Earnings Call Transcript - LYG Q4 2021

Charlie Nunn, CEO

Good morning, everyone. It's great to be here to see so many people in the room today. And I'd also like to welcome everyone joining us on the webcast and the phone lines this morning. Since I joined the group, I've spent a lot of time getting to know the business and our people. It is great to have the opportunity to speak directly to you, our investors and analysts. I have been with Lloyds for over six months now. I have to say I'm even more excited about the opportunities for the group today than I was when I joined. I've seen for myself that Lloyds Banking Group is an organization with significant competitive strengths, a fantastic franchise, including the UK's leading digital bank, and great people. But there are also some real opportunities for the group to grow whilst maintaining costs and capital discipline. We have a powerful group purpose helping Britain prosper. This underpins our new strategy and is integral to everything we will do. As you will hear, I believe that building on these strong foundations and raising our ambition on our purpose, growth and efficiency will enable the group to deliver higher, more sustainable returns to investors whilst meeting the needs of our broader stakeholders. I'm pleased to be able to share the details of our new strategy with you today. But before I do that, I know you'll want to hear about our performance in 2021. So I'm going to hand over to William now to run through the strategic and financial progress the group has made over the last year.

William Chalmers, CFO

Thank you, Charlie. Good morning, everyone. And once again, thank you for joining and for those of you in the room, it's great to be with you in person today. Let me turn first to an overview of the financials on Slide five. Lloyds Banking Group delivered a solid financial performance in 2021, alongside continued business momentum. Net income of £15.8 billion is up 9% on 2020, supported by a net interest margin of 254 basis points, up two basis points on the year. We remain committed to efficiency, and our cost income ratio for 2021 is 56.7% and operating costs of £7.6 billion are in line with guidance. A smaller year-on-year increase in operating costs was driven by the accelerated rebuild of variable pay of stronger than expected performance, which I mentioned at the half-year. As the quality remains strong, combined with the improved macroeconomic outlook for the UK, this supports a net impairment credit of £1.2 billion. Driven by this solid underlying financial performance, our profit after tax of £5.9 billion and the return on tangible equity of 13.8% are both significantly ahead of the prior year. In this context, we've seen continued balance sheet growth and a strong capital build of 210 basis points in the year. The group's exceptional capital position has enabled the Board to announce a share buyback of £2 billion alongside the ordinary dividend of £0.02 per share for the year. Our total distribution for 2021 is equivalent to £3.4 billion, around 10% of the group's market value. I'll now turn to look at how we've helped Britain recover during 2021, on Slide six. As you know, our purpose as an organization is to help Britain prosper. Within this, in 2021, our focus was on helping Britain recover, and specifically addressing areas where we can make the most difference. We've supported over 93,000 startups and small businesses in 2021, exceeding our original target of 75,000. We've lent over £16 billion to over 80,000 first-time buyers and provided over £3 billion of new funding to social housing. And importantly, we're also making progress against our diversity targets. Clearly, we need to go further to meet our ambitions in this area. Now moving to other aspects of our strategic progress in 2021, on Slide seven. We outlined a strategic review in 2021. A year ago for a period of transition. I am pleased with the progress that we've made during the year, our execution has provided a strong foundation for our new strategy. Touching briefly on some of these achievements. We've maintained our record all-channel net promoter score at 69. We've seen £16 billion net growth in open book mortgage balances and delivered over £7 billion of net new open book assets under administration in insurance and wealth. Alongside, we saw increasing customer usage of our digital channels, including growing the number of SME products originated digitally by around 60% and onboarding three times more clients to the new cash management platform versus 2020. We've also established important proof points in technology R&D. Finally, like many businesses, we're rolling out new hybrid ways of working. We've managed to reduce our office space by around 9% in 2021, ahead of our target of 8%. I'll now look at the group's financial performance in more detail, starting with solid net interest income performance. NII of £11.2 billion is up 4% year-on-year benefiting from a 2% increase in average interest-earning assets and a stronger net interest margin. AIEA is £445 billion or up £10 billion in the year. With strong mortgage growth more than offsetting modest reductions elsewhere in the portfolio. The margin of 254 basis points was resilient, with a Q4 margin of 257 basis points up two basis points on Q3. Within Q4, the impact of competitive mortgage pricing was more than offset by rate rises and lower funding costs. We remain positively exposed to rate rises. Currently, we would expect a 25 basis point parallel shift in the yield curve and associated base rate rise to benefit interest income by around £200 million in year one. This number is illustrative and based on the same assumptions, including the 50% passed on as we used in Q3. We provide further disclosure on this in the appendix. Looking forward, we expect low single-digit percentage growth in AIEAs in 2022. This will be supported by growth in the mortgage book and recovering unsecured balances. We now also expect the margin for 2022 to be above 260 basis points. Given the importance of mortgages for the group, let me look at this book in more detail on Slide nine. As mentioned, we saw continued strong mortgage growth in 2021. Balances are up £13.7 billion in the year, including open book mortgage growth of £16 billion. Q4 saw a modest open book growth of £0.7 billion based on a somewhat slow market and our own participation choices. Meanwhile, a bank book of around £64 billion is down 16% on 2020, seeing stronger attrition in Q4 given customer remortgaging in the context of rising rates. And clearly, that pattern could continue. It's worth touching briefly on mortgage margins. As you know, the market has become increasingly competitive in recent quarters, with new business pricing moving below the level of maturities in the fourth quarter, resulting in pressure on mortgage margins. Completion margins across Q4 were around 115 basis points, the low front of charities for around 150 basis points. Looking forward, we expect the group margin over time to continue to be impacted by maturities of high-yielding business repricing then at prevailing levels. This will of course apply for a proportion of the whole book turning over in any given period, including refinancing existing customers. To give you a sense of scale on this, in 2021, this number was around £90 billion. With that said, we continue to see mortgages as attractive from returns and from an economic value perspective. Now turning to our other asset books on Slide 10. UK consumer finance balances are down £0.8 billion on 2020. However, despite an Omicron-induced pause in December, we're seeing improving spending levels and are starting to see some growth in credit cards. Balances in the card book were up £0.5 billion in the second half of 2021. A large part of the net consumer finance decline is due to the £0.7 billion reduction in motor finance balances. That was mainly in the first half, and this in turn is significantly the result of supply chain constraints across the motor industry, which now are showing signs of easing. Commercial Banking balances around £2.8 billion in the year, it includes a £1.2 billion reduction in government-backed lending schemes and a £1.6 billion reduction in other underlying businesses. That is driven by elevated levels of client liquidity, which are likely to persist in 2022. Now looking at the other side of the balance sheet on Slide 11. We continue to see significant deposit growth in 2021. Deposits increased by £25.6 billion in the year, albeit reducing £2.8 billion in Q4. The deposit margin of 15 basis points in 2021, 17 basis points in Q4 reflects a low overall funding cost. We will continue to see inflows to our trusted brands. Retail deposit balances were up almost £28 billion in the year and £3.8 billion in the fourth quarter, given lower levels of customer spending and of course higher levels of saving. Commercial deposits were around £3 billion in the year following the reduction of £7 billion in the fourth quarter. The Q4 pattern reflected our business optimization activities. In aggregate, group deposits are now around £65 billion higher than at the end of 2019. This gives the group opportunities to further serve customers, as well as increase our pool of hedgeable balances, as outlined on Slide 12. In the context of our significant deposit growth, we've increased the structural hedge capacity by £30 billion during 2021. That’s to £240 billion. Hedge capacity has now increased by £55 billion since the end of 2019, based on our continued review of deposits hedge eligibility and deposit growth of £65 billion over that same period. Response to positive movements in the yield curve in 2021, we have reinvested the nominal balance up to the approved capacity of £240 billion. Meanwhile, the weighted average duration of the hedge remains around 3.5 years, just slightly below a neutral position for four years. Based on this recent gross income of £2.2 billion from hedgeable balances over the year. Looking forward, we have around £30 billion of maturities in 2022, which gives us flexibility to invest. Together with rates moves based upon our planning assumptions, 2022 hedge income will be ahead of 2021. And then again, we expect a further modest increase in 2023 and 2024. Now moving to other income on Slide 13. Other income is showing early signs of recovery. We delivered £5.1 billion in 2021, up 12% from the prior year. As I said, we benefited from improving performance, particularly in retail insurance and wealth and our equities business. Commercial banking has been broadly stable. Other income of £1.3 billion in the fourth quarter includes a benefit of around £80 million from insurance assumption methodology changes. If you strip out this less predictable item, the underlying run rate for Q4 was around £1.2 billion in line with my comments over recent quarters. Looking forward, we expect the underlying run rate and other income to build gradually depending upon customer activity levels, and including our new and continued investments. You'll hear more about our strategic ambitions and other income from Charlie in the next section of the presentation. And finally, as discussed in Q3, lookout for the IFRS 17 impact in 2023. Moving on, the group has maintained its focus on cost efficiency during 2021. So let me talk more about this on Slide 14. Operating costs of £7.6 billion for 2021 are in line with our guidance. As mentioned previously, the 1% increase in operating costs includes rebuilding variable pay, which in turn was driven by our stronger than expected financial performance. Remediation of £1.3 billion is significantly higher than 2020. Importantly, this includes a charge of £790 million for HBOS Reading, with £600 million recognized in the fourth quarter. The Q4 charge reflects the estimated future operational cost and redress for HBOS Reading. In respect of this, please note that uncertainties remain around the timing of the flow and indeed the ultimate cost of decisions from the ongoing independent panel review. Continuing our recent moves towards increased transparency and holistic cost management from Q1, we will report all restructuring costs except M&A related costs within our operating cost line. In line with this, from Q1, we will also move certain fraud costs out of impairment into operating costs as it better reflects the nature of these transaction-driven expenses. Using 2021 as an illustration, the combined impact of these reallocations would have increased above the line costs by around £685 million to £8.3 billion. Our stress is simply reallocation and will clearly have no impact on the bottom line. After this move, our 2021 pro forma cost income ratio would be 61%. As you know, that number includes an unusually significant remediation charge. If we exclude that and strip that out, the cost income ratio is around 53%, which remains sector-leading in the UK. Importantly, looking forward, the group will maintain long-standing cost discipline and a rigorous approach to managing BAU costs. Despite inflationary pressures, 2022 will see stable BAU costs. An uplift in total costs is planned, driven by the temporary increase from investment in our new strategy together with new business lines of Embark and Citra. As a result, we expect 2022 operating costs to be around £8.8 billion compared to £8.3 billion in 2021 on our revised basis. I'll address this again later in my comments. Looking at impairment on Slide 15, as the quality remains strong and new to arrears remain very low, with underlying charges below pre-pandemic levels. The net impairment credit of £1.2 billion for the year, including a £467 million net credit in the fourth quarter reflects the improved macroeconomic outlook for the UK. Our base case economic assumptions now incorporate the favorable 2021 outcomes, and for 2022, we forecast GDP growth of 3.7% and an unemployment rate of 4.3% and flat house prices. In this context, our expected credit loss provision stands at £4.5 billion, which remains around £0.3 billion higher than at the end of 2019 before the pandemic. Within our ETL, we've retained around £800 million of COVID-related additional management judgments. That includes the £400 million central adjustment, which we booked in Q4 2020, and this compares to £1.2 billion COVID management judgments that we held as of Q3. Looking forward in 2022, we expect the asset quality ratio to be around 20 basis points. Now looking below the line on Slide 16. Restructuring costs of £956 million include £570 million in the fourth quarter. This includes a £400 million write-off as a group invest in new technology and in systems infrastructure. Excluding that write-off, restructuring costs are broadly in line with 2020 levels. Previously guided higher technology R&D costs were offset by lower severance and lower property transformation costs. As mentioned, most restructuring costs will be reported above the line from Q1. This is equivalent to £504 million in 2021 and from that point on only M&A integration-related costs and exceptional write-offs will remain within restructuring. And of course, we do not currently anticipate any further write-offs on this line. The volatility line benefits from positive insurance and banking volatility. It also includes usual charges of around £200 million fair value unwind and £70 million of amortization of purchased intangibles. After these items, statutory profit before tax of £6.9 billion in 2021 is significantly ahead of the prior year. Likewise, statutory profit after tax of £5.9 billion, which also benefits from the £1 billion tax credit in Q2. Return on tangible equity was 13.8% for 2021 or 11.4%, excluding the tax credit. This is ahead of guidance and clearly benefiting from the net credit impairment during the year. Based on our forecast, I expect our 2022 return on tangible equity of around 10 percent. Now turning to the next slide, and looking at risk-weighted asset developments during the year. Risk-weighted assets decreased from £203 billion to £196 billion in 2021. That's in line with our guidance. We saw limited credit migration across the group in the year supported by continued increases in house prices. A £7 billion reduction was significantly driven by our continued economic optimization of the commercial banking portfolio, more than offsetting the impact of increased lending. This was particularly the case in Q4 alongside some model adjustments reflecting improved credit quality, leading to a £4.7 billion reduction during the quarter. Further opportunities remaining optimization, although I expect the pace to slow slightly this year. I talked before about the regulatory IWA inflation on the first of January 2022. The net impact of that was around £16 billion, meaning the pro forma IWA position on the first of January was £212 billion. I should note there's still some uncertainty around this number given ongoing more refinements. In line with our guidance to Q3, we expect 2022 closing IWAs to be around £210 billion. Anticipated balance sheet growth is expected to be more than offset by optimization activity through the rest of this year. Solid financial performance and effective IWA management have allowed strong capital build in shareholder distributions. So let me turn to this on Slide 18. The group's strong capital position has enabled the Board to recommend the final ordinary dividend of £1.33 pence per share, resulting in a total ordinary dividend for 2021 of 2.00 pence per share. Alongside this, we've announced a share buyback program of £2 billion. This significant increase in shareholder distributions totals £3.4 billion and has been supported by the group's exceptionally strong capital position for year-end 2021. Capital building year was significant. Pro forma CET1 ratio of 16.3% after dividends and buybacks includes 210 basis points of capital build with 51 basis points in the fourth quarter. CET1 position is after taking account of the linear fixed and variable contributions to pension schemes, and around 30 basis points due to the acquisition of Embark. The pro forma position also includes a £300 million dividend from the insurance business, which is the first payment to the group since 2019. As mentioned, there are capital adjustments from the first of January. These include the IWA inflation I mentioned a moment ago, but also the reversal of the intangible software benefit and the unwind of IFRS 9 transitionals. The total impact of all of these elements together is around 230 basis points. Even after this regulatory inflation, the group's pro forma CET1 level of 14% as of the first of January remains ahead of our ongoing target of around 12.5 percent plus the management buffer of around 1 percent. It's also well ahead of our regulatory capital requirement of around 11 percent. Looking forward, I expect 2022 capital build to be lower than 2021 after our increased levels of investment, although it will still be resilient based on our expectations of performance as I've outlined. So with that, I'll conclude my remarks on the strategic and financial performance for 2021. Thank you very much indeed again for listening. Let me now hand back to Charlie, who will outline our new strategy. Thank you.

Charlie Nunn, CEO

Thank you, William. And thank you all for listening to our 2021 full year results presentation. It's great to be able to now share with you our new strategy, which will define the priorities for the group going forward. This strategy is grounded in a three-year operating plan, with clear strategic and financial outcomes that we will continue for both of the next three and five years. I hope that by the end, you'll be as excited as I am about the group's future and how we intend to build on the strong foundations we have today to deliver higher and more sustainable value to all of our stakeholders. Let me start by highlighting the key points of our new strategy on Slide 20. Our strategy and transformation plan will set the group on a higher growth trajectory with more diversified revenues. The strategic initiatives that I'll outline later are expected to generate an additional revenue of £700 million by 2024, increasing to a full run rate of £1.5 billion by 2026. Split evenly between interest and non-interest income. This is a significant shift in the group towards growth. Having said that, we will retain our focus on cost discipline, committing to keep costs flat in 2024 compared to 2022, despite the inflationary headwinds. We are targeting an improvement to our operational leverage setting us on a path towards a cost income ratio of less than 50% by 2026. I'm confident that through our strategy, we will create higher, more sustainable returns and capital generation. Return on tangible equity is expected to exceed 10% by 2024, and be higher than 12% by 2026 as the full benefits of our investments are realized. As you've seen today, we remain committed to returning excess capital to shareholders and plan to pay down to our target capital ratio by 2024 at the latest. As a result of our high profitability, there'll be significant improvements in annual capital generation to 175 to 200 basis points by 2026. Turning to Slide 21. Our new strategy is designed to build upon our strong foundations and develop an even stronger competitive position in the UK going forward. As you can see on this slide, we are the largest bank and sole integrated provider of banking, insurance and wealth services in the UK. Half of the UK adults and about 1 million businesses turn to our trusted brands for meeting their financial needs, both directly and through our intermediaries. Our customers’ billion monthly transactions give us an unparalleled insight into their financial needs and behavior, helping us provide them with relevant solutions. We have 26 million customers and 18.3 million active digital users, making us the largest digital bank in the UK, with a digital user base greater than all the newer banks combined, and also 50% more than the next incumbent. Our dedicated colleagues with their breadth of experience and expertise are also a key strength. To add to these over the last decade, the group has created an exceptionally strong balance sheet with disciplined risk management. We intend to build on these strengths to realize our opportunities. Turning to Slide 22. Given the changes in the external environment, I think there are now a number of opportunities the group needs to focus on to strengthen its competitive position going forward. We need to grow our business and diversify to reduce our dependence on interest income. This is all the more important in a low albeit rising rate environment with margin pressures likely to persist in the industry. To achieve this, we have a unique opportunity to deepen relationships with our existing customers, both with consumers and businesses of all sizes. We can do this by making it easier for them to access our great products and by making our channels simpler and more personalized to use. In parallel, there are new opportunities for us to work with our intermediaries and third-party platforms by leveraging our market-leading digital capability, scale product offering and specialist brands. There is an opportunity to be faster than we have been historically in modernizing our technology estate, more effectively using our data and creating end-to-end efficiency. COVID has further accelerated customers’ digital adoption, engagement and transactions. Whilst we have a digital leadership position amongst incumbents today in the consumer space for future competitiveness, it is essential to achieve a step change in the speed at which we create new propositions, deliver change and reduce our cost to serve across the whole group. Finally, we need to ensure that there is a strong alignment between our purpose and value creation so that we can profitably deliver for all of our stakeholders. This also represents a significant growth opportunity for the group. I believe in the next decade, it is only by doing right by our customers, colleagues and communities that we can deliver higher, more sustainable returns to our shareholders. Let me talk a bit more about our purpose and strategy on the next slide. Helping Britain prosper guides our business model and strategic participation choices. Going forward, we will increase the alignment between our purpose, our strategy for growth and the commercial outcomes we deliver to be a truly purpose-driven organization. Our strategy will build on our current participation choices, which we believe are the right ones to pursue growth and further strengthen our foundations. We have a clear strategic vision to be a UK customer-focused digital leader and integrated financial services provider, capitalizing on new opportunities at scale. Slide 24 outlines the key pillars of our strategy and execution. We will create higher, more sustainable value for all of our stakeholders through three pillars. Driving revenue growth and diversification across our main businesses through increasing depth of relationships and breadth of products. Focusing on strengthening the group's cost and capital efficiency further, building on our strong foundations and executing by building a powerful enabling platform, combining people, technology and data to support our bold business ambitions. In that context, we have constructed a portfolio which ensures an appropriate mix of priorities to grow revenues and increase efficiency. And these will deliver value across both the short-term and the long-term. Turning to Slide 25, we want to drive positive impact for our customers, for our colleagues and the communities we serve. Given our scale and leading position, we are better placed than any other financial services business in the U.K. to make this a reality. I believe that our focus should be on building an inclusive society and supporting the transition to a more sustainable and low-carbon economy. This is where we can make the biggest difference and create new avenues for growth. To build a more inclusive society, we will focus on improving access to quality housing, supporting financial inclusion, enabling access to cash and improving the financial resilience of our customers. We also see an opportunity to help more customers in the U.K. have access to simple and helpful investments and protection solutions. Through our commercial bank, we will support regional development by helping businesses in target sectors across the U.K. We will also lead by example by reiterating our ambitious targets to create a more inclusive and diverse workforce. To support the transition to a low carbon economy, we are reinforcing our prior commitments, targeting net zero for the activities we finance by 2050 or sooner. This will also enable us to access fast-growing areas linked to sustainability, such as green infrastructure finance, green mortgages, electric vehicle financing and others. In addition, our own operations are set to be net zero by 2030. Turning to Slide 26, our strategy aims to achieve over 10% return on tangible equity by 2024 and more than 12% by 2026, with a significant improvement in capital generation fueled by enhanced profitability. This plan is backed by an additional £3 billion investment over the next three years and a total of £4 billion over five years. Increased profitability will result from a £0.7 billion revenue uplift from our strategic initiatives by 2024, doubling to £1.5 billion by 2026. Simultaneously, we are committed to maintaining flat costs in 2024 compared to 2022 and targeting a cost income ratio of below 50% by 2026. We understand the importance of distribution for our shareholders and plan to reach our target capital ratio by 2024 at the latest. I'll share further details on how we intend to achieve these benefits through our strategy, starting on Slide 28, focusing on growing and diversifying our revenues. William will then provide more specifics on the financial aspects in the next section. Growth is a key element of our strategy, with about two-thirds of our incremental strategic investments focusing on revenue growth and diversification. We have prioritized opportunities across all our businesses to ensure we create value in the short term while developing new revenue streams for the long term. In the consumer segment, we plan to offer more products and services to our current customers, innovate and expand our product range, and enhance accessibility through our intermediary partners. Moreover, we will launch a new mass affluent proposition to tap into this attractive and underserved market across banking, protection, and simple wealth. In our SME sector, we will digitize our offerings and aim to expand and diversify our products and revenues in areas where we currently have a smaller market share. We will also pursue disciplined growth in our corporate and institutional businesses. I'll discuss each of these opportunities in detail, starting with the consumer segment on the next slide. As you can see on the left-hand side here, we start from a very strong position as the U.K.'s largest consumer franchise with a full set of products, iconic financial services brands and record levels of service across our channels. We're the market leader in mortgages, current accounts, savings and credit cards and a top three home insurance and workplace pension provider. With 26 app logins on average per customer per month and a digital NPS of plus 69, our customers engage with us nearly once a day on average. In addition, we have the largest branch network across the U.K. working closely with local communities and customers. Having said that, we currently fulfill fewer needs and earn less revenue per customer compared to our potential. U.K. consumers hold over seven financial products on average, but our customers hold only 2.4 of them currently with us. We see a significant growth opportunity to enable our existing customers to choose more of our products by providing them with an even simpler and more personalized experience. For every 5% increase in the average needs we meet of our existing customers, we can generate additional revenue of £200 million per annum. Given our strong specialist brands unique to our group, the second growth area in the consumer space is for us to increase our market share in products brought through intermediaries such as brokers, IFAs, online platforms and car dealerships. Intermediaries constitute a significant proportion of the market for certain key products, and we generate about 40% of the consumer income through this channel. Although we have a leading position in mortgages, we have significant headroom for growth by getting closer to our natural share in products such as motor finance, home insurance, protection, individual pensions and investments. We will look to emulate our success in workplace pensions, where we have grown market share from 10% to 19% over the last few years. I'll take these two opportunities in turn, starting with Slide 30 on our priorities to deepen our existing relationships. We serve consumers directly through our three strong and trusted relationship brands, Lloyds Halifax and Bank of Scotland. Increasing the depth of these relationships through our breadth of products requires more personalized engagement. It also requires offering a simple, convenient way for customers to fulfill and service more of their needs in one place, consistent with their desire for a more unified experience. Therefore, we will enhance our data and analytics capability and further cement our digital leadership to deliver personalized engagement offers, pricing and credit risk decisions. This will result in more customers being digitally active, driving higher depth of relationship and revenues. Payments will be a key anchor to drive greater engagement and we aim to grow our market share in credit card spend, which is currently below our share of credit card balances. Home buying is a great example of a key life event, which creates a variety of linked and recurring needs for our customers. We aim to provide them with a unified experience to fulfill these needs by building a more integrated home ecosystem with mortgages, green retrofit solutions and associated insurance and protection products. In addition to broaden our product suite further, we will innovate to meet emerging customer needs such as launching new financing solutions for electric vehicles and charging points. We will continue to help our customers through all channels and be a leader in providing support and education to build their financial resilience and opportunities. Turning now to our intermediary partner priorities on Slide 31. Growing market share of our intermediary partners needs scale and expertise to deliver high-quality products and services with frictionless processes that are increasingly embedded in third-party platforms. We already have the first part in place with a broad product suite delivered by a stable of strong specialist brands. The opportunity is to capitalize on this by digitizing product processes, specifically in insurance and investments. As an example, our intermediary proposition will build upon our Embark acquisition and contribute towards our target of generating more than £55 billion of new open book net flows in investments and retirements by 2024. We will maintain our value-maximizing approach in mortgages and look to grow market share in car leasing. Specifically, we will finance over 200,000 electric vehicles through our Black Horse and LEX businesses. We will also drive growth by innovating to develop new propositions in embedded finance and flexible motor financing solutions and scaling our Citra private rental housing business. Moving to our mass affluent opportunity on Slide 32. The mass affluent market in the U.K. is growing at close to 10% per annum and there is a clear gap in the market for a digital-first integrated offering combining a full set of banking, insurance and investment products. We already have the largest mass affluent customer base in the U.K. However, they are meeting a number of their banking and investment needs elsewhere. This presents a material opportunity, which Lloyds is uniquely placed to capture. In order to ensure the right choices for customers, providers must also be able to support them in the accumulation and de-accumulation stage of their lives by joining up services across banking, housing, pensions and investments. Tech-led competitors only offer solutions for a small set of customer needs, while banks operate a higher touch model geared towards more affluent and wealthy customers, similar to our Schroders Personal Wealth and Cazenove's offerings. We intend to focus on this gap in the market, which is the broader pool of mass affluent customers with income of wealth above £75,000 with a scaled digital wealth offering and integrated banking solutions. On the next slide, I'll provide an overview of our priorities in this space. For our new mass affluent offering, we will combine a more tailored banking proposition with investments, protection and advice, leveraging the Embark platform. Whilst we will offer a premium service model across channels, we will be digital first, consistent with customer preferences. I believe value in this space is skewed heavily towards banking products such as savings, housing, lending and payments. This plays to our current strengths and will allow us to quickly set up the initial proposition, which we will further refine over time. We will bring to bear our personalization capabilities developed in the consumer segment to meet customers' banking needs through tailored products such as high-value mortgages and lending solutions. In addition, customers would be able to meet their daily transaction and payment needs through a convenient and easy-to-use digital interface. And for their investment needs, customers will be able to access digital guided advice for simple wealth solutions and an option to access human support if needed. I'll now move on to our SME business on Slide 34. As you can see on the left-hand side here, we have a well-established and significant SME franchise of roughly one million micro businesses and 70,000 small and medium-sized businesses across the U.K. We have a 20% primary relationship share with SMEs and a top three share across purpose-aligned sectors such as agriculture, healthcare, and real estate. We can build on these to grow our market share in other trading sectors and meet more of our customers' non-term lending and transactional needs. Our strong set of relevant transaction banking products and more than 1,000 relationship and product specialists across the U.K. provide a firm foundation for growth. We need to digitize to improve client experience and enable them to conveniently and quickly self-serve and meet their day-to-day needs. This is also essential given changing client expectations, increasing digital engagement and competition. In conjunction, we need to selectively build out key products like asset finance, invoice discounting, trade, merchant acquiring, and e-commerce solutions. We will provide a personalized experience by using data and analytics both for self-serve and for insights to relationship managers to better support our clients. We aim to grow our digital product origination and fulfillment to more than 50% of total volumes, with automated lending decisions for smaller loans, improving time to cash. And for new customers, we'll provide a quick and intuitive onboarding experience. Whilst we'll be digital first, our customers will continue to be supported by our sector and product specialists for their more complex needs. Alongside digitization, we'll expand our SME proposition through merchant services, trade, cash flow lending and broader value-added services like supporting SMEs on their transition to net zero. We are targeting more than 15% income growth from transaction banking and working capital solutions, and we're also aiming for a 20% annual growth in new merchant servicing clients. Moving to Slide 36 to talk about our opportunities in the large corporate and institutional business. We have built a targeted franchise supporting corporate and institutional clients with a strong U.K. focus, including 2/3 of the FTSE 350 firms as our clients today. In recent years, we've improved returns and can build on this in key sectors aligned to our purpose and areas of core expertise in cash, debt, and risk management products. Peer benchmarks indicate that we have substantial headroom to grow our ancillary income. Whilst balance sheet provision is a key relationship banker in this space, our clients have a broad range of needs, which can be fulfilled through our markets and transaction banking products. Moreover, we will continue to build on the synergies with the rest of the group by providing banking, FX, and rates capability to our consumer and SME franchises and making the most of Lexan Scottish Widows by seeking to grow the £500 million of annual revenues that our clients currently generate using the group's motor insurance and pension propositions. Finally, as a leading green finance provider in the U.K., we are well placed to support our clients through ESG advisory and sustainable financing to support their transition and the U.K.'s broader net-zero goals. Turning to Slide 37. Whilst there's no doubt that the large corporate and institutional market is a competitive space, we are well placed to selectively and profitably grow the business within our current risk appetite. We are not looking to expand into regions where we do not have sufficient scale, capability or a clear U.K. link. Also, we will not participate outside of our core capabilities. This ensures that our ambition is bold but grounded. As we grow in key sectors, we will increase our balance sheet velocity through a scaled originate-to-distribute model, building ancillary income in a capital-efficient manner with modest RWA growth. Through this focus and strengthening our product capabilities, we aim to grow other operating income by more than 20% by 2024. We will continue to invest in our transaction banking capabilities and build on the momentum in onboarding clients to our new payments and cash management platform, which continues to drive growth and value. We will also be launching a new supply chain proposition this year. In debt and risk management products, we will enhance our DCM capability, including developing our U.S. dollar franchise and investing in FX and rates capabilities. Finally, we will continue to drive our purpose outcomes by supporting regional development and supporting more clients with their transition plans. As a result, sustainable finance will represent 20% of our corporate lending book by the end of 2024, more than double the proportion today. This concludes our four areas of growth. Now moving on to Slide 38, as we invest to grow and diversify revenues, it will be essential to maintain our disciplined cost and capital management approach, a key strength of Lloyds. I can see there remain significant technology-enabled efficiency opportunities in the group. These are important to create capacity for investment and growth to increase the pace at which we can change and improve our services and to further strengthen our resilience. Let me briefly touch upon the strategic imperatives of these, and William can add details from the financial implications later. One of the key imperatives is to reduce our total cost of technology run and change. We're targeting a 15% reduction by 2024 through modernizing our technology estate, leveraging public and private cloud and adopting a more agile operating model whilst increasing the throughput of change. We also need to reduce the cost to serve our customers through our further end-to-end digitization of processes, which will drive greater efficiency in distribution, operations and servicing. Our aim is to increase customers served per distribution FTE by more than 10% by 2024. Finally, we need to reduce our central function and property overheads. The formal will be addressed through automation and process simplification and the latter will benefit from the move to hybrid working and transformed workspaces. We aim to reduce our office footprint by more than an additional 30% by 2024.

William Chalmers, CFO

Moving to capital efficiency on the next slide. Higher capital efficiency largely flows from the strategic choices we've made to drive growth. Our focus to increase the proportion of non-interest fee businesses will deliver revenues in a capital-light manner. Building and scaling an originate-to-distribute model in the commercial bank, leveraging our synergies with Scottish Widows will increase balance sheet velocity and generate higher fee income. We will continue to maintain rigid discipline in managing our portfolio and the recycling of RWAs into higher returning and growing businesses. On Slide 40, let me touch upon execution, which will be key to achieving our strategic ambition. Delivering this strategy will require the group to build on the capabilities and new ways of working it has developed over the last few years and accelerate the pace at which it uses digital technologies and data to support our customers. Having built the largest U.K. retail digital bank gives us confidence to replicate that success, end to end and on a larger scale across the group. Our prior investments in technology and data provide a strong foundation for delivering on our new strategy. As I mentioned earlier, our colleagues are a key strength. Their expertise and skills will be instrumental to our success. And I've been really impressed by the management teams and the people we have at the group, since I joined. It is our people who offer the most distinctive customer experience, drive us to innovate, take thoughtful risk and enable change at greater pace. Going forward, we will need to invest in our people and how the organization works to deliver this strategy. This will include further developing our ways of working and culture to enable greater empowerment for the team serving customers and innovating our products with clear accountability to drive growth and maintain our disciplined risk and efficiency approach. We will also increase collaboration and organizational joining up to serve customers to deliver a more integrated experience across our businesses.

Charlie Nunn, CEO

Turning to Slide 41. I hope this presentation provides you with a good sense of how we will build on our strong foundations to capitalize on the opportunities for significant value creation. We look forward to updating the market on our progress over the coming quarters as we start to execute against these priorities. Let me summarize by reiterating that our new strategy represents a significant shift for the group towards growth whilst maintaining our cost and capital discipline. With this, I'll hand over to William to provide more details on the financials underpinning the strategy. Thank you very much.

William Chalmers, CFO

Thank you, Charlie. Now that you've heard about our strategic priorities and business outcomes, I'll spend the next 15 minutes highlighting our target financial shape over the coming years. Our strategic priorities allow us to link clear financial outcomes to our strategy. These allow us to grow our revenue base and to deliver greater diversification, reducing NII dependency. These allow us to reinforce our cost discipline, evidenced by absolute cost targets and further improve capital efficiency. And these allow us to deliver higher, more sustainable returns and, in turn, higher, more sustainable capital generation. These financial outcomes are enabled by a temporary increase in investment, managed by strict return hurdles and delivery requirements, all overseen by strong governance. Together, these lead to the execution outcomes and financial performance that we're highlighting today. Moving now to economics on Slide 44. I'd first like to highlight the important economic assumptions that sit behind our plan. We've built a plan based on prudent assumptions and the impact of our own actions. We assume a continued macro recovery in the U.K., although we are not building our plan on significant or rapid increases in interest rates or for that matter, a recovery in mortgage pricing. We expect GDP growth to remain strong in 2022 at 3.7% before normalizing thereafter at lower levels. The unemployment rate is forecast to remain stable at just over 4%. We expect inflation to peak at 6.5% in Q2 of this year before moving lower thereafter as supply pressures ease and higher rates start to take effect. Alongside this, our plan includes two further rate increases in 2022 to 1%, flat rates in 2023, and two additional increases over the rest of the plan. We believe our estimates in this respect are below current market-implied levels. Any further increase in interest rates will clearly contribute positively to NII, competitive conditions allowing. So for example, the current market curve would generate around £400 million additional interest income from the hedge alone in 2024. That's beyond what we have embedded in the plan. Turning now to income on Slide 45. As Charlie discussed, we see several growth opportunities for the group that support our ambition for higher and more diversified revenues. We expect the combination of growth in our existing business and the benefits of our strategic opportunities to build significant revenues and outweigh potential income headwinds. I'll now briefly discuss each element of our business assumptions in turn. As mentioned earlier, in the full year financials, the group is exposed to the current mortgage margin headwinds. We've prudently assumed these pressures continue throughout the plan period and impact our NIM. Clearly, that could turn out differently. In addition, and as highlighted in Q3, we expect a reduction in OOI in 2023, due to the accounting impact of IFRS 17, with this income stream recovering thereafter. Finally, both equity investments and operating lease depreciation should also revert to more normal levels versus 2021. On the other side, within our existing franchise, we are positively exposed to rising interest rates. As part of this, we expect hedge income to increase in 2022, and then modestly increase again in 2023 and 2024. Before the incremental investment plan, we also expect our core business areas to deliver further revenue growth. That's independent of rate rises. And in particular, we anticipate an increased contribution from unsecured in line with the ongoing economic recovery. In insurance, income will benefit from continued progress across key product areas as well as an improving rate environment. Alongside this, we expect growth in our existing wealth franchise built on Schroders Personal Wealth and the introduction of Embark. In commercial, our markets businesses should also build from the activity levels experienced in 2021. And beyond business as usual, our new growth initiatives will gradually deliver additional revenues for the group. We expect additional revenues of around £0.7 billion in 2024, rising to £1.5 billion in 2026, as the investments mature. These opportunities will provide both earnings growth and diversification. As best illustrated by the expected 50-50 OOI, NII split from the new initiative revenues when they're fully realized in 2026. Let me now turn to costs on Slide 46. Our approach to costs is simple: stable BAU costs alongside a temporary investment-led increase to deliver our increased ROTE. After 2024, this investment-led cost increase tapers off. This is all underpinned by nearly £1 billion of gross cost savings from BAU and new initiatives by 2024. The cost approach can best be summarized in four parts. So let me cover each of these in turn. Part one is to move previously reported below-the-line costs to above the line. This new basis of reporting will improve transparency and allow us to manage the cost base more holistically. Accordingly, the majority of previously reported below-the-line restructuring spend will now be moved to the buffer line, while fraud charges that were previously reported in impairments will now be recognized in costs. Our reported 2021 operating costs plus these two items will now be recognized as our BAU cost base going forward, and this amounts to £8.3 billion in 2021. Part two of our cost approach is our commitment to net stable BAU costs versus 2021 on this new basis throughout the plan. Within this, we will see headwinds from items, including inflation and the rebuild of variable pay. However, we will offset these headwinds with £600 million of BAU savings over the next three years. Our savings plan includes initiatives such as in technology, decommissioning optimization, and a reduction in third-party spend, increasing our use of robotics and automation, and further optimizing our office footprint. Turning to Slide 47, part three of our cost approach ensures new savings cancel out any new OpEx from our growth initiatives. Higher operating expenses related to growth include OpEx from our new strategic initiatives as well as the expansion of our recently announced businesses, such as Embark and Citra Living. These costs will be offset by gross savings of £350 million by 2024. These will rise from our incremental investment spend, and they include some of the technology and data initiatives that Charlie highlighted earlier on, as well as actions taken to lower our cost to serve as we further digitize the business. Together, they allow new growth initiatives to be net OpEx neutral. Because they leverage our core platforms, they will also be delivered at low marginal cost income ratios. This leaves us with Part four of our cost approach. Our near-term operating costs, therefore, increase from the incremental investment over the plan, which equates to £3 billion over 3 years and £4 billion over 5 years. This then comes down as we exit this temporary investment boost; new OpEx is stable and the ongoing cost savings increase. At this point, we will converge towards ongoing BAU investment, including core and regulatory spend as well as the continuation of prior discretionary investment requirements. Turning now to Slide 48, summarizing costs. We are continuing to demonstrate strict cost discipline through a period of increased investment. On our revised definition, £8.3 billion in 2021, we expect to deliver stable BAU costs throughout the plan as our strengthened BAU cost actions offset expected headwinds. New OpEx costs because of new strategic initiatives as well as growth of Embark and Citra will be offset by new savings over the plan. This then needs a cost increase from 2021 of £500 million to £8.8 billion, which is substantially driven by CapEx and depreciation associated with the temporary boost to investment. Based on our investment schedule and expected capitalization rate, this allows us to keep operating costs at £8.8 billion by 2024. Beyond this three-year period, we anticipate a reduction in operating costs as we continue to deliver cost savings across BAU and across our new initiatives, and as the P&L impact of the incremental investment spend phases out. As a result, by 2026, we are targeting a cost-income ratio of less than 50% based on a combination of our revenue and our cost initiatives. Moving now to returns, we expect to achieve a return on tangible equity of over 10% by 2024. Compared to 2021, we anticipate higher total income over the next three years, which includes an additional £0.7 billion in revenue from our new growth initiatives. The extent of this increase will largely depend on the performance of our core business assumptions, particularly regarding interest rates and mortgage spreads. I have previously mentioned stable BAU costs. While predicting remediation charges carries inherent uncertainty, we expect these charges to be significantly lower going forward compared to 2021. Conversely, we also foresee higher impairment charges compared to the net release we experienced last year, with other impacts remaining broadly neutral. This collectively maintains our expectation of returns exceeding 10% by 2024. Looking beyond 2024, we aim to achieve a return on tangible equity of over 12% by 2026 as investment spending decreases and the full advantages of our growth investments are realized, with new business and capabilities gaining traction. Our returns are based on careful management of risk-weighted assets. We are sustaining our existing guidance for 2022 at around £210 billion, with modest growth projected towards a target range of between £220 billion to £225 billion by 2024. Let me now cover capital on Slide 15. On average, we're targeting a robust c150 basis points of capital generation per annum over the three-year plan period. This is after our elevated investment spend, but before the variable element of pension contributions. Thereafter, capital generation is expected to increase by 170 and 175 to 200 basis points by 2026. That's in line with the end of the temporary investment boost and the higher returns we receive from our initiatives. These numbers are significant by historical standards, particularly when considering RWA growth and a commitment to higher levels of investment. We're confident that this path towards higher profitability and strong capital generation positions us well to deliver attractive shareholder distributions. Now a brief word on pensions in this picture. Currently, we have an arrangement for the next two years to contribute 30% of in-year shareholder payments to our pension schemes. As these contributions are made, the scheme's funding position will obviously improve. And this gives us scope to discuss the appropriate schedule of payments in about a year's time from now. Importantly, we're pleased today to announce a total ordinary dividend for 2021 of 2 pence per share and a buyback of £2 billion. This takes total capital return for the year to £3.4 billion, representing around 10% of our market capitalization. The capital return clearly demonstrates our commitment to shareholder distributions. Looking ahead, we will also maintain our progressive and our sustainable dividend policy. Beyond the dividend, we will maintain our commitment to surplus capital distribution and expect to pay down to our target CET1 ratio by 2024. The combination of our ordinary dividend and our excess capital distribution should offer an attractive capital return potential for our shareholders. Let me now summarize our full guidance on Slide 51. We split our guidance into 2022, 2024, and 2026. Starting with 2022. We expect to deliver a net interest margin above 260 basis points. On costs, we expect restated operating costs of £8.8 billion in 2022 due to our higher investment spend. Having recorded a net credit in 2021, we expect impairments to remain below historical levels but return to a charge in 2022 with an AQR of around 20 basis points. These factors together support an ROTE of circa 10% with RWAs of £210 billion at the end of 2022, in line with our prior guidance. For 2024, we expect stable BAU costs to once again operate at £8.8 billion, flat on 2022. In line with the period of normalizing impairment, we expect the net AQR to be below 30 basis points. We expect our ROTE to be greater than 10% by 2024, with RWAs of £220 billion to £225 billion. And we're targeting around 150 basis points of capital generation per annum on average across 2022 and 2024. And moving to 2026, we're targeting a less than 50% cost-income ratio by 2026. This helps us deliver a greater than 12% ROTE, permitting capital generation of 175 to 200 basis points. Throughout our policy of a progressive and sustainable ordinary dividend and distributing capital in excess of our target CET1 ratio will remain unchanged. Putting it all together, we believe our plan delivers robust financial returns over the medium term while delivering a step change in profitability beyond this. And throughout this will all be underpinned by attractive capital return potential.

Charlie Nunn, CEO

So just to close briefly before we turn to the final part of the Q&A. We hope we've shared a compelling vision for the future of the group today. Our purpose-driven strategy is to be a U.K. customer-focused digital leader and integrated financial services provider, capitalizing on new opportunities at scale. This is driven by a transformation plan to drive higher and more diversified revenues to strengthen our cost and capital efficiency and to maximize the potential of our key enablers, our people, technology and data. These will allow us to capitalize on our opportunities, delivering clear revenue and cost objectives, which in turn will drive an increase to our return on tangible equity of more than 2 percentage points, allowing a sustained return of greater than 12% by 2026. Whilst we've taken a longer-term view on achieving a step change in growth in returns, at the same time, we've shared a clear set of three-year outcomes. These help signposts for shareholders our commitment and priority to deliver attractive returns over the period to 2024 as well as 2026. Our new strategy will support higher, more sustainable capital generation and increase shareholder distribution capacity. Even more importantly, our strategy will help us to help Britain prosper. Thanks for listening today. That concludes our presentation, and I'll now hand over to Douglas, who will host the Q&A.

Operator, Operator

Thank you, Charlie. We've set aside about an hour for Q&A. And in line with normal practice, please, anyone asking questions, actually state their name and their company. Let's start with Alvaro.

Alvaro Serrano, Analyst

Good morning, Alvaro Serrano from Morgan Stanley. I have two questions. Some of the guidance regarding the margin this year and the over 10% return on tangible equity is somewhat open-ended. Could you share your thoughts and the assumptions behind that? William, you've mentioned rate sensitivity, but I would like to understand the assumptions regarding the mortgage book. Can you provide an indication of what you're aiming for—over 10%, perhaps 10.1% or 11%? My second question concerns other income. I appreciate your comments on the run rate for Q4, but even when excluding one-off items, the contribution from central items and LDC remains quite high. In the context of your plan, could you provide some insight into what you consider to be the normalized level for that division compared to the expected growth in insurance? Additionally, I would like to get an understanding of what kind of other income would be reasonable to expect in the coming years. Thank you.

William Chalmers, CFO

Thank you, Alvaro. I'll address each question in order. Regarding our guidance of over 10%, we are very confident in that projection. The specific figure depends on how our key assumptions play out. We have intentionally designed a plan based on conservative macro and market assumptions to ensure we can meet our targets. On the revenue side, two areas are particularly noteworthy: rates and mortgage margins. We are taking a cautious approach to both. If we apply the current market implied top curve based on our planning assumptions, it would lead to a revenue increase of £400 million from structural hedge income alone, not factoring in any effects from the bank base rate or BBR. This increase corresponds to about a 75 basis points difference in ROE before considering any future bank base rate adjustments following the swap curve developments. For mortgage margin assumptions, we have carried forward what we see in the current mortgage market into our future plan. Specifically, we reviewed the completion rates in Q4, which stand at 115 basis points, and also evaluated data for November, December, and January to project the completion rates we expect to discuss in April. We anticipate these rates to fall between 75 and 100 basis points, which we have incorporated into our plan. Consequently, our forward-looking mortgage margin for 2023-2024 is grounded in that expected completion margin. Additionally, we feel very positive about our revenues in the BAU scenario and project £0.7 billion in incremental revenues from strategic initiatives. Our cost structure is well-defined, and we have a proven record of managing costs effectively. Hence, we are very confident in achieving over 10%. It's important to note that this projection accounts for significant investment costs, with a P&L impact of about £500 million, which is roughly 1% ROTE, and a cash charge of approximately £1 billion when averaging out £3 billion over three years. Remember that these figures account for the costs of our investments. Overall, we are very comfortable with exceeding 10%.

Charlie Nunn, CEO

William, can I add one thing on top of that? I won't do this for all the questions. We obviously had a lot of conversations around how to think about the uncertainty in the market and the external or exogenous factors versus what we control. And hopefully, what you see in this is the things we can't control, competitive pricing on mortgages and rates, we'll take a conservative and prudent view. We know you'll be able to adjust those assumptions over time, and we'll be able to talk about those assumptions. So we've taken a prudent view on the things we can't control. One of the things we can control and that we're committing to around growing our businesses, committing to revenue growth and managing costs and investments we think we've been pretty ambitious. And that's what we're really focused on is the controllable and the ambition we've laid out for those things. Obviously, we'll have a chance to talk about this over the coming quarters as to how the external environment develops, but that's been the core philosophy around this strategic plan.

William Chalmers, CFO

Alvaro, you asked about other income as well. So I'll address that perhaps before moving on. Other income, as I said, in Q4, we saw an achievement in other income of just over £1.3 billion. Within that, there was about £80 million of insurance basis review assumptions. So the run rate coming out of Q4 is effectively a little over £1.2 billion. Now you talked there about LDC and the contributions of our equity led businesses; they were back to normal in Q4. So I think it's fair to say the run rate, therefore, is a notch above £1.2 billion after you've taken out the ADR, the insurance business review assumptions of circa £80 million. How do we look at that going forward? A couple of points. One is, you'll remember from our previous conversations that I've talked in the past about business activity lost in other income of circa £300 million to £400 million over the lockdown period. We think that we've recovered about half to two-thirds of that, somewhere in that zone. And therefore, as we go into 2022, we would expect recovering GDP and activity levels to contribute to giving us the other one-third to half or thereabouts. So that will build into other income over the course of 2022. On top of that, as you know, you've also got Citra and Embark. And if you add those two together, you're looking at increased contribution to revenues of about £100 million from those two added together. And then I think it's fair to say that our previous investments, not for the moment, the strategic investments, but I think our investments in things like cash management and payments, for example, the home protection app that we have developed, for example, that will gradually help us in our other income contribution but that will be gradual. So over time, that will build in, but it will take us time. So as I said, hopefully, that gives you a sense of the building blocks for other income as we go into 2022 and the growth that we expect.

Operator, Operator

Omar?

Omar Keenan, Analyst

Good morning. Thank you very much for the presentation and all the hard work that's gone into it. I've got a follow-up question on Alvaro's question actually on the ROTE assumption and the interplay with rate sensitivity. And here, you've baked in very conservative assumptions. Some of your peers have put in I guess, deposit pass-through assumptions based on what they expect to play out in the market. Barclays yesterday said that even for the next 250 basis points, they're expecting deposit pass-through below 50%. So hear what you said about mortgage margins, here what you said about the rate assumptions. Can you please talk about what you've got on deposit pass-through? And maybe I'll just ask my second question as well. So on the incremental revenue from OOI, when I look at that in the marginal cost income the ROI on that looks really great, which implies that is low-hanging fruit. And so I guess the question is, what were the impediments to realizing these gains in the past? And what do you think has changed now to allow the delivery of that?

Charlie Nunn, CEO

Sure, I'll take the second question.

William Chalmers, CFO

Sure. Thank you for that, Alvaro. I'll perhaps take each of those questions in turn. On the guidance as to greater than 10%, we feel very confident in greater than 10%. How much depends, I think, upon how key assumptions play out. We've deliberately constructed a plan which is based upon conservative macro and market assumptions in order to ensure that it's our plan to make the difference as it were. But on the revenue side, two in particular stand out, rates and mortgage margins, as you identified. I think in both, we are conservative. So to focus on one in particular, if we superimpose the market implied top curve right now based upon our planning assumptions, then that would lead to a revenue increase for structural hedge income alone, leave aside any BBR effect or bank base rate effect, but structural hedge increase alone would be £400 million. That, as you know, equates to around 75-ish basis points difference in ROE.