Lloyds Banking Group - Q3 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 one on your telephone. Please note, this call is scheduled for one hour and is being recorded. I will now hand over to William Chalmers. Please go ahead.

William Chalmers (CFO)

Thank you, operator, and good morning, everybody. Thank you for joining our third quarter 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 an overview on slide two. In third quarter, we continued to make good progress on our strategic transformation to the benefit of all stakeholders. We are building momentum across our business, delivering for customers and driving higher, more sustainable returns. In the third quarter, the group again delivered a robust financial performance in line with our expectations. This includes income growth alongside cost discipline and strong asset quality. Our performance, as well as the strength of the group's franchise, allows us to reaffirm our 2024 guidance and gives us increasing confidence in our 2026 commitments. Let me turn to a summary of the financials on slide three.

As mentioned, Lloyds Banking Group delivered a robust financial performance, both in third quarter and in the year to date. Statutory profit after tax for the first nine months of the year was GBP 3.8 billion, with a return on tangible equity of 14%. Net income was GBP 12.7 billion year to date. Pleasingly, third quarter has seen growth in income versus the prior quarter, including net interest income up 2%. This was supported by a quarterly net interest margin of 2.95%, up 2 basis points on second quarter. Operating costs of GBP 7 billion in the first nine months of the year were up 5% year on year, in line with our expectations. Asset quality, meanwhile, remains strong. The year-to-date impairment charge of GBP 273 million equates to an asset quality ratio of 9 basis points.

The third quarter impairment charge was GBP 172 million, or an AQR of 15 basis points. TNAV per share increased to 52.5 pence, up 2.9 pence in third quarter, driven by profits and the unwind of a cash flow hedge reserve, given falling rates. Our performance delivered strong capital generation of 132 basis points in the year to date, in line with our guidance of 175 basis points for the full year. I'll now turn to slide four to talk through the balance sheet growth that we saw during the third quarter. Our customer franchise continues to grow across the balance sheet. Total lending balances of GBP 457 billion, up GBP 4.6 billion in third quarter. This was primarily driven by strong mortgage book growth, with balances up GBP 3.2 billion.

Higher mortgage completions reflect both a strengthening market throughout 2024 and a market share of new business that is in excess of our share of stock. Notably, our customer proposition in mortgages is being supported by improvements off the back of our strategic investments. Elsewhere in the retail business, we saw continued growth across cards and unsecured loans of GBP 0.1 billion and GBP 0.6 billion, respectively. Motor finance balances were down by GBP 0.6 billion, although this was impacted by a GBP 0.3 billion securitization in the quarter, and dealers holding lower stock levels than seen in the first half.

Commercial lending balances were down slightly in third quarter by GBP 0.2 billion. Within this, we saw similar trends to recent quarters, with targeted growth in corporate institutional more than offset by net repayments in small and medium businesses, including GBP 0.4 billion of government-backed lending balances.

It's been another positive quarter for our deposit franchise. Deposits now stand at GBP 476 billion, up GBP 1 billion in third quarter. Within this, we saw growth of GBP 1.7 billion in retail, with savings accounts up GBP 2.8 billion. Current accounts were GBP 1.1 billion lower in the quarter, an outcome which was a little better than we expected. Deposit churn overall eased slightly, as anticipated, in a declining rates environment. Commercial deposits were down GBP 0.5 billion quarter on quarter. Growth in targeted sectors within small and medium businesses was offset by an expected outflow in CIB. Alongside these deposit developments, insurance, pensions, and investments saw GBP 3.5 billion of net new money year to date. Turning to income on slide five. The group delivered income growth across both net interest income and other operating income in third quarter.

Net interest income of GBP 3.2 billion in third quarter was up 2% quarter on quarter. This includes a net interest margin of 2.95%, up two basis points on second quarter. The significant contributions from the structural hedge more than offset the ongoing headwinds from deposit churn and mortgage refinancing. Overall, the margin is a touch stronger than expected, given the favorable deposit dynamics mentioned earlier, together with yield curve developments. The structural hedge notional balance remained unchanged at GBP 242 billion in the third quarter, after reducing GBP 5 billion in the first half of the year. This reflects increasing stability in our rate-intensive deposit balances and generated hedge earnings of GBP 1.1 billion for the quarter. Looking forward, we continue to expect the 2024 net interest margin to be greater than 290 basis points.

Alongside year-to-date AIEAs are GBP 450 billion, with healthy growth in third quarter, led by the mortgage book. We continue to expect AIEAs to be greater than GBP 450 billion for the year as a whole. Also within NII, the non-banking interest charge was GBP 118 million, broadly stable on second quarter and consistent with our expectations. Note that this will tick up a bit in fourth quarter, given expected refinancing and activity growth in the businesses. Overall, the NII performance has improved in third quarter. Looking forward, fourth quarter will be more stable, given structural factors, but we expect the improvement seen in third quarter to be the beginning of a gradual trend. In other income, we saw continued momentum in the third quarter. Year-to-date OOI of GBP 4.2 billion is up 9% year-on-year, with third quarter OOI up 3% quarter on quarter.

Our performance this year continues to be driven by stronger activity and our strategic initiatives across the franchise. As you know, we'll give a full update on our strategic progress at the year-end. That said, we're continuing to execute at pace and are on track to deliver GBP 0.7 billion of additional strategic income in 2024. Operating lease depreciation was GBP 315 million in third quarter. This is consistent with our expectations at the half year, based on business momentum and revised depreciation schedules. Let me now turn to costs on slide 6. We remain on track to deliver our cost guidance of GBP 9.4 billion in 2024. third quarter operating costs were GBP 2.3 billion, stable quarter on quarter.

Over the first nine months of the year, operating costs of GBP 7 billion were up 5% year-on-year, or 4%, excluding the Bank of England levy. As noted at the half year, this also includes accelerated severance charges versus 2023, taken to facilitate cost efficiencies. Excluding both the levy and the component of severance, which is in excess of last year, costs were up just 2%. Inflationary pressures are being significantly offset by continued cost discipline and investment in savings. The third quarter cost-to-income ratio is 53.4%, or 52.7%, excluding remediation. As said, we continue to expect operating costs of circa GBP 9.4 billion in 2024, including the GBP 0.1 billion Bank of England levy. The remediation charge is GBP 29 million in the quarter and GBP 124 million year to date.

There have been no further charges relating to the FCA investigation into historical motor finance commission arrangements. Stepping back for the full year run rate remediation charge, we still see circa GBP 200-300 million as an appropriate guide. Let me move to asset quality on slide seven. Asset quality remains strong and reflects resilient group credit performance. The third quarter impairment charge is GBP 172 million, equivalent to an asset quality ratio of 15 basis points. This benefited from strong portfolio performance, but also a debt sale of unsecured assets, providing a circa GBP 80 million credit, worth about seven basis points in the quarter. Year to date, the impairment charge is GBP 273 million. This reflects a low underlying charge, helped by some one-offs and an improving economic outlook in the first half of the year.

On a pre-MES basis, year to date, the impairment charge is a still low GBP 597 million, or an AQR of 18 basis points. Our stock of ECLs on the balance sheet remains GBP 3.8 billion. This is about GBP 500 million in excess of our base case, and like for like, higher than pre-pandemic levels. Looking forward, we continue to expect the asset quality ratio to be less than 20 basis points for 2024. Let me move on to slide 8 and address the below-the-line items and TNAV. Return on tangible equity in third quarter was 15.2%, contributing to a robust year-to-date performance of 14%. Within this, restructuring costs remain low at GBP 6 million in the third quarter, and GBP 21 million for the first nine months of the year. The volatility and other items charged was GBP 24 million in third quarter.

This was driven by the usual fair value unwind, offset by positive banking and insurance volatility, given recent rate movements. This contributes to a year-to-date charge of GBP 182 million. Tangible net assets per share at GBP 0.525 are up GBP 0.017 year to date, and up GBP 0.029 in third quarter. The increase over both periods was driven by profits and the unwind of the cash flow hedge reserve, offset by shareholder distributions. In third quarter, the TNAV also benefited from the mechanical reversal of a GBP 0.009 per share accrual for the share buyback that we flagged at second quarter. Looking ahead, we continue to expect TNAV per share to grow as headwinds unwind and the reduced share count from the buyback continues to provide support.

We also continue to expect the group's return on tangible equity to be circa 13% for 2024. This incorporates ongoing TNAV growth, alongside slightly lower fourth quarter earnings, given the usual seasonal factors such as the bank levy and a more normalized impairment charge. Turning now to capital generation on slide nine. The group delivered strong capital generation in the first nine months of the year of 132 basis points. This is in line with our expectations and keeps us on track for our target of circa 175 basis points for the full year. Within this, risk-weighted assets were GBP 223 billion, up GBP 4.2 billion in the first nine months. This continues to be largely driven by lending growth, partially offset by securitizations and other capital optimization activity.

We remain confident that RWAs will end the year consistent with guidance of between 220 and 225 billion. Further lending growth and regulatory inflation will be partially offset by continued active balance sheet management. Our closing CET1 ratio for the quarter is 14.3%, after 71 basis points of ordinary dividend accrual. We continue to expect to pay down to a 13.5% CET1 ratio by the end of 2024. Looking further forward, since we last met, the PRA has published its policy statement on Basel 3.1. We now expect the impact to be modestly positive when introduced on the first of January, 2026. I'll now move on to slide 10 to wrap up the presentation. Overall, the group delivered an encouraging performance in the third quarter. This includes strong progress on our strategic transformation.

In that respect, we look forward to updating you on this at our full year results, which will represent the closing of the first chapter of our strategic plan. Third quarter also represented another robust financial performance, reflecting income growth, continued cost discipline, and strong asset quality, leading in turn to strong capital generation. Our continued strategic execution and consistent financial performance allows us to reaffirm our 2024 guidance. It also gives us increasing confidence in our commitment to generate higher, more sustainable returns for our shareholders. That concludes my comments for this morning. Thank you for listening. We'll now open the lines for your questions.

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 today is Aman Rakkar from Barclays. Your line is now unmuted. Please go ahead.

Aman Rakkar (Analyst)

Good morning, William. Thanks very much for the presentation. I had a question on net interest income, please. I guess, first of all, around the usual NIM and NII drivers into fourth quarter, as you see them, would be helpful. I guess I'm particularly interested about the structural hedge. It's a big, big contribution in the quarter in third quarter, and I'm just ultimately trying to work out if there's any upside to the structural hedge this year, but I suspect that there should be by virtue of the kind of year-to-date performance that you've achieved is close to the, I think it's close to the seven hundred million or in excess of seven hundred million that you're guiding for the full year.

I also suspect that your structural hedge notional probably isn't gonna fall much from here, so I think there should probably be a pickup from this hedge being more stable, and I guess that the swap rate environment has been better than expected through the course of this year. I know you've pre-hedged, but it does seem to me like there is upside to that structural hedge, so, to be more succinct here, should we expect a meaningful kind of sequential pickup in the structural hedge Quarter-on-Quarter in fourth quarter, and what does that mean for the NIM, please, and then I had a second question on average interest-earning assets, so you've pointed to kind of sequential growth in fourth quarter in your IMS.

I can see that averaging is a decent tailwind Quarter-on-Quarter, but I think there is some decent underlying momentum in your retail business as well. So could you help us maybe think about fourth quarter average interest-earning assets? I feel like it should be decent Quarter-on-Quarter, and I think you need it to be in order to deliver on your full year. I think that's what you're pointing to, right? That the lending momentum really should drive average interest-earning assets quite meaningfully from here. Thank you very much.

William Chalmers (CFO)

Thanks, Aman, for those two questions. I'll take them in order. Net interest margin, first of all, as you know, net interest margin was at two ninety-five during quarter three. The drivers in respect of that were the principal ones that we've discussed before, but to go through each of those, we've seen structural hedge make a good contribution in the third quarter, ten basis points, as you'll have seen in our numbers. And then on the flip side of that, the two headwinds that we've seen are deposit churn and mortgage refinancing. So to comment on those respectively, deposit churn we've seen during the course of the quarter, as anticipated, actually, that is to say, modest PCA outflows in combination with a continued drift from instant access into fixed term and limited withdrawal.

But a couple of points within that, Aman, which are relevant. The PCA outflows are probably a little more modest than we had expected. That is to say, the PCA balances are a little better than we had expected. That's off the back of things like inflationary wage settlements. It's probably off the back of slightly more conservative spending patterns, but also things like, government or bank giro credits and the like. So overall, a more benign picture in PCA, down GBP 1.1 billion in the quarter, but leading to a balanced outcome that, as said, touch better than expectations, perhaps. And then alongside of that, the churn taken overall has, as I mentioned in my comments earlier on, eased up a little bit over second quarter.

So we're seeing essentially what we thought might happen in a falling rates environment, which is to say the deposit churn eases a little bit as we go through the year. The mortgage refinancing headwind continues pretty much in line with where we thought it might do. That is to say, we've got mortgages that are refinancing or rather coming off the balance sheet at about 110 as a margin. They're going on the balance sheet at a competition margin of around 70, maybe a touch over 70 basis points. So you've still got that mortgage refinancing headwind playing out, again, in a more or less mechanical way, in line with how we expected.

Now, when you look forward, on that, and pursuant to your question on the structural hedge, which I'll come back to, Aman, we would expect that net interest mechanic, if you like, i.e., the principal tailwind allied to the two headwinds that I mentioned, to continue to play out in the course of the fourth quarter. Overall, as I mentioned in my comments earlier on, we think the net interest margin has more or less turned for the time being. It looks to us like the net interest margin increased by a couple of basis points in the quarter of third quarter. I think we might expect something roughly similar in the course of fourth quarter. Of course, that will be affected by things like deposit behavior, for example, competition in the mortgage market, and the like.

But overall, taking what we can see into perspective, if you like, I would expect that net interest margin to continue to tick up a little bit in the course of fourth quarter. Now, the structural hedge role within that is clearly important. As I said a second ago, we've seen the structural hedge contribute ten basis points in the course of third quarter. That was a particularly strong contribution, simply because of maturities, because of yields on those maturities, and the like. And that's the type of, you know, overall, very positive contribution you get from the structural hedge, but it will go up and down a little bit, Quarter-on- Quarter.

When we look forward, the structural hedge expectation for the year as a whole, as you know, I think we mentioned at our half-year numbers, that we thought it would be growth of greater than GBP 700 million in the course of 2024. As we stand today, you know, it may be that swap curves have been a little bit stronger than we expected, but there's probably not much in it, to be honest, Aman. And so, you know, maybe it's a touch stronger than that, but not awfully, not awfully much and, you know, not terribly material. Your notional comment is interesting. How do we see the notional balances in the structural hedge? We thought at the beginning of the year that they would come off by a modest amount.

We compared that, I think at the time, to what we saw in 2023, which was a GBP 8 billion reduction. So far, we've seen a GBP 5 billion reduction. And I mentioned earlier on that the deposit churn picture is easing up, just as we thought it might. Where does that take us to? You know, let's see what depositors do during the course of the fourth quarter. But overall, I think we feel pretty good about the notional balance at GBP 242 billion, as it is right now, and we'll report back to you how we fared during quarter four. Just taking a step back on your first question still, Aman, what does that net interest margin picture look like? Or rather, what does it imply for net interest income?

I think it's just worth finishing the question on that, which is to say, when you look at net interest income as a whole, as you know, it's composed of net interest margin, AIEAs, and non-banking net interest income. I'll come back to AIEAs in a bit more detail in just a second, but to round that off, net interest margin is set. Looks like it turned, you know, maybe a bit more progression in the context of fourth quarter would be our base case. AIEAs, you've got our guidance there. It's greater than GBP 450 billion. I'll come back to that in just a second. But don't forget, during my scripted comments, I did comment that NBNII, non-banking net interest income is expected to tick up a little bit in the course of fourth quarter, and that's off the back of greater levels of activity, which in turn go into securing our other operating income growth that you've seen year to date.

So, you know, consider that point, too. Where does that take us to net interest income? Our expectation is that net interest income will be broadly stable, fourth quarter versus third quarter. And that's, you know, overall, if you like, the point that I'd finish off that question on. Second question, AIEAs, Aman. Couple of points there. You've seen a strengthening of AIEA through the course of the year. In third quarter, you saw AIEAs of GBP 455 billion. Year to date, as you know, AIEAs are a touch below that, at basically GBP 450 billion.

When we look into fourth quarter, we see the type of growth that we've seen in assets, GBP 4.6 billion lending increase in assets in quarter three. We would overall expect that growth to continue during the course of quarter four, and therefore contribute to the AIEAs build over that time. But where we think that will land us in terms of AIEAs for the year as a whole is in line with our guidance of greater than GBP 450 billion. I don't think we'll be an awful lot ahead of that, to be perfectly clear, but nonetheless, we do expect to meet our guidance of greater than GBP 450 billion based upon that building trajectory of AIEAs, third quarter, 451. Let's see where we get to in quarter four. But overall, as said, meeting our guidance of 450. So that's an overall picture. Perhaps I'll stop there for now, Aman. Hopefully, that's helpful.

Aman Rakkar (Analyst)

Thank you so much. Appreciate it.

Operator (participant)

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

Jonathan Pearce (Analyst)

Hi, William. Hope you're well. I've got a couple of questions, if that's okay. The first is on this hedge tailwind again. I mean, GBP 450 million annualizing increase in the third quarter, given there probably wasn't any averaging benefit coming through from second quarter, given there was no tailwind in that quarter. It is obviously pretty big, in the context of the GBP 20 billion maturity number you previously talked to across H2 as a whole. I just really want to clear something up from a definitional perspective here. When you talk about maturities, that GBP 20 billion in H2, for instance, is that number, as I understand it, excluding positions you have already pre-hedged? So we can't sort of look at GBP 20 billion and multiply by a yield delta to get the tailwind in any particular quarter.

So that, that's the first question. The second question is a broader one on 2026. The TNAV is obviously now moving up at a decent clip. I think if you look at consensus retained earnings next couple of years, get about 10p. At the end of 2026, the cash flow hedge reserve is still a 5.5p negative, I think, and presume a lot of that will unwind. So TNAV feels like it's moving into the mid-sixties plus. If that's a number you recognize, and are you still confident, if that is the base, that the ROT will be north of the 15%?

Are you still wedded to this idea that you'll do a 15% plus ROT, even if the CET1 ratio was 13.5% rather than 13% you talked about earlier in the year? Thanks a lot.

William Chalmers (CFO)

Thanks, Jonathan. I may ask you to just repeat your first question to make sure I followed it. But, in essence, on the structural hedge, what we've committed to in terms of the income profile is, as you know, in 2023, we saw GBP 3.4 billion. We believe that we're going to achieve greater than GBP 700 million growth over the course of 2024. We then, I'll take it further forward for now, expect a step up from that GBP 700 million growth in 2025, and a further more significant step up in respect to 2026. So that's the overall income picture, Jonathan.

When we describe that income picture, it takes into account the dynamics of the hedge in terms of notionals, in terms of the extent to which we have pre-hedged, in terms of the yields on maturities that are coming up and so forth. So everything is gathered together. That may or may not answer your question. Perhaps you can tell me at the end if there's anything further you'd like to ask. On your second question, in respect to TNAV, we've seen pretty decent TNAV build over the course of the third quarter. As you know, up GBP 0.029 per share during the third quarter to GBP 0.525. We do expect that TNAV per share to increase over the course of the near term and into the medium term.

And the primary drivers for that, from a business point of view, from a TNAV-as-a-whole point of view, if you like, are business growth, are the unwind of the cash flow hedge reserve, our pensions, not pensions contributions, I shouldn't say, but rather asset performance in the context of pensions. And that overall drives P- TNAV positivity. That is then augmented by the buyback, which obviously reduces the number of shares and therefore further boosts the TNAV per share. You've seen in the, in respect of the cash flow hedge reserve, in particular, Jonathan, you've seen the rates profile that we have. The cash flow hedge reserve right now is about GBP 3.3 billion, thereabout.

In the context of rates profile we have, that unwinds, more or less in line with the structural hedge, albeit some of it is front-loaded by its nature. That overall leads to pretty decent TNAV growth over the immediate future, as said, and over the forecast period. When we look at the 2026 expectations, Jonathan, we always thought that was going to be the case. There's nothing new there. That is consistent with what we said at the beginning of this year and indeed in the preceding year. So nothing terribly much has changed in that respect. We've had some short-term volatility in rates, for sure, but the overall profile hasn't changed terribly much from what we previously set out. Where does that leave us? That leaves us with greater than 15% ROT expectation for 2026.

And you've seen our capital commitments and likewise alongside of that. But greater than 15% ROT expectation for 2026 off the back of what will, in our expectation at least, be an undoubtedly materially higher TNAV. It's that combination, Jonathan, yes.

Jonathan Pearce (Analyst)

Okay, and you're still comfortable you'll do that even if the equity tier one ratio had been held at 13.5, as it was when the target was put in place?

William Chalmers (CFO)

Absolutely. That's what we committed to at the beginning of this year, and that's very much where we continue to be.

Jonathan Pearce (Analyst)

Okay and sorry, just to follow up on the hedge tailwind point. I think it's the point that if I just took GBP 20 billion in maturities in the second half, it's very difficult to see how you're getting the tailwind in income terms that you're talking about. And I'm just wondering whether the GBP 20 billion is really the relevant number, or if there are more maturities and you're not including within the GBP 20 billion stuff that's been pre-hedged.

William Chalmers (CFO)

No, I think the maturities are always slightly difficult to kind of model, if you like, off the back of the hedge expectation, simply because you don't have other parts of the puzzle, such as the yield on maturities, and the pre-hedging, which, as you say, is a further metric, so you know, overall, I think it's that balance. I think I'd pay more attention to the income expectation for the hedge as a whole in terms of modeling expectations.

Jonathan Pearce (Analyst)

Okay. All right, very clear. Thanks, William.

William Chalmers (CFO)

Thanks, Jonathan.

Operator (participant)

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

Benjamin Toms (Analyst)

Morning. Thank you for taking my questions, William. A recent conference, I think you talked about NIM gently rising in 2025 and more significantly in 2026. Can I just check whether you think the current consensus actually reflects that sentiment that you were trying to convey at 301 basis points for next year and 311 basis points for 2026? And then secondly, in respect to motor finance, I think there's a couple of court cases we're due to get judgment on before Christmas. Can you just give some timing around those? And do those cases have the potential to impact your motor finance provisioning modeling, or are we really waiting for the May 2025 consultation paper for shifting impact expectations?

I think I noticed in your presentation that your remediation charge year-to-date is GBP 124 million, but you're guiding still to GBP 200-300 million, which leaves me with a slight feeling you might be giving yourself room to do a top-up at year-end. Thank you.

William Chalmers (CFO)

Thanks, Ben, for those two questions. In respect of NIM, as said in my comments earlier on, the NIM has effectively turned as of third quarter. We expect that to continue over the course of fourth quarter. So when we look at 2025, we obviously haven't given guidance for 2025. We'll certainly do that in February of next year when we meet to discuss full year results. But overall, some comments on the shape there that we might expect. It is our expectation that the same factors, if you like, will drive the 2024 and 2025 NIM outcome, as are currently driving the setup right now. Specifically, what do I mean by that? I mean, a gathering pace in the structural hedge. As said, we're delivering greater than GBP 700 million growth in respect to 2024.

Our expectation is that 25 deliveries from the structural hedge will be in excess of that GBP 700 million growth during that year. And alongside of that, continued slowdown in deposit churn, I think very much consistent with our interest rate expectations, and off the back of that, the incentive, if you like, to move from instant access or PCA, for that matter, into fixed-term savings. So that reduces deposit churn over time, and then alongside of that, finally, the mortgage headwind tapers a little bit going through 2025, albeit it will not be done until the first half of 2026. You know, we'll give specific guidance for the margin on in 2025 at the beginning of next year.

But the expectation is, based upon those dynamics, that we do indeed, to your point, Ben, see an increase, but a gradual one, during the course of the year. The only offset to that, that I would highlight, that we have not seen during the course of this year so much is rate cuts. That is to say, we've seen one rate cut so far this year. We expect one further rate cut during the course of fourth quarter, and we expect three rate cuts during the course of 2025 And those do act, as you know, have a lag effect, a cost effect, essentially, on the margin. But still, taking that point into account, you add up all of what I've just said, and we would expect to see a gradual increase in the margin over the course of next year.

On the motor point, Ben, that you raised, first of all, just to distinguish between the GBP 200-300 million remediation guidance that I mentioned earlier on, anything to do with motor. GBP 200-300 million of remediation guidance that I gave, that has been our longstanding guidance in remediation for a very long time, which predates motor. So it's not with reference to anything to do with motor. It's simply to guide you to what we expect on a full-year run rate remediation basis. In respect of the court cases that you referred to, Ben, a couple of points to make.

I mean, one is obviously the main event here is the FCA Motor Commission review, which, as you know, has been moved into May of next year, which from our perspective at least, is a timing event rather than anything more substantive than that. So we obviously look forward to getting that Motor Commission review wrapped up and moving on from that. It's going to be May rather than this year. Fine, that doesn't affect our GBP 450 million provision. With respect to court cases, court cases are obviously a matter of law as opposed to the FCA review, albeit the FCA did say that they would take them into account in considering the overall stance. So we will observe those court cases. We'll obviously consider them in the context of, you know, where they might go.

I would note a couple of things, the principal one of which is to say that the court cases that have been determined to date on motor have predominantly gone in our favor. Not every one, but mostly gone in our favor. So we'll look with interest to, the court cases and how they come out, but with that context in mind.

Benjamin Toms (Analyst)

Thank you.

Operator (participant)

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

Jason Napier (Analyst)

Good morning, William. Thank you for taking my questions. Two, please. There's good momentum in parts of the loan book in particular. So first question on the mortgage growth in the quarter. Thank you for the competition margins there. Presumably, this is strong from a market share perspective. If we think about, you know, in the background, you've got an SVR book that is running down and so on. Can you just talk about sort of your share, where it's coming from, and what you're seeing on sort of front-end pricing there? And then secondly, U.K. retail's done, you know, phenomenally well year to date, up another 7% in the quarter. If you could just talk about the credit quality of what's going on in the book there and sort of how you're seeing end-to-end consumer credit demand.

I mean, U.K. savings rates at 10% looks like everybody's very, very cautious, but you're generating really quite good commercial momentum in that portfolio. In particular, if you could talk through that, that'd be, that'd be helpful. Thank you.

William Chalmers (CFO)

Thank you, Jason. First of all, in respect of mortgage growth, yes, we're pleased with the mortgage growth that we've seen in the context of the third quarter, in fact, in the context of the year to date. The third quarter growth, as you know, is GBP 3.2 billion, which represents a good performance. We've always taken a stance with mortgage growth, as you know, or the mortgage market, I should say, as you know, which is to say that we will aim for a decent, a healthy proportional share, but we will only do so if it is acceptable on value basis. It's good to see, actually, that over the course of this year, and particularly in the third quarter, the trade-off between share and value, from our perspective at least, has been a constructive one.

So what have we seen in respect to pricing, and what have we seen in respect to share? In respect to pricing, we've seen a circa seventy basis points, maybe a touch over, as I mentioned earlier on, for completion margins. So, you know, that's a return that allows us to deliver a cost of capital positive return, both on a stock basis and a marginal basis. What have we seen in terms of share? We've seen around a 21.5% market share in flow within mortgages within the third quarter. Importantly, I think what is delivering for us there is the results of some of the investments, as I mentioned in my script comments earlier on. And specifically, what do I mean by that?

We've invested heavily in the intermediaries journey, for example, to address the needs of intermediaries to get a quicker result for our customers. And we've invested heavily in the overall proposition, including focusing on certain segments, sectors, including, for example, the mass affluent mortgage that we've recently put out. So it's that combination of investing in end product, investing in journeys, which we think is helping us to achieve a successful market share, again, in the backdrop of what we see to be acceptable pricing. U.K. retail, overall, yes, I think we've seen some decent growth within U.K. retail outside of mortgages, too, Jason, which is good to see. A couple of comments within that. We've seen about GBP 0.6 billion increase in loans. We've seen about GBP 0.1 billion increase in cards. That's all in the third quarter.

We've seen a modest decrease, actually, about GBP 0.6 billion decrease in motor. So that motor one, I'll just dwell on briefly. The motor reduction of GBP 0.6 billion is about half of that is about securitization that we did in August, which is an important risk management approach in the context of our operating lease depreciation exposure. So half of that reduction in U.K. motor is off the back of a securitization done in August. The other half, or a good part of the other half, is essentially about dealer destocking. Dealers had built up their stocks early on in the year. Through the course of the year, they run those down, basically, as vehicles get sold. We've seen a bit of that during the third quarter.

So you step back, and I think, Jason, to your point, we've seen strong personal loans growth, we've seen strong cards growth, and that's pleasing. You asked about the credit quality. The credit quality, I think, is not just benign, but actually more benign than probably surpassing our expectations. What is behind that? I think it's a benign macroeconomy on the whole. I think it's also some of the approaches that we've invested in, in the context of our strategic initiatives. So, for example, we've created a Your Credit Score tool, which is a tool that customers can visit, and build an understanding of their overall credit performance. We've seen that link to greater take-up within the personal loans business. And indeed, I think that is probably what's one of the factors behind the good credit quality that we're seeing.

So overall, Jason, I think it's been healthy volume growth. I think it has been very benign credit quality that we've seen behind that, and it's a good combination. One slight point that I would make on the personal loans growth, again, GBP 0.6 billion up during the quarter, which is great. Don't forget the fact that we did a securitization on the personal loans tail end of last year, which in turn probably slightly flatters that, GBP 0.6 billion increase in personal loans. It's still healthy growth underneath it, but just bear that in mind.

Operator (participant)

Thank you. Our next caller is Chris Cant from Autonomous. Your line is now unmuted. Please go ahead.

Chris Cant (Equity Analyst)

Good morning. Thank you for taking my questions. Two relatively quick ones, I think. Firstly, you mentioned, Basel 3.1 is now expected to be modestly positive upon transition, in 2026. I was just wondering if you could give us a little bit more quantification there in terms of how we should think about the RWA impact. Obviously, that will be a factor potentially within how you think about distributions for next year, given it hits 1 January 2026. But any more precise quantification than modestly positive would be appreciated. And then the other question I wanted to ask was on non-banking NII. I'm sure we're all going to spend a bit of time today.

Trying to wrangle the generally positive commentary on the direction of NIM and loan growth with the fact NII is expected to be broadly flat. And you mentioned non-banking, and NII will be stepping up into the fourth quarter. Is there any way you could give us a sense of the quantum of that impact? And I guess, more importantly, how we should be thinking about that looking into 2025. As I think the twenty twenty-five consensus for non-banking NII would essentially be flat on roughly where you were as of the third quarter of this year, which is stepping up into fourth quarter, should we be expecting a sort of a bigger negative non-banking NII number in 2025 than consensus currently has them? Thank you.

William Chalmers (CFO)

Yeah. Thanks, Chris. To take those in order, Basel 3.1, you're quite right to spot a change in language. We do believe that Basel 3.1 is now going to come out modestly positive as opposed to neutral to modestly positive, which is what we have said before. What's behind that is a number of changes that have been adopted in the consultation process, which in turn are marginally favorable versus where they previously were. So things like scalar in the context of infrastructure, things like credit, counterparty credit conversion factors, rather, those types of things, reduction in standardized loss given defaults, trade facilities being more benign than we had expected. All of these things add up into a slightly more benign RWA outcome for Basel 3.1, Chris.

I shan't put a number on it, actually, because the Basel 3.1 process is still going through finalization. And as you know, the types of estimates that we're adopting now, basically assume a more or less static, balance sheet and likewise credit environment. And so we have to see how that evolves over the course of the coming periods in order to give you a more precise number at the beginning of 2026. But overall, I do expect it to be modestly positive, you know, which is frankly a better outcome than we previously thought. Our capital commitments, you asked about that in the context of your question. We remain at 13%, as of, 2026. Still our ambition to get to that level, and it's in our intention to get to that level.

So hopefully that gives you some context to think about. In respect of non-banking net interest income, your second question, we've given an overall guidance for non-banking net interest income of GBP 450-500 for the year as a whole. And it's the upper end of that that I would steer you towards in the context of the overall year, and therefore, hopefully give you some sense as to where we might go during the course of quarter four. What's going on there, as you know, it's off the back of increasing levels of other operating income, increasing levels of activity, often fueled by the strategic investments that we're making. And so that's the, that's the main characteristic, if you like, or say, a good part of the characteristic of the increase in non-banking net interest income.

Alongside of that, we've got some areas of activity within OOI that are basically term financing, transport being the obvious case in point. And so there's a bit of a lag effect between, if you like, base rates going up and the refinancing of those term structures, which in turn feeds into NBNII in a slightly lag way versus changes in base rates. You asked about next year. I would expect that lag effect and a little bit of the activity to slightly tick up NBNII next year. We'll give you more precise guidance at the end of the year, but a modest tick up might be a reasonable expectation. But having said that, Chris, the overwhelming pattern, I think, in the context of our NII for next year, if you like, overcomes that.

That is to say, the effect of any NBNII increase is offset, more than offset, by the other positives that we're seeing going on in the NII line, by which I obviously mean the developments in average interest-earning assets, and alongside of that, the developments in the margin. That's what prevails during the course of 2025.

Chris Cant (Equity Analyst)

That's, that's helpful. Thank you. Just to clarify on the non-banking NII, when you say slightly tick up into next year, do you mean relative to the implied fourth quarter run rate of just north of 600, or do you mean relative to the 500 that you're now pointing to for full year 2024 as a whole? So should we be assuming growth on the fourth quarter level, given those continued investments and the lagging effect, or is it actually coming down sequentially quarter over quarter from that fourth quarter implied number? And I'm taking the top end of your 450-500. I appreciate the some give within towards the top end.

William Chalmers (CFO)

Sure.

Chris Cant (Equity Analyst)

Is it?

William Chalmers (CFO)

Yeah, it's my...

Chris Cant (Equity Analyst)

Picking up year over year.

William Chalmers (CFO)

My answer, Chris, referred to the 450-500, and that's what I was referring to in terms of slight tick up.

Chris Cant (Equity Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next caller is Edward Firth from KBW. Your line is now unmuted. Please go ahead.

Edward Firth (Equity Analyst)

Yes, morning, everybody. Morning, William. Just two quick questions. One was actually broadly, I think, answered by Chris's, but I just to clarify that. So just to be absolutely clear, you would expect net interest income to broadly follow your margin guidance for next year. Is that... Should we broadly take that? And I guess, sort of supplemental to that, is my understanding correct that in a falling rate environment, that non-banking charge should go down? I think it went up with higher rates, and I assume it reverses, but just to check that, that would be point number one. And then the second question is a sort of broader question.

You're still buying back shares, but you're obviously now buying them back at above tangible book, and at a price that, is, you know, probably, well, considerably higher, let's say, than you've done in the past. Is that something you think about when you're buying back shares, or is it more of a sort of mechanical process? You've got the surplus capital, and you buy it back. And does it, in any way, influence your thinking about buybacks versus dividends, firstly? And secondly, does it influence your thinking in terms of acquisitions? Because, I mean, obviously you will see that there are a number of banking assets available in the U.K. at the moment at substantial prices, you know, materially cheaper than you are.

I wonder if that is the sort of trade-off you think of as a management team strategically? Thanks so much.

William Chalmers (CFO)

Yeah, thanks. Thanks, Ed. On the net interest income point, I'll start there as it refers to your questions. Again, just bear in mind that net interest income is a function of margin of AIAs and of NBNII, non-banking net interest income. I mentioned earlier on, and again, I won't get any more specific about this, but I will underline the patterns that we expect to see, the shape that we expect to see, if you like. Our expectation on NIM, as set out, is that it gradually moves upwards, basically from here on. Our expectation around AIAs is that we've seen the rise to GBP 451 billion in the course of third quarter.

We'll see more modest lending growth during the course of fourth quarter, to be sure, but we do expect AIAs to grow during the course of next year in line with our strategic ambitions to grow the business and in line with... You know, I won't put a number on it at all, but in line with the spirit of the growth in balance sheet that we've seen over the course of this year and expect to continue to see next year. So that's a AIA comment. And then this probably addresses both question one and question two of your questions. NBNII, however, is lagged in terms of its growth off the back of rates, and the reason for that, as said, is because we've got within NBNII financing of things like transportation assets.

Those transportation assets will often be on, let's say, three-year lending facilities, and therefore, base rates can come down. But there's a lagged effect as the higher level of rates versus when these things were financed is put into the NBNII structure. Alongside of that, and perhaps more importantly, we get growth in activity, and that growth in activity drives OOI. You've seen OOI up 9% year on year, up 3% quarter on quarter. It's our expectation that OOI continues to grow in next year, and we have to pay for that. You know, we have to pay for that at some level, which is still frankly awfully shareholder value accreted, but we have to pay for the financing of that through the NBNII line, so it's that combination, Ed, which hopefully answers question one and question two.

Edward Firth (Equity Analyst)

Great. Thank you.

William Chalmers (CFO)

On the buyback, I'm very pleased to see that the share price actually is ahead of Tangible Net Asset Value for all sorts of reasons, as you can imagine. Starting from the beginning, though, the key point here is that we are very committed as a team, as a board, as an organization, to capital return to shareholders. That's a core commitment of the organization. You've seen it hopefully manifested in abundance or testified to over the course of the last few years, both in terms of the dividend, which again, we've increased by 15% as of the half year, and also in terms of the succession of buybacks that we have launched. At the moment, as you know, we have a GBP 2 billion buyback out there, which is being completed more or less as we speak, and we remain very committed to that.

As we look forward, we expect the business to continue to be strongly capital generative. We do expect to continue to invest in the business. We also expect to produce surplus capital above and beyond the investment needs of the business, even in the context of the strategic transformation that we're undertaking, and so the question of excess capital generation is unlikely to go away, and it will drive, if you like, both the growing dividend and also a question beyond that about what do we do. Now, you've asked the question about how does the current share price drive the decision on that excess capital. Couple of points to make there. One is we still see significant value in the business, even at the current share price, significant value.

The second point is our investors, I think, likewise, see significant value, and as a result, like the buyback structure. From a value-based proposition, the buyback makes sense to them, and that's the consistent feedback that we get. Alongside of that, it's obviously an EPS and a DPS driver, which is good to see, and alongside of that, you know, we see many banks out there who are engaging in buybacks at significantly higher valuations. So, and in short, we think we've got a long way to go on the valuation, which in turn will, I'm sure, be a factor in any board decision that will be made at the year end as to what to do with excess capital. Final point, Ed, you mentioned around acquisitions. As you know, our approach to acquisitions is a pretty cautious one.

Where we see the ability to add scale or alternatively add a capability which is strategically consistent, we will look at them, but on the other hand, it's a relatively high bar before we'll actually execute, and what informs that bar is, is it a faster way of getting to our strategic ambitions, number one? Can it be done with an acceptable level of risk, number two? And most importantly, can it be done with an acceptable value outcome for shareholders, number three, and so, Ed, although there might be a lot out there in the market, and we do see everything clearly, it is relatively little, or the opportunities that pass those hurdles are relatively few and far between.

Edward Firth (Equity Analyst)

Great. Thank you so much.

William Chalmers (CFO)

Thanks, Ed.

Operator (participant)

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

Guy Stebbings (Equity Analyst)

Morning, William. Thanks for taking the questions. First one was on other operating income. I was just wondering if you could give a little bit more color on so the drivers of growth there, because you haven't spent too much time on that. If there was any sort of standout contributor supporting the positive performance in the quarter. And looking ahead, third quarter was quite strong. There can be a bit of seasonality. So just to confirm whether you're happy for us to start with the GBP 5.7 billion or so third quarter annual run rate and grow that base into 2025. I think consensus is only about 2% above that figure, which doesn't look particularly stretching versus the sort of recent pace of growth we've seen for other operating income.

Then the second question was just on impairments. Another very encouraging quarter. I'm not expecting you to guide on next year, but, you know, you've highlighted the 18 basis point charge, ex-MES changes. There's quite a gap to the 27-28 basis points consensus in future periods. Just wondering if you're seeing anything in the data which leads you to sort of stay a little bit conservative and expect a slight uptick from that or actually quite the opposite, and you're quite sort of comforted by the data you're seeing. Your remarks regarding personal lending certainly sort of seem to suggest so. Thanks a lot.

William Chalmers (CFO)

Yeah. Thank you, Guy. Just taking each of those in turn. In respect of OOI, first of all, as you saw, third quarter, GBP 1.43 billion OOI, which was a decent uptick, 3% on second quarter. First of all, third quarter underlying is much the same as third quarter headline. There's nothing going on on an underlying basis that changes that picture. And that, as you know, is up 9% year to date, as I said, up 3% quarter on quarter. So decent growth within OOI, the headline being much the same as the underlying. Specifically, what's driving the growth. I, I think what's pleasing about OOI growth is that over the course of the year, we've got a number of different engines that are driving that OOI growth. Retail, commercial, IP&I, and central, by which I mean basically the equity businesses.

There's four engines there, and then within each of those, there's a set of kind of sub-businesses, if you like, that are diversified and driving growth. Their contribution in any given quarter is more or less, by which I mean in some quarters, some areas will be stronger, some areas will be weaker, and then generally speaking, that evolves over the quarters. What we saw in third was a particularly strong contribution from the retail business, including the PCA area and including the transport area, and then secondly, also a decent contribution from the equities business, including LDC. So that was a good pattern to see in third quarter

If you look at the year as a whole, however, it is also complemented by strong contributions from commercial, particularly C&I, corporate institutional, that is, and strong contributions from insurance, pensions, and investments from a variety of different engines, including things like, general insurance business. Home insurance has been particularly strong, at very attractive, pricing, if you like, alongside of that long-standing business. And so that combination of businesses within OOI and the diversification that it affords is a good thing. When we look at fourth quarter, by its nature, Q4 is typically a slightly slower quarter, and the reason for that is simply seasonal. You know, that is to say there are fewer market active days, I suppose, which in turn contributes to OOI being a slightly slower quarter. But overall, what would I expect?

I'd expect to consolidate the gains that we have seen in third quarter, if not necessarily keep up the growth rate between third quarter to fourth quarter that we saw from second quarter to third quarter. Overall, I think that leads to a solid, a pretty good outcome for OOI for the year as a whole for twenty twenty-four. Looking forward into twenty-five, I think it's the same pattern that informs the trends that we've seen. You know, that is to say, increasing levels of activity, and as importantly, the continued benefit of our strategic initiatives. Our strategic initiatives, as you know, will deliver GBP 1.5 billion of incremental revenues by 2026, of which we expect about half to be OOI. So there's an engine of activity there in line with our economic forecast.

There's an engine of activity there in line with our strategic investments, and a good part of that is OOI driven. Your second question on impairments. You're right to point out, Guy, that the impairments picture has been... continues to be pretty benign. third quarter impairment charge, GBP 172 million, about 15 basis points. Underneath that, we did do a debt sale, as mentioned in my script earlier on, and that debt sale was across a number of different asset classes, actually, but overall, contributed about 9 basis points in the quarter, which, if you add that back in, means that the underlying impairment charge is about 24-25 basis points. Interestingly enough, that is very consistent with what we saw at quarter two, and I would say it's more or less consistent with what we expect to see in fourth quarter.

When we look at twenty twenty-five, I shan't comment in any detail on 2025, other than to say that the overall impairments trends continue to be pretty stable and, on the whole, pretty benign. So that's, if you like, feeding into our expectations for that year. It is informed by, and this goes back to some of the comments on U.K. retail earlier on, that not just the underlying charge being, again, pretty stable and being pretty benign, but alongside of that, new to arrears being low, write-offs being low, flows to default being low, and perhaps most importantly, early warning indicators. As you know, we look at an array of early warning indicators, across our customer base, within retail, within consumer, and we're not seeing anything there that is anything other than stable.

If anything, we're seeing modest declines in new to arrears, for example, but equally, a lot of stability in things like, minimum repayments within credit cards and that sort of thing. Similar patterns within commercial.

Guy Stebbings (Equity Analyst)

Very clear. Thank you.

William Chalmers (CFO)

Thanks, Guy.

Operator (participant)

Thank you. Our next caller is Amit Goel from Mediobanca. Your line is now unmuted. Please go ahead.

Amit Goel (Equity Analyst)

Hi, thank you. So two questions. One, I'm just basically curious to see if there were any kind of customer behavior changes or anything that was, you know, even slightly different to what you were expecting post the Bank of England rate cuts. And then secondly, just curious if there's any color that you could share from, you know, some of the meetings you've had more recently with Rachel Reeves, and/or, you know, how receptive you think the government is to some of the proposals that you've been putting forward? Thank you.

William Chalmers (CFO)

Thanks, Amit. I mean, I'll take your questions in order, obviously. The first of which, customer behavior changes off the back of the Bank of England base rate change. There's nothing in particular that I would highlight, save to say the deposit churn comments that I made earlier on, which I think have been reinforced by the base rate changes that we've seen. So, you know, overall, we took the base rate change. We passed on an element of it. I would say it was less than 50% that we passed on to our customer base, most clearly within retail. But overall, I think we were interested to look at how the market responded to those base rate changes, and in turn, I think we saw it as a relatively rational response from the market.

So overall, I suspect that played a bit of a role in terms of competitive pricing, in terms of the stability, in fact, reduction, as I mentioned earlier on, that we have seen in deposit churning. Perhaps it was a factor in our PCA outcomes being a little stronger than expected. And so, you know, at the forgive the term, but at the margin, I would say, Amit, that the, the main effect of the Bank of England rates change was we saw a rational market response to it, and we saw it as more or less confirmatory of our expectations and indeed experience in the context of deposit churn, which feed into the margin comments that I made earlier on. As you know, we expect one more Bank of England base rate change during the remainder of this year.

That is also a factor behind our expectations for churn continuing to slow into this year and then again into next, as the Bank of England continues to cut rates. The second of your question, just remind me on the second of your questions, Amit, if you could.

Amit Goel (Equity Analyst)

Sure. It was just, you know, in terms of your conversations with the Chancellor in recent weeks, I was just curious if there's any additional color you could give from those and/or even with respect to, you know, some of the proposals you've made for enhancing U.K. growth.

William Chalmers (CFO)

Yeah, of course.

Amit Goel (Equity Analyst)

Just curious if there's any color you can share? Thank you.

William Chalmers (CFO)

Yeah, of course. Sorry, I hadn't noted it down. Thank you, Amit. When we look towards the budget, I guess a couple of points. One is when we look towards the budget, we note the pro-growth stance of the government, and we very much hope the budget will be delivered in a manner consistent with that. I'll come back to that in just a second. But I think most importantly, when we look towards the budget, we look at it as an event that will provide some certainty, some clarity on what has been, you know, quite a few weeks of speculation, as you know.

And so we very much look forward to the budget in that context, as effectively a clearing event that we can then get on with business, get on with the growth ambitions that we have as a, an organization, and that we hope to contribute to in respect of the U.K. We have no particular insight as to exactly where the government will come out in terms of its various choices it might face into in the budget. We do note, as said, its pro-growth stance, and we very much hope that the net, if you like, of all that the government does during that budget will be consistent with that pro-growth ambition. Now, you asked about our involve.ment.

I mean, we, as obviously a major player in the UK and with our purpose of helping Britain prosper, have a strong interest in all of the, where this comes out, in particular in the context of encouraging growth within the U.K. If it is the case that the government chooses to come out with measures that are positive, if you like, or supportive of housing ambitions, of infrastructure ambitions, of energy transition ambitions, then, you know, we will find that obviously presenting opportunities for us to get involved and to promote the growth agenda, that we all want to see happen over the course of the coming months and years ahead. So certainly, we'll look at the budget with interest.

We'll look forward to it being a clearing event, providing clarity, providing certainty, and we look forward very much to being supportive of the growth ambitions that we hope the government will launch.

Amit Goel (Equity Analyst)

Thank you.

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, Ben Cavan Roberts from Goldman Sachs. Your line is now unmuted. Please go ahead.

Benjamin Cavan-Roberts (Equity Analyst)

Yeah, thank you very much. So just on completion margins for mortgages, you've indicated that recent activity had been around seventy basis points or a touch above. Just curious, is that broadly consistent with the level you're baking into your full-year guidance moving ahead, or do you see any potential for a further strengthening there? And then secondly, just in terms of operating costs, looking ahead, your sub-50% cost-to-income ratio target for 2026 still sits a fair bit ahead of consensus. Do you think there are any elements of your strategic initiatives which are perhaps a bit more back-end loaded, or should the progress on mitigating cost growth driven by inflation and investment be relatively linear from here?

William Chalmers (CFO)

Yeah. Thanks, Ben. I'll take each of those in turn. Completion margins, as you say, a touch ahead of seventy basis points or thereabout. So that's an overall, as said, pretty constructive picture, which allows us to write EVA positive, economic value added, positive business, both on a marginal basis and a stock basis. At that, as said, just a touch above seventy basis points. Overall, while you know, overall pricing might have been a bit volatile, it's good to see that margin performance has been pretty consistent actually over the course of recent periods, not dissimilar to what we saw in second quarter, a little bit stronger maybe, not totally dissimilar to what we are seeing so far, at least in the context of fourth quarter.

As we look forward, Ben, we've built in a more or less consistent picture in the context of our overall plans, and that is what's behind, if you like, the convergence that we expect to see between new business that we're writing and the old business that rolls off, as said, with that headwind more or less completed within the first half of 2026. So hopefully that addresses the point. The one point that I would add on to the back end of that, Ben, is that to the extent that we see pressure in mortgage margins beyond that, then I think we, just like every other financial services organization, or at least every other bank, would expect to manage the margin in a relatively realistic way.

So if there is any give in mortgage completion margins, you would likely see a bit of an offset to that in respect of other parts of the overall business, which in turn gives us continued confidence in the expectation around the NIM that I set out for 2025 and indeed beyond. Your second question, Ben, around the cost-income ratio expectation, less than 50% for 2026. As you know, we set out ambitions for 2024 and 2026, hopefully very clearly. In the context of 2026, we've set out basically three main ambitions. One is a sub 50% cost-income ratio, one is an ROTE expectation of greater than 15%, and one is a capital return expectation of circa or above 200 basis points. So those three are the pieces of guidance that we've given 2026.

And again, as we did today, we have a lot of confidence in those. We reiterated the confidence earlier on today in exactly that commitment that we have made. What's going on there? It is two or three things, but the main drivers of which are, we see income is growing. We see income is growing off the back of a significantly greater structural hedge contribution, as per my comments earlier on. We see income is growing off the back of, increased added value from our strategic initiatives investments, GBP 1.5 billion, as you know, by 2026. Number two, as well as a stable macroeconomic environment that we've put out in our forecast today. So that combination delivers a materially stronger income picture going into 2026.

The second point that we see, Ben, is the overall cost picture starts to lead to a flatter cost base. Now, a couple of points to make in respect of that. One is, as you know, we, just like every other institution, have been subject to a bit of inflation in the cost base recently, off the back of macroeconomic trends. That's still there. You know, it's still, to an extent, at least requiring us to tightly manage cost set, cost measures to at least partially offset that. The other thing that's going on in our cost base is that we're investing heavily.

And as you know, depreciation lags cash investments, which means that a bit of that carries on going into 2025, but then by the time we get into 2026, the depreciation pressure, if you like, is starting to slow down. And so off the back of that, together with the benefits from the strategic investments in savings that we're making, you've heard me talk about severance, for example. Today, we're making a lot of technology investments in our ambitions to ensure that we have an efficient cost base, is that combination which leads to a flatter cost base by the time we get to 2026. Again, not flat, but flatter.

The combination of the income growth points that I've made, together with the cost points that I've just made, leads us to have a lot of confidence in our 2026 commitments, as outlined just now and also earlier on in the session. It does, however, mean though, Ben, that 2025 looks more like 2024 than it does like 2026. So this is not a linear journey. It's gonna tick up, notably in 2026.

Benjamin Cavan-Roberts (Equity Analyst)

Thank you.

William Chalmers (CFO)

Thanks, Ben.

Operator (participant)

Thank you. This now 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.