Lloyds Banking Group Plc Q4 FY2024 earnings call

• Purpose-led strategy is delivering strong outcomes, with progress in the first phase of the five-year strategic transformation. - 2024 financial performance was robust, in line with guidance, with strong shareholder distributions including a 15% increase in the ordinary dividend and a £1.7 billion share buyback. - Strategic progress includes returning the franchise to growth through multiple levers, reinforcing efficiency position, and making strides in capabilities across people, technology, and data. - Delivered £0.8 billion of additional revenues from strategic initiatives ahead of target and £1.2 billion of gross cost savings, while undertaking significant de-risking activities.

In 2024, Lloyds Bank & Group delivered a robust financial performance. Statutory profit after tax for the year was £4.5 billion, or £5 billion excluding the Q4 motor provision. Net income for the full year was £17.1 billion, including a net interest margin of 2.95% in line with guidance and 9% growth in other operating income. Group lending balances were £459 billion, up £9 billion or 2% for the year, with mortgage book growing by £6.1 billion. Deposits grew by 2% or £11 billion during the year. Other income was £5.6 billion, 9% higher than the prior year. The asset quality ratio was 10 basis points for the year, with an impairment charge of £433 million.

• For 2025, expect net interest income to grow to around £13.5 billion, up about £700 million from 2024, built on robust lending and deposit growth and structural hedge contribution, with pressures gradually easing. - Reaffirm targets for 2026, including a return on tangible equity of greater than 15% and greater than 200 basis points of capital generation, with a cost-income ratio below 50% and a 13% CET1 ratio.

• Uncertainty around motor finance commissions due to recent Court of Appeal judgment and potential Supreme Court appeal. The provision for potential remediation costs is based on multiple uncertain inputs including Supreme Court outcome, FCA intervention, customer claim rate, etc., with significant uncertainty around these inputs.

Q: Could you give more substance on the building blocks behind the structural hedge trajectory, including nominal maturity and reinvestment yields?

A: The structural hedge notional currently stands at £242 billion. Yield in 2024 Q4 was 1.9%. There's a jump in maturing yield vs refinancing yield. Notional expansion in 2025 is very limited, and in 2026 also limited. Most of the hedge progress is mechanical, with a weighted average life of around 3.5 years.

Q: On the cost income guidance for 2026, how does it align with top-line expectations?

A: Cost income is a function of both income and costs. Income has growth drivers like net interest income and other operating income. Costs involve factors like inflation, OpEx in strategic initiatives, investment, and severance costs. The combination of revenue growth and controlled costs supports the sub-50% cost-income ratio by 2026.

Q: Can you elaborate on the methodology for motor finance provisions and the range of outcomes?

A: The provision is built on scenarios including legal uncertainties (Supreme Court outcome), FCA intervention, and customer response. There are scenarios above and below the £1.15 billion best estimate, with uncertainty around the impact, but we feel comfortable with the best estimate awaiting resolution of uncertainties like the Supreme Court hearing.

Q: What's the outlook for lending growth in 2025 and impairment guidance?

A: In 2025, mortgages are expected to continue growing, with other retail books having a more even spread. Impairment charge in 2025 is circa 25 basis points, due to no expected MES benefits and analysis of underlying asset quality excluding one-off benefits from 2024.

Q: How is digitization progressing and its impact on strategy?

A: Lloyds has a leading position in retail digital, and is expanding to other business units. Digitization drives growth, reduces cost to serve and acquire. There's still room for improvement, especially with generative AI and breaking down advice barriers. Challenger banks set a standard but Lloyds can replicate or exceed them with its ecosystems and breadth of engagement.