Lloyds Banking Group PLC (LYG) 2020 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Lloyds Banking Group 2020 Full Year Results Fixed Income Conference Call. (Operator Instructions) Douglas Radcliffe and Toby Rougier will outline the key highlights of the results, which will be followed by a question-and-answer session. (Operator Instructions) Please note, this call is scheduled for 60 minutes.

I will now hand the call over to Douglas Radcliffe. Please go ahead.

Excellent. Thank you very much, indeed. Good afternoon, everyone, and thank you for joining this call on the group's 2020 results. As I've just been introduced, my name is Douglas Radcliffe and I'm the Group Investor Relations Director, and I'm joined by Toby Rougier, our Group Corporate Treasurer. A number of you may have dialed into the results call this morning. And if you did, I'm afraid I'll run through many of the same points again.

I'll briefly cover our strategic progress over GSR3 before covering our financial performance in 2020, and provide an update on the next phase of our strategy, Strategic Review 2021. I'll then hand over to Toby, who will cover the balance sheet in more detail. We've also set aside some time at the end for Q&A.

2020 was a challenging year given the significant impact coronavirus has had on our customers, colleagues and communities across the U.K. However, our long-run transformation and investment positioned us well. We have seen unprecedented levels of contraction in the U.K. economy in 2020 as a result of the lockdown measures. But at the same time, the significant levels of government support has been fundamental in limiting the impact from the crisis. Despite the uncertainty, the group has continued to deliver both financially and strategically.

In 2018, we launched GSR3 with the aim of transforming the group for success in a digital world. We invested a total of GBP 2.8 billion across our 4 strategic pillars: Meeting customer experience, digitizing the group, maximizing group capabilities and transforming ways of working, achieving the majority of our targeted outcomes. These successes have laid the foundations for strategic review 2021, which I'll touch on later.

From a financial perspective, the group was inevitably impacted by lower rates as well as depressed customer activity and a significant deterioration in the economic outlook in the first half, but delivered a resilient performance. Net income of GBP 14.4 billion is down 16% year-on-year. This was largely driven by the bank base rate reductions, change in asset mix and lower levels of activity. Average interest-earning assets were stable in the year with a full year NIM of 252 basis points. Our Q4 margin of 246 basis points was slightly better than the guidance given in Q3, benefiting from lower funding costs, better mortgage margins, RCF repayments and small benefit from deposit repricing.

Looking forward, we expect net interest margin to be in excess of 240 basis points for 2021. Mortgage margins are expected to continue to be attractive for the time being alongside further optimization in commercial. This will be offset by lower unsecured lending balances and pressure from the structural hedge. Other income of GBP 4.5 billion was down 21% from 2019, with ROI in Q4 of GBP 1.1 billion. Over the year, retail other income was impacted by lower interchange fees and Lex fleet volumes.

Commercial was impacted by reduced levels of client activity, specifically within transaction banking. The Insurance & Wealth was impacted by lower new business, negative assumption changes and a reduction in nonrecurring items. In central items, income was impacted by reduced yield gains, and we also saw some impact during the year on our equity business.

As we begin to see the easing of restrictions and increased customer activity, we would expect other income to gradually recover. We also continue to invest in income diversification opportunities over the medium term.

Turning to costs. In 2020, we further reduced operating costs and BAU costs by 4%, with delivery of our enhanced cost target of GBP 7.6 billion. This equates to circa GBP 300 million reduction in absolute costs in 2020 and circa GBP 600 million in costs the last 2 years. In the end, we balanced headwinds from COVID costs with tailwinds from reduced variable remuneration. Remediation of GBP 379 million, 15% lower year-on-year reflects charges across a number of existing programs.

Looking forward into 2021, we expect COVID-related costs to remain elevated as we continue with hygiene expenses and potentially increasing customer financial assistance issues later in the year. We are also planning to increase variable remuneration costs in 2021. We expect to be able to fully absorb these headwinds through our ongoing cost reduction activity and for our operating cost to continue to fall to around GBP 7.5 billion this year.

Moving down the P&L. Pre-provision operating profit of GBP 6.4 billion is down 27%, clearly impacted by the income environment I've already spoken about. The impairment charge of GBP 4.2 billion was largely taken in the first half, driven by the significant deterioration in economic expectations. The Q4 impairment charge is GBP 128 million. Within this, the retail charge in the quarter is only a little above the pre-pandemic run rate and in line with Q3. Commercial charges in Q4 remained low, and coronavirus impacted restructuring cases have performed better than expected, generating a small release in the quarter.

The macroeconomic outlook has improved slightly since Q3 despite the current national lockdown, given the vaccine rollout and the extension of government support, and our actual credit experiences continue to remain stable. This improved macroeconomic forecast generates release -- generates releases in our models. However, given the unusually wide range of uncertainties in the current environment, such as virus mutation and extended lockdown, we have taken an additional GBP 400 million management overlay to partially offset these.

Our total stock of ECL of GBP 6.9 billion is GBP 2.7 billion higher than December '19. GBP 4.3 billion relates to Stage 1 and Stage 2 exposures, which provides significant resilience to absorb headwinds as and when losses begin to emerge. Meanwhile, coverage levels have increased across all products and write-offs continue to be at precrisis levels across the book.

Looking at our retail credit experience, we continue to see low new to arrears levels across the portfolio at or below precrisis despite the majority of payment holidays ending. In mortgages, the quality of our book continues to improve with the average loan-to-value now 43.5%, down 1.4 percentage points compared with 2019. More than 91% of the mortgage book now has an LTV of 80% or less.

Within the commercial portfolio, our exposure to the sectors most impacted by coronavirus remains modest at around 2% group lending. We've seen some deterioration in the credit ratings of these vulnerable sectors during the year, as expected, with the percentage of investment-grade reducing 8 points to 38%. As a context, however, our new-to-business support unit levels in H2 were in line with precrisis levels.

Taking all this into account and based on our current macroeconomic assumptions, we expect the 2021 impairment charge to return closer to pre-pandemic levels and the net asset quality ratio to be below 40 basis points.

Payment holidays have been effective in managing customers through the crisis. 98% of first payment holidays have now matured, with 89% of customers receiving payments. Of the remaining 11%, half are on extended payment holidays and half are in arrears. Roughly, 1/3 of those in arrears were actually in arrears before the payment holiday was granted. New payment holidays granted remain very low compared to H1 levels, with only 28,000 initiated during the latest national lockdown. In commercial, the vast majority of commercial repayment holidays have now matured with more than 85% repaying.

Now moving on to below the line. Total below the line items in 2020 was significantly lower than in 2019, given the reduction in the PPI charge. Restructuring costs of GBP 521 million were up 11% year-on-year, following the resumption of role reduction activities, severance charges will accelerate in Q4 whilst property transformation costs were largely in the second half as branch and office rationalization activities picked up. We also incurred technology R&D charges relating to costs associated with our initial investigation of new technology capabilities.

As you may have seen, we took a PPI charge of GBP 85 million in Q4. This was principally driven by the financial impact of delays in operational activities, given coronavirus and the final stages of work ahead of orderly closure of the program. More than 99% of predeadline inquiries have now been processed.

Moving down the P&L, the end-of-year tax credit of GBP 161 million reflects the DTA remeasurement benefit in Q1. As a result of all of this, we end with statutory profit after tax of GBP 1.4 billion.

Looking forward, the group will report its statutory ROTE without adding back the post-tax amortization of intangible assets. On this new basis and given improving profitability, the group is targeting a return on tangible equity of between 5% and 7% in 2021, on the path to our medium-term targets availing higher than cost of equity returns.

And with that, I'll hand over to Toby, who will cover the balance sheet in more detail before I cover off Strategic Review 2021.

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

Let me start by saying that whilst 2020 was, of course, a difficult year for all of us, our balance sheet and the associated ratios remain strong, which is a testament to the prudent way that we run our business. In terms of the detail on the balance sheet, customer loans and advances were flat over the year at GBP 440 billion.

We saw strong growth in our open mortgage book, which grew by GBP 7 billion, reflecting the strength of the U.K. housing market. We also saw strong growth of over GBP 11 billion in business and commercial banking, given our support for customers and the various government-backed lending schemes. This growth was offset by a reduction in unsecured retail balances, given the reduced level of activity in the year. And we also saw a continued reduction in the closed mortgage book as well as some reductions in other areas of commercial banking.

Total customer deposits increased by GBP 39 billion in the year, driven by lower customer spending and inflows into the group's trusted brands. Much of this was on the retail side, although we also saw growth in the commercial bank due in part to some customers placing the proceeds of the government supported lending back on deposit with us. Customer deposits totaled GBP 451 billion at the end -- at the year-end, resulting in a loan-to-deposit ratio of 98%, down from our historic levels of between 105% and 110%. This strong balance sheet position gives us significant capacity to continue to support our customers as the U.K. recovers.

Turning now to capital. The group's CET1 ratio increased by 242 basis over 2020 to end the year at 16.2%. The increase reflected strong pre-provision profits combined with IFRS 9 transitional relief, the reversal of the 2019 dividend and the new treatment of software intangibles. These items outweighed the impact of impairments and pension contributions made in the year. Excluding IFRS 9 transitional relief, our CET1 ratio also remained strong at 15%. We do expect some credit migration during 2021 and the unwind of some of the transitional relief. The PRA has also said that it intends to consult on reversing the impact from software intangibles. Should they reinstate the original deduction, this would have a negative impact of around 50 basis points for us.

Our 16.2% CET1 ratio provides headroom of over 700 basis points above our MDA level of 9.1% and over 500 basis points above our regulatory requirements of around 11%. The Board's view of the ongoing level of CET1 capital required to grow the business meets regulatory requirements and cover uncertainties remains unchanged at around 12.5% plus a management buffer of around 1%.

Given our strong capital position at the year-end and the regulator's position on capital distribution, the Board has recommended a final ordinary dividend of 0.57p per share, the maximum allowed under the PRA's guidelines. Outside of CET1, our total capital ratio also remained strong at 23.3%, and we continue to target AT1 levels of around 2.5% and Tier 2 levels of around 3.5%. And then finally, on capital, our U.K. leverage ratio increased during the year and remained healthy at 5.8%, as does our transitional MREL ratio at 36.4%.

And our legacy capital is likely to be something that many of you are interested in, and you'll be aware of the EU and U.K. regulatory statements on this topic. You will also have seen that over the past 12 months we've been proactive in reducing the size of our legacy security portfolio via a number of liability management exercises. We have about GBP 4 billion of legacy securities outstanding and that PRA has asked us, like others, to do a risk-based assessment of whether these securities create infection risk or represent an impediment to resolution.

I am limited on what I can tell you beyond saying that we do not believe these instruments create problems in our stack. However, if there are sensible economic opportunities to optimize its legacy portfolio further, we will, of course, consider these, as we did last year. A whole way details of all of our capital and MREL securities can be found in our Pillar 3 capital instruments report, which is available on our website.

Turning now to funding and liquidity. We continue to manage liquidity prudently. Our liquidity coverage ratio is 136% on a 12-month rolling average basis and continues to be comfortably in excess of our regulatory requirements and internal risk appetite. The average value of our liquidity -- our liquid asset portfolio was GBP 142 billion, up from GBP 130 billion at the end of 2019, in part due to the increase in deposits that I mentioned earlier. We continue to have a significant amount of secondary liquidity available to us, including drawing capacity in excess of GBP 40 billion under the new TFSME scheme.

At the end of 2020, we had drawn GBP 14 billion of TFSME and have repaid the remaining GBP 1 billion of TF -- of FLS and GBP 15 billion of billed TFS fee. Deposit growth and TFSME reduced our funding needs during 2020, and we raised around GBP 10 billion across both HoldCo and OpCo entities. That's below our steady-state requirements of around GBP 15 billion to GBP 20 billion per annum and has meant that our total wholesale funding reduced during 2020 from GBP 124 billion to GBP 109 billion.

In terms of issuance plans for 2021, those same deposits and SME dynamics mean that we expect our wholesale requirements in 2021 to be relatively low and probably around GBP 10 billion. I'd expect around GBP 5 billion to come from the HoldCo in the form of senior unsecured with the remainder at OpCo level. Given our healthy Tier 1 and Tier 2 ratios, we don't expect to issue capital this year. As always, we will continue to look for opportunities to optimize the funding and capital stack as we demonstrated in 2020.

And finally, good progress has been made in 2020 in addressing references to sterling LIBOR in some of our back book securities. We will continue to transition away from sterling LIBOR products by the end of 2021.

And so in summary, despite the volatility in markets and the wider economy over the year, our balance sheet, capital funding and liquidity positions all remain strong. As William outlined on the call this morning, there remains significant uncertainty relating to both the coronavirus pandemic and the full impact of Brexit on the U.K., but we will continue to navigate those uncertainties from a position of strength.

Douglas, back to you.

Thanks, Toby. As you all know, 2020 was a year of significant change for both society and the economy as a result of the pandemic. We have also seen a significant acceleration in longer-term strategic trends in our sector, including the move to digital. While change of this scale undoubtedly creates challenges and the path to recovery for the U.K. will not be linear, the strong foundations we have at Lloyds position us well to rise to these challenges. We want to take a leading and transformational role in many of the opportunities that change creates.

Strategic Review 2021 will deliver meaningful improvement for our customers and colleagues. It will also support the creation of sustainable shareholder value through revenue generation and diversification, further efficiency gains and disciplined and sustainable growth.

In Strategic Review 2021, we'll accelerate our transformation to build the U.K.'s preferred financial partner. Our purpose of helping Britain prosper is more important than ever. In Strategic Review 2021, we will focus this effort on helping Britain recover, supporting our customers' financial health and resilience through focus areas that are embedded in the business.

Across our core business areas of retail, insurance and wealth and commercial banking, we will bring further alignment and improvement to unlock coordinated growth opportunities. This will be supported by further enhancing the core capabilities that enable sustainable success in the new environment, specifically technology, payments, data, and our people. You'll see in our results materials of framework of Strategic Review 2021. In each of our 2 customer segments and core capabilities, we lay out our opportunity, our areas of investment for 2021 and some examples of how you can expect us to measure our success in 2021 and beyond.

Strategic Review 2021 includes clear execution outcomes for the year, underpinned by long-term strategic vision in each area. Our business and capability priorities are built on our transformation to date. They were and will continue to be the foundations of our success long into the future. All of these aims will be supported by significant levels of strategic investment. Together with our execution credibility, Strategic Review 2021 ensures that the group will continue to build momentum during a period of management and environmental change.

That concludes the presentation, and we can now take your questions.

(Operator Instructions) First question we have, comes from the line of Lee Street.

A couple from me, please. Just on IFRS 9, any thoughts on whether the way the models might change in the future? I know we've had a lot of government support, but my thinking is, IFRS 9, as we've seen last year, probably actually is creating more financial instability than stability by just stacking forward provisions very quickly, but probably precisely at wrong moment. Just any thoughts on will -- post this, we might see some sort of changes to how those IFRS 9 models might work will be calibrated?

Secondly, issuance. And I think out of the issuance entity or any thoughts about -- are you comfortable with the solvency levels there? And then finally, I'll try one on legacy securities. I do appreciate your comments. Your preference shares, you've got outstanding, do you think there is a way of possibly restructuring those to commit to actually continue to give Tier 2 capital benefit? Those would be my 3 questions.

Thanks, Lee. And I should just actually say before I weigh into that, we're also joined by Richard Shrimpton, who can look at -- if there are any particularly difficult questions, I will absolutely offer them sort of his way.

Lee, you've asked -- let me take them in reverse order, if I may, because I can remember them that way. On the -- look, on the prefs, look, I'm not going to comment on any specific security. It would be inappropriate to do so. How we -- all of our regulatory treatment of our bonds is fully disclosed in our Pillar 3 report. So if you want the detail of how we treat our bonds, it's all laid out there in a lot of detail.

Look specifically on the prefs, we have the most Tier 2 until the end of 2025. We are aware that there are some different views in the market. We do keep that on the review. And so working with our sort of internal and external advisers, we do keep that under review, but that's our current position.

You've asked about issuance from the insurance company. Well, we've got no immediate plans to do that, but we don't rule it out. There are a few insurance bonds that -- where the insurance board has an option to call, I think, this year. And so that's something that we'll work with the insurance board on. They are internal bonds. And if they are called, I suspect we would look to refinance internally in the first instance. We don't rule it out, Lee. But no immediate plans to issue from the insurance company.

And your first question, was that IFRS 9 model, wasn't it? Douglas, do you want to have a crack at that one?

Well, I'll have a little bit of crack at that one. I mean I think what you're really saying that, Lee, was with IFRS 9, yes, has it really been effective in creating a stable playing field or have actually introduced more volatility. Now clearly, in the current environment, the fact that you have to take expected losses upfront, and given the significant changes we've seen in the economic environment, it has meant that there has been clearly a significant spike in the impairment that you've had to take. And you've had to take that charge simply because of the -- or largely because of the changes in economic assumptions rather than any change in underlying performance.

As we've said today, a couple of times actually that, when you actually look at the underlying credit quality of the group, it actually remained remarkably stable. However, the view is still that's actually -- this is our expected loss. And based on these economic expectations, you would expect to see those losses coming through over time.

Is there going to be any review done of IFRS 9? I have to say I'm not close enough to that. I'm absolutely sure there will be at some point in the future. I'm not close enough to say actually whether there's something specifically being undertaken in the short term. I don't know whether you're aware of anything, Toby?

No, not me.

Our next question comes from the line of Paul Fenner-Leitao.

Thank you for the guide on supply, which I think is as good a guide as we've had from you in the past. My question, I'm afraid, is also about legacy. So let's give it a shot. It's the elephant in the room in terms of the institutional securities, which is the very expensive 12%. Now your Pillar 3 reports say it's got no value post the end of 2021, no capital value. It's obviously superexpensive to keep outstanding. You did a liability management exercise, which was very poorly taken up.

My question to you, given that it's got a regulatory par call, which comes into force, I guess, on the 1st of January next year, do you feel that you've provided investors with enough information about the potential risks of that regulatory par call? Or do you think it's fair for people to assume that you're going to take a much kinder, cuddlier option and provide them -- provide investors with another opportunity to tender at a higher price?

Thanks, Bill. I'll take this one. Look, as you say, it's got a regulatory call in it as has several other of our capital securities. And unlike those, as you probably rightly say, it ceases to count as regulatory capital beyond this year. I think we have documentation in the public domain that's pretty clear. We have our Pillar 3 capital report, which makes it pretty clear that it doesn't count for capital beyond 2021. And I don't think there's too many contentions with regard to that assessment versus CRO, CRB, which the Bank of England transposed into U.K. So I think that's out in the public domain. I don't think there's anything more that we need to disclose on that front. As regards to the call itself, I think it would be inappropriate, obviously, to say anything about our intentions as to call at the moment other than that if we decide to do something, we'll make an announcement at that time.

Yes. I'll just reiterate that. Paul, I mean, look, I do think we've been very clear on the disclosure here. And the fact that you can quote the facts around it will evidence that. So I would just reiterate what Richard said.

Okay. Next question comes from the line of Daniel David.

Sorry, I'm free now. Sorry about that. I just wanted to touch on legacy again and apologies for just sticking on the subject. I guess, I wanted to just touch upon one of your comments that you made during your intro, and I appreciate the comments you've made. You mentioned other impediments to resolution, and I guess the market so far has been quite focused on infection risk. So just looking at your legacy stack, you've got quite a few bonds that are issued in small denominations. So I'm just wondering whether the submission on the 31st will cover retail holdings as being a potential impediment and whether you see this playing into the submission? And then secondly, just quickly on ESG, are we likely to see any ESG issuance from Lloyds this year? And what's your thinking in that area?

Okay. Let me have another go at the legacy. So I'm not going to be drawn any further on the legacy securities, Daniel. I mean, we are partway through our risk-based assessment. As you know, we're due to submit that to the regulator at the end of March. It will cover both, both the infection risk and sort of other impediments to resolution that might exist. Look, we are partway through that risk assessment, and we're clearly going to submit that to the regulator at the end of March and then have a conversation with the regulator. So there's really not much more I can say on that topic at the moment.

On ESG, look, we have issued ESG bonds in the past, and we've more recently updated our sustainability framework. So look, we do have the capability -- or we do have that product in our tool set. We are thoughtful about the additional reporting. And I guess the additional complexity of the sort of use of proceeds type bonds. And so we haven't got any immediate plans to issue in an ESG format. But we have got that capability, and we will keep it under review.

The next question comes from the line of Robert Smalley.

Thanks very much for doing the call in accessible hours to the U.S. In the call earlier today, subject of capital generation came up. I didn't fully understand the response. But I think you mentioned something like 170 to 200 basis points of capital generation per annum. Is that right? And could you talk a little bit about that?

Then secondly, given where your capital levels are now, when I look at you versus peers, you -- with a 12.5% plus 1% management buffer, you're pretty close to your peers. On the other hand, if that number that we talked about in terms of capital generation is correct, then you're generating more capital than peers, couldn't you run at a level that's slightly lower than peers because you can make it up faster, is my second question.

And third, once we get through software amortization and potentially reinstating the countercyclical buffer and any cost you might have for legacy, then do we get from -- does that take us from 16% level down to 13.5%? Or is there room for more distribution there?

Okay. Well, thank you. Let me try and take them both in that order. So on capital generation, I think we haven't given specific guidance on this. I think it came up on the call this morning because we used to have some historic guidance that talked about capital generation of between 170 and 200 basis points per annum. And William was just trying to help people on the call to put that number in context of what equivalent might be today. And I think he talked about the fact that when we were generating that sort of return, we had low- to mid-level teens type ROTE. And we're guiding in terms of 2021 to a level that is broadly half of that as a way of thinking about the capital build.

But also in 2021 and in 2022, actually, we will see the unwind of some of that transitional relief. So we've got roughly around 80 basis points of transitional relief this year. And I think we think that it may unwind roughly equally between '21 in '22. So William was -- I think those are the numbers that William mentioned, and he was just trying to give people a way of thinking about what the cap gen might be this year.

In terms of capital levels, look, I mean, this isn't a video, but had it been a video, I think you would have seen me smiling on that, because I do remember when we came out with our guidance in terms of our CET1 target being around 12.5% with a management buffer of around 1%, most of the calls that we ended up having to -- most of the questions that we ended up having to defend at that time were around why was our management buffer so low relative to some others of that around 1% number. And I did -- at the time, I did point out the fact that we are -- one of the reasons is that we are a capital-generative business, and that's why we think we can run with that sort of level of management buffer.

Now over the passage of time, I think everybody has come more broadly in line with us in terms of their CET1 target. Ours hasn't changed from around 13%. And I think our -- others have moved into the sort of the 13%, 14% type levels is what I've been seeing. So I'd argue that they've come to meet us. Our CET1 target hasn't changed. We do update it when there are significant changes in some of the component parts, so be it our -- or other bits, but it hasn't changed recently. I'd say it is a sort of through-the-cycle type number for us.

So whilst the countercyclical buffer is currently 0, and hence, our regulatory requirements are around the 11% number, we do maintain the CET1 target of around 13.5% because we're looking -- we're forward-looking in that respect as well. I don't know if that's helpful, Robert.

I think the only other thing that I'd add to that would be similar. Actually, if you look at the regulatory requirements as they stand at the moment from a capital side, they're clearly quite a bit below the 13.5% that we actually target on an ongoing basis, they're more likely 11%.

The next question comes from the line of Alvaro Ruiz de Alda.

And I have 2 questions. The first one is about the mortgage portfolio. And if you can give us some details between the performance of buy-to-let and only occupied mortgages? And also some thoughts regarding the specialized mortgage portfolio. I know it's quite small and only getting smaller, but we have seen an increase in arrears in that portfolio.

And my second question is about discos. I think you have been very clear about the securities in the past. I just want to confirm that there is nothing new about the securities as they are issued from the Western Bank and liquidity is not an issue in that entity.

Thank you for the question. I'm going to share these out. So maybe Douglas, you can talk about the mortgage one and Richard, the discos.

Yes. I mean, first of all, what I'd say now is actually, look, if you look at the underlying credit quality of the portfolio, it's not just the retail, it's commercial as well. They've been remarkably stable, and it's -- we're seeing very little coming through in the current environment. I mean clearly, we did have the mortgage payment holidays. But as you can see, the mortgage payment holidays have been actually remarkably successful in actually ensuring customers have been able to maintain their payments going through.

If you look -- as you rightly say, the 3 main portfolios that we have, effectively the mainstream, the buy-to-let and the specialists. So we've got the overall mortgage book is what, about GBP 295 billion now. The specialists portfolio is only just over GBP 10 billion, it's only really quite a small proportion. The buy-to-let portfolio is about GBP 50 billion, and the mainstream portfolio is about GBP 234 billion. And what I would say is those are extremely well collateralized portfolios from a retail perspective.

You look at the 3 of them together and what -- look, from a loan-to-value perspective, almost likely 92% of the portfolio is less than 80% loan-to-value. And actually, when you look at it, I mean you were talking about how it varies from a specialist perspective. I mean, actually in the specialist portfolio, 94% of the portfolio is less than 80% LTV. And if you look at it from a buy-to-let perspective, 98%, nearly 99% of the portfolio it's less than 80% LTV.

So I think if you look at the quality of both of those books, I think it's quite strong. And I think from an arrears perspective, we're not seeing anything particularly coming through at the moment. You've seen that in one of the charts, we've actually highlighted in the results themselves was actually arrears performance. And you can see from that on the arrears chart we gave it for both cards, mortgages and loans, and you can see that there's no uptick coming through at all.

Thank you, Douglas. On the discos, Richard?

I guess on the discos, nothing particularly new in terms of what I'm going to say here, but I will confirm your question specifically, which is, yes, the discos are issued from the operating company. And also being the operating company in the ring-fenced bank, yes, liquidity is not a problem for us. Obviously, as Toby has talked about already, the access to the TFSME and the growth in customer deposits have been -- or have given us quite a lot of liquidity flexibility in 2020 and look likely during 2021.

But at the same time, I mean these do form part of the legacy stack that Toby outlined, the pool of just under GBP 4 billion. So we don't believe within that, they present an impediment to resolution. And longer term, they are quite attractive from a cost of funds point of view. But we will outline our proposals and intentions with these in the submission we make to PRA. So as we said earlier on, we won't say much more at the moment.

The next question comes from the line of Christy Hajiloizou.

All my questions more or less got asked, but I'll love one in on payment holidays, please. So thanks for the disclosure on that. I was just looking at the retail payment holiday. I noted the 5% missed payment when due. And also I appreciate that 1/3 of those already in arrears at start of the payment holiday. But I'd be interested potentially, if you could just talk me through what is -- what happens to those customers that have missed in terms of -- first of all, in terms of sort of managing the repayment schedule going forward. But also in terms of where those have ended up in terms of the balance sheet. I think for the retail book, it's about GBP 3.6 billion, I think, the balance. So is that going into stage 2 or stage 3 or some other forbearance balance? And if you do have the disclosure available, what kind of coverage have you brought against those?

Okay. As you can see, I mean, it's been really interesting actually seeing about the payment holidays. And clearly, when these first came into force, which must have been what about 6, 9 months ago at the start of the crisis, there was a huge concern as to whether payment holidays were going to be an effective mechanism in actually tightening customers over during a period of stress where they may well have been furloughed or may well have been without employment. I think our view now is that actually, we see a strong performance on payment holidays across the period with actually over 90% of them now matured.

As you rightly say that when you look at them across the period, there are a number of the payment holidays that are -- have gone into arrears. In essence, the way that we look at arrears on payment holidays is no different to the way we look at arrears for the rest of the mortgage book, and we'll treat it in exactly the same way when it comes to the collections approach because that's the right way to do it.

When you say how are they treated from a coverage perspective, I haven't got the separate coverage ratios to hand as to what that means by the different elements. But I'm pretty sure that as they go into arrears, they go into stage 2.

Next question comes from the line of [Daniel Crowe] .

Just a follow-up on that question just asked. If -- I would assume that if you came out of a payment holiday and went directly into nonpayment, that you would go into stage 3 rather than stage 2 because you would have effectively had a minimum 3-month break. And then, I guess, kind of in a similar vein, at what point do you think you can start reversing out? I know your models are telling you, you should take some of the provisions that you've put in here back. At what point, I guess, is it a year's time where you get comfortable where you think you can write some of those provisions back?

And then just a third kind of technical question, sorry, on the legacies here. But on regulatory calls, I assume that you would still need permission from the PRA on those calls. But could you apply to the PRA to make those calls before the end of this year so that you're kind of set up on, I guess, January 2, January 3 next year to send out the notices?

I'm going to share these out again, Daniel. So let me try and get the middle one, which was -- I think a question about -- in our Q4, we had taken a GBP 400 million overlay to the predicted model outcome on ECLs. I think your question about was when we might think about releasing that. I mean, the -- our models work on the basis of a set of conditioning assumptions -- input assumptions, if you like, and we have confidence in the way that the models work.

But given the heightened level of uncertainty currently, particularly as Douglas mentioned in his opening remarks, around -- just around things like how the virus might mutate or whether the vaccination program will roll out with the same success it has been rolling out up to date, just given that level of -- that higher level of uncertainty, that was the logic behind taking the management overlay to the model outcome as again meaning -- again, look, as to when we might reconsider that, we'll look at it every quarter because that's the way that we look at the business.

Given that it relates to uncertainty, I guess the answer to your question is when they when the uncertainty reduces, that might be a time when we would look to see whether or not it was still necessary. You've asked about reg calls. Richard, do you want to pick up that question?

Yes. I mean, as we said, we've got bonds with reg calls. There's nothing we're going to say right now in terms of our view on the bonds themselves, I guess. But in terms of your specific question, yes, we would -- in the ordinary course of events, as we would with any call, we would look at the terms and conditions of those bonds, satisfy ourself about what they do or don't do versus the regulation. And then we would engage with the regulator in terms of our intentions with those bonds. But as I say, that, along with the detail we factored into the submission that we're making shortly to the Bank of England with our intentions. And then if there's something that we need to notify the market on, we'll obviously notify the market on it at right time in terms of disclosure for MNPI purposes.

Perfect. And this is the final -- the final question that you asked was about payment holiday going into stage 2 or stage 3. I'm pretty sure that even if you end up having a payment holiday of 3 or 6 months, even if you end up coming -- not paying as soon as you come off the payment holiday, that doesn't clarify as you being 3 months in arrears because effectivity it is a holiday. It's only once you get an additional 3 months that, that would count. We will update you separately if indeed that is in the case, but I'm pretty sure it is going into stage 2.

Okay. Perfect. So I thought I had read a regulation somewhere that was the way it was going, but that's perfect.

Thank you, we have no further questions.

So I guess, if there are no further questions, so we'll leave it there. Well, of course, we're more than happy to answer anything that you have subsequent to the call, please do give one of the IR teamer a call. But let's leave it there for today. Thank you for attending the call.

Excellent. Thank you very much.

Thank you. Ladies and gentlemen, that concludes your Lloyds Banking Group's 2020 Full Year Results Fixed Income Conference Call. For those of you wishing to review this event, information for the replay is available on the Lloyd's Banking website -- group website. Thank you.