Lloyds Banking Group PLC (LYG) 2014 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Lloyds Banking Group 2014 full-year results fixed income conference call.

(Operator Instructions)

Douglas Radcliffe and Edward Short will outline the key highlights of the Lloyds Banking Group 2014 full-year results, which will be followed by a question-and-answer session.

(Operator Instructions)

Please note, this is scheduled for one hour. I must advise you that this conference is being recorded today, Friday, February 27, 2015. I would now like to turn the conference over to Douglas Radcliffe.

Good afternoon, everybody, and thank you for joining this debt-related call for the Lloyds Banking Group results. For those that don't know me, I'm Douglas Radcliffe, and I lead the Investor Relations Team at Lloyds. I'm joined by with Ed Short, our Corporate Treasurer.

A number of you may have well dialed into the call this morning before the results call. And if you do, I apologize, or if you did, I apologize, as there will be some duplication.

I'll start with a quick run through of the key points from our results, and then I'll hand over to Ed for some more detailed comments on the balance sheet, capital, funding, liquidity, and regulation. Finally, we've then set aside some time for Q&A.

Looking at the results as a whole, 2014 was a year of continued delivery for the Group, with the achievement of key objectives set out in our 2011 strategic plan, resulting in a significant transformation of the business and substantial improvement in performance. This progress has allowed us to announce the resumption of dividends, a key milestone for the Group and further evidence of the progress we have made.

We have seen a substantial increase in profitability and returns. Underlying profit increased 26%, to GBP7.8 billion, with movement in total income offset by a 2% reduction in costs and 60% improvement in impairments. Excluding SJP, that's St. James's Place, income was up 1%.

Net interest income grew 8% to GBP11.8 billion, driven by better deposit pricing, lower wholesale funding costs, and loan growth in key segments, partly offset by disposals and the expected pressure on asset pricing. The net interest margin of 2.45% is 33 basis points higher than 2013.

The Q4 margin was 2.47% and includes a one-off charge of 5 basis points as a result of the consolidation of the savings products range we announced in December. Looking forward, we expect the net interest margin in 2015 to be around 2.55%, with continued pressure on asset pricing, more than offset by improvements in the liability spread and mix, and reduced funding cost.

On costs, we have hit our target of GBP9 billion, excluding TSB, and total costs including TSB were GBP9.4 billion, and 2% lower than the prior year. Our market-leading cost income ratio now stands at 51.2%, or 49.8% excluding TSB and adjusted for operating lease depreciation.

Impairments fell 60% year on year to GBP1.2 billion for the full year, with the AQR improving to 24 basis points, compared with 57 in 2013. With the possible impact of more the favorable economic backdrop, this is has led to a significant reduction in nonperforming loans, which now represent less than 3% of lending balances, compared to over 6% at the end of last year and over 10% at the end of 2010. The proportion of our mortgage book with the loan to value in excess of 100% has reduced dramatically, from GBP45 billion at December 2010, to less than GBP7 billion, or 2% of the portfolio, at December 2014.

While these trends are encouraging, we have also strengthened impairment provisions, increasing our coverage levels to 56% from 50% at full-year 2013, reflecting our focus as a low-risk bank. Given our focus on low-risk retail and commercial banking, together with improved credit analysis and risk management, we expect the AQR for 2015 to be around 30 basis points. As a result, we have delivered a significantly improved statutory profit before tax of GBP1.8 billion, after making further provisions for legacy charges, including GBP2.2 billion for PPI.

Looking at the balance sheet, our strong balance sheet and key ratios continue to improve. On capital, our key capital ratios are amongst the strongest in the banking industry.

Our common equity tier 1 capital ratio increased to 12.8%, from 10.3% at the end of 2013 and well ahead of our targeted growth. Our leverage ratio is at strong at 4.9%, and total capital stands at 22%, positioning us well compared to peers and for later in 2015 when we expect to receive greater clarity on TLAC and MREL requirements. Ed will provide further details shortly.

Going forward, given our strong levels of underlying profitability and the anticipated reduction in the below-the-line items, we would expect the business to generate between 1.5% and 2% of additional core equity tier 1 per annum, pre dividend, starting in 2015. This is essentially an acceleration of last year's guidance, which indicated 2.5% over the next two years, and 1.5% to 2% per annum thereafter. Given we delivered 250 basis points in 2014, we brought forward the later part of the guidance.

As you know, the capital framework continues to evolve and we, and now assume the steady state core equity tier 1 ratio requirements for the group to be around 12%, compared with our previous estimates of around 11%. Despite this increase, we are still targeting a Group return on required equity of 13.5% to 15%.

Looking at the runoff portfolio and risk-weighted assets, the runoff portfolio now stands at just under GBP17 billion, and well below our guidance of less than GBP20 billion for the year. Risk-weighted assets now stand at GBP240 billion, down GBP32 billion, or 12% in the year, and clear evidence of our continued de-risking of the balance sheet. This reduction has been led by runoff, where RWAs are down by GBP14 billion, due mostly to disposals, and commercial banking, where RWAs are down GBP18 billion, or 14% thanks to the active management of the portfolio.

In summary, 2014 was another year of achievements. Underlying profitability is strong, statutory profit saw a fourfold improvement, and capital ratios continue to improve.

In the shorter term, we expect the Group to continue to perform strongly. In 2015, we expect our net interest margin to increase further, other incomes remain broadly stable, and our low-risk business model to be reflected in a low AQR. We also expect the business to remain strongly capital generative.

And now, I will hand over to Ed.

Thanks, Douglas, and good morning, everyone. Or rather good afternoon in Europe, and good morning in North America. Douglas has given us an overview of the credit highlights, and I'm going to focus on the bank's balance sheet, covering some of the continuing and evolving themes that are familiar to many of us. In the last 12 months, we continued to build on the strong progress made over the last several years, further de-risking the balance sheet by reducing wholesale funding in the runoff portfolio, strengthening the capital position to allow the resumption of dividends, building our liquidity resources, and positioning the bank to meet the evolving regulatory environment.

Let's begin with highlights of the Group's funding and capital developments in 2014. Over the course of the year, we significantly reduced our reliance on wholesale funding by the careful management of our lending portfolio and the growth in our relationship deposit base. As a result, we've seen our loan-to-deposit ratio further declined to 107%, compared to 113% at the end of last year. This ratio is now within our medium-term range of 105% to 110%.

During 2014, total wholesale funding fell by GBP22 billion, down to GBP116 billion in total, 65% of this has a maturity of greater than one year. This reduction was driven by an increase in customer deposits, and that continued reductions in the run-off portfolio, and the balance sheet effect of exchanging ECNs for new additional tier 1 securities, which are recorded as equity. Our wholesale funding is now broadly equivalent to the primary liquid asset portfolio, which was GBP109 billion at the end of 2014.

Term issuance in 2014 totaled GBP10.6 billion, with a good proportion of this in the form of privately-placed medium-term notes. We also successfully executed strategic benchmark trades in euros and dollars where it was economic.

2014 term issuance also included approximately GBP1.5 billion worth of pre-funding for 2015. Including this, we have issued GBP4 billion year to date in 2015.

The strategic benchmark transactions completed year to date have refinanced the Group at spreads much tighter than those achieved during 2009, 2012. We would expect to issue term funding across a mix of secured and unsecured markets at an average spread of around 70 to 80 basis points this year, assuming current market conditions persist.

For reference, Lloyds Bank PLC senior unsecured debt continues to trade in line with high-quality European bank credits in the secondary market. We expect 2015 issuance volumes to be in the region of GBP15 billion, and that includes private placement EMTNs.

Turning to capital. We continued to strengthen our capital position during 2014. Our fully-loaded CET1 ratio increased by 2.5%, to 12.8% post dividend. This improvement was driven by a combination of underlying profit, further dividends from the insurance business, changes to the Group's defined benefit pension arrangements, and reduction in risk-weighted assets.

The positive impacts of those items was partly offset by charges relating to legacy issues and the EC exchange tender offers, where the Group repurchased the equivalent of GBP5 billion of ECNs and issued GBP5.3 billion of new CRD IV compliant additional tier 1 securities. Our CET1 ratio is now amongst the strongest within the banking sector worldwide, positioning us well against the backdrop of evolving regulatory requirements for capital and leverage.

In 2014, the Financial Policy Committee published its proposed leverage requirement for UK banks, setting a minimum level of 3% plus supplementary systemic risk-based buffers of up to 1.05%, and a time-varying countercyclical leverage buffer of up to 0.9%. We are in a strong position with a fully-loaded leverage ratio of 4.9% post dividend, having increased from 3.8% at the start of the year. This was driven in part by the AT1 issuance in April, which accounted for 50 basis points of the increase. Our fully-loaded leverage ratio of 4.9% already meets the required minimum levels proposed by the FPC for major banks.

In 2014, the Group's total capital ratio increased by 3.2%, to 22%, on a transitional basis. With the introduction of the European Union's recovery and resolution framework in 2015, the strength of the Group's total capital ratio will continue to position us well for any future capital and funding requirements.

Following the recent PRA consultation on proposals to reform the Pillar 2 framework in the UK, we have also disclosed our Pillar 2A requirement, which, at December 2014, equated to 3.8% of risk-weighted assets, of which 2.1% is covered by CET1 capital. As Douglas mentioned earlier, the Group is now assuming a steady-state CET1 ratio of around 12%.

2014 was an important year for stress testing, with the Group participating in exercises carried out by each of the EBA and the PRA. The Group exceeded the capital threshold set for both these tests and was not required to take any action as a result of these exercises, despite the onerous stress parameters for a UK retail and commercial banking focused business model such as ours.

Over the course of 2014, we received a further clarity on banking regulatory regime requirements. However, uncertainties remain in a number of areas including liquidity, ring fencing, bank capital, and recovery.

First, let's have a look at liquidity. During 2014, we, as a Group, continued to strengthen our liquidity position. This includes primary liquid assets, which grew by GBP20 billion during the year, to a year-end total of GBP109.3 billion.

Primary liquid assets cover more than five times our short-term money market funding and are approximately equal to our total wholesale funding. In addition to primary liquidity, we have a significant secondary liquidity holding of approximately GBP100 billion, the majority of which is eligible for use in the range of central bank facilities.

Following the release of the European commission's delegated act in October and the PRA's consultation paper in November on the liquidity coverage ratio, the regulatory liquidity requirement for UK banks has become clearer. The delegated act is directly applicable in the UK, and the LCR will become the primary liquidity regulator requirement from October 1, 2015.

The PRA's consultation paper sets out how the PRA will transition from the current [ILS] regime to LCR. The PRA proposes to implement the LCR from October 1 with a minimum requirement of 80%, which is 20% higher than the delegated act requirement. This rises to 100% requirement by January 2018.

The consultation is due to end shortly, with final rules of the supervisory statement being published thereafter. Based on the Group's current understanding of the LCR standards due to be implemented in October, the Group believes that it met the upcoming requirements as of December 31, 2014.

The remaining regulatory theme is the net stable funding ratio. We await the final rules prior to implementation in January 2018, and we are confident that we will meet the regulatory requirement.

Second, the key area of regulatory reform, ring fencing. In July last year, the treasury finalized the secondary legislation in relation to ring fencing. Following that, in October, the PRA released its consultation paper on legal structure, governance, and continuity of services, which required us to submit our initial business plans in January this year. A further PRA consultation on the degree of financial separation is expected in the third quarter of this year.

So what does that mean for us? We would likely be less affected than the other major UK banks because the vast majority of our banking business will sit within the ring fence. This is consistent with our overall strategy to be a low-risk, UK-focused retail and commercial bank. We expect our insurance business to be largely unaffected, although it will obviously sit outside the ring fence.

Lastly, the resolution debate, which has received much attention of late, or bail in. Bail in is the focus of both the total loss-absorbing capital, or TLAC, proposals currently being developed by the FSB for G-SIBS, and the minimum requirement for owned funds and eligible liabilities, or MREL, which is currently being consulted on by the EBA and will apply to all credit institutions in Europe.

Whilst uncertainties surrounding the final design and calibration of both TLAC and MREL remain, the overarching policy intention for both proposals is clear. Regulators and issuers are working to create a more resilient and transparent banking system, which maintains the safeguards of creditor hierarchy and the principle of no creditor worse off, whilst ensuring that banks are better prepared for future financial stress without causing excessive systemic disruption to both the financial system and the real economy.

Lloyds Banking Group has a strong total capital ratio of 22%. Combined with our strategic focus to create a simpler UK-centric banking structure active in fewer international jurisdictions, with a prudent risk and conduct framework, we believe that the Group is well positioned to meet any future bail-in requirements.

Changing tack I'd like to move to discuss credit ratings. We continue to actively engage with the major rating agencies. Following the recent UK implementation of the EU's bank recovery and resolution directive, Standard & Poor's, Moody's, and Fitch have all indicated that they are likely to review sovereign support for major UK bank ratings in 2015. These reviews are industry wide and are not specific to the Group.

As you will be aware, earlier this month, S&P lowered the long-term senior rating on the Group holding company, Lloyds Banking Group, by two notches, to BBB. This rating action only applied to the Group's long-term senior rating. Subordinated debt ratings were unaffected by the announcement. However, at the same time, S&P also put the Holdco rating on positive outlook, as they could revise upward the unsupported group credit profile.

At the operating company level, Lloyds Bank PLC, S&P maintained the long-term senior rating of A, replaced Lloyds Bank PLC on credit watch negative. S&P indicated that Lloyds could lose up to two notches of support by early May, but have recently stated that the ratings could still be affirmed.

Lloyds Bank is currently rated A1 by Moody's and A by Fitch. We expect that both agencies will review these ratings later in the year taking into account regulatory changes in particular relating to recovery and resolution.

And finally, moving on to our ECNs. Following the release of the PRA stress test results on December 16, 2014, the Group announced that the remaining issued Enhanced Capital Notes were not taken into account for the purpose of core capital for the PRA stress test. A capital disqualification event occurred, allowing the Group, under certain conditions, to redeem, with the permission of the PRA, any series of ECN.

The Group has also indicated its intention to redeem those series of ECNs listed in the announcement, resulting in a reduction in tier 2 capital resources of GBP500 million. A firm must give the PRA notice of at least three months before carrying out any redemption, and the PRA is in the process of considering the application. We will provide an update to ECN holders on this process in due course. On the remaining ECNs we continue to consider our options, and there's nothing further that I can add on that today.

I am nearly at the end of what I wish to discuss today, and I'd like to leave you with a couple of thoughts looking forward over 2015. The Group's funding position and liquidity position have been significantly strengthened, and the Group has transformed its balance sheet structure in recent years.

With respect to funding supply for 2015, we expect our refinancing volume to be in the region of GBP15 billion and have made a good start to the so far this year. We do not expect to issue any further AT1, but we'll consider it lower tier 2, as required, to maintain an appropriate capital ratio.

We are one of the strongest capitalized banks worldwide, which, together with our low-risk capital-generative business model, positions us well to meet the evolving regulatory requirements as well as supporting the UK economy.

That concludes my part of the presentation, and I think, Nick, we'd like to hand back to you and open up the session for Q&A.

Thank you.

(Operator Instructions)

Lee Street, Citigroup

Hello. Thank you for the call. Thank you for the Pillar 2A disclosure. I was just wondering if you can confirm just what level of management buffer you're intending to run as we look ahead. And I'm just thinking about that in light of if you do have to apply a 3% ring fence buffer, how much that potentially eats into the headroom between where you currently are and your target 13% ratio.

Secondly, also on the Pillar 2A, as you state, Lloyds is a low-risk bank, and I don't necessarily disagree with you. I was just trying to reconcile the fact that Lloyds seems to have I think probably the biggest Pillar 2A requirement of any of the UK banks. Just trying to work out what I'm missing.

And then finally, on ring fence, just any comments on color or how you intend to fund the ring fence bank. That's all for me. Thank you.

Thanks, Lee. I'll take the questions 1, 2, 3. As George mentioned earlier today, the 12% target that we have does include a management buffer, but we haven't given any more detail on the composition of the various buffers, as at this point in time, we feel it's inappropriate given the continuing evolution of capital requirements. I think as we go through the year and we were in a better position to give you more useful information, we'll do so.

If I jump to the ring fencing, Lee, did you mean the funding of the ring fence bank or the non-ring fence bank?

The non-ring fence entity

So I'll just touch on that. And I think, really, it's a little bit early to give anything, particularly details on that, largely as the rules are still being set, and we're obviously going through the consultation later in the year with the PRA.

But our non-ring fence bank will, at least from an initial analysis, be relatively small, and we suspected that there may be some capacity to fund from deposits, which will be included in the non-ring fence bank entity. I think it's really, from our perspective, going to be a fairly small entity at this point in time, and we don't really have any much more details than that.

Okay.

And apologies, Lee. I wrote down here another Pillar 2A question, which was your second one.

Yes, the question was basically, I think you've got the biggest pillar 2A requirement of any of the big UK banks I've seen, and obviously, you've made the point you're a very low risk bank, and so I agree with that. I was just try to work out what am I missing? Why is it so high? If there's any comments or color you can give on that, because it just a bit of a contradiction.

(Inaudible) I suspect, given what we've seen in recent Pillar 2A disclosures from a couple of these other banks who have reported recently, we're pretty much the same size in terms of requirement. And I think if we look at our Pillar 2A, the issues are, we are quite concentrated in the UK, which to some extent is -- it underlies the analysis. And I think that's really as much as we have to say.

It's quite a difficult one there, Lee, because as you probably know, the way the regulators work with regard to disclosure in this area is that we're not actually allowed to disclose any detail on why our ratio is higher than our peers and how it comes about. So from that perspective, going into detail, we don't know exactly what's driving the other ratios. That's why actually providing any additional detail at this time is just really difficult.

That's fair enough. Thank you very much for your comments.

Robert UBS.

Good afternoon. Thanks for [doing the call]. Couple of questions, just on some of your comments. First, on the ECNs, you said that this would result in a reduction of GBP500 million in tier 2, and I'm assuming when you talked about potential sub-debt, it would be replacement for that and not much more than that this year?

Rob, hi; it's Ed. I think that GBP500 million was, as soon as you announce an attention to call a security, we're required to remove that portion from our reg cap requirements. So the securities involved is about GBP500 million worth of reg cap that's just been deducted as soon as we announced the intention.

In terms of refinancing, I think we obviously have an eye to what the changing outlook for TLAC and MREL is, so we won't give you a figure on how much tier 2 issuance were going to be doing this year, apart from saying that clearly, we have a pretty good total capital ratio, 22%. But we do want to maintain a very healthy capital ratio, and I think it really will be, dependent on how our understanding of the TLAC, and more specifically the MREL, rules, how we better understand that will influence our issuance.

Okay, and thanks. Working through the numbers on the funding side, you had said GBP1.5 billion pre-funded for the year. Already done GBP4 billion, so that's GBP5.5 billion.

I'm sorry, the GBP4 billion includes that. That's GBP1.4 billion.

Okay. So we're still getting to a number, though, that you could probably satisfy through the private MTN market, given what you did last year. Is there still that appetite in that market for GBP10 billion, GBP11 billion, GBP12 billion to do? Or would you look to the public market to supplement that after that, with the private market being your first port of call.

I think probably to disabuse you a little bit, Rob, I think we would anticipate a very good number in the private placement markets, GBP4 billion or GBP5 billion for a full year. So we will very likely be looking to access the public benchmarks again this year.

One last one if I could. I know we've seen some subordinated debt mature, be call from the [HBOS] box. Is there a requirement to keep that funded and capitalized? Can we expect to see some kind of issuance out of there? I know there's also collateral and potentially DTAs. Is the current commentary about DTA qualification force you to think about that a little bit more?

I think the broader question, Rob, if I might, is where will we be issuing our capital securities for the Group? I think we have stated over the course of the last year that it's our intention to issue capital securities at the group level, at the holding company level, and then over time, downstream as appropriate to the various operating companies. So at least from where we are today, it's unlikely that we'll be looking to issue any subsidiary levels with capital instruments.

In terms of any covered securities or unsecured, could we (multiple speakers) --

Covered (inaudible) we'll be issuing at the Lloyds Bank level, as we currently do today. In terms of the more or pure funding senior unsecured, we're fortunate that we do have a degree of luxury, if you will, at the moment, that we have the choice of issuing at the operating company level, or potentially the group level, and certainly, what you've seen from us in the last couple of senior unsecured trades, it's been at the bank operating company level.

Right. Okay. Very good. Thanks for the clarity.

Tom Jenkins Jefferies

Hello, gentlemen. Just a couple of quick ones. Well, I hope they're quick. I appreciate you mentioned the need to maintain the principles of the creditor hierarchy no creditor worse off, which is great.

In that vein, I'm looking at a couple of issues here, one you may or may not want to comment on. The first thing is, there's a particular security, that perpetual sterling security, 13%, 2029 call. There's 26 points of coupon left outstanding on that. I just wonder how you feel in terms of repaying that coupon behind, as it were, paying the shareholder dividend. I know you've got lots of things in the air and that getting a shareholder dividend out there is important. I just wondered if you are considering at any time an early payment of that coupon.

And then secondly, moving on to the ECNs, and I know you may not want to talk about this, but I think it's -- you seem adamant that a capital disqualification event has occurred and that that would ideally redeem the -- I see you're redeeming the notes at the earliest opportunity, presumably within the next month to five weeks. I was just wondering if you would agree to accepting a declaratory judgment from a court as to whether indeed a CD has occurred, given it is quite contentious, in particular, if the FSA and/or your largest shareholder, the government, asked you to do so. I wonder if you can just comment on those, please.

So Tom, on the [ACSN], the 13%. I think, as we have done in the past, we would say that we will respect the contractual features of the security. I really don't have anything more to say at this point in time on that. On the second question, on the ECNs, I think you're right. We really have nothing further to say than we've said on the call today.

So you wouldn't be willing to -- do you appreciate that there is a contentious issue around the capital disqualification event clause, or are you 100% certain that one has occurred?

So Tom, I don't want to get drawn into a discussion about the ECNs. I've said as much as we're going to say today.

Thank you.

Cagdas Hatinoglu, HSBC.

Thanks very much for the call. A couple of questions if I may. One of your peers shared their plans related to how they were positioned for the ring fencing. Their OPCO will be a non-ring fence entity and has the existing debts at that point in time, the obligations of the non-ring fence entity. Could you please give me some color on how ring fencing will work for you and how your Lloyds Bank PLC debts will be positioned at that point in time, by 2019?

And my second question is, I was just wondering how the consolidated assets of the Group is less than the Lloyds Bank PLC. And the third one is, could you please remind me the difference between the underlying impairment provisions of GBP7.6 billion, versus the statutory number, which is around GBP6.4 billion?

We've got three questions, I think, (inaudible). All of them have a bash at the ring fencing one. As we referenced on the presentation earlier, we have a relatively straightforward Group structure, and anticipate that that will remain, when we transition into the ring fencing world, where the bulk of the Group's assets will be within the ring fence. At the same time, the bulk of the Group's liabilities will remain in the ring fence. So explicitly, with outstanding Lloyds Bank PLC debt, we anticipate that that will be within the ring fence.

Thanks.

Could you just run by me that second question on the consolidation. I didn't quite --

When I look at the first-half numbers, the (inaudible) of the Group PLC is around GBP843 million, while Bank PLC is GBP859 million and (inaudible) is around GBP396 million. I was wondering how the Group PLC is smaller than the Bank PLC on a consolidated (inaudible).

I think it's fair to say there that probably the precise detail about how the ring fence is going to work is yet to be clarified. So giving specific content on that is quite difficult. However, what is clear, which Ed has already highlighted is, actually the majority of our business is likely to be within the ring fence.

Just to supplement that with one thought, the insurance company will be outside the ring fence. So if you deduct the insurance company assets from the Group, that will be outside the ring fence, but that clearly does not include the outstanding Lloyds Bank debt.

Okay.

And clearly, from an insurance perspective, it would be outside the Group. That already has its own governing structures in place.

Right.

Your final query was relating to impairments. I think it's fair to say that we've seen a significant improvement in both the impairment charge, and indeed, the impaired loans as a percentage of closing advantage through the year. You can see particularly on the impaired loans as a percentage of closing advances that reduced from 6.3% at the end of 2013 to 2.9% at the end of 2014. Clearly, that's being driven by both continuing business, and indeed, the run-off portfolios. So what you are seeing is both an improvement both within the core book, and indeed, the run-off side.

Right. I see this. But when I look at the underlying numbers GBP7.6 billion, and the statutory number for the provisions number is GBP6.4 billion, so I was wondering where the difference comes from actually. Why would the (inaudible) between underlying impairments provisions and the statutory numbers different?

Why don't we take that off-line, and then I can give you a call, and we can discuss specifically your question.

Sure. Definitely. Thanks very much.

Gildas Surry, BNP Paribas.

Thank you. Just wanted to ask a question on the (inaudible), the Holdco, when it comes to the ECNs. Do you think that the PRA is looking at the two guarantors differently, especially when it comes to TLAC?

I think the TLAC issue, if I understand your question, it's very much a Group issue. So we look at the issues from a consolidated basis, so the underlying guarantees are not relevant.

With your discussions with the PRA on the ECNs, do you think that there's a different treatment given to Holdco guaranteed ECNs versus operating entity?

I hesitate to spend any more time on the ECNs. All I say, the PRA -- just to give you a little bit, the PRA will look at our capital position, and all they are looking at whether we have appropriate capital resources that would allow us to meet our obligations if the notes were called.

Okay. I've got another question on the hybrid mentioned by term, the 13%, especially the one that callable in 2029. When we look at the regulatory call, so in effect, because of the amortization of the [conservatory] limit, those instruments will no longer contribute to tier 1 by 2022? Do you think that we should look at the regulatory call in the context of tier 1 or also TLAC?

I think, really, it's the contractor terms of that bond is what you need to look at.

Okay. But you don't see the contractual reference should be widened to something beyond tier 1, or tier 2, CET1, and compare to TLAC?

I think we can't really give you any more insight, I'm afraid. The rules, particularly in that relatively complicated situation, are still evolving.

Yes, indeed. The last question I have is on internal TLAC. I appreciate that Lloyds (inaudible) are, I would say, above the line, given it's not a G-SIB, right between MREL and TLAC, but how do you approach TLAC conceptually when it comes to internal TLAC? In particular, the most efficient format of internal TLAC between and the (inaudible) Group and the subsidiaries. Have you given some thought about whether it would more efficient to have equity or AT1 or even tier 2? And in case of AT1 and tier 2, how do you see the actual coupon of those securities being set if it's an internal TLAC, if it's an internal instrument.

That's a very good and very relevant question. I'm going to give you a non-answer in the sense that we really do need to see what the rules are in particular for MREL and the requirements on the solo entity basis before we can give you a useful answer there. But it's certainly something we'll pick up as the rules become clearer.

Okay. Thank you very much.

Greg Case, Morgan Stanley.

Thanks a lot for having the call. Just a few from me if you don't mind. Mostly, I just wanted to dig a little bit into your instruments requirements for this year.

You're saying, I think it was GBP15 billion, and I also thought you'd taken GBP6 billion in FLS back in Q4. So that brings me to, what, GBP21 billion requirements when -- and I'm wondering what the cash requirement is. Bloomberg showed me you've got maturities about GBP7 billion this year, albeit that's possibly wrong. Is this funding growth, or is it potentially to build up your LCR ratio? I'm still noticing you're not disclosing that.

Greg. I think the cash component, it's the GBP15 billion that we've been speaking about. I think it's a combination of three things. One, refinancing. Two, replacing shorter-term funding that historically we'd kept in the money market. There's still a bit of work to do about reducing the very short-term funding that we have in the Group. And yes, there will be a component of that that helps us make sure we're well in excess of any LCR requirement.

And can you give us a timeframe for when you'll be likely to disclose the LCR? Will that be alongside the October requirements or --

I think that's a very good assumption. It's difficult to disclose it until we have a full picture of what the rules are.

And just on mortgage market, I know, obviously, there's more and more people in it every day, and it seems that margins are coming down. Can you give us a sense of where your underwriting is going? Is the credit quality remaining flat, or are you going further up the LTV curve or anything at the moment?

If you look at all the detail, our credit's appetite very much remains flat. In all of the growth aspirations that we highlighted both at the strategy updates and indeed today as part of the call with Antonio looking at how the mortgage market would grow or how we would grow in that area, and indeed, SMEs, mid-markets, and indeed the consumer finance, none of that is based on an extension of our existing risk appetite. It's certainly stable; it certainly won't be increasing.

Thank you. And just finally, (technical difficulty) might be a bit premature and that you can't answer, but -- and for non-ring fence bank, how do envisage that would be funded? Would that be largely repo with maybe some Holdco debt, or directly from the subsidiary, or does it just depend on the rating?

I think you've hit on a couple of the alternatives. Clearly, the rating of the non-ring fence bank fence will be relevant. I think the biggest factor will be this funding, the size of the funding requirement in the non-ring fenced entity.

To some extent, there's a limited capacity to lend from Group down to the non-ring fenced bank, but that will be fairly small. So clearly, at some level, the amount of funding required will either be met by deposits that the entity can raise or by debt that it can issue, which then comes back to the rating question. And I really think it's too early for us to give you a definitive answer, as we haven't finalized either the rules or what we're actually going to, in final form, have in the non-ring fenced entity.

Okay. That's fair. Thanks a lot.

James Hyde, Primerica.

One funding, one corporate structure question, and one on asset quality. I really welcome what you said that made it clear at this stage that all the existing Lloyds Bank debt is going to stay in the ring fence. Does that also apply for sub-debt?

Secondly, does this strange situation where you've got a Holdco under the OPCO owning and other Holdco owning another HBOS, is that still going to continue once the ring fence is going to take shape? I've seen that for a while with the Scottish referendum. That decision may have been affected by that.

Finally, an asset quality question. I just want to check on something that seems almost miraculous. You guys, in the half year, you got -- impaired loans went from GBP25.4 billion to GBP14.3 billion, and you upped the coverage ratio from 52 to 56. And I know, obviously, you've done some [NPL] sales. But typically, when that happens by other banks, it is the highest provided for that get sold. It looks like what you sold is at the average or even less provided. Am I missing something, or is it really that good, what's happened, or are there accounting the retreatments that play into that.

Thanks, James. We'll go through the questions one by one. With respect to sub-debt issued at the OPCO or subsidiary levels, clearly, over time, we would imagine that we'll be refinancing at the group level. I think that's probably the best way to think of it for now, so that there'll be a natural movement of sub-debt securities up to the group level.

And in the related organizational structure question, I think we -- clearly, there's an opportunity with the ring fencing requirements to look at our legal entity structure, and you could argue there are a number of intervening holding companies that we should look at the efficiency of those. But I think that's a big piece of work that we will be kicking off, I suspect, relatively soon. But I can't give you an answer on that right now.

I'm just thinking of sub-debt that's dated, or even called, beyond 2019. That's likely to stay at Lloyds OPCO?

I won't give you an explicit definitive answer on that. It really -- and apologies for giving this answer again -- it does depend to some extent the TLAC rules and where it's appropriate to hold our subordinated securities. I think, at least initially, it is more about migration process. As things are called and mature, we would refinance at the group level. But as you well know, the environment can change.

Right.

I'm looking at your final question on asset quality. I can assure you that there's no specific accounting retreatments going on there. I think it's more to do with the mix of the book and the mix of the assets. Clearly, if you look at it from some of the portfolios that have been sold during the year, clearly, the most notable ones have been the ones in Ireland where we've made a retail sale and we also did commercial real estate. Some of those were heavily impaired; some of them weren't.

Now, when you look at it from the UK side and the actual mortgage book, you will see that the actual impaired loans for the UK secured book have actually reduced by 30% themselves. So they actually came down from GBP5.5 billion to GBP3.9 billion, and that's reflecting the quality of the book, the continued improvement in the economy, together with the continued low interest-rate environment. And as you see now, we've taken the opportunity and been prudent while actually maintaining the coverage ratio on that book at the time.

So there's no accounting jiggery-pokery as such. It's more to do of a mix of business that we've seen.

That is very helpful. Thank you very much.

Daniel Crowe, Autonomous.

I just had a quick question. You're not actually a G-SIB, but do you expect to have to meet both MREL and TLAC requirements, and has the regulator suggested this to you? A competitor mentioned that they were looking at the high end of the 16% to 20% in the Pillar 1 buffer. Is that something that you've been told?

To answer your specific question, Daniel, we are not a G-SIB, so we will be falling under the MREL requirements as a European financial institution. However, with that said, I think it's our expectation, or our hope, shall we say, that TLAC and MREL will converge so that we have a single standard.

We should also recognize that as a significant bank in the UK, we would expect that the PRA will tend to treat us consistently with G-SIBs basically, in terms of buffers. But we have to wait and see.

Okay. Understood. Given that the focus on capital then, would you look for the ECNs that were untouched in the future? If you are looking to switch them out, would you look to switch them into tier 2 rather than a cash offer?

So, Daniel, I think right now, we're looking at a number of options on the non-prioritized ECNs.

Yes.

One final question on that. I think in the doc that it mentions that you don't actually need the permission of the PRA after five years, just no objection. If the PRA doesn't say anything to you by March 18, I think, I assume that you can just go ahead.

In the case of redemptions of capital securities, we do require positive response from the regulator.

Okay. Perfect.

Robert Montague, ECM Asset Management.

Thanks very much for holding the conference call. Couple of quick questions regarding your MDA trigger ratio. Given that you've disclosed a 2.1% (inaudible) component of your (inaudible), am I right in assuming you put a 9.1% MDA trigger ratio on an endpoint basis, a 6.1% from 2016? And given that you've also said that your steady state core equity tier 1 ratio is around 12%, can we infer a management buffer around 300 basis points?

Robert, on that, if we were to look at it today, clearly, there is a big buffer between the minimum requirements and where our core equity tier 1 ratios are. However, I think we have a number of the buffers of regulatory requirements we'll phase in over the next few years. I think our -- what George said today is that our steady state 12% includes a management buffer, but we're not, at this point in time, have a clear answer for you on what the size of the management buffer will be, as that would evolve as the rules settle down and we transition into the end state.

Right. But the MDA buffer of 9.1%, I'm correct in assuming that in 2019?

I think it really depends on the size of the other buffers because -- don't want to spend too much time on turning down.

But no G-SIBs, it's 4.5 to 2.5 (multiple speakers) --

It's the same buffer. There's a range, and we don't know where we will be in that range at this point in time.

There are no further questions at this time.

Okay. Gentlemen and ladies, thank you very much for joining us on this call.

Thank you very much, indeed.

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect.