Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lloyds Banking Group PLC (LYG, Financial) delivered a robust financial performance in the first half of 2024, in line with expectations.
- The company announced a 15% increase in the interim ordinary dividend to 1.06p per share.
- Lloyds Banking Group PLC (LYG) has made significant progress in its five-year strategic transformation, with strong capital generation and consistent growth in shareholder distributions.
- The company has grown its balance sheet with broad-based lending growth of GBP5 billion and deposits up by GBP6 billion.
- Lloyds Banking Group PLC (LYG) remains on track to deliver its interim 2024 financial targets and is confident in achieving higher, more sustainable returns by 2026.
Negative Points
- Net income of GBP8.4 billion was down 9% year on year, reflecting challenges in the operating environment.
- Operating costs increased by 7% year on year, driven by inflationary pressures and strategic investments.
- The company faced a significant charge in operating lease depreciation, particularly due to developments in electric vehicle prices.
- The mortgage book refinancing continues to be a headwind, with completion margins lower than maturing mortgages.
- Despite strong performance, the company did not upgrade its full-year guidance, indicating cautious optimism amid market uncertainties.
Q & A Highlights
Q: Can you discuss the four basis point headwind from mortgages and the persistence of this headwind?
A: William Chalmers (CFO): The four basis point headwind from mortgages in Q2 is consistent with Q1 and expected to persist through the remainder of the year. Completion margins were around 70 basis points in Q2, slightly up from Q1. However, maturing mortgages are coming off at around 110 basis points, leading to the headwind. This pattern is expected to temper slightly in 2025 and be eliminated by the first half of 2026.
Q: What are your expectations for the deposit margin and structural hedge contributions going forward?
A: William Chalmers (CFO): We expect the deposit churn to slow in the second half of the year, with some early signs of this already. The structural hedge will play a greater role in the second half, helping offset pressures. We remain confident in our guidance of a net interest margin in excess of 290 basis points for 2024.
Q: Can you provide more details on the structural hedge and its impact on future earnings?
A: William Chalmers (CFO): The structural hedge is largely locked in for 2024, about four-fifths locked in for 2025, and around two-thirds locked in for 2026. We occasionally take incremental steps when rates look favorable. The hedge is expected to contribute slightly more than the GBP700 million previously mentioned for 2024.
Q: What are your ambitions around further securitizations, and can you discuss the economics of these transactions?
A: William Chalmers (CFO): We use securitizations as part of our balance sheet management strategy, ensuring they are net present value positive for shareholders. We have deployed SRTs in our commercial business and retail securitizations in the mortgage book. These transactions help manage risk-weighted assets and optimize capital efficiency.
Q: How do you view the potential impact of artificial intelligence (AI) on your business?
A: Charlie Nunn (CEO): We are already a leader in AI with over 800 models in use. AI helps us make better decisions, optimize efficiency, and manage risk. Generative AI offers additional opportunities for customer service and efficiency. While adoption will take time, we see AI as a significant opportunity for the industry over the next three to five years.
Q: Can you discuss the outlook for asset quality and the impairment charge in the medium term?
A: William Chalmers (CFO): Asset quality remains strong, with a low impairment charge of GBP44 million in Q2. We expect the asset quality ratio to be less than 20 basis points for 2024. The observed charge has been extremely low, and we have withdrawn some inflationary adjustments due to resilient credit quality.
Q: What are your expectations for net interest income (NII) growth in the second half of the year?
A: William Chalmers (CFO): We expect modest progress in NII in the second half over the first half. The structural hedge will play a significant role in offsetting headwinds from deposits and mortgages. We remain confident in our guidance of a net interest margin greater than 290 basis points for the full year.
Q: Can you provide more details on the operating lease depreciation and its impact on earnings?
A: William Chalmers (CFO): The operating lease depreciation charge will be slightly above GBP300 million in Q3 and beyond, incorporating further reductions in electric vehicle prices. The residual value exposure within the leasing business is around GBP4.7 billion, with about 50% linked to electric vehicles. We have adjusted our depreciation schedules to account for expected price reductions.
Q: What are your expectations for average interest-earning assets (AIEAs) for the full year?
A: William Chalmers (CFO): We feel very comfortable with our guidance of greater than GBP450 billion for AIEAs. Lending developments in Q2 were predominantly back-end loaded, and we expect continued positive lending developments in Q3 and Q4 across retail and commercial businesses.
Q: Can you clarify your expectations for the net interest margin (NIM) in Q4 compared to Q3?
A: William Chalmers (CFO): We expect the NIM to be better in Q4 than in Q3. The evolution of the deposit churn, structural hedge, and mortgage picture will naturally lead to a strengthening of the margin over the course of the year. We remain confident in our guidance of a positive trajectory for the margin before the end of the year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
