Good morning. I am Perlie Mong, the Lead U.K. and Irish Banks Analyst here at Bank of America. It is my pleasure to welcome Charlie Nunn, CEO of Lloyds Banking Group, on stage with me today. Charlie, thank you very much for coming.
Thanks for having me again.
Charlie, why don't we start with the U.K. backdrop to set the scene? There continues to be some challenges in the U.K. macro backdrop, but households and businesses have been pretty resilient so far. Can you describe what you are seeing, and what gives you confidence in the medium-term outlook? With the budget coming up in the next few weeks, to the extent you can you comment on the new government's agenda and priorities and what they mean for the sector?
Good. First of all, thank you for having me, and it's great to be here with everyone. We were just commenting before I started, this time of year seems to be the moment when we're waiting for a new budget. It's my fifth prime minister in five years, my sixth Chancellor, and my seventh Economic Secretary, so it does feel like a good time of year to have this discussion. Look, the underlying economy, despite those last five years, when I look at the underlying economy and when we look at the kind of 25% share of the whole of the economy that we can see running through Lloyds Banking Group, the story remains incredibly similar. We see households and businesses are very resilient. They've had now three or four years of real wage growth.
Businesses, probably for not such good reasons, have strong or stable cash flows. The not such good reasons is they have slowed down investment, but their resilience is very, very strong. As we have talked about it, our outlook for the economy has been consistent now for a few years, which is what we call a resilient but slower growth economy. There is the potential to move to a higher growth trajectory if you could reestablish confidence and if we had a policy framework that was encouraging investment. At this moment, over the summer, we have seen both investor and business confidence slightly strengthen, and we are seeing very resilient underlying performance and behaviors.
By the way, discretionary spending, big-ticket items, the mortgage market, which I am sure we will talk about, remains very resilient, but our outlook for the economy is a 1%-2% real GDP growth over the next few years. So some recovery, some increase in investment, very resilient, but our baseline isn't for a faster-growing economy. I am sure we will talk about the strategy, but despite that, we still see significant growth opportunities for Lloyds Banking Group.
Great. It is always good to hear a more reassuring take on the U.K. In the meantime, the strategy, you have given us your new strategic plan out to 2030. At the half year, you were guiding to circa 20% RoTE in 2030 without fully marking to market the current rate environment. There are probably other areas where you have maybe applied some conservative assumptions. So if I invite you to lean away from that for a second, what excites you the most about Accelerate 2030? If everything goes right, what can it look like?
Great. Well, if my CFO were here, he would warn me about guiding to different guidance. So I am not going to take that opportunity. First of all, let me tell you what we are excited by. Obviously, the first thing is we have kind of completed our first chapter, which was the first four and a half, five years. The key themes there were de-risking and solving the legacy, getting the group back to growth and winning market share in strategic areas, and materially lifting through cost efficiency and that revenue growth, the capital generation and sustainability of that capital generation for our shareholders. That is really important because it gives us momentum and the capacity to continue to invest as we look forward.
When we look at what we are excited by going forward, the first thing is we have proven that we can grow our market share in the really big businesses despite a very competitive market, but that is an ever-rising bar. We are going to continue to invest and make sure we are the leader in all of the big retail and SME segments, and in the key businesses that we have chosen we want to be in. That is the first and most important objective or big objective of the strategy. The second thing is we have this unique franchise or set of businesses where although we are the leader across most U.K. businesses in commercial and retail banking and in parts of wealth and other businesses we will talk about, what we really focus on is being more joined up, more connected, and having a differentiated proposition.
We have shown a significant growth in specific businesses in the last five years. When we look to the next five years, there is a massive opportunity for us to use our capabilities, the new technologies to join up even better for our customers and drive that deepening of our relationships with our customers. The third thing is we have talked about and we are committed to some new businesses, some new areas where we see strategic potential and future growth. In the last phase, for example, we launched a new rental property business that got to about 10,000 properties, a very significant part of our OOI growth or a material part of it. We see other new businesses, specifically what we call connected commerce, which is using data to join up between our SME customers and our retail customers.
Some of the payments and wallets businesses we are launching, which we think is exciting, digital assets. Then how we can use agentic AI to bring intelligence or advice to all of our SME and retail customers, which we just see as a huge opportunity looking forward. Now, you said conservatism, so I am not going to avoid that. What you will see from us always is we will be ambitious on the things we can control, and we will be realistic, I think, about the things that we cannot control. There are two or three parts to that in the plan. We have talked about in this next phase, mid-single revenue growth for the next four years. That would be a decade of mid-single revenue growth we would have delivered and high single-digit other operating income growth.
We have just come off five years of 8% CAGR on other operating growth. Those two things are ambitious. We have had questions, though, as to why our NII is not higher in that. That is linked to two things really. The first is, we have just assumed that our terminal rate that we think is in our forecast, which is 3.5%, will be the baseline for our reinvestment of the structural hedge. That means it is a weighted reinvestment return of about 3.7%. If you use today's market curves, you would get a much higher number on the structural hedge, about GBP 250 billion worth of deposits being reinvested at that level. The second thing is we have seen elevated competition in deposits and assets, liability pricing in the last period of time.
We have assumed the market remains rational but stays stable, and that those margins remain tight through the back end of this period. I think those two things, if you want to take a different view on those, that could give you more upside in the plan. Then maybe the final thing we cannot control is the pace of adoption of AI, either by our customers or our regulators. We, for example, have committed to a less than 45% cost-income ratio by 2030. If AI gets adopted more quickly, the regulators really support it. We are right at the front of all of the use cases that are being adopted in the U.K., so we will push that faster. We are comfortable we can deliver the guidance, which shows a very significant step up in capital generation and sustainability of it.
There is some upside for those that want to make those assumptions.
Great. Very exciting prospects indeed, and I will come back to AI later. Now that we have talked about the medium term, I am going to bring the conversation to the nearer term and ask you a couple of questions on recent market trends. On mortgages, what are you seeing in terms of demand? Mortgages probably had some pull forward of activities in the first half of the year. What does the front-end application volume look like?
Yeah. The mortgage market has been remarkably resilient. Obviously, most people are still buying two or five-year fixed mortgages, so they have been impacted materially by the shape change in the yield curve or the swap curves, which is the primary basis for pricing. But despite that, we have seen volumes stable year-on-year. Slightly down year-on-year, but really quite resilient in the current context and market. Most bias towards first-time buyers and obviously remortgages. But it has been remarkably stable. In terms of margins, I think William has now guided for 18 months that margins have been about 70 basis points on the mortgage market. It differs by part of the market you are participating in. It came down a bit through the back end of last year, and it has strengthened a bit in the last couple of quarters as we have seen deposit pricing be very competitive.
You typically, as you would obviously expect to see it come out somewhere in the mix between assets and liabilities, and mortgages has been slightly more stable in that context. So it has been a healthy market. Last year, we grew our assets by GBP 22 billion, which is a very significant organic growth because we saw both opportunities on the asset and liability side at margins that make sense. This year, the trading has been tighter margins on both. On mortgages, we have been slightly more selective. I think, again, we have guided towards having slower growth than last year, but still strong growth in our asset businesses. But it has been remarkably resilient.
Well, that is great. Staying on the topic of mortgages, I might take the opportunity to ask about the progress you are making on the direct-to-customer proposition. Your direct application mix is 4% higher than the market. How much higher do you think it can go, and what are the economics there?
Yeah. This is really important for us. As you say, actually, for the whole mortgage market in the U.K., about 85% is broker-led, and that is great for customers that want to shop the market. But of course, it means higher cost for our customers and higher cost for our shareholders in terms of paying a broker to provide that service. It makes it harder and more timely for people to engage with the market. We are about 20% of applications. We are actually about 24% of completions are coming through our own broker channels, our own advisors. That is great because it can be a very, very quick, very turnkey experience for our customers. Because we know the customers, we can offer great deals. For example, premier customers get a 20 basis point discount.
It is one of the ways we have taken our share of kind of mass affluent mortgages from below 10% when I started to north of 22%, by offering value by joining up the relationship with our customers. Of course, we can then also be even simpler for our customers in bringing a broader set of products. So again, we have increased the cross-sell of home insurance and life insurance. Life insurance in this context, I will give you the data, has gone from about 7% cross-sell to north of 20%. So, those things are easier, more joined up, and better value for our customers for our direct channel. But we obviously massively value the broker channel, and we continue to be number one in that channel as well. When you look to the future, how far could it go? Look, we will see.
Again, you cannot predict always how customers and competitors are going to respond. But when we look at the ability to provide really seamless, quick mortgages for customers at a price point that recognizes the value, we see more opportunity to grow that. But I think the broker channel plays an important role and will continue to be important in this next phase. One more thought because I do not want to jump everything to AI. But when you really start to reimagine the future, and of course, we are at the front of all of these businesses, the role of AI in an advice journey around homes and mortgages is going to be fundamental. Then digital assets will start to be used to create tokenized mortgages and totally streamline the mortgage process.
Maybe not in the next few years, but certainly as we enter the next decade, being ready for those two things, I think gives us significant opportunities to grow further.
Thank you. On the other side of the balance sheet, we have mentioned deposit competition a couple of times now. We will actually jump into the topic. Deposit is always competitive in the U.K., but it does feel like it has increased further this year. What do you think is driving that competition, and how are you differentiating your proposition, and how are you balancing pricing discipline and customer relationships?
Great. This is, again, something we have been talking about for probably 18 months. We saw last summer, specifically the pricing in the deposit market harden. Just to reinforce your question, in the ISA and tax season this year, so in Q1, Q2, we saw most of the time deposit market price at - 50 basis points- 80 basis points gross margins. William will have talked about it at the Q1 results. We decided explicitly to slow down our participation in time deposits other than where it was really important from a relationship perspective. But it has been an interesting 12, and I think it will carry on 18 months around the deposit markets. As you say, that is not new for the U.K. I remember the Icelandic banks pre the financial crisis being the primary source of competition in time deposits.
The U.K. has always been an incredibly competitive market at different points in the cycle, and that is no different today. What is causing it, and then what are we doing about it? Let me just answer those two questions. What is causing it is what you would normally expect from a macro perspective, which is the growth in the money supply slowed down. Real wage growth has slightly slowed down. The central bank is reducing the money supply both through quantitative tightening, and they have reduced their liquidity into the market through a program called TFSME. They have pulled back on that, which obviously makes a difference. Then you have a whole series of competitors who can see asset growth but do not have strong, stable liabilities or funding, that are pricing at very aggressive prices.
Aggressive as in below negative net gross margins, not net margins, who are pricing aggressively to try and attract liquidity. Those three dynamics are hitting at a point in the cycle where asset growth is still quite a big opportunity. What are we doing about it? Look, first of all, we are very, very clear on where Lloyds Banking Group adds value and how we build sustainable capital generation. Personal current accounts and business current accounts are obviously the most valuable from a relationship perspective and a shareholder perspective deposits. We have actually grown our market share in both of those businesses in the last few years, which is something we are very proud of because most people would recognize the growth in fintechs, the level of incentive payments that are being made, the growth of building societies paying for business.
Most people would think that the biggest player might be having trouble in that context. Actually, we have grown our market share, and that is really important. As I say, it is important because that is still in this market, the heart of the relationship for customers, where you can then bring broader products and value to them. It is also the most valuable set of deposits for our structural hedge, which as you know is longer dated and we think is positioned better for through cycle returns for our shareholders. When rates are going up, we will be slower to get there, but when rates come down, we will be able to continue to invest for our customers and for our business. So that is the first thing that is important.
The second then is innovating around the product set, especially for the majority of customers around who still are trading liquidity with interest rates. We get very excited and probably most people in this room are shopping the time deposit market, but 80% of people in the country have less than GBP 5,000 of savings, 60% have less than GBP 1,000. So, 1% on GBP 1,000 is GBP 10 a year. I know I can do the maths, but it just is not going to move behavior, right? So really making sure that the liquidity and investment options are competitive for the majority, which is where you have really stable businesses, and the same on the SME side is important. The final thing is actually trading time deposits smartly. We operate at a 98% loan to deposit ratio. We could go further if we wanted to.
We are very, very aware, and I know you have heard me say this before, in any week or month or quarter or even year, we are not going to chase market share as the market leader on either the asset or liability side. Otherwise, you can write quite a lot of business which is negative return for our shareholders. If you just put that in the context of the last 24 months, last year we saw opportunity to capture market share and time deposits and mortgages, and we did that, and we wrote 22 billion of assets. This year, we are not going to do that same level of growth on either the liability side, and I think it will be a slightly slower asset year growth.
But that is the right decision for the franchise and the sustainability of Lloyds Banking Group, and it means we will be ready to compete when the market is in a different place.
That is great. Let us move on to the fee income side of the business then. Growth in OOI has been consistently strong in the last few years, as you say. We continue to expect high single digit CAGR growth from here. Can you help us understand where that growth is coming from? How much of it is selling more products to the existing customers, and how much of it is expanding product set and geographies?
This is hugely exciting for us. We think this is one of the key points of differentiation for Lloyds Banking Group. The context is the U.K. has relatively low other operating income as a percentage of total income, and that is a consequence of the financial crisis and regulation, bluntly, if you think about it. The backdrop for our commitment around this was we knew regulators and the U.K. economy had realized that customer outcomes on the back of punitive sales practices, punitive approaches to fees and growing those other businesses, and then capital regimes who had encouraged the banks to sell all of these businesses had resulted in a bad place, bluntly.
Now, in the last cycle, as you say, we grew these businesses at 8% CAGR. This year, we are already 11% up year- on- year, partly because of the acquisition of Schroders Personal Wealth and the build-out of our wealth business. By the way, that acquisition cost our shareholders nothing. We were really pleased with that deal and gave us good capability. So we are seeing good momentum in those businesses, and as you say, we think we can continue to grow them at that kind of high single digit rate. We have gone from about 30% share of our income that was other operating income to about 34%, 35%. We were going to guide towards a number, but I think it is a hard one to guide towards because it depends on the other side of the revenue stream, NII.
But we are heading towards 40% through this strategic plan. Whether we get there or not or whether we get past it will depend on a whole bunch of things we do not control. I think that is a much healthier place for an organization to be because, through cycle returns and the profitability of these businesses is really important to be able to give that consistency of returns and capital generation. How are we doing it? We are doing it through two themes I think are important. The first is a very diversified set of businesses. From transport finance, through payments businesses, through workplace pensions and life protection, through our rates and FX and corporate institutional businesses, working capital, all the way through to Lloyds Development Capital, which is an equity investment business, and our professional management rental property portfolio that we have grown from 0- 10,000 homes.
It is a very diversified set of businesses, and that is important for the obvious point, but we have lived this in the last five years. In any one quarter, one of those businesses will underperform or outperform. On average, you can start to deliver that kind of sustainable growth level. Even though we are a U.K.-centered organization, we have by far the broadest range of products and most diversified set of products. That is the first thing. Of course, all of the businesses we have connect or join up across the bank. We sell our transport finance business to our retail customers and our SMEs and corporate institutional customers. Our workplace pension customers are sold both ways into our corporate franchise, and then we can target the underlying employees with other propositions and services from our retail bank.
I will not go through every example, but every single one of these businesses benefits from the scale of the franchise. Going forward, the scale and value of data and technology and AI. The second way of thinking about it is there is kind of three quite different types of businesses in there. There are businesses which are a bit more like banking-based businesses, which are more predictable. Transport finance is basically like a lending business with a three and a half to four-year duration asset. The workplace pensions business, we actually book a lot of the value up front as a liability on the balance sheet, the CSM, and then it predictably rolls off. The nice thing about those businesses is they are much more predictable, much more stable.
We then have a set of businesses which are more transactional, but we are focused on growing market share, and we have done that successfully. Whether that is home insurance, life protection, parts of the transport biz business which are not financing businesses, or in fact, our rates and FX and DCM businesses underpinning our corporate and institutional businesses. We are showing we can get market share gains and grow those businesses, and they are therefore really about showing differentiation and growth, which will enable us to grow faster than our market and faster than the economy. The final thing is innovation. We have got some really exciting things, especially in the connected commerce, digital assets, wallets space, which no one else is going to be doing and which we think could give upside.
The range we gave for our 2030 targets was kind of upper single- digit growth or high single- digit growth. If we deliver the innovation and it adds value, we'll be at the top end of that range. If we don't, we'll be more in the middle of that range. That's where we're seeing the growth and the portfolio of businesses. At the heart of it, if you haven't got scale, you don't have the data and the digital assets we have, and you can't join up from a cultural and a technology perspective with the breadth of products, you won't be able to compete with us.
That's great. I'm glad you mentioned innovation because clearly the success in here partly reflects the investment decisions you've made in the last few years, right? You've said in the previous strategy cycle that you have invested GBP 4 billion above your normal run rate. What were those investments in and how do they support the current cycle? Looking forward, how are you assessing investment opportunities from here, especially in relation to AI?
Yeah, I'll try and answer the question and then, Perlie, keep me honest, because it's a hard question to answer in terms of detail. Broadly, the investments we've made historically and in the future have been in kind of three buckets, things which really are around differentiating and driving growth. I know that's a simple statement to make, but when you're winning market share and you're driving increasingly connected and digitally led services, there's investments in those digital services, the data, the frontline colleagues and RMs to drive that growth. So that's one area. The second is around operating efficiency and risk management and capability to be a kind of what I call a better, faster, cheaper organization. As you know, we delivered over GBP 2 billion worth of gross cost savings in the last phase. We've committed to another GBP 2 billion worth of gross cost saves.
There's a whole series of investments in that space. Then there is finally a set of stuff more around dealing with our legacy and ensuring we remain a resilient, well-regulated business. It's harder to put those investments into hard dollars or hard sterling, sorry. Still very U.S.-centered. But they're really important, both for ensuring the resilience and trust in the organization today, but building and future-proofing some of the capabilities for tomorrow. Some of the big investments we did around our data environments, for example, to modernize and port the data into really reusable environments, even before we knew of generative AI. They have been foundational for our ability to then innovate and drive pace on what we're doing going forward. So that's the kind of framework.
We run a very disciplined process, as you would expect, around both ROI and then tracking benefits and returns, and you should expect that from us going forward. We have kind of given you a broader number this time, which is we are spending about GBP 13 billion over the next four years, per year in that investment portfolio. When we look forward, the mix is similar. We are still driving operating efficiencies, improvements in capabilities, and then driving this significant revenue growth that we talked about. As I say, in some cases, it will be frontline colleagues and capability to drive the extra activity at the frontline. Sometimes it will be around new digital services and then acquisition strategies to drive the revenue growth. Sometimes it is much more traditional cost.
We still have opportunities to drive customers to support themselves through digital engagement rather than through our colleagues to optimize our real estate and portfolio, to demise legacy technologies and applications. Those investments are important for the future as well.
Well, I know AI is something that you are very excited about, so I am not going to miss an opportunity to ask you more about it. You have previously said that from your experience, technology tends to reduce margins in banks but allow you to scale to the extent that that increase in volumes more than offset the fall in margins. So where do you think we are in that cycle, and are there products or areas that you are actively building scale to prepare for that eventuality?
Yes, it is such an important question. I do not know if everyone. We have all been looking at the financial services markets for a long time. Look, I started by electronifying trading floors in the early 1990s. For those that went through that, many of us will have gone through that. You saw massive reduction in costs, massive improvements in efficiency, phenomenal volume growth. We ended up deploying low-latency trading by the end of the 1990s and massive reductions in costs for both institutional and retail investors. My favorite one is at the start of the 1990s, it would cost about GBP 200 to call a stockbroker to buy an equity. By the end of the 1990s, Ameritrade launched their first $5 trade. I was on the West Coast building that with Ameritrade. So that is our history. That is what financial services does.
At the same time, if you create differentiation and growth, that's sustainable. When you just take out cost, typically, you should expect over a period of time, the efficiency will be competed away, but the differentiation in growth and scaling you can get can be sustainable. That's been my experience, whether it's in retail, corporate, SME, or institutional activity. When we look at the AI opportunity in front of us, we have got a mixed portfolio, and I'll be simplistic, between efficiency, better, faster, cheaper stuff, which is going to be a hygiene factor and important, and we are right at the front end of that in this market, but also differentiating for customers and trying to drive growth. We think you need a portfolio of both things if you're going to really be positioned for the future.
What's so exciting about agentic AI, more than just generative AI, is it's a technology that's going to enable us to do things we've wanted to do for 30 years. You can really make it happen in a controlled way if you do it in a controlled way in this next period of time. Let me give you some examples. I'll talk about two, just to be quick on both sides.
We've launched something called an Invest AI agent, which is allowing our customers to have a conversation with an agent about what is risk, what is compounding, how should I think about my risk appetite, what are investment options, what would a financial plan look like for me today, later in my life, how do I think about goals, the stuff that we all in this room understand, but the vast majority of retail customers and even SMEs in the U.K. don't have an intuitive understanding of. Under the new regulatory regime in the U.K., we're in a sandbox working with the regulator. In the next month or so, we're moving that to what they call targeted support that can get them through to an understanding of what they might want to do.
By next April, if we can get the regulator comfortable with the outcomes, we'll move into actual product recommendations. That'll be the first time the U.K.'s ever had mass market intelligence around investments available to retail customers. So really differentiating, really exciting if you've got the kind of franchise we've got with 28 million people, 22 million of which are logging on 7 billion times a year with a pensions platform, a self-directed platform, and great simple investment products. We still have people they can talk to if they get nervous, which you need to have that combination of things. So that's one example. You can multiply that by a big factor across all of our businesses, and across the different activity we're doing.
But we've come up with this phrase for our vision for customers' experience, whether they're a sophisticated corporate or individual, which is to be simpler, smarter, more connected. If you use those words and you use them and look at way financial services delivers today, we're nowhere near being actually simple, smart, you can say, for intelligence AI, and then connected is properly connected across products, services today, tomorrow, the breadth of products we have across financial services. So that's an example on the kind of differentiation side. I could wax lyrical on this for the next two hours. On the efficiency side, look, it's what everyone looks at. What I think is really important on the efficiency side and what we've already learned in the first two, three years of this is the vast majority of use cases aren't that complex.
They do require a use of generative AI. They typically don't require frontier models. If you build to use frontier models, the economics won't work. But I'll give you an example. We have 2,000 people helping customers who have a declined fraud card, a debit card on a fraud activity on the telephones. That's a kind of 12-step process. Very quickly, we identified 50% of the time was taken up by four steps, and we could build an agent that was better at predicting what the customer's issue was and whether or not it was a fraud, and they could do it in less than a few seconds as opposed to five minutes. So the customer got the resolution quicker, there was a significant efficiency opportunity, and the risk management is better.
We built that, deployed it, created iterated learning, and we know we can get, if the regulator gets comfortable with those outcomes and we can prove it, we could do all 12 steps. But we have hundreds of journeys across the bank which are going to create that kind of better for customer experience, more efficiency for the bank, and actually better risk management. You need to deploy that with highly qualified engineers, great product managers, and a culture that empowers that level of change. That's what we're doing. So I'm really excited about the next five years.
I think we're all as excited as you are. I'll take the opportunity to open the floor up for questions. Please raise your hand if you have any questions for Charlie. Not immediately, so I'll take the opportunity to ask you more. I think William said last week that any discussion on U.K. macro and taxes, et cetera, should be taken together with what's happening on the regulatory side of things. The Treasury has proposed reforms to ring-fencing to create a more agile and proportionate regime, and the New Growth Allowance could enable banks to provide up to GBP 80 billion of additional lending. I know this is something that Lloyds Banking Group has been supportive of. So how do you expect the benefits of those proposals to come through?
Yeah, look, it's a really good question. I think if I take a step back, it's a kind of obviously complex moment because we have a new administration for this government. I have obviously had a chance to meet the Chancellor a few times in the last few weeks, but we actually don't know what choices they're going to make on a whole series of areas, including on ring-fencing. What he has said, both privately and publicly, is they recognize that growth is the most important thing to get going in this economy, which is important. They recognize that businesses, including financial services, will be the core to enabling that growth, and that for businesses to drive growth, they need to be more profitable. That's quotes from our Chancellor and the Treasury in that context.
He said on top of that, he's going to keep the existing regulatory reform process, what's currently going through Parliament, called the Financial Services and Markets Bill, and critically some of the FOS reforms, which historically have been the most difficult political reforms to push through around Consumer Duty. He's going to keep those going forward at pace, and certainly that's what we've seen. So really interesting set of positions. Very consistent with the last administration, and for that matter, because I've got the history, the last governments as well, whether they were Conservative or Labour. Because at the heart of it, that conundrum around to really build a more equitable and successful U.K. society, we need growth, and the government doesn't have the finances, however it organizes its fiscal policy, to drive that growth without the private sector.
There's a good recognition now that financial services is at the heart of all of those choices. So I think that's a very positive backdrop for us. Let's see what specific choices come in the next few weeks. On ring-fencing reform, which was your specific question, yes, they have created this proposal to allow 10% of the assets within the ring-fence to be enabled to enable new growth. That would be important for us, and so we are very supportive of it. There's some other operating changes within ring-fencing that we think would make sense as well. We have the FPC review of capital going on at the moment, which is independent of both the Treasury and the Bank of England, but it does have representatives of both on the FPC.
So far, their proposals haven't reduced the level of capital to support real economic growth, but there are some proposals on the table for that, and so we'll need to see how that comes out. For example, for those that do want to go into the details of our capital stack, the domestic O-SII buffer, which we think materially overlaps with other buffers. If that were offset or reduced, it would make it lower cost of equity and therefore more available funding to the real economy in the U.K., and obviously that's our job. We support real customers, whether they're corporates, institutions, SMEs, or individuals, to borrow and to invest in the economy. So that's still to go out in front of us. I probably, because you're going to go there, is have I had any discussion around bank taxes or reserve remuneration?
Look, the answer is at this stage, no proactive outreach. As said, I have been with the Chancellor three times in the last few weeks. He has not raised it. That does not mean they are not going to consider it because it is always on the list. As you know, just tactically about three weeks before the budget is when they finalize what they are going to do. But I think importantly for us, I know William shared this, for every 1% increase in a bank surcharge, if that were to happen, and I do not think it is guaranteed. Let us be clear. I do not think it is clear that that is the path they are going to go down given everything I just said. But for every 1%, it would be about GBP 75 million of profit.
If that were a 2%-3% increase, GBP 150 million-GBP 200 million, 50 basis points on our RoTE, none of that would change my guidance, and I do not think it would change the investments and the strategy we have got in place. If they did a reserve remuneration change that looked a bit like the Swiss model, it would be a similar impact. So these things, they will be driven by the politics. We are very clear that we do not think that would be the best thing for supporting the real economy. But look, our focus is on delivering our strategy, our shareholder proposition through cycle, and building this stronger, more sustainable bank.
Sounds great. I will just check for last-minute questions. I think there is some towards the back.
Thank you. Maybe just to round out on the macro, we have had a significant move up in the rate environment. How is that filtering through the customer base? Are you seeing any sort of attenuation of CapEx, as I think you sort of almost pointed to it a bit earlier, and then on the mortgage side?
Yeah. Thank you for that. Look, at this stage, we are still guiding from our expectations is that rates will be stable through this year and the terminal rate will be 3.5%. Obviously, the market has been a very different place all year. We are having a discussion at the moment as to whether that is our forecast when we get to Q3. I still think that is not a bad starting point for now. As you say, specifically on mortgage customers and those looking at five-year mortgages, they have seen an increase in the cost of their mortgages. They were trading at. Sorry, they were being priced at around 4.5%, 4.75% at the end of last year. They are now up about 5.5%, and some are going up to 5.9%. We are seeing no deterioration in any of our portfolios.
As you know, all of the mortgage customers have been stress-tested to 7% - 9%, depending which cohort they were over the last few years. We are not seeing any change in behavior. Yes, of course, I think the latest data I saw is depending on if it is two-year, five-year, interestingly, some of the two years are not getting an increase. For those people stepping up, I think on average it is about a GBP 200 a month increase, which is material. We are seeing for those customers, they have the capacity to do that, and it is not materially changing their spending capacity either.
It is obviously a very important change for those customers, but it is not driving any concerns that we have at this stage around risk on the portfolio and we are seeing exactly the same on our cards, loans, and SME portfolios, which look both based on the current backward-looking data and our forward-looking early indicators, incredibly resilient and strong relative to history. If the follow-up around that is when do we get nervous, I suppose we got to that question in 2022, 2023 when we got up to 5.25%. Even then we were stress testing. Broadly, my view is you would have to get towards 7%- 8% interest rates to see a material impact on customers struggling to make ends meet, partly because they have been originated now for 12, 15 years with that as their stress test case.
Of course, the big driver in the U.K. of a more level playing field around challenges on the portfolio will be unemployment, which is still really quite resilient.
That's great. We're almost out of time now, so I'll draw the session to a close. Thank you very much, Charlie, for joining us today.