Earnings Call Transcript - LYG Q4 2025

Charles Nunn, CEO

Good morning, everyone, and thank you for joining our 2025 full year results presentation. It's great that the move to prelims has allowed us to update you earlier than prior years. This means that our organization can make a fast start and increase our focus on the year ahead as we enter the final stage of the strategy that we laid out in early 2022. I'm very pleased with our ongoing strategic transformation, and 2025 was another strong year for the group. We're building significant momentum that sets us up well to deliver upgraded 2026 commitments and stronger sustainable returns for the period. I'm very excited about the plans we're developing for our next strategic phase, and you'll hear more about this in July alongside our half year results. As usual, following my opening remarks, I'll hand over to William, who will run through the financials in detail. We'll then have plenty of time to take questions. Let me begin on Slide 3. I'd like to start by highlighting the following key messages. Firstly, our strategic delivery is accelerating and building momentum across the business. We're on track to meet or exceed our 2026 strategic targeted outcomes, delivering clear benefits for all stakeholders. Secondly, our continued strategic execution underpins sustained strength in financial performance and growth in shareholder distributions. We've announced a 15% increase in the ordinary dividend alongside a share buyback of up to GBP 1.75 billion. And finally, we're confident in our outlook. We are upgrading our guidance for 2026 and are committed to further improvements in financial performance beyond this. Turning now to a performance overview on Slide 4. We delivered strong outcomes for all stakeholders in 2025. Our clear purpose of Helping Britain Prosper continues to drive attractive growth opportunities. This includes supporting our customers during a record ISA season and funding the growth ambitions of businesses that create opportunities across the U.K. These actions drive healthy franchise momentum, delivering growth across both sides of the balance sheet and market share gains in key focus areas such as personal current accounts. Taken together, the group is delivering sustained strength in financial performance. We returned to top line revenue growth during 2025 with increases in both NII and OOI, the latter up 9%. This supports a return on tangible equity of 14.8% and 178 basis points of capital generation, excluding the motor finance provision taken earlier in the year. On Slide 5, I'll provide a brief update on our outlook for the U.K. economy. As you've heard from me previously, we're constructive on our outlook for the U.K. We continue to forecast a resilient but slower growth economy with interest rates falling gradually in 2026. In addition, the financial position of both households and businesses continues to strengthen with emerging signs of growing capacity to spend and invest. Combined with the government's focus on regulatory reform and driving growth in key sectors, we believe the economy has the potential to move to a higher medium-term growth trajectory than is forecasted today. We are well positioned against this backdrop with our strategy focused on faster-growing high-potential sectors such as housing, pensions, investments, and infrastructure. We're already driving growth in these areas, leveraging our competitive advantages as the U.K.'s only integrated financial services provider. As a result, we expect the group to continue to grow faster than the wider economy over the coming years. I'll now turn to highlight our strategic progress, starting on Slide 6. We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency while significantly de-risking the business and establishing a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits. We've generated GBP 1.4 billion of additional revenues from strategic initiatives to date and are today upgrading our 2026 target to circa GBP 2 billion. As part of this, we expect the other income contribution to be circa GBP 0.9 billion, ahead of our original '26 guidance. At the same time, we've now realized circa GBP 1.9 billion of gross cost savings, having met our upgraded 2024 target of GBP 1.2 billion last year. As you'd expect, we remain committed to driving further improvements in operating leverage. To bring this to life, I'll now spend a few minutes discussing our progress in more detail. Let me begin with our growth areas, starting with Retail and IP&I on Slide 7. In Retail, we are the leading provider across key products in our own and third-party channels. We further strengthened our position through growth in high-value areas and continue to develop our product range and capabilities to meet more customer needs. Mobile app users are now up circa 45% since 2021. In '26, we'll roll out in-app AI agents for these customers with these currently in beta testing. In IP&I, we're deepening relationships as an integrated bancassurance provider, expanding our product offering through exciting partnerships. We're also transforming engagement through our Scottish Widows app with further growth expected in 2026 as we launch to the open market. Complementing our strategic delivery, we announced the acquisition of Schroders Personal Wealth in the second half of last year. It's early days, but we're really pleased with our progress, and we'll rebrand the business to Lloyds Wealth in the coming months. The acquisition is an important enabler to delivering our ambition for a market-leading end-to-end wealth offering, providing us with an opportunity to deepen relationships with our mass affluent customers and workplace clients. Let me continue on Slide 8. Our Commercial Banking division captures both BCB and CIB businesses. In BCB, we're building the best digitally-led relationship bank, building upon our strong deposit franchise and rolling out new mobile-first journeys to support growth in targeted sectors. Our BCB gross net lending increased by 15% in 2025, and we are committed to further growth this year. And in CIB, we're driving revenue diversification through growth opportunities aligned to our simple cash, debt, and risk management model. For example, FX volumes increased by over 20% in the year, supported by the launch of a market-leading algorithmic trading solution. We were also awarded a landmark U.K. Government banking services contract, a testament to the investment we've made in our award-winning cash management and payments platform. Finally, equity investments is a growing contributor to the group, now representing nearly 10% of group OOI. Lloyds Living has now grown to nearly 8,000 homes since launching in 2021, whilst LDC generated more than GBP 600 million of exit proceeds during the year. On Slide 9, I'll now talk about the ongoing drivers of OOI more broadly. Since 2021, we've delivered strong OOI growth across each of our business units, reflecting a resilient and diversified portfolio. For example, our Retail business has benefited from growth in our Motor franchise, whilst Commercial Banking has been supported by renewed focus in our Markets business. We've also realized the benefits from improved cross-group collaboration such as increasing protection take-up rates across mortgage journeys and leveraging the full breadth of the group to meet the ancillary needs of commercial clients. We delivered 9% growth in 2025, consistent with prior years and are confident in our outlook. Going forward, other income will also benefit from the full impact of the Lloyds Wealth acquisition, and we expect to unlock more value from this business over time. Turning now to cost and capital efficiency on Slide 10. We remain focused on delivering an organization that drives continued improvements in cost efficiency and capital intensity. As I mentioned earlier, we've now delivered circa GBP 1.9 billion of gross cost savings since 2021. This has been supported by the ongoing shift to mobile-first and consequent refinement of our physical footprint, as well as actions taken to reduce both the size and complexity of our legacy technology estate. These savings reinforce our confidence in delivering a cost/income ratio of below 50% in 2026. On capital efficiency, we've now delivered GBP 24 billion of gross RWA optimization since 2021. We continue to target more than 200 basis points of capital generation in 2026 and will now consider excess capital distributions every half year, reflective of our increasing confidence. I'll now move to Slide 11 and focus on our enablers of people, technology, and data. As you heard in our digital and AI seminar in November, we're making strong progress against our clear strategic priorities. We have significantly enhanced our infrastructure, actively managing our legacy estate and increasingly building on modern technology. The ongoing investment in our people is critical to our success with circa 9,000 technology and data hires since 2021. These actions have created the platform for increased innovation. Digital-first propositions such as your credit score are driving clear benefits for both customers and the group. Our strong execution to this point means we're well positioned to take advantage of future opportunities. We're innovating and leading across new and emerging technologies, launching industry-first use cases at scale in the U.K. These areas will be critical to driving further enhancements to operating leverage in the future. I was incredibly proud to see that our efforts were recognized across the industry during the year. But importantly, we're not done. I see further significant potential in the coming years. Now turning to Slide 12, where I'll provide more detail on how we're thinking about AI specifically. In 2025, we scaled 50 Gen AI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology, with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue and over 60% of the total gross cost savings realized since 2021. This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit in 2026, capturing both revenues and costs, with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we will, of course, talk more about our plans in this space as part of our strategic update in July. I'll now turn to Slide 13 and bring this together with a view on how we're building operating leverage in 2026. We've increased our net income by GBP 3 billion over the last 4 years. During this period, we have mitigated several headwinds, including those from the mortgage book and deposit churn, with these partially offset by the structural hedge earnings growth of more than GBP 3 billion. As a result, the majority of this growth has been linked to the management of the BAU business and the GBP 1.4 billion of strategic initiatives revenue, including a significant OOI contribution. We expect to deliver continued improvements in net income in 2026. Whilst headwinds will persist, these will be more than offset by an additional GBP 1.5 billion of structural hedge earnings and continued growth within the core franchise. This accelerating income growth, combined with flattening costs, will further improve operating leverage and underpin the delivery of a cost/income ratio below 50% in '26. Let me now close on Slide 14. So as you've heard, we are successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Indeed, reflective of our momentum, we are today upgrading our return on tangible equity target to be greater than 16% for 2026. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan with you in July. We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities, and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We will, of course, share more detail on our medium-term financials at that stage, too. Beyond 2026, we are committed to continuing income growth, improving operating leverage, and delivering stronger sustainable returns. Thanks for listening. I'll now return briefly at the end. But for now, I'll hand over to William to cover the financials.

William Leon Chalmers, CFO

Thank you, Charlie. Good morning, everybody, and thank you again for joining. As usual, I'll provide an overview of the group's financial performance, starting on Slide 16. Lloyds Bank Group delivered sustained strength in its financial performance in 2025, in line with guidance. Statutory profit after tax was GBP 4.8 billion, equating to a return on tangible equity of 12.9% or 14.8%, excluding the Q3 motor provision. Within this, we delivered robust net income for the full year of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively. In the fourth quarter, net income was 2% higher versus Q3. This was driven by a 4 basis point increase in the net interest margin, continued balance sheet growth, and further momentum in other income. Operating costs for 2025 were GBP 9.76 billion, up 3% year-on-year as continued investment, business growth, and inflationary pressures were partly mitigated by further efficiency savings. The remediation charge for the full year was GBP 968 million; GBP 800 million of this relates to the additional motor finance charge in Q3. Credit performance, meanwhile, remained strong with an impairment charge of GBP 795 million for the full year, equating to an asset quality ratio of 17 basis points. Tangible net asset value per share ended the year at 57p, up 4.6p in 2025. Our performance for the year included capital generation of 147 basis points or 178 basis points, excluding the motor provision. This enabled a 15% increase in the ordinary dividend and a GBP 1.75 billion buyback while maintaining a 13.2% CET1 ratio. Let me now turn to Slide 17 to look at Q4 growth in lending and deposits. We saw healthy balance sheet momentum in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 million or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. Mortgages were up GBP 2.1 billion, strong but slightly slower than Q3 given higher maturities. Highlights elsewhere in Retail include credit cards, which grew GBP 0.5 billion with continued market share gains and European retail also up GBP 0.5 billion in the fourth quarter. Commercial lending was GBP 0.2 million higher. This represents further growth in targeted areas within CIB and business-as-usual performance within BCB, partly offset by continued government-backed lending repayments. Turning to liability franchise. Total deposits increased by GBP 13.8 billion or 3% in the year. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs, with deposit churn continuing to ease as we had expected. Commercial deposits, meanwhile, were down GBP 1.5 billion in Q4, driven by actions on low-margin funding as well as by seasonal outflows in BCB. And alongside these developments, insurance, pensions, and investments saw open book net new money flows of GBP 7.9 billion for the year, including GBP 4.2 billion in Q4. This, of course, now includes inflows from Lloyds Wealth. Let me turn to net interest income on Slide 18. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year, with Q4 up 2% versus the prior quarter. Across both the year and Q4, strong hedge income and business volume growth were partly offset by mortgage repricing and deposit churn headwinds. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024. Q4 AIEAs were just over GBP 470 billion, up GBP 4.8 billion. Our net interest margin increased 11 basis points to 3.06%. This included a Q4 margin of 3.10%, up 4 basis points on Q3, driven by a significant pickup in hedge income, as we had expected. The non-banking NII charge in 2025 was GBP 515 million, up GBP 46 million or 10% year-on-year, supporting growth in OOI. For 2026, we are guiding to NII of around GBP 14.9 billion. Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial. Our guidance incorporates further hedge income uplift of circa GBP 1.5 billion, partly offset by mortgage refinancing and easing deposit churn. Alongside, we also expect some growth in non-banking NII charge consistent with associated business growth in OOI. Let me turn to mortgages on Slide 19. Mortgages grew by GBP 10.8 billion or 3% in 2025 to GBP 323 billion, supported by a growing market and a flow share of around 19%. We've continued to benefit from our strategic investment in the Homes ecosystem, enabling us to build customer relationships, including in higher-value direct lending and to retain more balances. It remains a competitive market. Q4 completion margins were again around 70 basis points with a further 1 or 2 basis points of tightening during the quarter. We continue to enhance the customer journey by integrating protection and home insurance. In 2025, we saw protection take-up rates in mortgages increase by 5 percentage points to 20%. There is further to go. I'll now turn to Slide 20 to look at developments in consumer and commercial lending. We saw a strong performance across our consumer portfolios in 2025 and a strengthening performance in commercial. Combined, cards, loans, and motor grew GBP 4.1 billion or 10% year-on-year. We are taking market share in all 3 segments, driven by leveraging better data to add personalization and by launching innovative new products such as Lloyds Ultra within credit cards. Turning to Commercial Banking. Lending was up GBP 2.7 billion in the year or GBP 4.1 billion, excluding government-backed lending repayments. We saw encouraging progress in CIB, particularly in strategic areas such as infrastructure and project finance. This was partially offset by BCB lending, which held steady when excluding government-backed lending repayments or down GBP 1.4 billion if they are included. Let me turn to developments in the deposit franchise on Slide 21. Our deposit franchise continues to perform well. Total deposits ended the year at GBP 496.5 billion, up GBP 13.8 billion or 3%. Retail deposits were up GBP 5.5 billion or 2% in the year. Within this, current account balances grew by GBP 1.5 billion, representing growth in our market share of balances during the period. Retail savings, meanwhile, grew by GBP 4.3 billion or 2%. This was driven by targeted participation throughout the year with a strong ISA season in the first half, followed by slower growth in H2 as we managed our portfolio. In Commercial, deposits grew strongly by GBP 8.5 billion or 5% on the back of growth in our targeted sectors. Notably, non-interest-bearing deposits stabilized and indeed grew a little in the second half. The performance and stability of our deposits are what underpin the structural hedge, which I will now talk to on Slide 22. The structural hedge is a strengthening tailwind to NII. The hedge notional stood at GBP 244 billion at the year-end, up GBP 2 billion over the year, supported by our high-quality deposit franchise. Hedge income in 2025 was around GBP 5.5 billion, a material step-up from last year and a little above our guidance. During Q4, the weighted average life increased to about 3.75 years built off continued strength in our deposit balances. And as previously guided, we expect a roughly GBP 1.5 billion step-up in hedge income to circa GBP 7 billion in 2026. We then expect hedge income to reach around GBP 8 billion in 2027 and to continue growing to the end of the decade as yields converge with market rates and as the notional slowly builds. Let's now turn to other income on Slide 23. Other operating income performance in 2025 was once again strong. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported, of course, by the full acquisition of Lloyds Wealth. Growth over 2025 has been broad-based. Retail is up 12% with strength in motor leasing as well as growth in cards and banking fees. Commercial was up 1% with solid growth in our Markets and Transaction Banking businesses, offset by lower loan markets activity. Insurance, Pensions, and Investments meanwhile grew by 11%, driven by strong performance in general insurance and workplace as we continue to focus on our strategic choices in this area. And our equity investments business was up 15%. This was particularly driven by Lloyds Living more than doubling its OOI during the year. Operating lease depreciation was GBP 1.45 billion in the year, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles, and to an extent, electric vehicle price movements, altogether, essentially in line with the OOI growth generated by the vehicle leasing business. Moving to costs on Slide 24. Cost discipline remains critical to the group. Operating costs were GBP 9.76 billion in 2025, in line with guidance, excluding the impact of the Lloyds Wealth acquisition in Q4. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth, and inflationary pressures, partly offset by further efficiencies. As Charlie highlighted earlier, since 2021, we have now delivered cumulative gross cost savings of circa GBP 1.9 billion, thereby creating capacity for strategic investment across the business. The 2025 cost/income ratio was 58.6% or 53.3%, excluding remediation. And looking ahead, as you know, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. This is in line with the flattening cost trajectory that we have previously indicated as our investment in this strategic cycle culminates. On top of that, inflation moderates and cost benefits are fully realized. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. There is no update on motor in Q4. We wait to see the detail of the FCA's final proposals post the consultation in the next couple of months. Let me turn to credit performance on Slide 25. Credit performance remains strong, reflecting our prime customer base, prudent approach to risk, and healthy customer behaviors. Across Retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In Commercial, after some idiosyncratic cases in H1, the H2 picture has been very constructive. The 2025 impairment charge was GBP 795 million, equating to an asset quality ratio of 17 basis points. This incorporates a small MES charge, but also benefits from model calibrations and refinements. Indeed, we consider the underlying charge to be just below 25 basis points. The Q4 impairment charge is GBP 177 million or 14 basis points, including a GBP 47 million MES charge to reflect a slightly higher unemployment peak. Our stock of ECLs on the balance sheet now stands at GBP 3.4 billion. That's around GBP 0.4 billion in excess of our base case and leaving us well covered. Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026, similar to the underlying run rate that we've seen during 2025. I'll now turn briefly to our macroeconomic outlook on Slide 26. The macroeconomic outlook remains resilient. In the fourth quarter, we've made only minor changes to our base case versus Q3. We now forecast GDP growth of around 1.2% in 2026. Against this backdrop, our unemployment forecast increases marginally, now peaking at 5.3% in the first half of the year. Easing inflation, meanwhile, allows for two 25 basis point reductions in the bank base rate during the year to 3.5%. This reflects a slightly lower rate than we previously expected, albeit we still expect a modest pickup later on in the forecast period. And in Housing, we assume growth in house prices of around 2% in 2026 and '27. That is supported by the slightly lower interest rate environment. Let me now turn to our returns and TNAV on Slide 27. In 2025, our return on tangible equity was 12.9% or a robust 14.8%, excluding the motor provision. Within this, restructuring costs were low at GBP 46 million, including GBP 30 million in Q4 with integration costs relating to Lloyds Wealth and Curve. The volatility and other items charge was GBP 70 million. This includes an GBP 87 million benefit in the final 3 months, incorporating a fair value uplift from the Lloyds Wealth acquisition. Tangible net asset value per share meanwhile, increased to 57p, up 4.6p or 9% in 2025. The increase was driven by profits, cash flow hedge reserve unwind, and the reduced share count from our buyback programs, offset by shareholder distributions. And looking forward, we continue to expect TNAV per share to grow materially driven by these same factors. Given the momentum across the business, as Charlie said, we are upgrading our expectation for 2026 return on tangible equity to greater than 16%. Turning now to capital generation on Slide 28. The group remains highly capital generative and will become more so. In 2025, we generated capital of 147 basis points or 178 basis points, excluding the motor provision, in line with our guidance. Within this, risk-weighted assets closed the year at GBP 235.5 billion, up GBP 10.9 billion. This was driven by strong lending growth as well as GBP 2 million related to the implementation of CRD IV taken in Q4. This reflects our model outcomes, which are subject to PRA approval and therefore, of course, risk of modification. As planned, we paid down to a CET1 ratio of 13.2% at the end of 2025. And looking forward, we continue to expect 2026 capital generation to be more than 200 basis points. Beyond that, as you know, Basel 3.1 implementation is now scheduled for the 1st of January 2027. We expect this to result in a day one RWA reduction of around GBP 6 billion to GBP 8 billion on implementation. Our strong capital generation supports healthy and indeed growing shareholder distributions. So let me talk to that on Slide 29. We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board intends to recommend a final ordinary dividend of 2.43p per share, taking the total dividend to 3.65p, up approximately 15% year-on-year. In addition, we've announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024 and equivalent to around 6% of our current market capitalization. Dividends have grown consistently over our strategic plan with the 2025 dividend now up more than 80% versus '21. They remain at a payout ratio that allows for continued strong growth. Over the same period, our consecutive buybacks have also reduced the share count by more than 17%. We remain committed to paying down to our target CET1 ratio of around 13% by the end of 2026. In addition, given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward. Let me wrap up on Slide 30. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and the culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage, and delivering stronger sustainable returns. That concludes my comments for this morning. Thank you for listening. I'll now hand back to Charlie for closing remarks.

Charles Nunn, CEO

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

Douglas Radcliffe, Q&A Moderator

Thank you, Charlie. We will, as usual, be taking questions, both written online and from those in the room. Okay, why don't we start with Guy?

Guy Stebbings, Analyst

It's Guy Stebbings from BNP Paribas. The first question was on deposits. I think it's probably fair to say over the past year, if not longer, deposit flow has been better than expected, but Q4 was a touch softer mainly on the commercial side. I don't know if you could talk to any more in terms of whether that's just seasonality and then your expectations into 2026 in terms of pace of deposit growth, whether you're assuming kind of static mix effects and anything you might be able to elaborate in terms of deposit pass-through assumptions? And then the second question was on costs. Very reassuring performance in '25. The guidance for '26 in terms of limited absolute cost growth is encouraging. Just wondering how much we can sort of read into that, your ability to continue to run the business with limited absolute cost growth? Or is it more a function of the fact that it was a plan that was always expected that in 2026, you would see less growth in that particular year. Obviously, I'm thinking into beyond '26.

Douglas Radcliffe, Q&A Moderator

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

William Leon Chalmers, CFO

Sure. Thanks for the questions, Guy. Regarding deposits, we've seen strong performance over recent years, which has supported our structural hedge among other elements in the balance sheet. Thus, we have a solid franchise with favorable financial effects. In 2025, we recorded deposit growth of nearly GBP 14 billion, specifically GBP 13.8 billion, which is about 3%. This indicates a strong deposit performance for the year. Within that, Retail deposits grew by GBP 5.5 billion, and Commercial Banking deposits increased by GBP 8.5 billion, showing growth across various business segments, as well as healthy performance in the subcomponents of each division. Moving forward, we will manage the deposit base on a quarterly basis to optimize franchise value while ensuring good customer value and addressing the funding needs of the business. Therefore, you may observe fluctuations in deposit performance quarterly due to these factors, but overall, we anticipate healthy deposit performance similar to what we experienced in 2025. In relation to your question about Commercial, there are seasonal outflows we generally see in the fourth quarter, especially in certain subsectors like education. Additionally, we manage low-margin deposits that can accumulate in the Commercial Banking segment. We are committed to ensuring customer value, managing our funding position, and maximizing our franchise. Another positive note for the fourth quarter is that we see stability in NIBCA across both retail and commercial segments. Notably, the PCA balance within retail increased by GBP 1 billion, which is vital for our customer relationships, hence our close monitoring of this metric. Looking ahead to 2026, we expect deposit performance to be fairly consistent with what we saw in 2025 in terms of overall volume, though there may be some variations among different divisions as we manage the business accordingly. We anticipate a reduction in deposit churn, consistent with trends observed throughout 2025, due to declining bank base rates. On the cost side, maintaining cost discipline is crucial for the group. Our total costs for 2025 reached GBP 9.76 billion, reflecting a 3% growth over 2024. Excluding severance, the increase was 2.4%, and without severance and Lloyds Wealth-related costs in the fourth quarter, it was 2.3%. Therefore, when considering underlying cost growth, we see a 2.3% rise in 2025 compared to 2024. Looking forward, our projected cost base for 2026 is expected to be below GBP 9.9 billion, indicating a 1% increase from 2025. This figure includes additional costs from Lloyds Wealth, around GBP 120 million, and expenses related to the Curve acquisition, both of which represent incremental costs we will absorb. The anticipated cost increase to below GBP 9.9 billion for 2026 factors in these additional headwinds while aligning with our ongoing cost management efforts. Contributing to this cost outcome for 2026 is the slight improvement from inflation, positively influencing pay settlements and third-party contracts. Moreover, the elevated severance costs from 2025 will ease somewhat. Most importantly, we are seeing the results of our strategic initiatives that focus on cost efficiencies and the continued benefits of the costs initiatives we implemented in 2025. Additionally, as we approach the final year of our strategic plan, the pace of investment expenditures is tapering off gradually, providing some financial relief, estimated at around GBP 100 million. When considering our commitments beyond 2026, we highlight three key areas: income growth, increased operating leverage, and improved returns. Our focus on enhanced operating leverage signals our commitment to reducing the cost-income ratio. We will maintain our investment in the business to preserve our competitive edge and strength, particularly in line with the sector's evolution while ensuring we remain committed to refining our cost-income ratio. We will elaborate on these plans in more detail in the summer, but we deemed it essential to share these commitments now.

Benjamin Toms, Analyst

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

Douglas Radcliffe, Q&A Moderator

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

William Leon Chalmers, CFO

Thank you, Ben, for your questions. I'll address them one by one. Regarding net interest income (NII), you specifically asked about its trajectory for 2026. I'll get to that shortly, but I want to first provide some context around our overall guidance of 14.9%. Looking back at NII performance in 2025, we are pleased with the results driven by margin expansion and growth in average interest-earning assets (AIEA), which included GBP 22 billion in additional lending for the year, marking a 5% increase. This resulted in a 6% growth in NII for 2025. Our guidance now indicates a further 9% increase for 2026, reflecting solid growth expectations, driven by similar factors such as net interest margin expansion and improved AIEA. We anticipate that NII will continue to increase in the years following 2026, which supports the first of the three comments made by Charlie and myself regarding expectations beyond that year. When calibrating our guidance, we consider what we are confident in delivering, which is where the GBP 14.9 billion expectation originates. There will be both challenges and opportunities within the margin, which we can discuss further alongside AIEA growth expectations. We have adjusted our guidance based on the anticipated reduction in the bank base rate in 2026. As for NII growth throughout 2026, while I can't provide precise quarterly guidance, you can generally expect steady growth supported by margin expansion, although some quarters may show faster growth than others. This is influenced by the varying impacts of our structural hedge. Additionally, remember that the first quarter has fewer days than the fourth quarter, so keep that in mind when considering NII expectations. Regarding the buyback, we have shifted to a biannual buyback strategy due to our increased confidence in the business's capital generation and the clearer regulatory environment. Previously, we felt that a once-per-year buyback was appropriate as we aimed to reach a capital ratio of 13% by the end of this year. Now, moving to two buybacks per year aligns us more closely with our capital target. You asked about timing and our approach at the half-year mark. We'll allow the Board to manage the buyback at that time, considering the existing buyback position. Historically, our buybacks have concluded in August or December; this year’s buyback is larger, owing to our increased market capitalization, so we might expect it to proceed at a faster rate than before. We'll review the buyback specifics at the half-year mark, including determining the amount based on the company's available capital and future business needs while ensuring the company’s position is maintained. You also inquired about our progress towards the 13% capital target. Our current goal remains to reach 13% by the end of 2026, which we've consistently held, and we will reassess at mid-year.

Douglas Radcliffe, Q&A Moderator

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

Jason Napier, Analyst

Jason Napier from UBS. I have a question for William and another for Charlie. William, regarding the earlier question on deposits, I think you've effectively addressed the volume aspect. Given the larger market cap most companies now have, there is significant investor concern about commercial intensity and competition, especially concerning deposits. Could you provide some additional insight on that? Charlie, the firm has navigated a very volatile macro environment over the last five years of the plan remarkably well. One factor is the rise of Gen AI, which has become a frequent topic of discussion. How do you believe the efficient frontier of cost/income ratios for banks has changed during this planning period? Where should a fully modernized Lloyds aim to operate in this context?

Douglas Radcliffe, Q&A Moderator

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

William Leon Chalmers, CFO

Sure. Yes. Thanks for the question, Jason. I think you have to judge us by our results in some respects, at least. So the way in which we respond to the competitive environment is hopefully by delivering sustained franchise growth. And once again, you've seen that in 2026 with GBP 13.8 billion growth in deposits. I mentioned earlier on that we expect continued deposit growth during the course of 2026 and indeed beyond. So I think that's probably the base answer. What would I say in terms of competitive environment? Yes, to a degree, at least, it is increasing in its competitive intensity. I do think there are various different reasons for that. Some of them will be present for a while, i.e. they're more systemic. Some of them may be a little more transitory. We've seen, for example, quite a lot of competition from some of the fintech challenges, and there's much talk about that and the market share that they may be gaining or accessing. How do we respond to that? We respond in the context clearly of enhancing capabilities of our offering. That obviously includes things like app capabilities. Alongside that propositional improvements, which you've seen a consistent flow of over the course of the last few years. Alongside that, very competitive pricing in the markets that we want to be when we want to be in them. So we won't necessarily, if you like, be there all the time in every single case, we'll be there where we need to be. And in the context, obviously, of the systemic security that Lloyds offers, the branch offer that it offers, the brand and marketing and so forth. So overall, we see our competitive position versus some of those other factors within the deposit market is gradually strengthening, as said, endorsed by the deposit performance that we've seen across the franchise. One good indicator of that, going back a little to the earlier question is the PCA performance, which for us, as said, is the absolute critical relationship product. Balance is up GBP 1 billion in the course of quarter 4, balance is up GBP 1.5 billion during the course of '25 as a whole. And that is in the context of continuing market share gains from a balance perspective, which is good to see. So Jason, the competition is relevant. It's clearly something that we take very seriously. I do think the results that we show up against that competition withstand scrutiny.

Charles Nunn, CEO

I might just add one thing to that. I don't want to jump on all of these questions because it's a really important question, obviously. We made the point around market share gains in personal current accounts. We've also done that in business current accounts over the life of this cycle, and those are 2 very important areas for any organization, but especially given our strategy. When you get to savings and investments, we performed very well on Instant Access money, which is money for liquidity purposes. And last year, we had a very strong ISA tax season, but as you get into time deposits, obviously, the margin for shareholders will depend on the pricing and the competitive context. They don't support directly the structural hedge. So we typically compete there from a customer proposition and a broader relationship perspective, but we won't chase market share for the sake of chasing market share where it's not relevant to our customers and where it's not relevant to our shareholders. So we really look at quite a differentiated view of the deposit base. And you're right, it's a competitive market. That's good for customers. Last year, we traded very well and offered great offers. Let's see where the market is this year. The really core part of this is really competing where we have the stable funding and stable deposit base that shows trust. Regarding your second question, we could spend the entire morning discussing it. Thank you for your inquiry, Jason. I won’t provide a complete answer now, as we’ll have further discussions in July. However, I can share a couple of key points. First, we've mentioned several times, including in our seminar last November, that about 60% of the GBP 1.9 billion in gross cost savings we've achieved in recent years is linked to digital initiatives and AI, excluding generative AI for the moment. This ongoing trend in significantly enhancing operational efficiency in financial services has been a focus throughout our careers, and currently, it presents a substantial opportunity that has contributed significantly to our benefits over the last three to four years. We believe Agentic AI will help us maintain this efficiency trend. Looking ahead, we’re excited about what this year holds. We announced today that for the generative AI use cases we are deploying this year, in addition to the ones from last year—which generated GBP 50 million in P&L from 50 use cases—we anticipate benefits exceeding GBP 100 million this year, encompassing both revenue and cost advantages. In our industry, the ability to differentiate our services and cultivate broader relationships on the revenue side is crucial. While we will focus on efficiency, it's important to note that if we can achieve it, others can as well. What’s really energizing for us is the differentiation we are building through our services this year. We plan to launch a couple of initiatives later this year, currently being tested with our team. One initiative involves providing investment advice to the entire market, regardless of investment size, which the team is leading. Though it may not generate substantial short-term revenue, it has the potential for long-term sustainability. The second initiative aims to enhance how customers access their everyday banking, offering a conversational interface to better manage their everyday spending.

Douglas Radcliffe, Q&A Moderator

Excellent. Thank you, Charlie. We'll take one final question.

Sheel Shah, Analyst

Sheel Shah, JPMorgan. Two questions from me, please. First, on the IP&I business. The other income has grown strong at 11%, but one area where maybe the strategic initiatives have been a little slower to show there is maybe the net flows. Net flow rate of growth has been maybe at the low single-digit percentage. How much of that is a function of the market? And what do you think is the natural growth rate of this business? And secondly, coming back to AI, the GBP 100 million that you've spoken about, there's a lot of focus on the ROI of these investments. Is that on a gross basis? Or is that including the cost of these investments that you've made?

William Leon Chalmers, CFO

On the strategic investments, in particular, Sheel? The AI. The AI. Charlie, shall I kick off, please? In terms of IP&I, the business, as you say, has been really successful in terms of growing some of its core activities. You'll notice that the IP&I business recently last year, maybe actually '24, it might be the tail end of, effectively focused the business on 2 or 3 core strategic areas. These include things like GI, it includes things like workplace pensions, for example. At the same time, it sold the bulk business. That was a reflection, if you like, of the strategic focus of the business and a very deliberate capital allocation decision upon those areas where we frankly felt we had a right to win and indeed a path to ensuring that we did so. So that's what's behind the positioning of the business. That's also what's behind the 11% OOI growth in respect of Insurance, Pensions and Investments in 2025, and that added to the acquisition of Schroders Personal Wealth now to be Lloyds Wealth, should add to greater growth, i.e., faster growth in OOI from IP&I going forward into 2026. That's the earnings story. You talked about book growth there. I would just distinguish in doing so between what we describe as the open book growth versus the closed book growth. And what we mean by that is that we're very interested in growing assets fast in the context of those businesses that we are strategically focused on, just as I mentioned a second ago. And if you look at open book AUA new money in 2025, it's almost GBP 8 billion. It's about GBP 4.2 billion in Q4. Of course, we would expect to see that build over the course of time. And off the back of the strategic focus and investments in the businesses that I've just mentioned, Sheel, you should expect to see that. I won't give you a precise run rate that we expect to target the business at. Safe to say that it's strategically focused and concentrated. And in addition to that, with that type of investment, with that type of background and context, we would expect those open book AUAs to grow at a faster base than necessarily or faster pace than necessarily the totality of assets under administration in the entire IP&I business might do. The second of your question, ROI, ROI always takes account of the investment.