Earnings Call Transcript
Lloyds Banking Group plc (LYG)
Earnings Call Transcript - LYG Q4 2022
Charles Nunn, CEO
Good morning, everyone, and thank you for joining our 2022 full-year results presentation. I'll begin today with an overview of our performance in 2022, including an update on the good start we have made one year into our strategic transformation as well as outlining what you can expect over the next 12 months. William will then provide the usual detail on our numbers, and we'll have plenty of time for Q&A at the end. So let me begin on Slide 3. Similar to my update at the half year, I'll start with five key messages I'd like you to take away from today. First, our purpose of helping Britain prosper is core to everything we do. With this in mind, we've taken significant action to provide support to our customers and colleagues through a period of increased uncertainty. We delivered a robust financial performance in 2022 with increased capital returns supported by strong income growth. Although the macroeconomic environment has changed significantly, we remain confident that our strategy is the right one, delivering positive outcomes for all our stakeholders. We've made a good start to our strategic transformation with 2022 largely focused on mobilizing the businesses and laying the foundations for our future success. Our investment is fundamental to the prospects of the group, and we are already seeing early evidence of delivery. And finally, our confidence in our strategy is reflected in an enhanced financial outlook, particularly as we build through the plan. This includes upgrading our medium-term return on tangible equity and capital generation targets. So with that, I'll now turn to Slide 4 to briefly outline how we've delivered for our stakeholders in 2022. Customers and clients are at the heart of our business. In a year where the environment has proven more challenging due to increases in the cost of living, I'm extremely proud of the support we have provided. We've leveraged our digital strength to provide our customers with the ability to take greater control of their finances. Over 5,000 customers access our digital financial resilience tools every day, and over 5 million have accessed our new credit worthiness app. We've also invested in deep capabilities to help customers build financial resilience and support them with tailored products and plans if they're unable to make ends meet. This includes training more than 4,600 colleagues to provide financial assistance where it's needed. As a result, we put in place around 250,000 personalized plans, helping individuals and businesses with our finances. Despite the more challenging economic environment, we've not seen a meaningful increase in the total number of customers needing this enhanced support. This highlights the resilience of our customer base as we enter 2023. Our colleagues are critical to providing the support. And we've also made significant efforts to help our people through changes to pay and working practices. In 2022, we provided early cost-of-living support for colleagues through a one-off payment, whilst many colleagues received a further payment in December. Towards the end of the year, we also made an early announcement on the 2023 pay deal, providing certainty for our people. Core to our purpose is our focus on building an inclusive society. To that end, we have provided over GBP2 billion of funding to the social housing sector and lent over GBP14 billion to first-time buyers in 2022, helping more than 60,000 customers get on the housing ladder. At the same time, I'm proud of the fact that we provide around 30% of basic bank accounts in the U.K. Alongside this, we've delivered race education training to all colleagues, provided focused support for Black entrepreneurs, financed high-speed Internet in less privileged communities, and supported agricultural clients in their efforts to build financial resilience. We've also made progress in supporting the transition to net zero. This includes our commitment to responsible investment with Scottish Widows, launching a carbon calculator for SMEs and our innovative new partnership with Octopus Energy, which will enable customers to make their homes more energy efficient. We've also provided over GBP13 billion of green and sustainable lending in 2022 and developed our first group climate transition plan. The latter includes important industry firsts, such as our commitment to not directly finance any new oil or gas fields. So there's a lot going on. And as ever, we are targeting our efforts in areas we can make the biggest difference whilst creating opportunities for profitable growth. We have published our environmental and social sustainability reports this morning, and you'll find a lot more information in there. Turning now to a brief overview of our financial and business performance on Slide 5. The group delivered a robust financial performance during 2022. Net income was up 14% compared to the prior year, whilst operating costs increased by 6%, in line with expectations. Stable Business As Usual costs highlight our ongoing cost discipline, which is particularly important in an inflationary environment. We delivered a return on tangible equity of 13.5% and generated 245 basis points of capital. This enabled an increased ordinary dividend of 2.4p per share, alongside our share buyback of up to GBP2 billion. As you'll hear in my remarks on our strategic progress, we're delivering continued business momentum and seeing real franchise growth. This is alongside improving levels of employee engagement and progress on our diversity goals. Turning to our strategy on Slide 6. Our purpose-driven strategy has three distinct pillars: First, driving revenue growth and diversification across four key areas that cover our consumer and commercial franchises. Second, strengthening the group's cost and capital efficiency, building on our strong foundations. And third, building a powerful enabling platform that combines people, technology, and data to support our ambitions. The combination of these priorities will enable the group to deliver on our purpose, attract and retain the best talent, and grow profitably with our customers. In turn, this will enable us to deliver higher, more sustainable returns and capital generation across both the short and long term. Now turning to Slide 7 to look at how the changing environment reinforces our strategy. It is a year since we set out the group's new strategy. The operating environment has changed significantly over the last year. And as I mentioned earlier, our customers are facing a more challenging outlook than we had anticipated. This also presented challenges for us as we are focused on supporting our customers and ensuring they remain financially resilient. We've also continued to see shifts in our customer behavior to be more digital. Given the group's financial strength, it is more important now than ever to deliver the purpose-driven strategy we set out last year. It will enable us to further differentiate how we serve our customers as they start to recover from these economic challenges, whilst we can also strengthen and diversify the group's earnings. In some cases, we've stretched our ambition even further, such as adding an additional GBP0.2 billion of cost-saving targets for 2024. Our ongoing commitment to our strategy is reflected in the scale of the investment, GBP3 billion of incremental strategic spend over the first three years of the plan, or GBP4 billion over five. In 2022, we delivered GBP0.9 billion of this incremental investment. Turning to our strategic progress on Slide 8. As we set out a year ago, we have a purpose-driven strategy focused on driving revenue growth and diversification, strengthening cost and capital efficiency, and maximizing the potential of our people, technology, and data. We have an ambitious strategy for a five-year transformation of the group with clear deliverables and the financial benefits increasing as we move through the plan. 2022 was a foundational year, and we've taken significant action as we've invested for growth and accelerated our efficiency initiatives. We've also reorganized the group to accelerate the pace of transformation and have seen good early evidence of delivery across our initiatives. So I'm confident we are well placed to deliver our strategy going forward. I'll note some highlights of our progress shortly, but first, on Slide 9, I'll highlight some of the initial financial benefits. You'll recall that when we presented our strategy, we highlighted an expectation that the growth initiatives will provide GBP0.7 billion of additional revenues per annum by 2024 and GBP1.5 billion by 2026, split 50-50 between interest and other income. As I'll highlight on the coming slides, we've made good initial progress. And as we deepen our customer relationships further over the coming years, we expect to build momentum that will support higher, more sustainable revenues that extend beyond the current rate cycle. In addition, we achieved GBP0.3 billion of gross cost savings in the year, which supported a stable BAU cost base. As mentioned, we've identified further cost savings in 2024 that will partially mitigate the impact from inflation and create investment capacity. We expect an inflection point in 2024, where the benefits from our strategic initiatives will positively contribute to the bottom line in 2025 and beyond, as reflected in our financial guidance. I'll now briefly highlight progress across our four priority growth areas, and I'll start with Consumer on Slide 10. We've made good progress on building deeper customer relationships as well as innovating and broadening our product offerings, whilst improving the ease with which our customers can access them. We've invested in driving improved levels of personalization and digitization, resulting in a 15% increase in daily logons as well as reaching 20 million digitally active customers, two years ahead of schedule. This enables the group to reduce costs and drive deeper customer engagement. In 2023, we will continue to personalize and digitize our consumer offering, supporting our ambition to meet more of our existing customers' needs. This morning, we announced the acquisition of a vehicle management and leasing company focused on electric and low-emission vehicles. This will further develop our motor business in a way that is clearly aligned with our purpose and sustainability ambitions and supports our growth ambition in SME. In 2022, our mass affluent business, supported by targeted campaigns, increased banking balances by over 5%. We've also launched new tailored banking products including credit card and packaged bank access. Our direct-to-consumer investment capability has been enhanced, aided by the completion of the Embark acquisition. This was previously a gap in our product capabilities, and we expect both D2C and ready-made investment options to launch in 2023. Our mass affluent offering will be launched in earnest this year with customers experiencing a differentiated digital-first model. We also expect an expansion of our banking offering, providing value-added products, services, and benefits for customers. Looking now at progress on commercial on Slide 11. Our ambition in SME is to build a diversified, digital-first business. This is a multiyear journey, and in 2022, we have laid strong foundations and shown positive growth, including more than 20% growth in new merchant services clients. We're also broadening our product capabilities through strategic fintech partnerships where appropriate. For example, our invoice discounting partnership provides a solution that allows clients to better manage cash flows. In 2023, we'll take further steps to improve our digital offering with new onboarding propositions, enhanced functionality, and insights for clients. Our corporate and institutional offering has made good progress within the targeted parameters that were outlined in February last year. We are also investing in product capabilities that support our clear cash, debt, and risk management offering. This includes upgrading our rates digital product offering and delivering the first phase of our new FX platform. And finally, we've strengthened our originate-to-distribute capabilities, delivering our milestone first strategic co-investment partnership. These strengthened capabilities further improve the group's capital efficiency. In 2023, we expect to extend the scale of our originate-to-distribute offering alongside maintaining our clear sector focus and further improving product capabilities. Having highlighted just some of the progress in our growth businesses, I'll now look at our clear commitment to the enablers on Slide 12. Maintaining discipline with regards to cost and capital efficiency is critical to our strategy. In 2022, we increased customer engagement and service options through our digital channels, enabling us to optimize our cost to serve by, for example, closing around 200 branches and increasing automation of operational processes. With regards to capital efficiency, we continue to demonstrate RWA discipline whilst pursuing growth in capital-light, fee-generating businesses and enhancing our originate-to-distribute capabilities. In 2023, we will also conclude the triennial pension review, which is expected to demonstrate the significant advances we have made. Our people efforts in 2022 have included refreshing the leadership team, establishing our new operating model to deliver the strategy, and driving greater efficiency, for example, by reducing our office footprint by 12% as we adapt to new ways of working. We've continued to invest in future data capabilities as well as decommissioning 5% of legacy applications and reducing our data center footprint by 10%. This brings new capabilities to supplement our strategy as well as greater team efficiency. I'll now finish my remarks on Slide 13. So I hope that was a helpful update. I'm pleased with our strategic progress, particularly in the face of a changing external backdrop. Looking forward, it is our intention to provide you with regular deep dive sessions over the course of this year and into the first half of 2024. You'll find more detail on these sessions in the appendix. As you know, our strategy is underpinned by a robust financial framework and a clear link to how strategic initiatives contribute to the delivery of higher, more sustainable returns and capital generation. Based on our strategic progress, future plans, and the changes to the macroeconomic forecasts, we are today enhancing our financial guidance. William will provide you with more detail shortly, but at a headline level, we're now targeting a return on tangible equity of 13% in 2024 and greater than 15% by 2026. Both are around three percentage points higher than last year. This, in turn, drives higher capital generation, and we're now targeting circa 175 basis points in 2024, increasing to greater than 200 basis points by 2026. I believe that these targets reflect a compelling proposition for our shareholders, and they demonstrate our confidence in the future. Thanks for listening. I'll now hand over to William for the financials. Thank you.
William Chalmers, CFO
Thank you, Charlie, and good morning, everyone, again, and thanks again for joining. As Charlie said, the group delivered a robust financial performance in 2022 based on continued strength in the customer franchise. Net income of GBP18 billion is up 14% versus 2021, supported by a higher net interest margin of 294 basis points, 4% growth in other income and a low operating lease depreciation charge. We remain committed to efficiency. Operating costs of GBP8.8 billion are in line with our guidance. This includes stable BAU costs alongside higher planned strategic investment and the cost of the new businesses. Asset quality meanwhile is strong. The observed impairment story has not materially changed in the quarter. The full-year impairment charge of GBP1.5 billion includes the impact of the revised economic outlook emerging during the year. Together, the strong performance delivered statutory profit after tax of GBP5.6 billion and a return on tangible equity of 13.5%. Tangible net assets per share of 51.9p, down 5.6p in the year, although up 2.9p in Q4. Robust earnings, alongside a modest reduction in risk-weighted assets and significant insurance dividends, have driven strong capital build of 245 basis points in 2022. Let me now turn to Slide 16 to look at the ongoing development of our customer franchise during the year. Our mortgage portfolio continued to grow in 2022. Balances are up GBP3.7 billion in the year, including GBP1.2 billion open book growth in the fourth quarter. Credit cards are up GBP0.5 billion in the year, although flat in the fourth quarter. Motor Finance is up GBP0.3 billion in 2022, including GBP0.1 billion in Q4. The order book is strong, albeit the business remains impacted by the ongoing global supply chain issues affecting the industry. Commercial banking balances meanwhile are up GBP1.2 million during the year. This continues to be led by attractive growth opportunities within Corporate & Institutional and FX. FX partly being offset by repayments of government support scheme loans, predominantly in our small and medium businesses franchise. On the other side of the balance sheet, retail deposits were up GBP2.4 billion in the year. This includes current accounts, up GBP2.5 billion in 2022, although down GBP1.7 billion in Q4, given some customers switching balances and seasonality. Commercial deposits are down GBP3.7 billion in the year, including GBP6.4 billion in the fourth quarter. We saw some short-term placements from Q3 and CIB reverse in the final quarter as we had expected, alongside the impact of management pricing actions and seasonal effects. During the year, we've also seen assets under management growth within insurance of over GBP8 billion of net new money. I'll now turn to Slide 17 and the strong net interest income performance in a little more detail. NII of GBP13.2 billion is up 18% on the prior year. AIEA is at GBP452 billion are up GBP7 billion or 2%, largely due to the GBP6 billion growth in average mortgage balances. The full-year margin of 294 basis points is up 40 basis points on 2021. This benefited significantly from the base rate changes through the year and structural hedge reinvestment, outweighing mortgage pricing pressures. The Q4 margin of 322 basis points was up 24 basis points in the quarter. The margin is driven by base rate movements, but bear in mind that deposit pricing has lagged base rate changes, and therefore, some of this will unwind in H1. The mortgage rollover pressure increased to 8 basis points in Q4, and this indeed will continue across 2023. Looking forward, we now expect average interest-earning assets to be broadly stable in 2023. We should see low single-digit growth in the core businesses largely offset by reductions in the closed mortgage book and government support scheme loans within commercial. I should also note that Q1 will see a modest reduction in customer lending given our exit from a legacy mortgage book in January. So putting all this together, we now expect the net interest margin to be greater than 305 basis points in 2023. This is below Q4's exit rate given the impact of the mortgage book refinancing, deposit repricing actions, and higher funding costs. These will more than offset the expected higher hedge earnings. Within 2023, the headwinds will impact our numbers more in the first half, while the hedge benefit is back-ended. While this suggests the margin is likely to dip in H1 before stabilizing for the rest of the year, we do expect the margin to be above 300 basis points at all times. Let me now turn to Slide 18 and look at our interest rate sensitivity in a little more detail. The group remains positively exposed to rising rates. We expect a 25 basis point parallel shift to benefit interest income by about GBP150 million in year 1. As ever, this is illustrative and based on the same assumptions as before, notably the 50% deposit pass-through. And as you know, pass-through could differ from the 50% illustration, and that makes a meaningful difference to our sensitivity. As always, published sensitivity does not assume asset spread compression, for example, in mortgages. So with that, let me move on to look at the individual asset portfolio, starting with mortgages on Slide 19. The open mortgage book grew GBP6.3 billion during the year, including GBP1.2 billion during the fourth quarter. The bank book is now around GBP47 billion, down 25% over the year. Customers are refinancing their mortgages in the context of a higher rate environment, and indeed, we are actively supporting them in this process. As you know, mortgage pricing has been competitive over the course of 2022. Completion margins were around 60 basis points for the year and around 50 basis points in Q4. The mortgage margin picture is now better and more stable than a few months ago. However, the effect of the remaining low-margin October business still awaiting completion will continue to impact Q1. More broadly, we're forecasting mortgage new business margins in the year to be below the 75 to 100 basis points that we talked about last February. With that said, we do still see mortgages as attractive from a returns and from an economic value perspective. Let me now turn to our other asset books on Slide 20. Consumer finance balances of GBP1.4 billion higher than 2021 and essentially flat in the fourth quarter. We've seen a recovery in credit card spend, resulting in balances up GBP0.5 billion in the year, largely in the first half. As mentioned, motor finance growth remains impacted by the issues affecting the whole sector. Commercial banking lending is up GBP1.2 billion in the year. As discussed earlier, attractive growth opportunities within the Corporate & Institutional business alongside FX impacts have been partly offset by clients repaying their COVID loans. Let's move to the other side of the balance sheet on Slide 21. Total customer deposits of GBP475 billion are down GBP1 billion in the year due to lower commercial balances. Retail current accounts were up GBP2.5 billion in 2022, further supporting our hedge capacity. The Q4 reduction of GBP1.7 billion, in part reflected a movement to savings offers, both internal and external. Retail relationship accounts were up GBP1.8 billion in the year, including GBP0.6 billion in Q4 as customers have begun to seek higher returns on their deposits. Commercial deposits meanwhile are down GBP3.7 billion. This includes GBP6.4 billion in Q4, partly reflecting the outflows of short-term CIB deposits that we flagged to Q3. Aggregate deposits are around GBP65 billion higher than at the end of 2019. I'll now turn to Slide 23 and other income. Other income of GBP5.2 billion is 4% higher than 2021. We are building confidence in our growth potential across the franchise. 2022, including Q4, retail saw improved current account and credit card performance in the context of recovering activity. Likewise, commercial OI saw improving transaction banking and financial markets activity. Meanwhile, insurance pensions and investments benefited from assumption and methodology changes in the year, most notably as product persistency beat our expectations. After adjusting for this in GI weather events, insurance other income was slightly up in 2022 from increased new business income in workplace pensions, bulk annuities, and protection. The fourth-quarter result of GBP1.4 billion was largely supported by those same trends as well as the net benefit from assumption changes and weather claims in insurance. Looking forward, leaving aside IFRS 17, we continue to expect other income to develop, depending upon customer activity levels, supported by our ongoing investments in the business. To touch briefly on IFRS 17. As you know, IFRS 17 is an accounting change that impacts the phasing of profit recognition for insurance contracts but not the cash flows. Under IFRS 17, new business income and associated costs, alongside most one-off assumption changes and some volatility, will now be deferred to a new contractual service margin liability to CSM. That's going to be on the balance sheet. And these items, the CSM will then be recognized over the period the services provided through the unwind of that liability. This will have a neutral, longer-term impact on the group's financial results, although near-term reported other income is expected to be lower. If we applied this standard to 2022, other income would have been circa GBP500 million lower. Although this impact includes lower than usual in-year assumption charges or change benefits. The run rate impact is likely to be closer to GBP300 million to GBP400 million, as we set out previously. There will also be impacts on the below-the-line volatility items and TNAV from IFRS 17. I'll touch on TNAV shortly.
Charles Nunn, CEO
Thanks, William. So as you've heard, the group delivered a strong performance in 2022. Our purpose-driven business and financial strength enabled the group to provide significant support to customers and colleagues. Alongside the group's robust financial performance underpins our increased capital returns. Our strategy is reaffirmed as the best way to serve our purpose and support our stakeholders as well as put the group in a higher, more diversified growth trajectory. We've made a good start. Finally, we're enhancing our guidance over the short and medium-term as we progress towards delivering higher and more sustainable returns for our shareholders. That wraps up our comments for this morning. Thank you very much for listening. We now have plenty of time for Q&A. So let me hand over to Douglas, who will coordinate the Q&A.
Operator, Operator
Thank you, Charlie. We've set aside about 45 minutes for Q&A. And in line with normal practice, if people could mention their name and indeed their company. Please, could you also wait for the microphone to actually arrive so that everyone online can also hear your question. Why don't we start with Guy?
Guy Stebbings, Analyst
Regarding net interest margin, I'm looking at its trajectory for 2023. I appreciate the insights on stabilization and the expectation of staying above 300 basis points. It seems that the second half of the year should be positive. The effects of liability spread compression may be more prominent earlier in the year due to the timing of rate hikes. You mentioned that mortgage spread churn was around 8 basis points in the last quarter, and I believe that will decrease over the year. Meanwhile, the structural hedge tailwind should continue, and based on the maturity profile you mentioned, it might become more significant later in the year. Therefore, I wonder if it could improve slightly beyond stability after we adjust for the first half of the year as we look towards Q3 and Q4. Or am I being overly optimistic with this outlook? Additionally, regarding margin, I'm curious about deposit movements and the structural hedge notional. There was a significant reduction in deposits in the fourth quarter, primarily from commercial deposits on hedge deposits. Given what you're observing now and your expectations for the upcoming months, how are you considering the hedgeable deposit component and current customer behavior? Is there anything unexpected in how customers are responding?
William Chalmers, CFO
Thank you, Guy, for your questions. Regarding the margin, first, keep in mind that our margin guidance is based on our macroeconomic assumptions. That's an important starting point. Now, to address your building blocks, we expect the margin to move from a 294 margin for all of 2022 to an exit margin of 322 in Q4, with guidance for 2023 set at over 305. This reflects a mix of headwinds and tailwinds factored into that guidance. Starting with the headwinds, we anticipate fewer base rate increases this year, which leads to reduced lag benefits compared to the latter half of 2022. Additionally, we expect some rebalancing of PCAs into savings accounts as depositors seek higher returns, which we've accounted for in our margin projections. Moreover, the mortgage headwind is quite significant this year and will continue to be so into 2024. We believe once we move past this period, we will begin to see improvements, but for now, the mortgage headwind, stemming from the attractive rates offered during 2019 and 2020 as we transition from two-year fixes, plays a considerable role in this scenario. There are also some marginal headwinds from increased funding costs on the wholesale side, but the primary tailwind we see for Q3 is the structural hedge. We have about GBP35 billion in maturities this year, most of which will occur in Q3 and Q4. As a result, we expect to maintain a healthy margin in Q1, but the interplay of headwinds and tailwinds will have a greater impact in Q2. We aim to keep the margin sustainably above 300 throughout 2023. In terms of dynamics, I want to emphasize the macro assumptions we are using. I also think the way you're viewing the unfolding dynamics may be over a slightly longer timeline than how they are actually playing out. I hope this provides clarity.
Omar Keenan, Analyst
I have a question regarding your approach to increasing deposit costs. You mentioned the delayed effects from the Bank of England's rate changes. We've noticed some deposit migration beginning in October and November. We're trying to model this situation, which is new territory for us, especially since rates have risen so rapidly. Could you share your thoughts on the deposit migration process? How fast do you anticipate it will occur and to what extent? Are your assumptions influenced by customer polling, or how did you reach those conclusions? I would like to understand your assumptions better. Additionally, if I missed it in the material, could you provide an update on the year-end position for the pension deficit or at least a rough estimate?
Charles Nunn, CEO
Thanks, Omar. Let me take the first one, and it's a great question because as you say, this economy in the last 20 years hasn't been through this kind of a rate cycle. We talked last year about our view on this, which was partly informed by, obviously, the U.K., but also what I've seen in other rate cycles. And at this stage, we think it's playing out very in line with what we discussed last year, but let me just give you the outline and then you can see if there's a follow-up. The first thing we talked about is normally you see certainly on individuals, commercials, and businesses are slightly different, but the core of our balance sheet and our structural hedges is underpinned by our retail customers. They become more price sensitive in a rate-rising environment, around the 2.5%, 3%. And actually, that's exactly what we saw, and we talked about last year that the vast majority of our customers by number, not by value, have actually really quite small deposits and savings balances. And so the real sensitivity doesn't kick in until about a 3% base rate. And that's what we saw happening in kind of Q4 last year. There was more sensitivity in customers looking for value on their savings with us but also switching between different financial services providers. The second thing we said was we would recommend, and this is certainly how we think about it. But as we get deeper into the rate cycle, we'd be thinking about a 50% pass-through. Now I know that's a very blended set of assumptions. That includes churn out of current accounts at almost 0% rates, as well as customers putting money into time deposits and various saving building products. But for us, as you know, we pay 3% to 5%. So there's a set of assumptions around churn where customers are putting their money and what the rates are. But we still think actually that's the right way of thinking about this. Our experience is that takes a few years. And if you think that in our baseline assumptions, rates are peaking now at 4%, and we're stabilizing at about 3% in 2024. That 50% pass-through, the rebalancing customers placing their money in the right place will happen with that kind of 3% target. So when we think about a 50% pass-through, that's where we're looking at, and we think that will continue to play out through 2023 and 2024. And certainly, that's what's the foundation of our assumptions. Obviously, it's an incredibly dynamic market. It's competitive, as you know, in the U.K., as in other markets. And we don't have recent history. But actually, at this stage, we feel really confident it's playing out as we expected. And we have the tools to be able to compete for retail and commercial deposits as we go through this next period of time.
William Chalmers, CFO
Omar, you asked about pensions as well just before we move on. In short, the expectation for the pension deficit at the end of 2022, which as you know, is the final year of the triennial when we negotiate. We do not have a certain number for that right now. It's being finalized, but our expectation is that, that comes in south of GBP2 billion, below GBP2 billion. That's off the back of considerable contributions, as you know, over the course of the last 2 or 3 years, including in 2022. It's off the back of asset performance on the back of the rate changes that we've seen. But again, we are very confident that it comes in below GBP2 billion. What does that mean? That means that while we expect to continue to pay about an GBP800 million fixed contribution during the course of '23, just as we did in '22 and the years before that. We are very hopeful that we will not have to pay any further variable contributions, including in 2023.
Raul Sinha, Analyst
It's Raul Sinha from JPMorgan. Can I have two questions as well, please? The first one, obviously, when we look at the net interest margin progression in Q4, the structure has tailwind of basis points was completely offset by the mortgage margin compression. And looking at the asset side of the balance sheet, I can't have been worried about the pace at which you're seeing some of these trends play through. So if you look at your mortgage book, the back book churn is 25% on the SVR book. Can you talk to us a little bit about what you expect there going forward? When we look at your completion margin was only averaging 50 basis points. And if you look at some of the pricing trends so far in Q1, I mean, there's a Halifax product, which is only 20 basis points above the 5-year swap rate. So it looks like the asset spread compression might actually get worse. So if you can talk to us a little bit about how you expect the pressure from the asset side to evolve this year? That would be really helpful. I guess the second question is around what you expect your deposit balances to be this year in terms of outflows. So I appreciate they're only down GBP1 billion last year and obviously, some of that outflow in Q4 on the PCA side was surprising. But in terms of the decision not to guide to a change in the hedge balances going forward, which one of your competitors did. What assumption are you making about your deposit balances?
William Chalmers, CFO
Thank you for the question, Raul. Regarding our mortgage book, the refinancing trends are in line with what we anticipated and discussed last year. We previously highlighted the impact of products with margins between 150 to 200 basis points from 2019 to 2021, which are now refinancing at much lower spreads, currently averaging around 50 basis points. While the refinancing environment is tougher, the overall unwind wasn't unexpected. We previously indicated a mortgage headwind of GBP1 billion to GBP2 billion over a few years, and this estimate has slightly exceeded GBP2 billion, suggesting around GBP1 billion a year moving into 2023 and 2024. Despite these challenges, we have incorporated these expectations into our margin guidance, including lower anticipated completion margins. We have observed an increase in back book churn, which is typical in a rising rate environment as customers look to refinance into new fixed-rate deals. We are actively encouraging this process to ensure our customers are informed and supported, recognizing that the shrinking back book size contributes to higher churn percentages. Additionally, competition dynamics affected our completion margins. In October, we remained in the market while many competitors withdrew, allowing us to capture significant volumes. Our overall completion margin for Q4 reflects a substantial contribution from October, though margins became more favorable in November and December despite lower volumes during those months. In early this year, we are experiencing improved margins for new business applications. We also anticipate growth in unsecured balances this year and into next year, which will impact margins more significantly in 2024. As for deposit balances, we expect them to remain flat or modestly increase, with some shifts between current accounts and savings accounts. In our commercial sector, balances might slightly decrease in some areas while increasing in transaction banking. Overall, we expect stability in our deposit balances, which contributes to our structural hedge strategy.
Charles Nunn, CEO
I will present an optimistic strategic outlook, which I hope you're used to hearing from me. What we can observe is the interplay of various factors affecting our asset pricing for 2023 and 2024. It's a complex situation, as we are dealing with a mix of legacy and higher-priced mortgage businesses that are being repriced. There has been some uncertainty in the market regarding how Lloyd's will navigate this, but we believe we will largely overcome these challenges during this period. We are demonstrating our ability to compete effectively and maintain resilience on the liability side of our business, which allows us to establish a structural hedge that can drive growth in 2024, 2025, and 2026. This provides us with real resilience and an opportunity to clean up our legacy mortgage business. Additionally, we remain focused on strategic initiatives aimed at generating further income growth for Lloyds Banking Group, contributing to stronger capital and cash distribution. We also believe we will largely address the £7 billion pension deficit we faced in 2019 during this period, subject to discussions with our trustees, which will free up capital for our Board to consider distributions. When considering these dynamics together, we are building a robust engine for cash generation and cash distributions to shareholders, which is highly resilient in light of the balance sheet outlook and the economic conditions we anticipate.
Operator, Operator
It's good to hear your views, Charlie. Rohith?
Rohith Chandra-Rajan, Analyst
It's Rohith Chandra-Rajan, Bank of America. A couple of quick follow-ups, please, if I could. Just quickly to follow up on the mortgage discussion. On that backbook attrition, so that was GBP10 billion in the second half of 2022. How do you expect that to evolve going forward? And then the second one was just on the pension contribution. So William, I think you said you expect the GBP0.8 billion fixed contribution to continue and you've got nothing in for the variable contribution. Does that include the final distributions for 2022, which will be paid in 2023? And is all of that reflected in your 175 basis points capital generation?
William Chalmers, CFO
Yes. Thanks, Rohith. First of all, on the SVR book, we've got about GBP48 billion or so of SVR book left now. We are seeing refinancing of between GBP4 billion to GBP5 billion per quarter. I mentioned that although the percentage of 25% may be ticking up, that's because the GBP4 billion to GBP5 billion is staying steady and the denominator is declining in size. So that's what's going on there. I think, Raul, as we look forward, I don't think we see terribly many changes in that. I think we expect to see a similar kind of pattern as we roll forward of about the same rate in absolute terms, which might mean a slightly higher rate in percentage terms. As I say, fair enough because we see those customers as in some cases having very low balances, happy to stick with where they are, value the ease with which they can give and take with respect to an SVR. Other customers want to switch into fixed, and we'll be there to help them where they do. So hopefully, that addresses that point. On the pension contribution, as you say, GBP0.8 billion, GBP800 million fixed contributions we're expecting this year, that is before you get to circa 175 basis points guidance, that is already assumed in our run rate P&L, if you like, the 175 basis points is on top of that. As you say, in 0 variable rate is our expectation. Now as Charlie has pointed out, and we must not forget this, we have yet to finalize negotiations with the trustees. But we have fairly frequent conversations with the trustees, and we hope that that will result in the outcome that I've described. So that is our expectation.
Operator, Operator
Thank you, William. Just before I take any more questions from the room, there are a couple of questions that have come in online.
Benjamin Toms, Analyst
It's Ben Toms from RBC. Firstly, on other income. If I take your Q4 number, deduct out the one-off, deduct a quarter of the IFRS 17 headwind that you flagged and then put that into future years, grinding kind of 2%, 3% higher as you go through the years. Is that the right way to think about other income growth from here? And then secondly, on the pension, you talked about the triennial coming up this year.
William Chalmers, CFO
Yes, thank you. Shall I start from here, Charlie? First of all, regarding ROI, the underlying trends from Q4 and the entire year, as mentioned in the slides, have given us confidence in the underlying OOI businesses. It has taken some time to reach this point, and I have been cautious about our overall AI trends over the last couple of years. However, the insights from Q4 and the overall performance in 2022 are encouraging. If we disregard certain assumptions, such as GI weather, and focus on the underlying performance in retail, commercial, and insurance, we can see signs of progress. In retail, this includes customer activity and aspects like PCA, the LEC business, and the cards business. In commercial, we observe market performance in insurance, workplace pensions, bulk annuities, and protection. These areas are gaining some momentum, showing year-on-year improvements in both 2022 compared to 2021 and Q4 compared to Q3, even on a detailed basis. Looking ahead, Ben, you correctly noted that we should exclude the IFRS 17 effects. If we analyze the performance by stripping out IFRS 17, it results in a figure of about . However, we anticipate that our underlying performance for 2022 will exceed the target of 4.7. We expect to see a slight growth continuing into 2023, though we aim to avoid getting overly optimistic. This is tied to the success of our strategic initiatives, which are significant OOI drivers for the years ahead. While 2023 is just the beginning, we do expect to build on this progress throughout the year.
Operator, Operator
Okay. Just briefly before finishing, let me just finally hand over to Charlie just for a couple of closing comments.
Charles Nunn, CEO
Thank you very much for attending. I know we are the last U.K. financial institution to announce results. My guess is that many of you were up at 4:00 a.m. yesterday for HSBC. Thank you again for joining us today. As Douglas mentioned, we will be here for a little while to answer any questions from those in the room. Please feel free to follow up with your questions, and we look forward to sharing our next results in Q1. Thank you very much.