Earnings Call: Q1 2021

Apr 28, 2021

Thank you for standing by, and welcome to the Lloyd's Banking Group Q1 twenty twenty one Interim Management Statement Call. At this time, all participants are in a listen only mode. There will be a presentation by Antonio Orto Osorio and William Chalmers, followed by a question and answer session. Please note this call is scheduled for one hour. I must advise you that this call is being recorded today. I will now hand you over to Antonio Orto Osorio. Please go ahead, sir. Good morning, everyone. Thank you for joining our Q1 twenty twenty one results presentation. I will begin by providing a brief overview of Q1 performance before William will discuss our recent strategic progress and financials in more detail. Turning to slide two of the presentation. We are now more than a year on from the start of the pandemic. And whilst we are starting to see some positive signs, the significant impact on people, businesses and communities in The U. K. And around the world is clear to see. The group remains absolutely focused on supporting all of its customers and on helping Britain recover from the financial effects of the pandemic. And we are continuing to support our customers and businesses across the group, for example, through payment holidays and government backed loans, whilst maintaining the excellent customer satisfaction scores we spoke to you about with our full year results, which are the highest in the last ten years. Our colleagues across the group continue to demonstrate extraordinary resilience and dedication, supporting our customers and communities in these very difficult circumstances. And I would like to thank them again for it. And in what continues to be a challenging environment, we have seen good momentum and encouraging franchise growth in the first quarter of twenty twenty one. Both NIM and IIEAs are up versus Q4 twenty twenty and are better than our expectations with NII up 2% when adjusted for the number of days. Whilst our continued cost discipline means total costs were down 2% with operating costs down 1% year on year. Given our prudent low risk business model and the success of the measures put in place by the government, regulators and the banking sector, the underlying asset quality of our different portfolios has remained strong with credit experience benign. Although uncertainty remains, The UK economy is performing better than expected on the back of a very successful vaccination program. As a result, we have seen an improvement to our economic outlook, predominantly in unemployment and HPI expectations, which has resulted in an impairment release of GBP $459,000,000, which together with the positive behavior of the underlying asset quality has produced an impairment credit in the income statement in Q1 of GBP $323,000,000. William will talk more about this later. Relating to the balance sheet, we have continued to take advantage of the strong mortgage markets with GBP 6,000,000,000 open book growth during Q1. We are now seeing growth for the third consecutive quarter in a market where economics have improved substantially. Retail deposits were up more than £9,000,000,000 in the quarter, including current account growth of GBP 5,600,000,000.0, demonstrating again the strength of the franchise. Another area of strength has been our capital build. And during the quarter, our CET1 ratio increased to 16.7% and our strong capital base remains significantly above both our ongoing internal capital target of circa 13.5% and our regulatory capital requirement of around 11%. Regarding Strategic Review 2021 launched in February, we are already making good progress across a number of areas. Our clear execution outcomes for 2021 underpinned by long term strategic vision position the group well for future success. William will further elaborate on this. Finally, given the trends we have seen and reflecting the solid business momentum, we are today enhancing our overall guidance for 2021. I will now hand over to William, who will run you through the new guidance, the financials and the strategic review 2021 progress in more detail. Thank you, Antonio, and good morning, everyone. I will run through the Q1 results including a brief update on the strategic review 2021 before opening up for Q and A. Turning first to slide four with an overview of the financials. Income of $3,700,000,000 is down 7% year on year given lower rates, but an increase of 2% versus the last quarter of twenty twenty. NII was flat quarter on quarter, but if adjusted for day count, would actually be up 2%. In particular both NIM and average interest earning assets were ahead of our expectations. In a challenging environment, the group continues to demonstrate cost discipline with total costs down 2% year on year. Pre provision operating profit of $1,700,000,000 was down 12% year on year, but up 21% compared to Q4 given the increased income and lower costs. Asset quality remained strong with underlying credit experience benign. The improved economic outlook was driven by provisions release of $459,000,000 resulting in a Q1 impairment credit of $323,000,000 Statutory profit before tax of $1,900,000 was up significantly both year on year and versus Q4. TNAV was stable compared to Q4 at 52.4p per share with profits offset by cash flow hedge reserve movements driven by the upward shift in interest rates in the quarter. Meanwhile, the group's capital position remains very strong with a CET1 ratio of 16.7% after 54 basis points of capital build in the quarter. Now turning to slide five to look at our Strategic Review 2021 progress so far. As you know in February, we launched the next evolution of our strategy. Strategic Review 2021 is a combination of clear execution outcomes for the coming year underpinned by long term strategic vision and supported by significant strategic investments. It is very early days, but in Q1 we have delivered progress against a number of our priorities. In Helping Britain recover, we have made meaningful progress across all five of our priority areas that are embedded in our business ambitions. Achievements to date include launching the pay as you grow and our recovery loan scheme to support clients through the next stage of their recovery where required. We have also lent nearly $4,000,000,000 to first time buyers in the first quarter of twenty twenty one. We joined as a founding member of the Net Zero Banking Alliance commitment to help accelerate the transition to a low carbon economy and to achieve our net zero by 02/1950 ambitions. Our customer ambitions focus on further business alignment to help unlock coordinated growth opportunities across our core customer needs. In Q1 in that respect, we've built upon group connectivity of our insurance and wealth franchise by significantly increasing Schroders personal wealth introductions and by launching a new Halifax branded protection product, the latter increasing direct to site volumes by 25% year on year. For our commercial clients, we have launched new and exciting propositions in line with our investment focus on increasing digitization, while also building out product delivery functions. Examples of this are outlined on the slide. Finally, and as outlined at full year, we are investing in our core capabilities to enable sustainable success in the new environment, technology, data, payments and our people. We are encouraged by the progress we're making and we'll provide further updates on these areas in more detail over the remainder of this year. I'll now turn to slide six and look at how the group's customer franchise performed in Q1. Open mortgage balances were up $6,000,000,000 in the quarter, building on the trends that we saw in Q4. Given the continuing strength of activity levels, we expect further open book growth in Q2 with a somewhat slower pace thereafter in H2. As expected, given the continued social restrictions during balances were down $800,000,000 to $36,200,000,000 Modest growth in Motor was more than offset by the reduction in the credit card and unsecured loan books. In commercial, balances were broadly in line with December. A small pickup in SME balances was partially offset by continued optimization in large corporates. Given the strong mortgage volume seen to date and assuming a gradual pickup in unsecured balances in H2 in line with our macroeconomic assumptions, we now expect low single digit percentage growth in average interest earning assets this year. Once again, deposits were a strong growth area, up more than 9,000,000,000 quarter, including current account growth of $5,600,000,000 This continues to demonstrate the strength of the franchise in what is a still subdued environment. In commercial, we continue to see a small tick up in SME and mid corporate deposits, whilst large corporate balances stayed relatively stable. Now turning to income on slide seven. As I said earlier, Q1 NII of 2,700,000,000 was in line with Q4. Both net interest margin and average interest earning assets were ahead of our expectations. Q1 margin of two forty nine basis points was up three basis points on Q4 benefiting from continued optimization activity in the commercial book, strong customer inflows and liability management benefits. Lower structural hedge net interest income was largely offset by the strong mortgage book growth at attractive margins. Mortgage growth was also the primary driver of the AIEA growth in the quarter. Following the increase in structural hedge capacity at the end of twenty twenty and in the context of favorable yield curve movements during the first quarter of twenty twenty one, we have both reinvested and increased the notional balance of the hedge by 21,000,000,000 to $2.00 $7,000,000,000 The growth structural hedge capacity has since been further increased to two twenty five billion dollars capturing a part of the deposit growth observed in 2020 and reflecting continued success in attracting current account balances. We continue to take conservative view on eligible balances for the hedge. Consistent with recent investments, the weighted average life of the hedge has now increased to around three point five years, that's up from around two point five years in 2020. Given the positive yield curve impact on reinvestment and the increase in hedge size since year end, we now expect hedge earnings in 2021 to be stronger than previously estimated. The headwind we expect now is circa $300,000,000 compared to 2020. Based on current market rates, we now do not expect to see a headwind from the hedge in 2022 and only a modest headwind in 2023. With the benefit of the developments in Q1 and the improved yield curve environment, we have upgraded our guidance in this area. We now expect the net interest margin to be in excess of two forty five basis points for 2021. Other income across all divisions continues to be impacted by the lockdown restrictions in The U. K, albeit up 6% on Q4 given the non recurrence of negative insurance assumptions. We continue to expect other income to gradually recover in the second half of the year as activity returns. We also continue to invest in income diversification opportunities over the medium term. Q1 operating lease depreciation was impacted by lower fleet volumes. Q1 charge also included a circa $30,000,000 benefit from the more resilient used car price outlook given recent trends. Let's now look at costs on the next slide. Our focus on efficiency and cost discipline continues to provide competitive advantage and remains fundamental to our business model. In Q1, total costs were down 2% with a reduction in both operating costs of 1% and remediation costs of 25% versus Q1 twenty twenty. Looking forward on remediation costs, the quarterly run rate equivalent is likely to be somewhat higher than Q1. Following the successful start to Strategic Review 2021, Q1 included a $200,000,000 strategic investment spend on track for our target of $900,000,000 in the year. Looking forward, we continue to expect full year costs to be lower than 2020 at circa $7,500,000,000 That's despite COVID related headwinds and expected increased variable remuneration costs. Now turning to slide nine to look at impairments. Asset quality remained strong and the observed credit experience in Q1 continues to be very stable. Retail credit experience remains benign and in line with pre COVID levels. In commercial, we've seen a release in the quarter given improved outcomes on restructuring cases, lower defaults and reduced balance sheet exposures. Furthermore, the macroeconomic outlook has improved since year end. The vaccine rollouts in The U. K. And additional government support announced in the spring budget result in positive shifts in our economic assumptions. This implies peak unemployment now 1% lower at 7% versus 8% previously and HPI now expected to reduce by circa 1% in 2021 versus circa 4% previously both compared to our Q4 base case. The improvement in the macroeconomic outlook has resulted in the $459,000,000 provision release in Q1. Together, the benign underlying environment and macro improvement results in a net credit of $323,000,000 for impairment in our income statement. Our total ECL provision of $6,200,000,000 remains around $2,000,000,000 higher than at the end of twenty nineteen. Given uncertainties continue, we have increased COVID related management judgment CCL by around $100,000,000 to circa $1,000,000,000 consistent with our approach at the year end. This includes the $400,000,000 overlay we took in Q4 given the high level of uncertainty in the current environment such as risk of virus mutations and the impact of the coronavirus job retention scheme when it's removed. It also includes circa $600,000,000 held in retail and commercial largely to recognize the absence of losses that we would have expected to see had support schemes not been in place during the pandemic. The updated economic outlook has resulted in a modest reduction in coverage, which nonetheless remains conservative and well above December 2019 levels, point 2% of total lending and 27.1% on Stage three assets. Given the updates this quarter, we now expect full year 2021 net asset quality ratio to be below 25 basis points, although needless to say uncertainty remains on the outlook. Now turning to the next slide to look more closely at credit quality performance. Credit quality remains strong across the book with both retail and commercial portfolios performing well. In retail, we continue to see low new to arrears levels across the business at or below pre crisis levels. Notably, this is despite the vast majority of payment holidays now ending. 95% of all retail payment holidays have now fully matured, 94% of these customers resuming payments. Of the remaining 6% in arrears roughly a half of those were already in arrears before the payment holiday was granted. Within the commercial portfolio, our exposure to the sectors most impacted by coronavirus continues to remain modest at around 2% group lending. Indeed excluding government backed lending through the CBOLS and BEALLS programs, which as you know is a low risk exposure given the guarantee, we have actually seen a net reduction in drawn lending across the majority of key coronavirus impacted sectors when compared to March 2020. Circa 70% of commercial banking exposure is at investment grade. Investment grade percentage of key coronavirus impacted sectors remains unchanged from the end of year position at 38%. Meanwhile across the portfolio, our new to business support unit volumes remain in line with pre crisis levels. Looking forward, we do expect new to arrears levels to increase later in 2021 consistent with our economic outlook as support measures subside and unemployment increases. We are well provisioned for this. I'll now move on to slide 11 to look at below the line items. Restructuring costs in Q1 were up year on year, largely driven by increased severance costs and R and D technology costs. Volatility and other items are down both year on year and compared to Q4 benefiting from positive insurance gains. Both statutory profit before tax and statutory return on tangible equity are up year on year and compared to Q4 somewhat helped by the impairment credit. Following the announcement in the spring budget that the corporation tax is to increase to 25% from 2023, we will see a circa $1,000,000,000 P and L tax credit and revaluation of our deferred tax asset at the point this change is enacted in TDA law. This is expected to be in Q3 of this year. Given the improved outlook for both NIM and AQR, we now expect 2021 full U. S. Statutory RoTE to be between 810% excluding a circa 2.5 percentage point benefit from the tax credit that I've just outlined. Moving to RWAs and capital on slide 12. Risk weighted assets reduced $3,800,000,000 in the quarter, largely driven by continued optimization in commercial with limited credit migration seen to date. In 2021, we continue to expect RWAs to be broadly stable on 2020. As we look forward into 2022, RWA inflation will impact from regulatory change starting on the 01/01/2022. Looking at our capital. Our CET1 ratio increased to 16.7% with 54 basis points of capital build in the quarter, benefiting from 31 basis points of RWA reduction. Our strong capital base remains significantly above both our ongoing internal capital target of circa 13.5% and our regulatory capital requirements of around 11%. The CET1 ratio includes circa 50 basis points from the change in treatment of software intangibles. Following the PRA statement that they intend to appeal the revised treatment in 2021 and revert to the original full production, we do expect this benefit to reverse out of CET1 potentially as early as Q2. CET1 also continues to benefit from 91 basis points of IFRS nine transitional relief compared to 115 basis points at December 2020. If our macro assumptions are correct, this relief will run off across 2021 and 2022 albeit precise timing remains uncertain. Even excluding both of these elements CET1 remains strong at circa 15.3%. In the quarter, accrued five basis points in respect to dividends in line with the 2020 payout and consistent with regulatory guidance. As previously outlined, we will update the market on interim dividend payments with the half year results when we have received greater clarity on distributions from the regulator. The Board remains committed to future capital returns and in 2021 intend to resume our progressive and sustainable ordinary dividend policy at a dividend level higher than the 2020 level. Finally, moving to slide 13 to conclude. To summarize, we have supported customers since the start of the pandemic and we will continue to support them throughout the recovery period. We will deliver across our Helping Britain recover focus areas and contribute to the transition to a more sustainable and inclusive society. We have seen solid financial performance in Q1 as the business continues to deliver with balance sheet momentum and income growth versus Q4. We have also continued to build our strong capital position with a CET1 ratio of 16.7%. Strategic Review twenty twenty one is underway and is delivering momentum on key initiatives. During the remainder of the year, we will continue to build opportunities across our core business areas of Retail, Insurance and Wealth and Commercial Banking. This will create sustainable shareholder value through revenue generation and diversification, disciplined growth and further efficiency gains, whilst delivering for our customers and for our colleagues. All of these initiatives will support our trajectory to a medium term statutory RoTE in excess of our cost of equity. Looking at our 2021 guidance. We now expect net interest margin to be in excess of two forty five basis points. We continue to expect operating costs to reduce to 7,500,000,000.0 We now expect the net asset quality ratio to be below 25 basis points. We continue to expect RWA to be broadly stable on 2020. Given these upgrades, we now also expect statutory RoTE to be between 810% excluding circa 2.5 percentage points benefit from the anticipated tax rate changes. With that, I'll conclude the financials. Before we move to Q and A, as you know this is Antonio's last set of results. I'd like to take this opportunity to thank him on behalf of the Board and on behalf of the group. His contribution to our business over the last decade has been extraordinary. I personally have benefited greatly from his experience and guidance during the time I have worked with him. More importantly, the group has benefited hugely from Antonio's leadership both in turning it up for success and in allowing it to make the contribution that it does to The U. K. Today. I'm sure I speak for all stakeholders in saying thank you and wishing Antonio continued success as he moves on to his next role. You for listening. And we'll now open up for Q and A. Thank you, We will now take our first question from Joseph Dickerson from Jefferies. Please go ahead. Hi, good morning guys. Also echo Antonio Williams sentiments and wish you the best in your new role starting next week. I guess I had a couple of questions. Thanks a lot. Thanks a lot, Chuck. Pleasure. Just a couple of questions on the management overlay of $1,000,000,000 and the provisioning more generally. First of all, what are the things you would need to see to start to release out of that $1,000,000,000 to a further extent? And then secondly, how sensitive is the underlying provisioning to house price changes? Because I note that in your base case you've got about an 80 basis points decline this year and I think the land registry is showing growth of closer to 9%. So I was trying to square that. So that's provisions. And then lastly on slide seven, you show a two basis point quarter on quarter benefit to NIM from funding and capital. And I'm just wondering if there are still legacy instruments that you can call on the capital side to help continue to drive that sort of benefit to NIM in the near term? Yes. Thank you, Joe. The first of your question is relating to the management overlay. As you point out, we have COVID related management judgments in the ECL of around $1,000,000,000 That is composed of two components. One is the $400,000,000 what I call conditioning assumptions insurance overlay I suppose. The second is a further overlay COVID management judgment related overlay of $600,000,000 And that relates to provisions that we have taken against both the retail and the commercial book to take account of losses that we would have expected to see, but for government furlough schemes and other forms of assistance in place. As we look at that going forward Joe, the $400,000,000 first of all, we have conditioning assumptions which essentially are setting the underpinnings for our base case based upon vaccine progress being in line with government expectations based on reopening being in line with government guidance and based on furlough and government support being in place as the plans have been indicated including the extensions that were talked about at the budget. To our conditioning assumptions there's a number of conditioning assumptions, but those are three of the most important. We've taken the $400,000,000 conditioning assumptions management judgment to ensure ourselves if you like against any of those going wrong whether it be by a vaccine mutations, whether it be by a slower reopening process than we had first forecast. I think therefore Joe in respect of the 400,000,000 as we see those conditioning assumptions getting hopefully confirmed as we roll through the course of the summer then we'll take another look at those at that 400,000,000 management judgment in respect of those assumptions. With respect to the 600,000,000 as said that is a management judgment additional overlay that has been taken to account for provisions that we would have expected to see but for the various assistance programs payment holidays and furlough being foremost amongst them. Therefore, as we see the results of the furlough program as it rolls off during the course of the autumn probably going into the third and fourth quarters of this year possibly into next, we'll take another look at that 600 and see whether or not our assumptions play out and consider the 600 and its placement accordingly. With respect to HPI, the we don't update them on a quarterly basis, but I'll just refer you back to the year end sensitivities that we gave on HPI, which both show HPI down. The sensitivity given there was if HPI fell by a further 10%, the incremental impact would have been about $280,000,000 or thereabouts. And it's not quite symmetrical if you look at it from the upside perspective, but it won't be too far off. So I would take a look at those assumptions as of year end. As I say, bearing in mind that we don't update on a quarterly basis for those sensitivities. And then finally with respect to funding capital Joe, we have as you say received some benefits. One point that I'd like to make there actually is that the funding benefits that we're enjoying are in part because of the strength of the retail deposit inflow that we have seen. You've seen $12,000,000,000 in this quarter. You saw $40,000,000,000 during the course of 2019 sorry 2020 excuse me. And that is allowing us to effectively fund the business relatively more cheaply than we have historically and indeed better than our expectations. And so you're seeing some funding benefits flow through from that and we would expect that to largely continue through the course of 2021. As regards to legacy instruments, there's always something further that you can do on legacy instruments for sure. But we did undertake activity as we pointed out as of the tail end of last year. We are getting through that. As I say, there will always be some pieces more that you could do, but I would expect those to gradually tail off over time. Great. That's very helpful. Thank you. Thanks, Jack. We will now take our next question from Omar Khinane from Credit Suisse. Please go ahead. Good morning. Thank you very much for taking my questions. I just wanted to ask a question on the revision of the average interest earning asset guidance to low single digit growth. I was wondering perhaps if you could elaborate on your thinking here. Are we just seeing a temporary lift from the budget measures and mortgages that is helping 2021? Or do you think that there are the more permanent factors that have changed structurally in the housing market, for example, that might inform us beyond 2021? On the related question, just on the consumer unsecured balances and consumer behavior, which I guess is quite a big topic of debate with investors, especially with high savings levels. I was hoping you could offer your thoughts here on any clues you've seen so far in the very short time hospitality and nonessential retail has been open that can help us think about what a modest recovery in the second half can look like? Thank you very much. Thanks, Homer. In respect to AIEAs, as you say, we have both experienced a decent Q1 in that respect. AIEAs went to 439.4% as you saw from 436.9% at the end of Q4, so an increase of roughly $2,500,000,000 That's obviously very welcome. It's driven by a number of factors, but principally the mortgage growth that we've seen in the course of the first quarter. Looking forward to the remainder of 2021, first of all, we expect to see several elements of the AIA picture continue into Q2 and beyond into H2 of twenty twenty one. Most obviously that's the mortgage market where we continue to see strength in Q2. And indeed, we would expect continued mortgage growth into H2 of twenty twenty one because we think there are structural factors behind that growth in the mortgage market in addition to some of the more cyclical factors that we're currently benefiting from. Likewise in the second half of H2, we would expect the opening up of the economy to lead to a gradual expansion of the unsecured balance, although clearly that will be activity dependent and also depend upon the extent to which our customers choose to use deposits versus going to credit. But overall, those are two positive factors for the growth in AIEAs in the second half of twenty twenty one. I think looking forward beyond that, I won't give any official guidance as it were, but a couple of thoughts to put into the mix. First of all, as I said, we do think the mortgage market is driven by structural factors. It's driven for example by people's preference about where they live. It's also driven I think it's fair to say by low rates as well and therefore mortgages being relatively more affordable than it might be in other circumstances. Likewise, if you look at other areas of our balance sheet, we do expect the macro growth to continue in 2022. You have seen in our economics this morning that we expect 5% growth in GDP in 2022, which is a better pattern of growth going forward. And we would expect some form of balance sheet expansion in our business to be reflected therefore unsecured most obviously as spend patterns start to pick up and the macro growth continues. And likewise over time we'd expect that to feed through across all of the business lines. So I think Omar there are factors that are structural by nature and certainly encouraged by macroeconomic developments that we think are encouraging from an AIEA growth perspective. But we have to see how that pans out over the course of this year and we'll obviously be updating you accordingly. That's wonderful. Thank you. Omar, you asked about spend. The spend trends are pretty encouraging so far. We have seen through the course of the first quarter improvements from January through to March and those improvements are continuing in the context of April's figures. If we look back at the comparison with 2019, the spend figures for the what is it about second week in April to Wednesday twenty first second and third week in April to Wednesday twenty first show us increasing spend by about 21% over 2019. But it's worth pointing out that that is positive plus 27% within debit card spend and relative to 2019 negative 12% versus 2019 credit card spend. We do expect that over time as airlines hotels travel that sort of thing picks up that credit card spend is going to grow accordingly. And that's really what we're waiting for. So positive developments on the spend picture Omar and that's obviously encouraging. That's great color. Thank you very much. We will now take our next question from Rahul Sinha from JPMorgan. Please go ahead. Good morning, Antonio. Good morning, William. Antonio, thanks for everything over the past decade, especially the healthy debate, and I wish you the best in your next role. I've got two questions, please. Thank you very much. The first one is just I was wondering if you can unpick a little bit of the NIM guidance upgrade today for us to give us a sense of how much of your increased view on the NIM reflects the structural hedging changes that you've made in terms of both the increase in the size of the hedging the capacity versus how much relates to a more positive view of consumer spending in the second half of the year? I'm just trying to understand what are you assuming in terms of consumer spend in the second half of the year within the sort of NIM guidance? And then I've got a second one please on the dividend. Sure. Shall I just take the first one first then Rahul then we can go into second. The margin outlook, as you say, first of all, Q1 has been a relatively benign development in the margin. We've come from $246,000,000 at the end of last year to $249,000,000 at the end of this quarter. And that's been driven by headwinds, which won't surprise you include the structural hedge, include also unsecured balances, but also tailwinds as I outlined in my comments earlier on around Commercial Banking, around funding as we discussed earlier and around some liability management capital benefits. Those benefits stay with us as we look forward. There are one or two other factors that come into play as we look forward Rahul. From a tailwind perspective, the structural hedge headwind that we have previously seen as I mentioned in my comments that structural hedge drag has been reduced significantly by the yield curve improvements that we've seen during the first quarter. And that is clearly a benefit. In terms of the headwinds that we see, it's interesting because they're actually very benign from a net interest income point of view, albeit a little dilutive from a margin point of view. So for example mortgages volume is benign from an interest income point of view, but slightly dilutive to margin. Likewise, we see some expansion in Commercial Banking both RCS and also trade finance balances. And finally, expansion in unsecured as I mentioned earlier on, which more or less gets us back to where we ended the year in 2020 as we see it unfolding. But we're expanding unsecured at very high levels of the credit spectrum I. Very cautious credit standards, which in turn is a slightly more dilutive measure than you might have first seen. So all of that gives us our guidance for margin in the remainder of 2021 Rahul and hopefully that's useful. Consumer spend, I think we see that as unfolding along the lines I mentioned earlier on continuing to grow in particular, I would expect the opening up measures and in particular things like travel hotels airlines that sort of thing to lead to greater credit card expenditures over time. And obviously, a part of that is going to stay on the balance sheet. And a part of that is margin accretive. So hopefully, that gives you some sense, Rahul. Got it. Thank you. I guess the second one is just around what we should be expecting in terms of the interim stage on dividends. And I don't know if I'm reading too much into this, but it sounds like we might get more than the sort of usual interim sort of update on the dividends. Are you expecting the PRA to talk about sort of broader capital restrictions? And perhaps should we expect that you might be able to address some of the surplus capital position at the interim stage? Or should we be waiting until the end of the year for this? Yes. Yes. Thanks for the question, Rahul. On dividend, as you know, we did the most that we could with respect to 2020. That was a regulatory determined standard. We do as I said a number of times before continues to be the case. We recognize the importance of dividends and capital distribution more generally to shareholders. And we also obviously note our strong capital position in that respect. And that will lead us Rahul to both intend to accrue dividends and also to pay an interim dividend in line with the position that we see it at the time. To your question, we are waiting for the regulators to take a view on allowable dividends for the sector as a whole. We very much hope that the regulator will allow the Boards to make the judgments that they would like to make and that the restrictions that have previously been in place are no longer seem to be necessary. So our expectation is that by the time we get to half year we will have a better view on that. We're clearly looking out to see what the PRA says. And then subject to that, we'll look at the interim dividend. Again at the end of the year, we'll also look at the final dividend in the context of the macro, the outlook, the capital position and clearly what the regulator says. But all in the context of as I say recognizing the importance of dividends and capital distribution to shareholders. Understood. Thanks very much. Thanks, Rahul. We will now take our next question from Jonathan Pierce from Numis. Please go ahead. Hello, everybody. And again, to repeat, good wishes to Antonio. Good set of numbers to leave on me. Thanks, Jonathan. Thank you. Yes, of course. And the three questions I've got focus on, I guess, start with the structural hedge where I suppose the degree of the margin improvement or guidance improvement is coming from. And then I've got a question on operating lease depreciation. On the hedge, maybe you could give us a bit of color on how you scale the approved capacity of the hedge. You've said that there's a £225,000,000,000 approved capacity today, but that's only reflecting part of the liability growth over the last year. So do you do what I think Nat West does and look at the last twelve month average deposit base? Over the next six, twelve months, we'll get some further rolling through of that averaging effect and the improved capacity will just naturally increase further. So I'm just trying to get a sense as to what the capacity of this hedge could move to based on the spot deposit base today. That would be helpful. And the second question on operating lease depreciation. Last few quarters now ex the profits on the car sales, we've been running at an annualized probably £700,000,000 7 50 million pounds a year. And that's a lot lower than the £1,000,000,000 number we've got used to historically. And is that a sensible base now to be thinking of driven almost purely by the size of the Lex fleet and hence that overall operating lease depreciation closer to 700,000,000 odd moving forwards? Thank you. Yeah. Yeah. Thanks, Robin. Just if I take the first of those questions first around the scaling of the hedge. When we look at the hedge, it's interesting. Over the course of the last five quarters, our hedgeable deposits have moved from around $200,000,000,000 to around $254,000,000,000 to an increase of roughly $55,000,000,000 over the course of that time. At the same time, our hedge capacity has gone from around $190,000,000,000 to around $225,000,000,000 And so effectively the cushion has increased by circa $20,000,000,000 during that time. Now normally we'd expect to run with about a $10,000,000,000 cushion I. E. The difference between hedge capacity and hedgeable deposits. Right now because of the growth last year we're running with a cushion that has actually trebled from that to around $30,000,000,000 or so. And we are waiting to see how those deposits behave over the course of a macroeconomic expansion. And the watchword right now if you like is just to look at those balances and to be cautious about how they might respond in the context of a macroeconomic expansion and therefore significantly increase the buffer. That gives us the opportunity if those deposits end up being sticky. We do expect that some of them will be to accommodate the hedge accordingly during the remainder of this year. But we're kind of waiting to see Jonathan as we see how 2021 unfolds. The second point is around hedge deployment, which obviously when we increase the capacity of the hedges we just have done to 02/25, it takes us a little bit of time to deploy that in the course of the year. So we will see the benefits of that increased hedge capacity as we deploy the hedge over the course of the year. It will be gradually deployed into the market in an orderly way. And therefore our headwind our reduced headwind gives you some sense of how we expect that to see play out. Second of your question operating lease appreciation Jonathan. The operating lease appreciation as I mentioned in my comments has seen a benefit of around 30,000,000 this quarter from improved used car prices. As we look forward, I would take the quarter one operating lease depreciation take that $30,000,000 which I mentioned in my comments and just adjust accordingly. And you'll see relative to previous years an improved performance as you say and that is partly because the size of the fleet is going down and it's also partly because as I say we've taken a cautious view on used car prices. We're not seeing that unfold in as negative a way as we had expected and therefore that is coming back on to the operating lease depreciation in any given quarter including Q1. Okay. That's really helpful both of those answers. Thank you. Can I ask a very quick follow-up on the hedge? I think this is quite important. These new deposits that are getting deployed, because a lot of them are current accounts, can I just confirm you're still comfortable putting those out up to ten years forward because you have got such a big cushion? You're quite happy to still be deploying those at ten years. Is that right? Well, think I'll see it slightly differently actually Jonathan. As I said in the last five quarters, we've basically seen deposit inflows of close to $55,000,000,000 We've increased hedge we have increased hedge capacity, but only increased it by $35,000,000,000 and thereby significantly increased the cushion that we have of if you like deposit flows over hedge capacity. And so actually I think we're taking a very prudent and cautious view with respect to the movement or potential movement of current accounts. And as I say that's expressed by the increase in buffer that I've just talked through. So when we look at the hedge, we're typically deploying the hedge by way of background at around the five year part of the curve. That's typically where we go. That's consistent with our asset side and consistent with roughly moving towards a neutral position from the hedge perspective. But I think we are being extremely prudent with respect to the rate at which we deploy the deposits and indeed leaving ourselves a lot of room for even a very, very substantial macro expansion before we need to worry about the hedge side. And Jonathan just to build on what William just said, so you will see we are still below the weighted average life that 100% hedged position would be. And as William just said, we are mostly investing these additional deposits, these current account balances on the five years because of the reasons William explained, but also because we do believe that there is a significant probability the curve will steepen further. While we think from the comments that you are hearing from the different central banks around the world that they will not move short term rates. And therefore, there is a significant probability that the curve might steepen further. And we think that also for that reason, the five years is the right way to invest these additional balances. Okay. That's actually really helpful. Thank you. It's perhaps also worth mentioning, Jonathan, in response to your question. We have around €40,000,000,000 of maturities this year in the hedge. So again, we've taken an incredibly prudent position vis a vis the cushion of the hedge I. Eligible deposits have increased much faster than our hedge capacity number one. Number two, in addition to that we have $40,000,000,000 of maturities in the hedge this year. So it's really quite substantial above that. Indeed. Okay. That's great. Thanks a lot, Matt. Thank you, Jonathan. We will now take our next question from Robin Down from HSBC. Please go ahead. Good morning. I have to confess that Johnson has asked most of the questions I was going to ask in terms of that structural hedge. But so can I just clarify then, are you your £300,000,000 you're assuming then that you deploy the hedge up to its kind of full capacity to be $25,000,000,000 I mean, looked like it took quarter to deploy that sort of amount in the first quarter, but that is what you're assuming there? Just sort of linked on the margin side. I just wonder if you could talk a little bit more about the Commercial Banking side and the sort of optimization that's going on there. I can see it kind of it's added kind of two basis points in the first quarter. Just how much more you've got to go on that front? And if I could be really cheeky, and I appreciate we're only in kind of April 2021, but I think you're signaling the drag on from structural hedge in 2022 is going to be kind of minimal. That's also one of the major negatives in terms of the margin development. Just wondered if you could talk a little bit about how you see margins developing then in 2022 because I think with rising consumer credit balances and assuming we've got further deployment of the structural hedge coming through, is there any reason why we shouldn't be looking for a relatively stable margin picture in 2022 versus 2021? Yes. Thanks, Robin. First of all, in terms of the deployment of the hedge, in our guidance around the $300,000,000 headwind in 2021, we are assuming that we gradually deploy that hedge capacity over the course of the year. So that takes into account, as I say, just normally deployment over the course of the year as opposed to doing it all upfront. Secondly, in terms of the CV optimization question, there's a couple of different things going on there. One is, as you know, we have a business here which is very strong, but we also want to manage it to appropriate return standards. And so as a result, there are clearly going to be some relationships where it's harder for us to earn a sensible return that makes sense from a shareholder point of view than others. And so with respect to those assets those relationships we just seek to manage them in a sensible and appropriate way. And that's really what we mean by optimization. There is also a pattern that is partly responsible for some of the margin developments which is around lower forms of demand particularly in the RCF area. And as you know that was a feature of our 2020 results and margin development. And that contributes a little bit here. And then finally the demand from a commercial point of view is relatively muted. In some cases that's because of the government assistance programs. And so that has some margin substitution effect in terms of what we're seeing within CB. In terms of 2022, I won't go into guidance on the margin per se, but I think you probably have all of the factors that will make a difference during that time. The hedge headwind is as I said neutral during 2022. We don't expect a hedge headwind during that time and that's because of the yield curve developments that we have seen. There'll be other factors at play in the margin in 2022, which include obviously continued mortgage growth on the one hand, also include unsecured expansion I would expect off the back of an improving macro as a further element. Those elements will play out in the context of margin development Robin. So I won't go beyond that, but you probably have the ingredients to get to a conclusion. Sorry. Just to come back on the Commercial Banking side. So some of it was due to the RCS. I guess, hopefully, of at the end of that. How much more optimization do you think there is to go for over the next couple of quarters? I think there is a little. Yeah. I mean, I there is a little. I think it's best seen in the context of the inputs to the margin guidance for the remainder of the year Robin really. And that is to say, as I said earlier on tailwinds we have the removal of what we previously expected as a significant structural hedge drag that seems to be going away following on from the benign yield curve development. We have headwinds from size of the mortgage volumes to a degree also from the return of some activity on Commercial Banking front including things like trade finance balances and so forth. So on a net basis, if you look at the Commercial Banking influence on the margin over the remainder of 2021, it's more actually from expansion than it is actually from contraction. And so that hopefully answers your question. Great. Thank you. We will now take our next question from Alvaro Rouss de Alder from Morgan Stanley. Please go ahead. Good morning. This is Alvaro from Credit Research at Morgan Stanley. Thank you very much for your time. I have a question about your legacy Tier one, the 12% U. S. Dollar bond. As you know, this would be expensive funding after the end of this year. Considering the very high cost of leaving this useless debt outstanding, are you expecting to use the regulatory part coal in early twenty twenty two? Thank you. Thanks. Although I might just refer you to the treasury team to get an answer to that question. I'm not entirely surprised you asked it, but I'll refer you to the treasury team. Thank you very much. Thank you. We will now take our next question from Amin Roker from Barclays. Please go ahead. Good morning, gents. Antonio, just wishing you the best of luck with your new role. Just a of questions. Can I, first of all, ask around mortgages, please? Just interested in anything you can tell us about the Q2 pipeline. I guess, when I look at some of the system level data, it looks like applications were not far off in Q1 versus Q4. I mean, there any reason why we couldn't see a similar mortgage volume print in Q2? And I guess, there anything about your relative risk appetite? Were you taking share in Q1? And if you can kind of give us in terms of color there? And could you update us on your pricing experience currently? So I know we've seen some narrowing in spreads through the course of Q1. It'd be interesting what we should be expecting in terms of completions in Q2. That would be good. Another one on consumer credit, if I could actually. Just around your expectations for the growing balances in the second half of the year. I guess particularly around credit cards, what your experience was on repayment rates and kind of what your assumptions were regarding the rebuild of those balances in the second half of the year, guess, as well as seeing the recovery in spending, I guess, we probably need to see repayment rates not too elevated. It'd good to get your thoughts there. And then just finally on other operating income. I was just interested in if you had any kind of updated views on what to expect from that line through the course of this year given we're kind of one quarter further down the line? Yes. Thanks, Ram. Kicking off on mortgages, first of all, we feel pretty good about volumes in Q2. The market continues to be very solid. We continue to see very attractive volumes at frankly very attractive prices. So I think that we enjoy the benefits in Q2 of both secular and cyclical drivers. It may be that stamp duty turns off in Q3 then the cyclical driver component of that starts to weaken. But we still expect the structural drivers remain in place. So we feel pretty good about mortgage volumes in Q2 and indeed beyond. But as I say, an accentuated growth in Q2 in particular. Pricing. Q1 completions have been around 190,000,000 So that's been very attractive and frankly pretty much in line with our Q4 experience. There has been a little bit of narrowing of prices in the course of the quarter. New business applications are around 175,000,000 to give you some idea. But both the completions in Q1 and the new business applications margin both of those two are at significantly attractive margins versus the roll off that we have seen for the same fixed rate asset. So from a volume and from a pricing point of view, it looks very favorable. Consumer Credit, consumer credit I mentioned earlier on that we're seeing significant expansion in spend. At the moment at least in March that has been driven by debit card. Credit is coming back, but it's coming back at a slower pace than debit. We do expect that to evolve over the course of the next quarter or so, particularly as restrictions come off and bigger ticket items including I mentioned earlier on travel, but not just travel consumer durables likewise come into play that in turn starts to boost credit spend above and beyond where it is today. And so that will help. But I think you're right to raise the question of repayment rates. Repayment rates so far have been a little higher than we've seen them historically. And obviously, the significance of repayments will influence the extent to which credit spend then stays on the balance sheet. At the moment, we do expect our unsecured asset to increase over the course of H2 And we expect roughly speaking credit cards for example to get back more or less to where we started at the beginning of twenty twenty. So it's a kind of a bit of deleveraging in the first half and then a bit of deleveraging during the course of the second half. But I would stress on that two points really Iman. One is our risk appetite in the whole area of consumer credit is very low. We're being very cautious on risk appetite. And so that is driving to an extent our volumes. If we end up getting into a better macro space, our risk appetite adjusts accordingly and that in turn may impact balances. But for now, it's a very cautious set of standards that we're applying. The second point is that even if we see a little bit of delay in unsecured expansion versus what we might have thought by virtue of repayments then I think it's a question of when it comes. It simply gets delayed rather than necessarily put off entirely. Your third question on ROI. The ROI performance in Q1 has been pretty Just before you go on ROI William. About the mortgage volumes and about what's happening on the mortgage markets, I mean, you might recall that we are saying this already since Q3 that we continue and now it's three quarters that we see this continue to see a structural shift in the mortgage markets whereby people are leaving as we all know much longer much more time at home. I do believe we will continue to work at least partially from home for the future and that is a structural change. And therefore, many people that have the capacity to do so have been moving into larger homes outside cities with gardens if possible. So you are seeing as much of very high volumes of mortgages of first time buyers as you are also seeing from home movers. And it's the third quarter in a row that we see those shifts continuing. And so on top of the stamp duty impacts that William mentioned to you, I strongly believe this is a structural shift, which you'll continue to watch as time goes by, because people obviously spending more time at home. They want to invest more in that home and that is going to continue in my opinion. And Arman you asked on OI. OI has been a pretty solid quarter during Q1. That is to say it's consistent with our essentially our run rate lockdown NOI of about $1,100,000,000 I think that is also a pretty straightforward quarter. There's not much to draw your attention to in terms of one off items either way. The $1,135,000,000 therefore I would expect to be completed during the course of Q2 and beyond as a base. And then I think we believe that during 2020 we lost around 300,000,000 to 400,000,000 of effectively lockdown related shortfalls and activity across all of the businesses across retail, web interchange, across commercial, transaction banking, across insurance, via web new business and indeed even to a degree across our equities business. Therefore, we emerge out of lockdown, we would expect that 300 to $400,000,000 to start to return to the business and start to gradually build back in on top of that $1,100,000,000 number that I mentioned. That in turn will be augmented by our investments again over time on a gradual basis and again across all of our business areas. So I think Aman we see $1,100,000,000 as I say as a lockdown base. We think over the course of three quarters in total we lost around 300 to $400,000,000 We would expect that to gradually come back in and gradually be augmented by the benefits of investments across our business those in respect of SR21 and those that are longer term. All of the pace of that, Oman, as won't surprise you is going to be activity dependent. Okay. Thanks. Can I just just a couple of points of clarification there? So I mean that other operating income commentary is really helpful. And I mean it looks like it's pointing to a number that's kind of around probably 4.8%, four point nine % for the full year 2021. And then hopefully, we can kind of grow that in 2022. So please correct me if you think I've interpreted that incorrectly. And I guess just coming back to the consumer credit point. Did you say that you would expect credit cards to end the year in line with 2020? And if so, I mean, that it's down six ish percent in Q1, are we talking about hopefully flat in Q2 and then maybe a kind of 6% growth in H2? I mean, that a kind of run rate that we should be looking for in 2022? Yeah. Just respond to those two points. First of all on ROI, it's going to be activity dependent. So we've got the engines of growth there, which basically are twofold I. Activity returning coming out of lockdown and the benefits of our investments over time both are going to be gradual. Both are going to be activity dependent. So I wouldn't go further than that in giving you much guidance I'm afraid of on. In terms of cards, again, I wouldn't be too precise because it will be very activity dependent. I do think overall when the outlook is broadly speaking for a bit of deleveraging in H1, a bit of deleveraging in H2 more or less getting you back to somewhere where you started. But again that could be faster. If we see a rapid macro and an increase in credit usage, it could be a little slower if the repayments of the big deposit base end up being people's preference over taking credit. If it is a little flatter, as I say, me that's a question of time. That's not a question of the unsecured business not benefiting from that. It's simply a question of a slight delay and such. So again, I wouldn't be too precise, Amam, but hopefully that's helpful. We will now take our next question from Fahed Khunvar from Redburn. Please go ahead. Thanks for the questions and thanks, Antonio, for your help over the last ten years and good luck at Credit Suisse. Had a couple of questions on just a couple of clarification on the hedge actually. The hedge duration increased really markedly in the quarter. Am I right in assuming that links to your earlier comment that essentially you're going you're hedging current accounts and assuming a ten year duration. So the reason that we can expect that duration to continue to increase if you decide to keep on kind of hedging what our current account balance is a longer duration? And the second question I had on the hedges is bit more kind of high level. I mean, think a couple of years ago hedge income was about probably sub 10% of group revenues. It is now sitting at about 15%. If you were to deploy the capacity suggest, it probably goes higher than that. Do you think about a revenue cap on the hedge in the sense that at some point if kind of rates stay low and deposits keep growing, which we've seen in other countries with low rates, the hedge income becomes a bigger and bigger portion of income. How do you think about that dynamic? Or is it just purely mechanical on the linking it to the growth in deposits? And my second question was around your impairment guidance. And if I think about kind of your 25 bps or lower than 25 bps guidance, just taking the high end of that, that's about 40 basis points a quarter thereon. It seems very high. Am I is that potentially linked to the fact that actually commercially defaults you see them as kind of artificially low right now? And do you think actually commercial defaults would increase to normalized levels in the second half of the year? And that's just purely on the fact that not looking at the economic provision releases in your actual on the ground defaults, the commercial business have big write backs. So is that a factor in you thinking that actually impairments get up to higher levels as we go through the year from the charge we had in 1Q? Thank you. Look, I will start with your question in terms of structural question about the structural hedge. And then William can add on the point also on the structural hedge and on your second question. And what I would say Saket is the following. If you look because you were asking about the potential cap of revenues, I mean the way I think we should look at this is the following. We have a policy like most banks have of hedging all interest rate risks in the balance sheet back to three months LIBOR. And let me just say LIBOR because as you know the bank is going to look from LIBOR to the other benchmarks. But the point is as a bank you should provide on both sides of the balance sheet whatever your customers want. So if they deposit current accounts, which have no maturity is one thing. If they deposit with you at six months, whatever they want you should satisfy their needs. In the same way, on the other side of the balance sheet, we provide mortgages which have thirty year maturities or may have lower maturities. So you should do what the customers want on both sides of the balance sheet. But then in order to properly manage the risks of the bank, you should convert everything to for example three months LIBOR in both sides of the balance sheet. Having said that, so what is happening with our structural hedge is not anything financial other than we have to assess what is the average life of the current account balances. We have been gaining market share of current account balances as you and I and we together have been discussing for the last years. We have constantly been gaining market share of current account balances in The U. K. And therefore, what we have to do is to in order to have the balance sheet hedged, we have to estimate what's the behavior life of those balances because they are the only part of our liabilities and equities, which don't have a predetermined duration or maturity. And we believe as we have told you along the way that current accounts should be ten years maturity, which is five years duration and the rating sensitive balance is five, which is 2.5. So the fact that the revenue proportion of the current account balances is increasing, I would say it's a very good thing because it only reflects Farid, the fantastic work that the commercial teams have been doing with our multi brand model where we continue to attract balances which are basically paid zero. So they are convenience and trust balances. And we are just reinvesting those balances at a conservative average maturity as William explained in the previous question. So that there is no reason at all to have a gap. This is our most valuable franchise on the liability side is the current account balances that I repeat represent the trust of our customers in our brands and our convenience balances not price driven balances. So I have two points to that and then answer your question on impairments. The hedging strategy as I mentioned earlier on in my comments on one of the earlier questions has basically been moving from about two years to five years. So if you think about the duration with which we are deploying the hedge that gives you a sense. Previously when the curve was very flat there was essentially no transformation margin. We were investing at relatively short ends in order to ensure that we maintain some degree of optionality should interest rates change. When interest rates did change, there's clearly value at that point in investing slightly longer along the curve and we've typically moved to around five years. It is the case that as we deploy the increased capacity in hedge then that average life that is currently three point four years will increase a little in response to that. It will increase to something that is closer to its neutral position, which is around four point five years, five years or so. So you can expect to see as the deployment of the additional capacity within the hedge rooted as Antonio said and the success of the current account product and the success of the savings product and the success of the commercial deposit gathering exercise, you can expect to see the weighted average maturity of the hedge move out a little. But it won't be more than about the one year eighteen month type indication that I've just given you. And that is on the assumption that we fully deploy the hedge and move to a what we call neutral position. It is worth bearing in mind in all of that Fahad that as I said earlier on, we have increased the hedge cushion the difference between the hedge capacity and eligible deposits from 10,000,000,000 to $30,000,000,000 over the course of the last five quarters number one. And number two, it's worth bearing in mind that there are $44,000,000,000 of maturities still coming on over the course of this year. So that together gives you about 70,000,000,000 pounds of cushion or so either not hedged or alternatively maturities during the course of this year. The impairment question that you had. The impairment language is very deliberately less than 25 basis points Fahad. And I would just ask you to look closely at that language as you think about what it means. As we stand today, that impairment language is off the back of an assumption that our macro holds steady I. E. You look at our macro assumptions. That set of macro assumptions is a slightly more adverse environment versus business as usual if you like. 7% unemployment is not a through the cycle unemployment charge. We still see a bit of HPI deterioration this year even though frankly current performance makes that look increasingly unlikely, but we'll see how it unfolds. But the point being that we are giving you guidance of less than 25 basis points. That is on the assumption that the macro that we have portrayed is indeed what unfolds. If it is a little better than what unfolds then that's why we've chosen the language less than 25 basis points. Enough. I think that's useful to thinking about how we're looking at the AQR That's great. Could I just ask one question on just on the commercial side and just looking at the actual on the ground business restructuring the force redundancies they're all kind of a bankruptcy sorry all at all time lows right now. And I'm assuming that's a big function of the government support mechanisms. How do you see that evolving as the government support mechanisms go out? Does it go back up to normalized levels? Or do you think actually there's something else in the commercial book which is rendering the charges and defaults as low as they are? I think there are two or three things that are going on in the commercial book default. Generally speaking, we're in a benign underlying credit environment across retail and across commercial if I had enough why you've seen us take the $3.23 credit today. That's obviously compounded by the economic outlook and the release that is inspired of that as the second input into that credit. I think when you look at commercial in particular there's two or three things going on. What is that benign outlook without a doubt? And that is benefiting the performance of the commercial book as a whole. Second is particular restructuring cases are performing better than we had expected. And so you're seeing specific write backs in terms of some of the cases that we have on the books. Third, you're also seeing as we discussed earlier on a reduction in balances within the commercial area in certain cases because of our own optimization strategy. And that in turn is also leading to a more benign overall commercial banking outlook. It's worth mentioning that during the course of Q1, we only had one material movement into Stage three in the entire Commercial Banking portfolio. And that gives you an idea as to just how benign Commercial Banking position is right now. We do expect as I mentioned in my comments earlier on that in line with our macro assumptions arrears rates are going to tick up as we go through the course of the year. The withdrawal of the furlough scheme may well be an ingredient to that. But I think the important point as you look at it is that we are already provisioned for that development. That's what IFRS nine provisioning is about. And despite the credit that we've enjoyed today, we remain very well positioned for the macro that we're forecasting. That's very helpful. Thank you both for the detailed answers. Cheers. Thanks, Rob. As you know, this call is scheduled for an hour and we have now gone over the end of the allotted time by sixteen minutes. So this is the last question we have time for this morning. We will now take our last question from Rob Noble from Deutsche Bank. Please go ahead. Good morning, both. Just a couple of questions on capital. How do the Stage one and two write backs, how do they impact capital at the moment given the current level of transitional relief? I think you previously said within the half of the relief on this year, I assume that's a lot lower now given guidance. And then secondly, in the past you've taken pension contributions, the majority of them in H1. How much have you taken? How much is there left to do this year to impact capital? And then lastly, Antonio, good luck with the new job. As you're leaving, is there anything that you think Lloyd's should do that it isn't doing currently that you think could enhance the business going forward? Thanks. Thanks. I'm just going to tell you that there are lots of things that we can continue to do and be better. I personally think that in life you should always try to do better and it is always possible to do better. And as you saw when we launched Strategic Review 2021 in February, there's a very clear plan with milestones, everybody's involved, everybody's committed. And with this single idea, I mean, it's always possible to do better and we should always try to do better. So I look forward to seeing Lloyd's go from strength to strength. Okay. Thank you. Mark, in relation to your first question first two questions actually, one Stage one and two write backs. As you see those write backs, the transitionals associated with those write backs adjust accordingly is the short answer. In terms of what we saw in Q1, as the statements imply, we currently have about 91 basis points of transitionals left in the books. That's around 70 basis points of dynamic around 20 basis points or thereabouts of static. Looking forward, those transitionals will potentially roll off consistent with our macroeconomic assumptions. So, the transitionals as those Stage two migrate to Stage three then the transitionals roll off in that context with obviously no net capital impact given that transition. The dynamic that we've seen in Q1 is interesting because essentially the transitionals that we previously had there in the capital base we had thought on our old macro assumptions would then come out of the capital base as Stage two moves to Stage three. What we've seen in Q1 is that actually the macroeconomics have not turned out the way that we expected. It turned out a little better than we expected. So instead of the transitionals running off into Stage three and coming out of the capital base, they're actually effectively derisked within the capital base because the Stage two is moving back into Stage one. So that transitional element is a derisked component of our capital. Over the course of the remainder of this year, if we see our macroeconomics unfold as we expect them to then we're looking at around one third of that total of 91,000,000 getting moved used up over the course of 2021. But again, I would stress that that is contingent upon the macro unfolding in the way that we expect it to and there's a lot of uncertainties. Finally, Mark on your pension point, we have a Q1 contribution on pensions, is consistent with our previous contribution schedule. Going forward that will adjust to the new contribution schedule. But what it means is that we have provided slightly more than half of the fixed contribution of $800,000,000 in Q1, which obviously means that we front end loaded the pension contributions for the fixed contribution over the total of this year. Lovely. Thanks very much. Thanks, Matt. This concludes today's question and answer session. I would now like to turn the conference back to Mr. Orto Osorio for any additional or closing remarks. Well, I just want to say it's my last investor call here at Lloyd's. It has been a real pleasure to have this interaction with you over ten years. It was really great to share performance with you, listen your points of view, have debate, you having challenge, very helpful to us, you as shareholders and the people you represent. You are the owners of the bank. It was very clear from me and the management team, it was our absolute duty to deliver to all stakeholders, including yourselves and the clients you represent. So I look forward to keeping in touch with you for my next job and wish you all the best. Thank you. This concludes the Lloyds Banking Group twenty twenty one Q1 IMS call. For those of you wishing to review this event, information for the replay is available on the Lloyds Banking Group website. Thank you for participating.