returning to outline our new strategy.

Tom Grantham, Head of Investor Relations

Thanks, Douglas. So the group delivered another strong performance in the first half of the year, with momentum evident across the business. Statute profit off tax was £3.1 billion, up 23% year-on-year. Return on tangible equity was 17.1%, reinforcing our confidence in full-year guidance of more than 16%. Net income was £9.7 billion, up 9% year-on-year, supported by strong growth across both net interest income and other income. Operating costs were £4.9 billion and flat year on year, demonstrating our continued cost discipline. So let me now turn to movements on the balance sheet on the next slide. Customer lending saw broad-based growth across the business, increasing by £5.3 billion or 1% in the second quarter to £492 billion and was up 2% year-to-date. Customer deposits increased by 5 billion or 1% in the quarter to 501 billion, demonstrating the strength of our franchise. So let me now move on to income. Net interest income was 7.3 billion in the first half at 9% year-on-year, delivering a net interest margin at 3.19% for the half and 3.22% in Q2 at five basis points in the quarter. Structural head Hedge earnings were £3.4 billion in the first half, with our guidance for hedge income unchanged at more than £7 billion for 2026 and more than £8 billion for 2027, with it then growing to the end of the decade. We continue to expect 2026 net interest income to be more than £14.9 billion. Moving on to other income, other income was £3.3 billion in the first half, up 11% year-on-year, with broad-based momentum across the group. having covered income let me move to costs on the next slide as you know cost discipline remains a core strength for the group and it's critical when we deliver our our ambitions operating costs were 4.9 billion in the first half which was flat year on year and that delivered an improved cost to income ratio of 50.4 for the first half and 49 in the second quarter we remain confident in our 2026 guidance for a cost to income ratio below 50% and clearly our second quarter result increases our confidence in that regard. I'll now turn to credit performance on the next slide. Credit performance remains strong and stable, reflecting our prime customer base, prudent approach to risk and healthy customer behaviours. The first half impairment charge was 617 million, equivalent to an asset quality ratio of 25 basis points. We continue to expect an asset quality ratio of around 25 basis points for 2026. Let me now turn to capital distributions. The group's strong capital generation supports significant growth in shareholder distributions, including a 30% increase in our interim dividend to 1.58 pence per share in the first half. This significant step-up reflects the actions taken to de-risk the business, our strong capital position, and our confidence in the future earnings trajectory of the group. Alongside this increase in dividend, the group has announced its first interim share buyback of up to £1bn. Taking the dividend and the buyback together, these represent £1.9bn of capital return announced in the first half. Let me now conclude on slide 30. To summarise the financial update, we are on track to deliver our 2026 guidance as you can see on the screen. This performance supports a progressive and sustainable ordinary dividend and our commitment to continued income growth, improving operating leverage, stronger, sustainable returns, and growing capital generation. I'll now hand back to Douglas to take you through our strategy, which is Accelerate 2030.

Douglas Radcliffe, Head of Investor Relations

Thanks, Tom. Our new strategy represents an acceleration of our transformation and ambition, while remaining in the evolution of our existing strategy and established strengths. Our purpose is unchanged, helping Britain prosper. We will accelerate through reimagined customer experiences, increased group connectivity and a productivity step change enabled by pioneering technology. This will be delivered through three strategic pillars. Grow the core, innovate to deepen and diversify and simplify to outperform. These pillars underpin four financial outcomes. continued income growth improving operating leverage stronger sustainable returns and growing capital generation let me expand on that on slide 16 our pillars represent distinct opportunities grow the core is focused on reinforcing our position as the UK's financial services leader we will meet more customer needs in our areas of strength and accelerating faster growing segments maintaining or gaining share across the core franchise. To achieve this, we will reimagine customer experiences embedding AI to make things simpler and more personalized than ever before. Innovate to deepen and diversify focuses on increasing cross-group connectivity whilst extending into higher value feed generating adjacencies and building new businesses. We will increase the group's presence in third-party and AI channels to be where our customers are. Our delivery here will support a high single-digit OOI growth. And finally, Simplify to Outperform is focused on how we'll create the capacity, pace and discipline to enable our acceleration. Investment in our people, data and AI are the cornerstones of this and are critical to enabling our growth ambitions and a productivity step change turning to slide 17 we are building accelerate 2030 on our existing competitive advantages turning these into sustainable value creation we will deliver mid single digit net income growth supported by high single digit growth in other income operating leverage will improve delivering a cost to income ratio below 45 percent in 2030 with year-on-year reductions This will support a return on tangible equity of around 20% and capital generation of more than 225 basis points in 2030. Turning to slide 18 and a focus on connected opportunities. Central to our strategy is making the group more than the sum of its parts by connecting our capabilities more effectively for customers. will deepen relationships improve customer outcomes and serve more customer needs this will deliver more diversified income and sustainable returns for our shareholders for example we will better connect our retail customers with our wealth and insurance propositions develop a unique end-to-end lifetime wealth proposition and a group-wide innovative banking proposition. Moving now to a deep dive on AI, clearly that's everyone's favourite subject at the moment, on slide 19. AI is a significant opportunity across both revenue growth and efficiency and we are well placed to take advantage as an established industry leader. Looking ahead revenue opportunities include customer coaching and advice agents, personalised group-wide rewards intelligent pricing faster underwriting and ai support for relationship managers our scale trusted brands breadth of customer relationships data and capabilities gives us a strong foundation to capture this opportunity responsibly importantly we are already embedding ai within our business and realizing the benefits and value today if you are interested in further detail I would definitely recommend watching the AI webinar from our CEO Charlie and our chief operating officer Ron that was undertaken late last year this is available on our website so turning next to slide 20 the group has strong momentum and our plans will further reinforce this supporting nearly a decade of ongoing mid single-digit revenue growth by 2030 and continued improvements in operating leverage and cost income ratio. These actions will drive strong sustainable returns of circa 20% in 2030. Let me briefly explain our financial framework that enables that on slide 22. The strategy is underpinned by a robust financial framework which is designed to deliver long-term and sustainable value. That sustainability is really important to us as a group. The framework rests on the three foundations of investment discipline, efficiency focus and risk management. Together they underpin continued income growth, improving operating leverage and strong returns and capital generation. The financial outcomes drive a positive feedback loop. They create capacity for further investment to reinforce business performance alongside, and importantly, delivering growth and sustainable shareholder distributions. Let me now turn to growing capital generation and growing distributions on slide 23. Capital generation and shareholder distributions will grow throughout the plan. We expect more than 200 basis points of capital generation in 2026, around 225 basis points in 2028 and more than 225 basis points in 2030. Our capital allocation remains disciplined. We will invest in organic growth and in talent to deliver our sustainable and growing distributions while continuing to strengthen the franchise. Let me close by bringing together our guidance on slide 24. For 2027 to 2030, we are targeting mid-single-digit net income growth and high single-digit other income growth over the plan period. We expect the cost-to-income ratio to reduce each year to below 45% in 2030 with an asset quality ratio between 25 and 30 basis points through the plan. We expect return on tangible equity above 18% in 2028 and around 20% in 2030 alongside capital generation above 225 basis points in 2030. Capital distributions Distributions will continue to comprise of a progressive and sustainable ordinary dividend. You'll clearly see that obviously we had progressive being an increase of 30% in the latest six months, but we'll also have excess capital distributions that will be considered half yearly. In conclusion, Accelerate 2030 is an ambitious but disciplined plan. it builds on our competitive strengths to deliver continued income growth improving operating leverage stronger sustainable returns and growing capital generation for our shareholders thank you for listening we now have left we have plenty of time left for questions so we'll move to the questions and and in essence respond to all of the questions that have been submitted so if I go through what I'll probably do is use Tom at times as well to just answer different questions so the first question I'm going to that's been submitted to us was if the bank rate stays 3.75% but 10-year gilts rise another 100 basis points what happens to Lloyd's net interest income what happens to the net interest margin what happens to the tangible net asset value and what happens to the return on tangible equity. So let me do perhaps provide a little bit of detail. We won't be providing specific numbers here, but I think it's really important to get a gauge of how the trends work for a bank and the interest rate environment. Tom may well be able to add further detail as we respond as well. So I think the first thing I'd say is, look, from a Lloyd's perspective, we are very clear with every set of results what our economic expectations are. We outline them specifically within the documents. If you look at our latest economic changes, we've effectively got GDP growth. That was revised to 1% for 2026, and indeed we expect 1% in 2027 as well. Peak unemployment rates, we're currently expecting at around 5.5%, and we believe that's going to peak in the first quarter of 2027. And we expect the bank base rate to be held through to the third quarter of 2027, and we still see a terminal rate of 3.5%. So we're very clear on where that is at any point in time. That's really important for us, because essentially when you look at it from our side, there's a significant element of our P&L that's related to the structural hedge. The structural hedge is essentially interest rate insensitive balances that get invested in the markets. That's actually a large notional of about 246 billion. If you look at the moment on that, we're currently earning a yield of about 2.8%. But as you rightly say um you know but but what happens is that yield is 2.8 but what we'll do is we'll reinvest a proportion of that every year at whatever the market yield curve is at that point in time so for example the the current if you look at the um the the length of of that that structural hedge that that structural hedge at the moment is about um 3.75 years so essentially means it will run off over seven, seven and a half years. So essentially you're reinvesting about 30 to 40 billion pound of that hedge at any point in time. And you're actually reinvesting at the yield, wherever the yield curve is at that point. Now that might be four years, five years, six years, depending on where you are. But essentially, as you can see, the yield curve at the moment is much higher than the base rate and indeed higher than expectations. So the yield curve at the moment is probably more like about 4% and you're reinvesting that every year. So essentially, if you've got to the stage where the yield curve actually increases, and if it's by something like 100 basis points, you're actually going to receive benefits on net interest income. You're going to receive benefits on net interest margin. So that will essentially benefit across the piece, both your ROTI and your TNAB. So a higher rate is beneficial, or a higher yield curve is beneficial from a structural hedge perspective obviously what you need to be wary about is because obviously we are a bank um a key part of our business is lending and the credit environment so you don't want rates to go up too high because otherwise if rates go too high what you'll see is an impact on credit and the amount that you have to take in provisions so essentially you will have that as some offset across the piece so i think those are those are key drivers um there tom is there anything else that you would want to add overlay on that?

Tom Grantham, Head of Investor Relations

Maybe just two minor points. So one is, obviously, gilt yields are distinct from the yield curve. They obviously follow similar patterns, but Douglas is talking there to the yield curve and essentially the market's expectation for base rates over time, whereas obviously there are slightly different drivers that determine where the gilt yields are. And they largely are correlated, but there is clearly sometimes differences. It's worth saying that the economics Douglas just talked to and that the benefits that he talked to that could come to an NI if you had an increase in swap rates. That would be from swap rates. GILTS would not necessarily follow that perfectly. So if you had an increase in GILTS, which without an increase in swap rates, you wouldn't necessarily get all that benefit. At the same time, though, we are hedged to those increase in GILTS yields. And so there wouldn't be any impact, wouldn't be any negative impact to the group as well. Clearly, as I said, those swap rates are the market's expectation of future bank base rate. And so clearly the question talks about what happens if bank rates stayed at 3.75%, eventually you would expect those two sort of swap rates and bank base rate to converge at some point. At the moment, we don't expect that to happen. At the moment, as Douglas said, we expect the bank base rate to stay at 3.75% and then to fall 3.5%. And therefore, our expectations for swap rates are on that same basis. But as Douglas said, we'll see where the market goes. The only other point I would add is on TNAV, one sensitivity we have, and you obviously mentioned TNAV in the question, is when rates go up, that is a negative for the mark to market of the structure hedge. And that comes through in something called the cash flow hedge reserve. Now, when that negative increases, that actually reduces TNAV. So very simplistically, higher rates often mean a negative impact for TNAV. Now, there are clearly positive tailwinds for TNAV that will offset that. And we talked to the fact that we expect material growth in TNAB over the medium term. But on a pure sort of everything equal basis, high rates tend to be a minor headwind for TNAB.

Douglas Radcliffe, Head of Investor Relations

Excellent. Thank you, Tom, for that extra. The next question that came through was actually relating to a recent search sale by our CFO, William Chalmers. Some of you may well have noticed that he sold a stake quite recently of about £10 million. And the question was whether there's anything that we should read into it with regard to that sale. We've been very transparent with regard to that in the fact that actually, you know, there's good reasons for him selling. I mean, simply, if you look at a lot of it is due to diversification of his portfolio, as you can imagine. He's very heavily exposed to Lloyd's shares, having never sold any shares in the previous seven years he's been in the organization i think we're like any good investor would do that they will look towards diversifying your portfolio there's a there's a few other points however that i think are really worth uh referencing when talking about that sale um firstly actually despite the sale he is still holding well in excess of his holding requirement of 450 of his of salary indeed that holding requirement was was increased only last year so in essence he could have sold more um he also has a significant amount of shares that are uh yet to vest probably about 15 million shares so you know going forward he you know and indeed he may well be paid in uh shares going forward it's part of the nature of of large corporates and the fact that a lot of remuneration is is actually paid in in shares rather than cash itself so it's highly likely that he will be receiving uh additional shares um you know going forward in the future um i think from from william's side i think there's a couple of things as well is the fact that obviously he hasn't sold at all in the last seven years um his view is the fact that actually he's not in the business of selling shares often, it actually makes sense to make a, you know, a sale once rather than on a regular basis. And if so, given the nature of holding, it's likely to be larger than most of our holdings. What I would also say there is it's also a reflection of, you know, we're almost coming to the end of the first stage of the strategy, recognition for what he's done. And as I say, there'll be more shares coming through likely as part of the next stage. So actually, the actual timing on conclusion of the existing strategy, launching of a new strategy, seems like the obvious time. What I would say, William is very much committed to the organisation, very much committed across the piece and still has significant exposure to Lloyd's shares. Indeed, as I said, he could have sold significantly more. So in essence, that's just a brief overview of that share sale. There's a question there on, is Lloyd's performance in line with others in the UK? How does this compare with other banks? In essence, this is really quite interesting, both from a, I suppose, a UK perspective and a US perspective, and both from a performance side and also from a share price perspective side. If you actually look at the wider market as a whole, UK banks essentially reported what a 5% pre-provision beat in the first quarter of 2026, despite elevated expectations leading into the results. That was primarily driven by other operating income-led revenue strength that outweighed inline costs. However the upgrade potential itself was limited beyond the Q2 outperformance given there are only minor revisions to guidance. So I think when you start to look at performance it's as much about every bank has slightly different areas of guidance, slightly different areas of expectations and indeed has put out guidance relating to different periods of time we very deliberately put out guidance uh 2030 guidance but there are elements of that guidance as well that are staged over the number over the next few years for example we've said that our cost income ratio will be less than 45 percent um by by 2030 but we've indicated that it'll improve each year during that period in the same way when we talked about return on tangible equity we've talked about it being around 20%. We've also talked about it being greater than 18% in 2028. So in essence, what we're saying is the fact that actually, we are very confident in delivering against the guidance that we've done. We've very successfully delivered against the strategy for 2026. We're not quite there yet, but we fully anticipated delivering that guidance. And that will be what will be reflected. Each of the different banks, whether that be UK banks, or indeed some of the international banks will have their own guidance and be able to perform in different ways. If you look at the UK share price performance, we've performed better than our UK peers this year, and that's recognition of the delivery and the sustained strength and financial performance. If you look at it from a US perspective, the US market and indeed European markets are different with regard to both their regulatory environment and their economic environment. So what you start to see is that their returns, their cost income ratios are actually quite different. So actually doing a direct comparison is quite tricky. Tom, is there anything further you would want to add to that?

Tom Grantham, Head of Investor Relations

No, I think that covered the main points. I think, and exactly like you say, every bank has their sort of area of focus. Clearly, the thing that's differentiated us from other UK banks over the last few years as other income. That has been a differentiator and will continue to be a differentiator. And that's an area where we've been growing faster than other UK banks. So it's a really important income stream for us. If you compare UK and US on maybe a couple of bases, I think from a profitability perspective or a returns basis, that gap has closed. So it used to be a much wider gap in terms of the US banks had higher returns than UK banks. That gap has closed over the last few years. Where there is still a delta, though, is on valuation. So US banks tend to have a higher valuation, and you can look at it on different metrics, versus UK and frankly European, but particularly UK banks. And so that's an important thing for us as we look at sort of the future valuation perspective of the group and UK banks in general is it does seem to be a discount there that clearly we'd hope would close over time. So those are probably the only other two things I'd add.

Douglas Radcliffe, Head of Investor Relations

Okay, good. Another question that's come in is at what level do higher gilt yields cease being positive for Lloyd's and become negative through mortgages housing and credit losses so again you know look we're not going to be specific there this sort of relates to the to the previous uh question we had in this area um essentially what i would say it's probably more like you know the the yield curve rather than the gilt yields that are actually going to be more relevant to us uh as an as an organization um you know if you're going to have you know what i would say is if you look at the interest rate environment and interest rate environment as it is at the moment is probably more optimal for an organization for a financial services firm such as ourselves because you actually have the ability to manage both the asset and the liability side of the balance sheet if rates are uh if the yield curve or rates are too low it becomes much more difficult to manage in the same way if rates are too high it becomes too much uh it becomes difficult to manage because you can only manage one side of that balance sheet so in essence what you're saying is is there actually a a level at which uh it switches over it's not it's difficult because it's not the only factor in play do i think that an extra 50 or 100 basis points would have a significant impact from a credit perspective no i don't given the fact that rates have actually been higher in the last three or four years if you were talking more like a 400 500 basis points increase then i suspect that that would be more of an impact on credit. But there isn't specifically almost like a point in which that tips. Again, Tom, I don't know whether there's anything you'd want to add to that, but I think it's the yield curve that's probably more relevant to us than the Gilt yields. No, I agree.

Tom Grantham, Head of Investor Relations

I think you covered everything there.

Douglas Radcliffe, Head of Investor Relations

The next question is, at today's valuation, are buybacks still more value accretive than retaining capital or increasing dividends? So I suppose the first thing is to look at actually our capital return policy. And I mentioned this in the presentation in itself. So our approach is that we will have a progressive and sustainable ordinary dividend. As I indicated, we actually increased that by 30% at the half year. And then we will review the excess capital that we generate on a half yearly basis and look towards returning that to shareholders. Now, clearly, there are a number of ways in which you can return capital shareholders. You could do a special dividend, you could do a buyback, or indeed, you could actually undertake greater M&A. So at this moment in time, obviously, you saw at the half year that we took the view that we would have an increase in the dividend, so a progressive and sustainable ordinary dividend, and we announced an additional buyback of a billion pound. So from that perspective, at this moment in time, we believe that actually still using buybacks for the excess capital is a good use of capital. And the reason that we believe it's a good use of capital is the fact that actually, if you look at the strategy, the delivery, the future expectations of the organisation, we still believe that the group is undervalued so we believe that that is actually a very good use of funds at this moment in time however as you rightly say depending on where the share price is depending on other circumstances in the market whether that be valuations that can change from time to time so in essence we review that or when i say we review it the board reviews it on a half yearly basis so after the half year results and after the full year results um the board will review the excess capital um capital creation and then say what the best way of returning capital to shareholders is okay that was addressing that question um another question that had come up was um diversify and the question was should we be selling some current brands or indeed uh acquiring more well you'll probably um recently seen the announcement with regards to you know the halifax brand in the fact that actually we're retiring the halifax brand and actually you know focusing very much on deloitte's brand um in england and indeed um the bank of scotland uh in scotland so those will be the two primary retail brands that we will use uh across the uh across the uk um and that's very much been the approach and the decision that's been made, both from a simplicity perspective and indeed from a customer perspective about making sure that the actual proposition is aligned to all customers effectively using technology. We do have other brands across the piece and we will use other brands in specialist segments, but for a core retail space, those are the two brands that we intend to use going forward. Again, Tom, I don't whether there's anything else that you would want to add to that no i think that's exactly right okay uh we have also a question on uh credit uh and indeed the the credit so it says 25 to 30 basis points is guided for the annual cost of risk seems high for a low risk retail bank like lloyd's can you walk us through why right why the cost of risk should be that high please Well, I suppose simply, I mean, and again, I suppose the way to look at this would actually be to look at, you know, the slides that we do on credit and indeed performance at any point in time. So, you know, we've continued to, you know, from a group perspective, we are very much a low risk organisation. Indeed, you know, the way that we look at underwriting remains prudent. And indeed, if you look at the performance, you know, since the financial crisis, I think that, you know, it has remained and has continued to outperform. When you look at that, that's across both the retail book, which obviously covers both secured and unsecured lending. Obviously, you know, we've got a mortgage book of around 300 billion, you know, because that's a secured book, what you tend to see is the actual losses on that remain remain less. Indeed, if you actually look at the average loan-to-values on that book, it's significantly lower than where we were indeed, what, 15, 20 years ago. If you look at the portfolio as it stands at the moment, we're not seeing any deterioration. It's strong, it's stable credit performance, it reflects that prudent lending and the resilient customer base that we talked about. The arrears are low and stable across the portfolio, and indeed early warning indicators are stable. And what you've seen in the second quarter was an impairment charge of about 617 million. That was equivalent to an AQR of about 25 basis points. If you look at the way that impairment is done, impairment is calculated both from essentially the deterioration in the portfolio that we're seeing in any quarter and also modelled economic scenarios in the way that effectively if we're looking at expected losses it has to take into consideration your expected view of the economy going forward. So those are the two aspects that are there. Pre those modelled economic scenarios actually your asset quality ratio was about 28 basis points in that second quarter. So actually, when you look at the target that we've got going forward, that range of about 25 to 30 basis points isn't far off from where we are now. And it's very much a sign of, you know, the prudent nature of the book. What I would say is that, frankly, impairment is a cost of doing business. There will always be losses associated with lending you know even as the most prudent come even if you have the most prudent bank in the world the likelihood of still having losses is there it is a cost of doing business so the expectation is it's 25 to 30 basis points that seems to be the appropriate level and seems to be in the case indeed over previous cycles anything else you'd add to that one Tom No, I think it's exactly right in the sense that when we've used to talk about through the cycle cost of risk, it was 30 basis points.

Tom Grantham, Head of Investor Relations

The fact of the last years is we've actually had a very good performance from an asset quality perspective at being less than 30 basis points. And so the 25 to 30 reflects the fact that actually it's a more normalized credit cycle and reflects the fact that we're continuing to grow our lending. And as Douglas says, that's the cost of doing that lending. But it's a good performance.

Douglas Radcliffe, Head of Investor Relations

Yeah, excellent. Another question that's come through is how much of the targeted circa 20% to 2030 return on tangible equity is structural operating environment versus the interest rate hedge environment? Well, what I would say is that there are different elements across there. You can't do a specific split across the piece, but there are very much specific drivers of the return on tangible equity. And what I would indicate there is that's driven by both net interest income, other operating income, impairments and indeed costs. So when you look at it across the piece, what I would say is net interest income is very much driven. Yes, it's driven by the operating environment, the yield curve, how you reinvest your hedge. But it's also impacted by the actual volume of business that you're undertaking. and actually you look at it from a lending perspective actually we had Q2 lending which was up what 5.3 billion so that's about one percent across the quarter so actually if you look at it from how you're writing business and the volume of lending that you're you're driving that's also a key driver and a business driver of what you're going to deliver from an NII side if you look at it from an other operating perspective and other operating income is an area that Lloyd's really differentiates itself. Very much versus our peers, it's been very deliberate. We don't want to be as reliant on net interest income and the whole interest rate environment. You want to be at a stage where you can actually have other operating income that continues to deliver. Actually, if you look over the past few years, we've continued to deliver probably growth in our operating income of probably 7%, 8%, 9%. and indeed we continue to expect over the course of the plan to deliver high single digit growth in our other operating income. It's a key differentiator, it's very much driven by the business mix and where our investments are being directed. Costs, cost remains really important for us as an organisation and again I think is a differentiator. Look we've very much, if you look at the performance in recent years, we've had very much a focus on efficiency, a very much focus on managing the operational costs in the business. Indeed, if you look at the operational costs this year, they're actually pretty largely flat. Now, that's not always going to be the case, and we'll continue to want to invest in the business, and that will be the case. But we will continue to manage costs very effectively going forward. Likewise, obviously, returns will be dependent on the credits environment and if the credit environment was to deteriorate significantly, that would have an impact. But so what I would say is I think two elements here is the fact that it's linked by both the interest rate environment, but very much specific investments into how we're going to deliver going forward. Indeed, if you look at some of the specific initiatives that we talked about in Accelerate 2030, there is a significant amount of investment going into those to enable us to deliver across the strategic priorities um there's been a question oh i think we may have already addressed this if not already asked can you talk about how you think about the mix of buybacks and dividends within your distributions in the context of the multiple you're trading at please yes so we've talked about the progressive and sustainable ordinary dividend policy and then consideration of buybacks at the end of each year you know very much takes into consideration where we see the value of the organization, where we see almost like return on tangible equity, where we see the performance of the business and how we see that developing in future years, influencing the decision that we make on buybacks. So I say the decision we make, it's a decision that's made by the board at every half year. What I would say is the fact that, you know, the 2030 targets that we do have are indeed challenging and I think that it's worth flagging that a lot of it will be dependent on the interest rate environment at the time and that can change and I think the other thing to flag is that the UK market remains a very competitive environment. So there's a question here that it might be worth you addressing which is on the legacy preference shares.

Tom Grantham, Head of Investor Relations

I think the question was in terms of the legacy preference shares that we have outstanding. Do any of these still count towards your capital ratios and would you consider future tenders over time? So I'll answer this very briefly. So firstly, yes, they do count towards our capital ratios, specifically tier two capital. And then secondly, in terms of future tenders, we will only do future tenders if it makes economic sense to the group. And so that's not saying yes or no, but clearly we will look at those as they come up and opportunities come up. And if they make economic sense, we will look at them. But clearly there's no commitment in that regard.

Douglas Radcliffe, Head of Investor Relations

Excellent. We've got another question actually on mergers and acquisitions in particular which states that with the various acquisitions has the synergy been created on various common functions and how much has it improved the operating costs? So yeah I think that's definitely something that's worth talking about particularly M&A and indeed how we look at M&A and indeed past acquisitions that we've made. So I think, first of all, from what I would highlight is that actually our strategy that we've outlined is an organic strategy. So our priority as a business is organic growth. That's the focus of the business as a whole. We will look at all opportunities that come into the market where there is strategic alignment. So I think that's the first point to call is, you know, is the business that we're looking at aligned to the strategy that we've outlined and how we expect it to deliver going forward? On top of that, we then look at value, speed and risk. So actually, is that acquisition appropriate from a risk perspective? Is it in line with our prudent risk appetite? Does it actually create value for us as an organization and deliver appropriate returns and indeed would it enable us to almost like accelerate speed to market in certain areas that's particularly relevant if you're looking at things like technology when you look back at the acquisitions that we've made and indeed haven't made we've got high hurdles and that deal has to make sense from an internal rate of return so if you look at you know deals that we've made in the past. So we bought Curve, which was effectively a digital wallet. So that's more of a technology based acquisition. These are all relatively small, I would say. We bought Tusker. Tusker was a salary sacrifice motor finance business, which has been hugely successful. Over the last three years, I think the actual size of the fleet has quadrupled from that side. We bought Embark, which was effectively a platform for the insurance business. So there's various different acquisitions that we've made where we felt it was appropriate. To date, those have been relatively small in the context of the piece. But we will continue to look at elements throughout. out we will always build in those any synergies whether that be cost synergies whether that be revenue synergies um you know over time you know through our p l and it will be reported both from a divisional perspective and in the group numbers so it will be reflected clearly you get the most benefit from lots of these acquisitions in years um you know followings that might be two three years afterwards. But yes, they are indeed all reflected in our numbers. Anything else that you would add there, Tom, just from an M&A perspective or the way that we look at it?

Tom Grantham, Head of Investor Relations

No, I think the key, obviously, the question was talking specifically around sort of cost synergies.

Douglas Radcliffe, Head of Investor Relations

I think we've lost Tom there. But in essence, yes, as you said, it was looking at at cost synergies and they will all be incorporated in the numbers over time okay um that actually concludes uh all of the questions that have actually been submitted um so it probably makes sense just to say look thank you for your questions thank you for joining us today uh we really appreciate the continued interest and support of all of our retail shareholders and actually we really look forward to updating you on our progress as we deliver Accelerate 2030 going forward. So thank you very much indeed.