Lloyds Banking Group plc (LON:LLOY)

Earnings Call: Q2 2021

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Jul 29, 2021

Thank you for standing by, and welcome to the Lloyd's Banking Group twenty twenty one Half Year Results Call. At this time, all participants are in a listen only mode. There will be a presentation by William Chalmers followed by a question and answer session. Please note this call is scheduled for ninety minutes. I must advise you that this call is being recorded today. I will now hand you over to William Chalmers. Please go ahead, sir. Thank you, operator, and good morning to everyone, and thank you for joining our half year results presentation today. I'll shortly turn to an overview of the progress the group has made in the first half of the year on Strategic Review 2021. I'll then give an overview of our solid financial performance and the continued business momentum that we've seen in the first half. As usual, there will be plenty of time at the end for Q and A, which I'll be joined by John Burgess, our Deputy Group CFO. Turning to slide two. During the first half of the year, we delivered for our customers and we remain determined to continue to support them in the current recovery. We are making good strategic progress. We are building the franchise and we have delivered continued solid financial performance. The group's balance sheet and capital position is strong, underpinned by capital build of 93 basis points in the half. This has enabled the Board to announce an interim ordinary dividend of 0.67p per share. As we look forward today, over eighteen months since the start of the pandemic, we're seeing some signs of economic recovery and have updated our forecasts accordingly. In this context, given our performance and the macroeconomic backdrop, we are enhancing our guidance for 2021. This includes a stronger NIM outlook for 2021 and a lower credit charge, in turn resulting in a slightly higher cost base as we accelerate the rebuild of variable pay. Together, this leads to a return on tangible equity of circa 10%, ahead of previous guidance. We also expect RWA to be below 200,000,000,000 I'll now turn to the strategic progress that we've made during the first half of the year as shown on slide three. We're making good progress on Strategic Review 2021, the current evolution of our strategy that sets out clear execution outcomes for the year underpinned by long term strategic vision. As you know, our purpose is to help prosper. Within this, in 2021, our focus on helping Britain recover has been on the areas where we can make the most difference and we have delivered in the first half. We've expanded the availability of affordable and quality homes by lending around $9,000,000,000 to first time buyers, almost reaching our target for the full year. We've already exceeded our target for social housing sector funding for the full year 2021. We've supported over 48,000 businesses in start up out of our 75,000 targets for the full year. And we're also delivering on our objectives to create a sustainable and an inclusive future as well as making progress towards our diversity goals. We were recently ranked sixth in the Financial Times inaugural list of Europe's climate leaders. Turning now to our customer ambitions on slide four. During the first half, we made real progress across our core business areas, delivering growth while increasing customer satisfaction and enhancing our product capabilities. We've delivered increased satisfaction scores for both personal customers and businesses, further improving our record all channel NPS to 71. We've grown the open mortgage book by more than $12,000,000,000 our strongest half yearly growth in over a decade as we've supported customers in their housing preferences in the post pandemic context. We've also improved our position across core markets products with our GBP rate ranking improving from tenth base to sixth. As you know, enhancing our wealth offering is a core element of our customer ambitions. In the first half, we delivered $4,000,000,000 of net new money in Insurance and Wealth, reflecting a 7% annualized growth rate. And this morning, we're excited to announce the acquisition of Embark, a fast growing investment in retirement platform business with assets under administration of around $35,000,000,000 on behalf of circa 410,000 customers. This acquisition completes the group's wealth proposition by enhancing our capabilities in the attractive mass market and self directed wealth segments, while also significantly strengthening our offering in accumulation and retirement, important growth markets. Embark's existing business and technology capabilities will enable the group to deliver a modern leading direct to consumer proposition and new platform services for our share dealing business and the IFA sector. The acquisition therefore provides strong growth potential. We're targeting a top three position in the individual pension and drawdown market by 2025 as well as a top three position in the self directed robo advice market in the medium term. Stopping that, Embark is entirely consistent with and supportive of our Strategic Review 2021 targets. Indeed, we're increasing our 2023 net new money target from $25,000,000,000 to circa $40,000,000,000 to reflect our now increased growth potential. Embark will also contribute towards our ambition to build income diversification, which is particularly valuable in a low rate environment. We're targeting a mid teens return on invested capital in the medium term, including all integration and restructuring costs. I'll now look at our focus on enhanced capabilities in Strategic Review 2021 on slide five. Strategic Review 2021 identified four capabilities that are critical to sustainable success: technology, payments, data, and ways of working. In the first half of the year, we've made steady progress in all of these areas. In technology, we continue to improve our digital offerings to customers, including bringing new features and updates to the market more quickly and more efficiently. In the first half of the year, we safely migrated around 120,000 customer accounts to our pilot UBank architecture. This is less than the 400,000 originally planned, but it's sufficient to provide the necessary proof points for our investments, build confidence for our cloud plans and to allow the work to progress. On payments, we're on track to deliver a threefold increase in the number of clients onboarded to our cash management and payments platform. We have also maintained our leading car spend share in line with Target. We're continuing to improve our use of data, migrating 45,000,000 customer records to cloud hosting. This was another important proof point. And finally, respect of ways of working, we are preparing for around 80 of our colleagues to be working in a hybrid manner in the future. This provides scope for efficiencies in our office footprint and circa 3% reduction delivered in the first half and on track for a full year reduction of 8%. I'll now move from strategy to our operating environment and turn to The UK economy on slide six. As mentioned, we are beginning to see signs of an economic recovery, although uncertainties clearly remain. GDP and growth expectations have both picked up over the quarter. Business confidence is rising strongly as our expectations for staffing levels over the coming year. Together, these are key indicators for the SME sector, which of course is very important to us. In March, the coronavirus job retention scheme was extended to the September. This provides a significant level of support for people across The UK, although notably fewer people are on furlough than a year ago. We're also seeing spending recover. Combined credit and debit card spend is now above pre pandemic levels, although not yet translating into credit card balances given high repayments. So, while there is uncertainty around virus development and what will happen when furlough ends, we are nonetheless seeing positive trends. I'll now turn to the financial update beginning on slide eight. Financial performance of the business has been solid in the first half with Q2 consolidating trends established in Q1. Net income of $7,600,000,000 is recovering, up 2% from the prior year and up 8% from the second half of twenty twenty. NII of $5,400,000,000 is supported by higher average interest earning assets of $441,000,000,000 and a margin of two fifty basis points, which is further strengthened in Q2. Other income of $2,400,000,000 is up 18% on the second half of twenty twenty, although this is partly due to some nonrecurring items, which I'll explain shortly. Net income also includes a $271,000,000 operating lease depreciation charge in the half. This is below our typical run rate, but broadly in line with our expectations for the rest of the year, given the continuing strength of used car prices. Operating costs continue to be a focus and our cost income ratio is market leading at 54.9%. We are also accelerating the rebuild of variable pay, which adds to costs, but reflects our stronger than expected financial performance. We also saw a higher remediation charge in the half. This primarily relates to the historic insurance renewals fine, the HFOR threading re review and other ongoing legacy programs. Underlying equity quality is strong. Combined with the improved macroeconomic outlook, this supports a net credit in the half of $656,000,000 Taken together, statutory profit before tax was 3,900,000.0 significantly higher than prior year and a solid recovery. To part this recovery, we've seen continued balance sheet growth and capital momentum in the half with our CET1 ratio now at 16.7%. I'll expand on these points shortly. Now, let me turn to slide nine and cover the net interest income developments during the half. Both average interest earning assets and net interest margin were up on the second half of twenty twenty. As you can see on the slide, the strong mortgage book growth was again the main driver of the AIEA growth. Looking forward, while we expect growth to moderate, we have a solid mortgage pipeline for Q3. And in line with our macroeconomic assumptions expect a modest recovery in unsecured balances in H2. This means we continue to expect low single digit percentage growth in average interest earning assets in 2021. The H1 margin of two fifty basis points was up six basis points on H2, while the Q2 margin of two fifty one basis points was up two basis points in the quarter. In H1 twenty twenty one versus H2 twenty twenty, lower structural hedge income and the impact of lower cost balances were more than offset by the benefit from continued optimization activity in the commercial book, strong deposit flows and liability management benefits. Looking forward, the mortgage market remains attractive, but we are seeing pricing becoming more competitive and we will continue to be disciplined in our approach. We also expect increased structural hedge income, improved funding and capital costs and the modest growth in unsecured lending, which I mentioned to support the group margin in the second half. So, all taken together, we now expect the NIM to be around two fifty basis points for the full year. Turning to slide 10 on the lending performance and asset margins in a bit more detail. I've talked about the strong mortgage performance that we've seen, particularly the growth in the open book. Completion margins have been around 175 basis points in Q2, which remains above front book maturities, although it is down from the 190 basis points that we saw in Q1. Briefly on the back book. We've seen SBR attrition increased slightly to around 15%. However, given a smaller book, the absolute reduction in the size of the back book is broadly comparable to prior periods. As you can see on the slide, Consumer Finance volumes have largely stabilized in the second quarter, but are still down on prior year, particularly in Cards. This is clearly the impact of the margin. However, notably Card volumes ended Q2 in much the same position as Q1, showing balance reductions have now leveled off. In Commercial Banking, the margin in H1 has benefited from an improvement in the asset mix as well as ongoing pricing actions. So now let me move to slide 11 to look at deposits. Deposits have increased significantly in the first half of twenty twenty one, up $23,700,000,000 as we continue to see inflows to our trusted brands. In Retail, we've seen inflows from new and existing customers. Average current account balances have increased by almost 40% since 2019 given reduced customer spending and higher levels of savings. Commercial deposits are up $3,700,000,000 in the half, although this includes a temporary pickup in legal accounts in June for mortgage volumes before the phased resumption of stamp duty. The significant increase in deposit balances, is now $63,000,000,000 since the end of twenty nineteen, gives the group further opportunities to serve customers through our enhanced wealth offering, including today's acquisition of Impark. It also increases our pool of hedgeable balances. The deposit margin of 15 basis points was broadly in line with the second half of twenty twenty and continues to support a lower overall Group funding cost. I'll now turn to slide 12 to look at Structural Hedge in bit more detail. As you heard of Q1, in the context of our continued success in attracting deposits, we increased the Structural Hedge capacity by $15,000,000,000 to $225,000,000,000 Hedge capacity has now increased $40,000,000,000 since the end of twenty nineteen, which is prudent given the deposit growth we've seen over that same period. We've also acted upon the favorable yield curve movements and reinvested the notional balance up to $215,000,000,000 an increase of $29,000,000,000 in the half including 8,000,000,000 during the second quarter. The weighted average life of the hedge is now around three point five years, essentially in line with the position of Q1. As you can see, we've around $10,000,000,000 of unhedged capacity. Along with $30,000,000,000 of maturities in H2, there is therefore flexibility to invest, depending upon the environment and to ensure our objectives of earning stability and shareholder value. In H1, we see an income of $1,100,000,000 from hedgeable balances. Given our continued deployment into the more positive yield curve environment and the increase in size of the hedge, we now expect earnings from this area to be stronger than previously estimated. Based on current market rates, the headwind we now expect in 2021 versus 2020 is circa $250,000,000 We do not expect to see a headwind in 2022 and only a modest headwind in 2023. Now turning to slide 13 to look at other income. Other income of $2,400,000,000 includes $1,300,000,000 in the second quarter. This is clearly ahead of our recent quarterly run rate. The performance benefited by just under $100,000,000 from gains in Equity Investments business and minor assumption changes within Insurance. When you exclude these elements, whilst lockdown restrictions continue to impact, we are nonetheless seeing some very early signs of recovery in the second quarter. Retail, for example, delivered slightly higher levels of activity led other income in Q2. And likewise, Insurance and Wealth new business saw a modest improvement in the quarter, particularly in Workplace Pensions and particularly on a volume basis compared to prior year. Commercial Banking, meanwhile, was broadly in line with Q1 despite slightly softer markets related income. And looking forward, we do not assume the same level of equities and insurance gains, but we do expect underlying other income to gradually recover in the second half of the year, supported by increasing activity levels. We will also continue to invest organically in income diversification opportunities, which produce income over the medium term. I'll now look at costs on slide 14. Our market leading costincome ratio of 54.9% continues to provide competitive advantage and remains fundamental to our business model. Operating costs for the half came in at $3,700,000 This is slightly higher than last year and reflecting the accelerated rebuild of variable pay given the stronger than expected financial performance in income and in impairments. Our focus on efficiency and cost discipline is unchanged and it enables continued investment in the long term success of the business. Looking forward, we now expect 2021 operating costs to be circa $7,600,000,000 This increase from previous guidance takes into account the variable pay adjustments. And excluding the impact of variable pay, operating costs are developing exactly as expected at the start of the year. Remediation of $425,000,000 includes $91,000,000 in respect of the regulatory fines and historical insurance renewals, 150,000,000 for operating costs in redress for HBox Reading, as well as charges in relation to other ongoing legacy programs. On HBox Reading, we've now had the first few decisions from the independent panel we review. As disclosed previously, there could be further significant charges in coming periods, albeit the exact timing and flow of these is uncertain. These remediation charges are clearly very disappointing, but we are working hard to make things right and to put these issues behind us. Now turning to slide 15 to look at impairments. Asset quality remains strong and user arrears remain low. While we continue to expect some deterioration consistent with our macroeconomic forecast, underlying charges are currently below pre COVID levels. In this context, Commercial Banking has also benefited from improved restructuring outcomes and lower balances. The net impairment credit of $656,000,000 in the half is bolstered by an $837,000,000 release relating to our improved economic outlook. We believe our economic assumptions remain prudent compared to market expectations. And as a result of these changes, our stock of ECLs has reduced to $5,600,000,000 We're still around $1,400,000,000 above the closing 2019 level and we've also retained our COVID related management judgments. Indeed, these have increased in the second quarter to $1,200,000 including the $400,000,000 central overlay that we took in Q4 twenty twenty relating to the significant uncertainty in the current environment. COVID related management judgments also include circa $800,000,000 held in Retail and Commercial, largely recognizing the potential delay in losses that we would have expected to see had support schemes not been in place during the pandemic. Given the asset quality environment and the improvements to our economic assumptions, we now expect full year asset quality ratio to be below 10 basis points. Needless to say, remains on the outlook. Now turning to the next slide to look briefly at credit quality within Retail. The group has a high quality mortgage book, which continues to improve. The average LTV is now 43.1%. Ninety four % of the book has an LTV of 80% or below. Our pre-two thousand and nine book is now $46,000,000,000 and has an average LTV below the wider book of 39.2%. As you can see, new to arrears remain low across our retail portfolios at or below pre crisis levels. And this is despite over 99% of payment holidays having expired. Moving to Commercial on slide 17. We have a high quality Commercial portfolio with around 70% of exposures at investment grade. New to BSU cases are below pre pandemic levels and currently falling. Exposure to the sectors most impacted by coronavirus has reduced by two million over the last year and is around 2% for group lending. I note in this context that we've removed oil and gas from the chart as we can no longer justify calling it an impacted sector. As you can see on the slide, there has been significant reduction in Commercial Stage two balances in the first half of twenty twenty one from $14,300,000,000 to $8,400,000,000 This is almost entirely within the Up to date portfolio and is predominantly model driven given our improved macroeconomic outlook. Stage three balances remain low and have reduced by $400,000,000 during the half. Our Commercial Real Estate portfolio focuses on lower risk property segments and has been substantially derisked and secured. Further risk mitigation is then achieved through significant risk transfers. I'll now turn to statutory profit on slide 18. Statutory profit after tax of $3,900,000,000 and the return on tangible equity of 19.2% for the half were both significantly ahead of prior year. This benefited from higher underlying profit, lower below the line items and of course tax credit in Q2. Looking at the individual below the line items. Restructuring costs of $255,000,000 are significantly up from prior year and reflect the previously signaled higher levels of spend in technology R and D and in severance. Should see the benefits of this investment in our technology stack and financial performance over coming years. We previously talked about restructuring being higher in 2021 than in 2020 and that remains our expectation. The run rate is therefore expected to pick up in H2. Volatility and other items were favorable for the first half benefiting from around $250,000,000 of market gains within banking and insurance volatility. Following the enactment of the increase in corporation tax to 25% in 2023, we recognized a P and L tax credit of circa $1,000,000,000 relating to the revaluation of our deferred tax asset. As you know, the tax credit does not impact capital, but it is impacting profits and returns. Given the improved outlook for NIM and AQR and the updated operating cost guidance, we now expect the 2021 full year RoTE to be circa 10%. This excludes the circa 2.5 percentage point benefit from the tax credit just highlighted. Now moving to RWA from slide 19. This rate of assets reduced $1,800,000,000 in the half, helped by continued optimization in Commercial Banking offsetting asset growth. We've also seen limited credit migration to date in part due to the impact of house price increases. Looking forward, we now expect 2021 closing RWAs to be below $200,000,000,000 I've talked previously about regulatory RWA inflation starting on the 01/01/2022. And it's worth spending a bit of time addressing the changes that we anticipate. We expect 12,000,000,000 to $15,000,000,000 of inflation relating to CIB4 model changes and 3,000,000,000 to $5,000,000,000 relating to the standardized approach for counterparty credit risk. In total, therefore, we expect $15,000,000,000 to 20,000,000,000 of regulatory RWA inflation on the January 1. We will, of course, also see underlying customer driven balance sheet growth in 2022. And meanwhile, we will continue with our program of active RWA management over the course of next year. This will provide some offset, particularly through continuing to optimize the commercial book. Taking all of these points together, our expectation for 2022 closing RWAs is circa $210,000,000,000 Again, I would highlight that uncertainties remain. Looking briefly beyond 2022 on RWAs, the impact of Basel 3.1 in 2023 is expected to be broadly neutral. The reductions resulting from foundation IRB changes are expected to offset increases across other areas. And as disclosed previously, the full impact of Basel III. One will likely not be felt until 2028. Turning to slide 20 and capital. Our CET1 ratio increased to net 50 basis points in the first half to 16.7%. Ninety three basis points of capital build were partly offset by 37 basis points dividend accruals and six basis points in respect of the revised software rules. As mentioned previously, the CET1 ratio includes circa 50 basis points from the change in treatment of software intangibles. The PRA has stated that they will appeal a revised treatment on the 01/01/2022. CET1 also benefits from 78 basis points of IFRS nine transitional relief. We expect this to run down over the rest of this year and the early part of twenty twenty two linked to macroeconomic developments and the model changes on the 01/01/2022. Excluding the impact of both the software intangibles and all of the transitional relief, our CET1 ratio would be 15.5%. This is still significantly ahead of our ongoing capital target of circa 12.5% plus the management buffer of circa 1% as well as our regulatory capital requirements of circa 11%. Following the regulator listing restrictions on banks paying dividend, our strong capital position has enabled the Board to announce an interim ordinary dividend of 0.67p per share. The Board's commitment to capital returns remains unchanged. Our interim dividend reintroduces a progressive and sustainable ordinary dividend policy with payments being made twice per year. Any decisions about surplus capital distributions as usual will be taken by the Board at the full year. Looking forward, in addition to BAU capital evolution, we expect the acquisition of Embark in Q4 to consume circa 30 basis points on completion from a combination of price and restructuring and inspiration charges. And so finally, moving to slide 21. To summarize, we supported our customers throughout the pandemic and we remain absolutely committed to helping Britain recover. In the first half of twenty twenty one, we delivered good progress against our strategic priorities, continued business momentum and a solid financial performance. We have a strong capital position with a CET1 ratio of 16.7% after an interim dividend of 0.67p per share. The group's solid financial performance in the first half as well as the improved macroeconomic assumptions enable us to enhance the Group's 2021 guidance. We now expect the net interest margin to be around two fifty basis points. Operating costs to be circa $7,600,000,000 the net asset quality ratio to be below 10 basis points the return on tangible equity to be circa 10% excluding the circa 2.5 percentage points benefit from the change in tax rate and risk weighted assets to be below $200,000,000,000 In the medium term, we continue to target a return on tangible equity in excess of our cost of equity. And so in sum, although the economic outlook remains uncertain, the Group's business model and financial strength will ensure that it can continue to support its customers and to help them recover. This is fully aligned with the Group's long term strategic objectives, the position of the franchise and the interests of our shareholders. Before closing, I'd like to say that it's been my honor to be the Interim Chief Executive over the last three months. I'm immensely proud of everything the group has done to support our customers and colleagues, whilst helping Britain recover in these unique and challenging times. I very much look forward to working with Charlie when he joins in August. That concludes my remarks today. So thank you for listening. And John and I are now available to take your questions. Thank you. Thank session. We will now take our first question from Joseph Dickerson from Jefferies. Please go ahead. Hi, good morning and a good set of numbers there. Just on the COVID management adjustment of GBP 1,200,000,000.0, what hurdles do you need to see to release that? And is that something that you wouldn't expect to hold into 2022? And I guess, what how would you put that to use if you were able to release that? And what would you prioritize? Thanks. Thank you, Joe. The COVID related management judgments as you know in total sum to $1,200,000,000 That is a combination of the $400,000,000 overlay that we put in place essentially as insurance on the conditioning assumptions around our macroeconomic scenarios. And then $800,000,000 of further adjustments relating to retail and commercial book. In sum, all of those adjustments, the entire $1,200,000,000 are essentially related to judgments that we have taken to address potential shortfalls in the impairments that we would have seen but for the government policies that have been in place, number one, for the 800. And then for the 400 overlay, as you know, it's essentially conditioning insurance against our base case assumptions proven wrong, whether that is in relation to the vaccine rollout, whether that is in relation to virus mutation or whether that is in relation to how unemployment adjusts in the post furlough period. And so, I think, Gerry, in answer to your question, what we'll be looking for in order to roll off those management judgments is essentially developments in those factors. So, as the vaccine rollout completes, number one, as we see further evidence of viral infection or hopefully not, number two, as we see unemployment adjusting off the back of furlough changes in line with our expectations, number three. Those factors will go to give us greater assurance in terms of the $400,000,000 overlay. And then in terms of the $800,000,000 other factors, we will see as to whether or not the losses that we have, if you like, accounted for in the context of those government support mechanisms actually transpire as the economy develops in the back end of 2021 and going into 2022. So, think those are the types of catalysts that will cause us to look at the management adjustments, Joe. I think most likely that takes place during the throughout the second half of twenty twenty one. It is quite possible that it rolls into 2022, but that's very contingent upon all of the factors I've just mentioned. We'll look to be prudent as we address those issues going forward. In relation to what would we use that for, I guess a couple of points just worth bearing in mind. One is to the extent those management adjustments sorry management judgments are accounted for by essentially Stage one and Stage two ECLs, Then essentially, they're accounted for in the transitionals that we have in the capital ratio right now. And so, to the extent that management judgment come off against Stage one and Stage two ECLs, we are effectively derisking our capital structure and removing a potential future drag on our capital structure as we look forward. So, the capital position, if you like, looks stronger for it, but it's because transitionals just get solidified, if you like, in capital base. Clearly, to the extent that they are due to write backs in stage three loan provisioning, then indeed that comes back onto the capital sorry, the balance sheet as incremental capital and that then strengthens the capital position above and beyond what we already have. In terms of our priorities as to how we would look to deploy that additional capital, as ever, we remain very committed as a Board to capital return to shareholders. We also remain committed to continuing to invest in the business in the right way to ensure its prosperity going forward. So, hopefully that's helpful to your question, Joe. Yes. Thanks, William. Thanks. We will now take our next question from Rahul Singh from JPMorgan. Please go ahead. Good morning, William. Good morning, everybody. A few from my side. The first one really on capital. I just wanted to get a sense of what the Board would look at when it kind of comes to making decisions around payout. And with this, I basically mean, what CET1 ratio will you be looking at the year? Should we think about the 15.7% excluding the IFRS transitional relief and excluding software as the kind of right or part capital number? Or are you going to sort of pro form a for the regulatory changes? And the reason I ask that is also because I'm wondering whether the previous historical approach of paying all of your capital out above the right CET1 number is still valid in the current context. Interesting, any thoughts you have on that revenue? And then maybe a follow-up on your comment around non NII. I think you highlighted that there were few one offs this quarter and you reiterated that there's you expected a gradual recovery in the second half. Can I check whether you expect that sort of base level to be still the $1,100,000,000 type of run rate that you've talked about previously, referencing the gradual recovery? Or should we think it is now more like $1,200,000,000 in terms of what we should be building on? Yes. Thank you, Rahul. To address each of your questions in turn, First point is just to reiterate the fact that the Board remains frankly committed to capital return just as it has always been and there's really no change there. And hopefully today's statement of the interim dividend off the back of the change in PRA guidance is confirmation of that. It does, as you say, come off the back of a very strong capital position and 16.7%, as I mentioned in my comments earlier on, is unequivocally well ahead of both our regulatory capital requirements and indeed our own internal capital policy. Now looking forward as to the considerations that we will take into account for any distribution of excess capital at the end of the year, it will be the usual factors, our capital position, the macro outlook, regulatory factors, investment in the business and so forth, the usual parameters. You asked what is the relevant capital ratio to look at in making that consideration. And I think as you say, you could take the 16.7% as it stands today. If you make as it stands today adjustments, I think you would be right to look at the software adjustments. We anticipate that coming off as of the first of January twenty twenty two, which is circa 50 basis points or thereabouts. You could also look at transitionals. The source of transitionals as they roll off over the coming periods is the combined effect of the development or the evolution of the macroeconomic forecast that we have and the expectations for asset quality in that environment, number one. And also to a degree model adjustments that we'll see on the January 1 next year, number two. There are some mechanics within that that give rise to effectively costing some elements of the transitionals. You could take if you like a relatively prudent approach and say, right, I'll just take that transitional block out, which is 78 basis points today as you know. I would just bear in mind that the experience so far has been a little bit better than our expectations. We have to see clearly how that rolls out over the second half. But it is possible in line with the comments made to Joe earlier on that some element of that transition does not roll off in exactly the way that we expect. Credit quality turns out to be a bit better than we expect. And so, some of those transitionals effectively just solidify back into the capital base. But I think, Rahul, we have to see how things develop. You can see our guidance that we've given today. You can see our macroeconomics that we've given today. And that's our best shot as we stand today. When we look at the target at the end of the year, point that is apparent is that the RWA density in the business is increasing. And inevitably that causes us to think about what does that mean for our overall capital position within the business. Right now, we very much stick with and stand by our 13.5% total, which as you know is 12.5% core, if you like, plus a 1% management buffer. That is predicated upon essentially stress analysis of the capital base of the business. As that stress analysis stays the same, but regulatory RWA density increases, we obviously have to think about that. But that's not for today. That's for the end of the year. The second question you mentioned on ROI. As you say, the ROI developments over the course of the quarter have been positive. We've seen $1,280,000,000 in quarter two ROI, which as you say positive on quarter one. It's composed of two main elements really. One is just under $100,000,000 of essentially benefits from our equity related businesses and also a minor element of insurance assumptions. So, you can potentially at least strip that out. But what we have also seen which is encouraging is some resumption of activity in retail, particularly interchange and in insurance, things like workplace, things like protection and so forth. And so, the activity accounts for the remainder of the uplift in ROI in quarter two. We do think that that is predicated upon less than a quarter of full reopening. And so, if and as we see full reopening going forward and essentially consumers being a bit less cautious than they have been, there is potentially more to go for in that activity led recovery. And that's consistent with the $350,000,000 to 400,000,000 cost that I've mentioned in the past over the course of three quarters of lockdown that we saw in 2020. So, think organically you'll get that rebuild. And to your point, I won't be too precise about a number, but it does look like the run rate is moving up from 1.1 to something that is more like 1.2. Now, as I say, it may be there's a little bit more to go for. We have to see how the economy reopens. And then I think on top of that, as I said before, you get the gradual benefits of the organic investments that we have been making on this line. Final point, Rahul, is that as ever, ROI is going be activity dependent. The signs so far rather in Q2 have been constructive. We would certainly look forward to more of that as the economy reopens. But again, that activity dependency is really the key. Got it. I apologize, but I think you cut out slightly in the answer to the capital question. So just to paraphrase and make sure I understand correctly, not all of the transitionals should be adjusted out, some of them might solidify. And then your 13.5 ratio, given the increasing RWA density, you will take a closer look at what the appropriate ratio for the group is as well as per year? Yes. Rahul, just to retrace the steps, apologies if it cut out. On the transition, the point that I was making is that you can look at our capital position, which is very strong today at 16.7%. And you can take a view that you want to strip out software, which makes sense to me because the PRA is going to strip it out in the January 1 next year anyway. And you could look at the transitionals, which as you know at 78 basis points currently composed partly of dynamic, partly of static. And you could choose to take those out. Again, that would be fair enough. The move of transitional is driven by a combination of macroeconomic evolution of the asset book plus also 01/01/2023 RWA changes, which impact on transitionals. My only word of slight caution there is that macroeconomics has so far this year turned out a little bit better than we had expected. And therefore, if that continues to happen, some element of the transitionals that previously have, if you like, covered Stage three movements in our asset base, Stage one, two, three or three movements in our asset base, we'll not cover that because that evolution doesn't take place. Instead, the transition will stay on the balance sheet in the capital ratio and effectively derisk the capital ratio and remove the source of drag going forward. Whether that happens or not is really dependent upon your view of how the macroeconomics unfold in the second half of this year. We've given you our view of the macroeconomics, but everybody has their own view on that topic. So that's that on that point. On the capital levels, I would simply make the point that we are very much sticking with our 13.5%, which consists of 12.5% plus as you know a buffer of 1%. At the same time, one of the factors in that capital level is stress performance of the business. That stress performance hasn't changed despite the fact that we are seeing an increased RWA density off the back of the changes in January of next year. We stick with our capital targets for the time being, but we acknowledge that that point is going on in the background, which is clearly an interesting development. Thank you very much. Very clear. We will now take our next question from Benjamin Thompson from RBC. Please go ahead. Good morning. Thank you for taking my questions. Just firstly on Embark the purchase plugs a gap in the bank's mass market wealth proposition. Are there any other gaps in your wealth proposition you think you're particularly enhancing? And how worried are you about Goldman Sachs and JPMorgan moving into the space with Marcus and Nutmeg? And then secondly, there's been some recent press on Lloyd's entering the real estate market. Can you give us an idea on how big a part of the Lloyd's group this business could eventually become? Thank you. Yes. Thank you, Benjamin. There's three questions in there. So perhaps to take them in order. The first point is that we're obviously very excited about the acquisition of Embark today. It does as we see it complete the waterfront of our wealth offering. So, if you look at our wealth offering right now, it's really composed of three main components. One is the acquisition of Embark today, which is aimed at breast market and self directed consumers as well as enhancing also our intermediary proposition. I'll come back to that in a second. Two is for those that prefer advice, the Australian personal wealth offering is in place. And then three is in relation to high net worth customers, we have the investment in Casanova that we have. So, what we have is a very complementary wealth offering, which we see as now being a complete waterfront. We have been working with Embark a long time to secure this acquisition. We're tremendously pleased that we have managed to announce it today. We very much look forward to working with the Embark team going forward. What it is going to do is, ascend, it's a significant addition to our wealth and retirement proposition. And what I mean by that is it gives us a direct consumer capability on what is a modern platform for a spectrum of consumer savings products. It also gives us an ability to integrate and modernize HSDL alongside our execution platform. Thirdly, it gives us a platform on again modern technology, FMZ technology to transform our retirement account drawdown and indeed our accumulation proposition. And then finally, it gives us an interesting B2B white label business in savings platform area. So, it's a tremendous proposition which sits in a very complementary fashion to our existing wealth offering. The reason why we're so excited about it is because this is a huge opportunity. We think that over $10,000,000,000 of assets under management every year leave our Lloyd's customer base to go and be managed by other providers. There is no reason why that should be the case. We should be able to offer a compelling proposition to our savers going forward across our entire customer base. And indeed that's what Embark is going to allow us to do in a complementary fashion to show this personal wealth and of course interest. So, for now Benjamin, our wealth offering is very complete. We see it as compelling across the waterfront and we're really excited about what we can do with Embark going forward. You asked about JPM and Goldman Sachs. I think we have to let competitors do whatever it is the competitors are going to do. The only point that I would make is that the fact that they are interested in operating The UK market, I think just underlines that it is an attractive market and it's a market that we really believe in. We're here yesterday. We're here today. We're going be here tomorrow. We're a long standing piece of this market. And whatever the competition from outside of The UK brings in, we'll address that as it comes. So, to your questions, Benjamin, around Citra initiatives that we have. A couple of points to make there. One is the work that we're doing with respect to Citra is to address what we consider to be a relatively poorly served market with a lot of private landlords that are maybe withdrawing and a market where we believe we can really help customers. The area of housing and any risks associated with that is an area of significant expertise for us clearly. And so, we see this as an ability to leverage off of many of our core competencies. It's also somewhat adjacent to our other business areas. That is the generation of long term assets is obviously interesting to us from our insurance perspective as well. So, there's a degree of complementarity there. And what it gives us furthermore is the opportunity for a really holistic customer offering, where we can offer a customer a high quality rental proposition. Potentially at least, there is also a customer who may be interested, depending on their circumstances, in insurance, in personal credit, mortgages. And so, we see this as very adjacent to our core areas of expertise. But I would say, Benjamin, that underlying all of this is a very disciplined approach. We are keeping this on a limited basis while we explore the area, while we allow ourselves to learn from it. And as I say, we will take a very prudent and appropriate approach to gradually exploring this area further in line with the objectives that I just laid out. Thank you. Thanks, Benjamin. We will now take our next question from Rob Noble from Deutsche Bank. Please go ahead. Morning. Can I ask a couple of questions? First one is on costs. I think within your original GBP 7,500,000,000.0 guidance, you'd already assumed an increase in performance costs. So is the new GBP 7,600,000,000.0 guidance, does that assume performance costs exceed twenty nineteen levels? Or what's in there for performance costs? And then secondly, there's been a big uplift in Commercial Banking gross margins and group margin as well. Can you give us a bit of a breakdown between the margin between SME, mid quarter, C and I? And how do you think about the margin of that business in particular going forward so that we can sort of filter into the group? Thanks. Yes. Okay. Thank you, Rob. First of question on costs. Just to restate the points at the outset really that cost remains a core area of focus for us and indeed a core source of competitive advantage. Our discipline very much remains and you can see that evidenced in the cost income ratio that we have, which continues to be market leading. We did increase costs year and a half relative to last year because of the increase in variable compensation. And as I mentioned in my comments, excluding this, everything else is on track, that's property, whether that's IT, whether it's operations, it's marketing. Now, as you rightly point out, well, that much of the increase in variable pay is actually already in the 7.5% guidance that we gave at the beginning of the year. You're absolutely right in that respect. What we've done today is to acknowledge the fact that income developments are proceeding faster and better than we expected, likewise in PEMs developments. And that then causes us to look at that variable pay and to accelerate some of the rebuild that we have previously built into future years. So, what you're seeing today is just a bring forward because of the better income, because of the better impairments performance of that increase in variable pay that otherwise would have taken place during the course of 2022, '20 '20 '3, obviously depending on the development of the P and L during those periods. So, that helps you in terms of the understanding in that area. But again, just to underline that this area remains key and a core component of our competitive advantage. The focus is not lost. We do want to recognize colleagues given the fact that we paid no bonus last year. We want to recognize the colleagues that things two colleagues that things are proceeding in a better way than we had expected and therefore it is appropriate to enable our colleagues to share in that performance. CV margin, the Commercial Banking margin that you mentioned, it's really as you can see a part of the overall group margin that we have given. And the overall group margin basically showed two fifty in the first half. We're we're giving guidance of two fifty across the year. And so, you can see that our expectations for the second half of the year are pretty much in line. So, kind of a steady picture for margins during the course of the second half. As for particularities of the Commercial Bank margin, there's a number of different moving pieces that are going on in there. One is optimization, which is a positive pressure for the an upward pressure, if you like, for the Commercial Banking margin. And that is off the back of the way in which we approach customer relationships, the way in which we select assets that we invest in or don't invest in, the way in which we manage the balance sheet in connection with our RWA activities, a number of different factors. But that contributes that optimization process contributes to a better Commercial Banking margin than would otherwise be the case if we did nothing. The other elements that are at play here are developments in terms of the organic lending picture, which as you can see has been relatively over the course of the half. Frankly, that reflects the commercial market that is pretty flush with cash and therefore not necessarily needing to take out new lending facilities in quite the way they might normally do. We'll see whether the recovery changes that over the course of the remainder of 2021 and indeed going forward. And then thirdly, the composition of government lending in that picture, which at the moment is pretty much in line with what we have seen before. But we are now starting to enter the repayment period, so things like bounce back for example. Overall, is just one of three components, but it's notable. That's the asset side. If I flip over to the liability side, you can see that our funding costs have come down over the course of the half. That is reflecting a very liquid balance sheet. That in turn helps the Commercial Bank margin. And that's the third factor which plays into the equation, Rob. Thanks. Can I just quickly follow-up on your cost point? So, hadn't fully appreciated that you accelerated the performance from the 2022, '20 '20 '3 years. Presumably, if I look at consensus, I've got if impairments normalize higher, then the performance costs will come down in 2022 and provide some offset there. So how we should think about it? Well, essentially, the variable pay component, Rob, is simply a reflection of the P and L development that we have seen. And that hopefully explains your question. I mean, think if impairments come down next year that's clearly a better financial performance of the business. And we'll obviously look at variable pay in that context. I'm not sure whether that answers your question, but hopefully. It does. And William, there's an element of those costs that are deferred across into Trent Valley relating to this year's pay orders as well. So you won't get that sort of fluctuation that you're pointing towards. All right. Thanks very much. Thanks, John. We will now take our next question from Omar Khayn from Credit Suisse. Please go ahead. Good morning. Thank you very much for taking my questions. I've just got two. So firstly, on consumer credit, we can see, thanks to the slides, that credit and debit card spending are above pre pandemic levels. I was hoping you could help us think a little bit more about credit card spend and how that's evolving as well as payment rates and how these two factors are balancing to influence the development in interest earning balances in the credit card book. And perhaps just what observations that you're making around the behavior of The U. K. Consumer as we're moving through the opening and what might say about whether they'll return to more normal patterns of behavior? And my second question is just on mortgages. I was wondering if you could give us a little bit of color perhaps on where completion and application margins were over the second quarter and perhaps where application margins are in July, if possible? Thank you. Yes. Thanks very much, Omar, for that. Perhaps just to kick off on the consumer behavior and one or two points on spend data. As you rightly point out, total spend is strengthening without a doubt. And if you add up debit and credit card, it's ahead of 2019 as we stand today. But within that credit card spend, to give you some idea, is down about 7% on June 2021 versus June 2019. So, card spend is still a little way behind, albeit it is strengthening. Within that credit card spend, you've got a couple of different components really. Retail is strong. Entertainment not surprisingly is coming back. But still there's a significant drag in terms of travel, again not surprisingly versus what you might have seen in the equivalent period for 2019. And it's that that's a big driver of credit card balances in particular going forward. We're also, as you say, seeing increased numbers of transactions as we call them, if you like, and fewer revolvers. And that's what's leading to the higher repayment levels in terms of credit card balances. So, there might be a transaction on credit card, but it's repaid more quickly. Now, inevitably as we go forward into the opening up period, we'll see more purchases of consumer durables. We'll see more travel. And it's travel in particular, which is by way of example around 30% of our credit card spend. So, it's a big contributor to credit card spend. And as we see that travel unlock, so we would expect to see credit card spend start to rebuild. Now, we are expecting a degree of caution to remain within the consumer outlook and consumer behavior. So, it is interesting that we have seen what may well be an inflection point in card balances in Q2. They've been pretty stable through the course of Q2. And we do believe and we mentioned in our in my script earlier on today, we do believe that we'll see a modest bounce back in terms of card balances going into second half of twenty twenty one. How fast that is will clearly depend upon levels of activity in particular things like travel spend as I just mentioned in one or two other related areas. We're being relatively cautious in terms of what we expect to see. We do expect to see a rebound. We do expect to see a rebuild, but perhaps still a little bit shy of year end 2020 levels, but again activity dependent. On your question on your second question on mortgage margins. As you know, the market was very attractive during the course of the first half. We were very pleased to play such an important role in meeting customer ambitions and demand in post pandemic period and expressing their kind of housing preferences, I guess. And you would have seen in our first half, did $12,600,000,000 of volume. In the second quarter, we did $6,600,000,000 So, it's really a very strong market. And during that time, we had frankly very attractive margins. During the course of the second quarter, they came down a little bit. We were at 175% completion margins in quarter two versus quarter one of 01/1990. So, you have seen some reduction. But that 175 is still compared to a maturity out, the asset that it's replacing if you like of 01/1933. So, you still got a very positive development in terms of that turnover. Now, as to applications today, they continue to come down. We're still at the point where margins within the mortgage business or pricing I should say within the mortgage business is still well ahead of Q1 twenty twenty, the pre pandemic period. But there's no doubt Omar that there is increased levels of competition on that front end pricing. We would expect that to continue during the course of Q3. So, we'll as an approach, we will retain our discipline in terms of our participation in that market. The mortgage market remains very attractive, built upon attractive margins right now. We are seeing further competition and we'll tailor our approach accordingly over the course of the second half. Thank you very much. Thanks, everyone. We will now take our next question from Alvaro Serrano from Morgan Stanley. Please go ahead. Good morning. I've got a couple of follow-up questions on capital, William, you mentioned that you could sort of have a look at your 13.5% target. Obviously, the stresses in RWAs are going up, implying it could be somewhat lower. But if we look at the stress tests from the PRA, they saw a larger drawdown of capital. Can you sort of maybe speak to that? And are you is that a risk that we learn in the full year when we get the back buyback detail that is another nudge in terms of capital you're required to hold. Is that a risk to that potential lowering of the target? And second, when we think about the Board discussions that might happen in February that will happen in February around the potential for distribution. Obviously, you've mentioned that they'll think about potential headwinds. My question was on Basel IV 3.1, sorry. Can you maybe talk to the sequencing? You mentioned that the peak impact is going to be 2028, but hopefully, the output flows, but obviously, you're looking for reductions in the RIB models. Can you speak to the sequencing there? Are you going to see a benefit initially? And would the Board take that into account? Just talk us through that if you can. Thank you. Sorry, I was on your second question. I just want to make sure I follow. Would you mind just briefly repeating that? Yes. So on the Basel 3.1, you mentioned that it's neutral now. The peak impact would be in 2028. You mentioned, I think, in your script. But initially, you'll have presumably some IRB sort of changes that you're also flagging. So I just want understand what's the dealing with those impacts and to the extent the Board might take into account when they decide about distribution in February? Yes. That's fine. Thank you, Orest. So, I think your first question in terms of stress tests. As you say, the stress test will be disclosed by the PRA at the end of the year and that will be on a bank by bank basis. We are obviously participating in the collective in the aggregate stress test right now. And I can't clearly disclose anything more about that. But I think overall, we would expect to be strong enough to withstand stress pressures and to continue lending into the economy, which is the key policy objective that I think people would like to see us achieve. We have to see how that evolves. But I think in the context of our overall capital targets, our capital targets will take into account a whole range of things. And as we look at them both today and at the end of the year, there's a number of factors that play into that. I mentioned risk weighted asset density as one example, but it's obviously also things like the macroeconomic outlook, the performance of the business, against stress taking into account any regulatory variations, the uncertainties that there might be in terms of the pandemic environment, for example. There's a number of factors that will play into that. Our capital target today is 13.5% based upon the 12.5% plus the 1% buffer. That remains the case. There are a number of factors that as always we will look at in the context of capital targets going forward. The Basel 3.1 question that you mentioned, we've talked in quite a bit of detail around the effects of the regulatory RWA inflation And hopefully, I've given enough information on that or if not, please do ask. But what's also interesting is as we move forward in 2023, there is a further capital development described as Basel III. One as you say. And as you pointed out in my script, I mentioned that there's no material impact from that. And the reason for that for us at least is because at the moment we're operating off of foundation IRB standards. And so, when we get to Basel 3.1, the changes in the capital regime convey some benefits for those banks that are on Foundation IRB. It's things like a reduced scale up in the risk weighted asset calculation. It's things like a reduced credit conversion factor for undrawn facilities. It seems like reduced loss given defaults. Now, for sure there are some headwinds. The removal of the corporate exemption for CBA is one example. Revised standardized operating risk is another example. There is a debate right now about whether or not the SME scale should be removed is a third example. So, are some headwinds in the context of the 2023 Basel III.1 introduction. But for us, because we're on Foundation IRB, the benefits at least accommodate those headwinds. And so, a result, we're calling it neutral at the moment, recognizing that there's a bit of uncertainty in this area. We do expect more clarity from PRA in Q4, I think, as of this year. But for now, we're calling it a neutral. So just a quick follow-up to summarize my sort of if I got it wrong. At the moment, if you take out the software, you're at 16.2. The headwind, certainly the RWA in 2022 are lower than consensus has and there's not much more inflation to go beyond that. I mean, with the current sort of asset quality outlook, that's pretty much all distributable down to 13.5% or even below distributable investable if you do more acquisitions. Is that am I missing something very obvious? Or we can happily assume that's all available? No. I don't think you're missing anything obvious in terms of the inputs Alvaro. We have the capital position as stated today 16.7. I think as discussed earlier on, you can take a view on software, you can take a view on transitionals. I do think that you need to look at the 01/01/2022 RWA inflation and recognize that comes early in the year. And then we have the organic build of capital assuming normal operating conditions over the course of next year, which then offsets that clearly. And we then get the dynamic that I described at 2023 off the back of Basel Three Point One. So, I think those are all the inputs. And then in terms of the decisions around what to do with excess capital, if we see it like that at the end of the year, it does revolve around the regular standard processes that we go through towards the end of the year. And that will include the macro, the outlook, the investments in business, usual stuff really nothing changes. We'll now take our next question from Andrew Coombs from Citi. I think my question has been answered. Firstly, I think in answer to Omar's question on the mortgage margin, we've from 1.9% to 1% to 1.75% in Q2, but our current acquisition run rates are lower, but still above where they were a year ago. I think you provided a number. Could you possibly just provide us with the number of where the current applications are? That'd be question one. Question two is just the CapEx on the dividend. If I look at the accrual you put through in capital annualized, it looks like you're accruing the 2P dividend for the full year. And then just what you mean? Andrew, I got the first two of your questions, but you broke up a little bit on the third question. You mind Just clarifying what your initiative progressive means dividend. Progressive. I'm sorry. Right. Okay, fine. Yes. Thank you, Andrew. In response to your first question, as said Q1 completion margin 190, Q2 more like 175%. As said, those are still both actually very favorable and actually quite similar simply because of the backlog distribution benefits to the asset that rolls off that they replace. We haven't given a number for current applications. And the reason for that is because it moves around quite a lot. And so therefore, we are seeing increased competition in the market. That is a trend that we expect to play out during the course of Q3. I hope the direction therefore is clear, but we're not giving kind of precise numbers simply because they move frequently. On the second question, dividend accrual, we do we are asked to accrue effectively for all foreseeable dividends as indeed for any foreseeable capital outflow. And so you'll see the 37 basis points that we've accrued for dividend there. And you can obviously work out from that what you think it might imply as to the statement around where we think the full year dividend might be going. But that is clearly contingent upon the Board discussion at that time in the second half of this year. And I'll leave you to figure out the numbers and where you think the Board might end up on that topic. The progressive point is a good question. What we've done today, as I say, is to recognize the importance of capital return to shareholders. That's unequivocal. We described the dividend as progressive and sustainable and that's a commitment going forward. And what we've done is essentially set the dividend at a level that allows us to put forward an attractive income, but also a progressive and sustainable growth going forward allowing for whatever macro uncertainties there might be out there. And so, we're focused not just on the dividend today, but we're also focused on creating room for the dividend to grow in a positive way going forward. That's part of our considerations too. So, won't put a number on it, Andrew. I don't want to be too tightly defined, but we are conscious of wanting to grow this dividend going forward. Okay. Thank you. I mean, perhaps just quickly coming back to the point on the current application margins. I guess if I look at your current pricing across your product range, two year, three year, five year average range of LTV, rates have come down by 20 to 25 basis points over the last month or couple of months. And if you add that in with where you've seen forward spreads go, it looks like you'd be looking at quite a big drop from 1.75% in Q2 down to Q3. But can you just confirm you are comfortable that you are still writing business comfortably above the back book 133 that you mentioned? Yes. I mean, I can tell you, Andrew, that we are comfortable with a solid pipeline of mortgage lending that we have for Q3 right now. That is based on pricing, which by definition we see as attractive. And so, again, I won't put numbers on in terms of new applications. But by implication, hopefully you get there to reach the conclusion that you just reached in your question. Okay. Thank you. Thanks, Andrew. We will now take our next question from Aman Rakkar from Barclays. Please go ahead. Good morning, William. Hi, Aman. I had a couple of questions on growth also on consumer credit. So I guess the first one was around your kind of medium term appetite for growth in the business. I kind of note I know you guys haven't filed the ring fenced bank report right now, but I suspect you're growing your ring fenced bank above the next systemic buffer capital charge. So I guess if that was to happen, which presumably given the mortgages, the consumer credit opportunities out there, if that was to tip you into a higher systemic cash charge in the ring fenced bank, could that have any implications for the group CET1 ratio? I mean, obviously, I note that alongside the commentary about the lower stress drawdown. So I guess that would be the first part of the question. And I guess secondly and related to that is what does this potentially signal about your growth ambitions for the business? Presumably, if you do tip into that higher systemic charge, are you kind of incentivized to continue growing now? And I mean should we expect your balance sheet to continue growing actually through 2022 and beyond? And I guess a kind of Fed related question to that is particularly the corporate loan book. It does look like you're looking to do quite a lot of optimization in that business next year to offset the regulatory RWA inflation. I mean, what does that mean net net for kind of net commercial loan book growth? I mean, can you grow that book in 'twenty two? Or actually, is there too much kind of optimization and government guaranteed refinancing taking place underneath that that's going to weigh on that? And I guess just the final or the second question was around car finance. I was actually kind of surprised to see that take a step backwards in Q2. Just kind of interested in kind of what you're seeing there and to what extent does that relate to a kind of supply bottleneck. It looks kind of interesting, particularly alongside the appreciation in secondhand car prices that we're seeing. It's obviously good for operating lease depreciation. But when can we expect that car finance book to start growing? Yes. Thanks, Ilan. On the first of your three questions, growth RFP thresholds, it's a good question. I guess the start point is that while we clearly building the business, we are still below the $610,000,000,000 cap that is relevant to the OSII charge in respect of the ring fenced bank. So, we are still operating within the levels of assets that is consistent with our current OSII charge at a RFP and ultimately therefore at a good level. If we were to exceed that level, then it would add on a further 50 basis points of capital to the RFP, which in turn then plays itself through into in a slightly lesser form obviously in a proportionate form to the group capital charge. So that's the consequence of moving beyond. Now where we are today is partly a function of growth activity on the asset side of the balance sheet and hopefully that continues in the context of a recovery, But it is also a function of a very liquid environment and partly a function of the growth in deposits that we've seen, 63,000,000,000 since the beginning of 2020. And so that allows us to potentially manage the balance sheet in a sensible way going forward to stay within the 6 to $10,000,000,000 cap if that's what we choose to do. If indeed we were to ever take that decision to go beyond $610,000,000,000 it would be in the context of growth within the business and it would be in the context of income opportunities. And so it would be from our perspective at least a value added opportunity to go beyond that cap taking into account that as I say it would incur incremental capital for us on the OSII charge. The other point that I'll make though, again, a, we have a certain amount of slack before we get beyond that $6.1 cap and that is induced because the balance sheet right now is very liquid. And number two, we are even if we were to get an incremental charge in the event that we went above that cap, we're clearly at a capital level that is in excess of our target capital requirements, however it is you manage them, however it is you measure them. And so, I suppose in answer to the question, Aman, it is an area that we are clearly keeping an eye on. We do have appetite for growth in the business. We do believe that our growth right now is consistent with our RFP cap. But if we were to go beyond it, it would be in the context of effectively income realization opportunities and indeed economic value added opportunities going forward. Second question, corporate loan book. The corporate loan book balance sheet development, it's a function of a number of different factors, but you referred specifically to optimization and the role that that has. It's worth me just returning to that and spending a minute on it. The optimization process is partly about low returning assets in areas of the book that just don't make economic sense. And so, we obviously address that in the context of our client dialogues and see that as an opportunity to enhance the value of the balance sheet and indeed the business. It's also about capital efficient securitization choices. It's also about things like collateral management and to a degree also about rerating of elements of the book. And so, all of these things and indeed not just in the commercial business but across the business as a whole are seen as a continual process of balance sheet management. It's not just about us doing it in 2021 and then that's kind of done. It's a process of continual management of the balance sheet. And frankly, over time, we will look to get better and better at that. We believe that we can add value in the approach that we have in terms of serving customer needs clearly, but also in terms of how we manage those customer needs in terms of the balance sheet. Most obviously that applies and most significantly that applies to Commercial Bank. But it's a proposition across the balance sheet and it's a continual process. I think on the third question is car finance. What's been going on in the car finance market is a combination of a couple of different things. One is, as we said before, the change in approach to corporate fleets has led to net volumes falling, not just actually in this half, but it's been falling for a number of periods now. That's just the difference in effectively company car policy that you see playing out there. But in this quarter, what's also playing out and I think what's behind your question really is that there has been a bit of a slowdown in dealerships restocking that sort of thing off the back of lower levels of new car supplies. And so as a result, the motor asset has been impacted by that. I think that resumes to back to normal levels potentially during the course of the second half for sure during the course of 2022. Some of these kind of pipeline plugs that are not just in the car business, but endemic to the economy perhaps as they play their way out. So, what you'll get therefore is kind of three factors that play out in the second half and going into 2022. One is the continued company car point I made around next a second ago. One is the unclogging of these pipelines around dealership stocking returns more normal levels. And one is potentially more enthusiastic recovery in the economy, which in turn builds motor demand. So, I think all three of those things come into play. But I think what you see in the second quarter is particularly that dealership stocking point. Thanks, William. I mean, you might not want to give too much guidance in 'twenty two and onwards, but it does sound like there's actually quite a lot of growth if I think about mortgages, consumer credit and maybe a bit less in corporate. But it does look like you should be able to kind of carry on growing that balance sheet through next year? Well, I think we feel good about the business today. We think it's been a solid performance in Q1 and then again in Q2. The outlook, as you can see from our economics, has been improved. We believe that we are on the prudent side of general market consensus around that topic. But we feel that clearly activity is macro dependent. We feel generally good about how the business progresses in the second half of twenty twenty one. And then we'll see how the macro economy unfolds during the course of 2022. But you've seen our guidance improvement for the second half of this year, which hopefully gives you some insight. Thank you. Thank you. Thank you, Eric. Good morning. We will now take our next question from Jason Peer from UBS. Please go ahead. Morning. Thank you for taking my question. Two things. First, coming back to the issue of costs. And I wondered whether we can approach it from a different perspective. It seems to me that the new guidance effectively requires you to keep the OpEx at the same level as 2Q for the next couple and then pay the bank every in the fourth quarter. So it's certainly not a runaway cost inflation story. I wonder whether you would talk about the investment spend, please, last year and this year and sort of how the Board feels about investment in the platform away from things like Embark, whether you're spending enough and how that looks? And then secondly, just in reaction to some of the questions we're hearing from the market this morning, I wonder whether you might provide any color you could around the sort of scope of the Reading provisions. The color around the OpEx versus findings split is helpful. But I wonder whether you might give a sense as to, I don't know, how many of the cases have been adjudicated on or perhaps just how it might impact capital returns in aggregate, either from a timing or a scale perspective? Thanks, Jason. Two questions there. One on investment spend and one on development and H plus trading. On investment spend, investment spend as you know Jason cuts across all areas of our business, whether it's legal, regulatory, mandatory as we term it, whether it's discretionary aiming at income or cost opportunities. Investment spend cuts across both. If you look at the investment spend for the business overall over the course of last year, this year, and even actually the year before that, it is basically staying at the same relatively high levels. So, we're still looking at levels of around $2,560,000,000 of investment spend over these periods. Now within that, we are also, as you know, aiming to have just shy of $1,000,000,000 about $900,000,000 of strategic investment spend. And that's been roughly half during the course of H1, actually slightly less than half just really for implementation related reasons. But that's on track for the full year. So, of the total investment spend that I just indicated, the $900,000,000 or thereabouts of strategic investment spend is on track for the remainder of this year and you'll see that play out. Related to that, you ask how the Board looks at the investment of the business. It's obviously critical for us to invest properly in the business to ensure the business is as successful going forward as it has been historically. And that's very much embedded in the Strategic Review 2021 ambitions that we laid out at the beginning of this year. I'm sure that as we take a look at that over the course of the autumn of this year that will continue to be at the heart of our strategy. And we will spend in the investment capacity whatever is appropriate to spend in order to keep business as strong tomorrow as it is today. On H plus rating, you asked. If you look at the remediation charge for H1, the remediation charge for H1 was $425,000,000 That's composed of three components. One is the general insurance signed letter by the FCA that we disclosed about a week or so ago. One is HBOS Reading of about $150,000,000 and that is as we disclosed partly related to future operating costs and today's operating costs as well as Redress. And the third component is 185,000,000 of other essentially legacy related redress issues, again of which a proportion is forward look operating non redress expenditure. So, as you look forward at that going forward, Jason, one way to look at it is that the GI FCA fine clearly drops out. The HBOS rating fine, forward looking operational costs, they clearly drop out by definition. We won't be taking them twice. But on the other hand, the addressed costs may come in to compensate for that drop out. We'll see about that. As we say, there's some uncertainty about the timing and the extent, but that's one way to think about it. And then the third component, as I said, part of that is look forward until an element of that drops away. And then part of that stays as kind of an ongoing legacy item that we have to deal with. And so hopefully that gives you some picture as to how we see that unfolding over the course of future periods. What I would add to that is that none of the items that we are currently dealing with on the three points that I just made, the FCA general insurance side, HBox ready and clearly and the of the the vast bulk of the legacy, none of those are new items. They are essentially all items that obviously we are working exceptionally hard to address in the right and proper way. But there are items therefore that we look to get beyond once we have done so and move beyond, put them behind us and then focus on doing the right thing going forward. Thank you. And so, just to follow-up, materiality versus capital distribution plans. I don't know whether there's any way to sort of I mean, is this a material risk to overall distribution I think the best way to look at it Jason is to take what I told you about future periods and how that charge might develop, which hopefully gives you a sense of proportion to recognize that the capital position is a very strong capital position and take into account some of the other comments that I've made about both the dividend and excess capital considerations at the end of the year. But I mean, this remediation charge has played its way through the P and L. And I think as we see the capital position today, it's very, very strong despite that remediation charge playing its way through the P and L. Agreed. The beat on capital is bigger than the remediation charge. Thank you very It is not. As we think about capital distribution going forward, Jason, to answer your question more directly, this is obviously a P and L factor that we have to take into account, but it does not alter our views overall of our capital distribution strategy. Thank you. As you know, this call is scheduled for ninety minutes, and we now have reached the end of the allocated time. So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. We will now take our last question from Guy Sebbing from Exane BNP Paribas. Please go ahead. Good morning. Thanks for squeezing me at the end. Most questions are answered. I just wanted to circle back on net interest margin. Firstly, on the hedge, just wanted to check that the guidance of no headwind next year, I checked that, that still implies a slight headwind versus the H2 twenty twenty one run rate. So I think the guidance for this year implies the second half contribution would be up slightly on the first half, whereas the comment for 2022, I think, is in reference to full year 2021. And then more broadly, as we kind of think about headwinds versus tailwinds into 2022 versus the 2021 exit rate, I guess headwind from the SVR attrition still may be a little bit of headwind on the hedge, unclear on new mortgage spreads versus the back book, but then on sort of tailwinds, we've got funding benefit, perhaps unsecured starts to grow ahead of secured from a mix point of view. I guess in the round, it doesn't feel like we should be expecting a big move in NIM next year, perhaps slightly more risk to downside than upside if new mortgage spreads drifted lower. Does that sound like a reasonable way to think about it? Thanks, guys. You're leading me into the territory of 2020 guidance. I'll be a bit careful about what I say in that. But in essence on the hedge, it's pretty much a wash really. We've given the comments today that I gave in the script. But I think based upon current expectations for the yield curve in line with the market, It's not at all the important factor in terms of the overall distinction between twenty twenty versus 2021 as a base when you look forward for 2022. I think as you look at the factors for 2022 on the margin instead of giving you kind of direct input on that, I'll give you a sense as to what we see playing out in 2021 and you'll then be able to kind of figure out how that plays itself out into 2022. As you know, we improved the guidance on the margin today to around $250,000,000 That's up from what we said at quarter one. And it's driven by a couple of tailwinds and a couple of headwinds. The tailwinds, first of all, are a bit of benefit from the yield curve that we have seen playing itself out through the structural hedge, number one. Number two, some essentially capital cost savings, lower funding cost, lower capital cost kind of coming together in a sense, number two. Number three, some of the commercial bank margin developments that we talked about earlier on. And those are all helpful tailwinds in the context of the margin. Now headwinds are essentially a larger mortgage book, which is tremendously attractive from a net interest income point of view and also an economic value added point of view. But it is on average at a lower margin and therefore is slightly diluted from a margin point of view. And it plays itself out obviously later on as you go into the year. There is also a little bit of margin dilution a little bit not much of unsecured dilution. And that's simply because our credit standards in the current economic uncertainty are very high and therefore you get a more dilutive effect from that unsecured book margin than you would necessarily normally get in a more normal macro environment. That picture I think because of the mortgage point that I made earlier on maybe shows a bit of a stronger margin development in Q3 versus Q4 simply because of the weighting of that mortgage point is a little bit back ended. But guys to come back to your question, all of this is activity dependent. And you've seen our economics over the course of this year, the forecast that we have for 2021, the forecast that we have for 2022. If you see that economics as either different today or alternatively changing going forward, then you can see our asset growth and in particular our asset growth in different areas is going to respond to that. And the most obvious point is the one I was chatting about earlier on, which is that if we see stronger macroeconomic growth than we expect, then you would start to see then you would expect to see consumers use unsecured balances more than we are currently forecasting for example. And that all plays itself into margin development over the course of the second half of twenty twenty one and the second half of twenty twenty two. So, I think take those two together, take our macroeconomic forecast, take our margin guidance and look at them as one and think about how they might relate to each other. This concludes the question and answer session. I would like to turn the conference back to Mr. Chalmers for any additional or closing remarks. Just to say thank you to everybody for taking the time to dial in today. We appreciate the questions and we look forward to continuing the dialogue. So thank you very much indeed. This concludes the Lloyd's Banking Group twenty twenty one Half Year Results Call. For those of you wishing to review this event, information for the replay is available on the Lloyd's Banking Group website. Thank you for participating. You may now disconnect.

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