Lloyds Banking Group PLC (LYG) 2016 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Lloyds Banking Group 2016 results fixed-income conference call.

(Operator Instructions)

Douglas Radcliffe and Toby Rougier will outline the key highlights of the Lloyds Banking Group 2016.

(Operator Instructions)

I must advise you that this conference is being recorded today, and I will now hand the conference over to Douglas Radcliffe. Please go ahead.

Good afternoon everyone, and thank you for joining this debt-focused call on the Group's full-year results. For those who don't know me, my name's Douglas Radcliffe, and I'm the Group's Investor Relations Director, and I'm also joined today, as the lady said, by Toby Rougier who is our Group Corporate Treasurer, and Richard Shrimpton, who is Group Capital Pensions and Issuance Director.

A number of you may have dialed into the results call this morning. If you did, I apologize as I'll run through some of the key points again. I'll cover the financials, and then hand over to Toby, who will cover the balance sheet debt in more detail. Finally, we have set aside some time at the end for Q&A.

So in 2016, we made significant strategic progress, and delivered strong financial performance. Our low risk and simple business model provides us with significant competitive advantage, as seen in the consistently high and stable underlying profits the Group has generated over the last few years.

The Group is now translating that underlying profit into strong statutory profit, with the gap between underlying and statutory profit narrowing. The Group remains strongly capital generative, and we have delivered around 190 basis points in the year, which has enabled us to fund the MBNA transaction, increase the total ordinary dividend by 13% to 2.55p per share, and return surplus capital through the payment of a special dividend of 0.5p per share.

Turning to the financials in more detail. The Group delivered good underlying profit of GBP7.9 billion. Income was marginally down, with stable net interest income, and slightly lower other income.

The operating drawers were once again positive, with our continued focus on cost management delivering a 3% reduction in operating costs. The impairment charge did increase on prior year, but this was solely due to the anticipated lower level of releases and write backs.

Net interest income was stable at GBP11.4 billion, with an 8 basis points increase in the margin to 2.71%, offset by slightly lower average interest earning assets. The improvement in the margin once again reflected lower asset pricing, more than offset by lower deposit and funding costs.

Moving forward, we will see the full benefit of the deposit repricing we implemented in December, and we will continue our focus on margin optimization. As a result, we now expect the full-year margin in 2017 to be greater than 2.7%, and this is before any benefit from MBNA.

Our relentless focus on costs and proven cost management capability have allowed us to reduce absolute operating costs every year since 2010, and in total by around GBP2 billion, while continuing to invest in the Group's strategic priorities. This track record of delivery gives us confidence that even in this lower rate environment, we can maintain our previous cost guidance, and we are reaffirming our commitment to deliver a cost income ratio of around 45% as we exit 2019, with reductions every year.

On credit, our asset quality remains strong, with no signs of deterioration in the portfolio. The charge for the year was GBP645 million, with a stable gross AQR of 28 basis points, and a net AQR after write-backs and releases of 15 basis points. In 2017, we again anticipate the gross AQR remaining stable, reflecting the strong credit quality of the book, while the lower level of releases and write-backs next year means we expect a net AQR of around 25 basis points.

As mentioned, statutory profit before tax has more than doubled to GBP4.2 billion, reflecting the good underlying profit and lower below-the-line charges, primarily from lower PPI provisions. As a result, our capital build in the year was strong at 190 basis points, and going forward, we anticipate our ongoing capital generation remaining strong.

We therefore now expect to generate between 170 and 200 basis points of CET1 capital per annum, pre-dividend. In terms of returns, we now expect a return-on-acquired equity of between 12% and 13.5% in 2019, a slight reduction from our previous guidance, to reflect the changed environment, and this represents a return on tangible equity of between 13.5% and 15%.

Finally, looking at the capital balance sheet, average interest-earning assets excluding runoff were broadly stable compared to 2015 at GBP426 billion, with growth in consumer finance and SME offset by lower mortgage lending. Runoff continues to be managed down, and reduced by a further GBP3 billion in the year to GBP11 billion.

In terms of risk-weighted assets, these reduced by GBP7 billion during the year as we continue to derisk the balance sheet. This has been achieved through a range of actions including securitizations, disposals, and the continuation of our portfolio optimization in commercial banking. I will now hand over to Toby, who will cover the balance sheet in more detail.

Thank you, Douglas. Good afternoon everyone, and good morning to those dialing in from North America. Douglas has provided you with an overview of the full-year results, so I'll now provide an update on the Group's balance sheet, covering the Group's capital, funding and liquidity positions. I'll then touch on some of the regulatory developments we've seen in 2016, and finally comment on our issuance plans for the remainder of this year.

As Douglas mentioned, the Group has delivered a strong financial performance in 2016, and this is reflected in the continued strengthening of our balance sheet.

Let me start with capital. The Group continues to be strongly capital generative with 220 basis points of underlying bank capital generation in the year, largely driven by underlying profits. In addition, CET1 also benefited from 20 basis points from the dividend paid by the insurance business early this month in respect to its 2016 earnings, and by 30 basis points from RWA reductions and other items.

Market movements contributed another 20 basis points, with a gain from the reclassification of the gilts, partly offset by pensions and other market movements. Against this, we had conduct charges which reduced CET1 by around 1% in the year, in part as a result of the additional PPI provision taken in Q3. Net capital generation for the year was 190 basis points pre-dividend, and our year-end CET1 ratio was 13.8%, post the ordinary and special dividends announced today.

Going forward as Douglas mentioned, the Group expects to generate between 170 and 200 basis points of CET1 annually pre-dividend. In terms of our CET1 requirements, we were recently notified that following the annual review, the PRA has reduced our PRA buffer to reflect the significant derisking that the Group has undertaken in recent years.

As you know, there are a number of future regulatory capital developments, including the introduction of the systemic risk buffer in 2019, and as a result, despite the reduction, the Board will continue to target a CET1 ratio of around 13%. The difference between our year-end ratio of 13.8% and our target ratio of 13% represents a retention of around 80 basis points, to cover the impact of the MBNA transaction.

The Group's total capital ratio also remains robust at 21.4%, which is one of the highest levels globally, and continues to provide significant capital protection for our senior creditors. And finally on capital, the Group's leverage ratio over the year also increased on a pro forma basis to 5% versus 4.8% at the end of 2015.

Turning next to funding and liquidity, the Group continues to maintain a prudent funding and liquidity profile. At the year end we held around GBP121 billion of LCR eligible liquid assets, broadly unchanged from a year ago.

As we discussed at the time of our half-year results, we maintained a higher level of liquidity across the referendum period, and we also saw liquidity increase over this period from inflows of collateral and deposits. As a result, in the fourth quarter of this year, we managed down the liquidity position, and have now returned to a more normalized level.

To put our liquidity portfolio in context, it's now slightly in excess of the Group's total wholesale funding, at almost nine times our short-term money market funding. Our LCR ratio remains comfortably in excess of the regulatory minimum. In addition to our primary liquidity, we have around GBP120 billion of secondary liquidity, the vast majority of which is collateral eligible for use in a range of central bank or similar facilities, hence the Group's overall liquidity position remains strong.

Turning now to funding. The Group continues to fund its balance sheet predominantly through customer deposits, with a loan-to-deposit ratio of 109%, roughly flat on the year, and in line with our target range. Customer deposits have declined by about GBP5 billion during the year as we continue to optimize our deposit and funding requirements, and this reduction is broadly in line with the asset side of our customer balance sheet.

Also, our funding decreased by GBP9 billion to GBP111 billion at the end of December, primarily due to the liability management exercises and buybacks completed in the fourth quarter, and the reduction in money market funding. The Group maintains a strong and diverse funding platform, which comprises a number of customer deposit franchises, together with a range of secured and unsecured wholesale funding programs. On the wholesale side, I'll come back to our plans for issuance in 2017 a little later.

Taking a step back to discuss the broader market and regulatory environments. During 2016, we got further clarity on our MREL requirements, following the publication of the Bank of England's policy statement at the end of last year. As a reminder, Lloyds is not a GSIB, and as such, we're not subject to TLAC, but we are required to meet the UK's MREL requirements.

The Bank of England has set an interim MREL requirement which is equivalent to two times Pillar 1, plus one times Pillar 2A in addition to the capital buffers to be met by January 2020. For us, this is expected to be a mid-20%s requirement as a percentage of RWAs, based on our current Pillar 2A, which as you know, is reviewed annually by the PRA. The Bank of England has said they will review the calibration of MREL in 2020, before setting end-state requirements, which will then need to be met by 2022.

The Group is well placed to meet both interim and final MREL requirements due to our strong total capital position of over 21%, and our diversified funding platforms. We expect to meet our MREL targets organically, primarily through the replacement of sub debt and some OpCo senior debt as it matures.

To give you a sense of quantum, we have on average around GBP5 billion of OpCo debt, which is 2.5% of current RWAs, maturing in each of the next three years. It's part of this debt we will refinance at HoldCo level to meet our MREL requirements.

We have made good progress on MREL so far, raising around GBP5 billion of HoldCo senior debt over the last eight months, to give us an MREL ratio of just over 23% today. This included our inaugural HoldCo senior issuance completed in the week following the EU referendum, which demonstrated the strength of our investor base and funding franchise.

Also important on the regulatory front is the continued preparation for the introduction of in the ring-fencing in the UK in 2019. As previously outlined, the Group expects the vast majority of our business to sit within our ring-fenced banking group, which will include Lloyds Bank PLC, HBOS, and Bank of Scotland. Outstanding debt from these entities will sit within our ring-fenced bank.

Our non-ring-fenced bank will be a new legal entity, which will be relatively small in size and will largely comprise our DCM, and some of our financial markets business, together with our non-EEA activity. The non-ring-fenced bank will be funded by customer deposits and internal capital, and is unlikely to have a significant external wholesale funding requirement.

Finally then, in terms of our issuance plans for the rest of this year, as I said earlier, the Group's balance sheet is broadly stable, and hence our funding requirement is similarly stable, and remains in the region of GBP15 billion to GBP20 billion per annum, maybe a bit more or less in any one year, depending on market conditions and how maturities fall. In terms of volumes for 2017, we expect issuance to be at the lower end of this GBP15 billion to GBBP20 billion range, partly due to the availability of the Bank of England's term funding [mystique].

In terms of products to expect in 2017, we'll look to issue between GBP4 billion and GBP5 billion of HoldCo senior debt during the year in both public and private markets, as we progress with our MREL requirements. In January this year we raised over GBP2 billion of HoldCo senior debt, so you can expect roughly the same amount again during the rest of the year.

In addition, we'll continue to have a natural need for funding at the OpCo level, and we'll need this through a combination of public and private debt, both secured and unsecured, across a wide range of currencies. This is in line with the Group's desire to maintain a diversified funding platform by currency, product and geography.

In summary, the Group continues to maintain a robust funding and liquidity position. Our healthy year-end capital position, together with the strong capital generation in our business, continues to position us well amongst our peers, and to meet any future regulatory changes. Douglas, back to you.

Thanks, Toby. So to sum up, in 2016, the Group made further good strategic progress, and delivered strong financial performance. Our differentiated business model is delivering, our cost discipline and low-risk approach are providing competitive advantage, while the investments in our multi-brand and multi-channel distribution platforms is enabling us to create the best customer experience.

The business is also delivering strong statutory profit and capital generation, as the gap between underlying and statutory profit narrows. 2017 will see us focused on delivering the final year of our current strategic plan, and our confidence in the Group's prospects is reflected in the increased dividends we have announced today, and the strong financial targets we have set. That concludes today's presentation, and we are now available to take your questions.

(Operator Instructions)

Your first question comes from the line of Lee Street. Please proceed.

A couple from me. On your HoldCo senior, I noticed you changed your terms for your recent review versus the ones you've done previously. Just to confirm what your thinking is, what you think the ones done previously will be grandfathered for MREL purposes?

Secondly, in your report, you obviously report in addition the modified UK leverage ratio. Just, does that impact the way you're going to manage liquidity at all?

And also you refer to a recalibration happening there. Can you just explain how that will work in practice, and what the implications are?

And finally, just any thoughts from yourselves on risk weighting before risk weighted flows, risk weighted asset flows, just what your thinking is there. That would be most helpful. Thank you.

I missed the second one. What was the second question?

Your modified leverage ratio, is that going to change the way you manage liquidity at all, and how does the recalibration work, and what does that recalibration actually mean in practice?

Let me start with that one. So yes, we do publish a modified leverage ratio in R&S. I think it's slightly higher, about 5.2% as opposed to 5.0%, which is the CRR number. The principal difference is, as I'm sure you're aware, the principal difference is the exclusion of central Bank deposits.

In terms of the second part of your question, how that changes going forward, a short answer is we don't really know. I talked about recalibrating it, with that adjustment in mind, so I can't really give you much more information than that, in terms of how that recalibration might work.

In terms of how we think about this, we look to maintain a leverage ratio broadly around, or in excess of 4.5%, so that keeps us well above the regulatory minimum, and we think it's roughly the right sort of number for us. So to be honest, the modification of the leverage ratio doesn't really have a great deal of impact, in terms of how we think about the business.

I think you asked also a question about HoldCo senior, and the change of the terms. I think that was, as I'm sure you're aware, that was just to reflect a revised draft of the CRR that was released in December, which updated some of the default language, was a proposal to update some of the event default language for MREL. We've updated our language, in line with that.

We don't really have any clear guidance from the PRA on this as yet, but I would have thought that would be a grandfathering period, if it was required. But that's supposition on my part currently. You had one last question which I think was on RWAs. Could you remind me?

Your expectation for risk weighting or flows, what your thinking is there. What you're thinking is there. Obviously we're waiting on VaRs, but what is your thinking?

We obviously follow that debate. We follow that debate very carefully. As I'm sure everybody's aware, the VaR committee was trying to finalize its proposal during 2017 for implementation somewhere in 2021 or beyond.

Judging from the recent commentary, it looks like that is going to be delayed. I have no particular insight other than what we see. It doesn't feel like that is coming to a conclusion, certainly not in the first quarter, which I think they were initially intending.

We do take comfort from the fact that certainly the European Commission has been very vocal in terms of its position, in terms of not wishing to significantly increase the capital requirements for banks. We've heard similarly from the Bank of England and PRA, both privately and publicly, that they are satisfied with the amount of capital in aggregate in the system. And so we watch developments there, wait for developments, but I've got no real further update for you on that.

Thank you very much for your comments.

Your next question comes from the line of Paul Fenner. Please proceed.

Quick question on sub supply. My understanding is that you've got no particular need for AT1. You've been coy to give us an indication around potential Tier 2. Can you give us a sense of how you might split that GBP15 billion, or do you intend to do this year, in terms of sub and within sub, the different categories? Thank you. Thank you.

You're right, I'm guiding you to the lower end of our GBP15 billion to GBP20 billion range this year. As I mentioned, probably about a third of that will be HoldCo senior. Most of the rest of that in addition to the OpCo funding at this stage, you're quite right in that we don't have any need to issue AT1 currently, having filled our requirement there.

We don't currently have plans to issue any Tier 2 debt, either. Our total capital ratio is a very healthy 21% plus. So we don't currently have any plans to issue further Tier 2.

Thank you. Very clear.

(Operator Instructions)

Your next question comes from the line of Corinne Cunningham. Please proceed.

Just a follow-up on the issuance requirements. I know your capital ratios are very high, but the capital has been issued, not necessarily by the right entity. Virtually all of it is out of operating Company level instead of new holding Company except for the AT1s. A lot of that is quite long-dated, as well, so I hear what you're saying about replacing it as it comes to maturity, but that would still leave you with quite a backlog to address. Perhaps you could give us a bit of an idea how you intend to tackle that? Thank you.

You're quite right, our capital ratios are very healthy. I think you called them very sound, but they're very healthy, and we're very focused on maintaining healthy capital ratios.

In terms of the OpCo debt, yes, you're also right, we issue out of a variety of entity, as of today, and an amount of it is out of the HoldCo. There's also legacy amounts out of both Lloyds Bank, Bank of Scotland, and I mentioned HBOS as well. You wouldn't have designed that. It's a function of legacy.

Going forward, all of the capital issuance will be out of Lloyds Bank Group, Lloyds Banking Group, so that will include AT1s, as far as we issue AT1s in the future and Tier 2, and also our senior HoldCo for MREL purposes. And as the sub debt comes up for maturity, we will look to replace it if required, at the HoldCo level.

You're also right in that we do have an amount of quite long-dated OpCo sub debt. I can't remember the numbers, but last time I looked at it, it was about GBP10 billion, GBP5 billion to GBP10 billion that was outstanding with a maturity post 2020.

That will still count as regulatory capital for those regulated entities, even if it's not eligible for MREL. It's also quite a long way out.

So we've got plenty of time to think about what, if anything we do about that. So I can't give you any guidance greater than that other than 2020 is still a while away, so we can figure out as we get closer to the time what it is we intend to do, if we intend to do anything about it.

Thank you.

At this time, I'm showing we have no further questions.

Okay. In that case, thank you very much everybody for dialing in. I hope that call was useful to you. Thank you very much.

Thank you all.

Ladies and gentlemen, this concludes the Lloyds Banking Group 2016 results fixed income conference call. Replay info for those of you wishing to review this conference, the replay facility can be accessed by dialing 0-800-032-9687 within the UK, 1-877-482-6144 within the US, or alternatively using standard international on 0044-20-71-36-92-33. The reservation number is 46878122-hash. Thank you for participating. You may all disconnect and have a great day.