Lloyds Banking Group PLC (LYG) 2011 Q2 法說會逐字稿

Thank you for standing by, and welcome to the 2011 half-year results, US conference call. At this time, all participants are in a listen only mode.

There will be a presentation, followed by a question and answer session. (Operator Instructions). I must advise you this conference is being recorded today, and today is Thursday August 4, 2011.

I would now like to hand the conference over to your speaker today, Mr. Tim Tookey. Please go ahead, sir.

Thank you very much, Scott; and thank you, everybody, for joining today's conference call. A number of you might have attended or listened in to our results presentation this morning, but for the benefit of our US investors, I will cover all the key issues on this call.

I'm pleased to present the Group's results for the first half of 2011. In addition, I'm going to spend a bit of time giving you an update on our continuing balance sheet de-risking through the run-off of non-core assets; and of course, I will also update you on capital, funding and liquidity.

As you will have seen from the news release, we have provided an enhanced core and non-core disclosure, with more detailed cost and divisional financial information, and I hope that you will find this useful.

Let me start with the business performance at Group level. In the first half of this year, the Group delivered a resilient performance in line with expectations, with underlying profits up 36% to GBP1.3 billion.

Underlying income, which excludes ECN movements and last year's liability management gains, fell by 12% to GBP10.4 billion; but this is also after including losses on non-core asset sales of GBP875 million, the sale of which facilitated substantial central bank facility pay-down during the half.

The reduction in underlying income was partly due to a lower net interest margin, but in line with the reduction in our average interest earning assets, both for the Group and the core business.

Operating expenses during the first half were slightly down, 2% in fact, benefiting from further integration savings and lower levels of operating lease depreciation, and absorbing increased employers' national insurance contributions, and higher VAT, inflation and other costs.

On a statutory basis, we saw a loss before tax of GBP3.3 billion in the first half. In addition to the reduced profit on a combined business basis, which I've just explained, the statutory result primarily reflects the PPI provision, as well as further integration costs, and the absence of pension curtailment gains that we saw in the first half of 2010.

Let me now take you through the performance in our core business. Well, core revenue reduced by 5%, with the reduction dominated by an adverse movement in banking volatility in other operating income. The reduction in customer balances had only a small effect, and in fact, was offset by other factors, including modest core margin expansion.

Having noted the minor trend impact from core balances and the core margin, it's worth looking now perhaps at the overall core business performance.

As we can see, core underlying income decreased by 5%, principally reflecting subdued new lending demand and continued customer deleveraging; but the core net interest margin increased to 2.35%, mainly reflecting the improved funding mix in the core business, with a higher amount of deposits, and a smaller amount of wholesale funding.

The core impairment charge was flat on a year ago, and down on H2 2010, principally reflecting a reduction in the Retail impairment charge, driven by the unsecured portfolio, and partly offset by an increase in Wholesale, primarily, as a result of lower recoveries on disposals of assets.

Core business profit before tax was down 28% compared to the first half of 2010. Excluding liability management and ECN effects though, core business profit before tax decreased by just 6%, which is broadly in line with the smaller balance sheet.

Let me just talk briefly about our Group margin. The net interest margin was 207 basis points in the first half, compared to 208 basis points this time last year, and 212 basis points in the second half of 2010.

As I said on a number of occasions, predicting margins is far from easy, but as I look forwards, I still expect the full-year margin to be just over 2%, which implies a second half margin of around about 2%, of course.

This guidance is supported by the growing impact of the annualization effect of repaying relatively cheap central bank funding; and also, the increasing weighted average cost of wholesale funding, including that the effect of the fairly expensive H1 issuance will only be fully felt in the second half.

In the medium term, the current margin trend will reverse, driven, as I have guided before, mainly by increasing base rates and lower new wholesale funding costs; lower, both from lower absolute issuance needs, and also lower issuance spreads, as the funding markets settle over time and recovery sets in. These factors will, as I have said before, support the Group margin expansion to our target range of 215 basis points to 230 basis points by 2014.

I'm now going to move on to impairments. The Group saw a further reduction in the impairment charge in the first half. The charge was 17% lower than in the first half of 2010, with higher charges in Ireland and Australasia, more than offset by improvements elsewhere in the Group, particularly the substantial fall in the Wholesale division's impairment charge.

Impaired loans increased by 1% compared to the year end, and now represent 10.6% of closing advances. The Group's coverage ratio against this is about 45%. I'm pleased to report that both core and non-core impairments reduced.

I want to talk about the headline trends in our Irish portfolio for a moment. Continued weakness in the Irish economy resulted in an increase in impaired loans for the first six months of the year.

Provision coverage levels have been increased due to actual and anticipated falls in property values, as we have discussed, and we now have a coverage ratio of 56%, up from 54% at the year end, and 42% a year ago.

Although the portfolio is non-core, and a dedicated UK-based business support unit credit team is managing the wind-down of the Irish book, current levels of redemptions and recoveries are low due to a severe lack of liquidity in Irish assets, a problem we do not expect to be resolved quickly.

This morning, I also made some brief comments on some Eurozone exposures. Our Retail and Corporate exposures in the Eurozone are unsurprisingly dominated by our Irish positions.

Our Spanish Retail exposure of about GBP1.8 billion, consists of secured, residential mortgage lending. About half of this portfolio is to expats, and the other half are local mortgages. The performance of these books is fine, with average loan to value of about 63%; about 5% of the book is impaired with a coverage ratio of 30%.

The Spanish Corporate exposure of about GBP1.7 billion is mainly local lending comprising corporate loans, project finance and some commercial real estate. The corporate loans and project finance books have seen only modest impairments, 3% is all that is impaired, in fact; whilst the CRE book, which is only about GBP400 million in total, is about 22% impaired, with a 59% coverage ratio.

The Corporate exposure we have in Greece is limited to about GBP770 million, and relates to loans to Greek shipping companies, where the loans are generally secured, and where repayment is mainly dependant on international trade rather than being linked to the state of the Greek economy.

So whilst we manage all of these exposures carefully, they are modest in scale, and we are not unduly concerned.

Exposures to sovereigns and local banks are limited, with more than 40% of these secured through either covered bond or ABS structures. The Group has minimal direct exposure to the sovereign risk of any of these countries, and this includes national governments and central banks.

Now back to the UK for a moment, and the performance of our UK mortgage portfolio. As expected, the secured impairment charge increased, reflecting less favorable house price forecasts. Pleasingly, the proportion of the mortgage portfolio with an index loan to value greater than 100% decreased slightly to 12.2%.

Perhaps more importantly, however, the value of the portfolio with an index loan to value greater than 100%, and which is more than three months in arrears, improved slightly by GBP0.1 billion, and is now GBP3.1 billion, still less than 0.9% of the portfolio.

Let me now take you through the profile and the management of non-core business, which as you know, excludes Verde.

We're pleased with the progress made on our balance sheet reduction plans in the period, given the challenging market conditions of the first half. On June 30, we updated our strategy to reduce the non-core portfolio, and set a new target to reduce the balance to be equal to or less than GBP90 billion by the end of 2014.

In the first half of 2011, we achieved a substantial reduction of the non-core portfolio of over GBP30 billion, resulting in the portfolio now amounting to GBP162 billion.

We expect the remaining book to account for less than or equal to GBP65 billion of risk-weighted assets by the end of 2014; and we're also targeting our non-core run-off from disposals to be net capital generative over the period 2012 to 2014. More on that in a moment.

We continue to de-risk the whole balance sheet, and this also helped reduce our Group risk-weighted assets, which are down by 6% in the first half, driven by the run-down of our non-core asset portfolio, strong management of risk, and tighter risk criteria for new business.

We expect further modest risk-weighted asset reductions in the second half of the year. However, we expect these will be offset by the effect of the implementation of the CRD rule changes, and RWAs will therefore be broadly flat from now until the year end.

Let me also take you through the performance of the non-core business. Well, the 51% fall in non-core underlying income was primarily driven by the losses on asset disposals in the first half of this year. Excluding these losses, income decreased by just 16%.

The non-core margin decreased, primarily as a result of the higher Wholesale funding costs, and the income drag effect from increased impaired assets.

We have been rigorous on how we allocate the operating expenses to non-core, only considering an expense as non-core when we have a very high level of confidence that we can manage the expenses down as the assets go down.

The non-core impairment charge reduced, principally as a result of the material reduction in the Wholesale impairment charge, and partly offset by an increased charge in International, principally due to Ireland.

Even though we have seen lower non-core income, the reduction in costs and the reduction in impairment led to an improvement in the non-core loss of about 25%.

If I move on now to our capital liquidity and funding position. Our core Tier 1 ratio now stands at 10.1%, reflecting the effect of a statutory loss partially offset by a reduction in risk-weighted assets of GBP23 billion.

The business generated about 50 basis points of ratio improvement in the half, albeit that this was absorbed by the PPI provision that we took in Q1.

On June 30, I also spoke of further planned capital restructurings which would reduce the total core Tier 1 deduction under full Basel 3 relating to our insurance operations by about GBP2 billion. That has now been completed, achieving significant mitigation equivalent to about 50 basis points of core Tier 1 under full Basel 3, and reducing the transitional rules impact from insurance to about 20 basis points per annum.

We made excellent progress on our term funding issuance plans. In the first half, we achieved GBP18 billion of publicly placed term issuance. In addition, we issued a further GBP7 billion of term funding via a series of private placements.

We continue to expect to issue new funding of between GBP5 billion and GBP10 billion over the second half of the year across all public and private secured and unsecured programs, and this is the aggregate amount.

During the half, the absolute level of Group Wholesale funding fell by 1%, despite strong new term issuance, and this reflects H1 maturities. Successful new issuance also allowed the Group to maintain its maturity profile, with 49% of wholesale funding having a maturity date greater than one year, despite, as you could see from the chart that we circulated this morning, a significant volume dropping into the less than one year maturity bucket.

As you know, the Group achieved a reduction in government and central bank funding of GBP60 billion in the first half of this year, leaving just GBP37 billion outstanding at the half year.

The liquidity support from the government and central banks has various maturity dates, the last of which is in October 2012; and current plans assume that the remaining facilities will be repaid in line with contractual maturity dates.

We've also been successful in further improving our loan to deposit ratio. By the end of the first half, the ratio, excluding repos and reverse repos had improved to 144%. And we also further reduced our core business loan to deposit ratio to 114%.

This reduction is partly due to the continued customer de-leveraging and subdued new lending demand. But at the same time, we are successfully growing total customer deposits by 3%, reflecting good growth in relationship deposits in Retail and in Wealth. And we continue to work towards a Group loan to deposit ratio of 130% or lower by the end of 2014.

So let me now summarize the material aspects of our first-half performance, and also reiterate our guidance for the full year.

Well, our view on 2011 is broadly unchanged. We're continuing to see various pressures on our net interest margin, but despite these effects, we're still targeting a net interest margin of just above 2% for the year as a whole.

As a result of increased margin pressures, we have seen a reduction in income, and clearly, we expect a further slight reduction in core income.

As a direct result of cost actions taken in the first half, we continue to expect costs to reduce slightly this year, and we remain on track to deliver our target integration cost synergies of GBP2 billion per annum by the end of the year.

We've seen a good reduction in the impairment charge as improvements in Wholesale and Retail more than offset further deterioration impairments in Ireland; and our overall impairment guidance, including the division by division comments, remains unchanged.

Additionally, we were very pleased with the non-core asset reductions in the first half of over GB30 billion. Together with excellent progress on our term funding issuance plans and our deposit growth, this has enabled us to pay down GBP60 billion of government and central bank debt.

And lastly, we achieved continued strong improvements in the loan to deposit ratio, which now stands at 144%.

In summary, the Group's performance in the first half of the year was in line with our expectations and guidance, and we're making good progress towards our medium term goals.

And with that, I'd like to now hand back to Scott, who's going to help us organize some questions.

We will now begin the question and answer session. (Operator Instructions). Louise Pitt, Goldman Sachs.

Thanks for holding the call, by the way. It's really helpful for us in the US. I just had a question on funding for 2012. I understand that you have pre-funded a lot of 2011 and I understand are in a pretty good position for funding this year. But can you talk about funding for 2012 and whether or not you may try and pre-fund some of those maturities as they come due this year?

Thanks.

Hi, Louise. Funding for 2012; you're right to flag that we've done a lot of pre-funding in 2011, and that was very specifically done in order to facilitate a material acceleration of the pay-down of government and central bank funding, and we're absolutely thrilled with the progress that we made.

As we look at markets today, we feel even better about what we have achieved, because markets are obviously very difficult and it's very nice to only be needing GBP5 billion to GBP10 billion across all of our programs for the rest of the year.

I feel though, Louise, it's a little bit early to think about pre-funding 2012 when the markets are as difficult as they are. So I think we might just enjoy not needing to do a great deal of funding at all in the second half for a little while; and then if markets do improve, well, we may or may not. But the pressing need to so do has quite clearly gone, as we've now repaid by far and away the majority of our central bank and government funding.

Okay, great. And just as a follow up, can you just talk about after CRD IV and your discussions with the regulators how you are thinking about the ECNs?

Yes, Louise, that's an easy question to answer because there haven't been any discussions yet with the FSA over how the ECNs would work or play out in a CRD IV environment.

We're looking forward to having those discussions, but I don't know when they will take place. We may find they take place much nearer the year end, as we're expecting further announcements coming out of the G20 Group and the Basel Committee in November after the big conference then. So no news at the moment, I'm afraid. Sorry.

Okay. Do I have time for a third question?

Yes, go for it; go on. (Laughter).

Okay. I just wanted to ask about the ICB report and the discussion on ring fencing. We've talked to a number of your competitors in the UK about how they're potentially preparing for that. Could you talk a little bit about your funding entities, because you guys still have a number of issuing entities within the Group, and how that might change depending upon the recommendations from the ICB?

Yes, Louise, it's something we have started to think about internally, but it's really very early for us to be even forming even skeleton plans over this, because we don't know yet where the ICB are going to come down on ring fencing. But I would say, we've had some very useful and productive dialog and meetings with the ICB, and we will continue to do so up until their final report is issued.

There are clearly a number of different things that they're looking to achieve from the discussions on ring fencing, if indeed ring fencing is part of their final proposal. So I think we'll have to wait and see at the moment how that plays out.

Okay, that's great. Thanks, guys.

Thank you.

(Operator Instructions). Anne McDermott, New York Life Investments.

I'd also like to reiterate that this call is very helpful. Could you give us the amount of the liquidity buffer that you have at the end of June?

Yes, certainly. Liquidity buffer at the end of June, we hold it in two categories; our primary liquid assets of GBP101 billion; and then our secondary assets are a further GBP117 billion, giving us an aggregate of GBP218 billion.

Perfect. Thank you.

Okay. Thanks, Anne.

(Operator Instructions). Anne McDermott.

I'll pop in again. The news we're getting over here on the UK economy is pretty dismal. I'm wondering how that might impact your plans for the second half of this year.

Anne, thanks very much for the follow-on question. Well, there certainly is I think mixed news about the UK economy at the moment, and there is obviously a lot of discussion going on over how the economy will perform for the rest of the year. I can remember thinking back a couple of weeks when the second quarter GDP figures, for example, were announced. There was a lot of debate in the media over here over what might the effects be of the extra bank holidays associated with the royal wedding, and all sorts of other things that commentators were trying to look into the numbers for to see what it might have been in underlying terms.

But unemployment statistics have actually been quite good, and we saw a nice -- a bigger drop than had been expected in the seasonally adjusted figures for the second quarter, which was very pleasing; and we see the Governor of the Bank of England is still talking about inflation coming down towards the end of the year as some of the annualizing factors work their way out of the mechanical calculation.

But I think all of this is really very much in line with our own central scenario for the UK, which is one of a slow and steady, but actually quite a long period of recovery.

So in that sense, our scenario is still aligned with what we're seeing in the UK economy, and I think the actions that we've taken in the first part of the year are absolutely aligned with what we should be doing, given the fragility and the uncertainty in the economic environment.

And by that, I'm referring to the actions around reducing the cost base through the simplicity program that we announced as part of our strategic review; growing core relationship deposits through our Retail and our Wealth franchises, which clearly provides us with very reliable and behaviorally long and stable funding; as well as, as I was just talking about with Louise earlier, getting on with what has to be done, which was funding in the term markets for 2011. And there -- and from that, enjoying the funding flexibility that meant we could bring down early some of our Central Bank debt schemes, which leaves us in a very good position.

So I think for the second half, we will continue to implement as quickly as we can the actions that we set out in our strategic review announcement on June 30; will focus on reducing the operational break-even for the business by focusing on simplifying the business, streamlining processes, cutting out layers, and increasing spans of management in the organization. This will make the organization fitter and leaner, and then better able to take the investments that we want to make, starting in the second half, that will really start to drive the core income business forward.

But we'll do this in a measured way and will only invest to drive some of those strategic initiatives forwards when we have good line of sight to the savings coming from the simplification program. This will give us a lot of flexibility and agility to flex our plans up, down, faster, slower, across different parts of the Group should the economy turn out to be slightly different than we'd expected.

Great.

Does that help?

It does help. That's my last question, I promise.

Okay. Thanks, Anne.

(Operator Instructions). James Hyde, Pramerica Investment.

Hi, Tim. I just wanted to ask about the non-core disposals versus Louise's earlier question regarding would you come -- would you try and tap the market for more than GBP5 billion, GBP10 billion for pre-funding 2012. From the -- having listened to the webcast in the morning, clearly, this -- there is some doubt about certain parts of the non-core pools and how they will perform long term.

So given that the -- for us, debt investors, the very welcome focus that you have on reducing leverage, and, well, deleveraging faster, which is what's happened in the first half, is this almost not an important alternative, hurrying through some of the -- or maybe hurrying through is the wrong word, but pushing aggressively on non-core reduction? Given the non-access to other markets, to normal funding markets, and the various different corners of asset classes that you have in the non-core, isn't this a more -- an alternative to pre-funding 2012 through issuance?

James, that's a very interesting question. The short answer is, yes, it could be seen as a way of pre-funding into 2011. And clearly, in all of these things, one of the things we look at when we're making hold or sell decisions is looking at the flexibility that one gets from a funding perspective. And that could be that one generates surplus cash that could be used to pay something down, or that one can avoid needing to issue something that one would otherwise need to if you hadn't sold the non-core assets and liberated the cash.

In the full presentation I took analysts through this morning, we flagged that we'd sold GBP31 billion of assets during the first part of the year. In fact, in profit before tax purposes, the actual profit and losses on those things was actually only a loss of about GBP225 million, which was very encouraging.

We did take some impairments in non-core. But overall, the cash benefit we got from the non-core rundown was about GBP27 billion, and we achieved that with only an overall capital destruction from non-core run-off of about GBP111 million.

So that trade-off of GBP27 billion of cash for only destroying capital on a net basis of GBP111 million was clearly a very positive overall result. And there, we were making those kind of trade-offs that you're thinking about, when you're thinking whether run-off, it could be a substitute for pre-funding.

On June 30, we did set out for people the criteria that we would use to make those hold or sell decisions, and this is a real balancing act. It's a balancing act between the risk, the latent risk that's inherent in the asset that we're holding, versus the market appetite for a purchase; and that, of course, flows through into any capital that is consumed through a loss on disposal. And we balance that against the liquidity benefit that we would have, as well as capital that would be released, in inverted commas, from having the RWAs disappear.

We think we got that balance pretty much spot on in the first half of this year; and indeed, over the 2012 to 2014 period, we expect the non-core run-off to be capital-generative, although we haven't made the commitment that it will be capital-generative in each period. But there clearly is a trade-off to be had there.

But you opened your question, James, by commenting on the focus that we had on this, and this clearly has been a focus of management for the first six months of the year. And under Antonio's leadership, we set out early on to accelerate the pay-down of government and central bank facilities in the first half, and to do that through having a sensible and measured approach to growing customer relationship deposits, which we've done very well at, with 3% growth there; by accelerating some of our term funding, as we were discussing with Louise earlier on; and also, by running down and selling some of our assets.

I would estimate that probably about GBP15 billion of our GBP31 billion non-core reduction in the first half was purely done to generate liquidity to facilitate faster pay down.

So it all comes into the pot, and it's a trade-off that we'll manage week by week as we go through the second half as well.

That's really helpful, Tim. Just as an aside, as a debt investor, I'm viewing this year -- debt investors, versus equity investors; [I'm with] debt investors. We're viewing this year as possibly a bit of a lost cause for equity investors, and it just seems a very good thing to kitchen sink in terms of doing as much of this kind of deleveraging, and if necessary, take losses; just to give a debt investor's point of view. And I do believe this is an important last chance year to do such kitchen sinking from (inaudible).

Well, thanks for the observation, James. We're certainly not out to kitchen sink the results. In fact, in the first quarter of this year, the only area where we actually wanted to adjust our provisions was actually in respect of Ireland, and that was because we'd seen some deterioration in the Irish economy since the previous review completed by the Board in December last year.

But I also think this is a year when the equity investors are actually hearing an awful lot from us on what we're looking to achieve. So I appreciate your debt investor angle, and I can understand the way you're thinking about it.

I'm an equity investor in the Bank, and I'm looking at this and saying the last five weeks, I've heard about a higher level of clarity on the strategy of this business than I've ever have before; and I've heard about a lower risk approach to taking the franchise forward; one where we're looking at a less capital intensive future, where we're looking to reduce the operational break-even of the business. And all of those things to me as an equity investor I read very, very positively indeed.

And that's five weeks ago. And I now see the half-year results, and I actually say, okay, in the choppy waters of the UK, or global economies, I see a resilient performance that's just ahead of consensus at the profit level, but where I see significant further de-risking, and I mean in credit risk, but particularly in terms of future funding risk, as markets are so difficult for the moment.

So I actually think this is a good way to look at it from an equity investor's view; and I'd just put that on the table to counter your debt angle.

I didn't mean accounting kitchen sinking, I meant (multiple speakers), that kind of kitchen sinking.

No, I know you were tongue in cheek, James.

Yes, okay. Well, thank you very much, Tim. That's very helpful.

That's okay. We're looking to build a very, very good and attractive story here, but all of our stakeholders, whether they're on the debt or the equity side, or of course are customers and the staff that work in the Bank.

Great, thanks.

Louise Pitt, Goldman Sachs.

I just wanted to ask another question on the UK mortgage portfolio, because you still have around 12% of it that is more than 100% LTV. And while we all understand that mortgages in the UK are recourse to the borrower, contrary to the US, I just want to get your sense on how you think that portfolio is going to develop, not only in the second half of the year, but more importantly, just longer term.

Okay, Louise, thanks for the question, and don't be embarrassed in asking a second one. Well, congratulations; you found the right number. 12.2% is indeed the proportion of the whole mortgage book at June that is more than 100% loan to value. Encouragingly, that's lower than we had at the year end when the book was 13.2% more than 100% loan to value, and that's despite house prices coming off a bit in the first half of this year.

Another very encouraging trend though is around levels of arrears. So if I look at that 12%, and I say, okay, so how much of that is actually over 100% loan to value and in arrears, and actually the value is down; it's down from GBP3.2 billion six months ago to GBP3.1 billion now; and that's a good performance.

New customers into arrears; well, we've had the second reduction in a row from two halves, and really, the peak of this was -- for us was in the second half of 2008.

Louise, you might have also read quite a lot of commentary from UK writers on this topic about what we call forbearance, and so one of the things I took analysts through this morning was showing the trend in our forbearance activity that we've had with UK borrowers. And I showed a steady declining trend from a peak in the summer of 2009 in the level of forbearance activity in our mortgage book.

So this has proved to be a very resilient performing portfolio, and one in which we're comfortable with how it is going to look as it grows forward.

Okay, so it doesn't worry you that the percentage of the portfolio that is more than three months in arrears and more than 100% LTV hasn't really changed?

No, it's the same percentage, but fractionally lower in pounds from year end. But it's lower than it was 12 months ago and lower than it was 18 months ago, so the trend here is going in the right direction.

Just in terms of pure size of book that's more than 100% LTV, if I wind the clock back, I think it was two years ago, Louise, we had 20% of the book was actually at more than 100% loan to value. So at times like that, the fact that, as you rightly observe, UK mortgages are with full recourse to the borrower, there's no jingle mail here as there are I know in some states, then we saw that 20% and then we saw it improve, both with borrower performance as well as with rising house prices last year.

Can you also just give me an idea for what the average LTV on new mortgages is right now in the UK?

Yes, I can. Our book -- I know I've got it in the -- just bear with me, Louise. I know I've written it in the back here somewhere. Okay, new business loan to value 61.3% in the first six months of this year.

Okay. That's really low.

Yes, well, the average loan to value in my whole book is actually only about 55%. But of course, the risk here is in the tail, so I enjoy you saying all that's low, which is good, but let me be balanced; the risk here is always in the tail, which is why we always give people a complete analysis of the whole book.

Right. And then just a follow-up. In terms of your coverage of NPLs, in terms of the coverage ratio, it's still relatively low compared to some of the other global banks that we look at. How are you guys thinking about that? We estimate it to be around 45%, but that's pretty low. Can you just comment on that?

Yes, I think the whole book is around about that level; you're absolutely right. Of course, mix plays a huge part in this. Mix of different portfolios is really very, very important. So for example, just over half of our balance sheet is retail mortgages in the UK. We've got a pretty low level of impaired loans within that. And within that, I've got a 25.3% I think it is coverage ratio on that book.

But the quirk of coverage ratios is, and if take a mortgage, if I have a customer with a 60% loan to value mortgage who becomes impaired, the chances of me taking a loss on that mortgage are very, very low indeed, but I still have to classify the mortgage as impaired even though I don't need a provision. So you tend in books with a high proportion of prime mortgages that we have, then you would see normally the weighted average coverage ratio such a business would be lower.

Okay, that's great. Thanks a lot.

There are no further questions from the phone line at this time. Please continue.

Okay. Well, look, I'd like to thank everybody for joining the call this morning your time. Thank you very much indeed for doing that. And I always sign off these calls by saying you know where we are; please do not hesitate to get in touch with the Investor Relations team if you'd like some help interpreting further any of the discussion points we've had on the call today, or any of the disclosures we've made in the news release.

And I wish you a very good day. Thank you very much.

That does conclude our conference for today. Thank for your participating. You may disconnect.