Earnings Call Transcript - LYG Q3 2025

Operator, Operator

Thank you for standing by, and welcome to the Lloyds Banking Group 2025 Q3 Interim Management Statement Call. Please note, this call is scheduled for 1 hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

William Leon Chalmers, CEO

Thank you, operator, and good morning, everyone. Thank you for joining our Q3 results call. As usual, I'll run through the group's financial performance before we open the line for Q&A. Let me start with an overview of our key messages. We continue to make great progress on our strategy. In doing so, we are creating value for our customers and wider stakeholders through improved propositions, targeted growth, and enhanced operating leverage. In Q3, we delivered a robust financial performance, supported by healthy growth across the business, driving continued income momentum. We maintained our cost discipline and strong asset quality, reflecting stable credit performance in the period. Taken together, this is driving strong capital generation. As you know, in the third quarter, we've taken an additional charge of GBP 800 million relating to the FCA consultation process on motor commissions. Clearly, we are disappointed by this outcome, and I'll talk more about it later in the presentation. Accordingly, we've revised our 2025 guidance to reflect the motor provision. Excluding the charge, we are beating our prior targets. We remain highly confident in our 2026 guidance. Before turning to our financials, a brief update on two important strategic developments. Firstly, I'm delighted to say that we have completed the full acquisition of Schroders Personal Wealth, which will be renamed Lloyd's Wealth. This is an exciting step forward for both our customers and shareholders, as it will deliver full control of a market-leading wealth management business that has GBP 17 billion of assets under administration, more than 300 advisers, and 60,000 clients. Embedding Lloyd's Wealth into the broader group will advance our end-to-end wealth ambitions, delivering clear benefits for our customers. Secondly, we've taken significant steps forward in our digital asset strategy. Earlier in the year, we partnered with Aberdeen Investment to deliver a U.K.-first FX derivatives trade collateralized with tokenized digital assets. Alongside this, we're co-chairing the U.K. finance project to deliver tokenized deposits. Retail and commercial pilot use cases in programmable digital money are due to deliver in H1 of next year. These developments will ultimately drive material customer opportunity and maintain our commercial leadership. We look forward to elaborating on this alongside other areas of our technology, digital, and AI strategy in an investor seminar on the 6th of November. Let me now turn to the financials. The group demonstrated a robust financial performance during the first 9 months of the year. Year-to-date, statutory profit after tax was GBP 3.3 billion with a return on tangible equity of 11.9%. Excluding the motor provision, return on tangible equity was 14.6%. Looking at the full year, we expect RoTE to be around 12% or around 14%, excluding motor. We remain committed to efficiency. Year-to-date operating costs of GBP 7.2 billion were up 3% year-on-year, and our credit performance remains strong with a year-to-date impairment charge of GBP 68 million, equating to an asset quality ratio of 18 basis points. We are upgrading our full-year guidance on the asset quality ratio to around 20 basis points. Our tangible net assets per share increased to GBP 55, up 2.6p in the year-to-date and 0.5p in the quarter. Our performance delivered strong capital generation of 110 basis points year-to-date, or 141 basis points excluding motor. I'll now turn to the developments in our customer franchise. We have seen good growth across both the lending and deposit franchises so far this year. Group lending balances of GBP 477 billion are up GBP 18 billion or 4% year-to-date, with retail lending growing significantly. We continue to see no sign of a slowdown in mortgage applications ahead of the budget in November. Year-to-date deposits have grown GBP 14 billion or 3%. In Q3, we saw a good performance, up GBP 2.8 billion quarter-on-quarter. Alongside the deposit developments, we continue to see steady growth in insurance, pensions, and investments. Let me turn to net interest income. Year-to-date, we are seeing sustained growth in net interest income, which was up 6% year-on-year to GBP 10.1 billion, with GBP 3.5 billion in Q3 alone. The Q3 margin was up, supported by a growing structural hedge tailwind. Looking ahead, we expect net interest income for the full year to be around GBP 13.6 billion, slightly ahead of our previous guidance. On Slide 6, we continue to demonstrate strong momentum in other income, which is up 9% year-on-year. In Q3, other income was GBP 1.6 billion, driven by growth in our retail and LPG investments. Looking forward, the full acquisition of Schroders Personal Wealth will further support other income growth. We'll remain committed to cost discipline, and I will now wrap up by summarizing our robust performance in the first 9 months of 2025, where we are improving our underlying guidance, including net interest income, asset quality, and return on tangible equity.

Operator, Operator

Our first caller is Benjamin Toms from RBC.

Benjamin Toms, Analyst

The first is Motor Finance. The provision post top-up leaves you with the just below GBP 2 billion. That's based on a weighted average scenario calculation. If the consultation paper does not get softened and the FCA is correct with their 85% claim rate, how material would the provision top-up be from here? Just some sensitivity around that would be useful. And then secondly, on NIM, I think before you said you expected NIM to build faster in Q4 than Q3. Is that still the case? And can you give us some indication about whether you'd expect NIM to continue to build through 2026?

William Leon Chalmers, CEO

Thanks, Ben. Just to take each of those in order, the start point and perhaps the end point is to say GBP 1.95 billion in respect of motor represents our best estimate of the cost of this issue. It is a scenario-based estimate, and those scenarios represent what we think are reasonable FCA responses to the issues that we raise. The FCA proposals, as currently proposed, represent the heaviest weighting in our overall scenario analysis. I would expect to see continued growth in that interest margin over the course of Q4. We do anticipate a bit of a back-end loaded step-up in Q4, predominantly because of the structural hedge contribution, which is slightly more heavily weighted in Q4. However, that is somewhat offset by the usual headwinds of bank base rate and deposit effects. On your second question regarding NIM, you should expect to see interest margin expansion in the course of Q4, greater than what we have experienced from Q2 to Q3. Additionally, for 2026, we anticipate continued margin expansion. This is mainly attributed to the structural hedge, which is expected to contribute significantly alongside the continued increase in AIA. We expect to guide on that for 2026 in due course. Thank you, Ben.

Operator, Operator

Our next caller is Jason Napier from UBS.

Jason Napier, Analyst

I wonder if you could just talk about how Lloyd's sees wealth as sort of a banking business in the U.K. and about the 300 advisers and the funds that they advise in how you might be interested in inorganic expansion in IFA-led businesses. And the second, I don't want to steal the thunder from your upcoming tech event, but the slide on tokenized assets does, I think, invite further inquiry. I just wondered whether you could talk about the work that you've done so far and where you think things like tokenized assets and deposits might impact banking industry revenues in total.

William Leon Chalmers, CEO

Thank you, Jason. A couple of comments on wealth and the overall opportunity. We're pleased to see the conclusion of the SPW transaction. It brings us full ownership of what we consider a great business. The statistics you've heard reflect a promising start, and we aim to grow this significantly. It's part of an integrated proposition that will enhance not only our direct-to-consumer self-serve but also our building digital proposition. In terms of inorganic opportunities, while I won’t comment explicitly, we need to focus on our existing capabilities before considering further expansion. Now regarding tokenized assets, we've conducted a partnership utilizing tokenized assets as collateral for a market-based trade. This was a proof of concept that shows potential while recognizing challenges that stable coins face in the U.K. market as we aim for a seamless transition to programmable money.

Operator, Operator

Our next caller is Perlie Mong from Bank of America.

Perlie Mong, Analyst

William, so just a couple of questions. One is on distribution. It sounds like you're comfortable with the motor finance charge. Thinking about full-year distributions for '25, would you consider that there is no more uncertainty in your mind regarding the future? And while on that topic, is there any consideration about moving to a more frequent distribution cadence, similar to some peers who have moved to quarterly buybacks? And secondly, on mortgage margins, your peers have mentioned about 5-year mortgages rolling off next year. Is this something already integrated into your guidance for '26, or do you expect competition behavior of competitors to change in any way?

William Leon Chalmers, CEO

Thank you, Perlie. Regarding motor provisions, our current estimate of GBP 1.95 billion is a scenario-based estimate, and we believe this is close to the expected worst-case outcomes. With respect to distributions for 2025, we're committed to distributing excess capital. We've provided guidance for 145 basis points of capital generation. We are evaluating options for enhancing buybacks, but any decisions will be made by the Board periodically and in respect to capital capacity. Regarding the mortgage margins and any potential competition, we recognize that these have been factors we've discussed previously. Our guidance for net interest income includes anticipated mortgage headwinds.

Operator, Operator

Our next caller is Jonathan Pierce from Jefferies.

Jonathan Pierce, Analyst

I had two questions. The first is on the structural hedge. I wondered if you could help us scale the contribution for Q4. Can you clarify the impact for 2026? When do you expect to discuss this and the metrics linked with distribution strategies?

William Leon Chalmers, CEO

In respect to the structural hedge, the yield on the structural hedge is about 2.3%. The contribution to the margin in Q3 was about 4 basis points, but we expect this will more than double in Q4. For 2026, our expectation for the yield is consistent with our previous discussions, about 2.9%. I won't go into quarterly specifics yet, but you can expect continued build in the subsequent years, particularly in '27 and beyond. We will provide further updates as we move through the year.

Operator, Operator

Our next caller is Aman Rakkar from Barclays.

Aman Rakkar, Analyst

I wanted to query on nonbanking funding costs, which appear lower than your previous commentary around up GBP 100 million year-on-year. Also, on other operating income, can you provide a steer on the trends within the divisions moving forward?

William Leon Chalmers, CEO

On nonbanking net interest income, Q3 was GBP 136 million, up about 10% year-on-year. It’s running slower than expected due to less commercial banking activity. Going forward, we anticipate continued growth primarily driven by volumes. In regard to other operating income, we have seen strength in retail, up 9% year-on-year. Commercial has been slightly slower due to valuation adjustments not repeating. We expect growth to continue as our strategic investments yield results and a competitive position strengthens.

Operator, Operator

Our next caller is Sheel Shah from JPMorgan.

Sheel Shah, Analyst

The CIB business has performed exceptionally well this year. Could you elaborate on the active strategies behind this? Additionally, regarding the cost-to-income ratio for 2026, that consensus sits at 51%. What do you believe the market may be missing on the revenue or cost counts?

William Leon Chalmers, CEO

On our commercial banking performance, we see strong growth in CIB driven by product broadening and transformations. We're encouraged by positive momentum, even as historical comparatives weigh down some areas. Regarding costs, we are focusing on strategic initiatives designed to optimize our cost structure, leading us closer to our commitment of a sub-50% cost-to-income ratio in 2026. However, we won’t aim to be far below that threshold.

Operator, Operator

Our next caller is Christopher Cant from Autonomous.

Christopher Cant, Analyst

I have questions about stable coins and tokenized deposits, including the timelines against FCA actions. Secondly, on motor, do you agree with the FCA’s stance on capturing cases as it may relate to administrative costs?

William Leon Chalmers, CEO

In terms of tokenized deposits, we must move quickly to deliver efficiently. Use cases for the first half of next year will demonstrate value and capture benefits. In regards to the motor sector, we believe the proposals from FCA are disproportionate and we'll likely advocate for more tailored approaches to reduce broader costs. We aim to deliver value while ensuring suitable provisions are in place.

Operator, Operator

Our next caller is Guy Stebbings from BNP Paribas.

Guy Stebbings, Analyst

Can you speak about net interest income growth? Your average asset growth looks strong. What are your expectations moving forward on mortgage volumes and spreads?

William Leon Chalmers, CEO

The recent growth in our lending book is encouraging, yielding significant contributions to net interest income. We expect growth to continue, particularly in mortgages as we face lesser market friction. Current mortgage spreads are competitive, and while there has been slight erosion, we remain committed to offering attractive products that yield good returns. The competition might encourage a slight shift in strategy, but we are prepared regardless.

Operator, Operator

Our next caller is Ed Firth from KBW.

Ed Firth, Analyst

Can you clarify the NII growth rate? Additionally, as for the SPW joint venture, I’m curious about the cost offset and if those numbers should go through directly to revenue.

William Leon Chalmers, CEO

Our guidance suggests an increasing trend for NII, reflected in our recent performance, indicating strengthened growth ahead. The guidance for SPW will indeed involve additional costs, about GBP 120 million, as it plays into our overall perspective on operating income in 2026. We view this acquisition as strategically significant, contributing positively to long-term returns.

Operator, Operator

As you know, this call is scheduled for 1 hour, and we have now exceeded the end of the allotted time. This is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. With that, our final caller is Amit Goel from Mediobanca.

Amit Goel, Analyst

On deposits, are the positive trends finally reaching a peak? Additionally, how is your engagement with the government regarding the upcoming budget impact on banking sector taxation?

William Leon Chalmers, CEO

Our recent deposits performance has been solid, particularly with the upward trends we've seen recently. We continue to assess the future trajectory and potential impacts. Engagement with the government has not excessively impacted our operations, and we remain optimistic about the overall framework for financial operations.

Operator, Operator

Thank you. This concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website shortly. Thank you for participating. You may now disconnect your lines.