Lloyds Banking Group Plc Q2 FY2024 earnings call

• The group is halfway through its five-year strategic transformation and on track to deliver 2024 targets, creating value for shareholders. - Robust financial performance in H1, with strong capital generation supporting increased shareholder distributions. - Strategic progress includes addressing growth opportunities, extending digital leadership (e.g., launch of Invest Wise), strong growth in CIB market business, scaling mass affluent proposition, and better connecting businesses to meet customer financial needs. - Enablers: digitizing end-to-end, transforming physical footprint (reduced office footprint by over 20% since end-2021), focusing on capital efficiency, and growing people capability (recruited 1,500 technology and data specialists in H1).

Lloyds Banking Group's financial performance in H1 2024 showed a robust picture. Group lending balances were £452 billion, up £3.9 billion or 1% in Q2, led by retail growth with mortgage book balances up £3.2 billion in Q2 (excluding legacy mortgage securitization). Deposits stood at £475 billion, up £5.5 billion or 1% in Q2, with retail deposits up £4.9 billion. Net interest income was £8.4 billion in H1, down 9% YOY, with a resilient net interest margin of 2.94% in H1. Other income was £1.4 billion in Q2, 9% higher than Q2 last year, with H1 up 8% YOY. Return on tangible equity was 13.5% for H1, and the interim ordinary dividend was increased by 15% to £1.06 per share.

• Reaffirmed 2024 guidance, with confidence in delivering higher, more sustainable returns in 2026, including return on tangible equity >15% and capital generation >200 basis points. - Expect net interest margin to be >290 basis points for 2024, and AIEAs to be >£450 billion. - Structural hedge income growth in 2024 is expected to be slightly higher than the £0.7 billion mentioned in February. - Continues to expect full-year 2024 capital generation to be circa 175 basis points.

• Volatility in operating lease depreciation due to used car price developments, particularly in electric vehicles, which caused an increased charge in Q2. - Uncertainties in economic conditions, such as potential impacts on asset quality and loan book performance, including the pace of bank base rate cuts and their effect on deposits and lending margins.

Q: On growth, AI, and regulatory impact.

A: Charlie Nunn discussed growth potential tied to infrastructure and sustainable sectors, leveraging CIB capabilities. On AI, Lloyds is a leader with over 800 AI models, piloting generative AI for efficiency and customer service, seeing it as a medium-term competitive advantage. On regulation, he emphasized the importance of responsible AI use with regulatory context development.

Q: On asset quality, impairment charge, and cost of risk.

A: William Chalmers noted extremely benign impairment experience in Q2 and H1, with low observed charges and MES revisions. The cost of risk is expected to remain below 20 basis points for 2024, driven by resilient portfolios and low default levels.

Q: On NII, operating lease depreciation.

A: William Chalmers discussed modest half-on-half growth in NII, with progress expected in H2. On operating lease depreciation, it was driven by used car price developments, particularly electric vehicles, with growth in the business expected to increase depreciation, but with offsetting other income growth.