Lloyds Banking Group - Q1 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Lloyds Banking Group 2024 interim management statement call. At this time, all participants are in a listen-only mode. There will be a presentation from William Chalmers, followed by a question-and-answer session. If you wish to ask a question, please press STAR 1 on your telephone. Please note this call is scheduled for 1 hour and is being recorded. I'll now hand over to William Chalmers. Please go ahead.

William Chalmers (CFO)

Thank you, Operator, and good morning, everybody. Thank you very much indeed for joining our Q1 results call. As usual, I'll run through the group's financial performance before we then open the line for Q&A. Let me start with our key messages on slide 2. In Q1, we continue to execute on our strategic ambitions. You've seen this in our deep dive seminars, including the Mass Affluent and IP&I session last month. Strategic execution underpins our ambition of meeting more customer needs and securing higher or sustainable returns.

Alongside in Q1, the group again delivered a robust financial performance in line with expectations. The strength of the group's business model and strategic execution, together with our sustained financial performance, gives us continued confidence in our guidance for both 2024 and 2026. Let me turn to a financial overview on slide 3.

As said, Lloyds Banking Group delivered a robust financial performance in the first quarter of the year. Statutory profit after tax was GBP 1.2 billion, with a return on tangible equity of 13.3%. In Q1, net income of GBP 4.2 billion was down 9% on the prior year, in line with the previous quarter. Alongside this, the net interest margin was 295 basis points, down 3 basis points from the fourth quarter of 2023. Operating costs were GBP 2.4 billion. This included elevated severance and the introduction of a new and P&L neutral sector-wide approach to the Bank of England levy, as we highlighted in February. Excluding the levy, operating costs are up 6% year-on-year. Asset quality remained strong. Excluding MES benefits, the asset quality ratio was 23 basis points.

After MES benefits of GBP 192 million, reflecting improvements in the economic outlook, the Q1 impairment charge was 6 basis points, or GBP 57 million. TNAV per share is now 51.2 pence, up 0.4 pence from the end of 2023. This performance resulted in strong capital generation of 40 basis points in the quarter after regulatory headwinds. With this, we remain on track to generate circa 175 basis points of capital in 2024. I'll now turn to slide 4 to look at developments in the customer franchise. The customer franchise remains resilient. Total lending balances of GBP 448.5 billion were down GBP 1.2 billion in the quarter. This was driven by a GBP 1.6 billion reduction in mortgages, with expected balance reduction linked to the refinancing overhang from maturities in Q4.

We've since seen an increase in both application volumes and market share in Q1, which is expected to support growth in the mortgage book through the remaining three quarters of the year. Elsewhere in retail businesses, there was growth across credit cards, motor, and unsecured loans. Commercial lending balances were down by GBP 0.8 billion in the quarter, significantly driven by ongoing repayments of government-backed lending in small and medium businesses. Moving to liabilities, total deposits decreased by GBP 2.2 billion in the first quarter.

This includes growth of GBP 1.3 billion in retail, offset by a reduction of GBP 3.5 billion in commercial banking. Within retail, deposit term was roughly equal to Q4 after slowing from Q3. Savings accounts were up GBP 1.6 billion, or GBP 0.9 billion, including wealth. Alongside this, current account balances increased by GBP 0.4 billion in the quarter.

Within current account, seasonal tax payments were offset by strong inflows alongside lower spend. The timing of the Easter Bank holiday also played a role in adding to balances, and we expect a reversal of this impact in Q2, meaning higher outflows in current accounts. Overall, the underlying flows and deposits are constructive and in line with our expectations. In the commercial franchise, the decrease in deposits was largely driven by balance reduction from small and medium businesses. In insurance, pensions, and investments, we've continued to see good organic growth with circa GBP 1.3 billion of net new money in the quarter. Moving on to slide 5 and group income.

The group saw a solid income performance in the first three months of the year. Net interest income of GBP 3.2 billion supported a Q1 margin of 295 basis points, 3 basis points lower than Q4 last year.

The slower decline quarter-on-quarter is consistent with our expectations for the year, as outlined in February. Behind the headline, margin development is led by expected headwinds from mortgage refinancing and deposit churn, partly offset by the reinvestment of the structural hedge. In the context of the deposit trends I described earlier, the structural hedge national balance of GBP 244 billion reflects a GBP 3 billion reduction from year-end. We do anticipate this pattern continuing during Q2, in line with our expectation of a modest reduction of the national balance during 2024. This should stabilize over the course of the year as deposit churn slows. Non-banking net interest income was GBP 105 million, up on the prior year as expected. From here, we expect a modest quarterly increase through the rest of 2024, reflecting continued business growth in a high-rate environment.

Average interest earning assets of GBP 449 billion were down GBP 3.7 billion in the quarter. This was driven by the previously mentioned unexpected mortgage outflows and continued runoff of government-backed lending in small and medium businesses. Looking ahead to the full year, we continue to expect AIEAs to be greater than GBP 450 billion. We also expect the net interest margin to be in excess of 290 basis points for 2024. Within this, we anticipate that both the mortgage refinancing and deposit churn headwinds will ease through the year. The structural hedge will provide a continued tailwind, contributing in total about GBP 0.7 billion higher income this year versus last. Within this, note that the quarterly contribution of the hedge may increase or decrease slightly, in line with pre-hedging and maturity profiles.

Turning to other income, OOI of GBP 1.3 billion in the first quarter is up 7% year-on-year, driven by progress in both the retail and commercial banking businesses. This continued improvement quarter-on-quarter is in line with our expectations for other income to build gradually and reflect broad-based strategic investments and customer activity driving business growth. Operating lease depreciation of GBP 283 million represents an increase compared to the prior year. This is due to growth in the fleet size of Lex and Tusker, as well as declines in used car prices and normalization of the charge.

Stepping back for a moment. As you know, we're investing significantly for growth across our income streams. Indeed, our recent seminars are highlighting the areas of investment that underpin our ambitions. So let me move on to costs on slide 6. Cost management remains a core discipline for the group.

Operating costs of GBP 2.4 billion in the quarter are up 11% year-on-year. They include expected elevated severance charges taken early in the year to facilitate cost efficiencies, as well as a circa GBP 0.1 billion charge relating to the sector-wide change in approach for the Bank of England levy. As you'll remember, we spoke about this point at the year-end. Excluding the levy, operating costs were up 6% on the prior year. Excluding the levy and the component of severance in excess of Q1 last year, costs are up 1%. The Q1 cost to income ratio was 57.2%, or 54.4%, excluding remediation and the new levy.

The group continues to maintain cost discipline in the context of inflationary pressures and strategic investments. We still expect to deliver operating costs in 2024 of circa GBP 9.3 billion, now +GBP 0.1 billion for the Bank of England levy.

It's important to note that while the full cost of the levy is recognized in Q1, the impact on profit will be roughly neutral in 2024, and offsetting gain will be recognized monthly in net interest income. Moving on, the remediation charge is low at GBP 25 million. This is all in relation to pre-existing programs. There have been no further charges relating to the potential impact of the FCA motor finance review. Let me now move to asset quality on Slide 7. Asset quality remains strong across the group. Mortgage arrears and default rates are improving.

Within this, the slightly elevated trends in legacy mortgages seen last year are now easing. Other retail portfolios remain stable, with unsecured assets continuing to exhibit low to new arrears and default trends broadly at or below pre-pandemic levels. Commercial banking also remains resilient with stable customer behaviors such as working capital utilization rates.

The impairment charge of GBP 57 million for the quarter equates to a very low AQR of 6 basis points. It benefited from strong observed performance and an MES credit given improving economic forecasts. Before forecast adjustments, the observed impairment charge was a still low GBP 249 million, or 23 basis points, reflecting both a resilient customer base and a prudent approach to risk. Compared to the prior year, the charge remains at low levels across the retail portfolios.

Meanwhile, commercial banking benefited from a one-off release of circa GBP 50 million based on a better, more granular understanding of our portfolio and model loss rates. As mentioned, Q1 also saw a net MES release of GBP 192 million due to updated economic forecasts reflecting improvements in the outlook. We now expect HPI to rise by 1.5% in 2024, given observed resilience in the housing market.

In addition, our unemployment expectations continue to assume only a gradual build to a now lower peak. Behind this, we continue to expect 3 base rate cuts this year, starting in Q2. The stock of ETL on the balance sheet stands at GBP 4.1 billion. This is still over GBP 600 million above our base case and higher than pre-pandemic levels on a like-for-like basis. This drives strong coverage levels across the portfolio. For 2024, we continue to expect the asset quality ratio to be less than 30 basis points. This guidance is clearly further reinforced by the charge in Q1.

Let me now move to slide 8 and address the below-the-line items and TNAV. Statutory profit after tax of GBP 1.2 billion resulted in a robust return on tangible equity of 13.3% for the first quarter. We continue to expect a return on tangible equity of around 13% for the full year.

Within statutory profit, restructuring costs of GBP 12 million for the quarter. This should be roughly the run rate going forward. The volatility and other impact of GBP 117 million was largely composed of a GBP 114 million charge and negative insurance volatility. This was a function of the increase in long-term rates, partly offset by positive banking volatility. The charge also includes the usual fair value unwind. Tangible net assets per share at GBP 0.512 are up GBP 0.004 in Q1. The increase was driven by profit accumulation, partly offset by the impact of movements in the rate curve on both the cash flow hedge reserve and the pension accounting surplus. Looking ahead, we continue to expect TNAV per share to grow over the medium term from buybacks, growth, and the unwind of headwinds.

Inevitably, the growth trajectory may be influenced in the short term by rate volatility, just as we saw in Q1. Turning now to capital generation on slide 9. We delivered strong capital generation in the first three months of 2024. Within this, risk-weighted assets at GBP 222.8 billion are GBP 3.7 billion higher than at year-end.

This increase includes the impact of unsecured and motor finance lending growth, but also a temporary RWA increase related to hedging, which is expected to reverse in Q2. Capital generation was 40 basis points after regulatory headwinds in the quarter and in line with expectations. After 22 basis points of dividend accrual, the CET1 capital ratio stood at 13.9%. We continue to expect to pay down to a CET1 ratio of circa 13.5% by the end of 2024 and to pay down to circa 13% by the end of 2026.

We also continue to expect RWAs of between 220 and 225 million at the end of 2024. Strategic balance sheet growth will be supported by active balance sheet management to offset regulatory pressures. Based on our ongoing profitability and active RWA management, we therefore continue to expect 2024 capital generation to be circa 175 basis points. Let me put our performance in context on slide 10.

In summary, the group is continuing to deliver in line with expectations. We are focused on our strategic execution. Alongside, we showed a robust financial performance over the first three months of the year with solid net income, cost discipline, and strong asset performance. Looking forward, we are reaffirming our 2024 guidance, and this is set out in full on the slide. In the context of our Q1 performance and reaffirming our 2024 guidance, we remain well-positioned for the future.

That concludes my prepared remarks for this morning. Thank you for listening. I'll now hand back to the operator for Q&A.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone keypad. To withdraw your question, you may do so by pressing star two to cancel. There will now be a brief pause while questions are being registered. Thank you. Our first caller is Aman Rakkar from Barclays. Your line is now unmuted. Please go ahead.

Aman Rakkar (Director of Banks Equity Research)

Good morning, William. Thanks very much for the presentation and taking the questions. Two main questions, please. One on funding costs, non-banking funding costs. I think that's a pretty decent pickup Q1Q. I think you talked about a modest sequential pickup, but I think it's more like up 25% Q1Q, the run rate in Q1.

So can you help us think about that number going forward and the extent to which that's set to continue rising from here? Clearly, that's a source of noise first thing this morning versus market estimates. So whatever you can do to kind of help us understand the outlook for non-banking funding costs through the year and what it means for the full year would be really appreciated. Sorry, just related to that, should we be thinking about any income benefit through, say, OOI associated with this as part of that? And then the second question is just more broadly on NIM, please. You've been really helpful in terms of thinking about the drivers. Could you help us think about the NIM trajectory into Q2 and putting some numbers on some of these driving forces?

I note your comment around the hedge contribution on a quarterly basis might bounce around a bit. I guess really what I'm trying to tease out here is, could we see a stable NIM Q1Q in Q2, or is that a bit too early? Thank you very much.

William Chalmers (CFO)

Thanks, Aman. Thanks for the two questions. I'll take them each in turn. First of all, on non-banking net interest income. As you say, it increased from GBP 80 million in Q4 to GBP 105 million in Q1. We did guide to an increase in our Q4 numbers, and it's worth, for a moment at least, just putting it into context. That's an increase of GBP 25 million in the context of GBP 4.2 billion of overall income. So just to put it in a little bit of proportion, but it is important.

We did advise that it would increase at Q4 going forward simply because it finances OOI activities, which, as you know, are growing. We're up 7% year-over-year in quarter one. Last year, we were up 10% OOI. So this is about the cost of financing those activities which lead to the OOI growth. Types of activities behind it are motor leasing. It's about 40%-45%. And then insurance, commercial markets activities, and Lloyds Development Capital, each of which are around 20% in respect of the charge. The increase in non-banking net interest income is about 50% from growth in volume and about 50% from rate increases as our financing of those activities rotates or evolves, if you like, into a higher rate component.

As said, the growth component is correlated to the progression in OOI that we've seen, and you've seen that last year and again in this quarter be a pretty steady stream of growth. And then the rate increase is linked to around GBP 10 billion-11 billion of assets that are financed in the areas that I've just been through, but they're all financed over different terms, often in different ways. And so what we've done in the past and what we continue to do is to give you indications of future trends when we report in respect of this item. Now, as said, we've seen non-banking net interest income of GBP 105 million in Q1. I think based upon our look forward for the year as a whole, we see it as in somewhere around the GBP 450 million-500 million range.

Now, if you think that activity and rates will be strong, you're going to be at the high end of that range, naturally, because you're going to see expansion in other operating income and likewise off the back of higher rates if that's your scenario. If you see it at the other end of the spectrum, if you like, lower levels of activity, lower rates, then of course it's vice versa. But somewhere in that range is not a bad guide. I won't comment beyond 2024. Safe to say that, as you know, our strategy is about growing these businesses. It's about growing the transport business. It's about growing the insurance business. It's about growing, likewise, commercial markets and LDC, all in the appropriate way, but it is a growth strategy.

So you should expect to see this growth, and you should expect to see it sponsor decent growth within OOI, which, at the end of the day, as said, is very much behind our commitments in respect to 2024 and in respect to 2026. Aman, your second question is on net interest margin patterns. As you say, we saw a reduction in the net interest margin from 298-295 in quarter one.

That was pretty much as expected. It was a significantly slower reduction in quarter one than we saw in quarter four, so three basis points. It's being driven by a couple of principal factors. In terms of the headwinds, it's being driven by ongoing deposit churn, which was very stable during quarter, but as expected, it continued. And it's being driven by the mortgage refinancing headwind, which we talked about a number of times before.

So maturing mortgages, for example, coming off at about 128 during quarter and being refinanced back on at around 65 basis points. So there's a mortgage refinancing headwind going on there. And then the principal offset to that, as you know, is the structural hedge, which is refinancing into a much higher rate environment. Now, as we go forward over the course of the year, we do expect those trends to start to inflect a little bit. In particular, we expect the deposit churn to stabilize over the course of the year, and the structural hedge contribution will pick up. Now, what that means is that by the time we get to the end of the year, we do expect the margin to be taking a positive direction.

I would expect, looking forward, if you like, to see a little bit more of the deposit churn and likewise the mortgage refinancing headwind be a touch stronger than the structural hedge contribution during, of course, the next quarter or so. But again, at the end of the year, we expect the margin to be ticking up. So that's the pattern. That's the journey that I've described for you, Aman, which I hope is helpful.

Operator (participant)

Thank you. Our next caller is Benjamin Toms from RBC. Your line is now unmuted. Please go ahead.

Benjamin Toms (Director Equities)

Good morning. Thank you for taking my question. The structural hedge notional was down GBP 3 billion or 1.2% in the quarter. Are you to expect the pace of reduction of the notional to decrease from here? I note your comments. You expect outflows in current accounts in Q2.

Where would you expect the notional to get to by the end of the year versus the GBP 244 billion today? And then secondly, there's no change in your motor finance provision in the quarter. You've no doubt had further conversations with the interested parties since your full-year result. And perhaps you could give us a high-level thought on how your feelings have changed on the topic since the full year. Are you any more optimistic or pessimistic as we stand at Q1 results? Thank you.

William Chalmers (CFO)

Thanks very much indeed, Ben. Again, two questions, and I'll take them in turn. On the structural hedge, as you say, we've got GBP 244 billion of invested hedge right now. We have guided towards a modest reduction in the structural hedge over the course of the year.

Included within that modest reduction is the GBP 3 billion reduction that we saw in Q1 from GBP 247 billion down to GBP 244 billion. So I think if you give some sort of color, if you like, to what a modest reduction means, it's worth having a look at last year for something that might be roughly similar. But of course, it will depend upon how deposits evolve over the course of the period. I'll come back to that in just one second. I think what that means, Ben, is that we might see a touch more in the structural hedge adjustments than we have seen just in Q1. But again, I would expect it to be within the confines of the modest reduction over the course of the year, perhaps not dissimilar to what we saw last year.

Now, that is all in the context of income from the structural hedge being plus GBP 700 million versus last year, which, as you know, will take us to a contribution in the structural hedge of around GBP 4.1 billion. And indeed, we see strong tailwinds from that contribution not just in 2024 but also in 2025 and particularly within 2026. And so you're going to see some decent pickup from that structural hedge in the years looking forward. I think one point to put into context there is the deposit performance.

As you can see from the deposit performance, I commented on earlier on, but overall, particularly within the retail space, it's been a pleasing deposit performance. We've seen savings up GBP 0.9 billion during the course of the quarter. We've been seeing PCAs up GBP 0.4 billion during the course of the quarter.

While some of that was a benefit from the bank holiday weekend, at the same time, we also saw what we always see: quarter one as a tax outflow period. So from slightly stronger inflows, from, if you like, less significant outflows, we saw a robust performance in PCAs. It'll come off a bit in quarter four because of, sorry, quarter two because of that bank holiday benefit. But nonetheless, it's a decent performance in PCAs. And with that benefit, I'm sure over time it will have an impact on the structural hedge.

So we feel very comfortable in the combination of deposit performance and how that informs our expectations for a modest reduction within the structural hedge. Your second question, motor. In essence, on motor, there is no new news. We, as you know, took the GBP 450 million provision at the end of the year.

That was off of a variety of scenarios, if you like, about how this issue might play out. We are engaged in, as is the rest of the industry, a data gathering exercise right now. We saw the FCA comments around the speed of that data gathering exercise. From our perspective, at least, we're doing everything we can to support in that and believe that we are making good progress. So that is going very much according to plan. We have seen the various bits and pieces of commentary from the FCA and how they might look at this industry and, in particular, the structural importance of this industry and the, if you like, role that the FCA review might play in ensuring an orderly outcome for what is a vital industry for not just the UK car business but, of course, consumers accessing car finance.

So stepping back, Ben, we realize the FCA is looking for misconduct and customer loss, number one. As you know, we believe that we have complied with the regulations at all applicable times. We look forward to the review providing clarity, but we also look forward to it providing a secure place for motor finance going forward.

Operator (participant)

Thank you. Our next caller is Joseph Dickerson from Jefferies. Your line is now unmuted. Please go ahead.

Joseph Dickerson (Equity Analyst)

As we move into Q2 and Q3, do you expect the improvement in mortgage approvals to start to translate into mortgage growth, open-book mortgage growth in Q2, or is it going to be later in the year? And then secondly, see the growth in the current accounts on the retail side. But what are you seeing as well in Q2 thus far on SME and commercial deposits? Many thanks.

William Chalmers (CFO)

Thanks, Joe. You cut out a little bit at the beginning of that question, but I think I caught it. If I didn't, just let me know as we go through the response. In terms of the quarter one mortgage performance - and then I'll answer your question in terms of the look forward on mortgages - a couple of points to make, really. One is we flagged at Q4 that we had a mortgage refinancing overhang in the context of Q4, which we expected to take a toll, if you like, on mortgage book growth during the course of Q1. So it rolled out pretty much exactly as we expected. That is to say, refinancing decisions were taken.

Off the back of that, we saw a slight reduction in the open mortgage book alongside a modest reduction in the closed mortgage book together, contributing to a GBP 1.6 billion reduction within mortgages as a whole. That played out pretty much that refinancing piece played out pretty much as we had guided and as we had expected. Now, what also happened is that the mortgage market itself picked up. So we saw a 20% increase year-on-year in terms of applications. We played a decent role in that. We saw our market share go up to just over 19% in terms of that applications volume. That, I think, sets us up for a better year in the context of mortgage growth for the sector as a whole and for Lloyds Banking Group within that.

So we are expecting mortgage growth over the year as a whole. And actually, the events of the first quarter have probably underlined, if you like, our conviction in that development. So I won't put too precise the kind of quarterly development on exactly how it flows through, but I think we have seen better progress than we had expected within Q1 on mortgage volumes. And we expect the development of the market to be stronger in 2024, perhaps than we had previously anticipated, all of which I think is a good thing for the development of the asset.

Your second question there in terms of the performance of deposits and in particular on the commercial space - let me give you a bit more color on that - as said, retail, really good, really strong performance across savings and across PCAs.

Moving into the commercial area, I highlighted I think I highlighted in my comments that we saw about GBP 3.5 billion down in commercial banking deposits. What's going on there? Just to pull that apart a bit. First of all, the corporate institutional business. We, in the past, have taken out term deposits. They are relatively expensive, not surprisingly, because of the dynamics of capital markets. We've got a very liquid balance sheet. As you know, a loans-to-deposit ratio of around 96%. In that context, we can ease up on some of those deposits, which are at the more expensive end of our range.

And so as a result, we've seen about GBP 1 billion of that GBP 3.5 billion off the back of reducing effectively high-cost deposits within CIB, which we see as a value-added step to take for the business.

The second component in the context of SME, that's responsible for the other roughly GBP 2.5 billion of deposit reductions within commercial banking. What's going on there? One, it's just a very seasonal factor, which is to say tax payments from our SME customer base happens every year. And so that part of the trend, if you like, is entirely unexpected and just as last year. The second point is, despite my earlier comments, because the market in mortgages was slow last year, the housing market has been relatively slow in terms of, in particular, the legal sector this year, this quarter. And so if you like, some lower deposit volumes within the legal sector, within SME, reflecting, if you like, the balance of completions from last year in the mortgage market.

And then finally, in contrast to retail, the SME business in the deposit area was somewhat adversely affected by the bank holiday. And that's simply a function of payments in and spend out. And we think there was a bank holiday price there. We're not going to put a precise number on it, but it was in the GBP several hundred millions, let's say, which in turn means that the underlying SME performance in deposits was actually a touch stronger than necessarily the headlines suggest. So I hope that's useful, Joe, and gives you some context on SME performance.

Joseph Dickerson (Equity Analyst)

That's very helpful. And presumably, the commentary on the mortgage share of apps and better progress in Q1 gives you conviction in the AIEA guide?

William Chalmers (CFO)

Yes. And it's a good point to raise, Joe. It does.

We said at the end of last year that we expected AIEAs in 2024 to be greater than GBP 450 billion. We do indeed continue to expect them to be greater than GBP 450 billion. And if anything, the developments of the quarter in terms of not just mortgages but also unsecured, for example, give us greater conviction in that AIEA performance over the course of the year. So we're sticking with guidance, but I think it is guidance that has greater conviction behind it.

Joseph Dickerson (Equity Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next caller is Jason Napier from UBS. Your line is now unmuted. Please go ahead.

Jason Napier (Head of European Banks Research)

Good morning, William. Thank you for taking the questions. The first one, I guess, building on a previous question around funding mix and deposit movements, Charlie has spoken in the past about the potential to run a slightly higher loan deposit ratio.

Wholesale funding volumes are up a tiny bit in the quarter, which I guess is more deposit-driven than anything else. But I wonder whether you might talk about where you think par is for loan deposit ratio, how that might change as we come to repay the TFSME, and what that means for NIM overall. And then secondly, capital generation in the quarter, notwithstanding the RWA growth, that sort of temporary GBP 1.5 billion, was very good on an underlying basis and I guess positions you to do quite a lot better than the 175 basis points of CET1.

So I wonder whether you could talk about any foreseeable headwinds around capital generation in the residual three-quarters of the year and whether you've allowed for any further provisions below the line that might make 175 more reasonable of current run rates. Thank you.

William Chalmers (CFO)

Sure. Thanks, Jason. Again, two questions, and I'll take them in turn. The loan deposit ratio finished the quarter at 96%. That is relatively low, as you know, by, I suppose, historical standards, although one has to take into account the variables or idiosyncrasies, if you like, of any given historical period. First of all, your comment in terms of wholesale funding. I wouldn't read too much into wholesale funding volumes in any given quarter. Money markets, for example, will fluctuate as part of that and give you slightly different reads on any given quarter. The pattern for wholesale funding costs, which is perhaps one of the points behind your question, we saw a jump in wholesale funding costs last year in line with maturities around sort of GBP 250 million or thereabouts.

The expectation this year, because of maturity profiles, because rate expectations being what they are, we expect that wholesale funding cost increase to be much less. Now, that is built into our greater than 290 guidance. To be clear, I'll come back to that in just a second. You asked about the kind of equilibrium loans-to-deposit ratio or the strategic ambition around loans-to-deposit ratio. I think it is fair to say that we'd be very happy to see it a touch higher than 96%. We don't have a target ratio associated with it.

We do think that over time, the expansion of lending activities within the business, consistent with customer activity, number one, and consistent with the expansion of our strategic investments as part of our strategy, number two, should deliver lending growth that is a touch stronger than we've seen over the course, certainly of quarter one, for example.

With that lending growth, we would expect to see the loans-to-deposit ratio develop but only gradually because at the same time, we're seeing deposit markets expand, and we're also seeing our share in those deposit markets perform very respectably. And so that dynamic, if you like, we do see a bit of upward scope within the loans-to-deposit ratio, not awfully much. That is a function not just of lending, though, but also strength in our deposit performance. You asked about the impact of that on NIM. First of all, our guidance this year, as you know, for NIM is greater than 290. We feel very comfortable in that guidance, to be clear. When we look forward, as I mentioned in the earlier question, we do expect the margin to be ticking up at the back end of this year.

That gives you an indication of where we expect the net interest margin to be going in 2025 and then indeed in 2026. And that's a function of all of the headwinds and tailwinds that we've described in 2024 continuing to play out as we go forward. So that gives you, I hope, a bit of a sense, if you like, of the dynamics behind the net interest margin over the course of the next year and beyond.

Your second question, Jason, in terms of capital generation. Capital generation, as you say, in quarter one was strong. You look at 40 basis points headline level. That's after regulatory headwinds relating to CRD4 number one and transitionals number two of around six basis points. That is also after RWA or temporary RWAs, if you like, of the GBP 1.5 billion that I mentioned. That's around eight or nine basis points.

And so if you take all of those into account, you've got a strong underlying capital generation of around 50-55 basis points thereabouts. Now, for the full year, we're sticking with our guidance of circa 175 basis points, which, to be clear, is strong and should allow decent distributions. I'll come back to that at the end. So we're sticking with our guidance of circa 175 basis points. What's going on behind that?

A couple of things. First of all, quarter one benefited from some share-based payments around compensation, employee share-save schemes being the very major part of that, plus also some market moves which helped us a little bit. The overall combination of that is we've probably got around 10 basis points or thereabouts benefit from those movements in Q1, share-based compensation and market movements that are not going to repeat in Q2, Q3, Q4.

Building into that, Jason, as you look forward, bear in mind our guidance, if you like, for the development of the P&L and the balance sheet. And then on top of that, one or two headwinds and tailwinds which I'll elaborate on. We do have the tailwind of RWA optimization. Likewise, we have the tailwind of the give-back of that temporary 1.5 billion of RWAs that I mentioned earlier on.

Likewise, we have the insurance dividend in the second half of this year. But at the same time, we have a couple of headwinds that are worth pointing out. CRD4, we took GBP 0.3 billion of CRD4 in quarter one. We've probably got about another GBP 1.6 billion or thereabouts to go for the remainder of this year. We have, as usual, the bank levy, which will arrive in the fourth quarter just as it always does.

And then alongside of that, we've got various capital markets activities that may take up a bit of an impact on capital. And then finally, the organic RWA bill that you would expect us to see as we expand the balance sheet in line with Joe's question about mortgages, but also we'll see that in the context of unsecured and other activities as well. So those are some insights, if you like, on the headwinds and tailwinds that we see expect to see in the context of our overall guidance.

And it's that, Jason, that leads us to confirm our guidance of circa 175 basis points for the year, which, again, to be clear, is strong capital generation, number one. And board-willing, subject to board's confirmation, should allow strong capital distributions at the end of the year, number two.

Jason Napier (Head of European Banks Research)

Thank you. That's very clear. Thanks.

William Chalmers (CFO)

Thanks, Jason.

Operator (participant)

Thank you. Our next caller is Rohith Chandra-Rajan from Bank of America. Your line is now unmuted. Please go ahead.

Rohith Chandra-Rajan (Director of Equity Research)

Thank you very much. Morning, William. I had two as well, please, if that's okay. The first one on volumes again. So average interest-earning assets were down GBP 4 billion in the quarter, but spot loans were down GBP 1 billion. Is that averaging, or is there something else going on there aside from what we see in the spot loan movement? And I think just to follow on to that one, you sort of talked in response to Joe's question earlier about volume growth for the remainder of the year. Could you talk a little bit more about the mix there, please? And then the second question, I think you mentioned mortgage completion spreads of 68 basis points.

I was just wondering what you're seeing in terms of application spreads and how they are responding to the move higher in swap rates, please.

William Chalmers (CFO)

Yeah. Sorry. Rohit, on your second question, would you mind just repeating it to make sure I understood it there?

Rohith Chandra-Rajan (Director of Equity Research)

The second question was just on mortgage completion spreads. I think you mentioned 68 basis points for the quarter.

William Chalmers (CFO)

I just wanted to make sure I got the second.

Rohith Chandra-Rajan (Director of Equity Research)

You mean part two of question one?

William Chalmers (CFO)

Yes.

Rohith Chandra-Rajan (Director of Equity Research)

That was really just around the mix of volume growth we're expecting for the remainder of the year. Is it dominated by mortgages, or what are you seeing there?

William Chalmers (CFO)

Got it. Thank you. Thank you for that, Rohit. First of all, you highlighted the lending versus AIEA growth.

There's a couple of things going on in there, really, Rohith, which are around the timing of balances and around the volumes of balances. We saw AIEA growth over the course of the quarter, or rather, AIEA reduction over the course of the quarter, down about GBP 3.7 billion at GBP 449.1 billion. It is driven by a number of factors which will play themselves out over the course of the year. So the reduction in mortgages, for example, somewhat offset by the growth in other retail, but obviously, the mortgage reduction was bigger than the growth in other retail.

And then at the same time, reduction in commercial banking balances. Again, I'll split that between business and commercial banking, the SME franchise, where most of that was basically payback of government-backed bounce-back loans. So that's been an ongoing phenomenon in the balance sheet for some time.

It'll play itself out over the course of the year and maybe a little bit beyond. But the majority of SME reduction in balances, again, bounce-back loan repayments. And then within CIB, CIB balances will fluctuate because a lot of the activity there is driven by ancillary income ambitions. It is, from our perspective, at least, it is generally a good thing when we can see solid other income growth, as we have seen in commercial, without too much balance sheet growth.

That is very much the strategy. And so you will see CIB balances kind of ebb and flow a little bit in that context. Overall, we see AIEA growth, as said, as being greater than GBP 450 billion over the course of the year, or AIEA, I should say, as being greater than GBP 450 billion balances over the course of the year.

The activities within Q1, if anything, have underlined our conviction in that. So for the moment, at least, I wouldn't get too focused on the distinction between lending and AIEAs. We think it will pass in the way described. In terms of the overall mix, your question there was around how do those balances develop. A couple of points to make there, Rohit. One is, in respect of retail, we do expect to see continued growth in the context of mortgages and in the context of unsecured and likewise motor. That should continue over the course of the year. We're seeing some greater gearing in the context of mortgages there. Unsecured will continue just as it has done within Q1. And then within commercial, as said, within CIB, we'll see some ebbing and flowing.

But overall, I would expect to see balances a touch higher at the end of this year versus at the end of 2023. And then within SME, you're going to see those cross-currents that I highlighted. That is to say, continued payback of government lending, which is going to push down the expectation, if you like, in AIEAs within SME. But at the same time and at the same time, relatively muted new credit demand from what are still relatively cash-rich and quite shy of lending SME sector. So I think pretty muted growth within the SME, slightly more robust growth within CIB, all in the context of decent growth across both secured and unsecured in the retail space. You asked about completion spreads there, Rohit, in respect of mortgages.

Completion spreads in respect to mortgages, I think I said 65 basis points earlier on, which is what we've seen in Q1. As you know, that represents a bit of an improvement over Q4, which is more like 60 basis points. What's going on there? I think in the round, what's going on there is you're seeing a slightly stronger mortgage market, which, as we said at Q4, we thought would lead to slightly stronger margin conditions. They're still relatively tight by recent historic standards, as you know, but nonetheless, slightly better completion margins than we saw during 2023 when, let's say, mortgage volumes were very limited and therefore competitive conditions were even more intense. As said, we are seeing those ease up a little bit. We'll see how we go through the rest of the year.

But our expectation is that completion margins will be at or around the 65 basis points for much of this year. I think if we see mortgage volumes increase, we might see that improve a little bit. And likewise, if it goes the other way, we'll see them be cost a little bit off the back of that. But that is not our base case. Our base case is circa 65 through the course of the year. If we see mortgage volumes increase, we may see some benefit.

Rohith Chandra-Rajan (Director of Equity Research)

Thank you.

William Chalmers (CFO)

Thanks, Rohit.

Operator (participant)

Thank you. Our next caller is Jonathan Pierce from Numis. Your line is now unmuted. Please go ahead.

Jonathan Pierce (UK Banks Analyst)

Hi, William. I've got a couple of questions. I'd like to actually step back a bit and think about the 2026 ROTE target. It feels like, as we get ever closer to that, you're increasingly confident of hitting it.

In that context, I want to ask two questions, if it's okay. The first is they're both related to the hedge. The first is the yield on the hedge. Everything you've told us about the income and the notional this year suggests that the average yield will probably be about 1.7% in 2024. By the time we get to 2026, if the yield curve holds, the five-year rate, at least, would have been above 3% for nearly four years and would have averaged nearer to 4%, in fact. And accepting all of your hedge points have rolled by that point, an awful lot of it will have done. It's a significant move from 1.7% up to something consistent with that in 2026. You've told us 2025's tailwind is not really that different to 2024.

And you've started to allude a lot more in recent meetings to this additional tailwind in 2026. How much bigger is that, broad terms? Are we looking at a tailwind in 2026 that's, I don't know, twice the GBP 700 million that you're seeing at the moment? So a level of guide around that would be really helpful. The second question is on pre-hedging.

So to the extent to which you are locking this in today, again, I know you won't give us a precise number, but it'd be good to get a sense as to how many of the maturities over the next year or two you have pre-hedged. Is it 10%? Is it 50%? Is it all of it? Just to give a sense as to the risk to the 2026 target from the yield curve itself moving between now and then. Thanks a lot.

Yeah. Thanks, Jon. A couple of questions there, more or less both on the structural hedge, but I'm actually going to step back a little bit and describe some of the dynamics in ROTE in 2026 that go beyond the structural hedge. So maybe I'll start there, Jonathan, which is to say, fundamentally, we do have confidence, significant confidence, in our guidance for 2026 of greater than 15% ROTE. What is going on there? A couple of things. One is we do see a positive improvement in the macro. You'll have seen in our economic forecast, there's a bit of gathering pace. It's not particularly strong, but it is a stronger macro versus what we have seen.

Two is we do see an increase in net interest income. That is driven by a number of organic activities. It is also driven by the structural hedge.

I'll come back to that in just a second. So that does step up. The third component, still within net interest income, is that the headwinds that we have seen abate. So by the time we're in 2026, the mortgage refinancing headwind is done, certainly towards the second half of it, and the deposit churn has stabilised, particularly in the context of rates as we outline them. So the headwinds have abated alongside some of the strengthening tailwinds.

The third point, beyond net interest income, or rather included in it and indeed going into other operating income, is our strategic investments have been realised. And those are both revenue metrics, which, as you know, should contribute a further GBP 1.5 billion by the time we get to 2026, and also some of the cost ambitions in the context of our strategic investments have been realised.

So that's a tailwind in the context of revenues and also supportive in the context of costs, which in turn, the cost point at least, delivers a degree of operating leverage alongside kind of stabilising investments, if you like, that will be very helpful in terms of improving ROTE for the business going forward. Overall, that is a stronger return in terms of the numerator that we expect to see develop. You've seen our macro assumptions, so they will help inform the AQR as part of that, Jonathan, but you're seeing a stronger return. Now, to be clear, that is also on top of a higher TNAV. And that TNAV is higher because of profit accumulation, because of RWA accumulation to finance ongoing growth, because of the cash flow hedge reserve diminishing, and the pension surplus building.

So it's a stronger return on a higher TNAV, leading to a profit contribution, if you like, that is significantly stronger as we move towards 2026. Specifically, Jonathan, in respect to your structural hedge questions, you asked about the contribution this year. We put a number down of plus GBP 700 million over the course of this year. You asked about the yield, the full-year yield on the structural hedge. It is about 1.7%, to be clear.

Your number is about right. That is in the context of, as you know, maturities which are refinancing, pre-hedges which are coming on, and that's together what leads to the plus GBP 700 million over 2024. When we look into 2025, it really depends upon how rates go as to the added contribution in 2025. But as you say, we've in the past have commented that it won't be terribly different.

It might be a touch better, but that really depends upon how rates fare over the course of the next periods ahead. By the time we get to 2026, by virtue of pre-hedges, by virtue of the yield on maturities that roll off, we do expect structural hedge income to step up during that time. So +GBP 700 million in 2024, a number that might be a touch above in 2025, but it's not unrecognisable, and then a step up in 2026.

And that's, if you like, that's relatively well programmed in in that we know the rates at which maturing hedges are coming off, and we know the rates at which pre-hedges will be coming on. The one point, Jonathan, which you mentioned in your question, which is not fully nailed down yet, is around all of the pre-hedging that is being put on for the 2026 outcome.

To elaborate on that a little bit, 2024 structural hedge income is now pretty certain. It's pretty much locked in. 2025 is not entirely locked in because, as you can imagine, we have a set of rolling maturities, and they are not 100% pre-hedged at the moment. If we have a sharp rise in hedge, sorry, in interest rates, that'll contribute to a better outcome. If we have a sharp dip in interest rates, that'll be a sensitivity on the downside. The same is truer in respect to 2026, i.e., less of 2026 is locked in versus 2025. That is simply a matter of prudential management of the hedge, if you like. We're looking to secure stability, and we're looking to secure shareholder value, which means that we lock into a certain extent but not entirely.

Hopefully, Jonathan, that gives you an impression as to the drivers behind the ROTE for 2026, the confidence that we have in the greater than 15%, the fact that actually there are many drivers to the ROTE in 2026 which have nothing to do with the structural hedge, but then also gives you a bit of an impression, a better understanding, if you like, as to the expectations for the hedge this year and beyond.

Yeah, that's really helpful. Can I just ask one very quick follow-up, and you'll probably just say you're not answering this question. But is the maturity yield on the hedges in 2026 close to zero?

William Chalmers (CFO)

Well, you're right, Jonathan. I won't answer that. I won't answer that question with any precision. Safe to say that, as you know, the structural hedge has been in place for quite a long time.

It's in the interest, again, of securing stability of the earnings pattern so that we are not exposed to sharp rises or falls in interest rates. The reason why we do that, just to be clear, Jonathan, is because we want to secure for our shareholders a steady stream of dividends going forward. And so that is what's driving that stability concern. And then it's around shareholder value in a similar way. We manage it in a way that is strictly governed by committees within the bank but nonetheless allows us to ensure that we don't lock up deposits, if you like, when the curve is very flat and we're not getting rewarded for that locking up. We don't comment specifically on the maturities yield, if you like, within any given period.

Safe to say, because the structural hedge has been around for some time, inevitably, it contains some pretty low-yielding maturities which are gradually working their way through the hedge, and we're seeing a chunk of those come off in 2026.

Jonathan Pierce (UK Banks Analyst)

Okay. Brilliant. Thanks a lot.

William Chalmers (CFO)

Thanks, Jon.

Operator (participant)

Thank you. Our next caller is Guy Stebbings from BNP Paribas Exane. Your line is now unmuted. Please go ahead.

Guy Stebbings (Executive Director)

Hi. Morning, William. Thanks for taking the questions. I had a follow-up on NIM and then one on volumes. So, on margin, thanks for the color and the expectation to be back in growth by the end of the year. I mean, that sounds unchanged versus the guidance back in February, but at the same time, some of the drivers are perhaps running better than expected, such as deposit mix, where swap rates have held, and the outlook for policy rates.

So should we infer that that conviction is enhanced and perhaps even the trajectory slightly better than prior expectations, and we could be looking at stability perhaps as soon as Q2 and growth in Q3, accepting that guiding around specific quarter NIM is challenging? But is that broad line of thinking on NIM trajectory fair? And as a sort of supplement to that, can I just check? I think you said maturing mortgage spreads were 128 basis points in Q1. Can you confirm if that's correct and in any sense on what we should be looking at for the rest of the year? And then on volumes, I was just hoping you could elaborate a little bit on unsecured, which looked very strong in the quarter, particularly in motor and unsecured personal loans.

Just wondering if there's anything lumpy there, or is that sort of a run rate we can expect to continue? Is that sort of a sign of you leaning into credit given the more favorable macro? Thank you.

William Chalmers (CFO)

Thank you. Guy, call question one and question three. I may need to come back to you on question two, just to make sure I understood it fully. But let me address question one and three first, and then I'll ask you on two. In terms of net interest margin, I think the patterns that we are seeing playing out are very much consistent with our expectations at Q4. And so we maintain our guidance of greater than 290, and we have, as you would expect, conviction in that guidance just as we did at Q4.

Now, to the extent that things turn out a little bit better than we had expected, for example, if the deposit patterns reflect a little bit more strongly off the bank holiday timing issue that I mentioned earlier on, we'll take a look at that in the context of the quarters ahead. But to be clear, we're early in the year at the moment. We're only, what, eight weeks away from our quarter four guidance. So now is not the time to refresh that.

We'll take a look at it depending on progress over the course of the year. The added point there that I would make is that the margin performance is going to be dependent upon customer activity levels, upon how exactly rates play out over the course of the year, and of course, on competitive conditions in areas like the mortgage market, for example.

But it remains our base case that we are greater than 290 for 2024, and we have conviction in that base case. The third question, in terms of volumes, as you say, we saw some decent performance during the course of the quarter across the books and in particular across the unsecured books. A couple of comments to make in that respect is that in respect to motor, for example, we've now got a Q1 balance of GBP 15.8 billion. That's about GBP 0.5 billion up in the quarter. That is a combination of organic growth, number one, in terms of very customer-facing growth. There is also a bit of restocking by the dealers in the course of quarter one. So a little bit of that 0.5 growth is off the back of basically restocking of forecourts and the like.

So that means that you shouldn't expect to see GBP 0.5 billion in quarter two, but you should expect to see growth, to be clear. It just may not be fully GBP 0.5 billion. So on the unsecured business, on the personal loans, for example, you have GBP 0.7 billion in growth there. Don't forget the fact that we had the securitization activity in the course of quarter four in respect of that, and so you're not seeing the repayments affect the loans balance there.

So again, you should expect to see respectable personal loans growth going into Q2 and beyond, but I don't think it's going to be the 10% level that you saw in Q1 simply because of that kind of distortion effect around the repayments off the back of the securitization. So growth but just not perhaps the GBP 0.7 billion that you saw in Q1.

Then finally, in cards, as you know, we saw balance growth of GBP 0.1 billion in cards. That is pretty straightforward stuff. I would expect that to continue over the course of the quarters going forward. Dependent upon economics, it may be that it's a touch stronger if things play out in a more benign way from an economic point of view. Now, your question two, Guy, I just want to make sure I got the right sense of. Would you mind just repeating it quickly so that I get it right?

Guy Stebbings (Executive Director)

Yeah, absolutely. Thanks for the column and those other questions. So I think you said the maturing spread in Q1 was 128 basis points on the mortgage book relative to the 65 new spread.

So I just wondered how that 128 looks like it phases for the rest of this year so we can get a sense as to the sort of residual mortgage spread churn as we look forward.

William Chalmers (CFO)

Yeah. Yeah. Got it. Thank you for that, Guy. As you say, we did see maturing margins of around 128 basis points in quarter one. That compares to about 65 basis points at which it is coming on. Over the course of 2024 as a whole, we expect those maturity margins to be at about 1.15%. So that gives you an idea. Effectively, what's going on there is that as the particularly COVID period, very high margins at which we wrote mortgages start to come off, the balance becomes a fairer representation of the whole book, if you like. So the 128 in Q1 falls to about 1.15% for 2024 as a whole.

That progress, it's a little bit lumpy on a month-by-month basis, on a quarter-by-quarter basis, but nonetheless, that progress continues through the course of 2025 into 2026, consistent with my comments earlier on about the mortgage headwind gradually tailing off. Again, there will be bumps in quarters, but gradually tailing off as we progress through to 2026.

Guy Stebbings (Executive Director)

Very clear. Thank you.

William Chalmers (CFO)

Thanks, Guy.

Operator (participant)

Thank you. As you know, this call is scheduled for 60 minutes, and we have now reached the end of the allotted time. So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyds Investor Relations team. Please go ahead, Christopher Cant from Autonomous.

Christopher Cant (Head of Banks Strategy)

Good morning. Thanks for taking my questions. I just wanted to come back on NIM and non-banking NII, please.

So in terms of the NIM, as we think about the progression into 2Q, just to understand your comments about the shape of the NIM during the year, given the Bank of England funding changes, my understanding is that that NII benefit will only start to impact the NIM essentially in the second quarter where you've had the costs in the first quarter. So I think it's worth about 1.5-2 basis points on the NIM on an annualized basis given your commentary. Should we be expecting the NIM to be down still Q-on-Q despite the fact you have that tailwind? That's the first question, please.

Then on the non-banking NII, I appreciate you don't necessarily want to give us a precise figure beyond 2024, but that has been a pretty material source of negative surprise, I think, the consensus over the last several quarters cumulatively. You're now talking about 450-500 for this year. I think you referenced two dynamics in there. Firstly, business growth, which we can all try to take a view on.

Secondly, just the impact of the higher level of rates. On that second component, how much of a sort of refinancing impact do you still have to come through here in terms of sort of the quarter-over-quarter lumpiness that we've been seeing? How many of the sort of funding bonds that you allocate into that non-banking NII bracket are still to roll, and how much of an impact will that bit have?

Because presumably, that's reasonably foreseeable even if the business growth aspect is less easy to anticipate. So just keen to understand whether we've now sort of hit a level on rates, and therefore, if policy rates fall into 2025, that aspect of it would actually start to work in your favour, or whether we're still waiting for a large volume of low-yielding funding positions to churn into the new rate environment. Thank you.

William Chalmers (CFO)

Yeah. Thanks, Chris. Again, two questions there, and I'll just take them in turn. On net interest margin in respect of Q2 was your first question. As you know, we went down from 298 to 295 in Q1, dropped 3 basis points, a lot less than we saw in Q4. When we look forward, your question was specifically around the Bank of England levy.

As you point out, we have got very modest benefit from the Bank of England levy change in respect of net interest income in quarter one. So very little benefit in quarter one from the Bank of England net interest income effect and the changing of the charging structure. That will come into play a little bit more in Q2, and then it assumes a run rate, if you like, in Q2 and beyond, Q3 and Q4. And there is approximate P&L neutrality during the year and complete P&L neutrality over the course of 12 months, just to be very clear. That does lean favorably into net interest margin over the course of quarter two. Having said that, there are other factors at play within quarter two. I've talked about deposit churn. I've talked about mortgage refinancing.

I talked in my script earlier on also about the hedge being a touch weaker in Q2 off the back of maturities and hedges, pre-hedges, that is. So overall, our guidance for net interest margin remains very much as it was, Chris, which is greater than 290 over the course of the year, turning into a positive direction at year-end.

We have very strong conviction in that off the back of the developments that we're seeing across the book in terms of the deposits, in terms of the mortgages, and of course, in the context of structural hedge viewed in the year as a whole. But when you look at quarter two, as I mentioned in some of the comments that I made earlier on, it's probably a touch too early for us at least to see stability in the margin in Q2.

We'll just see how that fares in line with rates, customer activity, and the like. Your second question, Chris, on non-banking net interest income, I guess we end where we started. We, again, acknowledge the fact that non-banking net interest income has gone up GBP 25 billion, but it's worth just putting that in context as I did earlier on. The increase in that context is, as your question pointed out, about driving growth within the business. And so an increase in non-banking interest income, at least the extent to which it relates to growth in business, is a good thing, to be clear. It's driving other operating income growth across the four business areas that I mentioned: insurance, commercial, transportation, LDC, and so forth.

I've given the extra guidance today to say that we are looking at somewhere in the GBP 450-500 range, hopefully to be helpful in that respect. There is behind that charge a kind of complex of different terms, as I indicated, for the different types of assets. Commercial, for example, is typically more or less an overnight charge, whereas motor is often a 3 to 3.5 year charge. And so there's a lot of information that would be required to really model that and hence the guidance from a top-down perspective that we're giving you. Your question then, Chris, is how does it develop? I think your thesis is approximately right. That is to say, as we move forward, the growth component does not drop out. It continues to drive non-banking net interest income, and that's a good thing.

Having said that, the driver from rate increases that should start to drop out. It should start to drop out not during 2024, but it should start to drop out from future periods thereafter. Therefore, that element at least eases up, and the growth very much remains within the picture consistent with our strategic objectives to drive growth within the business as a whole and in this context, particularly in the context of other operating income. I hope that's helpful, Chris.

Christopher Cant (Head of Banks Strategy)

Thank you.

William Chalmers (CFO)

I think we're going to bring the session to a close now. We've gone over a little bit, but thank you very much indeed for the questions and indeed for the interest likewise. There are a couple of questions that I think were left on the line.

Apologies for not getting to those, but IR will make sure that they contact the analysts and individuals concerned. Again, this concludes Q&A session today. Thanks once again to everybody for joining the presentation. I want to hand back to the operator to close the call.

Operator (participant)

Thank you. This concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website. Thank you all for participating. You may now disconnect your lines.