Lloyds Banking Group PLC (LYG) 2020 Q2 法說會逐字稿

Good day, everyone, and welcome to the Lloyds Banking Group 2020 Half Year Results Fixed Income Conference Call hosted by Toby Rougier. My name is Leslie, and I'm the event manager. (Operator Instructions) I'd like to advise all parties that the conference is being recorded for replay purposes.

And now I'd like to hand you over to Douglas Radcliffe. Please go ahead, Douglas.

Excellent. Good afternoon, everybody, and thank you for joining this debt-focused call on the group's 2020 half year results. My name is Douglas Radcliffe, and I'm the Group Investor Relations Director. I'm joined by Toby Rougier, our Group Corporate Treasurer; and Richard Shrimpton, who is Group Capital Pensions and Issuance Director.

A number of you may well have dialed into the results call this morning with Antonio and William. And if you did, I'm afraid I'm going to run through a number of the points again. So I apologize for that. But hopefully, it will be very useful for those people that didn't dial.

I'll cover the business performance and results, and 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.

We are now several months into the pandemic. And while progress has been made on reducing the immediate threat of the virus, the crisis is still having a significant impact on people and businesses across the U.K. In line with the easing of some lockdown restrictions, we have started to see the U.K. economy return to growth with some signs of recovery in the group's core markets. This recovery is largely being driven by consumers as opposed to the slower recovery we're seeing in commercial sectors.

As a group, with around 75% of its lending to prime U.K. retail customers, we are well positioned to benefit from this recovery. Having said that, we are conscious that longer-term uncertainty over the pace and extent of the U.K.'s economic recovery remains, and we have seen a significant deterioration in the outlook since April.

I'll now provide an overview of the group's financial performance in the first half of the year, and I'll also spend some time discussing our approach to IFRS 9 and the impairment charge that we took in Q2.

Net income at GBP 7.4 billion is down 16%, driven by a lower margin of 259 basis points on stable average interest-earning assets and other income of GBP 2.5 billion. The Q2 margin of 240 basis points is down 39 basis points in the quarter, in line with the guidance at Q1. Also as expected, the rate impact of 21 basis points is around half of the reduction with the rest due to product mix and the actions we've taken to support customers.

Looking forward on the margin, we expect the rate impact to continue into H2 as the structural hedge rolls over into a lower rate environment. Furthermore, while the mix impact should gradually reverse as activity normalizes, we expect the effect of lower balances in our higher-margin areas to persist into H2, reflecting economic activity and customer behavior.

Offsetting this somewhat, there will be some benefit to come in Q3 and tailwinds such as the end of free overdraft periods and deposit repricing. Based on all of this, we expect the margin to remain essentially stable at the Q2 level throughout the rest of the year. This, in turn, means we expect the full year margin to be around 250 basis points.

Other operating income of GBP 2.5 billion for the first half is down 22% year-on-year. This is due to a slowdown across our key markets as well as the one-off items in VocaLink and insurance that we saw last year. We also had GBP 135 million of gilt gains in H1, which I did not expect to repeat in the second half, and which were almost entirely offset by the revaluation adjustment of GBP 110 million in LDC in H1.

Going the other way, Q2 included a GBP 90 million benefit relating to a liquidity premium methodology change within insurance, and this is not going to repeat into H2.

Looking forward, we expect a charge in H2 within insurance relating to the asset management market review. We will also consider our persistency and longevity assumptions in the second half, the former focusing on the possible impact of higher unemployment. In retail, ongoing lower levels of activity across products will also likely have a negative impact in H2. Overall, other income is likely to be tough in the short term, although we are now getting towards the base level. We're investing in growth areas. And in addition, we expect activity to pick up in 2021.

Turning now to costs. Our focus on costs remains strong, and the 4% reduction in operating costs includes 6% lower BAU costs. The cost-to-income ratio, meanwhile, has been impacted by the pressure we have seen on the income line. Lower compensation has contributed in H1 and will continue into H2. Although to be clear, we have also continued to realize sustainable cost savings. It is this track record that enables us to enhance our operating cost guidance for 2020 to less than GBP 7.6 billion.

Moving down the P&L, pre-provision operating profit of GBP 3.5 billion is down 26%. This is lower than we would like, but it still gives the group significant loss-absorbing capacity. The impairment charge of GBP 3.8 billion in the half reflects our prudent reserving based on the updated economic outlook. The charge in H1 includes GBP 2.4 billion in Q2, of which GBP 1.8 billion reflects a model charge for the significant deterioration in the economic outlook. Including the Q1 impact, the total forward-looking economic impact in the half is GBP 2.6 billion, almost 70% of the H1 impairment charge. Excluding the updated economic outlook, divisional charges have increased by GBP 22 million in retail and GBP 141 million in commercial from H1 '19. The latter from a very low base.

The coronavirus impacted restructuring cases reflect clients where the pandemic has directly hampered their recovery strategy. The charge of GBP 432 million predominantly reflects historic debt on 2 individual names. The AQR for the first half of the year was 173 basis points. Within this, the charge for economic assumption changes is equivalent to 36 basis points. Uncertainty, of course, remains, and the final impairment charge will depend on the severity and duration of the shock. However, based on our current economic assumptions, we would expect the full year impairment charge to be between GBP 4.5 billion and GBP 5.5 billion. This gives an idea of the front-loading of the charge under IFRS 9.

In terms of our approach to IFRS 9 and the modeling of ECLs, the main drivers of impairment charges for us are GDP, unemployment and house prices. Our base case assumes GDP down 10% in 2020, and unemployment is around 7% in 2020 and '21. Peak unemployment in our base case is 9% in Q4 2020. We have also adjusted our severe scenario to which we give a 10% weighting as prudent overlays, including, for example, peak unemployment of 12.5% in Q2 2021; GDP down 17.2% in 2020; and HPI, down 29% over 3 years. The overall impact of our multiple economic scenarios is currently provided ECL of GBP 7.2 billion, a pickup of GBP 0.5 billion on our base case.

The increase in ECL provisions across the business lines has naturally resulted in higher coverage levels across stages and products. The GBP 3.1 billion increase in the ECL in the half and GBP 7.2 billion total ECL give additional balance sheet resilience and buffers to absorb losses as they may arise.

Coverage has increased to 1.4% of total lending and almost 30% of Stage 3 assets. This includes 6.3% coverage of the cards portfolio and 44% of card Stage 3 balances. It is worth noting that the cards business employs a proactive charge-off policy at 4 months in arrears. If we instead adopted a slower approach to charging off at, say, an additional 12 months, our Stage 3 cards would have coverage of around 70%, and the overall cards book of almost 9%.

We continue to offer payment holidays to customers in order to help them manage temporary financial pressures. Over 1.1 million holidays have been granted to date, of which around 750,000 are still in force. A significant number of holidays ended in July, and we're now seeing 72% of mortgage customers and 74% of card customers resume paying. This data is improving as more holidays mature. And importantly, we are also seeing low levels of early delinquencies across the products.

It is also worth noting that some of these early delinquencies are likely are -- early delinquencies are likely secure. To be clear, customers who have extended payment holidays are typically of a lower credit quality than average. However, in mortgages, the average LTV is still around 52%. And in cards, so far, only around GBP 70 million of balances have been extended.

Looking forward and assuming a stable macroeconomic forecast, Stages 2 and 3 are already provided for within our ECL. You should expect the P&L charge in the second half of 2020 to reflect any unexpected single name moves within commercial, future losses on Stage 1 assets as the 12-month window rolls forward, including a charge for new business and experienced variances. Absent of change in macro assumptions, you should not expect to see a repeat as a significant uplift in Stage 2 assets that we saw in Q2.

Now moving on to below the line. Restructuring is down 27% on the prior year, largely due to our deliberate pause on severance and property rationalization work for the duration of the lockdown. This will pick up in H2. Volatility and other items of negative GBP 188 million is 60% lower than last year. This is largely due to GBP 308 million of positive banking volatility and the charge in 2019 for changing asset management provider. We have again not taken anything for PPI in the second quarter, we remain happy with the circa 10% model conversion rate, although note that processing activity has been impacted by the lockdown. Overall, we are comfortable that the unused provision of GBP 745 million remains appropriate. The tax credit of GBP 621 million reflects the DTA remeasurement from Q1 and taxable losses in Q2. As a result of all this, we ended up with statutory profit after tax of GBP 19 million.

And with that, I will hand over to Toby, who will cover the balance sheet in more detail.

Thank you, Douglas, and good afternoon, everyone. Clearly a lot has happened since I last spoke to you in February. So the key points I made then about the strength of the group's balance sheet and our strong capital funding and liquidity positions remain true today. I'll touch on each of these briefly in turn.

Turning first to the balance sheet. The group's customer loans and advances were broadly stable over the first half at GBP 440 billion. This reflects strong growth in our SME and Business Banking segments as customers drew down on the various government-backed lending schemes, offset by reductions in mortgages and unsecured lending as a result of retail customers prudently repaying borrowing and lower levels of new business activity. Like the rest of the market, we also saw strong growth in large corporate lending balances in the first quarter, but these have been largely repaid in the second quarter.

On the liability side, customer deposits have grown strongly, increasing by GBP 29 billion over the first half, showing the strength of our deposit franchises. Customer deposits totaled GBP 441 billion at the half year, resulting in a loan-to-deposit ratio of 100%, down from our more recent levels of somewhere between 105% and 110%. Much of this deposit increase was in current account balances as on the retail side, customers reduced spending and built their savings balances. And on the commercial side, customers deposited some of the additional government-backed lending into their current accounts. This strong balance sheet position gives us significant capacity to continue to support our customers as the economy recovers.

Turning now to capital. Our CET1 ratio increased by 80 basis points over the first half to 14.6%. Underlying capital build was 100 basis points, and this, combined with IFRS 9 transitional relief and the reversal of the 2019 dividend, outweighed the impact of impairments, pension contributions and a modest increase in risk-weighted assets. On a fully loaded basis, our CET1 ratio also remained strong at 13.4%, excluding both dynamic and static IFRS 9 transitional relief.

Our 14.6% CET1 ratio provides the group with a headroom of 520 basis points above our MDA level of 9.3% and 360 basis points above our regulatory requirements of around 11%. As a reminder, our MDA level excludes the ring-fenced bank systemic risk buffers. For us, that systemic risk buffer is technically not within our CRD IV buffers in the way that it is for some of our peers. At a group level, the ring-fenced bank's systemic risk buffer is 1.7% and is reflected in the group's PRA buffer, which is outside of MDA.

In terms of our regulatory requirements, there are 4 main developments to mention in the first half of 2020. Firstly, as you'll remember, back in March, the U.K. countercyclical buffer was reduced to 0 in response to the COVID crisis, reversing the previously communicated increase to 2% envisaged for December this year. Secondly, our CET1 Pillar 2A requirement was reduced from 2.6% to 2.3% in July, reflecting continued derisking of the balance sheet, especially in pensions. We continue to expect Pillar 2A to reduce over time.

Thirdly, in May, the PRA announced the U.K. bank's Pillar 2A requirements would temporarily be set at a nominal amount instead of as a percentage of total RWAs. This has the effect of providing stability of requirements in the event of RWAs increasing in the stress, although the impact for us is limited. And then lastly, the PRA announced in July that it would further reduce the Pillar 2A requirement for U.K. banks in December 2020, following their countercyclical buffer consultation. This is worth around 25 basis points to us. However, any reduction in our Pillar 2A requirements will initially be offset by an increase in our PRA buffer, although our MDA requirement will reduce accordingly.

So lots of moving parts, but they result in our group MDA level being 9.3% currently, and our group regulatory requirements being around 11%. Despite these changes, our ongoing target CET1 ratio remains around 12.5% with a management buffer of around 1%.

Our total capital ratio remains strong at 22.3%, and we continue to target AT1 levels of around 2.5% and Tier 2 levels of around 3.5%. And then finally, our U.K. leverage ratio increased slightly in the first half and remains healthy at 5.4% as does our transitional MREL ratio of 36.8%. We expect to receive our final 2020 MREL requirement later this year from Bank of England. As always, details of all of our capital and MREL securities can be found in our capital instruments report, which will be available on our website in mid-August.

Turning now to funding and liquidity. We continue to manage liquidity prudently. Our liquidity coverage ratio is 140% on a 12-month rolling average basis and continue to comfortably exceed our regulatory requirements. The average value of our liquid asset portfolio was GBP 138 billion at the half year, up from GBP 131 billion at the end of 2019, due in part to the increase in deposits I mentioned earlier. We continue to have a significant amount of second liquidity available to us, including drawing capacity in excess of GBP 40 billion under the new TFSME scheme, if we choose to use it.

Turning to funding. We have raised around GBP 8.5 billion during the first half across both opco and holdco entities. Wholesale funding remains broadly stable at GBP 125 billion and below the size of our liquid asset portfolio. In terms of the government funding schemes in the first half of this year, we repaid the remaining GBP 1 billion of FLS and an additional GBP 5 billion of TFS, and we expect to repay the remaining GBP 10 billion of TFS in the second half of the year. As of the end of June, we have drawn down GBP 1 billion under the new TFSME scheme.

In terms of issuance. When I spoke to you back in February, I guided you to expect 2020 issuance of around GBP 10 billion to GBP 15 billion and probably towards the lower end of that range. Given the GBP 8.5 billion of funding completed to date and the introduction of TFSME, we have limited requirements for the rest of this year. We currently do not expect to issue from Lloyds Bank plc for the remainder of this year and are likely to have requirements of only GBP 1 billion to GBP 2 billion from the holdco. We anticipate this being in the form of holdco senior rather than capital.

We will continue to look for opportunities to optimize the funding stack as we have demonstrated this year, with buybacks executed across both capital and funding amounting to around GBP 6 billion, helping to provide liquidity to the market.

And so in summary, despite the volatility in markets and the wider economy over the first 6 months of the year, our balance sheet capital funding and liquidity positions remain strong. As William outlined on the call this morning, there remains considerable uncertainty as to how the pandemic affects the economy going forward, but we will continue to navigate those uncertainties from a position of strength.

Douglas, back to you.

Thanks, Toby. So to conclude, the group has strong foundations and our unique competitive strength position the group well for the future. Our business model, superior efficiency and track record of consistent and sustainable delivery will continue to drive ever lower costs with increased and sustained investment in the business and a better customer experience as a continuous outcome. It is this virtuous circle which means that we are well positioned to deliver long-term superior and sustainable returns.

As already outlined, our updated 2020 guidance reflects the group's proactive response to the challenging economic environment and is based on our current macroeconomic assumptions. While the economic outlook remains highly uncertain, the group's financial strength and business model will ensure that we can continue to support our customers and the wider U.K. economy through the crisis and beyond.

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

(Operator Instructions) And the first question comes from Lee Street from Citigroup.

Three for me, please. So your guidance on loan loss provisions is GBP 4.5 billion to GBP 5.5 billion, and obviously, you've got quite a buildup in Stage 2 loans. So is it possible in terms of guidance or just sort of translate -- assuming you finished the year, the GBP 4.5 billion to GBP 5.5 billion impairment charges, what would that translate to whether this year or we see anything in terms of sort of Stage 3 loan balances, how much should we be expecting to move out to Stage 2 into Stage 3? Just like to get a bit of understanding of your thoughts on what your internal planning says about that?

Secondly, thanks to the sensitivity analysis on your macro assumptions for IFRS 9. I suppose my question is to what extent is sort of no-deal Brexit in your pricing? So let's say tomorrow if it's officially announced, there's going to be a no-deal Brexit, and that's it all negotiations are off. Would you need to change your macro assumptions or sort of move your probability weightings around it? Or just to understand that would be helpful.

And then just a quick request, you obviously gave the number of accounts that have benefited from payment holidays. Could we get a sterling equivalent balance just perhaps give a bit more context and understand what they really mean. That would be my 3 questions.

Thank you, Lee. I'm going to share (inaudible), if that's all right. The -- so let me try and pick up IFRS 9, although I willingly admit that IFRS 9 is not my specialist subject. So what we have done on IFRS 9 is set out -- I think it's to be very transparent and set out our revised economic assumptions and how they have differed Q2 versus Q1. And you can see there, we have a range of scenarios that we have set out. And we've actually set out the implications that you -- if you wanted to take a different set of probability for those range of assumptions versus the probability segment that we have taken. Clearly, the -- we have a downside scenario, and then we have a severe scenario, which has a very significant rises in employment, very significant falls in house prices.

And we think we haven't specifically developed a scenario that reflects a no-deal Brexit, we feel that, that fits somewhere within the scenarios that we have chosen. That said, we continue to plan on the basis that there will be some form of trade agreement. I think that is the stated position of the government at the moment. But if there were, we think that is in the range of scenarios that we have come up with, given the severity of the severe scenario that we've got.

So I hope (inaudible) that one. Your other question was on loan loss provisions and what that might mean for balances. Douglas, do you have a view on that?

Well, no, the first element was, I'm not going to give you that -- unfortunately, I won't be able to give you the full answer you're after, Lee. But when you look at it, clearly, if you see the full year guidance of GBP 4.5 billion to GBP 5.5 billion, you can see there that we clearly don't expect the same elevated charges in H2 given the nature of IFRS 9 and indeed front loading. Clearly, the whole impact of IFRS 9 does mean that you accelerate those charges and front load.

As you can see, the primary driver of the additional charges we've taken is the change in economic outlook. I mean, GBP 3.6 billion of the GBP 3.8 billion that we've taken is actually due to the updated economic outlook. And if you look at the Q2 charge, GBP 1.8 billion of the GBP 2.4 billion actually relates to that economic outlook. So clearly, the economic outlook is a key driver and we've given you a detailed disclosure of how the economic outlook is derived.

And indeed, if you look on Slide 38 in the investor deck, that gives a full breakdown of the different economic measures under each of the scenarios and how we bring it together.

Now frankly, as you can see, the guidance of GBP 4.5 billion to GBP 5.5 billion, that assumes that there is effectively no change to the current economic assumptions. So what would actually drive that additional charge? Well, the additional charge would reflect -- additional charges in the second half for provision was taken on new assets. It would be future losses on Stage 1 assets as the 12-month provision window rolls forward. And it will be experienced variance.

So those would be the 3 main drivers of the additional charge coming through. So it doesn't directly answer your question, but those would be the drivers of the charge.

No, I understand. I guess what I'm trying to get to -- I appreciate, it's helpful. I was just to try and understand if you (inaudible) and you've booked Stage 2 now, how much of that kind of ends up in Stage 3, kind of unemployment (inaudible) and I appreciate your comments.

To give you -- I guess, to give you another sense of this, if I can perhaps come at it a different way, Lee. So if you look at the IFRS 9 transitional, I think our dynamic IFRS 9 was around 80 basis points from the provisioning that we do. And that was obviously -- that was clearly on Stage 1, Stage 2 balances. If and when those balances migrate to Stage 3, we will lose the benefit of the transition. And we're currently estimated that we might lose, let's say, half of that dynamic IFRS 9 transitional in the back half of this year. Something of that order.

Okay. All right. And then on the payment holidays, is it (inaudible)?

You asked the volumes on payment holidays didn't get -- we haven't disclosed those, Lee. So I'm not proposing to do that on this call. Albeit you've got the volume of payment holidays that we have provided as well as the volume of payment holidays still in force. And so if you were to use your average values and that sort of thing, you can get to a rough estimate of the total value. But we haven't disclosed those numbers currently.

But you've -- really, you have seen the payment holiday slide that we've produced there, which is quite a comprehensive data on 1 page.

Yes. No. I am familiar. All right, I won't take more of your time.

Your next question comes from the line of [David Herrington].

For visioning, just looking at the coverage you've got on -- so cards and mortgages, you're at 6% on cards, Barclays are at 16%, U.S. banks are in the double digits. I know you explained the write-off is part of that, but still at 9%, you're still a fair bit below peers. Is that a difference in (inaudible) prudence?

And on the mortgages, simply on the other side, you've got 0.6% coverage, which is more than U.K., more than Barclays to support it, and even more than the Bank of England kind of stress scenario which is like [4%] losses on mortgages. So yes, it's the same questions on those.

And secondly, on capital, obviously, we now have a fully loaded for IFRS 9 capital figure as well as the transitional 14.6%. How much will that -- the fully loaded for IFRS 9 figures play into capital planning and sorts for our management buffers, et cetera?

Sure, [David]. Shall I take the capital one because Doug needs a little bit more time to think about the -- to think about coverage ratio. Do you want to take cover ratio?

I can touch upon coverage of the cards.

There we go, coverage ratio first.

We did touch upon this in the call this morning actually. Because obviously, this is something that's looked at to a fair degree, because the coverage on our cards portfolio is about 6.3%. The key element there, and actually, if you look at the coverage on Stage 3 on the cards portfolio, it's about 44%. The key difference -- I think there's 2 elements that drive the differences here.

The first element is actually the charge-off policy that we actually have. So we actually have a proactive charge-off policy for credit cards invoice that actually means that when they get to 4 months in arrears, we actually effectively -- we charge them off. So therefore, they wouldn't be included in the coverage, which would immediately drive a lower coverage for us anyway. So if you took that equivalent, so you would get to a stage where the overall cards portfolio, we've got a 6.3%. If you try to do that on an equivalent basis, you'd get to an overall coverage of about 8.8%. And if you look from a Stage 3 asset coverage, you'd get to 67%.

Now clearly, if you look at the 8.8%, 9%, that's still lower than, as you say, one of our peers. One of our peers that also has a significant credit card book. Now I think when you look at the differences there, the nature has to come down to the actual nature of the book itself, which is one of the reasons why we gave additional detail on the credit card book and the delinquency trends. So one of the slides that we actually presented this morning tried to highlight almost like the Lloyd's delinquency trends versus other major banks. And those are differences in the charge-off ratios. I think what it really brings out is the prime nature of our credit card book, which would actually drive the difference.

Clearly, I think you can also see that if you start looking at some of the securitization data. So that's the primary 2 reasons from a credit card perspective.

Is there any difference in MBNA and legacy Lloyds?

Very little. And then David also talked about the secured, I think. Douglas, do you want to take that as well?

I'm not sure there's just too much extra to add on the secured side. I mean it's a prime portfolio we have. It's a good LTV book across the base and has continued to perform well.

David, and your second question I think was around capital. Yes, we've got -- we have a very healthy capital ratios, particularly in the context of our GBP 7 billion -- what is now GBP 7 billion -- just over GBP 7 billion worth of credit provisions and GBP 3.5 billion worth of sort of pre-provision profit. So the -- as I mentioned, the CET1 ratio is 14.6%. If you exclude the transitional, it's 13 fold. So we've got more transitionals in our numbers than we have had for -- certainly prior to this quarter as a result of the additional provisioning, Stage 1 and Stage 2 provisioning that we have done.

As we look forward, as I mentioned, we do see some of that dynamic provisioning reducing. Let's say it was 80 basis points of dynamic provisioning. We see roughly half of that coming off this year and I suspect the remainder might come off in 2021. So over time, the fully loaded and the transitional ratios will sort of naturally get closer together.

I think in terms of -- in terms of distribution, I mean, the Board will consider distributions at the end of the year in light of all the information that is available to them at that time. So that will obviously include what our actual ratios are, but it will also look forward and consider things like the economic outlook, where we think reg requirements might be going -- the earnings outlook for the business at that time in the light of what's happening to the economy. So it will be a decision that the Board will take with the information available to it at the end of the year and not before then, David. Hope it helped.

Your next question comes from Robert Smalley from UBS.

I have question on different areas. First, one of your competitors experienced another goodwill write-down the other day. RBS goodwill write-down several quarters ago. Is there any possibility, probability of goodwill write-downs within the group or any operations? That's first question.

Second question with non-calls of AT1s, when we look at MREL and Tier 2 debt, does that make it more, less or the same in terms of likelihood for non-calls? Are you going to look at that as strictly on an economic basis? Or are there other factors at play there?

And then third and following up on [David Herrington's] question in a broader sense. You've given a lot of disclosure about reserves, payment rates. But if you could just narrow down 3 or 4 metrics that you're looking at to try and get a more prescriptive view of asset quality going forward. Is it, for example, those who have deferred but are still paying or some other kind of metrics that you're looking at, better trend? Or you think asset quality is going to be a little bit further out 4Q and Q1 '21?

Okay. Thanks, Rob. (inaudible). So Richard, do you want to comment on the non-calls and AT1?

Yes. Thank you, Rob. Yes. I mean, nothing's changed in terms of policy. So we've been pretty candid with investors over the years. But when it comes to AT1 calls or wherever we have an issue of call option, we'll look at it on the prevailing economics. So they are very much the circumstances. I'm sure you'll appreciate back in early April when it came to making the decision around the AT1 call, the market conditions were far from conducive for issuance at any sort of similar level. So we have to acknowledge that at a time where calling would have taken lead at the -- our own sort of Tier 1 risk appetite to pretty tight levels. So we felt the prudent thing at the time there was to leave that bond outstanding. And the plan is that it remains outstanding for the next 5 years to its next call option.

But it is very much case by case. So it doesn't create a rule that everything will remain outstanding, far from it. We'd hope that like August, the market conditions normalize somewhat in the next few years. And issuance is accessible to all of us at good levels. For us, say, we look at the AT1 on that basis. As far as other calls, Tier 2 calls, et cetera, again, pretty much on the same principles. But I think as I recall of our back book of Tier 2 instruments, most of those remain legacy instruments, which will lose capital qualification post their call date because of legacy issues such as step-ups. In terms of...

With that extent, MREL as well?

I mean it's very different. I mean it's -- yes, I mean, MREL is a very different product. I think when you're talking about senior holdco, you're talking about predominantly 1 year's extension. So I think it would be fairly remarkable circumstances for an issuer -- any issuer to consider that extra year based on a prevailing term credit spread for no material benefits to their MREL stack. It would purely be for funding. So to see anyone extend an MREL security for funding purposes for 1 year, that sort of spread would be highly unlikely.

I hope that -- I hope that helped, Robert. You asked then about simple measures around asset quality and goodwill. So I'll try to form or I'll -- maybe I'll hand over to Douglas on the latter. So I mean on asset quality, we look at a whole range of metrics, as you would expect. I mean at the very highest level on a -- from a sort of key macroeconomic point of view, I mean, the drivers are really the drivers that we have outlined in our scenario. So it's GDP. And then specifically, unemployment is a big one for us. HPI is a big one for us, given the weight of our mortgage book. And actually what [Robert didn't] mentioned which is base rates, which affects affordability.

And so those are the main sort of macroeconomic drivers. So basically impacts affordability. HPI, we -- given the volume of mortgages in our books, if we have to realize some of that security, what is happening to HPI is important, albeit our mortgage book has a very low LTV, probably at around average LTV of 44%, and 90% of the book on 80% LTV. And then unemployment, which does tend to -- it's certainly for the -- unsecured product is a big driver.

So at the top of the house, if you like, those are the main macroeconomic variables. And then there's a slew of stuff that we look at across the different portfolios in terms of early arrears, levels of car prices or whatever it may be, but they tend to be much more sort of portfolio specific, either on the retail side of our business or on the commercial side of our business. So I'm afraid other than the macroeconomic, I can't really simplify it any further.

And what I would add is there is, obviously, if you look at the consumer portfolio, early arrears is normally a really important driver of future losses at the moment. Given the fact that you've got payment holidays in place, given the fact that you've got furloughing also from a macro perspective, it's increasingly difficult to see exactly the underlying trends, which is why a lot of the actual charge that we've taken has actually come from -- you might argue, from the economic overlay rather than the underlying deterioration in the portfolios.

Clearly, at the moment, what you'll see is that those payment holidays are running off, they're running off as we speak at the moment. And indeed, we'll continue to run off over the next 3 to 4 months. And over that time, we'll start to get a clearer picture of the underlying situation. But it's clearly something that we will be monitoring on a regular basis.

And Douglas, (inaudible) review on the goodwill?

Well, the goodwill write-downs clearly, I mean, that's something that we will need to assess at every reporting period and make the call. At this moment in time, clearly, there was nothing that was made with the set of results. So there's nothing specifically on the cards at this moment in time. But it will have to be reviewed at every reporting period.

Your next question comes from the line of Corinne Cunningham.

A few questions also on asset quality. First one is when a payment holiday does extend, what's the main driver behind that? Is it unemployment? Or is it a real mixed bag of (inaudible)?

The second one, what (inaudible) decline which really give you a tipping point in terms of RWA? So not in terms of asset quality per se, but in terms of RWAs.

And then just on the slide that you have with the economic scenarios. So you've kind of got 30% upside, 30% downside, which largely kind of offset each other. That leaves you with just the 10% probability factored in for this severe downside in the model. That doesn't seem -- I don't know, maybe I'm being a bit unfair, but that doesn't seem to be that much that is being priced in, in terms of a negative scenario going forward. So any comments you've got on that would be helpful.

So Corinne, what was the first question? I didn't -- there's crackle, the line is crackled as well.

I'm sorry. That was when payment holidays extend, what are the main drivers behind that? Is it literally just unemployment? Or is it a real mixed bag of things guiding that decision to extend the payment holidays?

Sorry, I got that one. The third question, there was one on economic scenarios, I think you asked.

Yes. I'm sorry. The up and downside scenarios, the 30% of each, but they seem to sort of offset each other and that just leaves you really with this 10% probability of a severe downside in the model. That doesn't seem to me to be particularly conservative. So any thoughts you have on that. I guess you partly answered it with what you were saying to Lee, but yes, any thoughts there would be appreciated.

Okay. Douglas, (inaudible) payment holidays.

Yes. I mean the first thing -- with the payment holidays, I think the first thing to add is with payment holidays is basically -- these are a means to help clients through pressure. And overall, they should be positive to the AQR in the medium term. It's not the payment holiday that drives the default, it's the underlying macro situation. So when you look at the slides that we produced, which was actually on Slide 28, clearly, what you can see is over 1.1 million holidays are being granted.

Now a number of customers that actually took those payment holidays would have actually taken them as a precautionary measure. They weren't necessarily as being clients that are particularly suffering in any way, it was relatively easy to take out a payment holiday online, and it was felt by a number of people that was prudent to do so. So just as a bit of an example there when you look at it, so for example, you look at 472,000 payment holidays have been taken out. So actually, of those that have matured, so you look at -- of those 472,000 payment holidays, 193,000, so what's that about, 30% to 40%, have actually matured so far. Of those that have matured, 72% have returned to paying, 23% have extended.

Now the reason for extending that, now it may not necessarily be the case that there is any particular issue from that customer's perspective. It could be that they're still furloughed. It could be that actually they've got other issues that might just be actually that at this moment in time, given the changes of coronavirus, this is something that they felt it was appropriate to do. So there is in particular -- just because a customer extends, doesn't necessarily mean that there's a future problem going to arise.

In exactly the same way, when you look at it from a personal loan perspective and a motor finance perspective, you'll actually see that the numbers that are extending are higher. So the numbers that are extending are probably 32% and 34% for personal loans and motor finance, respectively. And one of the reasons you get more people extending there is because the original payment holidays personal loans and motor finance, you could actually take out a 1-month payment holiday. Now clearly, if you have a 1-month payment holiday, the likelihood of someone extending after 1 month to extend it for another 2 months is more significant. Hence, why that's happened. So it's more a temporary way of getting through a challenging period.

So there isn't necessarily a default's driver or weakness driver that's, I suppose, driving that extension percentage. Does that help?

Yes.

And on your loans -- on your scenarios point, I guess we feel that our scenarios are -- we've set up a set of scenarios that are realistic but probably slightly on the conservative side. We think they do capture the range of outputs that we might be looking at. I hear what you said in terms of, one canceling out the other. But the difference between our weighted scenario and our weighted scenario is sort of GBP 500 million in terms of the additional weight that we give the weighted scenario. But we've also set out -- we've also set out some new various sensitivities for you. So if you wanted to do something different, we've shown you, roughly, what would be the impacts of different views on unemployment or HPI, albeit it's not -- it's got completely linear.

So there's some -- but there's some opportunity there to think about the sensitivities. And on the HPI decline in RWA, I don't have a number to have. But Rich, do you have a view on that?

Yes. I think broadly speaking, I think if HPI were to fall by 10%, let's say, that would be about GBP 2 billion to GBP 3 billion on RWAs.

Your next question comes from [Jacob Litcha].

One follow-up actually from what you said. I think you mentioned just right now on the call that you have to make a decision around AT1 call in April, is that correct?

That's right, yes.

Okay. So is this a normal lead time? Or do you have some sort of -- I thought you may have a capital planning at the beginning of the year and you may present what your plan is and get approval earlier. And maybe for specific security, get the approval right before, I mean, I don't know, a week before the window expires. So what is the normal timing there for the call that you have to notify the regulator?

Yes. So typically, you have to notify the regulator of a request to call 3 months before the notification dates, typically about 4 months before the event itself. Obviously, the terms and conditions of each bond may vary, but generally for our AT1 securities, it's a call notice period of 30 to 60 days. So there's sort of 3 elements to your question, 3 elements at play is whatever we planned for. And then obviously, there's the PRA application process, and then the final part is obviously what we're notifying the market.

Now you'll be aware, 3 months before the call -- or 4 months before the call date, the market was very different to what the eventual circumstances were when we had to make the decision. So a lot evolved around the first 5 months of the year. And so (inaudible) candidly may have been different from what we planned, but the circumstances has changed quite materially, as you'll appreciate.

Sure. And kind of a follow-up, I mean, I think the answer will be clear, but is there -- do you see the value of [running] with excess AT1 Tier 2 in a steady-state or not -- I mean one of your competitors or peers in the U.K. So I was wondering if it's encouraged by PRA excess or it's just (inaudible)?

We have a little excess. So when we were talking to investors around the AT1 call, I mean there was probably much more RWA uncertainty than there perhaps is now where we've got a little bit more clarity about what we think we've got a bit more clarity about our modeling and outlook given the revised economic situation we have. As we sit today, we're running with about 2.8% of AT1. Historically, we've run at sort of 2.5% to 3%. Probably these days, we're looking to run around 2.5% given the reductions more recently in Pillar 2A.

So we don't -- certainly don't target to run a great deal of excess. However, when we were looking at this call option, obviously, the thing we had to consider was what if market conditions remain as they are or, in fact, deteriorate further given that from an AT1 point of view, we still have a couple of annual reductions coming through from the removal of grandfather securities.

And then, Richard, I will try to make you -- I mean in the Tier 2 space, we typically target around sort of 3%, 3.5% Tier 2. We're running slightly in excess of that at the moment, but that's because we've got some maturities coming up and some grandfathering coming through. But yes, we would typically run around -- we would aim to run around those levels, around 2.5% and around 3.5% for our capital securities, recognizing there's a bit of volatility in that.

Okay. And one final one, if I may, about the payment holidays. Did I understand that -- I think you said that you wouldn't want to disclose the total figure for the payment holiday, would that be correct?

We haven't -- well, we haven't disclosed the value.

That's right, yes.

Can I ask actually -- I know there can be a perfect defined answer. I mean what is the reason for not disclosing it? Do you think the market will get their own picture? Is there a lot of specificities that will make analysis difficult. There's quite few banks out there that have disclosed that figure. I mean maybe you can infer it, just kind of what the reason is?

I don't think there was -- there was particularly a driver as such, it's just something that we haven't included. You can infer most of the different product areas, different average balances, but it was just -- I don't think it was a conscious decision either way.

And your final question comes from Joe Hopkins from Morgan Stanley.

Two questions from me, please. My first is on provisions in the consumer loan books. So Slide 32...

Joe, we're struggling to hear slightly. Joe, could you speak up a bit?

Is that better?

Yes. That's a little bit better.

Okay. So the first question on the provisions of the consumer loan books. So on Slide 32, we can see some Stage 3 coverage for motor loans is significantly higher than it is for cards, but the opposite proved for Stage 2 coverage. So I was just wondering what the drivers behind the big differences were.

And the second question is on LIBOR. So we (inaudible) some increase in these verticals perhaps transitioning away from LIBOR, and I can see from the release that you've moved away from LIBOR internally. But I wondered what plans you had to manage instruments that referenced -- debt capital instruments that reference LIBOR before the end of the transition? And also, whether you feel the need or you think there's a need to manage fixed coupon instruments that might reset against the rate that includes LIBOR like the AT1s?

Yes. Okay. Let me speak up on LIBOR transition, and I'll hand over to Douglas to talk about the provision of the loan coverage question. So on -- just generally on LIBOR. So look, I think we're making pretty good progress on LIBOR transition. I would stress that this is a market thing. It's not just an issuer thing. It's important that issuers and investors work together to deliver the market desired outcomes.

Certainly, we have on the -- in the sterling instruments, we had -- we've been through a number of consent activities. And we're very pleased that those have been supported by investors. And we've seen most of that sterling book now transition, both in terms of the outright coupon linkage and in terms of sort of some of the soft call provisions and that sort of stuff that have a sort of subsequent relationship with LIBOR.

Outside of sterling, we need to see the market convention settle down a bit more. That would be particularly true of dollars and so forth and that sort of stuff. And as we see a bit more stability and maybe in some of those market conventions, we will have to think about how we -- how best to transition those sort of non-sterling bonds. But as I said, we need a bit more consistency around the market conventions there before I think we were -- we can formulate our ideas.

And clearly, as we have an idea, as we have a proposal, we would naturally make a market announcement if -- at the right time if that were appropriate. But in general, I think we are making good progress on transition. Clearly, we've got, whatever it is, 18 months to go now in terms of -- certainly in terms of sterling and probably dollars. And so we are keen to see the market convention settle down and progress with the transition of those outstanding instruments.

On loan coverage, again, Douglas?

Yes. I think on loan coverage, I mean, yes, the difference in the percentage between the stages and Stage 2 to Stage 3 is, in essence, just driven by the difference in the product side. So I mean if you look at the credit cards, I mean, clearly, across the (inaudible) remains pretty low. Though clearly, it's suppressed, as I indicated previously by payment holidays. The impairment charge has actually increased, driven by updates to the economic outlook. And you can see that the charge-off rates are actually pretty stable at around 3%.

It's really the nature of whether it's Stage 2 or Stage 3, depends on the charge-off policy and depends on the individual nature and quality of the portfolio. It's really not that much more than that.

We have no further questions.

Perfect. I hope you found the call useful. Thank you for the questions. I know we're following up with a number of you in terms of follow-up meetings. And a lot of people would like those words. We're more than happy to do that. Contact Richard or Blake or Tanya. So I'm sure we'll speak in due course.

But let's leave it for there today, and thank you for joining the call.

Thank you.

Thank you very much.

Thank you, gentlemen, and thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.