Good morning, everyone. For those of you who do not know me, my name is Jason Napier. I run equity research for financials for UBS in Europe. Welcome to day two of the UBS European Conference. I trust that you had a good day yesterday, and we are greatly looking forward to the conversations we will have today. Beginning with William Chalmers, the CFO of Lloyds. William, thank you for joining us once again.
Pleasure. Thank you for inviting me, Jason.
It is great to have you here. It feels like the U.K. banks are amongst the most hotly debated, almost of all the banks we cover in Europe.
It will not come as a surprise that we will probably start by talking about top-line momentum.
Sure
competition, and so on. Before we get into the more precise questions, would you mind talking a little bit about how you characterize kind of current trading from a spread and a volume perspective in your core markets?
Sure. Yeah, happy to. Well, maybe the first point to make there, Jason, is that for us at least, we are very focused on total income.
That is to say, net interest income is clearly part of it. I will come back to that in just a second. But so is other operating income, as you know. We have been seeking to diversify and build a broad set of diversified businesses for some time now. With that point having been made, how do we see current trading? We put forward some numbers at our Q3 results recently, which showed net interest income up 10% year to date, which likewise showed other operating income up 10% year to date.
Right.
It is actually pretty decent year-to-date trading. As we go into the fourth quarter, Jason, I see that pattern more or less as continuing. We gave some kind of color and context about that, again, at the Q3 results. Net interest income, we expect to deliver modestly above GBP 14.9 billion over the course of the year. Again, very much in line with guidance, i.e., greater than GBP 14.9 billion, but we just wanted to, I guess, make the point on top of that, modestly above GBP 14.9 billion.
Right.
Other operating income, very similar. That is to say, high single digits growth in other operating income, pretty much in line with what we delivered at Q3. That is composed of a broad set of earnings on an organic basis, then the addition of Lloyds Wealth, which we bought, as you know, at the tail end of last year. Current trading overall, pretty resolute, good, is the way I'd describe it, Jason. Consistent with the guidance that we've given, indeed consistent with meeting our full-year objectives.
Mm. When we think about sort of the margin outlook, which is obviously the topic du jour, when you think about last quarter, NIM was up 3 basis points. I think you've made the point in the post-Q3 CFO call that product spread compression next year should be less of a feature than it is
Yeah
this year. If we could just start with why that's the case, then we can look at perhaps the other factors that will drive trading into next year.
Sure. Yeah, I'm happy to elaborate. I mean, first of all, on net interest income, pretty good performance actually year to date, as mentioned, 10% up year to date, it's GBP 11.1 billion. We're going to meet our guidance for the full year, greater than GBP 14.9 billion. Again, we said modestly so. When we look at 2027, Jason, I guess I'd make a couple of points really. One is 2027 NII, we expect to be healthy growth, we expect that to be very much consistent with the financial framework that we laid out in July, alongside our Accelerate 2030 strategic ambitions. Now, what's going on there? I think, effectively, when we look at the composition of 2027 net interest income, three main components. Net interest margin, number one, volumes, number two, non-banking net interest income, number three.
The traditional kind of three components that always add into or build into net interest income. Within that, what are we seeing? Net interest margin, strong structural hedge tailwind. As we've seen this year, albeit about GBP 1 billion growth next year versus GBP 1.5 billion this year. So, strong structural hedge tailwind. As you say, Jason, we expect continued, pretty competitive actually, product, well, let's say asset and liability markets.
What do we mean within that? On the asset side, overall, I expect to see, or we expect to see, continued product margin competition, if you like. That will be a combination of annualization of much of what we've seen in 2026, plus also, as we new lend, or rather lend into new markets and likewise rotate the balance sheet, it will continue to be competitive.
Sure.
On the deposit side, we have pointed out all year already, it is a pretty competitive market on the deposit side, both for structural reasons and also for cyclical reasons. What I mean by that, structural reasons, we are talking about things like withdrawal of TFSME, we are talking about things like QT, we are talking about the fact that there are a number of non-lending entities taking deposits out of the market.
Sure
Which in turn has meant that the flow of new deposits into the market is relatively more modest than we might have expected at the beginning of the year. On top of that, things like rising energy costs, increasing mortgage rates, high interest rates generally, is making things a little tighter from a cyclical perspective. So, slightly more attenuated deposit flows. Those deposit flows that have arisen typically going into fixed-term deposits.
Yeah.
The product margin environment I would describe like that. We do see it as a pattern of continued competition in 2027, albeit going into abeyance in perhaps the years thereafter. Volumes, Jason, our call is that volumes next year are going to be pretty similar to what we've seen over the course of this year. I've made the point a couple of times that if we see high interest rates continue to play out, then inevitably, at some point, they are likely to take or may take or may have a bit of an impact upon markets. Mortgage's market is a good example of that. Non-banking net interest income, that'll grow modestly, is our expectation over the course of next year. That is a charge that is associated with the strong other operating income growth that we have.
It's a kind of, I suppose, it's a necessary cost of all the goodness that we deliver through other operating income. What does that mean for net interest income? Over the course of next year, as I've said many times, and very consistent with what we said in July,
Right
we expect net interest income next year to be healthy. We also, to be clear, expect it to grow at a pace that is slower than what we have seen in 2026. I've said that, what does that mean? It means that it isn't going to be the high single digits that we've seen in 2026. In a very literal sense, what does that mean? It's likely to be, therefore, somewhere in the mid-single digits range, kind of one follows the other.
That's the way I characterize it, Jason.
Yeah. Thank you. That is really helpful and very clearly put. I guess from a directional perspective, it is our view that almost all of the factors that you rank as cyclical, other than energy,
Yeah
are structural. The emergence of neobanks, which are largely asset-light, they have got good operating footprints, no branch networks, no back book to defend. They are going to keep taking liquidity out of the system. Central bank will continue to withdraw. In the current rate environment, some kind of shift to term looks like a sustainable thing. But I guess what is sometimes missing is how important each of these things might actually be.
Your term migration in Q3 was GBP 1.5 billion-
Yeah
on a 300 billion deposit base.
Yeah.
I guess, so what the market's struggling with is just how difficult the things we spend so much time talking about are for the business model. I think the clarity around NII is helpful. In an uncertain world, however, how big are the tails around that, seen from your perspective?
I think pretty manageable would be the way I'd describe it, Jason. I mean, to be very clear, much more has stayed the same than has changed, and I expect that to continue to be the case. This is a story of continuity. If I think back to our commentary over the course of the summer with the financial framework that we gave off the back of the Accelerate 2030 plans that we discussed—
pretty much everything is playing out more or less as we anticipated.
Right.
That is to say, we called out ongoing competition over the course of the year. We were very early to call out the deposit trend. Asset competition, asset pricing competition in the context of banking, it's just business as usual. That's just what happens. So I see it really as a picture of continuity, and to a large extent, really, consistency with what we've been discussing all year. So nothing there terribly much troubles me. I think, therefore, as we look into 2027, it's the patterns that we've established over the course of 2026, as said, tempered in the way that I've just described.
You described there one or two kind of phenomenon. The arrival of the neobanks, those liability-heavy models, asset-light models, they are not new. They are just kind of carrying on from what they are.
Yeah.
The fact that rates are a little higher for a little longer, it probably gives a little bit more competition at the margin on the deposit side than previously might have been the case, because rates are a little bit higher for a little bit longer.
That is life. We are fortunate that we have a very diversified customer proposition.
Yeah.
That goes for the asset side, and therefore, you would expect to see us compensate, to a meaningful extent at least, on the asset side by picking our spots in assets for those more attractive, higher-margin sectors, exactly what we do. You look at our lending balances over the course of this year, maybe we will talk about it more, but you look at our lending balances over the course of the year, very deliberately focused upon the shareholder value-added parts of the balance sheet. Likewise, a very diversified strategy across not just, as I said earlier on, the lending and the deposit-gathering businesses, but also the fee businesses, so the insurance business, the commercial banking business, the Lloyds Equity Investments businesses, Lloyds Living, Lloyds Development Capital, those types of things. It is a pretty diversified strategy.
Yeah.
You mentioned, one final point if I could, Jason.
You talked there about deposit migration. Little bit of deposit migration, again, pretty BAU. But overall, in the scheme of things, we've got about half a trillion of deposits, just over half a trillion deposits, GBP 503 billion, I think it is. Within that, if we see deposit migration within the retail book of GBP 1 billion-GBP 1.5 billion on a quarterly basis, it's not going to make a huge amount of difference. It's a fact of life, and we just need to deal with it.
Right. Let's talk about participation choices, seeing as you brought it up.
Yeah.
Q3, from a volume growth perspective, was another one of those quarters where smaller books delivered far more of the growth-
Yeah
than their share of stock, credit cards, European retail, motor, again. In the broader envelope of the 2030 plan, does the shape of Lloyds change much? Do we have to worry about, post-HBOS, there was a really prolonged period of margin defense that saw a lot of market share losses. Is that the sort of thing we ought to worry about as a market, do you think?
I think the shape of the business is an interesting one. I think we have a pretty diversified overall strategy, Jason. We have the intention to do two things, really. One is to sustainably manage shareholder value and maintain market leadership. The second is to, on occasion, tactically manage value and volume, depending upon how the markets play out.
Right.
That is one of the attributes that market leadership gives you. It gives you the ability to afford to play the markets in the way that a shareholder value added on an ongoing basis at any given moment in time and over the course of the cycle. A good illustration of that, Jason, to your point, is if you look at our year-to-date performance, you will see some businesses on the asset side that we have grown pretty fast-
Right
because we see the opportunity there, and there is lots of opportunity to build shareholder value added on a long-term basis. We have grown some businesses on a slightly more tempered basis, but maintained our market position. The best example of that is mortgages. We have grown mortgages about 1% year to date, about GBP 4 billion or so when you add back in securitizations.
Now, that has been consistent with us maintaining a market share of roughly 17.6% in terms of completions in the new business areas, market leadership. We are able to play it tactically and maintain the market leadership position, and that indeed is our ambition. Alongside of that, we have grown some of the consumer finance businesses, whether it is transport, whether it is cards, whether it is loans, depends upon which one you look at, 6%-7% over the course of that period, year to date, that is. And that is in turn because they are very attractive markets for us to play in, and we have meaningful competitive strengths to exploit, for want of a better word.
That is on the asset side. On the liability side, same thing. On the liability side, we have seen a very competitive fixed-term market, and we have chosen on occasion to step back from that. And that is because on occasion, it has actually been not just thin margin, but sometimes negative margin in parts of the ISA season, for example. And with the half trillion deposit base that I mentioned earlier on, we do not need to go in there if at any given moment we do not see it as being so attractive. But what we do do is play with strength in the markets that really matter to us. PCA market shares, for example, PCA balances, I should say, have grown during the year. PCA is up GBP 1 billion over the course of the year. Balances market share growing during the course of the year.
On the liability side, again, a good example of where we will manage for long-term shareholder value, but also manage the individual markets that we participate in at any given moment in time in a way that is consistent with our shareholder value-added objectives. And it is that balance, Jason, that we would seek to play over the course of time. Again, market leadership, for sure, that is absolutely a strategic imperative. But also, we are considered in terms of how we play different markets at different times. One further point I would make is, as you know, a very deliberate part of the strategy is to have an approach which is not just single product. It is an important point. It is not just about a single product relationship.
It is about a customer depth of relationship, which in turn allows us to augment the benefits, if you like, of interacting with any given customer on any given product. What do I mean by that? I mean, in the mortgage context, for example, we have got about, I have mentioned it before, 20% share of protection alongside mortgage product. Now, actually, if you look at certain segments of the market, first-time buyers, that share is more like 42% protection product against first-time buyers who take out mortgage. That is a very deliberate strategy to make sure that we are building the depth of the customer relationship in the interest of the customer, for sure, but also in the interest of us having a rounded and more beneficial relationship with that customer from a financial value-added point of view.
Right.
That's one example. Another example is the build-out of things that we call ecosystems. Homes ecosystem, for example, transport ecosystems. These are trying to address the customer in a much more holistic way, which of course benefits the customer. Anytime they buy a house, they think about home insurance. Anytime they buy a car, they think about car insurance. Not that we underwrite car insurance, but we do offer it underwritten by other people. It allows us to have a much more kind of fully-fledged, holistic customer relationship, which benefits the group much more than, if you like, a very single product narrow approach.
Right. We've addressed the sort of participation choices, and you've got the platform to be dynamic in that, in terms of tempo repricing?
In terms of, I see. You mean-
On the asset side in particular. Yes, when the market isn't priced where you'd like it, how dynamic is the firm able to be in reacting to sort of changing prices?
I think pretty dynamic. I mean, a lot of the platform modernization simplification efforts
Yes
we are making right now in terms of introducing new systems into the bank are helping us in that respect.
Right.
I would say, the responsiveness of the business in the seven years that I have been in terms of product introduction, number one, in terms of product agility, i.e., changes to product, number two, in terms of repricing, number three, all of these things have been absolutely revolutionized since I have been in.
Right.
You can cite certain examples of that. Lloyds Premier, for example, is a product that we managed to introduce in probably half the time versus what we would have introduced it just a few years back, off the back of the platforms, the operating platforms that we have introduced. Likewise, we are introducing a platform off the back of a system called Thought Machine, which some of you may be familiar with, in the personal loan space shortly. Same thing. The agility that that gives us to modify the product, to modify the pricing, to evolve the product is just far greater than we have seen before. That type of systems or enabler background that is going on in the background to the front-end customer propositions is key to us achieving our revenue and also cost savings objectives.
Yeah. I mean, the bank had a great reputation for pricing agility even before you joined.
Yeah.
The capabilities of reacting to a dynamic market are obviously important strategically.
Yeah.
On the volume side, you are not the only bank to say that higher rates might cause a slowdown in demand for credit. Others are of the view that the 40% of GDP decline in private sector leverage
post GFC means we are going to power through this.
I guess there is a chance that the volume growth we see now is based on credit applications before
things got as choppy as they are. Where do you stand on that?
I guess, I mean, there's almost two questions there, Jason. One is about volume growth and credit demand, and the other is about, implicitly, I guess, about asset quality and how the book's faring. I think we feel very comfortable really on both fronts, which is to say, I've called out a couple of times, and as you say, it sounds like others likewise, you can't have a pattern of rates that is just edging higher. They're not outrageously high. I was talking to somebody the other day who was comparing this period to much earlier periods, where rates were much higher.
But nonetheless, they're probably a touch higher than we expected them to be. We expected rates to be coming down at this stage. They're not. They're staying pretty stubbornly where they are. At some point, that probably slows down a bit of credit demand at the edge. I cited mortgages as an example of that earlier on. I think it's probably not a bad example. But having said that, we've grown lending so far year to date by about GBP 18 billion, if you add back in securitizations. That's pretty healthy lending growth, actually, year to date, about 3% or so year-to-date lending growth.
Our projection over the course of next year is really very similar to this. Even though rates are where they are, we are seeing pretty robust credit demand, actually.
Right.
Actually, to extend the point into asset quality, we are very comfortable with the asset quality right now. We will deliver in line with guidance, circa 25 basis points over the course of this year.
Without a doubt, as you know, we were bang on that number at GBP 930 million charge, i.e., an asset quality ratio of precisely 25 basis points, without any tailwind from MES adjustments or otherwise. That is basically an underlying charge.
Very consistent with our guidance. When we look at things like new-to-arrears, when we look at our so-called early warning indicators, they are low, and they are very stable in every case. There is really nothing there that is troubling us. Why do I think that is? I think it is because, as you said, Jason, household and corporate balance sheets are actually pretty strong. They are pretty unlevered. There is a lot of resilience there. I think added to that, we have a pretty resilient customer base. I have cited some of these numbers before, but our average mortgage customer is in excess of GBP 85,000 from an income perspective. Our CIB book is over 80% investment grade. Then on top of that, we have not just, I suppose, got a resilient customer base, but also pretty prudently lent to them.
And we've implied, or rather used, or stressed against interest rates, which are markedly higher than what we're seeing today. So, things are playing out on that front really pretty much according to plan. No surprises, and I wouldn't expect to see any, Jason, going forward.
Thank you. And one of the themes that I guess I keep revisiting in the sort of questions is the extent to which there are tails around the plan.
Yeah.
Because my sense is that the tails are far narrower than the market might imagine, but you're the expert in this area. The RoTE improvement over the plan is pretty linear.
Yeah.
On our numbers, it implies mid-teen EPS CAGR with a decent yield on top of that. Confidence in delivering on the plan, given where we stand today, is-
Is high-
is where?
Yeah, I think it's very high, Jason. I mean, we laid out in July, well, I suppose we did two things in July. One is we reconfirmed 2026 guidance, and then the second is that we laid out Accelerate 2030 and put in place a financial framework alongside of that.
That financial framework gave commitments as to income growth, gave commitments as to cost-income ratio reductions to sub 45%, gave commitments as to RoTE at circa 20% by the end of the plan, and gave commitments as to capital generation in excess of 225 basis points. So, those financial framework commitments were of just that, a framework within which we'll give precise financial guidance at the beginning of every year.
Sure.
Our confidence level in July and our confidence level today is exactly the same, i.e., very confident, very comfortable in meeting that financial framework. I should perhaps address this point first, meeting indeed the 2026 financial guidance. Those two come hand in hand. At Q3, we reconfirmed the commitment and expectation that we will meet 2026 financial guidance. We reconfirmed that we will meet the commitments within that financial framework, and it's a very high level of confidence, Jason, and it hasn't changed.
Well, you've certainly got a very well-established track record of meeting guidance.
Yeah
On an in-year and a multi-year view. Within that sort of expansion of RoTE, I mean, the sell side sometimes comes in for a bit of flak because every time we drag a column to the right to add another year, RoTE goes up 50 basis points and revenues grow faster than costs, but it does look like that's the plan. How constrained is the bank in terms of pace of investment? One of the things that's going on in a lot of slides, yours included, is gargantuan gross cost saves, substantial investment, expenses that grow slower than sort of revenues.
Right.
Are you investing enough in the business? How do people on the outside know the quality of that balance between?
Yeah
gross and net?
Yeah. No, that is a good question. I might actually, one of your questions just before you got to that point, Jason, was around the tails and resilience in the context of those tails.
Right.
Let me address that first and then come back to
Please
your point about investment. The bank, the group, has a pretty disciplined capital allocation approach. That disciplined capital allocation approach is obviously about top-line returns and margins, and I kind of addressed that in the earlier comments that I was making.
That disciplined capital approach is also about risk. What I mean by that is, and you can tell this by my earlier comments as to prudent lending and the type of customers that we lend to and the stress rates that we apply and all the rest of it, that disciplined capital approach is also about making sure those tails are not widely distributed.
Right.
It goes hand in hand with the same disciplined capital approach that applies to the margin considerations and where we invest RWAs as it does to the risk allocation. Overall, that means that we are not immune to the cycle, but it does mean that we have a pretty resilient business model that is able to cope with most variants, if you like, that we might see in the macro. We're forecasting a relatively stable, slow, to be clear, but nonetheless relatively stable macro environment. We will perform very much consistent with our financial framework in that context. But at the same time, hopefully, as you can tell from my comments, the business is pretty resilient, and therefore, if you're getting variance around the edges of our macro forecasts, I don't expect us to jump up and say, "Actually, all of our targets have changed.
Right.
That is not going to happen. That isn't the case. That isn't the expectation. I just wanted to make the point because you raised the tails point a couple times, and as we look at the world, that's the way we look at it.
Right. Okay.
Your question about investment, Jason, is a good one. In short, in answer to the question, are we investing enough to ensure the future sustainability and prosperity of the business, and indeed capital generation returns to shareholders? Unequivocally, yes.
As an illustration of that, and to elaborate around it, the investment plan, I think as many people in this room will know, is around GBP 13 billion of investment over the course of Accelerate 2030. That's quite a lot of money. It allows us to ramp up investments materially next year as we begin the next stage of the strategic cycle. But to your point, Jason, is it responsive? I mean, that is the base case plan as we have played it out. We have 2027 investment allocations very substantially made now.
Done, right.
We have pretty thorough plans actually for the years thereafter. I expect us to stick to that GBP 13 billion number that I mentioned. But actually, if you look back at the last plan that we laid out in 2022, we expected there when we started out to have about GBP 4 billion incremental investment in pursuit of our strategic objectives above and beyond BAU. Actually, we saw the opportunity set expand during the course of that plan, and so we plugged in not GBP 4 billion, but actually GBP 5 billion, or close to GBP 5 billion of investment over the course of that plan, because we saw the opportunity set expand, and also because we felt that we could do so without compromising any of the commitments that we had made, without compromising any of the guidance that we had done.
Therefore, why not take advantage of the opportunity that we saw? The investment portfolio therefore became somewhat responsive to the opportunity set that we had seen, provided, and this is an important point, provided that it was within the commitments that we had given to the market. So yes, we are making meaningful investment. Yes, we will be responsive to the opportunity, but equally, we will do so within the envelope of commitments that we have made to the market, and that much will not change. A couple of provisos to make, though. One is, we are not going to, again, we are not going to make that investment without making sure that we can simultaneously meet the financial framework commitments that we have given.
Secondly, any given investment, and indeed the supplies portfolio as a whole, is going to have very strong, A, business cases, B, ongoing monitoring of whether or not the investment is meeting those business cases, and C, if they are not, then reprioritization within the overall investment portfolio. That is a philosophy that informed the last cycle, and it will be just as strong, if not stronger, in the context of this cycle. Obviously, that is important to us.
Yeah.
Then a second, maybe a couple other points that are important to make, Jason. One is, added investment is what creates capacity. That is to say, as we build investment within the business, then in turn it creates more savings as those investments mature, because many of them are in, after all, simplification and modernization agendas, for example, or other cost savings initiatives. That is all helpful, and you get somewhat, therefore, of a positive feedback loop between investments and investment capacity. The final point, Jason, which is, again, important to us internally and maybe interesting, is change saves, what we term change saves. What I mean by that is productivity of investment. Quite a lot of the investments that we are making are driving through what we describe as change saves internally.
Which in turn is effectively saying, for every given GBP of investment that you spend, you are getting more bang for that buck. If you think about our GBP 2 billion of, actually now in excess of GBP 2 billion of gross cost saves from this cycle that we are finishing up now.
Around GBP 500 million of that was what we describe as change efficiencies, which means the change process itself getting more efficient, meaning in turn that you get more benefit for every pound of investment that you spend. I think all of those points are important.
Yeah. I guess concluding on that area of inquiry, most of the banks in the U.K. are advertising spend a pound, save a pound type returns on these sorts of actions.
Yeah.
Which in the abstract, it is impossible to argue that you should not do that. It is the most profitable thing one could do outside of core banking. But equally, we pay dividends and do buybacks out of the net sort of thing. What are investors to do with the stock of spend a pound, save a pound opportunities in the bank? When do we get to the other side where all that is left is the spend a pound, save a pound sort of outcome, if you like? Another way to ask, does AI in the medium term lead to a much better cost income and a higher ROATCE for banking, if not for Lloyds?
Yeah. To an extent, I suppose. Part of that is answered by that change efficiency point that I mentioned earlier on, Jason. That is to say, as said, the investment budget gets ever more productive.
Right.
Part of that is off the back of a positive feedback loop. The more you spend, the more efficient your investment budget can get if you plug it into the right places.
Yes.
Your comment there, one of your points there is about AI in particular. I also might just return to the financial framework point that you made and the operating leverage point that you made a second ago. AI is now endemic across the business. It is not a standalone project. It is embedded across all areas of the business.
Whether that is in terms of customer engagement, e.g., personalization, whether that is in terms of servicing and operations, e.g., automation, whether that is in terms of the relationship managers, e.g., customer assistance and the like. So, it is embedded across the organization rather than a kind of a standalone profile. What we are trying to do right now is to take it from a set of experimental business cases, which is kind of what it was in 2025, to an extent in 2026, into something that is much more scaled. That is what we are seeing gradually, as I say, infiltrate the business, for want of a better word.
Right.
As you can tell from my examples, customer engagement on the one hand, servicing and processes on the other hand, and the automation implications of that, you described as a cost-income ratio, and I think that is the right way to describe it, because it is very much a revenue customer engagement income proposition.
Every bit as much as it is also an efficiency proposition. Therefore, as AI starts to build in the way that I've just described, you should expect to see cost-income ratio enhancements. Now, to your question, whether or not that is linear or exponential-
Right
I think we have to see how things play out. Our commitment is to a sub 45% cost-income ratio at the end of 2030. We have a lot of confidence that we will be able to deliver on that. How much space there will be between 45% and what we actually print in 2030, I think will depend upon the answer to your question to an extent, just how productive is this stuff. I think that there are some knowns there. There are plenty of unknowns there. Financial framework, just to get back to your previous question-
because it may be interesting to the audience. As said before, the financial framework is just that, a framework. It has mid-single-digit income growth, albeit a bit higher than that in 2027, over the course of the plan. It has cost-income ratio sub 50%. It has RoTE circa 20% along the way, greater than 18% in 2028. It has capital generation in excess of 225 basis points. That's the financial framework. At the beginning of every year, we will deliver more precise guidance to fill that out. That's the plan.
That's the intention. The financial framework has within it what we think is a positive feedback loop, a feedback loop which kind of perpetuates itself and enables it to be fulfilled. So what do I mean by that? If you look at the framework that we laid out in July, right at the heart of that, we had three things. One is significant investment, two is commitment to efficiency, and three is risk management. Those are what we described as the foundations of the financial framework. Now, once you have those foundations in place, you are able to make meaningful investment in the business. In our case, the GBP 13 billion over the course of 2027 through 2030. With that investment, you should expect income growth. That is where a lot of the investment is going, after all, customer propositions and the like.
As income grows, if you have cost efficiency and cost discipline, you should expect to see improving operating leverage.
As that operating leverage comes through, you should expect to see improving returns and indeed improving capital generation, but also the ability to continue that investment cycle, i.e., to grow the investments.
That is the positive feedback loop. That is the positive feedback loop that is a very deliberate outcome, if you like, of the financial framework that we laid out. There is much of that that we delivered in the 2022 through 2026 period. We did not talk about it in quite that way, but there is much of that that is hopefully familiar to this audience, because that is pretty much what was going on
Yeah
in the 2022- 2026 period. We then articulated, I hope clearly, in July, and it is the intention to continue delivering on that going forward. To your point about ongoing improvements in operating leverage and the effect upon RoTE that that has, that is what we are trying to lay out in July, and that is our expectation for the years ahead in Accelerate 2030.
Before I turn it over to the room for questions, the point you made about the deployment of AI potentially being a revenue as well as a cost thing. In Europe, we tend to think about it as revenue destructive and cost positive, whereas when you listen to American banks, it is revenue positive and cost positive.
Yeah.
It feels, at least from my vantage point, that the bank is doing an awful lot around cross-selling, around loyalty schemes, around product innovation to reward loyalty and maybe knit the relationship around the customer.
Yeah
In a potentially more robust way. Is that a defense strategy around agentic AI? Is it just good banking? How do you feel about the revenue risks of a more agentic world?
It is a good question, Jason. Obviously, it is key, it is pretty core to our strategy.
In your mind
As your comment implies, as your question implies. The first thing I would say, though, is that depth of relationship and rewards, as a general matter, is much more than just about AI. It is absolutely core. Leave aside AI, leave aside agentic AI, it is absolutely core to the strategy that we have. That has been true in very large part in the 2022-2026 journey. It is even more true in the context of Accelerate 2030. Why is that? I think basically two reasons. The depth of relationship and indeed the reward strategy in the context of our group, if you think about our business model spanning the entirety of financial services, it is just a natural. If you have that business model, why wouldn't you do that? That is why you have the business model in the first place.
The second is, it is a competitive environment, and we talked at the beginning of the conversation about tight asset margins and the like. Well, in the context of those tight asset margins, it is a very natural response to try to build out the customer relationship so that, for example, you are only having one customer acquisition cost for the delivery of two products. Forgive me for phrasing it so crudely, but that is basically what it is. Which in turn allows you to achieve the economies and a better outcome from a customer point of view, most importantly, and from a financial point of view from the group's perspective.
Right.
Again, leave aside AI for the moment. It is just what comes out of the business model that we have, and it is also a function of the competitive environment that we live in. So it is to be welcomed, and it is there, and it is central. I do think, to your point, in the context of AI, and in particular, both what we can take advantage of, number one, but also competition, number two, both of those two angles. Then again, the depth of relationship and rewards has a very important role to play. Specifically, what do I mean by that?
There's no doubt that the AI technology that, as I said, is becoming increasingly infused and embedded within the business, is allowing us to approach the customer with a much more enriched data set, understanding what their needs might be, and hopefully preempting what their needs might be with a richer proposition. It might be personalized pricing on a single product basis, but it also might be a better understanding of what they need in order to achieve their lifetime financial objectives on a slightly more sophisticated and multi-product basis.
That's what AI does to us. Now, if we think about it versus our bank and non-bank competitors, then again, like your question implies, Jason, it's a pretty effective defensive tool, if you want to describe it like that, as well. What do I mean by that? A customer comes to Lloyds for many, many reasons, right? They might come for price, they might come for brand, they might come for security, they might come for service, they might come for branches. There's just a stack of reasons why they are going to bank with Lloyds.
If we are able to enrich the discussion with that customer off the back of the unique data set that we have, because we've been banking with them forever, and because we've got, hopefully, a multi-product relationship, then we should be able to understand and indeed tailor our proposition to that customer in a much more effective way.
Right.
Such that if, let's say, an AI agent says, "Actually, you can get 4.3% over here versus 4% over there," that's kind of somewhat irrelevant. It's not about the single product relationship. It's about the approach to the customer and the multi-product discussion that you can have with the customer, and importantly, to your point, the reward setup that you can have with the customer. So, for example, if you're a Lloyds Premier customer, you're going to get a discount on your mortgage, as an example of that. If you are a customer who has a need within the home insurance area, same thing.
That type of approach on both an individual business unit basis, i.e., within the retail product set, or alternatively on a cross-business unit basis, i.e., between retail and insurance, that type of enriched relationship, as you say, you can describe it as what we should be doing anyway. You can also describe it as a defense against any given agent saying that actually you ought to rate optimize on a single product as an alternative.
Yeah. Thank you. Any questions from the room? There is one in the front here.
Just two questions.
We are streaming it. Sorry, you probably better use the microphone.
Oh, sure.
You are live.
I am live. Okay, two questions, please. One on just big picture on AI. Should we expect all banks have tried to grow their non-NII, tried to improve the relationship with their customers. Should we at least expect a mix shift over a period of time as you explore how you can do more with your existing customers with AI? Should we naturally expect that mix to change towards non-NII just naturally? That is the first question.
The second one was just Scottish Widows. Every now and then I ask about Scottish Widows, and Lloyds gets excited, but we have not mentioned Scottish Widows once.
What's going on there?
Both good questions. In terms of the mix, I think the applicability and the opportunity from AI is going to arise both on the balance sheet side and on the fee income side, the other operating income side. I wouldn't see in AI so much inspiring a change of mix. I mean, it might do, but I think if it does, it will probably be at the margin. To give an illustration of that, a balance sheet example might be if we've got a, again, a Lloyds Premier customer, then we are going to be approaching that Lloyds Premier customer with a price advantage mortgage offer. That's an illustration of where AI plays a role in that somewhere. At least the more personalized the pricing, the more AI is playing a role. That's an example of where it's going to benefit the balance sheet businesses.
At the same time, if we have an understanding of a customer's life objectives, we're setting up something called Invest AI right now in the insurance area, for example. That enables a customer to come in to discuss with the AI agent what is their overall savings profile, what are their aspirations, and all the rest of it. Basically, an AI-enabled tool, Invest AI, as the name suggests. That is going to enhance ultimately our relationship with that customer, which comes into the OOI line. I think an example there of where AI is going to establish itself, deliver benefits in the fee line rather than the balance sheet line. But I think you can probably pick out examples on each line, is my point, and therefore mix overall, I think, will stay much the same on an AI basis alone.
I do think there's a broader point about how might the business mix change over the course of time. As you know, our strategy has been very much to diversify the business and to make sure that if we ever go into a flat interest rate cycle again, then we are less exposed than we were in the 2010 to roughly 2020 period. That means deliberate investments. We're investing heavily across the business, but deliberate investments in places like insurance, pensions, investments, I'll come back to that in just a second, but also in places like commercial banking, BCB, business and commercial banking, for example, our Lloyds Equity Investments businesses, for example.
At the edges, I think if you look at the composition of Lloyds Banking Group, a percentage point or two of our income line might shift in that direction over the course of the Accelerate 2030 plan. We will still be a retail and commercial bank, for sure. That will be the way that you describe Lloyds both today and in 2030. But I think a percentage point or two around the margins might change in that way off the back of that strategy. The insurance, pensions, and investments, the CEO of that business would be absolutely thrilled that you asked that question. So, thank you for raising it. It is a really important business to us. It is, in a sense, one of the unique attributes of the business model. We are, as you know, we are the U.K.'s only scale bancassurance. We are the only people with that business model.
In turn, it is a powerful one. If you look at it, we have about 10 million customers within Scottish Widows. Only about 2 million of that 10 million customers are actually overlapping with the bank. That itself is a massive growth opportunity. Alongside of that, it is a stable of, if you add together Scottish Widows and Lloyds, it is a stable of tremendous brands, tremendous capability, tremendous data, tremendous customer base. It really ought to be an opportunity for growth, number one, and at that, capital-light growth, number two. So there is a very big opportunity there. I think we have done some of the work in the 2022 through 2026 strategy in delivering upon that, but we have got a lot to do. So what does that mean? It means things like integrated customer journeys. It means things like integrated products.
It means making sure that in conjunction with that, we are leveraging the data that we have across that product base and plugging in technologies in the way described. Likewise, we have distribution channels that when I talk to insurers out there in the market, they are hugely envious of, not surprisingly. So, the customer connectivity that we enjoy off the back of that is meaningful. When we look at it going forward, we expect the market positions that that business enjoys, e.g. top three positions in workplace, for example, in individual annuities, in home, top three market positions, alongside the banking integration that we enjoy, and therefore the cross-business unit approach, to give us really meaningful revenue growth over the course of the plan. We also expect, off the back of existing approaches, and indeed some new, very tight cost discipline in that business.
It is a scale business at the end of the day. It is a business that is susceptible to operating leverage improvements. With that combination of revenue growth, number one, and tight cost discipline, number two, we think there is a very promising bottom line for that business. Again, as a standalone matter, delivering upon its market position, strong market positions, but also as a cross-group matter too. So, I think that business is a meaningful source of growth for the group going forward. Big opportunity.
And I guess at a slightly geekier level, before IFRS 17, there was a billion-GBP-a-year business, and by 2028 or 2029, I have only got it making GBP 700. So, the unwind of CSM and the work that you are doing should make it one of the fastest-growing parts of the group.
Yep. I mean, I will not comment exactly on your numbers, Jason, but I think we expect to comfortably beat them.
Yes.
The why is that is because of that revenue growth pattern that I mentioned, again, individually and cross-business unit, number one. By the way, reinforced by the depth of relationship reward strategy that we discussed. I mean, clearly, rewards in the context of a bancassurance proposition, you will maybe remember this part of Charlie's presentation, Accelerate 2030, rewards in the context of a bancassurance proposition are key, right? I mean, we have done a lot of We are doing a fair bit on that. There is a lot more to do. But that, in turn, leads to the growth expectations within the business. I think we should expect, again, without commenting specifically on your numbers, I think we should expect to deliver comfortably in excess of that type of number.
Right. Thank you. If we are lucky enough to have you here a year from now, given the uncertainty and all that is in the market and the meetings you are having with investors and shareholders, what do you want to be able to say a year from now about the performance of the bank or the things in the market that you would like to have changed people's minds on? We are asking everyone that question.
I'll be interested in what others have answered to it then, Jason. What do we want to change the market's mind on? In three words, cost of equity.
Right.
Why do I say that? When I look at the overall business, banking is always going to be a little bit cyclical. Competition is a fact of life. That's just the way the bank is. Having said that, we are making really quite significant investments in the context of delivering a business which is diversified, a business which, if you like, delivers on the opportunity that we have in front of us, which in turn should deliver a set of sustainable and growing earning streams, which in turn will deliver for the shareholders a set of sustainable and growing capital distributions. I hope that over the course of the next, not just year, but several years ahead, just like I hope we have done in 2022 through 2026, I hope that we are able to consistently deliver on that promise.
I hope that as we consistently deliver on that promise, then the market over time will give us a bit more credit for that. I hope that as it does give us a bit more credit for it, then alongside of that, or as a result of that, our cost of equity that we currently trade at should come down a little.
Thank you very much. Thanks, everybody, for joining us.
Pleasure. Thank you.
Thank you.