Earnings Call Transcript - LYG Q2 2024

Operator, Operator

Thank you for standing by, and welcome to the Lloyds Banking Group 2024 Half Year Results Call. At this time, all participants are in a listen-only mode. There will be presentations from Charlie Nunn and William Chalmers, followed by a question-and-answer session. Please note this call is scheduled for 90 minutes and is being recorded. I'll now hand over to Charlie Nunn. Please go ahead.

Charlie Nunn, CEO

Thank you, operator, and good morning everyone. And thank you for joining our 2024 half-year results presentation. As usual, I'll start by providing a short overview of the group's financial and strategic performance. We will then run through the financials in detail. Following a brief summary, we'll have plenty of time to take your questions. Let me begin on Slide 3. I'm pleased to say that we're continuing to make strong progress on delivering in line with our purpose of driving positive outcomes for customers, colleagues, and shareholders. I'll cover this in more detail on the following pages, but to start, I'd like to highlight the following three key messages. Firstly, we're now halfway through our five-year strategic transformation. We remain on track to deliver our interim 2024 targeted outcome, delivering meaningful change for our customers and creating value for the group. Secondly, we've delivered a robust financial performance in the first half in line with the expectations we laid out for the full year. This is driving strong capital generation and enabling consistent growth in shareholder distribution. And finally, we are reaffirming our guidance for 2024 and remain confident of delivering higher, more sustainable returns in 2026. Turning now to our purpose on Slide 4. Delivering in line with our clear, long-standing purpose of Helping Britain Prosper ensures that we drive outcomes that benefit all stakeholders. During the first half, we continued to provide extensive support to our customers to help them meet their lifecycle financial needs, such as supporting their savings goals through our strong ISA proposition. Our 19% share of cash ISA flows has enabled an additional £6 billion of tax-free savings for our customers. We also help more than 50,000 small businesses and charities start a new banking relationship with us. We remain focused on contributing to an inclusive society and supporting the transition to a low carbon economy, which also represents new opportunities for growth. Since the beginning of 2022, we provided around £38 billion of sustainable financing. Looking ahead, we welcome the emphasis placed on sustainable economic growth by the new government. Businesses like ours have a vital role to play, working in partnership with the government to address national priorities and help communities across the U.K. prosper. We are positioned in this regard and believe we can make a meaningful contribution across key focus areas such as sustainable infrastructure, housing, and financial planning. On Slide 5, I'll provide a brief overview of our financial performance. Our robust financial performance in the second quarter and across the first half was consistent with our expectations and guidance. Our Q2 NIM has remained resilient, while we continue to deliver strong momentum in the other income with our strategic initiatives supporting this growth. Net income was lower, reflecting an increase in operating lease depreciation, an area that William will cover in more detail shortly. As well on the P&L, costs are tracking in line with guidance, and asset quality remains strong. We've also grown the balance sheet in the quarter with broad-based lending growth of £5 billion excluding a Q2 securitization, while deposits were up £6 billion with growth in both retail and commercial banking. Our return on tangible equity was 13.5% for the first half. This translates into strong capital generation of 87 basis points with 47 basis points in Q2. In line with our intention to deliver attractive shareholder distributions, we today announced a 15% increase in the interim ordinary dividend to £1.06 per share. Our financial performance is supported by our strategic progress as we realize the benefits of our investments. I'll provide an update on this over the coming slides starting with Slide 6.

William Chalmers, CFO

Thank you, Charlie. Good morning, everyone, and thanks again for joining. Let me start with an overview of the financials on Slide 11. As you heard, Lloyds Banking Group delivered a robust financial performance in H1 and Q2. Statutory profit tax for the first half was £2.4 billion, and return on tangible equity was 13.5%. In H1, net income of £8.4 billion was down 9% year-on-year. This was built upon a resilient banking net interest margin of 2.94%, including a Q2 net interest margin of 2.93%, two basis points lower than in Q1. Operating costs of £4.7 billion were up 7% year-on-year, in line with our expectations. Excluding the impact of the sector-wide Bank of England Levy in Q1, H1 operating costs were up 4% on the prior year. We continue to see strong asset quality. The H1 impairment charge of £101 million equates to an asset quality ratio of 5 basis points. Through the MES benefits totaling £324 million, the asset quality ratio remained low at 19 basis points. Our performance resulted in strong capital generation of 87 basis points in the first half after the impact of regulatory headwinds. This supports our 15% increase in the interim dividend. I'll now turn to Slide 12 to look at the customer franchise. Our business grew in the first six months of the year across the lending and deposit franchise. Group lending balances of £452 billion were up £3.9 billion or 1% in Q2. This is led by growth across the retail business. The mortgage book balances were up £3.2 billion in Q2, excluding the £0.9 billion legacy mortgage securitization or £2.3 billion after that transaction. Higher mortgage balances reflect the increase in application volumes observed at the start of the year as we mentioned at Q1. Elsewhere in the retail business, we saw continued growth across cars, motor finance and unsecured loans. Commercial lending balances were also up slightly in Q2 by £0.3 billion. Within this, we saw modest growth in corporate and institutional lending, partly offset by net repayments in small and medium businesses, including £0.4 billion of government-backed lending balances. Let's look at the liability franchise. It's also been a good performance in deposits, which now stand at £475 billion, up £5.5 billion or 1% in Q2. We saw growth of £3.6 billion in retail with savings accounts up £5 billion driven by inflows, limited withdrawal, and fixed-term products in a successful lifestyle season. Current accounts were £1.4 billion lower in the quarter given the reversal of the bank holiday timing impact we saw at the end of Q1. This is probably a touch better than our expectations, driven by salary increases and lower spend. Commercial deposits were also up in Q2 by £1.9 billion. In particular, we saw some stabilization of non-interest-bearing accounts and growth in targeted sectors within small and medium businesses. Alongside deposit developments, we continue to see steady liability growth in insurance, pensions, and investments with circa £2.7 billion of net new money in H1. Turning to net interest income on Slide 13. The group delivered a resilient performance in net interest income in the first six months of the year. Net interest income of £3.2 billion in Q2 was down 1% quarter-on-quarter. Alongside, AIEA's £449 billion was stable on Q1, driven by the weighting of customer lending growth towards the end of the quarter. As mentioned, the Q2 net interest margin of 293 basis points was down 2 basis points from the first quarter, resulting in a first half net interest margin of 294 basis points. This general decline in the margin through the first half is consistent with our expectations as we outlined previously. Stage 1 non-banking NII charge of £229 million was driven by increased funding costs in the current rate environment and strategic growth in the group's non-banking businesses. The charge is tracking in line with the indication we gave previously for the full year of between £450 billion and £500 billion. Looking ahead, we continue to expect AIEAs for 2024 to be greater than £450 billion driven by current lending activity and expected further lending growth in the second half of the year. We also continue to expect net interest margin to be in excess of 290 basis points for 2024. Indeed, our confidence in this guidance is further reinforced by our performance in H1.

Charlie Nunn, CEO

Yes, thanks, William. Just on the mortgage market broadly, I think probably everyone will know, we saw a strong Q1 actually in terms of customers coming back and origination around mortgage volume that was linked to, obviously, the lower swap curve that we saw in January and February. And I think the good thing from our perspective is our strategy about being focused on our segments where we are the leader and maintaining and growing market share in those segments played out well. It played out at margins, as William said, that we're very much in line or slightly better than our guidance. Volumes in Q2 slightly dropped as the swap curves moved up, but it stayed healthy. And we'll have to see how the second half develops probably along with the rest of the market. We're not expecting huge volatility in the swap curves and therefore pricing. It remains a competitive market, but what we are pleased about is we're competing well within the segments we've seen, and we've actually gained a bit of share in the first half. So let's see how the second half goes, but it's a good start to the year. And obviously, those balances will be supportive of our AIEAs in the second half and hopefully in '25 and '26.

William Chalmers, CFO

Thanks, Jason. I'll perhaps take those two questions. Maybe that Charlie wants to add a little on the mortgage point in particular. On the mortgage question, first of all, in relation to NIM, as you say, we've seen a bit of a headwind during the course of quarter 2 in relation to mortgages, which was four basis points. That's very consistent with what we saw in quarter one. And to your look forward point, Jason, it's consistent with what we would expect to see for the remainder of this year. It's not playing out very much in line with expectations. What's going on behind that, as commented on in my comments, I think perhaps in Charlie's too, we've seen completion margins of around 70 basis points in the course of quarter two. That's up a touch versus quarter one, which I think was more like 65%. That is good to see, but it's a gradual and obviously relatively modest progression. That is, however, as you know, in the context of maturing mortgages coming off the balance sheet around 110 basis points. And it's that combination that leads to that four basis points headwind in quarter two. And as I say, I expect that pattern to be pretty consistent for the remainder of this year.

Charlie Nunn, CEO

Thank you, Aman. I'll address the questions regarding the margin and its outlook. Our margin guidance remains in line with our statements from the beginning of the year and our first-quarter update. This consistency throughout the year is reassuring. The developments we've observed in the first half have reinforced our confidence in that guidance. We expect it to exceed 290 for the full year, with underlying figures likely even higher, and we anticipate a positive turning point before year-end. The key factors influencing this are the mortgage headwind and other related factors we’ve discussed previously. The mortgage headwind is expected to remain stable for the rest of the year, while we’re noticing a slowdown in deposit churn during the second half. There are early signs of this trend, as we discussed in the context of the second quarter.

William Chalmers, CFO

In respect of your net interest margin question, as your question implies and hopefully, as my comments have implied throughout the course of the session this morning, in short, we would expect the net interest margin to be better in Q4 than Q3. That is not predicting anything about the Q2 to Q3 shape, which I've obviously given you commentary on during the course of this call. But by its very nature, the evolution of the deposit churn picture, the evolution of the structural hedge picture, to a degree at least, the evolution of the mortgage picture, although I said that that will be stable through the course of the second half, and I'll repeat that. But that combination naturally leads to the strengthening of the margin over the course of this year.

Charlie Nunn, CEO

Let me now look at the other lending books on Slide 15. Consumer balances are performing well. Credit cards, loans, and motor were collectively up £2.7 billion in the first half of the year, including £1.4 billion in Q2. We continue to see credit card spend recovering. The balance is up £0.5 billion in H1. Likewise, loan balances grew by £1.3 billion partly driven by lower repayments following a securitization in Q4 last year. Meanwhile, motor finance was also up £0.9 billion. In commercial, lending was down £0.5 billion in the first half. Within this, corporate institutional lending was up £1 billion including growth in strategic areas such as working capital and securitized products. In small and medium businesses, balances were down £1.5 billion with slow customer demand continuing to impact performance alongside £0.8 billion of government backed lending repayments.

William Chalmers, CFO

Yes, thanks, Chris. I'll take both of those two questions and hopefully address your queries. First of all, in respect of NII, you repeated my words obviously a modest tick up in NII in the second half over the first. I'm not going to comment on consensus numbers, so I'm going to answer your question directly in that respect. But hopefully, what we've given you in the context of the AIEA, net interest margin, and indeed non-banking net interest income guidance, which is pretty comprehensive gives you enough to work from.

Charlie Nunn, CEO

Let's see. I'm not forecasting it as such, but let's see. It should be an ingredient, if you like, for stability of prices. In that context, because of the residual value exposure within the leasing business, we are also exposed to the upside of that business. Now, if we see it, that will obviously be a net benefit to shareholders. Again, I'm not forecasting it. It's not in our additional depreciation expectations, Chris, but it has happened before.

William Chalmers, CFO

Thank you, Amit. I think we are through with the call today. I'd just like to say thank you to everybody for taking the time to join. Your interest is much appreciated, and we wish you a good summer.

Charlie Nunn, CEO

Thanks, everyone.

Operator, Operator

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