Lloyds Banking Group PLC (LYG) 2021 Q4 法說會逐字稿

Good morning, everyone. It's great to be here to see 70 people in the room today. And I'd also like to welcome everyone joining us on the webcast and the phone lines this morning. Since I joined the group, I've spent a lot of time getting to know the business and our people. It is great to have the opportunity to speak directly to you, our investors and analysts. I've been with Lloyds for over 6 months now, and I have to say I'm even more excited about the opportunities for the group today than I was when I joined.

I've seen for myself that Lloyds Banking Group is an organization with significant competitive strengths, a fantastic franchise including the U.K.'s leading digital bank, and great people. But there are also some real opportunities for the group to grow whilst maintaining cost and capital discipline. We have a powerful group purpose, helping Britain prosper. This underpins our new strategy and is integral to everything we will do. As you will hear, I believe that building on these strong foundations and raising our ambition on our purpose, growth and efficiency will enable the group to deliver higher, more sustainable returns to investors, whilst meeting the needs of our broader stakeholders. I'm pleased to be able to share the details of our new strategy with you today. But before I do that, I know you'll want to hear about our performance in 2021. So I'm going to hand over to William now to run through the strategic and financial progress the group has made over the last year. William.

Thank you, Charlie. Good morning, everyone. And once again, thank you for joining. And to those of you in the room, it's great to be with you in person today. Let me turn first to an overview of the financials on Slide 5. Lloyds Banking Group delivered a solid financial performance in 2021, alongside continued business momentum. Net income of GBP 15.8 billion is up 9% on 2020, supported by a net interest margin of 254 basis points, up 2 basis points on the year. We remain committed to efficiency. Our cost to income ratio for 2021 is 56.7% and operating costs of GBP 7.6 billion are in line with guidance.

Small year-on-year increase in operating costs was driven by the accelerated rebuild of variable pay of stronger-than-expected performance, which I mentioned at the half year. Asset quality remains strong, and combined with the improved macroeconomic outlook for the U.K., supports a net impairment credit of GBP 1.2 billion. Driven by the solid underlying financial performance, statutory profit after tax of GBP 5.9 billion and the return on tangible equity of 13.8% are both significantly ahead of the prior year. In this context, we've seen continued balance sheet growth and strong capital build of 210 basis points in the year. The group's exceptional capital position has enabled the Board to announce a share buyback of GBP 2 billion alongside the ordinary dividend of 2p per share for the year. Our total distribution for 2021 is equivalent to GBP 3.4 billion or around 10% of the group's market value.

I'll now turn to look at how we've helped Britain recover during 2021 on Slide 6. As you know, our purpose as an organization is to help Britain prosper. Within this, in 2021, our focus was on helping Britain recover, and specifically addressing areas where we can make the most difference. We've supported over 93,000 start-ups and small businesses in 2021, exceeding our original target of 75,000. We've lent over GBP 16 billion to over 80,000 first-time buyers and provided over GBP 3 billion of new funding to social housing. And importantly, we're also making progress against our diversity targets. Although clearly, we need to go further to meet our ambitions in this area.

Now moving to other aspects of our strategic progress in 2021 on Slide 7. We outlined strategic review 2021 a year ago for a period of transition. I'm pleased with the progress that we've made during the year. Our execution has provided a strong foundation for our new strategy. Touching briefly on some of these achievements. We've maintained our record all channel Net Promoter Score at 69, seeing GBP 16 billion net growth in open book mortgage balances and delivered over GBP 7 billion of net new open book assets under administration in insurance and wealth.

Alongside, we saw increasing customer usage of our digital channels, including growing the number of SME products originated digitally by around 60% and onboarding 3x more clients to the new cash management platform versus 2020. We've also established some important proof points in technology R&D. And finally, like many businesses, we're rolling out new hybrid ways of working. We've managed to reduce our office space by around 9% in 2021, ahead of our target of 8%.

I'll now look at the group's financial performance in more detail, starting with solid net interest income performance. NII of GBP 11.2 billion is up 4% year-on-year, benefiting from a 2% increase in average interest-earning assets and a stronger net interest margin. AIEA is GBP 445 billion or up GBP 10 billion in the year, with strong mortgage growth more than offsetting modest reductions elsewhere in the portfolio. The margin of 254 basis points was resilient with a Q4 margin of 257 basis points, up 2 basis points on Q3. Within Q4, the impact of competitive mortgage pricing was more than offset by rate rises and lower funding costs.

We remain positively exposed to rate rises. Currently, we would expect a 25 basis point parallel shift in the yield curve and associated base rate rise to benefit interest income by around GBP 200 million in year 1. This number is illustrative and based on the same assumptions, including the 50% pass on as we used in Q3. We'll provide further disclosure on this in the appendix.

Looking forward, we expect low single-digit percentage growth in AIEAs in 2022. This will be supported by growth in the mortgage book and recovering unsecured balances. We now also expect the margin for 2022 to be above 260 basis points. Given the importance of mortgages for the group, let me look at this book in more detail on Slide 9.

As mentioned, we saw continued strong mortgage growth in 2021. Balances were up GBP 13.7 billion in the year, including open book mortgage growth of GBP 16 billion. Q4, we saw modest open book growth of GBP 0.7 billion based on a somewhat slowing market and our own participation choices. Meanwhile, a back book of around GBP 64 billion is down 16% on 2020, seeing stronger attrition in Q4 given customer remortgaging in the context of rising rates. And clearly, that pattern could continue.

It's worth touching briefly on mortgage margins. As you know, the market has become increasingly competitive in recent quarters, with new business pricing moving below the level of maturities in the fourth quarter. This results in pressure in mortgage margins. Completion margins across Q4 were around 115 basis points below front book maturities of around 150 basis points.

Looking forward, we expect the group margin over time to continue to be impacted by maturities of higher-yielding business repricing at then prevailing levels. This will, of course, apply to a proportion of the whole book turning over in any given period, including refinancing existing customers. To give you a sense of scale on this, in 2021, this number was around GBP 90 billion. With that said, we continue to see mortgages as attractive from a returns and from an economic value perspective.

Now turning to our other asset books on Slide 10. U.K. consumer finance balances are down GBP 0.8 billion on 2020. However, despite an Omicron induced pause in December, we are seeing improving spending levels and are starting to see some growth in credit cards. Balances in the card book were up GBP 0.5 billion in the second half of 2021. A large part of the net consumer finance decline is due to the GBP 0.7 billion reduction in motor finance balances. That was mainly in the first half, and this in turn is significantly the result of supply chain constraints seen across the motor industry, which now are showing signs of easing.

Commercial banking balances are down GBP 2.8 billion in the year. This includes a GBP 1.2 billion reduction in government-backed lending schemes and a GBP 1.6 billion reduction in other underlying businesses. That is driven by elevated levels of client liquidity, which are likely to persist in 2022.

Now looking at the other side of the balance sheet on Slide 11. We continue to see significant deposit growth in 2021. Deposits increased by GBP 25.6 billion in the year, albeit reducing GBP 2.8 billion in Q4. The deposit margin of 15 basis points in 2021, 17 basis points in Q4, reflects a low overall funding cost. We continue to see inflows to our trusted brands. Retail deposit balances were up almost GBP 28 billion in the year and GBP 3.8 billion in the fourth quarter. This has given lower levels of customer spending and, of course, high levels of savings. Commercial deposits are down GBP 3 billion in the year following a reduction of GBP 7 billion in the fourth quarter.

Q4 pattern reflected our business optimization activities. In aggregate, group deposits are now around GBP 65 billion higher than at the end of 2019. This gives the group opportunities to further serve customers as well as increase our pool of hedgeable balances. This is outlined on Slide 12. In the context of our significant deposit growth, we've increased the structural hedge capacity by GBP 30 billion during 2021. That's the GBP 240 billion. Hedge capacity has now increased by GBP 55 billion since the end of 2019 based on our continued review of deposit hedge eligibility and deposit growth of GBP 65 billion over the same period.

In response to positive movements in the yield curve in 2021, we have reinvested the nominal balance up to the approved capacity of GBP 240 billion. Meanwhile, the weighted average duration of the hedge remains around 3.5 years, which is slightly below our neutral position for 4 years. Based on this, we've seen gross income of GBP 2.2 billion from hedgeable balances over the year. Looking forward, we have around GBP 30 billion of maturities in 2022, which gives us flexibility to invest. Together with raise moves, based upon our planning assumptions, 2022 hedge income will be ahead of 2021. And then again, we expect a further modest increase in 2023 and 2024.

Now moving to other income on Slide 13. Other income is showing early signs of recovery. We delivered GBP 5.1 billion in 2021, up 12% on the prior year. As I said, the year benefited from improving performance, particularly in retail, insurance, and wealth, and our equities business. Commercial Banking has been broadly stable. Other income of GBP 1.3 billion in the fourth quarter includes a benefit of around GBP 80 million from insurance assumption and methodology changes. If you strip out this less predictable item, the underlying run rate for Q4 was around GBP 1.2 billion, in line with my comments over recent quarters.

Looking forward, we expect the underlying run rate and other income to build gradually dependent upon customer activity levels and including our new and continued investments. You'll hear more about our strategic ambitions and other income from Charlie in the next section of the presentation. And finally, and as discussed in Q3, look out for the IFRS 17 impact in 2023.

Moving on, the group has maintained its focus on cost efficiency during 2021. So let me talk more about this on Slide 14. Operating costs of circa GBP 7.6 billion for 2021 are in line with our guidance. As mentioned previously, the 1% increase in operating costs includes rebuilding variable pay, which in turn was driven by our stronger-than-expected financial performance. Remediation of GBP 1.3 billion is significantly higher than 2020. Importantly, this includes a charge of GBP 790 million for HBOS Reading with GBP 600 million recognized in the fourth quarter.

Q4 charge reflects the estimated future operational costs and address for HBOS Reading. In respect of this, please note that uncertainties remain around the timing, the flow and indeed the ultimate cost of decisions from the ongoing independent panel review. Continuing our recent moves towards increased transparency and holistic cost management. From Q1, we will report all restructuring costs, except M&A-related costs, within our operating cost line. In line with this, from Q1, we will also move certain fraud costs out of impairment into operating costs, better reflecting the nature of these transaction-driven expenses.

Using 2021 as an illustration, combined impact of these reallocations would have increased above the line costs by around GBP 685 million to GBP 8.3 billion. I stress this is simply a reallocation and will clearly have no impact on the bottom line. After this move, our 2021 pro forma cost income ratio would be 61%. Now as you know, that number includes an unusually significant remediation charge. If we exclude that, we strip that out, the cost income ratio is around 53%, which remains sector leading in the U.K. Importantly, looking forward, the group will maintain long-standing cost discipline and rigorous approach to managing BAU costs. Despite inflationary pressures, 2022 will see stable BAU costs. An uplift in total cost is planned, driven by the temporary increase from investment in our new strategy. That's together with the new business lines of Embark and Citra. As a result, we expect 2022 operating costs to be around GBP 8.8 billion compared to GBP 8.3 billion in 2021 on a revised basis. I'll address this again later on in my comments.

Looking now at impairment on Slide 15. Asset quality remains strong and new to arrears remain very low with underlying charges below pre-pandemic levels. The net impairment credit of GBP 1.2 billion for the year, including a GBP 467 million net credit in the fourth quarter, reflects the improved macroeconomic outlook for the U.K. Our base case economic assumptions now incorporate the favorable 2021 outcomes. And for 2022, we forecast GDP growth of 3.7%, an unemployment rate of 4.3%, and flat house prices.

In this context, our expected credit loss provision stands at GBP 4.5 billion, which remains around GBP 0.3 billion higher than at the end of 2019, before the pandemic. Within our ECL, we've retained around GBP 800 million of COVID-related additional management judgments that includes the GBP 400 million central adjustment, which we booked in Q4 2020, and this compares to GBP 1.2 billion COVID management judgments that we held as of Q3. Looking forward, in 2022, we expect the asset quality ratio to be around 20 basis points.

Now looking below the line on Slide 16. Restructuring costs of GBP 956 million include GBP 570 million in the fourth quarter. This includes a GBP 400 million write-off as the group invests in new technology and in systems infrastructure. Skewed in that write-off, restructuring costs are broadly in line with 2020 levels. Previously guided higher technology R&D costs were offset by lower severance and lower property transformation costs.

As mentioned, most restructuring costs will be reported above the line from Q1. This is equivalent to GBP 504 million in 2021. And from that point on, only M&A integration-related costs and exceptional write-offs will remain within restructuring. And of course, we do not currently anticipate any further write-offs on this line. The volatility line benefits from positive insurance and banking volatility. It also includes the usual charges of around GBP 200 million for fair value unwind and GBP 70 million for the amortization of purchased intangibles.

After these items, statutory profit before tax of GBP 6.9 billion in 2021 is significantly ahead of the prior year. Likewise, statutory profit after tax of GBP 5.9 billion, which also benefits from the GBP 1 billion tax credit in Q2.

Return on tangible equity was 13.8% for 2021 or 11.4%, excluding the tax credit. This is ahead of guidance, although also clearly benefiting from the net credit impairment during the year. Based on our forecast, I expect our 2022 return on tangible equity to be circa 10%.

Now turning to the next slide and looking at risk-weighted asset developments during the year. Risk-weighted assets decreased from GBP 203 billion to GBP 196 billion in 2021. It's in line with our guidance. We saw limited credit migration across the group in the year, supported by continued increases in house prices. GBP 7 billion reduction was significantly driven by our continued economic optimization of the commercial banking portfolio, more than offsetting the impact of increased lending. This was particularly the case in Q4 alongside some model adjustments reflecting improved credit quality led to the GBP 4.7 billion reduction during the quarter.

Further opportunities remain in optimization, although I expect the pace to slow slightly this year. I've talked before about the regulatory RWA inflation on the 1st of January 2022. The net impact of that was around GBP 16 billion, meaning the pro forma RWA position on the 1st of January was GBP 212 billion. I should note there's still some uncertainty around this number, given ongoing model refinements. In line with our guidance for Q3, we expect 2022 closing RWAs to be around GBP 210 billion. Anticipated balance sheet growth is expected to be more than offset by optimization activity through the rest of this year.

Solid financial performance and effective RWA management have allowed strong capital build and shareholder distributions. So let me turn to this on Slide 18. The group's strong capital position has enabled the Board to recommend a final ordinary dividend of 1.33p per share, resulting in a total ordinary dividend for 2021 of 2p per share. Alongside this, we've announced a share buyback program of GBP 2 billion. This significant increase in shareholder distributions totaled GBP 3.4 billion and has been supported by the group's exceptionally strong capital position at year-end 2021.

Capital build in the year was significant. Pro forma CET1 ratio of 16.3% after dividends and buybacks includes 210 basis points of capital build with 51 basis points in the fourth quarter. The CET1 position is after taking account of the in-year fixed and variable contributions to pension schemes and around 30 basis points for the acquisition of Embark. Pro forma position also includes a GBP 300 million dividend from the insurance business, which is the first payment to the group since 2019. As mentioned, there are capital adjustments from the 1st of January. These include the RWA inflation, which I mentioned a moment ago, but also the reversal of the intangible software benefit and the unwind of IFRS 9 transitionals.

The total impact of all of these elements together is around 230 basis points. Even after this regulatory inflation, the group's pro forma CET1 level of 14% as of the 1st of January remains ahead of our ongoing target of circa 12.5% plus the management buffer of circa 1%. It's also well ahead of our regulatory capital requirement of circa 11%. Looking forward, I expect 2022 capital build to be lower than 2021 after our increased levels of investment, although it will still be resilient based on our expectations of performance, as I've outlined.

So with that, I'll conclude my remarks on the strategic and financial performance for 2021. Thank you very much, indeed, again, for listening. Let me now hand back to Charlie, who will outline our new strategy. Thank you.

Thank you, William, and thank you all for listening to our 2021 full year results presentation. It's great to be able to now share with you our new strategy, which will define the priorities for the group going forward. This strategy is grounded in a 3-year operating plan with clear strategic and financial outcomes that we will continue for both the next 3 and 5 years. I hope that by the end you'll be as excited as I am about the group's future and how we intend to build on the strong foundations we have today to deliver higher and more sustainable value to all of our stakeholders.

Let me start by highlighting the key points of our new strategy on Slide 20. Our strategy and transformation plan will set the group on a higher growth trajectory with more diversified revenues. The strategic initiatives that I'll outline later are expected to generate an additional revenue of GBP 700 million by 2024, increasing to a full run rate of GBP 1.5 billion by 2026, split evenly between interest and noninterest income. This is a significant shift in the group towards growth.

Having said that, we will retain our focus on cost discipline, committing to keep costs flat in 2024 compared to 2022 despite the inflationary headwinds. We are targeting an improvement to our operational leverage, setting us on a path towards a cost income ratio of less than 50% by 2026. I'm confident that through our strategy, we'll create higher, more sustainable returns and capital generation. Return on tangible equity is expected to exceed 10% by 2024 and be higher than 12% by 2026 as the full benefits of our investments are realized.

As you've seen today, we remain committed to returning excess capital to shareholders and plan to pay down to our target capital ratio by 2024 at the latest. As a result of our higher profitability, there'll be significant improvements in annual capital generation to 175 to 200 basis points by 2026.

Turning to Slide 21. Our new strategy is designed to build upon our strong foundations and develop an even stronger competitive position in the U.K. going forward. As you can see on this slide, we are the largest bank and sole integrated provider of banking, insurance, and wealth services in the U.K. Half of the U.K. adults and about 1 million businesses turn to our trusted brands for meeting their financial needs, both directly and through our intermediaries. Our customers' 1 billion monthly transactions give us an unparalleled insight into their financial needs and behavior. Helping us provide them with relevant solutions. We have 26 million customers and 18.3 million active digital users, making us the largest digital bank in the U.K. with a digital user base greater than all the neo banks combined and also 50% more than the next incumbent.

Our dedicated colleagues with their breadth of experience and expertise are also a key strength. To add to these over the last decade, the group has created an exceptionally strong balance sheet with disciplined risk management. We intend to build on these strengths to realize our opportunities.

Turning to Slide 22. Given the changes in the external environment, I think there are now a number of opportunities the group needs to focus on to strengthen its competitive position going forward. We need to grow our business and diversify to reduce our dependence on interest income. This is all the more important in a low, albeit rising rate environment, with margin pressures likely to persist for the industry. To achieve this, we have a unique opportunity to deepen relationships with our existing customers, both with consumers and businesses of all sizes. We can do this by making it easier for them to access our great products and by making our channels simpler and more personalized to use.

In parallel, there are new opportunities for us to work with our intermediaries and third-party platforms by leveraging our market-leading digital capability, scale product offering, and specialist brands. There is an opportunity to be faster than we have been historically, in modernizing our technology estate, more effectively using our data, and creating end-to-end efficiency. COVID has further accelerated customers' digital adoption, engagement and transactions. Whilst we have a digital leadership position amongst incumbents today in the consumer space, for future competitiveness, it is essential to achieve a step change in the speed at which we create new propositions, deliver change, and reduce our cost to serve across the whole group.

Finally, we need to ensure that there is a strong alignment between our purpose and value creation, so that we can profitably deliver for all of our stakeholders. This also represents a significant growth opportunity for the group. I believe in the next decade, it is only by doing right by our customers, colleagues and communities that we can deliver higher, more sustainable returns to our shareholders.

Let me talk a bit more about our purpose and strategy on the next slide. Helping Britain Prosper guides our business model and strategic participation choices. Going forward, we will increase the alignment between our purpose, our strategy for growth and the commercial outcomes we deliver in order to be a truly purpose-driven organization. Our strategy will build on our current participation choices, which we believe are the right ones to pursue growth and further strengthen our foundations. We have a clear strategic vision to be a U.K. customer-focused digital leader and integrated financial services provider, capitalizing on new opportunities at scale.

Slide 24 outlines the key pillars of our strategy and execution. We will create higher, more sustainable value for all of our stakeholders through 3 pillars: driving revenue growth and diversification across our main businesses through increasing depth of relationships and breadth of products; focusing on strengthening the group's cost and capital efficiency further, building on our strong foundations; and executing by building a powerful enabling platform, combining people, technology and data to support our bold business ambitions.

In that context, we have constructed a portfolio which ensures an appropriate mix of priorities to grow revenues and increase efficiency. And these will deliver value across both the short term and the longer term.

Turning to Slide 25, we want to drive positive impact for our customers, for our colleagues and the communities we serve. Given our scale and leading position, we are better placed than any other financial services business in the U.K. to make this a reality. I believe that our focus should be on building an inclusive society and supporting the transition to a more sustainable and low-carbon economy. This is where we can make the biggest difference and create new avenues for growth. To build a more inclusive society, we will focus on improving access to quality housing, supporting financial inclusion, enabling access to cash and improving the financial resilience of our customers.

We also see an opportunity to help more customers in the U.K. have access to simple and helpful investments and protection solutions. Through our commercial bank, we will support regional development by helping businesses in target sectors across the U.K. We will also lead by example by reiterating our ambitious targets to create a more inclusive and diverse workforce. To support the transition to a low carbon economy, we are reinforcing our prior commitments, targeting net zero for the activities we finance by 2050 or sooner. This will also enable us to access fast-growing areas linked to sustainability, such as green infrastructure finance, green mortgages, electric vehicle financing and others. In addition, our own operations are set to be net zero by 2030.

Turning to Slide 26. As I mentioned, our strategy will deliver in excess of 10% return on tangible equity by 2024 and more than 12% by 2026, with a step change in capital generation, driven by increased profitability. This is supported by incremental investments of GBP 3 billion over the next 3 years and a total of GBP 4 billion over 5 years. Increased profitability will be driven by revenue uplift from the strategic initiatives of GBP 0.7 billion by 2024 and more than double that by 2026 to GBP 1.5 billion.

In parallel, we're committing to keeping costs flat in 2024 relative to 2022 and driving towards a cost to income ratio of less than 50% by 2026. We recognize the importance of distribution for our shareholders and will pay down to our target capital ratio by 2024 at the latest.

Let me provide some details on how we plan to deliver these benefits through our strategy, starting on Slide 28, with growing and diversifying our revenues. William is then going to provide more details on the underpinning financials in the next section. Growth is a core focus of our strategy. About 2/3 of our incremental strategic investment is aligned to growing and diversifying revenue. We have carefully prioritized opportunities across each of our businesses to ensure we generate value in the near term as well as creating new revenue streams, which will deliver over the longer term.

In the consumer segment, we aim to bring more of our products and services to our existing customers as well as to innovate and broaden our product offerings and make it easier for customers to access them through our intermediary partners.

In addition, we will create a new mass affluent proposition to grow in this attractive segment and underserved segment across banking, protection and Simple Wealth. In our SME business, we aim to digitize our offering and grow and diversify our revenues in products and sectors where we have a lower market share today. And we will target disciplined growth of our corporate and institutional businesses.

Let me take each of these opportunities in turn, starting with consumer on the next slide. As you can see on the left-hand side here, we start from a very strong position as the U.K.'s largest consumer franchise with a full set of products, iconic financial services brands and record levels of service across our channels. We're the market leader in mortgages, current accounts, savings and credit cards and are top 3 home insurance and workplace pension provider.

With 26 app log-ons on average per customer per month and a digital NPS of plus 69, our customers engage with us nearly once a day on average. In addition, we have the largest branch network across the U.K. working closely with local communities and customers. Having said that, we currently fulfill fewer needs and earn less revenue per customer compared to our potential. U.K. consumers hold over 7 financial products on average, but our customers hold only 2.4 of them currently with us. We see a significant growth opportunity to enable our existing customers to choose more of our products by providing them with an even simpler and more personalized experience. For every 5% increase in the average needs we meet of our existing customers, we can generate additional revenue of GBP 200 million per annum.

Given our strong specialist brands unique to our group, the second growth area in the consumer space is for us to increase our market share in products bought through intermediaries such as brokers, IFAs, online platforms and car dealerships. Intermediaries constitute a significant proportion of the market for certain key products, and we generate about 40% of the consumer income through this channel. Although we have a leading position in mortgages, we have significant headroom for growth by getting closer to our natural share in products such as motor finance, home insurance, protection, individual pensions, and investments. We will look to emulate our success in workplace pensions, where we have grown market share from 10% to 19% over the last few years.

I'll take these 2 opportunities in turn. Starting with Slide 30 on our priorities to deepen our existing relationships. We serve consumers directly through our 3 strong and trusted relationship brands, Lloyds Halifax and Bank of Scotland. Increasing the depth of these relationships through our breadth of products requires more personalized engagement. It also requires offering a simple, convenient way for customers to fulfill and service more of their needs in 1 place, consistent with their desire for a more unified experience.

Therefore, we will enhance our data and analytics capability and further cement our digital leadership to deliver personalized engagement, offers, pricing and credit risk decisions. This will result in more customers being digitally active, drive a higher depth of relationship and revenues. Payments will be a key anchor to drive greater engagement and we aim to grow our market share in credit card spend, which is currently below our share of credit card balances.

Home buying is a great example of a key life event, which creates a variety of linked and recurring needs for our customers. We aim to provide them with a unified experience to fulfill these needs by building a more integrated home ecosystem with mortgages, green retrofit solutions, and associated insurance and protection products.

In addition, to broaden our product suite further, we will innovate to meet emerging customer needs such as launching new financing solutions for electric vehicles and charging points. We will continue to help our customers through all channels and be a leader in providing support and education to build their financial resilience and opportunities. Turning now to our intermediary partner priorities on Slide 31. Growing market share of our intermediary partners needs scale and expertise to deliver high-quality products and services with frictionless processes that are increasingly embedded in third-party platforms. We already have the first part in place with a broad product suite delivered by our stable and strong specialist brands. The opportunity is to capitalize on this by digitizing product processes, specifically in insurance and investments. As an example, our intermediary proposition will build upon our Embark acquisition and contribute towards our target of generating more than GBP 55 billion of new open book net flows in investments and retirements by 2024.

We will maintain our value maximizing approach in mortgages and look to grow market share in car leasing. Specifically, we will finance over 200,000 electric vehicles through our Black Horse and Lex businesses. We will also drive growth by innovating to develop new propositions in embedded finance and flexible motor financing solutions and scaling our Citra private rental housing business.

Moving to our mass affluent opportunity on Slide 32. The mass affluent market in the U.K. is growing at close to 10% per annum and there is a clear gap in the market for a digital-first integrated offering, combining a full set of banking, insurance and investment products. We already have the largest mass affluent customer base in the U.K. However, they are meeting a number of their banking and investment needs elsewhere. This presents a material opportunity, which Lloyd's is uniquely placed to capture.

In order to ensure the right choices for customers, a provider must also be able to support them in the accumulation and deaccumulation stage of their lives by joining up services across banking, housing, pensions and investments. Tech-led competitors only offer solutions for a small set of customer needs. Whilst banks operate a higher touch model geared towards more affluent and wealthy customers, similar to our Schroders Personal Wealth and Cazenove's offerings.

We intend to focus on this gap in the market, which is the broader pool of mass affluent customers with income of wealth above GBP 75,000 with a scaled digital wealth offering and integrated banking solutions.

On the next slide, I'll provide an overview of our priorities in this space. For our new mass affluent offering, we will combine a more tailored banking proposition with investments, protection and advice, leveraging the Embark platform. Whilst we will offer a premium service model across channels, we will be digital first, consistent with customer preferences. I believe value in this space is skewed heavily towards banking products, such as savings, housing, lending and payments. This plays to our current strengths and will allow us to quickly set up the initial proposition, which we will further refine over time. We will bring to bear our personalization capabilities developed in the consumer segment to meet customers' banking needs, through tailored products such as high-value mortgages and lending solutions.

In addition, customers would be able to meet their daily transaction and payment needs through a convenient and easy-to-use digital interface. And for their investment needs, the customers will be able to access digital guided advice for simple wealth solutions and an option to access human support if needed.

I'll now move on to our SME business on Slide 34. As you can see on the left-hand side here, we have a well-established and significant SME franchise of roughly 1 million micro businesses and 70,000 small and medium-sized businesses across the U.K. We have a 20% primary relationship share with SMEs and a top 3 share across purpose aligned sectors, such as agriculture, health care, and real estate. We can build on these to grow our market share in other trading sectors, and meet more of our customers' non-term lending and transactional needs. Our strong set of relevant transaction banking products and more than 1,000 relationship and product specialists across the U.K. provide a firm foundation for growth. We need to digitize to improve client experience and enable them to conveniently and quickly self-serve and meet their day-to-day needs.

This is also essential given changing client expectations, increasing digital engagement and competition. In conjunction, we need to selectively build out key products like asset finance, invoice discounting, trade, merchant acquiring and e-commerce solutions. These are important relationship bankers, and we currently punch below our weight. For example, in merchant acquiring, where volumes are growing around 20% year-on-year led by online transactions, we only have a 5% market share today.

Let me talk to our priorities on SME in the next slide. We plan to digitize front to back to allow our clients to engage, transact and fulfill needs through a digitally integrated front end across all of our products. We'll provide a personalized experience by using data and analytics both for self-serve and for insights to relationship managers to better support our clients. We aim to grow our digital product origination and fulfillment to more than 50% of total volumes, with automated lending decisions for smaller loans improving time to cash. And for new customers, we'll provide a quick and intuitive onboarding experience.

Whilst we'll be digital first, our customers will continue to be supported by our sector and product specialists for their more complex needs. Alongside digitization, we'll expand our SME proposition through merchant services, trade, cash flow lending, and broader value-added services like supporting SMEs on their transition to net zero. We are targeting more than 15% income growth from transaction banking and working capital solutions, and we're also aiming for a 20% annual growth in new merchant servicing clients.

Moving to Slide 36, to talk about our opportunities in the large corporate and institutional business. We have built a targeted franchise supporting corporate and institutional clients with a strong U.K. focus, including 2/3 of the FTSE 350 firms as our clients today. In recent years, we've improved returns and can build on this in key sectors aligned to our purpose and areas of core expertise in cash, debt and risk management products. Peer benchmarks indicate that we have substantial headroom to grow our ancillary income. Whilst balance sheet provision is a key relationship banker in this space, our clients have a broad range of needs, which can be fulfilled through our markets and transaction banking products.

Moreover, we will continue to build on the synergies with the rest of the group by providing banking, FX and rates capability to our consumer and SME franchises and making the most of Lex and Scottish Widows by seeking to grow the GBP 500 million of annual revenues that our clients currently generate using the group's motor insurance and pension propositions.

Finally, as a leading green finance provider in the U.K., we are well placed to support our clients through ESG advisory and sustainable financing to support their transition and the U.K.'s broader net zero goals.

Turning to Slide 37. Whilst there's no doubt that the large corporate and institutional market is a competitive space, we are well placed to selectively and profitably grow the business within our current risk appetite. We are not looking to expand into regions where we do not have sufficient scale, capability or a clear U.K. link. Also, we will not participate outside of our core capabilities. This ensures that our ambition is bold, but grounded. As we grow in key sectors, we will increase our balance sheet velocity through a scaled originate to distribute model, building ancillary income in a capital-efficient manner with modest RWA growth. Through this focus and strengthening our product capabilities, we aim to grow other operating income by more than 20% by 2024.

We will continue to invest in our transaction banking capabilities and build on the momentum in onboarding clients to our new payments and cash management platform, which continues to drive growth and value. We will also be launching a new supply chain proposition this year. In debt and risk management products, we will enhance our DCM capability, including developing our U.S. dollar franchise and investing in FX and rates capabilities.

And finally, we will continue to drive our purpose outcomes by supporting regional development and supporting more clients with their transition plans. As a result, sustainable finance will represent 20% of our corporate lending book by the end of 2024, more than double the proportion today. This concludes our 4 areas of growth.

Now moving on to Slide 38, as we invest to grow and diversify revenues, it will be essential to maintain our disciplined cost and capital management approach, a key strength of Lloyds. I can see there remain significant technology-enabled efficiency opportunities in the group. These are important to create capacity for investment and growth to increase the pace at which we can change and improve our services and to further strengthen our resilience.

Let me briefly touch upon the strategic imperatives of these, and William can add details from the financial implications later. One of the key imperatives is to reduce our total cost of technology run and change. We're targeting a 15% reduction by 2024 through modernizing our technology estate, leveraging public and private cloud, and adopting a more agile operating model, whilst increasing the throughput of change. We also need to reduce the cost to serve our customers through our further end-to-end digitization of processes, which will drive greater efficiency in distribution, operations and servicing. Our aim is to increase customers served per distribution FTE by more than 10% by 2024.

Finally, we need to reduce our central functions and property overheads. The formal will be addressed through automation and process simplification and the latter will benefit from the move to hybrid working and transformed workspaces. We aim to reduce our office footprint by more than an additional 30% by 2024.

Moving to capital efficiency on the next slide. Higher capital efficiency largely flows from the strategic choices we've made to drive growth. Our focus to increase the proportion of noninterest fee businesses will deliver revenues in a capital-light manner.

Building and scaling an originate-to-distribute model in the commercial bank and leveraging our synergies with Scottish Widows will increase balance sheet velocity and generate higher fee income. We will continue to maintain rigid discipline in managing our portfolio and the recycling of RWAs into higher returning and growing businesses.

On Slide 40, let me touch upon execution, which will be key to achieve our strategic ambition. Delivering this strategy will require the group to build on the capabilities and new ways of working it has developed over the last few years and accelerate the pace at which it uses digital technologies and data to support our customers. Having built the largest U.K. retail digital bank gives us confidence to replicate that success end to end and on a larger scale across the group. Our prior investments in technology and data provide a strong foundation for delivering on our new strategy.

As I mentioned earlier, our colleagues are a key strength. Their expertise and skills will be instrumental to our success. And I've been really impressed by the management teams and the people we have at the group, since I joined. It is our people who offer the most distinctive customer experience, drive us to innovate, take thoughtful risk and enable change at greater pace.

Going forward, we will need to invest in our people and how the organization works to deliver this strategy. This will include further developing our ways of working and culture to enable greater impairment for the team serving customers and innovating our products with clear accountability to drive growth and maintain our disciplined risk and efficiency approach. We will also increase collaboration and organizational joining up to serve customers to deliver a more integrated experience across our businesses.

Turning to Slide 41. I hope this presentation provides you with a good sense to how we will build on our strong foundations to capitalize on the opportunities for significant value creation. We look forward to updating the market on our progress over the coming quarters as we start to execute against these priorities. Let me summarize by reiterating that our new strategy represents a significant shift for the group towards growth, whilst maintaining our cost and capital discipline.

With this, I'll hand over to William to provide more details on the financials, underpinning the strategy. Thank you very much.

Thank you, Charlie. Now that you've heard about our strategic priorities and business outcomes, I'll spend the next 15 minutes highlighting our target financial shape over the coming years. Our strategic priorities allow us to link clear financial outcomes to our strategy. These allow us to grow our revenue base and to deliver greater diversification, reducing NII dependency. These allow us to reinforce our cost discipline, evidenced by absolute cost targets and further improve capital efficiency. And these allow us to deliver higher, more sustainable returns and, in turn, higher more sustainable capital generation. These financial outcomes are enabled by a temporary increase in investment, managed by strict return hurdles and delivery requirements, all overseen by strong governance.

Together, these lead to the execution outcomes and financial performance that we're highlighting today. Moving now to economics on Slide 44. I'd first like to highlight the important economic assumptions that sit behind our plan. We've built a plan based on prudent assumptions and the impacts of our own actions. We assume a continued macro recovery in the U.K., although we are not building our plan on significant or rapid increases in interest rates or for that matter, a recovery in mortgage pricing. We expect GDP growth to remain strong in 2022 at 3.7% before normalizing thereafter at lower levels. The unemployment rate is forecast to remain stable at just over 4%. We expect inflation to peak at 6.5% in Q2 of this year before moving lower thereafter as supply pressures ease and higher rates start to take effect.

Alongside this, our plan includes 2 further rate increases in 2022 to 1%, flat rates in 2023, and 2 additional increases over the rest of the plan. We believe our estimates in this respect are below current market implied levels. Any further increase in interest rates will clearly contribute positively to NII, competitive conditions allowing. So for example, the current market curve would generate around GBP 400 million additional interest income from the hedge alone in 2024. That's beyond what we have embedded in the plan.

Turning now to income on Slide 45. As Charlie discussed, we see several growth opportunities for the group that support our ambition for higher and more diversified revenues. We expect the combination of growth in our existing business and the benefits of our strategic opportunities to build significant revenues and outweigh potential income headwinds. I'll now briefly discuss each element of our business assumptions in turn. As mentioned earlier, in the full year financials, the group is exposed to the current mortgage margin headwinds. We've prudently assumed these pressures continue throughout the plan period and impact our NIM. Clearly, that could turn out differently.

In addition, and as highlighted in Q3, we expect a reduction in OOI in 2023, due to the accounting impact of IFRS 17, with this income stream recovering thereafter. And finally, both equity investments and operating lease depreciation should also revert to more normal levels versus 2021. On the other side, within our existing franchise, we are positively exposed to rising interest rates. As part of this, we expect hedge income to increase in 2022, and then modestly increase again in 2023 and in 2024. Before the incremental investment plan, we also expect our core business areas will deliver further revenue growth. That's independent of rate rises. And in particular, we anticipate an increased contribution from unsecured in line with the ongoing economic recovery.

In insurance, income will benefit from continued progress across key product areas as well as an improving rate environment. Alongside, we expect growth in our existing wealth franchise built on Schroders Personal Wealth and the introduction of Embark. In commercial, our markets businesses should also build from the activity levels experienced in 2021. And beyond business as usual, our new growth initiatives will gradually deliver additional revenues for the group. We expect additional revenues of around GBP 0.7 billion in 2024, rising to GBP 1.5 billion in 2026, as the investments mature. These opportunities will provide both earnings growth and diversification, as best illustrated by the expected 50-50 OOI, NII split from the new initiative revenues when they're fully realized in 2026.

Let me now turn to costs on Slide 46. Our approach to costs is simple. Stable BAU costs alongside a temporary investment-led increase to deliver our increased RoTE. After 2024, this investment-led cost increase tapers off. This is all underpinned by nearly GBP 1 billion of gross cost savings from BAU and new initiatives by 2024. Cost approach can best be summarized in 4 parts. So let me cover each of these in turn.

Part 1 is to move previously reported below-the-line costs to above the line. This new basis of reporting will improve transparency and allow us to manage the cost base more holistically. Accordingly, the majority of previously reported below the line restructuring spend will now be moved to buffer line. While fraud charges that were previously reported in impairments will now be recognized in costs. Our reported 2021 operating costs plus these 2 items will now be recognized as our BAU cost base going forward, and this amounts to GBP 8.3 billion in 2021.

Part 2 of our cost approach is our commitment to net stable BAU costs versus 2021 on this new basis throughout the plan. Within this, we will see headwinds from items including inflation and the rebuild of variable pay. However, we will offset these headwinds with GBP 600 million of BAU savings over the next 3 years. Our savings plan includes initiatives such as in technology, decommissioning optimization and a reduction in third-party spend and increasing our use of robotics and automation in further optimizing our office footprint.

Turning to Slide 47. Part 3 of our cost approach ensures new savings cancel out any new OpEx from our growth initiatives. Higher operating expenses related to growth includes OpEx from our new strategic initiatives as well as the expansion of our recently announced businesses, such as Embark and Citra living. These costs will be offset by gross savings of GBP 350 million by 2024. These will rise out of our incremental investment spend, and they include some of the technology and data initiatives that Charlie highlighted earlier on, as well as actions taken to lower our cost to serve as we further digitize the business.

Together, they allow new growth initiatives to be net OpEx neutral. And because they leverage our core platforms, they will also be delivered at low marginal cost income ratios. This leaves us with Part 4 of our cost approach. Our near-term operating costs, therefore, increase from the incremental investment over the plan, which equates to GBP 3 billion over 3 years and GBP 4 billion over 5 years. This then comes down as we exit this temporary investment boost, new OpEx is stable and the ongoing cost savings increase. At this point, we will converge towards ongoing BAU investment, including core and regulatory spend as well as the continuation of prior discretionary investment requirements.

Turning now to Slide 48, summarizing costs. We are continuing to demonstrate strict cost discipline through a period of increased investment. On our revised definition, GBP 8.3 billion in 2021, we expect to deliver stable BAU costs throughout the plan as our strengthened BAU cost actions offset expected headwinds. New OpEx costs because of new strategic initiatives as well as growth of Embark, et cetera, will be offset by new savings over the plan. This then needs a cost increase from 2021 of GBP 500 million to GBP 8.8 billion, which is very substantially driven by CapEx and depreciation associated with a temporary boost to investment. Based on our investment schedule and expected capitalization rate, this allows us to keep operating costs at GBP 8.8 billion by 2024.

Beyond this 3-year period, we anticipate a reduction in operating costs as we continue to deliver cost savings across BAU and across our new initiatives, and as the P&L impact of the incremental investment spend phases out. As a result, by 2026, we are targeting a cost income ratio of less than 50% based on a combination of our revenue and our cost initiatives.

Moving now to returns on Slide 49. We expect to deliver RoTE of greater than 10% by 2024. Compared to 2021, we expect to deliver higher total income over the 3-year period, including the additional GBP 0.7 billion of revenues from our new growth initiatives. How much higher will in part depend upon how our core business assumptions play out and in particular, on interest rates and on mortgage spreads. I've talked already about flat BAU costs. So moving on, while forecasting remediation charges always comes with inherent uncertainty, we expect significantly lower charges going forward versus 2021.

Having said that, we also expect higher impairment charges compared to the net release that we saw last year with other impacts being broadly neutral. And together, this produces a return in excess of 10% by 2024. Looking beyond 2024, we expect to deliver RoTE of greater than 12% by 2026. This is delivered as investment spend reduces and the full benefits of our growth investments are realized with new business and capabilities gaining momentum. Our returns are predicated on disciplined RWA management. Our existing 2022 guidance of around GBP 210 billion is maintained. We thereafter see modest growth to a target range of between GBP 220 million to GBP 225 billion by 2024.

Let me now cover capital on Slide 50. On average, we're targeting a robust circa 150 basis points of capital generation per annum over the 3-year plan period. This is after our elevated investment spend, but before the variable element of pension contributions. And thereafter, capital generation is expected to increase by 170 to 175 to 200 basis points by 2026. That's in line with the end of the temporary investment boost and the higher returns we receive from our initiatives. These numbers are significant by historical standards, particularly when considering RWA growth and a commitment to higher levels of investment.

We're confident that this path towards higher profitability and strong capital generation positions us well to deliver attractive shareholder distributions. Now a brief word on pensions in this picture. Currently, we have an arrangement for the next 2 years to contribute 30% of in-year shareholder payments to our pension schemes. As these contributions are made, the scheme's funding position will obviously improve. And this gives us a scope to discuss the appropriate schedule of payments in about a year's time from now. Importantly, we're pleased today to announce a total ordinary dividend for 2021 of 2p per share and a buyback of GBP 2 billion. This takes total capital return for the year to GBP 3.4 billion, representing around 10% of our market capitalization. The capital return clearly demonstrates our commitment to shareholder distributions.

Looking ahead, we will also maintain our progressive and our sustainable dividend policy. Beyond the dividend, we will maintain our commitment to surplus capital distribution and expect to pay down to our target CET1 ratio by 2024. The combination of our ordinary dividend and our excess capital distribution should offer an attractive capital return potential for our shareholders.

Let me now summarize our full guidance on Slide 51. We split our guidance into 2022, 2024 and 2026. Starting with 2022. We expect to deliver a net interest margin above 260 basis points. On costs, we expect restated operating costs of GBP 8.8 billion in 2022, due to our higher investment spend. Having recorded a net credit in 2021, we expect impairments to remain below historical levels, but return to a charge in 2022 with an AQR of around 20 basis points. These factors together support an RoTE of circa 10% with RWAs of GBP 210 billion at the end of 2022, in line with our prior guidance.

For 2024, we expect stable BAU cost to once again operating cost of GBP 8.8 billion, flat on 2022. In line with the period of normalizing impairment, we expect the net AQR to be below 30 basis points. We expect our RoTE to be greater than 10% by 2024, with RWAs of GBP 220 billion to GBP 225 million. And we're targeting around 150 basis points of capital generation per annum on average across 2022 to 2024.

And moving to 2026, we're targeting a less than 50% cost income ratio by 2026. This helps us deliver a greater than 12% RoTE, permitting capital generation of 175 to 200 basis points. And throughout our policy of a progressive and sustainable ordinary dividend, distributing capital in excess of our target CET1 ratio will remain unchanged.

Putting it all together, we believe our plan delivers robust financial returns over the medium term while delivering a step change in profitability beyond this. And throughout this will all be underpinned by attractive capital return potential. So thank you again for listening. I'll leave it there and hand over to Charlie to close.

So just to close briefly before we turn to the fun part, the Q&A. We hope we've shared a compelling vision for the future of the group today. Our purpose-driven strategy is to be a U.K. customer-focused digital leader and integrated financial services provider, capitalizing on new opportunities at scale. This is driven by a transformation plan to drive higher and more diversified revenues to strengthen our cost and capital efficiency and to maximize the potential of our key enablers, our people, technology and data. These will allow us to capitalize on our opportunities, delivering clear revenue and cost objectives, which in turn will drive an increase to our return on tangible equity of more than 2 percentage points, allowing a sustained return of greater than 12% by 2026.

Whilst we've taken a longer-term view on achieving a step change in growth in returns, at the same time we've shared a clear set of 3-year outcomes. These help signposts for shareholders our commitment and priority to deliver attractive returns over the period to 2024 as well as 2026. Our new strategy will support higher, more sustainable capital generation and increase shareholder distribution capacity. Even more importantly, our strategy will help us to Help Britain Prosper. Thanks for listening today. That concludes our presentation, and I'll now hand over to Douglas, who will host the Q&A. Douglas?

Thank you, Charlie. We've set aside about an hour for Q&A. And in line with normal practice, please get anyone asking questions actually state their name and their company. Let's start with Alvaro.

Alvaro Serrano from Morgan Stanley. I have 2 questions. Some of the guidance is obviously open-ended around the margin this year and the over 10% RoTE. Could you maybe share some thoughts and some of the assumptions behind that? Obviously, William, you've mentioned the rate sensitivity, but maybe some of the assumptions around the mortgage book. I just want to gauge, is that over 10%, is it 10.1%, or is it at 11%, what's the sense of what you're trying to steer us to? And the second question is on other income. I take your points on the run rate you've given for Q4, but that's still even taking out the extraordinaries of the one-offs. The contribution of central items and LDC is still pretty high. In the context of the plan, could you help us maybe give a bit of color on to what is the normalized level of that division that you call out versus the offsets we're going to see in growth in insurance. Just want to get a feeling as well for what kind of other income is sensible in the outer years?

Sure. Thank you for that, Alvaro. I'll perhaps take each of those questions in turn. On the guidance as to greater than 10%. We feel very confident in greater than 10%. How much, depends, I think, upon how key assumptions play out. We've deliberately constructed a plan which is based upon conservative macro and market assumptions in order to ensure that it's our plan to make the difference as it were. But on the revenue side, 2 in particular stand out, rates and mortgage margins, as you identified. I think in both, we are conservative. So to focus on 1 in particular, if we superimpose the market implied top curve right now based upon our planning assumptions, then that would lead to a revenue increase for structural hedge income alone, leave aside any BBR effect or bank base rate effect, but structural hedge increase alone would be GBP 400 million. That, as you know, equates to around 75-ish basis points difference in ROE. And as I said, that is before you consider any bank base rate pass on questions around the base rates that may follow the development of that swap curve.

Mortgage margin assumptions, we simply rolled forward where the mortgage market is today or where we expect it to be into our plan over the future periods. And specifically, what I mean by that is, we've had a look at the completion rates in Q4, which, as I mentioned, is 115 basis points. We've also had a look at what we have seen during the course of November, December and January, and therefore, we will inform the completion rate that we expect to be talking to you about in April. And we expect that to be somewhere between 75 to 100 basis points. And that's the assumption that we then rolled forward in our plan. So effectively, our forward-looking mortgage margin as we get into 2023, 2024 is based on that circa 75 to 100 basis points applications margin that we think we'll be telling you about in completions margin come Q1.

Beyond that, our revenues, we feel very good about on the BAU. We feel very comfortable with the 0.7 incremental revenues from the strategic initiatives. And as you know, our costs are clear, and we've got, I think, an exceptional track record in terms of delivering on costs. So overall, we feel very confident in greater than 10%. And it's worth actually just bearing in mind as a final comment that this is while absorbing considerable investment costs. Investment costs are leading to a P&L charge of circa GBP 500 million. Again, that's not short of roughly 1% RoTE, and a cash charge during the year, given the accounting policies, of more like GBP 1 billion, if you average out GBP 3 billion over the course of 3 years. So bear in mind that these metrics that we're giving you are after having absorbed that investment demand.

So I think overall, again, just to finish with the punch line, we feel very comfortable indeed about in excess of 10%.

William, can I add 1 thing on top of that. I won't do this for all the questions. We obviously had a lot of conversation around how do we think about the uncertainty in the market and the external or exogenous factors versus what we control. And hopefully, what you see in this is the things we can't control, competitive pricing on mortgages and rates, we'll take a conservative and prudent view. We know you'll be able to adjust those assumptions over time and we'll be able to talk about those assumptions. So we've taken a prudent view on the things we can't control. On the things we can control and that we're committing to around growing our businesses, committing to revenue growth and managing costs and investments, we think we've been pretty ambitious. And that's what we're really focused on is the controllables and the ambition we've laid out for those things. Obviously, we'll have a chance to talk about this over the coming quarters as to how the external environment develops, but that's been the core philosophy around this strategic plan.

Alvaro, you asked about other income as well. So I'll address that perhaps before moving on. Other income, as I said, in Q4, we saw an achievement in other income of just over GBP 1.3 billion. Within that, there was about GBP 80 billion of insurance basis review assumptions. So the run rate coming out of Q4 is effectively a little over GBP 1.2 billion. Now you talked there about LDC and the contributions of our equity led businesses, they were back to normal in Q4. So I think it's fair to say the run rate, therefore, is a notch above GBP 1.2 billion after you've taken out the ABR, the insurance business review assumptions of circa GBP 80 million.

How do we look at that going forward? A couple of points. One is, you'll remember from our previous conversations that I've talked in the past about business activity lost in other income of circa GBP 300 million to GBP 400 million over the lockdown period. We think that we've recovered about half to 2/3 of that, somewhere in that zone. And therefore, as we go into 2022, we would expect recovering GDP and activity levels to contribute to giving us the other 1/3 to half or thereabouts. So that will build into other income over the course of 2022. On top of that, as you know, you've also got Citra and Embark. And if you add those 2 together, you're looking an increased contribution to revenues of about GBP 100 million from those 2 added together.

And then I think it's fair to say that our previous investments, not for the moment the strategic investments, but I think our investments in things like cash management and payments, for example, the home protection app that we have developed, for example, that will gradually help us in our other income contribution, but that will be gradual. So over time that will build in, but it will take its time. So as I said, hopefully, that gives you a sense of the building blocks for other income as we go into 2022 and the growth that we expect.

Omar?

Good morning. Thank you very much for the presentation and all the hard work that's gone into it. I've got a follow-up question on Alvaro's question actually on the RoTE assumption and the interplay with rate sensitivity. And here, you've baked in very conservative assumptions. Some of your peers have put in, I guess, deposit pass-through assumptions based on what they expect to play out in the market. Barclays yesterday said that even for the next 250 basis points, they're expecting deposit pass-throughs below 50%. So I heard what you said about mortgage margins, heard what you said about the rate assumptions. Can you please talk about what you've got on deposit pass-through?

And maybe I'll just ask my second question as well. So on the incremental revenue from OOI, when I look at that in the marginal cost income, the ROI on that looks really great, which implies that is a low-hanging fruit. And so I guess the question is what were the impediments to realizing these gains in the past? And what do you think has changed now to allow the delivery of that?

Shall I take the second question?

Yes, Of course.

Thanks, Omar.

Thanks, Omar. On the effect of net interest income and the contribution to RoTE, the assumptions that we are building into that sensitivity that you see in the analyst presentation that you have is essentially the same as Q3. And so we are assuming a 50% pass-on assumption there on the liability side, which again is just same consistency done on exactly the same basis as Q3.

How does that relate to reality and what we've seen so far, I think it is fair to say that at the moment we have seen less of a pass-on than those numbers would suggest. And I think at very low interest rates, that is likely to be the case today and probably will continue to be case for a little while going forward. Now of course, the extent of that pass-on is obviously determined by competitive conditions as well as the funding position of the bank, and so forth. And so these factors will develop and will evolve into our overall pass-on assumptions.

But as I said, the sensitivity that we've shown is based on 50%. To date, that has proven to be an overestimate, if you like, of what would be passed on, just as perhaps some of our peers have been indicating. I expect that will continue for the time being, but we just have to see how competitive the conditions develop.

Great. And then in terms of -- sorry, just in terms of the OOI progression and why we think we can go after that now. One bit of context, obviously, as William laid out, there is a lower marginal increase in costs, partly because we're building off platform. but we're also committing to other efficiency savings to offset some of those costs, which makes the aggregate numbers look really good. But I think there's really 3 reasons. And again, coming in with a fresh perspective to the group has been great to make a difference. The first is external.

So if you look at the level to which our customers now are interacting with us digitally in the external environment, and we look at what their expectations are going forward, we have even greater opportunities, given the strength of our digital capabilities, to meet needs, to put great products and services in front of customers, and to respond to that. And similarly, we see the focus at the other end of our business on transition and net zero as really an important growth opportunity. We're already 1 of the leaders in infrastructure finance with a leading transport or electric vehicle financier in the U.K. as examples. And obviously, with the most meaningful housing financing organization. So we see there's really significant growth that we can get off the back of some of the things going on externally. That's the first thing.

Second thing is, the groups continue to invest and build its capabilities and probably the most obvious example is the Embark acquisition, and then the progression of our investments around insurance and wealth mean we can now really continue to bring those services and innovate those services and bring them to our 26 million existing customers. And that's a unique opportunity. No one else operates in this market with that breadth of customers and the breadth of services that we have.

And I talked briefly -- I won't go deeper right now unless you want to, but I talked briefly about customers in the de-accumulation stage of their lives, which is actually where most of the mass affluent opportunity is. If you can't join up around housing, pensions and then investments and really help customers at that stage in their lives, you can't go after that opportunity. And actually, no one else has that opportunity in the way we do. So that's the second thing building off our capabilities.

And the third is the simple one, which is, I think this is the first time that this group has for a while made a focus around joining up for our customers with a more explicit growth ambition. So we can reorganize and organize ourselves to really go after those as we look forward. And that's what we're committing to.

Guy, why don't you take the next question.

Guy Stebbings from BNP Paribas Exane. Just building on some of the prior questions to start with on rate sensitivity. So thanks for the color on the GBP 400 million for the structural hedge if we took prevailing swap rates. I guess doing the same for base rate, even assuming quite a cautious deposit beta on that incremental additional base rate, looks like it should be well north of GBP 500 million by 2024 based on prevailing market expectations. And then as you've said, the deposit beta to date has been better than what's in the plan. So it looks like well north of GBP 1 billion to net interest income just from taking the rate curve. And that's north of 2%. So effectively, we're looking at a greater than 12% RoTE in 2024 as we took the forward curve. I mean is that fair the math? Or am I getting something wrong? Or would you give some back on costs because you do that to invest more or under that rate scenario, there's more inflation in the economy. So that's the first question.

The second question is more kind of big picture on costs. If you look at Lloyds over the last 3, 4, 5 years, I would argue it compares quite favorably in terms of investment spend versus its closest peers. Yet today, you're pointing to more incremental investment than some of your peers. So I'm just trying to work out, is that because it's not fed through to efficiencies or the bottom line as you might have hoped or your view of the world 3, 4 years forward is just different in terms of what you need to do, invest to compete, who you're competing with isn't necessarily the same traditional players as today?

Shall I take the second one?

Thanks, Guy, for the question. On the full effect of base rate changes, which might follow the curve that's in effect today, as said, the guidance that we have given or rather the comments that I made around the sensitivity of our plan to the current market swap curve of GBP 400 million, that is simply for the structural hedge component of that mix. For base rates to take on a more kind of aggressively upward stance versus what we have in the economic assumptions that we've shown you today, I won't put a precise number on that. Safe to say that if you look at our GBP 200 million sensitivity for a 25 basis point change, in year 1, some 40% to 45% of that is from effectively the base rate pass-on assumption. That will then hopefully give you a building block, if you like, to use as you project that forward and what the effect of accelerated base rate changes might be.

In terms of what would we choose if that were to come through in that way? What would we choose to do with that? I think the vast majority of it would simply drop to the bottom line. As said, it would go to improve the RoTE in the way that you said. It is obviously our business to remain competitive in the markets that we operate in and mortgage markets are a good example of that. So how much we would choose to pass on to depositors in the context of that 50% assumption, deposit beta assumption or otherwise? Again, very much a function of the balance sheet and our funding position, which, as you know, is highly liquid right now within a loan to deposit ratio of 94%. But also, again, how we stay relevant on the asset side in terms of markets that we want to participate in, such as mortgages, and that's part of the reason why we've taken a conservative view on look-forward mortgage margin assumptions.

Overall, however, those are pricing decisions about how we stay relevant in the markets that we want to stay relevant in. As I said, we've got a very liquid balance sheet right now. So I think that 50% is probably erring on the conservative side. How asset prices develop, we'll have to see. But again, we've embedded, as a base case, a conservative assumption on the asset side in our modeling. And then we just have to see how things develop beyond that. What we will not do is invest any more in terms of the operating expenses of the business or investments of the business beyond what we have set out today. It is not a question of us achieving, if you like, higher revenues and then going back to revisit this investment plan that we're laying out for you today. That is what we're going to spend, and that's it.

Great. Let me just comment, if that's okay, just on the broadcast view. And I'll just build on that point. That was partly why we wanted to be very clear and ambitious around costs and revenues and actually give you 3 views around real numbers, because we want to be committed to those. I've built in my career a few base rate plans based on rising base rates. And I don't think that's a good place to be. We can agree the assumptions and see how the market evolves. You need to hold us accountable, and we are committed to delivering what we've laid out.

On the broader cost point, I think it's a really helpful question. First thing, you've seen, and William talked about this, we do have still the leading cost income ratio today, and with a commitment to offset inflation and have flat costs, we think we'll still have that on our BAU costs. So this is about the investment and why we think that's good for shareholders and then for creating more sustainable and diversified position in the medium to longer term. That's the way we certainly think about that additional GBP 3 billion of investment over 3 years and GBP 4 billion over 5 years.

Again, building on your question about rates and how the NIM evolves, a 200 basis point increase in RoTE based on that GBP 3 billion investment with more diversified income with greater and deeper relationships across our core customer franchises in the U.K., we see that as a very positive and accretive investment for our shareholders, and we think it actually creates real sustainability into the future. I know we will have models that go out that far, but we're convinced that's a good investment. And the way we're thinking about it is very much as that investment is for that broader and higher return and more sustainable return that we're talking about, and we'll continue to be the cost leader around the franchise that you know today.

Aman, why don't you take the next question.

It's Aman Rakkar from Barclays. Two questions, if I may. First, a double header on capital. I think for a couple of quarters now, you've indicated that there could be a reduction in some of your capital requirements, which may have been interpreted as maybe bringing the CET1 ratio down from 13.5%. I'd be interested to know what your thoughts were there. Does it have anything to do with the reintroduction of a 2% account cyclical buffer?

And I guess related to that, I guess, on the pro forma 14% CET1 ratio, you've got about GBP 1 billion of surplus currently. Cap generation of 150 basis points, half of that is probably going to be consumed by an ordinary dividend. A decent chunk of that remaining half is probably consumed by the pension in the next 2 years. The scope for surplus distributions looking forward, it's not obvious to me. So any color that you can give us there? Is there any chance of announcing anything to the quantum of what you've announced today in future years?

I guess the second was just on cost. One thing I'm struggling with a little bit is the idea that investment spend should fall away in 2024. I mean your increased investment here is perhaps rightly so a recognition of the change that's taking place in terms of digitization, sources of disruption, some of the emerging business models. Isn't this just the cost of doing business in U.K. retail banking going forward. I mean how credible is it really that investment cost should step away? Even if the strategic investment does, do we not need to see a step up elsewhere?

Do you want to deal with the capital ones, and I'll deal with cost again.

Thanks for the question. I mean, first of all, in terms of capital ratio, as said, our capital ratio is 12.5%, plus management buffer of 1%, just as a start point. And that gives us cover, if you like, for the regulatory requirements, the needs of the business and any buffer that we might need for uncertainty. That had been a historical foundation. As I mentioned last year, we have seen a period, including 1st of January of this year, where RWA intensity has increased in the business. But at the same time, we haven't really seen a change in the economic risk that we perceive in the business at least.

And so all other things being equal, you would have thought that might make one think about capital issue. Having said that, we also have some tailwinds alongside of that. So we would expect Pillar 2A to change going forward as we reduce the pension deficit through contributions. But it is the case today. As you know, there are a number of uncertainties, if you like, around the regulatory capital questions. We have the reintroduction of the account cyclical buffer that you mentioned in your question. We also have the consultation phase around the OSII charge that is going on right now.

And then we're also in an environment of great uncertainty. I mean, I witnessed the events of this morning, obviously, in Europe, but also the trails of the pandemic, which we hope doesn't come back, but we don't know for sure. And so you add all of that together, I mean, and I think where we are now with our capital target of 12.5% plus 1% feels about right for the time being. And we'll just see how things fare over the course of the medium term beyond that. But for now, I think we're fine.

In terms of your surplus capital distribution looking forward, actually, we feel pretty good about that. We feel good about it for a couple of different reasons. One is the strength of the capital position right now. As you said in your question, that is circa GBP 1 billion in excess of our target capital ratio. We've committed to going down to our target capital ratio over the course of the plan. And we'll obviously see how those factors that I just mentioned play out in contemplation of how we plan that or how we put that going forward.

The second reason we feel good about it is because, as built into our plan, you can see there's some very conservative backbone assumptions for BAU. We talked earlier on about rates. We also talked about mortgage margins. We feel very confident about the other BAU components of our business and indeed the GBP 0.7 billion of strategic initiative revenues. So all of that makes us feel that we are likely to see capital generation. We've outlined it today at averaging 150 basis points over the course of the plan, but it is predicated upon what feel very conservative assumptions, and therefore, we'll see how we fare. Second reason why we feel good about capital distribution within the business.

And the third, you mentioned the pensions plan. When we look at the pension plan, we obviously have the commitment to give 1/3 of in-year shareholder distributions to pensions and that's appropriate given the actuarial deficit that we set out in 2019. But 2 points; one is that while a part of that 150 basis points will indeed be consumed by the pension plan, it is only a part, and therefore, there is still a gap between the amount of capital that goes out for the ordinary dividend, the amount that goes back to the pension plan, and there is a spare amount within that. And we'll look at what to do with that. And obviously, distributions in the form of buybacks or special dividends will be high up on our agenda.

Final point on pensions, which I think is worth bearing in mind, because it puts this issue somewhat into context. We have an actuarial pension deficit as of 2019 of GBP 7.3 billion, as you know. The latest mark-to-market of that pension deficit as of December 2020, which you'll see in our public documents, is GBP 6 billion, off the back of contributions. Over 2021, we made a further circa GBP 1 billion, just a shade under GBP 1 billion contribution to that pension fund, gets it down to GBP 5 billion. This year, by virtue of 30% of in-year variable pension contributions plus the GBP 800 million of fixed contributions that you know we have, we're going to be making a contribution of about GBP 2 billion to the pension funds, combining fixed and variable components. Takes that 5 down to 3.

If you mark-to-market the actuarial pension deficit for the current prevailing interest rates, you want to knock off about another GBP 300 million from that number. If you then bear in mind that, that number also includes GBP 1.7 billion of contested charges, if you like, because of the RPI, CPI debate that is going through the house of launch right now, which we're not a party to, but if it is won, we will be a beneficiary of, then you can see that number will come down again. I'm not professing what that court case or rather how that court case goes, but it is a material item. So if you take the actuarial pension deficit and actually knock off what has been contributed and what will be contributed this year, combine that with the fact that we are going to be entering a negotiation with the trustees at the end of this year or about suitable contributions thereafter, I think it helps you keep the issue in proportion.

Great. So let me just talk about costs briefly, if that's okay. And I think there's 3 parts that will help unpack why we believe the investments will come down and costs will come down. The first is, and I talked about it quickly. A part of the investment we're doing is about modernizing our technology and changing our ways of working. So one of the very important outcomes from that is that the cost to deliver change and improvement is actually going to go down, and therefore, for the same level of investment that we have today, we should be able to continue to compete at a higher pace and a faster pace than we do today. And that's one of the clear objectives we've laid out for this investment, and we laid out some operational targets around that in the investment.

And that's really important because it means we can get more for the same amount of money invested in the business. The second thing is this was incremental to our current high level of investment. We think we're already investing above our competitors in the U.K. market. And so we're talking after 2024 coming back down to the level of investment, which is already the leading in the market. And again, leading in the market, and we're going to improve the bang for the buck from that investment.

And then the third thing, which we didn't make an explicit absolute cost target. But let me just give you a feeling for what it is. in our plans, we are building efficiency in '22, '23, '24, that we know will benefit us significantly on run rate cost, BAU cost in '25, '26. And so there's other efficiencies that come in the later part of the plan. I know your models probably won't go out that far. But as a management team, we have to be thinking about efficiencies, especially when you think about end-to-end digitization, how our customers are using our channels, and then building more productivity and efficiency through the middle and back office of the bank. Some of those things take 2 or 3 years to get to a full year run rate. So the benefit is in '25, '26.

So because of all 3 of those factors, actually, we do plan that the investment would decline. We would still have the highest investment in the U.K. We'll be getting more bang for the buck for that investment, a higher level of change at a higher pace, and we see other efficiencies in those outer years, which is how we get comfortable with the 50% cost income ratio in those outer years. and that's a core part of giving us that extra 200 basis points of RoTE or the extra capital generation that we've committed to.

Rohith, why don't you ask the next question.

Rohith Chandra-Rajan, Bank of America. I wondered if I could start by just coming back to net interest income, please, and particularly starting with mortgages. So thank you for the 75 to 100 basis point margin that you anticipate. I guess, application spreads currently at 60 basis points or so, and that takes a while to flow through to completion spreads. So I guess the start point would be how quickly do you think you'd get into the 75 to 100 basis points range in terms of new business being written? And that 75 to 100 basis points, you're applying that to the GBP 244 billion of front book, what that rolls over to over time? And what are your expectations around the 14% or so over the book that's still on standard variable rate that obviously ends at a much higher margin. So that was sort of around the mortgage piece.

You've given us very clear guidance on risk-weighted assets. I wondered if you could comment about your expectations for the nominal balance sheet, particularly average interest earning assets for 2022 and through the course of the plan, particularly noting that you want to stay competitive in the mortgage market and ground secured lending.

And then the final question was just the doubling or more than doubling of the new initiative revenues between 24% and 26%. Is that broad-based as your new initiatives gather pace? Or are there particular things that come online in that sort of last 2-year period that drive that significant uplift in the revenues?

I will take 1 and 2 and then over to you for 3.

Perfect.

Thanks for the question, Rohith. As you say, application spreads have been a bit all over the place for the last few weeks. There's a couple of things, I think, going on there. One is that the swaps market, as you know, has been moving up, and that's obviously what causes me to give the comments earlier on around the NII sensitivity. That has not been accompanied by pricing moving up within the market so far and I think that, that is largely because many of the mortgage providers have put in place swaps ahead of the time at which they write the business. And so effectively, they're able to weather the storm, if you like, maintain the spread despite a moving-up swaps market because they have this built-in protection from effectively mortgage pipeline hedging that they've done.

I think having said that, what we're seeing right now, and you'll see, I think, from all providers really that there is some pricing up going on in the market as those hedges run off. People are now having to hedge into, if you like, more highly priced swap markets. And off the back of that, they are adjusting front-end mortgage book pricing.

Now we have to see where all of that settles down because, as I said, there has been a fair amount of volatility over the course of the last few weeks. But having said that, we feel that in the context of what we've seen both in the latter part of last year and at the beginning of this year, plus also putting in a form of kind of RFP historical context, if you like, that 75 to 100 basis points feels like an appropriate assumption, and again, a pretty conservative one for what we might see in 2 to 3 years' time. And of course, we are hopeful that things will end up better than that. We'll just have to see whether or not that's the case. But certainly, some history would suggest that it might be.

As to the second part of your question, SVR, SVR, as I mentioned, we've seen attrition over the course of Q4 of 16%. What's going on there is that effectively people who are moving on to SVR in the context of a rising rate environment are choosing to take out a fixed-rate mortgage looking forward because they obviously feel exposed to potential higher payments. So as a result, what you've got is you've got a lower flow onto the SVR book. The runoff is about the same. It's not far different, but the new entrants onto the SVR book are lower because those new entrants are choosing to take fixed-rate products as the rates come out, and therefore, the decision is a more important one from a financial point of view.

And of course, that is entirely understandable. It's a sensible thing for many customers to do and we'll do everything we can to support them in making that right decision.

As to how that goes forward, I think if we see a rising rates curve, it's quite likely that, that type of behavior is going to continue. And then that will lead to an attrition assumption that is probably not far different from 16% that we saw in Q4, albeit I do think it will ebb and flow just as we saw over the course of the last year. What have we built into our plan is basically that. So we've built into our plan an attrition assumption that is substantially similar to what we have seen during the course of Q4.

On RWAs, as you've seen, we've given you RWA guidance at the end of this year of GBP 210 billion. We've given you guidance for the end of the year -- sorry, the end of the '24 period, I should say, of GBP 220 billion to GBP 225 billion.

You asked about AIEAs for 2022. The way that we see AIEAs for 2022 is very much in line with the strategic comments that Charlie and I made in the presentation earlier on. So we expect continued mortgage growth, for example. It will not be as fast as it was in 2021 for all the reasons that you know about, including stamp duty holiday, including pace interest rate changes, maybe 1 or 2 other factors. But nonetheless, we do expect continued mortgage growth.

We also expect unsecured growth. We've seen that coming back in the course of Q4. As I mentioned in my comments, we've seen about GBP 0.5 billion being added on to the credit card book during that time. So far, all the signs that we've seen in January and February have been very supportive of that return of the unsecured mortgage book. And it goes hand-in-hand with some of the reduced constraints at the back of the ebbing of the coronavirus crisis, at least for now.

Alongside of that, we expect the Commercial picture to be more or less a wash. And what I mean within that is that we've got high levels of liquidity within SME banking. At the same time, we've got some emerging demand and in line with some of the strategic initiatives within our overall large corporate offering. So net of those 2 will be more or less a wash within the Commercial Bank.

But overall, when you add the 2 components together, that expects -- that leads us to expect low single-digit AIEAs for 2022.

Now when you combine that with the margin developments that we are seeing above 260, then we would expect net interest income growth in a pretty solid fashion over the course of the year, and that's simply the natural arithmetic that arises from those inputs.

You asked about plan look forward assets versus RWAs. In short, you could probably use the same characterization for assets over the course of the plan, Rohith. So if you describe asset growth in the plan as low single digit, you'd be about right. RWAs, however, partly because the initiatives that Charlie talked about in the strategic component of our presentation, is likely to be about half that.

Great. Can I just come back on the question about revenues in the outer years, which I think is where you were saying and kind of how does that build and why is it going later. As I said upfront, we've looked at a kind of portfolio of things that deliver today, this year, in the next 2, 3 years and then beyond that. And that's because we're talking about organically growing with our customers and increasing the fundamental breadth and depth of our relationships in many of these businesses. And we know that takes -- some of those things take time. I think about it in 3 ways.

So these things build over time, as you know, and I'll give you a couple of examples. We have some investments that were made in the last few years where we've seen significant growth, and we talked about 2 actually, the worksite pensions growth we've seen, we'll continue to see that building throughout the next 3 years and that will roll over into '24, '25 and '26. And actually, the cash management and payments capabilities that we've invested in, in our large corporate franchise, again, we were successful last year of onboarding a large number of clients, and we see that building right from this year all the way through the plan.

The second type of investment is investments where we know we can get to market relatively quickly, and probably the best example of that is some of the intermediated products we have in our Retail business. So in mortgages, which we just talked about, but specifically when we think about the growth that we've talked about in auto leasing and through car dealerships and through the embedded finance businesses we've talked about. And there, we know that if we make some investments, we can see kind of medium-term growth quite quickly by working with our intermediated partners.

And then the third thing is we're committing to some things that we know will take longer to deliver but actually have very, very strong, sustainable, diversified revenues. And probably the mass affluent opportunity is the best example. And let me just be a bit clear on that. So as we need to build some of our new journeys to enable simple investments being made available to those customers, we then need to engage our customers around that new proposition in those journeys as an example. And then over time, customers will engage on that and they'll start to build their broader relationship with us, whether it's banking or investments. And we know that some of those things will take 18 to 36 months to deploy and then customers will then build actually over the following 1, 2, 3 years.

And some of those revenues are more back ended in the plan. The combination of those 3 types of investments, if that makes sense, is the plan does build in the outer years. And the reason we were really keen to share with you 2026 targets is it starts to give you a feeling for the real value of the investments both from a diversification, a deepening perspective with our customers and then in terms of the scale that we think that will go to over the longer term. Does that help? Thank you.

Chris, why don't we take the next question from yourself.

It's Chris Cant from Autonomous. One on sort of the dividing line between strategic and BAU and then a couple on headwinds, please. So the strategic distinction you're drawing and you're talking about the GBP 0.7 billion of additional income, what's included within that and what's not? So is Citra and Embark within that? You talked about GBP 100 million of additional other income from that into 2022, is that part of that or not?

And when you're talking about sort of balance sheet growth, you talked about wanting to develop your SME franchise and things like this. Is that part of that GBP 0.7 billion or not? Where are you drawing the distinction there? Just help us understand what's included and what's not.

And the reason I ask that is I'm trying to understand the fuzzy bar you give us on Slide 49 for existing franchise income growth. So there's obviously rising rates, and we can discuss that to death. So I'm just going to leave that to one side.

In terms of the headwinds within that, from what you've said in terms of mortgage pricing, should we be thinking about something like a GBP 2 billion mortgage NII headwind by the time we get to 2024? I think that's what some of the numbers you've given us today would imply that kind of ballpark.

When I think about operating lease depreciation, I'm guessing that's about GBP 200 million to GBP 300 million. I know you've had quite chunky gains this year on used cars. So that's got to go up. There's about GBP 400 million from IFRS 17.

So there's some pretty big headwinds in there. And we cannot pencil in what we want for rates, but I'm just trying to understand whether I should be offsetting Citra in there. Is there anything else I should be offsetting in there as a big positive?

Shall I take those?

Yes.

Thanks for the question, Chris. On strategic initiatives, Citra and Embark are not part of these strategic initiatives. So they are outside of the GBP 0.7 billion. On SME growth, Charlie may want to comment further. But in essence, within SME growth, we have defined some fairly clearly delineated strategic initiatives that we see and particularly around digitization of the business and the incremental revenues that we expect those to achieve above and beyond BAU, Chris.

I can't really give you a precise breakdown of exactly what those are simply because we're not disclosing it today. But they are pretty clearly delineated within the benefits, as we call them, that we expect to get from the SME piece above and beyond the ongoing growth in the SME business that we would expect to see as a matter of the ordinary course.

In terms of the headwinds, your comment on -- I won't provide too specific numbers for obvious reasons. But the mortgage NII headwind of GBP 2 billion, that's a little above what we expect and so there is a mortgage headwind in there for all the reasons that we discussed. I mean we were writing business -- or rather front book maturity business was around the 150 mark in Q4. We were writing new business at 115 in Q4. That gives you a sense as to turnover. We then put in place that assumption, as I said, of 75 to 100 for new business going forward. And you know, roughly speaking, the yield in our overall mortgage book today. But as said, it's below the GBP 2 billion that you mentioned, but it is above GBP 1 billion. Maybe I'll put it like that.

Operating lease depreciation. As you say, we've seen a period of very benign performance in car prices and that's a function of 2 things, really. What is the supply of component parts for new cars, which has been, as you know, limited and therefore people have moved into the used car market. And the second is a preference for public transport -- sorry, private transport in the context of what's been going on. And therefore, you have seen used car prices reflect increased demand essentially.

As we look forward, that operating lease depreciation line will start to return to normality as we expect to see essentially the dropping off of some of the temporary demand factors and indeed potentially at least the increased supply.

How much of that, when we look forward, we had a 2021 charge for operating lease depreciation, as you know, of about GBP 460 million. I would expect 2022 to be a little bit of a reversion to normal, but perhaps not quite back yet to levels that we saw in 2020. And the reason why I don't think it will necessarily go all the way, in 2020, as you know, it was about an GBP 884 million charge. In 2020, it was reflecting kind of a period of normality, to a degree at least. I don't think we're there yet. I think you still continue to see used car prices that are buoyant. You continue to see, too, and extensively some aspects of that playing through into our Lex business, which in turn, because of its more limited profile in the current market, reduces the operating lease depreciation charge going forward.

So I think you see a markup from that GBP 460 million. I don't think you see a full return to GBP 880 million as we saw in 2020, at least not for 2022.

IFRS 17, I would essentially agree with your numbers, Chris. I mean we made disclosures as of Q3, which said that we expected circa GBP 400 million of IFRS 17 accounting hit in 2023. If you look at it for 2021 and say what would the IFRS 17 hit have been in 2021, it's a shade below that, actually. But it's not more than a shade below that, so you're not too far off.

It's just worth me reiterating on IFRS 17 that it makes no difference to the cash profile of the business, and I know that you would expect me to say that. But the reason why it's important is because, ultimately, it's the cash that leads to the insurance dividend that contributes to the capital that we're then able to pay out to shareholders.

Okay. Thank you. Just before I actually take any more questions from the room, there's a couple of questions that are coming online. So firstly, from Robin Down at HSBC and he's rather giving away his age with this question.

But for 26 years, I've listened to Lloyd's CEO stand up and say they have low product penetration of the customer base and they want to cross-sell more. It's why Widows was bought in 1998. So what is different this time? Do you think consumers' willingness to buy from a bank has improved? Or is it the use of digital channels that you think will lead to greater success? Can you help convince a skeptic that this time is different?

Great. So I'll take that one. Great question. Thank you, Robin, for my old organization as well. I love it. Why, I partly, I think, discussed it earlier when I said why are we convinced this time is different in terms of how we can grow the business and I think the starting point is where you started, Robin, which is around consumer preferences.

And when we look at consumers, we still are seeing a great level of digital engagement and a real willingness to engage with us as we look forward. And we do see that there's going to continue to be a set of consumers in the U.K. that really value an integrated and joined up financial services offering. There's definitely another group of consumers that are looking to shop around and go through intermediaries and buy products. And the great news for Lloyds Banking Group is we are the leader in both markets. We're the leading relationship-led bank in our Retail franchise. And we also have the leading products through the distribution partners in the big banking products, and we've just laid out an aspiration to extend and increase our relevance, especially around investments in insurance. So yes, I think there's a change in consumer behavior.

The second thing is, as I said, the maturity and the capabilities we have developed in the last 3 and 4 years and then specifically how consumers have changed their preferences in the last 18 months through COVID really give us an ability to make it simple and easy for our customers to access our products and fulfill their needs. And so we think there is an additional benefit in that context.

And I think the third thing just to say is -- and this is something, the benefit of coming new to this. I can't talk about the last 26 years in the same way, but certainly when I look at the momentum that we've inherited around some of the initiatives that the team has been focused on in the last 18 months, we are making really significant progress on some of those cross-sell, whether it's about home insurance and protection between our Scottish Widows business and our Retail business is actually, William, you kicked off when you were interim CEO last year where you really focused the team on.

Or equally, if I look at the other end of the business, I've had the chance to meet a number of our CEOs of our corporate clients, large corporate clients. And all of them have said something, which was very interesting to me as I came in, they say we are the only organization able to help them across the full breadth of the things and the issues they have. So some of our biggest corporate clients are looking to us to help them with their defined benefit schemes through our [box] business through Scottish Widows. They have a pension with us through Scottish Widows. We help them with their car leasing. We help them in the building sector, finance their customers' purchasing of their houses. And of course, we're helping them with their green financing infrastructure as a leader in the U.K. And we're providing all of our debt and cash and liquidity management services. And we're an acquirer and nobody else is able to provide that joined-up service.

And what I'm hearing from our customers is that's a really distinctive position to be, which is why on the Corporate and Institutional side, we think there is this very targeted opportunity for us to do that even more going forward. And again, without spending too much time, if you think about the challenges they're facing in the next few years, transition to electric transport, transition to net zero, needing to look for more green financing and green alternatives, originating long-term assets that can be shared, dealing with their defined benefits -- DC schemes, defined contribution schemes. These issues are going to be bigger for them going forward than they have been in the last 10 years, and we're well placed to serve those needs.

Charlie, can I perhaps just add one point on that? You've seen from Charlie's presentation that essentially, we have built the competitive initiatives, the strategic initiatives that we're embarking on predicated upon our advantages. And those advantages are, again, as manifested in Charlie's presentation, built around our business model, around our scale and around our information access. All of those 3, I think, are indisputable competitive advantages that we have.

But what does that mean in practice? I'll take one example, and again, Charlie talked a bit about this in his presentation. The information access that we have to the 26 million customers that we serve allows us to create data. The creation of that data, as long as we deal with it properly, allows us to create identification and offers to customers. It allows us to identify risk-based pricing to those same customers. It allows us to improve the journey that those customers have if they interact with us in multiple areas.

And so I think in answer to Robin's question, the competitive advantages that we have are clear. We are now investing in and able to take advantage of those competitive advantages in a distinct way. And you'll see an awful lot of our investment, an awful lot of our time is going to be spent deploying our money, our people into exploiting what we see as our competitive advantages and data is a very good example.

Excellent. Thank you. There's another online question from Joe Dickerson at Jefferies. Do you plan to prioritize buybacks over dividends when it comes to capital return going forward?

Yes. Thanks. Thank you, Joe, for the question. First of all, I think it's worth reiterating that our capital return policy will include the commitment to a progressive and sustainable dividend, which, therefore, incorporates a pretty healthy yield to shareholders going forward. We will also take a look at the best way to repatriate excess capital above and beyond what we give back in the quarterly ordinary dividend.

So far this year, as you've seen, we've got a GBP 2 billion buyback going on. Given the stock price of -- the share price, I should say, trading below book, that appears to be the appropriate thing to do. It is also the preference of a number of our large institutional investors, and therefore, we have gone down that path.

We do recognize the importance of dividends. But as I said, based upon valuation concerns, based upon investor preferences as a whole, we also recognize the importance of buybacks. And so in short, in answer to Joe's question, I think it's very likely that our ongoing capital return story is a combination of ordinary dividend and some form of buyback depending upon how the stock trades and we'll see how that goes.

Okay. Thank you. Any other? Raul?

It's Raul Sinha from JPMorgan. I guess the first one is just on your targets. The challenge with this plan is that the costs are very tangible and upfront and the upside is very long dated. And also you're giving us a combined portfolio outcome, which grows into 2026. So I was hoping for a little bit more granularity.

William, you've mentioned Embark and Citra outside of the strategic growth initiatives. But could you perhaps help us quantify out of the GBP 1.5 billion ambition, what are the 3 largest areas just to get a sense of a little bit more granularity behind what's really driving the upside.

And then the second question, if I can give you that right now is, I think, like everybody else, I'm struggling to understand the 10% return on tangible equity target versus where rates are currently. And I guess I wanted to check within that, are you taking a conservative assumption again around the recovery in unsecured balances? Where do you assume unsecured balances will top out over the next couple of years relative to pre-pandemic levels?

And also, if you could address within your NII -- non-NII mix, there's been obviously a regulatory-driven shift with overdraft income going into NII. How has that impacted the potential margin from a recovery perspective, if you kind of bake in all of the unsecured growth into your plan?

Yes. Thank you. Did you want to deal with the...

So I do -- have a go at the first one first. So first of all, thank you for the question, Raul. So we haven't split out the GBP 1.5 billion. Part of it is because it's a longer-term view. Obviously, our plans have a clear view of the split. I talked about 5 growth areas and all 5 of them are really important for that growth. And as I said, in one of the other questions, some of those 5 growth areas start building in years 1, 2 and 3 and others are more 3, 4 and 5. But when you get to years 4 and 5, those 5 growth areas I talked about are the ones driving that additional GBP 1.5 billion of revenue and they are distinct and incremental to the BAU growth.

And I know we haven't given that complete breakdown, but one of the things we will continue to do is share some of what I would call the leading indicators as we go through the next quarters, which we're committed to delivering to show you how we're building that underlying franchise growth. So you'll get a real feel for that as we go forward. But we're really comfortable with that level of growth and the initiatives that really drive it. William, shall I pass you on...

Thanks, thanks. On RoTE, Raul, our approach to unsecured has been to assume that we see some recovery in unsecured over the course of this year, in line with the 3.7% GDP growth that we expect to see. And a bit of a change in customer behavior as well actually, Raul, as people look to take vacations and all that sort of thing that they haven't done before.

Having said that, it's pretty modest our expectations over the course of this year and we see only a gradual ramp-up in unsecured during the course of 2022, 2023 and 2024. And it's really only by '24 that you start to get back to levels that we saw before the pandemic.

Now that's an approximation of how things go, but it's therefore built upon what we think is a relatively, forgive the word again, but prudent approach to the buildup of unsecured balances. And it's simply a reflection of the uncertainties that we see. I do think that if we see economic confidence returning, and if we see, in particular, travel returning, which, as you know, is some 30%, 40% of our overall unsecured balances, then we would see potentially a faster ramp-up, not just in the unsecured balance, but also in some of the revenues coming from it, therefore.

You asked about areas of conservatism within the RoTE. We've talked a lot about interest rates. We've talked a bit about mortgage margins. [With each] there talked about unsecured balances. The other area is potentially the AQR. Now we've given guidance for the AQR of circa 20 basis points this year. Based upon the performance today, as I mentioned in my comments earlier on, we are seeing very benign underlying. If we project that forward over the course of this year and beyond, we're going to come well inside of that circa 20 basis points.

Now again, let's see how things fare over the course of this year. There's still plenty of uncertainties out there. But based upon today's mark-to-market and rolling that forward, we are ahead of that 20 basis points.

There's then a question as to what happens to the overlays that we still have within the portfolio, which as you know, total around GBP 800 million of COVID-related overlays, of which about GBP 400 million is essentially insurance against vaccine-resistant virus mutations coming out. And the other GBP 400 million is against worst default experience, but for various forms of principal government support being in place.

I think we have to see how the year rolls forward. And every quarter, we'll be looking at whether or not those overlays are still valid based upon then prevailing conditions. But that AQR assumption, we are aware of the fact that we are outperforming it today. We'll see how the rest of the year fares.

Overdraft moving to NII. I think I understood the point correctly, but we have seen overdraft be compressed off the back of various initiatives. I mean, a, obviously, the lower levels of customer activity, but also b, a bit of a change in product preferences as well. And I suspect that in some corners, not terribly much our base -- customer base. But in some corners of the market, I'm sure that buy now, pay later is playing -- is having an effect upon overdraft balance, too. That's not so much our customer demographic as it were, but nonetheless, I'm sure there's an effect at the margin.

So I think overall, overdraft, we do expect some comeback in line with economic activities. We're not building our plan upon it.

Okay. Thank you. I'll tell you what, I'm going to go right to the back and I don't think we can get any further back than Ed at the back there.

Great. Thanks very much, indeed. And yes, thank you very much indeed for finally putting restructuring back into the numbers, so we have proper earnings. So thank you very much for that, and thank you also for the pension disclosure, which is super helpful.

I just have 2 questions for Charlie, really. The first one is about culture. And really, I don't know how transparent you can be, but what your observation is, what you found as a new arrival at Lloyd's? Because you're talking about the products per customer and trying to sell more. But if there's one thing that's characterized Lloyds in the last 10 years, it's been a very aggressive approach to its customers. And we've seen that with things like PPI where your exposure was much bigger than everybody else's. Your predecessor told us it was solved, but then we had HBOS, which this time last year was 60 customers, and we didn't have to worry about it and is now a GBP 600 million one-off hit below the line.

So firstly, the question is how -- what has been your experience since you've arrived? And how might it compare and contrast with perhaps what you've seen at other places you've worked? So that would be my first question, if that's okay. Shall I go for the second one as well or...

I'm happy -- up to you. I'll write it down. Go both and I'll come back.

And then the other question is one, I guess, is again a question more for the sector rather than just for you. But you talked a lot about digital and how everybody is going digital and how well placed you are there, and I do get that. But if I look at your digital competitors, you talk about your cost efficiency. They're running off anywhere between operating costs of between GBP 10 and GBP 30 a customer per year.

Now it's difficult to get your numbers, but your numbers look like between GBP 150 and GBP 200 a year. And that's not going to change based on your plans you've given us today, that's not going to change materially over the next 2 or 3 years. So I'm just asking, how confident are you that, that is sustainable? That you can be running with such a materially different cost base versus the new entrants who now have certainly contacts with 30% or 40% of the customer franchise.

Great. So 2 great questions, difficult questions. So if you don't mind, I won't refer to my previous experiences on culture, but I will tell you what I've seen and how I'm thinking about it. And I think the starting point is a couple of things. First of all, what I found is a culture that cares about customers, is purpose-driven, is very disciplined around risk and costs, and I'll come back to the risk point in a second. And actually, those attributes have always been my personal view, those are the attributes you need of a systemically important financial services group. You have to be customer-driven in this industry. In the context of the U.K., we have to care about how we serve and then support broader society, but you really do need cost and risk discipline.

And I think, certainly, those attributes, there's other ways of describing the culture, are things that have been certainly true to Lloyds Banking Group for a long period of time. And they come across in spades as you come in as an outsider, which is what I've obviously just done in the last 6 months.

You talked about HBOS and PPI, and obviously, those have been obviously very material and they've had a material impact on shareholder returns over the last decade. But of course, they come from a period and from the parts of the group, which really are in the history. And when I think about conduct and the focus on customer outcomes, this organization really has been very focused on that. We've got lots of capability and discipline within their teams and invested in a lot of ways of serving customers with a real focus on customer outcomes. And so I've been very impressed by what I've seen there.

When I look forward, what do I see we need? We need to be able to move at a faster pace. We need a culture that really embraces change and our ability to be able to drive change and support customers. And we need to be able to join ourselves up more across the organization to deliver in a joined up way for our customers. And I don't think that will ever put us in a difficult position going forward with respect to customer outcomes because the difference in the 2020s versus the 2000s is the point that you were making earlier, William, that we have a different level of opportunity to use data and digital to engage our customers and to make customers at the heart of choosing who they go to for their financial needs.

So I think culture is a great starting point in this organization and a real strength. But we definitely, if we're going to deliver on this set of strategic initiatives and this execution path, it's something we've already started very proactively discussing and we're starting to shape as we go forward.

On digital, this is the core question of our time, and I think it's a really helpful question to look at. Of course, the starting point is today if customers are going to do something meaningful with you, really bring their relationship, really trust you with their money and then build a profitable financial services relationship, which means, today, largely having a strong balance sheet, which you can then build broader fee income and investments. I mean if you think about the full service, customers want to have either as a backup or an ability to serve them as they go through their relationship, humans, people that can really provide advice, can be available to them so that they can solve problems. And then for a large part of U.K. financial services, your stable funding comes from actually people that still want to have a full multichannel experience.

And that's been evolving, and that will continue to evolve and that's what our plan says. But if you want to create the proper revenue per customer to build a sustainable shareholder return, you can't do it with a digital-only proposition. I won't comment on specific digital organizations, but you'll know them all. If you look at their revenue per model and their revenue growth and their sustainability around their economic model today, they don't have a clear path to those things because people don't trust them today at the level they need to.

So I think the first starting point is this is as much or more about building trust and confidence to capture a big enough share of wallet on a revenue per customer as it is cost to serve. Now obviously, cost to serve, the numbers I've seen those numbers quoted at me multiple times. I think that's one way of looking at it. But we need to look at the sustainable returns of those relationships and the ability to then really grow those over time from a net profitability per customer.

And today, we think actually, our stance having multiple channels or all channels with trusted brands, with full service is actually the only proven way of creating sustainable returns. Obviously, some of the investments we're making, and again, this is where the time horizon of investments, I know it's slightly uncomfortable for this discussion if you've got a 3-year view, as we modernize our technology and we create the kind of data and modern technology application infrastructure that underpins these relationships. As customer behavior changes over the next 3, 5, 10 years, we're going to be well placed to optimize against that.

That's my thought on cost efficiency. I don't know, William, if you have anything else?

Yes. Just one point that I'd like to follow up on, actually, which is in relation to HBOS Reading. When we were taking charges of HBOS Reading last year, we always said that there would be an ongoing charge for HBOS Reading. There was nothing that we said different to that. What is different today in accordance with accounting standards, based upon the judgment made in the HBOS Reading case, we have brought forward the future charge in relation to HBOS Reading as to process and as to redress. So just to be very clear, there's nothing inconsistent about what we said on HBOS Reading last year versus this year, and I just want to make sure that's acknowledged.

Thanks, Ed. Anybody?

Just relating to Ed's question, there was another question on life, Fahed Kunwar at Redburn. On the investment itself, how much is defensive versus offensive? I ask this question because we see businesses, fintech and big U.S. banks, looking at the U.K. as an opportunity and investing heavily. Is this investment just to keep Lloyds competitive, so it doesn't lose share and profits? Or should we look at this investment as a way of gaining market share in fee income and profit growth over and above pandemic recovery?

Shall I have a go at that, you might want to comment on the -- so the answer is always it's both. But what we hope we've done today and what we're committed to is that we will -- the investments have a clear nondefensive return on investment. So we're very comfortable when you look at the portfolio of investments, there is either efficiency or revenue growth, and in many cases, both that are associated on a go-forward basis that give us a return that we think is quite compelling. And a number of the questions today have said if you look through these investments, you can see how compelling they are.

Now the reality is if we weren't to continue to innovate, improve and invest in our business, then there's a downside risk either to cost inflation exceeding the pace at which our revenues grow or alternatively losing share. We haven't built the investment case on that. The investment case is built very clearly on what we need to do to progress on our revenues and efficiency.

But William, I don't know if you'll build on that.

Well, I think you captured most of it, Charlie. Safe to say that at some level, it's just quite hard to distinguish between what is defensive and what is offensive. They all go to support the future of the business. And as we've discussed through this presentation, now feels like a particularly important time to be making the right investments for the sustainable future of the business.

Added to that, you do as you look forward see a set of investments, both in 2024, but particularly in 2026, that have very attractive ROIs. It's attractive in 2024 for the mathematics that you can work out, but it becomes particularly so as we move forward in 2026 for 2 reasons.

One is the traction of the investments starts to be gained, if you like, producing a better revenue outcome. And two is we have to fall away from the investment requirements, and therefore, the reduced CapEx and depreciation charge associated with it. That combination produces a very powerful ROI for the business, particularly when we're operating at scale as we do.

Okay. Thank you. Any other questions.

It's Rob Noble at Deutsche Bank. Just 2 questions, please. One was on the cost of risk that you mentioned, William. The GBP 180 million that you moved from fraud charges, from impairment to costs, for want of a better phrase, is that a normal level of fraud? And should we not be thinking by 2024, if you've moved fraud out, your unsecured balances are going to be far lower than ever were in the past, even by 2026 presumably. Should your through-the-cycle cost of risk cannot be lower than it was in the past?

And secondly, just on the strategy, Charlie, I just wanted to ask about the road not traveled. What did you look at in terms of growth that you threw out because of -- and why did you throw it out because of hurdle? What were your hurdles they didn't meet. Maybe thinking about specialist buy-to-let lending, for example, buy now, pay later or anything else you looked at, it'd be interesting to show what didn't make the bar.

Shall I take the first?

Yes.

Thanks for the question, Rob. On fraud, essentially, what's changed with fraud is that it used to be the case that much of the fraud that happened in the business was linked to the lending side of the business. What's happened with the growth -- unfortunate growth of push payment fraud is that it's moved to the liability side of the business. And so it becomes very transactional from a customer basis. And therefore, in line with our statutory accounting, we've chosen to move it up and put it into the cost base.

Is that a normal level of fraud? As you say, it's a sort of unfortunate way of phrasing it, in a sense, but I suspect that, that will be more or less the characteristics of fraud as we move forward. I don't expect it to necessarily grow much. I'd like to see it shrink, but that obviously will depend upon the success of some of our initiatives to tackle the fraudsters in line hopefully with other participants in the payment industry.

When we look forward for 2024, given the fact that we have removed that fraud from the impairment line and given, frankly, other relatively benign factors that are going on today, and to a degree, at least, are factored into our macroeconomic forecast of kind of 1.5% growth next year and the year beyond, I would expect our through-the-cycle charge to be inside of the guidance that we are giving of below 30 basis points. So it's deliberately set at below 30 basis points today.

If you look at our historical charges, they've been around 35 basis points. Today, we're moving to below 30 basis points over the cycle. And based upon that fraud impact, amongst other factors going on in the macro, then I would expect us to be inside of that 30 basis points.

Great. And then on the second question, which is obviously such a fundamental question when you think about strategy, one bit of context, which is obvious, but let me just repeat it, which is Lloyds Banking Group comes out of 2 decades. Not just 1 decade of restructuring, 2 decades where we've been optimizing ROE through the (inaudible) era and then the last decade where we, post the financial crisis, have been restructuring and made pretty bold decisions and clear decisions around participation choices, if that makes sense and focusing back on a core U.K.-centered retail and commercial bank at the core of what we do. So I think that's the first important starting point when you think about what choices we made. And our perspective was we have this well-managed, promptly derisked and focused business that has an opportunity to grow.

Now having said that, it's slightly different and I'll characterize if it's okay between our Retail businesses, the affluent wealth businesses and then the Corporate and Institutional businesses. There's lots of choices we were going through. So I'll give you examples. On the Retail side, it would be more about risk appetite and you talked about BNPL. But actually, when you look at our unsecured lending businesses and then our mortgage businesses, there are segments of the market we don't participate. It surprised me coming in actually that we just don't participate in the subprime or near-prime segment. We're a prime-plus, relationship-led institution and unsecured lending and we've continued to say that we want to operate in that way.

And in what is talked about as BNPL externally, we are in our embedded finance world looking at how we provide lending and payments going forward in a more -- in a simpler, more embedded through third-party platforms model. But we think it will look different from BNPL because you need to be able to look at a customer's whole borrowing exposure across all of their relationships and then really help them build their borrowing in that context.

So yes, we decided to not participate in BNPL as it is today, but we do actually like some of the ways that we can serve the customers in a more simplistic way. So that's on the Retail side, risk appetite choices.

On the affluent piece, actually, the core decision was not moving up into high net worth, ultra-high net worth private banking space. And probably that's clear. We obviously have some customers in that context today. Our view is what's really distinctive about Lloyds Banking Group is the 2 million customers that we know have money to invest, the kind of GBP 75,000-plus. And the fact there's a gap in the U.K. for serving those customers in a joined up way. So it was more around wealth and where we wanted to really build a distinctive franchise.

And then on the Corporate and Institutional space, actually, there was a whole set of choices around which sectors we would versus wouldn't prioritize, which products. I don't know if the cash debt risk management works for you, but it's a very focused franchise. We start from a place where, in sterling and in the U.K., we're actually a leader in many of those segments today and in gilt, which is we wouldn't -- we know you can't be successful without having scale and really strong capability to date. And we looked at, do we need to have any capabilities in other parts of the world to serve those corporates, these U.K.-linked corporates, and we excluded some of the choices in that.

So it was a combination of geographies, products and sectors that we were going to focus on around the things we just said we can't compete, provide sustainable returns and really build the franchise we need to be. So those are core choices. Does that help? But thank you.

Excellent. Okay. Given the time, we've probably got time for 1 more question. I can see a hand at the back there.

It's Andrew Coombs from Citi. If I could have 1 follow-on for William and 1 for Charlie. For William, just coming back to the deposit beta point and just to be specific on the 2022 NIM outlook. You talked about using a 50% deposit beta going forward for future rate hikes. You said your experience had not been 50%, [it had been] lower thus far.

So for your 2022 NIM guidance, are you putting in what you've in reality seen for the first couple of hikes and then assuming 50% for the next 2 that's baked into your assumptions? So if you could just clarify that, please?

The bigger picture question for Charlie is there seems to be an awful lot of initiatives here to essentially come to the same output. And what I mean by that is if we go back in time and think of the RoTE that you're doing pre-COVID -- or Lloyds is doing pre-COVID and the targets were out there, the old organic capital generation target of 170 to 200 basis points and you're now talking about 175 to 200 but all the way out in 2026. I guess my question is there's a lot of good initiatives here, so what's gone wrong to offset those? And more importantly, is this as good as it's ever going to get.

Great. Do you want to go first.

Thank you. Thanks for the question, Andrew. On your question around the 50 basis points or 50% pass on assumption, what we've assumed for the business plan for 2022 is not too far off that, Andrew. What in fact we will do will be driven by a number of factors. Obviously, customer requirements, first and foremost amongst them, but also considerations around the market and competitive conditions and also considerations around liquidity of the balance sheet, which, as I mentioned before, is extremely high.

So how that plays out, we'll see. I mean, so far, as per my comments earlier on, we have seen a lesser pass on across the sector, actually, not just ourselves, but a lesser pass on versus that 50% assumption. I suspect as long as rates are low, that may continue to be the case. But for our planning purposes, we put in an assumption that it's not bang on 50%, but it's not far off.

Great. Thank you. So I'll take the second question. Thanks for the question again. So a couple of thoughts. The first is just looking forward, hopefully, one of the things you've seen today and that we're committed to is actually the diversification and the sustainability of the revenues in the business we're talking about as we look forward is materially different. And that's both because of the nature of the businesses we're talking about growing and how we will be deepening relationships with customers, but it's also how we're seeing margin evolving through the next few years.

So bluntly, if you look at IFRS 17 coming through and producing from an income perspective, not from a shareholder return perspective, the income story and then the margin on mortgages, we have at the end of this period, we think, a significantly more sustainable franchise than you may have seen in prior targets. I'm not going to comment about the prior targets.

And the second thing is, obviously, the world and the context has changed significantly from those prior targets and when we look at this, we think this provides a very good shareholder return and sustainable position going forward.

I think the third is if you look at returns in financial services over the last decade and you look at what we're now talking about and where we are aspiring to get Lloyds Banking Group to, we're still seeing, we can talk about NIM progression in the first few years, but a 200 basis point lift with an organization that's already covering its cost of equity and is planning to get closer bluntly to Nordic-like style banks than U.K. and the rest of European banks. We think that's a clear blue water. It will make us a leader in terms of financial returns in the financial services U.K. market, and it's actually a pretty bold aspiration.

Now the whole discussion today, I think, a really good discussion around how does margin and rates and competitive pricing play out relative to that 10% -- greater than 10% return on tangible equity or 12%. But what we're laying out as a management team is a commitment to grow 200 basis points of return on tangible equity above already covering our cost of equity. That is not what has been delivered by financial services in the U.K., as you well understand, nor has it been driven by most of the other European banks in the last decade.

So we do see this as a materially different trajectory from the past, and we see it as ambitious. And you'll take a call on whether it's also got alpha on the macro play on rates.

Excellent. Thank you, Charlie. I think that's a good conclusion. So that will conclude the Q&A. I'm conscious that there are a couple of people in the room that haven't been able to ask their questions. And I'm also conscious that there's a number of people online that haven't been able to ask their questions. So what we'll make sure, if all of those individuals could get in contact directly with the Investor Relations team and we'll respond to those appropriately. Otherwise, if I could just briefly hand back to Charles just to effectively provide a brief closing response.

So thank you, Douglas, and thank you for facilitating the question-and-answer session. And thank you to everyone who joined today. It's great actually to be back in person especially for my first proper face-to-face one and especially with everything that's going on externally today. We really appreciate you joining both physically and virtually. So thank you for coming.

We also hope you have a good sense of our ambition and share our excitement about the group's future and how our new strategy will deliver higher and more sustainable returns. We're really looking forward to updating you in future quarters and engaging offline. And on that, hope you have a great rest of your day. Thanks very much.

Thank you.