Good morning, everybody, and thank you for joining our Q3 results call. Let me start with an overview of the key messages on slide two. As you all know, we're operating in a fast-evolving and uncertain environment. In this context, and as ever, we remain focused on supporting our customers. The group is performing well. During the third quarter, we saw further income growth, supported by the net interest rate environment and ongoing robust business volumes. We continue to observe strong asset quality and stable credit trends across the portfolio. Our robust financial performance is supporting the update to our guidance for 2022. Strengthening could come from an increased NIM outlook alongside continued cost discipline, enables us to maintain our RoTE guidance and to give further clarity on our strong capital build. This is despite the tougher macroeconomic outlook, which drives the forward-looking impairment charge that we're taking today.
We continue to progress our net zero ambitions. Last week, we announced new sector-based emissions targets for 2030, alongside a net-zero ambition for our supply chain. These are important commitments as we continue to support the transition to a low carbon economy. Our strategic delivery and robust business model position the group well for the future. We announced our new strategy in February and the associated investment is now well underway. We'll update the market on our progress in more detail for the full year. I'll now turn to slide three to look at what we're doing to support customers in the current environment. The vast majority of our customers are demonstrating resilience and adapting to the cost of living increases. However, we know many are concerned about the outlook, and we're committed to proactively helping where it is most needed.
In retail, for example, we're contacting vulnerable customers with advice and guidance on relevant product adjustments. In commercial, we're reaching out to business banking clients with specialist relationship manager support. In insurance, we're removing monthly interest charges on home and contents insurance products, enabling customers to spread the cost of their policies. As I said, we're committed to proactively supporting our customers. We remain vigilant for any signs of stress across the portfolios. Let me now turn to slide four to look at an overview of the financials. Lloyds Banking Group has delivered a robust financial performance in the first nine months of 2022. Net income of GBP 13 billion is up 12% on the prior year, supported by a stronger net interest margin of 284 basis points, growth in other income, and a continued low operating lease depreciation charge. We remain committed to our market-leading efficiency.
Operating costs of GBP 6.4 billion are up 6% on the prior year. This includes stable BAU costs alongside higher planned strategic investments and the costs associated with our new businesses. Observed asset quality remains very strong. Impairment has increased to GBP 1 billion, but this is largely driven by the weaker economic outlook and associated scenarios adopted in Q3. I'll go into this in more detail shortly. Taken together, this robust group performance resulted in statutory profit after tax of GBP 4 billion in the first nine months and a return on tangible equity of 12.9%. Our financial performance, alongside effective management of risk-weighted assets, has resulted in capital generation of 191 basis points for the year to date. I'll now turn to slide five to look at the ongoing strength in our customer franchise during the third quarter.
Our mortgage book continues to grow, including open book growth of GBP 1.8 billion in Q3. Credit cards have continued their gradual recovery. Balances are up GBP 0.1 billion in Q3, with improving spending levels, particularly in discretionary categories, although much of this is offset by customer repayments. Unsecured personal loans have increased GBP 0.3 billion in the quarter, in part due to our enhanced preapproval capabilities for attractive low-risk customers in the intermediary channel. Commercial banking balances are up GBP 0.6 billion in the quarter. We're seeing attractive growth opportunities within our corporate institutional franchise alongside the effect of FX movements. These are partly offset by repayments of government support scheme loans in SME. Looking briefly at the other side of the balance sheet. We continue to see inflows to our trusted brands.
Retail deposits are up GBP 1.5 billion in the quarter, building on the growth seen in the first half. Within this, current accounts are up GBP 2.3 billion in Q3, more than offsetting lower savings balances in our tactical brands, with our relationship brands essentially flat. Commercial deposits are up GBP 3.5 billion in the third quarter. Note that part of this growth is short-term placements, which are likely to reverse in Q4. Alongside, we continue to see good organic growth within our insurance business, including over GBP 6 billion of net new money in the year to date. I'll now turn to slide six, and the group's income growth in a little more detail. Net income of GBP 13 billion is up 12% year-over-year, with higher NII and other income, alongside lower operating lease appreciation.
Net interest income of GBP 9.5 billion is up 15% on the prior year, benefiting from a stronger net interest margin and higher average interest earning assets. AIEAs of GBP 451.4 billion are up GBP 8.4 billion on Q3 2021. Within this, mortgage growth is more than offsetting the lower average balances in SME. The year-to-date net interest margin of 284 basis points is up 32 basis points from the prior year. The margin in the third quarter was 298 basis points, benefiting from the bank base rate increases and favorable structural hedge reinvestment, more than offsetting the drag from mortgages. In respect of mortgages, completion margins were around 60 basis points in Q3 in the context of considerable swap volatility.
It remains unclear exactly where margins will settle, but we're seeing persistent material pricing moves compensating for the recent swap rate increases. Looking forward, our updated economic assumptions now include a year-end base rate of 4%. This will act as a tailwind to the margin. Indeed, with the benefit of this and other factors, we are seeing sustainably higher margins than previously expected. Accordingly, we're enhancing our 2022 net interest margin guidance to greater than 290 basis points. With respect to volumes, we continue to expect low single-digit % growth in AIEAs in 2022. Now turning briefly to other income. OOI of GBP 3.8 billion year to date is up 2% from the prior year, while GBP 1.3 billion in the third quarter is roughly in line with recent periods.
Within OOI, retail other income is up 11% year on year, including improved current account and credit card performance. Commercial banking is up 3% given financial markets and transaction banking income. Insurance, pensions, and investments income is up 6%, reflecting a good performance in workplace pensions and bulk annuities. Finally, within our equity investments business, income is materially lower given the non-recurrence of exceptional gains in 2021 and one-off charges in Q2 2022 impacting the Business Growth Fund . Going forward, we continue to expect other income as a whole to build gradually, supported by customer activity levels and our ongoing strategic investments. Of course, within this, you should remember that we will see an impact from the implementation of IFRS 17 in 2023. We'll go into this in more detail at the year end.
Given the continued focus on interest rate impacts and the structural hedge, I'll now look at these in more detail on slide seven. The structural hedge has been a material net tailwind to group income in the first nine months of the year. Gross hedge income was GBP 1.9 billion for the nine months, while Q3 alone was around GBP 120 million higher than Q3 last year. Looking forward, in the current rates environment, we expect structural hedge income to be stronger in 2022 than in 2021, and to build significantly again into 2023 and 2024 as the hedge reprices. In this context, the nominal balance of the structural hedge remains around GBP 250 billion, with a weighted average life of around 3.5 years.
GBP 65 billion growth of the hedge nominal balance since 2019 incorporates around about GBP 40 billion of the more than GBP 70 billion of deposit growth since the end of 2019. This is alongside GBP 17 billion of increased eligibility from previously existing deposits and GBP 9 billion utilization of the previous buffer. As a result, as you can see, we've built a substantial buffer of balances which represent deposits that have not yet been taken into the hedge. This buffer now stands at GBP 31 billion, providing significant protection in the event that deposits prove more rate sensitive than expected. As you've heard many times, the group is positively exposed to rising rates. We currently expect a 25 basis point parallel shift in yield curve and associated base rate rise to benefit interest income by about GBP 150 million in year one.
This is lower than reported at the half year, reflecting the fact that we've deployed the hedge into the recent rising rate environment and hence have a lower level of maturities in Q4. I should also note that the sensitivity is likely to pick up again going forward, as we have over GBP 38 billion of maturities expected in the remainder of 2022 and 2023. As you know, our sensitivity is illustrative and based on the same assumptions we have given before, including the 50% deposit pass-through. Clearly, the actual pass-through experience could differ from our 50% illustration. For every 10 percentage point reduction versus the assumed pass-through, we expect an additional GBP 50 million of NII in year one for a 25 basis point shift. As noted before, this is broadly linear. You can double that sensitivity for a 50 basis point shift.
Now moving to costs on slide eight. Operating costs of GBP 6.4 billion are up 6% on prior year. As expected, essentially stable BAU costs are alongside planned higher investment and costs associated with our new businesses. We continue to expect 2022 operating expenses to be circa GBP 8.8 billion. Our cost income ratio of 47.8% in Q3, including remediation, has significantly improved over recent quarters. Looking forward, like all organizations, we are impacted by inflationary pressures, but we retain our rigorous cost focus. We will look to offset higher costs wherever possible, as we have with the circa GBP 65 million expense associated with the one-off payment to staff in Q3. We'll provide an update on the cost and investment outlook at the year-end. I should just highlight at this point that the phasing of our strategic investment is expected to peak next year.
As mentioned, remediation remains low at GBP 89 million for the year to date and GBP 10 million in Q3. Within this, there is no charge for HBOS Reading, although uncertainties remain. Looking now at impairment on slide nine. Observed asset quality remains very strong. The net impairment charge for the third quarter is GBP 668 million. This includes GBP 618 million in respect of the updated macroeconomic outlook and associated scenarios, partly offset by the release of the remaining GBP 200 million central COVID related overlay. I should note that this Q3 MES charge is materially driven by a very severe downside case. This is a function of our methodology, but it is also an unlikely outcome. The Q3 charge pre-updated economic scenarios of GBP 250 million reflects a very strong observed credit quality.
It is equivalent to 21 basis points Q3 or 15 basis points year to date, in line with our previous guidance. NES and observed charges together bring the net year to date impairment charge to approximately GBP 1 billion, equating to an asset quality ratio of 30 basis points. As a result of the provision build in Q3, driven by the weaker economic outlook and associated scenarios, our stock of ECL has increased to GBP 5 billion. We now expect the net asset quality ratio to be around 30 basis points for 2022. Turning to slide 10, I'll consider customer behavior across our businesses. We are seeing few signs of pressure in our customer base from cost of living increases. Credit card spend in September was up 16% compared to September 2019, driven by our middle and high income customer bands.
Indeed, our customer base is continuing to increase discretionary spending, providing further opportunities to adjust outcomes if needed. Alongside regular minimum payers in the card portfolio remain at consistently low levels. We continue to see stable trends in SME overdraft and revolving credit facilities. Indeed, RCF drawings remain at around 80% of pre-pandemic levels, while invoice financing debtor days have remained broadly stable throughout the year. Let me now turn to slide 11 and the resilience of our portfolios in the current environment. Our mortgage book now stands at GBP 311 billion. This is a very high quality portfolio. Average loan to value is 40.3%, and 96% of the book has an LTV below 80%. Just 0.5% has an LTV above 90%. We're now assuming a peak to trough house price reduction of 10%.
Even after that, given the LTVs, our customers would retain significant equity. Our commercial portfolio is also very high quality. Over 70% of exposure is to investment grade clients, while around 90% of SME lending is secured. Within commercial, the real estate portfolio has been significantly de-risked in recent years. Net exposure is now GBP 10.9 billion and the business has an average LTV of 39%, while just 11% have an LTV above 60. Average interest cover of the portfolio is basically stable at 4.4x . As you can see on the slide, there's a very slight increase in new to arrears and unsecured. However, these levels remain very low across our portfolios at or below historical averages and below pre-pandemic levels. In short, customers are showing resilience and performing strongly.
Moving on, I'll now look at the group's updated macroeconomic scenarios on slide 12. As mentioned earlier, the group's updated macroeconomic scenarios are driving a circa GBP 600 million charge in Q3, partly offset by a GBP 200 million release of our central COVID adjustment. We now assume base rate peaks at 4% in Q4 2022 before starting to fall in early 2024 as inflation is brought under control. Inflation peaks at 10.7% in Q4 while unemployment is expected to increase to 5.5% in Q1 2024. We're now assuming a fall of 8% in house prices in 2023 or 10% peak to trough.
Importantly, because of the strength of recent performance, this sees average house prices reverting to around the level of Q3 2021. This means the vast majority of customers will still have experienced net price gains during the life of their mortgage product, even after this adjustment. As ever, we've provided the full range of upside, base, downside, and severe downside scenarios in the appendix. We've also provided the ECL by scenario. You can see the downside, and particularly the severe downside scenario, significantly impact our probability weighted expected credit loss. This now drives a difference of almost GBP 700 million between the actual ECL we hold versus our base case expectation, and it illustrates the conservatism of our approach. Moving on, I'll now address statutory profit on slide 13. Following the reporting changes set out at the 2021 year end, restructuring now reflects only M&A and integration costs.
The charge of GBP 69 million for the nine months includes the early integration costs relating to the acquisition of Embark. The volatility line includes GBP 74 million of positive banking volatility year to date. This is more than offset by GBP 144 million of negative insurance volatility, principally driven by rising interest rates. The line also includes the usual fair value unwind and amortization of purchased intangibles. Year-to-date statutory profit after tax of GBP 4 billion on the Return on Tangible Equity of 12.9% represents a robust performance. We continue to expect the RoTE for 2022 to be around 13% even after the impairment and volatility charges that we've seen in Q3. A quick word on book value. Tangible net assets per share of GBP 0.49 are down GBP 0.058 in the quarter.
This is very largely due to the impact of movements in the cash flow hedge reserve, similar to the movement that you saw in the second quarter. As you know, this is a timing issue that will unwind, and it has no effect on capital. Turning to slide 14 and looking at our RWA management and strong capital generation in the nine months. Risk-weighted assets of GBP 211 billion are down GBP 1 billion, excluding the regulatory inflation on the first of January. Underlying lending growth of GBP 3 billion has been more than offset by model reductions and ongoing portfolio optimization. As before, we are seeing no impact at this point from credit migration. Capital generation of 191 basis points year to date is strong and reflects robust financial performance.
This includes 169 basis points of underlying banking generation, as well as the GBP 300 million in interim dividend from the insurance business. It is also after the full GBP 800 million fixed pension contribution for 2022. The CET1 capital ratio of 15% is very strong and well ahead of our ongoing board target of circa 12.5%, plus a management buffer of circa 1%. The capital ratio is after taking 60 basis points of dividend accruals, as well as substantially all of the expected GBP 1 billion of variable pension contributions for 2022. As you'll be aware, the 2022 buyback program was successfully completed in October, buying back over 6% of outstanding shares. Looking forward, we continue to expect 2022 closing RWAs to be around GBP 210 billion.
Based on this and the robust financial performance to date, we now expect capital generation for 2022 to be between 225 and 250 basis points. The board remains committed to shareholder remuneration. As always, we'll consider both the dividend and further capital distributions at the year end. Now turning to slide 15 to wrap up. In summary, the group is performing well and faces the future with confidence. The current environment is concerning for many people. As always, we are committed to maintaining the support we give to our customers. However, our franchise is resilient, and our low-risk portfolios are well positioned for more challenging times. The group has delivered a robust performance in the first nine months of 2022, with improving net interest income and cost discipline driving robust profitability. That is despite the revised macroeconomic outlook.
Looking forward, the group's robust financial performance and revised economic outlook are reflected in our updated guidance for 2022. We now expect the net interest margin to be in excess of 290 basis points, the asset quality ratio to be circa 30 basis points, and capital generation to be between 225 and 250 basis points. The rest of our guidance for 2022 remains unchanged. That concludes my comments for this morning. Thank you for listening. I'll now hand back to the operator for Q&A.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Joe Dickerson at Jefferies. Please go ahead. Your line is open.
Hi, good morning. Just a couple of quick questions. Just thanks for the disclosures on slide seven for the additional sensitivity around the pass-through rate. Could you give us a sense of, you know, what the ballpark is on the current 3Q or year-to-date pass-through rate? I mean, presumably this will start to shift as rates cross, let's say 3.10% or some level like that. You know, I guess just what what's been the experience thus far is the first question. Similarly on net interest income, you know, is the way to think about the GBP 38 billion of maturities that, you know, you can earn a probably a couple hundred basis points higher spread on those plus whatever you decide to do with the GBP 31 billion unutilized buffer. Is that
At probably current rates. Thanks.
Yeah. Thank you, Joe. Just to take each of those in turn. On the pass-through activity, we haven't given a specific number for the year to date. Since bank base rates started to change at the beginning of the year, we passed on a little below the 50% assumption that we've seen. I think when we look at that, we look at three things essentially. How do we deliver customer value? Clearly that's about price. It's also about many other things too, including service, distribution network and so forth. How do we compare versus the competition, where our pass-through has been very much in line? How does the funding of the balance sheet look, where at the moment, as you know, we have a loan-to-deposit ratio of 94%, so a very liquid balance sheet.
As said, so far we've been very much in line with the sector. We have been below the 50% mark. To your point, I would expect as we go forward and as bank base rates continue to increase, we will likely see that pass-through increase. I would expect it to move more in line with our core assumption of the 50% mark that we put forward. It's also worth saying, Joe, that we have a number of term offers out there. There are offers available for customers that choose to lock their money in for longer terms at more favorable rates should they choose to. You'll have seen some of our offers in that respect over the course of the last few weeks and days.
It is also worth saying that we've had very strong deposit inflows over the course of Q3. As you've seen our number of GBP 6.1 billion, with retail, a significant proportion of that, including PCA's current accounts that is at GBP 2.3 billion in the third quarter. We continue to see very significant, deposit inflows, which I think is testimony to the fact that customers still find us a very attractive place in which to put their deposits. Your second question on NII. On NII, it's worth maybe just stepping back. We have, as you say, 38 billion of maturities, over the coming year or so. We also have the 31 billion buffer that I mentioned. That is a buffer that has increased threefold, versus where it was in 2019. I think we'll look closely to that.
It is in a sense a form of insurance policy, I suppose, in case deposits prove to be more interest rate sensitive than we expect. Equally, based upon our core assumptions, I would expect some of that buffer to be utilizable over the course of the coming year, because I'm sure that many of those deposits will stick with us, and that will then make them eligible for the structural hedge going forward. In terms of the yield point, Joe, that you mentioned, how do we look at that? The yield on the structural hedge right now is a shade over 1%. As you know, over the next, we have a weighted average life of around three and a half years, but over the next several years, we'll be redeploying that hedge into the existing interest rate environment at that time.
What that means now and for our forecasts going forward over the next year or so, is that we'll be redeploying that hedge into more like the 4%-4.5% environment that we're seeing right now. Quite a considerable markup from the existing yield that is on the hedge, as you can tell.
Great. Yeah, that's quite helpful. Thank you very much. It's just when we look at the out years of where the market expectations are on net interest income, you know, considering the mechanics around the hedge and the unutilized balances, it just seems fairly, the estimates out there look fairly low when we look a year or two out, given this hedge dynamic.
Yeah, I mean, maybe just to pause briefly on that, Joe. As you've seen, we've enjoyed strong net interest income performance, up 15% year on year for the nine months year to date. That is a function of a couple of different things. We have seen very strong tailwinds in terms of the bank base rate changes, and likewise the redeployment of the hedge, as you point out. To an extent at least, the headwind of mortgage refinancing is starting to hit us, and I expect that to continue over the course of 2023 as the fixed rate mortgages refinance into a slightly lower margin environment.
Having said that, Joe, you can tell from our net interest margin development in Q3, which is +11 basis points versus Q2, that the headwinds are very significantly offset, if you like, in fact, beaten by the tailwind. That is to say the positives significantly outweigh the negatives in terms of the margin composition. I would expect that to continue going forward, Joe.
Thanks. Very helpful. Thank you.
Thank you. Our next question comes from the line of Rohith Chandra-Rajan. Please go ahead, your line is open.
Hi, good morning. Thank you very much. Just like to follow up actually on the margin just to start with and just look at your near term guidance. That implies a something above a 308 margin for Q4. I was just wondering if you could help us with the drivers for that. William, you've discussed them a little bit already, but if you could just expand on that for Q4 in particular.
It sounds like from what you just said that you're expecting further margin expansion from that level next year, given your comments on the tailwinds outweighing the headwinds. Then similarly just on the AQR, so 57 basis point charge on reserve build primarily this quarter, and the guidance for the full year, it seems to suggest that pretty much halving in Q4. Is that Q4 number really what you're expecting in terms of underlying credit quality? Or is there some additional reserve build in that number as well? Thank you.
Yeah. Thank you, Rohith. Just to deal with each of those in turn again, I guess. On the margin point, as said, you've seen our margin in Q3 2.98%. You've seen our margin year to date, 2.84%. Thirdly, as you point out, Rohith, you see our margin guidance for greater than 2.90% for the year as a whole. Now realistically what that means is that we expect to see continued margin strength going into the next quarter. There are two or three drivers to that. If you look at the positives there, again you're seeing bank base rate changes so far year to date. Actually many of the bank base rate changes that we're forecasting up from the 4% destination point, if you like, are still ahead of us.
Likewise, the hedge that I mentioned before is redeploying from the previous rate environment that it was executed at into a new rate environment that is considerably more favorable. The average yield, as I said before, shade over 1% now being redeployed into a yield environment of more like four and a half percent or so. Those are the principal tailwinds that continue into Q4 and are then, as I said in my comments in the script, we believe much of that is sustained going into 2023. Now offset against that, as said, we see the mortgage book refinancing to a lower margin environment, and that provided a headwind in Q3 that is also gonna provide a headwind going forward into Q4 and beyond. On balance, it is very clear that the positives are significantly outweighing the negatives here.
That implies that the margin benefits from that net balance, if you like, and we see that as being a pattern going forward. The AQR point-
Sorry.
Sorry, go ahead.
Sorry. Just on that, 'cause I know, approval spreads would have been very volatile over the last month or so. Can you give us some indication of how, you know, what that pattern has looked like?
Yeah. This is a slight separate question in terms of what's been going on in mortgage pricing. Rohith. That-
Yeah. Sorry. Yeah.
Yeah. Perhaps just to address that. Mortgage pricing, as you know, has been quite volatile over the course of the last quarter or so. We saw mortgage completions of around 60 basis points in Q2. The mortgage completion number that we've seen in Q3 has basically been the same. However during that time we saw a strengthening of application margins, particularly in July and August, and I think I talked a bit about that during the course of the Q2 results in August. Then we saw a significant uptick in swaps during the course of September, which then took margins down towards the end of that month. As we look today, application margins are ahead of that completion margin of 60 basis points. To be clear, Rohith, the volumes at which those application margins are being executed are quite low.
Therefore, you will see an impact of the late Q3 completions that we did at relatively low margins because of this increase in swap rates, get pulled through into our expected Q4 completion margin. The Q4 completion margin is likely to be affected by those late September swap volatility moves that we saw, against which we executed quite significant volumes. If I pull that back into the margin commentary, when we look at the margin pattern at the moment, as said earlier on, the tailwinds are outweighing the headwinds. In our guidance of 290 basis points, or greater than 290 basis points for the year as a whole, all of what I have just said about mortgage margins is taken into account. Now, clearly as we look forward, the dynamics of the margin development are going to change.
We forecast our base rate changes, being more or less completed by the end of this year. That benefit, if you like, then comes full into the full year in 2023, accompanied by hedge benefits. Bear in mind that the tailwinds, if you like, are strong this year. They're mainly front loaded against some of the headwinds which start to come into play a little bit more during the course of 2023. Rohit, I'll proceed to your second question on AQR. The asset quality ratio, as you have seen, is guiding towards circa 30 basis points. Indeed, the asset quality ratio year to date is just that, 30 basis points. Now, essentially what that means just arithmetically, Rohith, is that the fourth quarter can't be terribly different to what we have seen year to date. What is that composed of?
Two points worth making. One is the observed credit quality has been very strong. As you've seen year to date, it's 15 basis points if you look at the observed component of our impairment charge. Even within Q3, the observed credit quality remains very strong, 21 basis points for Q3. As we look at the year to date, the effect of the multiple economic scenarios, and indeed as I mentioned in my script, the particular effect of the severe scenario, is what has increased the impairment charge in Q3, and therefore leads in significant part the overall AQR ratio of 30 basis points for the year to date, and also for the year as a whole. Now what we look forward to in Q4, to your point, Rohith, is we assume obviously that the economics remain exactly as we have forecast them as of the end of September.
That's the core assumption. What you do see in Q4 is a roll-forward effect on the stage one loans that roll forward into a slightly tougher macroeconomic forecast and pick up the next three months of that slightly tougher macroeconomic forecast, as they roll forward. That has a little bit of an impact on Q4 AQR. As said, that is accounted for and all taken into account in the context of the AQR guidance of circa 30 basis points. Underlying credit rolled through, no additional economic scenarios charged beyond what we've already stated.
Thank you. Could I just clarify that? If it's around 30 basis points for Q4, is it right to assume that that's roughly 20 basis points of underlying credit quality, so similar to what you've seen in Q3, plus 10 basis points of this roll forward on the stage one loans, or is it a different mix?
Maybe just to comment briefly on the observed credit quality to help you think about that, Rohith. As said, observed credit quality 15 basis points year to date, 21 basis points in Q3. As I mentioned in my comments, there is a very slight uptick during that time, principally in the unsecured area. However, the increase is not as much as it might first appear because Q1 and Q2 were benefiting from debt sales, number one, and CRD IV adjustment benefits within our models, number two. Actually the increase in the underlying is more modest than you would see based upon looking at the numbers prima facie. There's a second thing going on within those numbers, which is that because interest rates are increasing, the discount for recoveries for already defaulted loans is getting lower.
Also within that observed credit performance, you're seeing some discounting effect from already defaulted loans. For each of those two reasons, one because of debt sales and CRD IV benefiting Q1 and Q2, two, because increased interest rates reducing recoveries for already defaulted loans within Q3, the actual underlying increase in observed credit quality or deterioration in observed credit quality is less than it might first appear. Now as we roll forward, we take a look at several different early indicators, early warning indicators as we call them for what's going on in the book, what's going on in customer behaviors and so forth. I've commented upon many of those in the script earlier on. Overall that gives us a sense of the observed credit quality of the book is likely to continue being pretty robust.
As said, you get the roll-forward effect on the stage one loans that will add to that. That is really a function of economic scenario modeling rather than anything to do with actual observed credit quality. That together amounts to a likely fourth quarter AQR charge. It's actually fractionally below 30 basis points, but as you can tell, it averages up to about 30 based upon our guidance.
That's great. Thank you very much.
Thanks, Rohith.
Thank you. Our next question comes from the line of Aman Rakkar of Barclays. Please go ahead. Your line is open.
Good morning, William. If I could ask a question on volumes and capital, predicated on your assessment of the environment, you know, notably house prices falling and an uncertain outlook and, you know, activity of demand more broadly. Interested in kind of your expectations for volume growth in mortgages and consumer credit as you look forward, would be my first question. Then secondly, around capital, obviously note the increased capital generation guidance, and given the start point on the CET1 ratio at the beginning of the year, suggests scope for you to announce potentially pretty quite attractive distributions at full year.
I guess, you know, something to the tune of GBP 4 billion I think post the kind of variable pension contribution, you know, which suggests you could easily do another GBP 2 billion pound share buyback at February. Kind of keen to test my understanding of that, if that's correct. More broadly, your approach to kind of capital in this kind of uncertain backdrop. Are you tempted to operate with a CET1 ratio that's higher than what we would have thought previously? I guess is the kind of politics and the optics of the broader backdrop a part of the consideration as well? You know, is it? Is that the kind of thing you worry about paying too much away in this kind of difficult sentiment backdrop? Any thoughts there would be really appreciated. Thank you.
Yeah. Thank you, Aman. Both important questions. In terms of the volume environment going forward, I guess our macro assumptions are giving a picture of a slightly more challenged macroeconomic outlook next year versus what we've seen this year. We think that's really a function of what's happened globally and to a degree, what's happened within the UK. It does seem to us, quite plausible, quite likely even, that that will potentially dampen volumes over what you might have seen otherwise, certainly in a more benign economic environment and potentially versus what we were projecting as of the half. That's simply a function of the macro environment that we believe we're likely to operate in. What does that mean?
We've had very strong expansion growth in mortgages, as you know, over the course of the last couple of years, really since the pandemic, in fact, starting with the beginning of the pandemic and beyond. Those very strong volumes we think are likely to taper off a little bit, as we go forward into a slightly tougher environment. However, we've seen pretty muted overall growth in the unsecured during that time for a variety of reasons, including most obviously repayment behaviors by customers. If we see continued spend growth amongst the customer base that we do business with, then, you know, it's possible that the volume effect on those customers in that area may be less significant than what you might see in mortgages, for example.
I think within retail, therefore, overall, Aman, you are likely to see the macro have some effect upon volume growth. Within commercial, you broadly speaking might say the same, although again, I would distinguish there between our relatively, healthy growth that we've seen in business opportunities within CIB business year to date, and within SME, decent business performance underlying, but actually offset by much of the government support loans getting repaid. Those are additional dynamics there. Overall, a tougher macro usually does make for slightly slower volume growth than you might otherwise see. I would just add one final point before going on to capital there, which is, as you've seen, we have taken a what we believe to be prudent and conservative view of the macroeconomic outlook going forward.
That is very deliberate because we see the changes going on around us, and we have taken a view that we believe fits with that. You know, having said that, it may be that the macroeconomic environment ends up a little better than our expectations. We took them as of the end of September. We'll see how we evolve into next year. It's too early to make that judgment, frankly. If it does, then you will see some benefits clearly in terms of the business performance off the back of that, and in particular in respect to your question on volumes. Second point on capital. You're right to highlight the very strong capital performance and capital generation that we have seen year to date, and also our guidance looking forward.
We've seen 191 basis points year to date, very strong capital generation, and we're guiding 225-250 basis points. Again, very strong capital generation. Within that, Q3 performed well at 52 basis points. Broadly speaking, I would see similar trends persisting into Q4, which is what lends itself to our guidance. How we look at that, first and foremost, we are absolutely committed to repatriation of capital above and beyond what the business needs to our shareholders. We've demonstrated that very significantly, I think, this year with our GBP 3.4 billion of distributions over the course of this year. We demonstrated it again with a 20% dividend increase at the half year.
I've no doubt that the board will have a discussion towards the end of this year as to what it should do with likely excess capital at that point. That'll be a discussion for the board at the time, but it's very likely that we're gonna be having it, Aman. How do we think about capital targets in the current environment? As you know, our capital target is 13.5% based upon 12.5%, plus a roughly 1% management buffer. We have committed to paying down to that target over the course of the plan. Now, what that meant at the year-end of 2021 is that we got to 14%, and because of some of the uncertainties in the environment, we held it there.
That gives you some idea of how we look at the capital ratio that we might hold to in the context of an uncertain environment, obviously taking into account any regulatory uncertainties that might accompany that. The operating target, long-term operating target continues to be 13.5%. The ambition is to pay down to that over the course of the plan. In an environment of uncertainty, as it was at the end of 2021, we held it at 14%, and then we distributed everything above that. That gives you some context for the type of approach that we might adopt to this issue at the end of this year.
Thanks very much. I mean, in terms of RWA procyclicality that may or may not be coming down the pipe, is that, is that another reason why perhaps you might print a, you know, a pro forma CET1 ratio that's a bit higher than what we think otherwise?
Well, a couple of points on that, perhaps, Aman. One is because as you know, procyclicality relates to RWAs in the main, that's already gonna be taken account of before we get to any given capital buffer, which I know you appreciate, but just to make the point really. Second point is the procyclicality of the business, to comment briefly upon that. We have a range of models within the business. If you look at the mortgage model, for example, it's very much through the cycle, albeit it is getting affected by some of the CRD IV discussions that we're having with the regulator, and it is likely that we get a little bit more volatility in that going forward. Essentially a through the cycle model.
Second point, in terms of our unsecured, there is more point in time within the unsecured. You're gonna see a bit more procyclicality in that if we do enter a macro downturn. To give you some sense on the retail side, if we see a 10% drop in HPI, we're looking at around a GBP 1.5 billion mortgage RWA increase. Now, clearly that's not linear in terms of particular downturn scenarios, but it gives you a sense as to what the expected RWA increase might be, if we were to see a 10% drop in HPI within the base case. Within commercial banking, because we have a foundational IRB approach, Aman, it is very much through the cycle. That is to say we have regulatory prescribed loss given defaults. The RWAs don't typically budge much in the context of macroeconomic volatility.
You saw that during COVID, where the RWAs did not increase terribly much. We expect that to be the case pretty much going forward. To be clear, if the macroeconomic scenario deteriorates, we will see some procyclicality. You can tell by the comments that I've made that it should be relatively modest. Not to say it's nothing, but it should be relatively modest versus what I might otherwise see. Finally, coming back to the impact that all of that has upon capital distribution. The capital distribution question, to be clear, is very much a matter for the board at the end of the year. I don't wanna prejudge that. The RWA procyclicality will be taken into account by the time we get to those discussions with the board.
Thank you, William.
Thanks, man.
Thank you. Our next question comes from the line of Chris Cant at Autonomous. Please go ahead. Your line is open.
Good morning. Thanks for taking my questions. I just want to come back to some of your comments on NIM and try to square the cycle a little bit there. You sort of talked about expecting headwinds to continue to exceed tailwinds going forwards. I think in response to a later question, you talked about headwinds being front-loaded more into 2022, and then headwinds being more pronounced next year. Are we to take it from those comments in the round that you're expecting them to sort of peak for Q1 and then start to drift lower as we go through 2023? That would be the first question, please. Coming back to the structural hedge, obviously we've had some years now of structural hedge growth.
You talked about the buffer and potentially investing some of that in addition to continued deposit inflows in 3Q. It's up very materially in terms of the size of the hedge versus pre-COVID levels. Do you expect the structural hedge notional to continue to expand from here? Or should we expect it to shrink in coming years as customers start to modify their behavior in respect of non-interest and deposit balances? Thanks.
Yeah. Thanks, Chris, for those questions. In terms of NIM, my observations around what happened in Q3 and what we expect to happen into Q4, you know, as said, very much remain along the lines of the tailwinds from bank base rate changes and the hedge effect are weighing the headwinds from the mortgage refinancing. Now, making a call as to what happens in any sort of longer timeframe, if you like, very much depends upon what one assumes for bank base rate changes, what one assumes for mortgage spreads, what one assumes for front-looking curves, if you like, are the environment into which we deploy the hedge. You know, these are big moving pieces.
We have to see how they pan out during the course of 2023 and beyond before making too many calls around what exactly or how exactly the NIM will develop. All I can say is what we've seen within Q3 and what we expect to see in the near term future going forward. What we'll see beyond that is really very much a function of the two or three variables that I just mentioned. The structural hedge. Structural hedge, as you say, at the moment we have GBP 250 billion in the structural hedge. We have seen a significant build up in buffer during that time from GBP 9 billion as it was in 2019 to GBP 31 billion as we stand today.
The effect of that or rather the impact of that has been led by the over GBP 70 billion in deposit growth that we have seen during that time, of which we have deployed about GBP 40 billion into the hedge, by a further roughly GBP 17 billion of increased eligibility, principally in the commercial area, for deposits that are now on a managed rate and therefore eligible for the structural hedge. Then finally, previously, buffer deposits that now have become, you know, very much part of the core franchise and therefore again are eligible for structural hedge. That's what's led to the increase to GBP 31 billion in the buffer. When we look forward, we'll take a view as to how much of that GBP 31 billion might be assumed into structural hedge going forward.
To the question that you raised there, Chris, we'll look closely at how deposits behave within that. A couple of points on that. One is, as you've seen, we experienced very positive deposit behavior in Q3. Up GBP 6.1 billion during the quarter. GBP 2.3 billion increase in PCAs. GBP 3.5 billion increase in CB. That is a very strong quarter of deposit growth. The business continues to attract deposits in a sustained way. Of course, as we get into a higher inflationary environment and a tougher macro, one might expect that to adjust gradually in the context of that tougher macro. For now at least, it's been a really strong quarter and has, you know, lent further resilience, if you like, to the structural hedge.
The second point within deposit behavior is are we seeing a switch between instant access sight deposits into term deposits, i.e. stuff that would be no longer eligible for the structural hedge? Might that affect it? So far at least, the evidence has been remarkably solid and consistent. That is to say, and you can see from our disclosures that, current accounts, for example, are remaining very steady. In fact, they're growing, mind my comments earlier on. The savings balances are remaining very steady, particularly if you look at our relationship savings balances, they're basically flat. There's been a little bit less activity in, taxable savings balances, but simply a function of pricing behavior.
There has not been a switch from sight into term in a way that will question the structural hedge approach at all so far. Now, clearly that might change as rates go high. One would expect, frankly, people to gradually put more of their money into term deposits. Again, Chris, that's where the buffer comes in. I don't think we see GBP 31 billion as a long-term buffer for structural hedge. It seems unnecessarily high. That presents an opportunity to us to consider a part of that GBP 31 billion for the structural hedge as we go forward. How much of that we'll consider appropriate will in turn depend upon, you know, how we observe some of these deposit behaviors that I just mentioned. So far, the deposit behaviors have been, you know, very reassuring from our perspective.
Okay. Thank you.
Thanks, Chris.
Thank you. Our next question comes from the line of Jonathan Pierce at Numis. Please go ahead. Your line is open.
Hello. Good morning. Thanks for taking my questions. The first one, I just want to clarify something on this risk-weighted asset procyclicality point, because it's a question that's getting asked a lot more, given the potential outlook for house prices. The GBP 1.5 billion increase that you talked to just then is, you know, it's only 3%-4% of your mortgage risk-weighted assets in total, which seems like quite a small number relative to 10% house price drop. Can I just check my understanding. This is basically because you, like other banks, I guess, are assuming a downturn LGD in the models already that assumes house prices drop effectively 25%-40% from their peak, as I think is guided by the PRA.
Just wanna check that's why the procyclicality that directly relates to HPI is so limited. The second question is on the capital guidance for the full year. I mean, I suppose the range is quite wide, 25 basis points with only a quarter to go, and I'm just wondering whether this is largely a function of the decision still to be made with regard to dividends upstream from Scottish Widows. I just wanna ask on that. Has any of the recent market volatility that we've seen changed the potential for probably quite a sizable upstream from Scottish Widows at the full year stage? Thanks.
Thanks, Jonathan. On the first of the two questions, the RWA procyclicality within the mortgage models. As said, 10% drop in HPI leads to a GBP 1.5 billion mortgage RWA increase. Again, just note the comment. That's a base case comment. As you move into progressively worse, or for that matter, better economic scenarios, it is nonlinear in relationship to that. In terms of the downturn LGD, yes, I think we and others have it on a downturn setting, if you like, and that does moderate the procyclicality of RWAs. But also, Jonathan, I'd make a couple of other points which are important to bear in mind, is the quality of the mortgage portfolio, which again contributes to relatively more limited RWA inflation.
As you know, the mortgage portfolio is 40.3% average LTV, very low average LTVs. The amount that is in excess of 90% is just 0.5% of the book. Those customers with a significant income shock from that change in refinancing rates even lower. I think it's just worth bearing in mind also the quality of the mortgage book in turn helps on the loss given default, which in turn supports the absence of relative lesser procyclicality versus what might otherwise be the case, Jonathan. The capital point, your second point.
The range that we set, 225-250, there's not supposed to be anything particularly significant to read into that other than just us wanting to be, you know, appropriately prudent, if you like, as we give you guidance towards the year end. The business has generated around 52 basis points of capital in quarter three. I don't see the trends in quarter four at the moment at least as being terribly different to that. As always, there's gonna be a certain amount of, you know, tying things up towards the end of the quarter, which we'll have to take account of. You know, that's not meant to hide anything particularly significant. We would see the run rate in Q four as not too dissimilar to the run rate in Q three. Your comment on SW.
Scottish Widows, as you know, dividended up about GBP 300 million as of the half. The interest rate changes that we have seen have benefited Scottish Widows from a capital point of view, albeit there will be a transitional recalculation likely off the back of interest rate rises, which will offset some of that capital benefit. I think if you take that on balance, Jonathan, we are likely to see a second half dividend on Scottish Widows. I don't want to preempt the board at Scottish Widows about what that would be, but it is likely to have benefited somewhat from the interest rate rises that we have seen.
We'll take steps to ensure that Scottish Widows is as well positioned as possible to dividend up whatever it feels comfortable with in the context of the operating structure of Widows, the liquidity within Widows, protection of its own policy holders and so forth. You know, we certainly look forward to discussing the second half dividend with the Widows board at the appropriate time.
Okay, thanks a lot.
Thanks, Jonathan.
Thank you. Our next question comes from the line of Raul Sinha of JP Morgan. Please go ahead. Your line is open.
Hi. Morning, William. I've got a few questions, please. Just I don't know if we can take them in turn, but just coming back to your comments around the capital distributions at full year, and the 14%. I was just interested, obviously your Pillar 2A went down by 50 basis points to 1.5%. And if I put that against your, you know, MDA and capital requirements, obviously that feels like a step down from where you were previously. Just to try and understand, is that reduction in Pillar 2A something that you perhaps were already anticipating given the increased pension contributions? And is it something kind of business as usual in terms of the capital planning, or is there something else that might be driving that?
That's the first question. The second one, I'm just interested in the increase in the stage two balances in your mortgage book is GBP 10 billion in the quarter. I was just wondering if you can give us some perhaps qualitative comments around the interest rate shock that your mortgage customers might be facing. You know, there was obviously a large cohort of borrowers two years ago around the Help to Buy scheme, which might have locked themselves into, you know, unfavorable market conditions. I was just trying to understand how you see your own mortgage customers behaving as their mortgage prices reset higher. You know, what are you seeing in terms of affordability trends?
Is that one of the reasons why we're seeing this increase in the stage two balances?
Yeah. Thank you, Raul. Just to deal, as you suggest, with each of those in turn. As you point out, we have seen a Pillar 2A decrease during the course of recent weeks, actually. At the moment, our capital ratio, our capital targets stay very much the same. That is to say the 12.5% + 1% is the capital target that we adhere to. When we look to our distribution decisions at the end of the year, which I said earlier on, is really very much a matter for the board, we'll look at a number of kind of variables within that and make an assessment as to where that stands. That will include clearly the macroeconomic outlook, number one. It will also include regulatory uncertainties.
Don't forget the countercyclical buffer, for example, is coming in tail end of this year and into next. It also will include our ACS performance, for example, which is in the second half of this year, as well as any changes within the anticipated Basel 3.1. Although as I've said before, we see ourselves as net neutral on Basel 3.1. We'll take account of the macro outlook, if you like, good or challenging. We'll take account of the regulatory benefits that we've seen, e.g., Pillar 2A, as well as some of the regulatory uncertainties. We'll also take account of business performance, and all of that will then lead to a board discussion about what the appropriate distribution is at the end of the year. Those factors are very much taken in the round, Raul.
Your second question on interest rate shock and in particular stage two. As you say, we've seen an increase in stage two since June. The mortgage component of that, I think you mentioned a number of about GBP 10 billion. We've actually seen stage two in totality increase by about GBP 15 billion since June. That is very much a function of the change in economic outlook, the multiple economic scenarios that I talked about a lot in my script earlier on. As testimony to that, Raul, you've seen a significant increase in up-to-date stage two versus what it was at June. At June, 90.5% of our stage two was up to date. As we stand today, 92.5% of our stage two is up to date.
That accounts for the vast majority of assets that have been transferred into stage two. The vast majority of assets into stage two post June are up to date and therefore high-quality assets. Further testimony to that, Raul, we've seen stage three remain static. If you look at stage three in Q2, sorry, actually in Q1, in Q2, in Q3, it's staying around the GBP 11.4 billion level. It's not moving. That goes back to my earlier comments on A, the strength of the observed credit quality that we have seen, which has led to the GBP 250 million charge. B, the influence of not just the economic outlook, but particularly the severe scenario that we portray in terms of the additional GBP 600 million MES charge that we've taken. GBP 250 million of that GBP 600 million.
Of that GBP 600 million MES charge is coming from the 10% weighting attached to the severe economic scenario. You know, don't forget, that's what's going on in our impairment charge. It's about those scenarios, and it's significantly impacted by the severity of the severe downside scenario. Answering your question on mortgages a little further, Raul. For the mortgage assets that we have, we have tested for many years now on the basis of SVR plus 3%, as a stress test to apply to borrowers. That SVR plus 3% for many years now has been well in excess of the type of 6% refinancing rates that customers are likely to see during the course of 2022, the remainder of 2022 and into 2023.
We've effectively stress tested customers for rates that are in excess of what they're gonna refinance onto. Added to that, most of our customers, although we take a relatively broad cut of the demographic on our liability side and our savings and deposit side, we tend to lend in to relatively better off customer segments on the asset side. A testimony to that, Raul, the household income, the average household income from mortgage borrowers is GBP 75,000. That means that they are able to afford the type of rate environment that we're moving into now. Again, our stress tests vindicated that, supported that in terms of the original lending decisions. When we look at those customers who are likely to experience significant payment shocks, we think are in a relatively small group.
Those customers that are at higher LTVs who are likely to experience significant payment shocks are a very, very small group of the portfolio. The best evidence of that, again, is the loan-to-value ratios for the portfolio as a whole at 40.3%, and for those customers in excess of 90% of less than 0.5%. Hopefully, that gives you some idea for how we look at the mortgage issue.
Thanks so much.
Thanks, Raul.
Thank you. As you know, this call is scheduled for one hour, and we have now reached the end of the allotted time. This will be the last question we have time for this morning. If you have any further questions, please contact the Lloyds Investor Relations team. The next question will be from Omar Keenan at Credit Suisse. Please go ahead.
Good morning, William. Thank you very much for taking the questions and thank you for the color around the severe downside scenario assumption. You can hear that these are quite conservative, and it does also look to me like the base case is more cautious than the current consensus. It does feel like you're getting ahead of things, which I think feels very sensible. I just wanted to explore a little bit the circumstance in which the economic environment gets a bit worse from here and how the provisions should behave going forward from here. If I look at your new downside scenario, you know, that's got GDP of, yeah, -2.3%.
Unemployment peaked at 7.5, and house prices falling 22%. Which feels like a you know a sort of reasonable further downside case with you know which is bearish, but it's not a kind of Armageddon scenario. The slide 19 seems to imply that that would be an additional GBP 500 million of provisions, which is around 11 basis points of loans. If we were to think about that playing out in 2023, should we think about you know a possible asset quality ratio of in the 41 basis point range to account for that? Am I thinking about that correctly or am I not? Could you just help us a little bit with how the management judgments changed as well, please? Thank you.
Yeah. Thank you. Thank you, Omar. As said, our intention with respect to the economics and the impairment charge that comes off the back of our revised economic case and associated scenarios is very much to address what we have seen over the course of the last quarter and take into account the world as we saw it at the end of September, in a way that is consistent with the requirements of IFRS 9. You know, I think most people would acknowledge that there has been some modest deterioration in the outlook from the end of the second quarter, i.e., H1, to September 30. I think most people would acknowledge that. The approach that we've taken for the base case in the MES is simply to recognize that and put it into place.
Now, as you can see from our assumptions, therefore, looking forward, it's a reasonably conservative view of how it might play out. It forecasts a modest downturn, i.e. recession in 2023. It forecasts an uptick in unemployment to around 5% to 5.5%, and a softening of house prices of around 8%, peak-to-trough of around 10%. Those are the factors that contribute to the base. The base expected credit loss associated with that is around GBP 4.35 billion, and you can see that on page 19 that you referred to. The impairment charge that we've taken for Q3, as I mentioned earlier on, is impacted clearly by that change in the base case, but it is also impacted significantly by the change in the downside and in particular, the change in the severe downside.
The severe downside has moved from GBP 6.8 billion at the half to now GBP 9.4 billion. As a result, we have taken a 10% share of that increase of GBP 2.5 billion. GBP 250 million, therefore, of the impairment charge is driven by that severe downside weighting. Now, that is not, as I said in my script, what we expect to happen, but that is driving an element of the impairment charge as of Q3. What that means in response to your question, Omar Keenan, is that what the AQR will look like as of the 2023, I won't give guidance to you on 2023 now, but absent any MES changes, you should simply see the roll forward of the book on an observed asset quality basis.
As I mentioned before, the stage one rolling forward on a 12-month basis every three months. That's what you should see absent MES changes. If there are MES changes of any description, it's worth just bearing in mind that it won't just depend upon the base case, but it will depend upon how also the downside case and the severe downside case respond. That's particularly important right now, because if you look at the difference between our base case expected credit loss, the 4.35 number that I mentioned earlier on, and the actual ECL that we're holding of GBP 500 million, there's a GBP 700 million buffer there.
In answer to your question about what is the AQR for 2023, even if we get a change in outlook, the actual impact upon AQR and expected credit loss will very much depend upon how the downside and the severe downside respond to that. As said, as we stand at the end of Q3, there's quite a big buffer between the base case expected credit loss and the actual expected credit loss that we're holding on the balance sheet. That gives you a bit of a sense for how you might look at your question, Omar.
Okay. Thank you very much. Just the current, you know, the current position on the management adjustment.
Yeah, sorry, Omar, I forgot to comment on that. The management adjustments have come in quite a lot since the half year. At the moment, the COVID management adjustment, as you know, we released GBP 200 million into quarter three results. That is standing at just below GBP 100 million, number one. Number two, the inflation adjustments that we've seen, they have come down a little too. We're holding around GBP 130 million of inflation-related adjustments. Why have they come down? They've come down simply because the inflation and the interest rate environment within our base case, but also within our downside and severe downside, is now incorporating higher interest rates. It's now incorporating higher inflation.
As a result, we're able to measure within our models the extent to which those higher interest rates and higher inflation rates impact the behavior of the portfolio and the extent to which they will feed through to the expected credit loss. Effectively, what was previously a management judgment at H1, Q2, has now been assimilated within the models as of Q3, very largely. There's still an inflation adjustment, and that inflation adjustment is targeted at a real versus nominal income adjustment, which you may remember me talking about at Q2, and also at vulnerable customers who are typically the more indebted customers, number two, which again, I think I talked about at Q2.
Those two pieces are remaining, but much of the rest of the management judgment for inflationary times has now been assimilated into a model which projects higher inflation and higher interest rates.
Okay. That's very helpful. Thank you.
Thank you. This concludes today's call. For those of you wishing to review this event, information for the replay is available on Lloyds Banking Group's website. Thank you for participating. You may now disconnect your lines.