Lloyds Banking Group plc (LLOY) Earnings Call Transcript

Yes, I think it's very high, Jason. I mean we laid out in July. I suppose we did 2 things in July. One is we reconfirmed 2026 guidance. And then the second is that we laid out Accelerate 2030 and put in place a financial framework alongside of that. And that financial framework gave commitments as to income growth, gave commitments as to cost-income ratio reductions to sub-45%, gave commitments as to RoTE at circa 20% by the end of the plan and gave commitments as to capital generation in excess of 225 basis points. So those financial framework commitments were just that framework within which we'll give precise financial guidance at the beginning of every year. But our confidence level in July and our confidence level today is exactly the same, very confident, very comfortable in meeting that financial framework. And I should have perhaps address this point first, meeting indeed the 2026 financial guidance. But those 2 come hand in hand. At Q3, we reconfirmed the commitment and expectation that we will meet '26 financial guidance. We reconfirm that we will meet the commitments within that financial framework. And it's a very high level of confidence, Jason, and it hasn't changed.

You've certainly got a very well-established track record of meeting guidance on an in-year and a multiyear view. Within that sort of expansion of RoTE, I mean the sell side sometimes comes in for a bit of flag because every time we drag a column to the right to add another year, RoTE goes up 50 basis points and revenues grow faster than costs. But it does look like that's the plan. How constrained is the bank in terms of pace of investment? One of the things that's going on in a lot of slides, yours included is gargantuan gross cost saves, substantial investment, expenses are gross lower than sort of revenues. Are you investing enough in the business? How do people on the outside know the quality of that balance between gross and net?

Yes. No, that's a good question. I might actually -- one of your questions just before you got to that point, Jason, was around the tails and resilience in the context of those -- so let me address that first and then come back to your point about investment. The bank -- the group has a pretty disciplined capital allocation approach. That disciplined capital allocation approach is obviously about top line returns and margins, and I kind of addressed that in the earlier comments I was making. But disciplined capital approach is also about risk. And what I mean by that is, and you can tell this by my earlier comments of prudent lending and the type of customers that we lend to and the stress rates that we apply and all rest of it. But that disciplined capital approach is also about making sure those tails are not widely distributed. So it goes hand-in-hand with the same disciplined capital approach that applies to the margin considerations and where we invest RWAs as it does to the risk allocation. Overall, that means that we are not immune to the cycle. But it does mean that we have a pretty resilient business model that is able to cope with most variance, if you like, that we might see in the macro. Now we're forecasting a relatively stable, slow, to be clear, but nonetheless, relatively stable macro environment. We will perform very much consistent with our financial framework in that context. But at the same time, hopefully, as you can tell from my comments, the business is pretty resilient. And therefore, if you're getting variance around the edges of our macro forecast, I don't expect us to jump up and say, actually, our targets have changed. That is not going to happen. That isn't the case. That isn't the expectation. So I just wanted to make the point because you raised the tail point a couple of times. And as we look at the world, that's the way we look at it. Your question about investment, Jason, it's a good one. In short, in answer to the question, are we investing enough to ensure the future sustainability and prosperity of the business and indeed capital generation returns to shareholders? Unequivocally, yes. As an illustration of that and to kind of elaborate around it, the investment plan, I think, as many people in this room will know, is around GBP 13 billion of investment over the course of Accelerate 2030. That's quite a lot of money. It allows us to ramp up investments materially next year as we begin the next stage of the strategic cycle. But to your point, Jason, is it responsive? I mean that is the base case plan as we have played it out. We have 2027 investment allocation is very substantially made now. We have pretty thorough plans actually for the years thereafter. And so I expect us to stick to that GBP 13 billion number that I mentioned. But actually, if you look back at the last plan that we laid out in 2022, we expected there when we started out to have about GBP 4 billion incremental investment in pursuit of our strategic objectives above and beyond BAU. Now actually, we saw the opportunity set expand during the course of that plan. And so we plugged in not GBP 4 billion, but actually GBP 5 billion or close to GBP 5 billion of investment over the course of that plan because we saw the opportunity to expand and also because we felt that we could do so without compromising any of the commitments that we have made, without compromising any of the guidance that we had done. And therefore, why not take advantage of the opportunity that we saw. And the investment portfolio, therefore, became somewhat responsive to the opportunity set that we have seen provided, and this is an important point, provided that it was within the commitments that we had given to the market. So yes, we are making meaningful investment. Yes, we will be responsive to the opportunity. But equally, we will do so within the envelope of commitments that we have made to the market, and that much will not change. A couple of providers to make though. One is we are not going to -- again, we're not going to make that investment without making sure that we can simultaneously meet the financial framework commitments that we have given. Secondly, any given investment and indeed the supply portfolio as a whole is going to have very strong, a, business cases; b, ongoing monitoring of whether or not the investment is meeting those business cases; and c, if they are not, then reprioritization within the overall investment portfolio. And that's a philosophy that informed the last cycle, and it will be just as strong, if not stronger, in the context of this cycle. And obviously, that's important to us. And then a second -- maybe a couple of other points are important to make, Jason. One is added investment is what creates capacity. That is to say, as we build investment within the business, then in turn, it creates more savings as those investments mature because many of them are in after all, simplification and modernization agenda, for example, or other cost savings initiatives. And that's all helpful. And you get somewhat, therefore, of a positive feedback loop between investments and investment capacity. And then the final point, Jason, which is, again, important to us internally and maybe interesting, is change -- what we term change saves. And what I mean by that is productivity of investment. quite a lot of the investments that we're making are driving through what we describe as change saves internally, which in turn is effectively saying for every given pound of investment that you spend, you are getting more bang for that buck. If you think about our GBP 2 billion of -- actually now in excess of GBP 2 billion of gross cost saves from this cycle that we're finishing up now, around GBP 500 million of that was what we described as change efficiencies, which means the change process itself getting more efficient, meaning in turn that you get more benefit for every pound of investment that you spend. So I think all of those points are important.

Yes. I guess sort of concluding on that area of inquiry, most of the banks in the U.K. are advertising spend a pound, save GBP pound type returns on these sorts of actions, which in the abstract, it's impossible to argue that you shouldn't do that. most profitable thing one could do outside of core banking. But equally, we pay dividends and do buybacks out of the net sort of thing. So what are investors to do with the stock of spend a pound, save pound opportunities in the bank? When do we get to the other side where all that's left is the spend a pound, save pound sort of outcome, if you like? Another way to ask, does AI in the medium term lead to a much better cost income and a higher RoTE for banking, if not for long.

Yes, yes. To an extent, I suppose, part of that is answered by that change efficiency point that I mentioned earlier on, Jason. That is to say, as I said, the investment budget gets ever more productive. And part of that is off the back of a positive feedback loop. The more you spend, the more efficient your investment budget can get if you plug it into the right places. Your comment there, one of your points there is about AI in particular. I also might just return to the financial framework point that you made and the operating leverage point that you made a second ago. AI is now endemic across the business. It's not a stand-alone project. It is embedded across all areas of the business, whether that is in terms of customer engagement, e.g. personalization, whether that is in terms of servicing and operations, e.g. automation, whether that is in terms of the relationship managers, e.g., customer assistants and the like. So it is embedded across the organization rather than a kind of a stand-alone profile. What we're trying to do right now is to take it from a set of experimental business cases, which is kind of what it was in '25 to an extent in '26 into something that is much more scaled and that's what we're seeing gradually, as I say, infiltrate the business for a better word. As you can tell from my examples, customer engagement on the one hand, servicing and processes on the other hand and the automation implications of that, that you described it as a cost/income ratio. And I think that is the right way to describe it because it is very much a revenue customer engagement income proposition, every bit as much as it is also an efficiency proposition. And therefore, as AI starts to build in, in the way that I've just described, you should expect to see cost-income ratio enhancements. Now whether -- to your question, whether or not that is linear or exponential, I think we have to see how things play out. Our commitment is to a sub-45% cost/income ratio at the end of 2030. We have a lot of confidence that we'll be able to deliver on that. how much space there will be between 45% and what we actually print in 2030, I think, will depend upon the answer to your question to an extent, just how productive is this stuff. And I think that there are unknowns there. There are plenty of unknowns there. Financial framework, just to get back to your previous question because it may be interesting to the audience. As I said before, the financial framework is just that a framework. It has mid-single-digit income growth, albeit a bit higher than that in 2027 over the course of the plan. It has cost/income ratio sub-50% has RoTE circa 20% along the way, greater than 18% in 2028, has capital generation in excess of 225 basis points. That's the financial framework. At the beginning of every year, we'll deliver more precise guidance to fill that out. That's the plan. That's the intention. Now the financial framework has within it what we think is a positive feedback loop, a feedback loop which kind of perpetuates itself and enables it to be fulfilled. So what do I mean by that? If you look at the framework that we laid out in July, right at the heart of that, we have 3 things. One is significant investment; two is commitment to efficiency; and three is risk management. Those are what we described as the foundations of the financial framework. Now once you have those foundations in place, you're able to make meaningful investment in the business, in our case, the GBP 13 billion over the course of '27 through '30. With that investment, you should expect income growth. That is where a lot of the investment is going after all, customer propositions and the like. As income grows, if you have cost efficiency and cost discipline, you should expect to see improving operating leverage. And as that operating leverage comes through, you should expect to see improving returns and indeed, improving capital generation, but also the ability to continue that investment cycle, i.e., to grow the investments. And that's the positive feedback loop. That's a positive feedback loop that is a very deliberate outcome, if you like, of the financial framework that we laid out. Now there's much of that, that we delivered in the '22 through '26 period. We didn't talk about it in quite that way, but there's much of that, that is hopefully familiar to this audience because that's pretty much what was going on in the '22 and '26 period. We then articulated, I hope, clearly, in July, and it's the intention to continue delivering on that going forward. So to your point about ongoing improvements in operating leverage and the effect upon RoTE that, that has, that's what we're trying to lay out in July, and that's our expectation for the years ahead and Accelerate 2030.

So before I turn it over to the room for questions, the point you made about the deployment of AI potentially being a revenue as well as a cost thing in Europe, we tend to think about it as revenue destructive and cost positive. Whereas when you listen to American banks, it's revenue positive and cost positive. It feels at least from my vantage point that the bank is doing an awful lot around cross-selling, around loyalty schemes, around product innovation to sort of reward loyalty and maybe nit the relationship around the customer in a potentially more robust way. Is that a defense strategy around agentic AI? Is it just good banking? How do you feel about the revenue risks of a more agentic world?

I -- it's a good question, Jason. It's obviously -- it's key. It's pretty core to our line as your comment implies -- your question implies. The first thing I'd say, though, is that depth of relationship and rewards as a general matter is much more than just about AI. It's absolutely core -- leave aside AI, leave aside agentic AI. It is absolutely core to the strategy that we have. That has been true in very large part in the '22 to '26 journey. It is even more true in the context of Accelerate 2030. And why is that? I think basically 2 reasons. The depth of relationship and indeed, the reward strategy in the context of our group, if you think about our business model spanning the entirety of financial services, it's just a natural. If you have that business model, why wouldn't you do that? That's why you have a business model in the first place. And then the second is it's a competitive environment. And we talked at the beginning of the conversation about tight asset margins and the like. Well, in the context of those tight asset margins, it's a very natural response to try to build out the customer relationship so that, for example, you are only having one customer acquisition cost for the delivery of 2 products, forgive me for phrasing it so crudely, but that's basically what it is, which in turn allows you to achieve the economies and a better outcome from a customer point of view, most importantly, and from a financial point of view, from a group's perspective. So again, leave aside AI for the moment. It's just what comes out of the business model that we have. And it is also a function of the competitive environment that we live in. So it's to be welcomed and it's there and it's central. I do think to your point, in the context of AI and in particular, both what we can take advantage of, number one, but also competition, number two, both of those 2 angles, then again, the depth of relationship and rewards has a very important role to play. And so specifically, what do I mean by that? There's no doubt that the AI technology that, as I said, is becoming increasingly infused and embedded within the business is allowing us to approach the customer with a much more enriched data set, understanding what their needs might be and hopefully preempting what their needs might with a richer proposition. It might be personalized pricing on a single product basis, but it also might be a better understanding of what they need in order to achieve their lifetime financial objectives on a slightly more kind of sophisticated and multiproduct basis. And so that's what AI does to us. Now if we think about it versus our bank and nonbank competitors, then again, like your question implies, Jason, it's a pretty effective defensive tool, if you want to describe it like that as well. And what do I mean by that? A customer comes to Lloyd's for many, many reasons, right? They might come for price. They might come for brand. They might come for security. They might come for service, they might come for branches. There's just a stack of reasons why they are going to bank with Lloyd's. If we are able to enrich the discussion with that customer off the back of the unique data set that we have because we've been banking with them forever and because we've got hopefully a multiproduct relationship, then we should be able to understand and indeed tailor our proposition to that customer in a much more effective way, such that if, let's say, an AI agent says actually you can get 4.3% over here versus 4% over there, that's kind of somewhat irrelevant. It's not about a single product relationship. It's about the approach to the customer and the multiproduct discussion that you can have with the customer. And importantly, to your point, the reward setup that you can have with the customer. So for example, if you're a Lloyd's Premier customer, you're going to get discount in your mortgage as an example of that. If you are a customer who has a need within the home insurance area, same thing. That type of approach on both an individual business unit basis, i.e., within the retail product set or alternatively on a cross-business unit basis, i.e., between retail and insurance, that type of enriched relationship, as you say, you can describe it as what we should be doing anyway. You can also describe it as a defense against any given agent saying that actually you want to rate optimize on a single product as an alternative.

Any questions from the room? One in the front here. We're streaming it. Sorry, you've probably read it in the microphone. You're live.

Okay. Two questions, please. One on just big picture on AI. Should we expect sort of all banks have tried to grow their non-NII, try to improve the relationship with their customers. Should we at least expect a mix shift over a period of time as you sort of explore how you can do more with your existing customers with AI? Should we naturally expect that sort of mix to change towards non-NII just naturally, right? That's the first question. And the second one was just Widows. Like every now and then I sort of ask about Widows and always gets excited, but you haven't mentioned [ Widows 1 ]. So what's going on there?

Both good questions. The -- in terms of the mix, I think the applicability and the opportunity from AI is going to arise both on the balance sheet side and on the fee income side, the other operating income side. And so I wouldn't see in AI so much inspiring a change of mix. I mean it might do, but I think if it does, it will probably be at the margin. And to give an illustration of that, a balance sheet example might be -- if we've got a -- again, a Lloyd's Premier customer, then we're going to be approaching that Lloyds Premier customer with a price advantage mortgage offer. That's an illustration of where AI plays a role in that somewhere, at least the more personalized pricing, the more AI is playing a role. That's an example of where it's going to benefit the balance sheet businesses. At the same time, if we have an understanding of a customer's life objectives, we're setting up something called Invest AI right now in the insurance area, for -- that enables a customer to come in to discuss with the AI agent, what is their overall savings profile, what are their aspirations and all the rest of it, basically an AI-enabled tool, invest AI as the name suggests. That is going to enhance our -- ultimately, our relationship with that customer, which comes into the OOI line. So I think an example there where AI is going to establish itself, deliver benefits in the fee line rather than the balance sheet line. But I think you can probably pick out examples on each line is my point. And therefore, mix overall, I think, will stay much the same on an AI basis alone. I do think there's a broader point about how might the business mix change over the course of time and as you know, our strategy has been very much to diversify the business and to make sure that if we ever go into a flat interest rate cycle again, then we are less exposed than we were in 2010 to roughly 2020 period. And that means deliberate investments, we're investing heavily across the business, but deliberate investments in places like insurance pension investments, I'll come back to that in just a second, but also in places like Commercial Banking, BCB, business and Commercial Banking, for example, our Lloyds Equity Investments businesses, for example. And at the edges, I think if you look at the composition of Lloyds Banking Group, a percentage point or 2 of our income line might shift in that direction over the course of the Accelerate 2030 plan. We'll still be a retail and commercial bank for sure. That will be the way that you described Lloyd's both today and in 2030. But I think a percentage point or 2 around the margins might change in that way off the back of that strategy. The insurance pensions investments, the CEO of that business would be absolutely thrilled that you asked that question. So thank you for raising it. It's a really important business to us. It is, in a sense, one of the unique attributes of the business model. We are -- as you know, we are the U.K.'s only scale bancassurer. We're the only people with that business model. And in turn, it's a powerful one. If you look at it, we've got about 10 million customers within Scottish Widows. Only about 2 million of that 10 million customers are actually overlapping with the bank. That itself is a massive growth opportunity. Alongside of that, it is a stable of -- if you add together Scottish Widows and Lloyds, it is a stable of tremendous brands, tremendous capability, tremendous data, tremendous customer base, really ought to be an opportunity for growth #1 and at that capital-light growth, #2. So there's a very big opportunity there. I think we have done some of the work in the '22 through '26 strategy in delivering upon that, but we've got a lot to do. And so what does that mean? It means things like integrated customer journeys. It means things like integrated products. It means making sure that in conjunction with that, we are leveraging the data that we have across that product base and plugging in technologies in the way described. Again, likewise, we have distribution channels that when I talk to insurers out there in the market, they are hugely envious of, not surprisingly. And so the customer connectivity that we enjoy off the back of that is meaningful. When we look at it going forward, we expect the market positions that, that business enjoys, e.g., top 3 positions in workplace, for example, in individual annuities in home, top 3 market positions alongside the banking integration that we enjoy and therefore, the cross-business unit approach to give us really meaningful revenue growth over the course of the plan. We also expect off the back of existing approaches and indeed some new, very tight cost discipline in that business. It's a scale business at the end of the day. It's a business that is susceptible to operating leverage improvements. And with that combination of revenue growth, number one and tight cost discipline number two, we think there's a very promising bottom line for that business. Again, as a stand-alone matter, delivering upon its market position, strong market positions, but also as a cross-group matter, too. And so I think that business is a meaningful source of growth for the group going forward, big opportunity.

And I guess at a slightly geeky level, before IFRS 17, there was GBP 1 billion a year business. And by 2028 or '29, I've only got to making GBP 700 million. So the unwind of CSM and the work that you're doing should make it one of the fastest-growing parts of the business.

Yes. I mean I won't comment exactly on your numbers, Jason, but I think we expect to comfortably beat them. Yes. The -- why is that? It's because of that revenue growth pattern that I mentioned, again, individually and across business unit number one. By the way, reinforced by the depth of relationship rewards strategy that we discussed. I mean, clearly, rewards in the context of a bancassurance proposition, you'll maybe remember this part of Charlie's presentation, Accelerate 2030. Rewards in the context of a bancassurance proposition are key, right? I mean we really -- we've done a lot of -- we are doing a fair bit on that. There's a lot more to do. But that, in turn, leads to the growth expectations within the business. I think we should expect, again, without commenting specifically on your numbers, I think we should expect to deliver comfortably in excess of that type of number.

So if we're lucky enough to have you here a year from now, given the uncertainty that is in the market and the meetings you're having with investors and shareholders, what do you want to be able to say a year from now about the performance of the bank or the things in the market that you'd like to have changed people's minds on? We're asking everyone that question.

I'll be interested in what others have answered to it then, Jason. What do we want to change the market's mind on? I -- in 3 words, cost of equity. Right. Why do I say that? When I look at the overall business, banking is always going to be a little bit cyclical. competition is a fact of life. That's just the way the bank is. But having said that, we are making really quite significant investments in the context of delivering a business which is diversified, a business which, if you like, delivers on the opportunity that we have in front of us, which in turn should deliver a set of sustainable and growing earnings streams, which in turn will deliver for the shareholders a set of sustainable and growing capital distributions. I hope that over the course of the next -- not just a year, but several years ahead, just like I hope we have done in '22 through '26, I hope that we are able to consistently deliver on that promise. And I hope that as we consistently deliver on that promise, then the market over time will give us a bit more credit for that. And I hope that as it does give us a bit more credit for it, then alongside of that or as a result of that, our cost of equity that we currently trade at should come down a little.

Thank you very much. Thanks, everybody, for joining us.

Pleasure. Thank you.

Thank you.