Lloyds Banking Group PLC (LYG) 2019 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Lloyds Banking Group 2019 Full Year Results Fixed Income Conference call. (Operator Instructions) Douglas Radcliffe and Toby Rougier will outline the key highlights of the results, which will follow by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today.

I will now hand the conference over to Douglas Radcliffe. Please go ahead, sir.

Thank you very much, indeed, and good afternoon, everyone, and thank you for joining this debt-focused call on the group's 2019 results. My name is Douglas Radcliffe, and I'm Group Investor Relations Director for Lloyds Banking Group. And I'm joined by Toby Rougier, our Group Corporate Treasurer; and indeed Richard Shrimpton, who is Group Capital Pensions and Issuance Director.

A number of you may well have dialed into the results call this morning. And if you did, I'm afraid I'm going to have to apologize because I will run through many of the same points again that were mentioned by António, William and indeed Vim this morning. I will cover the strategic highlights and the 2019 financials, and then hand over to Toby, who will cover the balance sheet in a bit more detail. We've also set aside some time at the end for Q&A.

I'll start with the strategic highlights for the year. 2 years ago, we launched the third phase of our strategic journey with the aim of transforming the group for success in the digital world while continuing to support our core purpose of Helping Britain Prosper. Our strategy is underpinned by increasing levels of strategic investment, which is only possible due to our unique business model and market-leading efficiency. This investment drives improvements to the customer experience and delivers further productivity enhancements, which ultimately both creates greater investment capacity and underpins strong and sustainable returns. As we have said on many occasions, we see this as a key competitive advantage of our business model.

Since the start of GSR3, we've made around GBP 2 billion of strategic investments and are on track to meet our commitments of more than GBP 3 billion by the end of 2020. Our plan is built upon a number of ambitious targeted outcomes across 4 pillars, covering the breadth of the group. With 1 year remaining, we are performing well against these and running ahead of plan in many areas.

While we look at some of the outcomes in more detail, starting with leading customer experience. Through the combination of our unique business model and strong digital capabilities, we are the only provider to serve all of our customers' financial needs in one place. Our unique single customer view is now available to more than 5 million banking and insurance customers covering multiple products, including pensions, home insurance and protection, and we remain on course to extend this to around 9 million customers by the end of 2020. Our continued efforts to enhance customer experience has resulted in consistent improvements in our Net Promoter Score, up by 3% during the first 2 years of GSR3 or by nearly 50% since 2011.

Then looking at how we maximize group capabilities, the second pillar of our strategy. In line with our commitment to Helping Britain Prosper, we've continued to demonstrate support for U.K. businesses. We are a leading lender to SMEs. We've increased our stock of lending by around GBP 8 billion since 2010 versus the market that has decreased by around GBP 21 billion. This has resulted in a market share increase of about 6 percentage points to 19% at the end of 2019. We are also seeing a strong start for our joint venture, Schroders Personal Wealth.

In 2019, retail wealth referrals increased by 33%, with associated gross new assets under administration growing by 21%. Both have shown a strong pickup since the launch of the joint venture. We are confident that Schroders Personal Wealth can build on this positive start and meet the ambition of becoming a top 3 financial planning business by the end of 2023.

Finally, turning to digitizing the group and transforming ways of working before looking at the financials. We continue to operate a disciplined approach to cost management, supported by investment in transforming ways of working and new technological capabilities. And today, we announced a new target of less than GBP 7.7 billion of operating costs in 2020, having improved our cost guidance twice in 2019. Our cost advantage relative to peers now stands at more than 13 percentage points, having improved by a further 3 percentage points in the last 2 years, and we remain committed to driving further efficiencies.

As well as investing in our own capabilities, we also recognize a need to embrace external innovation and work collaboratively with fintech providers that can offer products and services that will deliver additional value to our customers. This has resulted in a number of existing -- exciting partnerships, and we continue to monitor opportunities in this space. Overall, our successful execution is reinforcing our competitive advantages and creating new ones.

Alongside this significant strategic progress, we are also continuing to deliver on our ESG targets. And today, we have published a separate investor presentation specifically outlining our approach. This makes clear that we see ESG as a core element of building a sustainable business, not just an ancillary activity. This presentation is available on the IR website.

Now turning to the financials. In 2019, the group delivered solid financial returns and a resilient underlying performance in what was a challenging external environment. Underlying profit for the year amounted to GBP 7.5 billion, with a market leading underlying return on tangible equity of 14.8%. Statutory profit after tax was GBP 3 billion and statutory return on tangible equity was 7.8%, both significantly below last year, mainly driven by the PPI charges taken in the first 3 quarters of the year. No further charge was taken in the fourth quarter.

I'll now briefly look at the individual line items. NII of GBP 12.4 billion was down 3% on 2018 based upon a resilient NIM and broadly stable average interest-earning assets. The NIM of 288 basis points fell by 5 basis points year-on-year and 3 in the fourth quarter. This margin pressure in 2019 as a whole was mainly driven by continued competitive pressure on the asset side. To a degree, this is likely to continue over the coming quarters, as discussed in our Q3 results.

On the other side of the balance sheet, lower deposit costs and higher retail current account balances provided partial offsets during 2019. Also in the fourth quarter, the stated margin saw a further benefit of about 4 basis points from aligning MBNA product terms with the rest of the cards business. This represents completion of the EIR adjustments as we highlighted at Q3.

Average interest-earning assets were essentially stable at GBP 435 billion in 2019. The Tesco book acquisition and other targeted loan growth in SME and Motor Finance were offset by closed mortgage book runoff and the tail effect of the Irish portfolio sale in 2018. We expect average interest-earning assets to stay broadly unchanged in 2020. Going forward, in 2020, we expect the NIM to be between 275 and 280 basis points. This assumes an average 5-year swap yield of 75 basis points throughout 2020.

Turning to other income. Other income came in at GBP 5.7 billion, down 5% year-on-year. 2019 as a whole continues to see an unhelpful backdrop for our commercial banking markets business. To a lesser extent, we also saw lower other income in retail in 2018. The latter was particularly impacted by lower fleet volumes in Lex Autolease. Q4 was also a little softer than Q3 at GBP 1.27 billion, driven by continued softness in commercial banking and a number of smaller items, including some pressure on retail current account fees.

Insurance and Wealth, on the other hand, is continuing to perform well, albeit also impacted by rates. The year saw a healthy growth in workplace pensions, supported by auto enrollment and higher general insurance income net of claims. In the first half, it also benefited from the change in the investment management provider and longevity benefits. Central items are down a little, partly due to lower gilt sales and an exceptional 2018 for LDC, that's Lloyds Development Capital, as we flagged previously. Gains on the sale of gilts and other liquid assets amounted to GBP 185 million compared to GBP 270 million a year earlier.

Looking forward, in 2020, we plan to continue investing to build the resilience of the other income line and expect other income to build gradually during 2020. To be clear, it will still be market-dependent and improvements are likely to be somewhat back-end loaded, but we do not think Q4 should be annualized in 2020.

Moving to costs. Total costs were GBP 8.3 billion and down 5%, driven by reductions in both operating cost and remediation while we continued significant investment in the business. We reduced operating cost to less than GBP 7.9 billion, down 4%, in line with our guidance, as I mentioned before, which we enhanced twice over the last year. Remediation of GBP 445 million relates to a number of small items across existing programs and was 26% lower than prior year. Although Q4 was a bit above our expectation, we expect remediation cost to reduce to around GBP 200 million to GBP 300 million per year from 2020.

Alongside this, we drove a 6% reduction in BAU costs. This increased efficiency was combined with continued investment. As you know because we've mentioned on numerous times, the group has a focused cost culture and a strong track record of delivery. And going forward, there remains further opportunities. Examples of this include continued automation, reduction of our property footprint, our cloud strategy and just doing things better. Reflecting on all this, we expect operating cost to be less than GBP 7.7 billion in 2020 and for the cost-to-income ratio, including remediation, to be lower than in 2019.

Moving down the P&L. Credit quality remains strong, with a net AQR of 29 basis points, in line with our guidance for the full year. It is impacted by 2 material single names -- name cases, as highlighted already at Q2 and Q3. Excluding these, net AQR remained low and stable. Looking forward, the underlying credit portfolio remains strong. IFRS 9 may introduce additional volatility, and recent years' benefits from retail debt sales and commercial write-backs will slow, but we nevertheless continue to expect the net AQR to be less than 30 basis points in 2020.

Looking next at the statutory profit. Statutory profit after tax of GBP 3 billion was down 33% compared to the previous year given the impact of PPI. In terms of the individual lines, restructuring charges of GBP 471 million were down 46% on last year primarily reflecting the completion of the MBNA integration and ring-fencing work. These reductions were partially offset by initial costs relating to the establishment of Schroders Personal Wealth.

In 2020, we expect restructuring to be somewhat higher as we continue to transform the business. This will include severance costs, state rationalization and regulatory-driven costs, for example, the IBOR transition. No further provision for PPI was taken in Q4.

We continue to work through the information request received by the August time bar with an initial review of over 60% of the 5 million PIRs completed. The conversion rate remains low. Indeed, we are comfortable with our 10% assumption and continue to work within our existing provision. We are also pleased to say that the final agreement has now been reached with the official receiver, and that is included in our provision.

On taxes, the higher effective tax rate of 32% reflects the increase in nondeductible PPI provisions, partially offset by the release of a deferred tax liability. We continue to expect a medium-term effective tax rate of around 25%. In 2020, given the corporate tax rate is likely to remain unchanged, it should be slightly lower as a DTA revaluation of about GBP 300 million would come through.

Looking briefly at returns. The underlying return on tangible equity in 2019 was strong at 14.8%. The statutory return of 7.8% has clearly been impacted by PPI. Our unique business model delivered this solid statutory performance which, together with our robust capital position, which Toby will talk about further, has enabled the Board to recommend an increased final dividend of 2.25p per share, taking the total ordinary dividend to 3.37p, an increase of 5% on last year, in line with our progressive and sustainable ordinary dividend policy. And we are moving to quarterly dividends from Q1 2020.

Looking forward, our 2020 guidance reflects the health of our business and our confidence in it. In particular, in 2020, we expect a net interest margin of 2.75% to 2.80%; operating costs, as I've said, to be less than GBP 7.7 billion with the cost-to-income ratio lower than 2019; and net asset quality ratio expected to be less than 30 basis points; capital build expected to be within the group's ongoing guidance range of 170 to 200 basis points per year; and risk-weighted assets to be broadly in line with 2019. We also expect an increased statutory return on tangible equity of 12% to 13%, driven by resilient underlying profit and lower below the line charges.

With that, I'll hand over to Toby, who will cover the balance sheet in more detail.

Thank you, Douglas, and good afternoon, everyone. Douglas has summarized the group's full year results, and I'll now provide an update on the group's balance sheet, our capital funding and liquidity positions.

Turning first to the balance sheet. The group's balance sheet remained strong, with growth in targeted lending segments such as SME and Motor Finance, alongside open book mortgage growth aided by the Tesco acquisition. This was offset by further reductions in the closed mortgage book and lower balances in global corporates as a result of the continued portfolio optimization.

On the liability side, we continue to target growth in current accounts and floor balances grow here above the market rate. This allows us to reduce our tactical retail savings balances in some segments of our commercial book. Overall, customer deposits decreased slightly to GBP 412 billion, in line with customer assets, with the loan-to-deposit ratio remaining unchanged at 107%.

Turning to capital. The group continues to be highly capital generative with 207 basis points of capital build over 2019, excluding the impact of PPI. The PPI charge accounted for 121 basis points of this, resulting in net capital build for the year of 86 basis points.

The strength of our capital generation and distribution policy was evidenced during the year when we were able to accommodate the unexpected surge in PPI claims in the run-up to the deadline, in part by canceling our share buyback in September, which freed up around GBP 650 million of capital. This meant that we ended the year with a healthy CET1 ratio of 15% before the ordinary dividend or 13.8% net of dividend.

Our distribution policy remains unchanged with a progressive and sustainable ordinary dividend and consideration given to the use of any surplus capital at the year-end. In 2018 and '19, the Board chose to return surplus capital via a structured share buyback. This is deducted from the capital ratio upfront, but is only spent over time. It therefore provides an additional capital buffer and the flexibility to address any unexpected events which might occur during the year, as we saw in 2019. In terms of capital guidance, we continue to expect organic capital build within our ongoing guidance of 170 to 200 basis points per annum, which is equivalent to GBP 3.5 billion to GBP 4 billion a year.

Turning now to capital requirements. There has been some changes in our requirements during 2019. Firstly, the PRA reduced our Pillar 2A requirements to 2.6% from 2.7% during the year. Additionally, you'll know that in December, the Bank of England increased the U.K. countercyclical buffer to 2%, effective in December 2020. This equates to about 1.8% for us at group level. This increase will likely be partly mitigated through the PRA's proposed reduction in the Pillar 2A requirements. Assuming these both go ahead as currently anticipated, this would result in a net increase of around 65 basis points, with an expected CET1 requirement of around 12.8%.

Looking forward, the group continues to target an ongoing CET1 capital ratio of around 12.5%, plus a management buffer of around 1%. For now, given the announced increase in the countercyclical buffer, likely only partially mitigated by the proposed Pillar 2A offset, we are holding a level slightly above this, finishing 2019 at 13.8%. From 2021, our current view, all else being equal, is for the Pillar 2A to fall further as pension contributions increase, enabling us to bring capital back towards our target level of around 13.5%. In terms of the other capital ratios, our total capital ratio remains strong at 21.5% on a pro forma basis, and our U.K. leverage ratio is a healthy 5.2%.

Finally, on capital. Our transitional MREL ratio was 32.6%, again comfortably in excess of requirements. We expect to receive our final 2022 requirement this year from the Bank of England following their planned review of the MREL calibration. [Up] the normal details of all our capital and MREL securities could be found in our Pillar 3 capital instruments report, which will be available on our website shortly.

Turning to funding and liquidity. We continue to manage liquidity prudently with an average group LCR ratio of 137%, which is up on 2018. Our liquidity portfolio totals around GBP 131 billion, and we continue to have a large amount of secondary liquidity available should we need it. In terms of funding, we raised around GBP 16 billion of new term funding during 2019 across both holdco and the opco entities. This included the first term issuance for LBCM, our non-ring-fenced bank, which now has established benchmarks in both sterling and in euros.

In terms of other movements, we repaid around GBP 12 billion of the Bank of England's FLS funding during 2019. And subsequent to the year-end, we have repaid the last of the FLS. So we now have no FLS outstanding.

During 2019, we also repaid early around GBP 5 billion of term funding scheme drawings, reducing the outstanding TFS balance to around GBP 15 billion, which is due to be repaid in 2021. As a result of new issuance repayment to maturities, our outstanding wholesale funding increased by 4% during 2019 to GBP 128 billion, which is still slightly less than the size of our liquid asset portfolio.

In terms of our issuance plans for 2020, we have previously guided to an annual requirement of around GBP 15 billion to GBP 20 billion. While this remains true in the medium term, in 2020, we expect our requirements are likely to be less than this, in the GBP 10 billion to GBP 15 billion range. Of the 2020 funding, I'd expect around GBP 6 billion to come from the holdco, predominantly in the form of senior unsecured as we are unlikely to have much need for capital this year. The remainder will be opco issuance from either Lloyds Bank or LBCM. So far this year, we've issued around GBP 3 billion, with half of this issued from the holdco.

The final area I wanted to touch on is IBOR transition. We continue to make good progress here, having been the first U.K. bank to issue SONIA-linked notes back in 2018. More recently, we have undertaken consent solicitation exercises on a number of sterling bonds with LIBOR coupons that have maturities post 2021, and we're pleased to see these successfully supported by investors. As markets develop robust alternatives to IBOR, we will continue to work with investors to migrate remaining exposures in the back book between now and the end of 2021.

So in summary, the balance sheet remains in good shape with strong capital funding and liquidity positions. Our business model continues to be highly capital generative, which provides sustainable dividends for our shareholders and flexibility on the use of any excess capital.

Douglas, back to you.

Okay. Very briefly to recap. In essence, in 2019, the group delivered significant progress against our strategic priorities and generated solid financial returns. As you can see, we remain focused on delivering our purpose of Helping Britain Prosper whilst building strategic advantage in generating strong and sustainable returns.

That concludes our presentation, and we're now ready to take your questions. Thank you for listening.

(Operator Instructions) The first question comes from the line of Lee Street of Citigroup.

A couple from me. Obviously, in December, we've got the stress test results, and I guess, once again the Lloyds mortgage book seems to take more losses than a peer group. So just love to get your thoughts on that. How should we interpret that? Is the interpretation that SONIA a lower quality? Or are there other mitigating factors there? How should one think about? That's question number one.

Number two, you touched on LIBOR. Just are you getting pressure from the Bank of England to address your legacy securities? Obviously, they've put some papers out and commented on it. But are you actually feeling pressure from them to get those addressed sooner rather than later?

And then finally, you've obviously got legacy capital structure, HBOS and the likes. So are there any sort of glaring inefficiencies that you see sort of still contained within your capital structure when you look at it today? That would be my 3 questions.

Okay. Thanks, Lee. I said -- well, I'll take the first 2, and then I'll pass the third one -- I'll pass the third one to Richard maybe. Let me just start on IBOR. So we're very -- this is an industry issue, as you know. We're very engaged with the appropriate industry bodies in terms of the plan to migrate the industry to the new risk-free rates and off the existing IBOR rates. Certainly in the U.K., there is a well-publicized timetable, and we are well progressed in terms of our preparation and in terms of progressing to that timetable. It requires us to do a bunch of work both on the front book in terms of developing some new products and to think about how we migrate parts of the back book.

We've -- just on the back book, I guess, we've started that process already in terms of -- certainly in terms of our sterling exposures where the transition is quite clear so the SONIA risk-free rate at the moment. We were pleased that our -- that our consensus station exercise was successful and supported by investors. We've got -- as you may know, we've got another exercise underway at the moment, looking at some sort of secondary issues in terms of extension periods and that sort of thing, and we're hopeful those will be similarly successful.

And that broadly deals with the sterling back book. There are a lot of other bits and pieces, but that broadly deals with the sterling back book. All the other currencies other than dollars are on a slightly sort of different timetable and so pushed somewhat into the future. And on the dollars, again, we've got a few -- we have a few securities with a U.S. dollar LIBOR link that have maturities post 2021. We really need to see market convention settle down a bit there, Lee, before we know quite how we will migrate those books. But it will be our intention to do something similar to what we have done on the sterling back book.

Okay. Just on that, actually, if you've got up on with a 6% coupon and then obviously at a point in time post 2021 it changes to a LIBOR basis, do you have to address that upfront? Or are you okay to address that sort of further down the line when it would actually go across the LIBOR basis?

Well, I mean again, it's a market convention. We would like to address that upfront, to be honest. We would like to arrive at the end of 2021 with our portfolio clean of -- linked to historic risk-free rates. And so with linked to -- always linked to the future risk-free rates. But we'll have to take that security by security. It's not a huge issue in our back book, to be honest. It's relatively isolated.

And stress test, you asked about. Yes. Well, let me take the stress test slightly more broadly. I think you asked about mortgages. But let me just take it slightly more broadly. So first of all, we are obviously -- we obviously passed the stress test, and we don't have to take any actions as a result of it. In fact, our -- if you look at it on a like-for-like basis, our excess to the hurdle actually increased year-on-year. Having said that, we did have one of the biggest drawdowns. And there are -- there are a few reasons behind that, some connected to mortgages and some not.

But it's obviously a very -- it's a very rigorous, very tough stress test, particularly for U.K. players like us given the scenario and the fall in house prices and the increase in unemployment, that's a very -- when you're a big consumer bank, that's a very -- it had a very significant impact on us. It's also one that they run under what's called perfect foresight. So you can see -- you can see the bottom of the stress on day 1 effectively, and you have to provision under IFRS 9 on that basis. So you take a lot of your provisioning -- you take a lot of your provisioning day 1, and that particularly affects retail portfolio. So that will be part of the mortgage story.

There are sort of other -- 2 other relative points, I guess, just on mortgages. We do have a portfolio of mortgages that were originated between 2006 and 2008 that in this particular stress test do generate quite a lot of impairment. Now it is a well-seasoned portfolio. And actually, in BAU, it's a portfolio that performs reasonably -- or is performing reasonably well. But in this particular stress, that part of the mortgage portfolio does take some quite significant impairments when you've got house prices falling by sort of 30% to 40%.

The other point on stress test I'd point out more generally is that there is -- as well as a credit stress, there's a big conduct element in the PRA stress, and they put -- there's a big conduct stress. Given our history, we do take quite a lot of -- quite a lot of our drawdown is related to conduct, much of which is now a legacy issue. And you'll have seen how much we've provided this year for some of those legacy issues. So going forward, given that the PPI deadline is passed, we would be hopeful that that remains a legacy issue and wouldn't be a feature of our performance in the future. But you're right, our stress, although it is one of the largest, but I guess, the main point is that we passed the stress test. We obviously don't need to take any actions as a result of that.

No, if you probably let me -- just touching briefly the -- that's one of the exact reasons though, I mean Toby talked about the 2006 to 2008 mortgage portfolio and the originations and the fact that they are a higher proportion of the stress drawdown. That's exactly why, for the first time, today within our credit slides, within the presentation from William, we actually highlighted that particular book and the value of it and how it's evolved over time. So for example, you can see that that book actually reduced by 12% in 2019. So in essence, what you're saying, if that is a major driver of the stress test results, then, in essence, because the portfolio is falling, the impact on the stress will also fall.

Your first question, capital securities. Richard, do you want to take capital securities?

Sure. Lee, so looking at capital inefficiencies, generally, I mean I'll sort of take a step back and let Toby do some talk a little bit more broadly to start with that what we're doing on capital optimization to reduce inefficiencies. William and António both talked this morning about how we're managing the front book for capital efficiency. So that's about focus on returns on risk-weighted assets, and you'll have seen us reduce some of our exposure, for instance, to large corporates, and we're also working as best we can to try and anticipate Basel IV and any changes that might have in terms of the way we allocate capital.

On the back book, very active in terms of managing the back book again for efficiencies, and you'll have seen that we continue to be active in 2019 on risk transfer trades and risk mitigation trades in the market. I think closer to your question, there's 2 elements. One is the stack and what can we do about the efficiency of the stack. So that's where, again, we're talking about Pillar 2A components and what we might do there in terms of reducing the risk profile of the group. And then that also links to the stress testing point that Toby just mentioned as well.

And then in terms of debt securities, specifically, I think there's no individual call outs, I think given the size of our balance sheet and given the impact of any individual security. We have a handful of legacy securities. Mostly speaking, they are generally inexpensive. But as you'd expect and as we've done now for best part of 10 years, we continue to look at the economics of these bonds. We continue to look at their current and potential future reg treatment as well as the book value that we have them at and look for opportunities to do something with them, if it's possible to improve their efficiency. I would say, generally, there's a limited amount of scope that we've got on that.

The next question comes from Paul Fenner of Societe Generale.

I got 2 very quick questions. The first is on the MDA hurdle rate, did I understand you correctly that your minimum CET1 requirement is now 12.8%? It's a bit higher than I thought. And assuming that's also your MDA hurdle rates, I don't think you've got a deficit anywhere in terms of capital securities. You're running -- that would suggest that you're running at 100 basis point headroom. And in 2021 that could fall to 70 basis points, maybe a little bit lower. Have I got the math right? Did I understand that right? And is that enough headroom? That's the first question.

And then the second question is around your legacy securities. Just kind of a sense. I'm not expecting that -- tell us what you're going to do with these things. But is it fair to assume that some of these very expensive items, say, for example, the step-up 12%, which is going to fall out of regulatory treatment from the end of 2021, is it fair to assume that your regulatory park all those things soon afterwards? Because the -- I think the price would suggest that people are hoping for something more generous. I just want to get a sense of your policy around that.

Right. Yes. Paul, let me try and take the first one because I obviously wasn't clear enough. So let me give it another go, and then I'll hand the second one to Richard, if that's okay. So on sort of capital requirements and MDA is not something. Our requirements today are at the lower end of the 12% today, if you have the various components of our stack. What I was trying to indicate is that when the increase to the CCYB comes in, which is expected to be in December 2020 combined with a reduction in -- an expected reduction in the Pillar 2A, it is likely that our requirement will go to around the sort of 12.8% type number. And as of today, our CET1 ratio is 13.8%, and we are prudently looking forward in terms of where the requirements might go by the end of this year in terms of the capital that we are holding today in that 13.8%.

Got it. Yes. So it was -- I was -- I expressed myself poorly. So that was my understanding. So basically, from next year, what you're essentially saying is that you think from a management perspective, you can manage around a 70 basis point headroom. Is that right?

No. Well, we talk about having a management buffer of around 100 -- around 1%. So yes, effectively, the difference between the 12.8% number that I mentioned, albeit that's an end 2020 number, and the 13.8% number that we have today. So we talk about having a management buffer of around 100 -- around 1%, around 100 basis points.

Okay. And that is the same as -- so you expect -- so you're managing yourselves to 100 basis point headroom. That is the management buffer. So wherever the minimum requirement sits, you're going to be 100 basis points above that?

Yes. So we think for our business, the around 1% in terms of the management buffer is roughly the right sort of level. It's the level that we've successfully operated to in the past, and it's a level that we're comfortable with. So it's a level that we will continue to operate to in the future. And then it was -- you were asking about legacy securities again. Richard, do you want to pick that one up?

Yes. Paul, I think your question was more around reg calls or was it around generally...?

Yes. Yes. I mean the use of reg calls or whether you do something a little bit softer like liability management, what your sense is around that, particularly for these very, very expensive securities, right, because you've just mentioned a whole bunch of them are that expensive, but this is -- it's a crazy coupon, 12%.

We've got a couple of those that (inaudible) in 2019.

This is a big one.

Yes. Look, we've got -- I say, we got some of the recent [10] securities that I guess that extend beyond 2021, around half of which have regulatory calls. And of the 5 or so that have regulatory calls, some of which are pass, some of which are make calls, all cease to qualify post 2021. And as you quite rightly say, well, we've got varying economics. I'm not -- as you'd expect, I'm not going to talk about individual bonds on the call because it would be inappropriate. But I think, really, from a markets perspective, I would expect you to treat the call just like any other optional call date. That would be my guidance because that would be how I would be looking at it in terms of the economics, the regulatory treatment, et cetera. So that's probably as far as much as I can say on this call.

Okay. So -- yes. Sorry, just to clarify, you would treat the regulatory call as any other optional call that you might have later on?

Yes.

Yes. Okay. Very clear.

And again, Paul, our treatment hasn't changed. That's what we've done in the past, and that's what we'll continue to do there.

The next question comes from Corinne Cunningham of Autonomous.

Just to follow-up Paul's question there, could there be some ratings implications from running such low management buffers. And by saying that it's okay to be below 100 or for the time being and your target being 100 basis points, does that mean that your Pillar 2B requirement is practically 0?

And then I had another totally unrelated question just on what do you think is a realistic maximum market share per line of business? And you've been making some smallish acquisitions along the way, but what do you think, in practical terms, is the maximum market share that you can -- that you would be allowed to run to from a competition perspective?

Corinne, thank you for the questions. Well, I'll give Douglas the market share question. Let me just try on the -- you asked about management buffers and ratings, I think. So we -- so the management buffer that we have of around 100 basis points is -- as I mentioned to Paul, it's a level that we've been successfully operating at for the last couple of years, at least. And it takes -- in terms of how we think about the management buffer and we think about the level that we want to operate to, it takes all the information that we have -- that we have at our disposal in terms of requirements and internal stress test and external stress test.

We take all of that into consideration in arriving as the target CET1 level and management buffer that we want to operate at. So I'm not going to comment specifically on the PRA buffer because that's a confidential thing between us and the PRA, but we do take all factors into account in arriving at our view on what the right target level is for us. And you can see, given that we've operated in this way for a couple of years now, the rating agencies are comfortable with our approach. Douglas, do you want to comment on market share? There was a helpful slide on market share.

Yes, that's exactly what I was going to say, Corinne. It's actually the last slide in the share deck that we talked about this morning. So there's 3 slides in the appendix, which you might find quite helpful. One was which is just a quarterly P&L and key ratios, but another one is mortgage LTVs, and the third one is actually market shares and how they stand at the moment. So in essence, what I would say is there is not one market share we run to. We don't run the business on a market share basis. In essence, there are different -- in different product areas we will consider it in a different way.

So for example, if you look at our consumer credit card balances, our consumer credit card balances have a market share at the moment of about 24% currently because of the fact that we acquired the MBNA portfolio. So do I think the market share in credit cards is likely to go anywhere above 24%? No, I don't. I think that is probably the limit of what you're going to do in that area. However, if you're going back and look at some of the other areas, like, for example, on car finance, so you look at Black Horse car finance, we've currently got a market share there of about 15%.

Given that our average market share across all of our key portfolios is about 18%, I would say, absolutely, there'll be opportunity to grow there. Is there the opportunity to acquire there? Yes, there potentially is. And I think it's a case of looking at the chart, looking at where we have areas that are targeted key segments that have optionality for growth. So you can see consumer loans, Black Horse car finance. You see some of the almost like wealth management, financial planning and retirement areas.

Clearly, there are areas in which our market share is significantly below the average market share and options exist. And even if you look at something like the mortgage balances, I mean you might argue that we've got a 19% share in mortgage balances. But actually, we still took the view that actually it was worth acquiring and it made good business sense and was value-accretive to acquire the Tesco mortgage book. So it does vary by portfolio, and we will look at it on an individual basis.

Just want to say, if you did make further acquisitions in mortgages or SME lending, do you think that would expose you to a competition review? Or do you think you have scope?

No, no, no. I mean clearly -- well, I'm not going to comment on whether there is a specific percentage that drives some form of view, but I would say that if you look at just as those product areas, I think it's quite clear where there are opportunities and whether there isn't.

And more broadly, Corinne, you've seen us in the last few years make some small acquisitions. So where things are within our risk appetite and where things -- where we think it's a good use of our shareholders' money, we do look at books or businesses that come up, and we've obviously acquired a few small books in the last couple of years. I think António said in the meeting this morning there's nothing that we're actively looking at. But where things do come up that fits our risk appetite and we think are a good use of our shareholders' capital, then we would look at that and you would expect us to complete on a few of those.

And indeed. And indeed, given the capital generation, the strong capital generation of the group, clearly, we reiterated our target of 170 to 200 basis points of capital generation per annum. They are options that are available to us. But as Toby said, each individual opportunity will be looked on an individual basis based on the returns and, indeed, the market in which it's in.

The next question comes from Robert Smalley of UBS.

Just a lot of questions asked and answered. So just for a little clarity. First question, no Tier 2 issuance or AT1 issuance in 2020 planned? That's the first one. Second, on the margin, could you talk about development for 2020? Looks like a little bit of contraction there. Talk about the hedge and a little bit on the competitive environment as well. You've got one competitor who's rebranding. You've got another competitor who took a big goodwill write-down. You've got a third who's in challenged geographies who may be looking to the U.K. market for more profitability. What's the state of play in terms of competition, mortgages and other products? And where do you think the next battlefield is with your competitors? And third, when -- coming back to the buffer, and you alluded to it a little bit, how much does your relatively high capital generation rate play into your thoughts about the buffer and your ability to replenish that if you need to pretty quickly?

Yes. So let me take the last of those first, Rob, and I'll come back to the first, and then maybe I'll hand over to Douglas to talk a little bit about the margin. So on the buffer, clearly, the fact that we are very -- we are highly capital generative and the fact that typically we -- you declared dividends in arrears in a sense, so we're declaring our final dividend now at the end of February, we've had 2 months of the year that has gone past whilst our capital generation isn't entirely linear. The sort of the 170 to 200 basis points per annum is about 15 basis point-ish a month, and so that does feed into the thinking around what sort of management buffer is appropriate for the business, together with things like, we've got a reasonably predictable retail and commercial business. We don't have much in the way of exposure to sort of volatile investment banking lines. And so our earnings is a reasonably -- are sort of reasonably predictable. So that all does feed into thinking around what's the appropriate management buffer for our business.

You asked about Tier 2 and AT1. You said no Tier 2 or AT1. I wouldn't be quite so categoric as that. I just -- as I said, as I -- as we sit here today, we don't currently have any plans to issue either AT1 or Tier 2 this year. That said, we're always slightly sort of opportunistic about this. We currently have quite healthy Tier 1 and Tier 2 ratio, slightly in excess of what we would consider to be our sort of target levels. For us, our target level for Tier 1 is around the sort of 2.5% number. Target level for Tier 2 would be around the sort of 3.5% type number. We are a little bit ahead of that at the moment. And so we don't currently have any plans for any sort of capital issuance, but I wouldn't rule it out altogether.

Margin. Douglas, do you want to talk a little bit about that on top of hedge?

Yes, I can talk briefly about that. I mean in essence, if you look at the trends in the margin, the trends are pretty similar to previous years because what you're seeing is the asset pressure being partially offset by liability spreads and indeed wholesale funding. Now you can see that we've actually announced guidance. So we talked about NIM guidance for 2020 of 2.75% to 2.8%. Now when you look at what actually goes in there, you are seeing pressure from different areas. So the mortgage market in the U.K. remains a competitive market. That is not changing. What I would say, however, is actually, if you look at it from a Lloyds perspective, actually, what we've seen is that pressure isn't quite as much at the moment as it has been.

In essence, our SVR attrition has remained broadly stable over the last period, and it's actually on a declining book now. But more importantly, actually, when you look at maturing front book margins, they're now at or indeed below current new business levels. So in essence, what you're doing is you got an uptick on margin from business that's being written. So yes, that market remains competitive. You get different providers coming in at different periods. But actually, it's not as bad from a competition perspective as it has been.

Clearly, when we talked about how we manage margin, we're still going to see some benefit from growth in unsecured lending. We're still going to see some benefit coming through from the mix side. And also essentially, we talked about the fact that you look at our corporate relationships and the fact that we're exiting low-margin corporate relationships. So as a whole, they are all inputs into our overall group margin. So it's going to remain competitive. That's why you see the overall NIM guidance of 275 to 280 basis points lower than where we are at the moment. But it's certainly -- I think the phrase that we've used in the past has been resilient, and it remains so.

I think the other thing probably to flag is just the structural hedge. You did touch upon that. I mean if you look at hedge earnings, I mean they are expected to be around GBP 200 million lower in 2020 than they were in 2019, essentially because of the low rate environment. So you do see some increased pressure quarter-on-quarter. But when you look at our guidance, that's based off our 5-year swap projection of 75 basis points through the year. Is there anything else you'd add on the structural hedge, Toby?

No, I think -- I mean the -- you rightly call out the year-on-year impact from lower rates. But Rob, that's all embedded in that guidance of sort of 275 basis points to 280 basis points in 2020.

The next question comes from the name of Axel of JPMorgan.

So there's a lot of chatter around the PRA around PR2A and countercyclical rebalancing. But the PRA is also mentioning a potential view of IFRS 9 provisions in the context of its regulatory treatment. Is there any view in terms of where we can expect such a review to come out and when would that impact reported capital ratios?

Sure. Thanks. Yes, so for anyone not aware, in the financial stability report in December, the Bank of England was releasing the results of the stress test, which, as Toby said, were on a perfect foresight basis, which does introduce increased losses coming through IFRS 9. They have historically looked to adjusting the hurdle rates to sort of cushion that impact. But they are looking to work with the industry to understand how they might think about not just stress testing but real-world impacts of IFRS 9 on the capital framework.

For us, we're very supportive of that approach. For us, as we've talked about with stress testing generally, you get a disproportionate impact on IFRS 9 coming through from very long-dated U.K.-focused assets when you have a U.K.-focused stress test. We've spoken to Bank of England about it. We would expect that they will speak to banks on a one-to-one basis and use industry forums to gather information.

They put a few proposals together in the financial stability report about how they might look at the impacts. Obviously, for us, we would be quite keen to make sure that it is neutral from a CET1 perspective. And we're going to work with the Bank of England over that over the course of this year. I would hope that they will have collected their thoughts and put out some sort of proposals by the time of the next release of stress test results in Q4.

And just I agree with all that, Richard. Just what that -- what they are aiming -- so the PRA has said a number of times that they don't believe a change in the accounting regime should lead to the need for more capital in the system. And so what they're trying to work through is how to affect that, and that's what this consultation is all about. That's what it is trying to achieve is effectively neutralize, from a capital perspective, the change in the accounting regime.

We have no further questions.

Kathy, I think we'll end the call there, if that's okay. Thank you all for joining this call.

Yes. Thank you very much, indeed.

Ladies and gentlemen, this concludes the Lloyds Banking Group 2019 Full Year Results Fixed Income Conference Call. Replay information. For those of you wishing to review this call, the replay facility can be accessed by dialing 0 (800) 032-9687 within the U.K., 1 (877) 482-6144 within the U.S., or alternatively use the standard international on 0044 (207) 136-9233. The access code is 28525595. This information is also available on the Lloyds Banking Group website. Thank you for participating.