Nov 1, 2012
Executives
António Horta-Osório - Group Chief Executive and Executive Director M. George Culmer - Group Finance Director and Executive Director Juan Colombás - Chief Risk Officer
Analysts
Thomas Rayner - Exane BNP Paribas, Research Division Claire Kane - RBC Capital Markets, LLC, Research Division Michael Helsby - BofA Merrill Lynch, Research Division Chris Manners - Morgan Stanley, Research Division Jason Napier - Deutsche Bank AG, Research Division Arturo de Frias Marques - Grupo Santander, Research Division Manus Costello - Autonomous Research LLP
António Horta-Osório
Good morning, everyone, and thanks for joining our Q3 results call. I'll begin by giving an overview of the further significant progress we have made against our strategy.
So now turning to Slide 1, for those of you who are following the website presentation. The group's underlying performance has significantly improved, in spite of a challenging environment.
Underpinning this is a very strong core franchise, which is producing decent returns, significantly above the group's cost of equity. But we are not complacent.
We are on the front foot and are seeking further improvements through the initiatives we announced last summer at the strategic review. These includes our investment in customer service, where Lloyds now has the highest NPS score of all the High Street clearing banks, and also FSA reportable compliance continue to fall having fallen by 42% over the last 2 years.
We are also continuing to make good progress in strengthening our balance sheet to support these core returns and lower its volatility, while de-risking the business by reducing the negative effect from the noncore and ultimately lower our cost of capital. I am, of course, disappointed that legacy issues, especially PPI, continue to weigh on the bottom line.
However, more broadly, our sustained progress means that we are either reaffirming or improving existing guidance today. Turning first to an overview of our financial performance on Slide 2.
At the group level, our underlying profit has increased substantially due to 2 reasons: first, the further cost reductions we've achieved as a result of our Simplification program; and second, the de-risking of the balance sheet, which has produced the 40% decline in impairments. Both are above our plans set at the beginning of the year.
While income has declined by 14% in the first 9 months, it decreased significantly less by 7% in Q3 alone, and our third quarter banking NIM was stable at 1.93% compared to the first half. I am, of course, as I just said, disappointed to report a statutory loss for the period driven mainly by legacy issues, especially a further increase of GBP 1 billion in our provision for PPI.
The core business delivered a robust performance. However, with cost and impairment reductions offsetting a subdued income line, returns are significantly above our cost of equity with the return on risk-weighted assets improving to 2.6% so far this year.
Further progress on balance sheet strengthening is very clear to see on Slide 3. We have continued to see strong deposit growth, maintaining an above market 6% growth rate year-on-year.
This, together with the GBP 31 billion noncore reduction so far in 2012, already above our improved guidance for the year as a whole, given at the half year, has helped bring the group's loan-to-deposit ratio down to 124% and the core loan-to-deposit ratio to 102%. This is now very close to our long-term target of 100% for the core, which we continue to expect to reach in Q1 next year, at the same time as achieving a 120% ratio for the group.
As you will hear from George, our work to transform the group's funding structure is substantially complete. In addition, capital levels continue to grow, with the group ending the third quarter with a robust core Tier 1 ratio of 11.5%, 20 basis points above June's ratio, in spite of the charges for legacy items.
As you know, there has been much comment on U.K. bank's capital level in recent weeks.
Let me be clear on my view. We are well placed with a robust core Tier 1 ratio, prudently above our regulatory requirements.
Our estimated fully diluted ratio of 7.7% as of the end of September is also well in line to prudently meet our future regulatory requirements. And George will take you through the conservative premises we used in calculating this ratio.
We also have a significantly de-risked balance sheet, both in terms of noncore assets reductions and funding and liquidity and are, therefore, in a strong position to lend and support the U.K. economy, while maintaining strong capital ratios.
And our existing capital guidance already incorporates any additional nominal capital requirements, which have recently been discussed industrywide. For these reasons, I am very comfortable with our capital position.
Moreover, and as previously announced, we continue to explore with our regulators the advantage of becoming a ring-fenced bank ahead of regulatory requirements, which should give us a relative competitive advantage in relation to capital in the future given our lower-risk business model. Turning now to supporting our customers in the U.K.
economy on Slide 4. We have made substantial progress in delivering against our commitments to our U.K.
customers. So far this year, we have helped around 40,000 customers buy their first home.
This represents 1 out of 4 first-time buyers in the U.K. On SMEs, we have continued to grow our lending by 4% net, broadly equivalent to 10% above a market that contracted by 6% excluding ourselves.
We have also committed to lend GBP 1 billion to U.K. manufacturing and have already exceeded our target of supporting 300,000 startup businesses by the end of 2012.
The group was also the first bank to use the government's Funding for Lending Scheme, from which we have already drawn GBP 1 billion. This has given us the opportunity to increase our SME charter commitment by GBP 1 billion to GBP 13 billion of gross lending in 2012, as we said in the half year.
And we are also aiming to further support first-time buyers through using the FLS scheme to offer these customer mortgages at lower rates than would have otherwise been possible. As you can see, we are fully committed to helping Britain prosper.
Being the biggest retail and commercial bank in the U.K., our future and that of the U.K. economy are inextricably linked, as I have said now many times.
Therefore, helping Britain to prosper is the best thing we can do for Lloyds' shareholders. Moving on to Slide 5.
I would also like to briefly share with you some examples of how we are investing in our core business, to build growth and sustainable returns for the future. We are investing in our distribution capabilities, including in Retail where we have seen Internet customers increase by more than 1 million in last year and mobile customers by nearly 3 million.
We have continued to refurbish our Lloyds branded branches and extend their opening hours to better meet customers' needs, as we have already done in Halifax. And in Wholesale, we have seen the number of customers using the Arena online portal grow by 20% in just the last quarter alone.
Among the many initiatives to improve products and services, our core franchise is being further strengthened by investments to make account switching easier in Retail. In Insurance, we are helping companies meet their pension reform obligations, and we have invested in ways of assisting referrals into wealth.
We are also already seeing the benefits from our investments from the evolution of complaints, which have fallen 42% in the past 2 years, and from customer Net Promoter Scores, which have been rising markedly across all brands. We are, therefore, quarter after quarter, providing simple, additional value for money and transparent products and services that customers want, helping us build strong customer loyalty and a lasting competitive advantage.
This will ultimately strengthen returns for our shareholders. I will now hand over to George who will talk us through the results in greater detail.
George?
M. George Culmer
Thank you, Antonio. Good morning, everyone.
As you've just heard and can see on Slide 6, we delivered an improved underlying performance in the first 9 months with underlying profit up 148% to GBP 1.9 billion for the group, and broadly flat year-on-year, GBP 4.7 billion for the core business. Management profit for the group was up 29% to GBP 2.2 billion, which is after a number of broadly offsetting items, mostly reflecting accounting and timing differences and the active management of our balance sheet, funding and liquidity positions.
With prevailing low interest rates and reduction in wholesale funding spreads, we've continued to reduce and shorten the maturity of our gilt portfolio. We've also been active in liability management, and we've seen an increase in the mark-to-market of our own debt, all of which have impacted management profit.
Other volatile items of GBP 618 million is mostly the timing and accounting and economic mismatches as we hedge out the group's interest rate and FX exposures. And the fair value unwind of GBP 212 million is well down on last year, due to the decrease in impairment charge.
Looking now at the drivers of underlying profit. Underlying income in the third quarter of GBP 4.6 billion was slightly ahead of Q2, with core income decreasing by -- increasing by 2%, and more than offsetting the reduction in noncore, which now makes up only 6% of total income, down from 11% at the same point last year.
The core net interest margin for Q3 was again stable at 2.32%, with asset repricing offsetting increased deposit spreads, while the noncore margin was slightly down at 0.49%. The decreasing proportion of noncore assets resulted in an overall group margin for this quarter of 1.93%, slightly above Q2's 1.91%, and in line with our full year guidance.
Looking briefly at costs and impairments. As stated on Slide 8, we've delivered a reduction of 5% in total costs in the first 9 months while investing in our core business.
This has been primarily driven by Simplification program where run rate savings have now reached GBP 660 million, an increase of GBP 148 million since the half year. For the full year, we expect total cost to be close to GBP 10 billion, representing a reduction of around GBP 1 billion since 2010, and close to the initial plans set for the strategic review, 2 years ahead of the original plan.
In terms of impairments, in Q3, we've seen a continuation of the trends we saw at the half year with prudent risk appetite and strong management controls continuing to drive improved portfolio and asset quality. Impairments of GBP 4.4 billion are down 40% year-on-year.
And we've got continuing good experience in our core retail secured and unsecured book. For the full year, we now expect an impairment charge of approximately GBP 6 billion, around GBP 1.2 billion lower than our expectations at the beginning of the year.
If we now look at the movement from the management profit to the statutory loss in Slide 9. Simplification and Verde costs totaled GBP 731 million with Simplification comprising GBP 332 million of this and Verde costs GBP 399 million.
On PPI, as you've heard, we saw a decline in the volume of complaints received during the third quarter. However, it remained above the level, which we anticipated at the time of our half-year results.
And as a consequence, it's appropriate to increase the provision for expected PPI costs by GBP 1 billion. This increases the expected cost of contact and redress, including administration expenses to GBP 5.3 billion, which is our best estimate given current complaint volumes and revised forecasts.
Redress payments and costs incurred to the end of this amounted to GBP 3.7 billion. We have also prudently allowed for a further $150 million in relation to the legacy German insurance business given potential individual claims trends in the German courts.
Adjusting management profits for these statutory items, the group delivered a statutory loss before tax of GBP 583 million and a tax charge of GBP 419 million, which is impacted by changes in U.K. corporate and insurance tax rules.
Moving on to the balance sheet on Slide 10. Again, as you're already heard, in the third quarter, we have taken further action to manage and strengthen the balance sheet.
Strong deposit growth in the reduction in noncore assets have helped us drive a $65 billion reduction in Wholesale funding in the first 9 months, GBP 52 billion of which was in short term Wholesale funding. Maturities of less than 1 year and now earning 33% of our Wholesale funding compared with 45% at the start of the year and 50% in 2010.
And less than 1-year money market funding now accounts to only 19% of total Wholesale funding, and 7% of total funding including deposits. We've also maintained a strong and prudent liquidity buffer, with total liquidity at the end of September of GBP 211 billion, exceeding total Wholesale funding and being more than 3x our short-term funding.
Our primary liquidity of GBP 95 billion now represents more than 2.6x our short term money market funding. Given our strong liquidity position, in recent months, we've repurchased more than 10 billion of our senior debt as part of managing our overall Wholesale funding profile and optimizing future interest expense.
Looking next at the noncore book. As you can see on Slide 11, we delivered a further reduction in noncore assets of GBP 8 billion in the third quarter, with a year-to-date reduction now amounting to GBP 31 billion, GBP 27 billion of which, comes from nonretail assets, which are down by approximately 30% so far this year.
The year-to-date reduction of 22% of total noncore assets to GBP 110 billion continues to track the fall in RWAs, which are also down 22% to GBP 85 billion. We are now expecting to reduce noncore assets by around GBP 38 billion this year, GBP 13 billion ahead of the original plan and maintaining a strong rate of reduction seen in 2011.
And we expect to achieve this, while being capital accretive and delivering lower impairments than our original guidance. Moving on to capital on Slide 12.
We continue to maintain a strong capital position. Since the beginning of the year, our core Tier 1 capital ratio has increased by 70 basis points to 11.5%.
This increase was principally driven by the reduction in risk-weighted assets of 8%, with management profits partially offset by statutory and other items. The fully loaded Basel III core Tier 1 capital ratio increased to an estimated 7.7% at the end of September, while the total capital ratio was 16.6%.
Going forward, we will continue with our strategy to maximize capital generation, while the successful resolution of open items, such as the treatment of insurance and its capital structure, recognition of defaults, CVAs, and SMEs could represent significant upside potential to our pro forma fully loaded numbers. I remain very comfortable with our capital position and outlook.
And I'm confident of meeting our guidance to be both prudently in excess of transition requirements, and of course, to comply fully with CRD 4 and other future revenue regulatory requirements. That completes my review of the financials, and I would now like to hand back to António.
António Horta-Osório
Thank you, George. So in summary, the group's underlying performance has been improving and in an environment, which continues to be challenging.
The core business is also becoming more stable, while maintaining returns that are significantly above the group's cost of equity. We have made good progress on strengthening the balance sheet with, again, greater noncore runoff than we expected, both at the beginning and middle of the year, and continued strong above-market growth in deposits with our funding repositioning now substantially complete.
So overall, we believe we have continued to deliver on what we said we would and a bit more. This progress has allowed us to reaffirm existing guidance and improve it in several key areas.
Firstly, our NIM is expected to be in line with guidance at around 193% for 2012. We now expect total costs in 2012 to be close to GBP 10 billion, a reduction of around GBP 1 billion since 2010 and above our expectations at this point in time.
On impairments, economic conditions and prudent management of our book has allowed us to improve our 2012 guidance to around GBP 6 billion. We now expect a greater reduction in the noncore portfolio of around GBP 38 billion for 2012, around GBP 13 billion more than we anticipated at the beginning of the year, and done in a capital accretive way as committed.
We continue to expect to reach our long-term core loan-to-deposit ratio of 100% in Q1 2013 and to achieve a 120% ratio for the group as a whole at the same time, both approximately 2 years ahead of the target set at the strategic review last year. Finally, with respect to our medium-term financial targets, we remain confident of meeting, over time, those that have not already been achieved.
Thank you. This concludes our presentation.
And I would now like to open the line to questions.
Operator
[Operator Instructions] And your first question comes from Tom Rayner from Exane BNP Paribas.
Thomas Rayner - Exane BNP Paribas, Research Division
I'd like to ask a question on deposit growth because obviously still continuing at quite a decent pace, and you're going to be getting pretty close to your sort of target levels in terms of loan-to-deposit ratio, both at core and for the group. And I'm just wondering what we should really expect to see once you have reached those metrics?
I mean, are we going to see deposit growth slow? Might we see loan growth pick up?
Or will we see, possibly, the loan-to-deposit ratio dropping below 100% in core, maybe below 120% at group? And the reason I'm really asking is I'm trying to get a sense of what the margin implications might be of those different potential outcomes?
António Horta-Osório
Sure, Tom. That is a very valid question, which we have debated long enough as we are now doing our budgets for next year, and we're doing our 3-year plan.
So what we think we'll do is the following: we want, as usual, to meet what we have said we would. And therefore, you can expect similar behavior in terms of us achieving the target of 100% by March, which will be at the same time, as I said, 120% at group level.
And from then on, once the targets are achieved, as you were asking, we think we will probably grow savings at the lower rate in line with the markets. Because, as you say, we don't need the money, we are generating more than GBP 20 billion of actual liquidity every quarter, year-to-date, more than 60.
And we do believe that by then, also assuming, as you asked, that our core loan book should start to increase by the middle of next year, as I said, at last results presentation, we should increase our deposits as a whole at around the market level, so slow it down to market level, given all these economic assumptions.
Thomas Rayner - Exane BNP Paribas, Research Division
And the sort of margin implications possibly of being able to slow that growth in deposits?
António Horta-Osório
Well, you have seen recently, as a result, I believe, of the liquidity rules that have been changed in July, and also, I think, from the expectations of the Funding for Lending Scheme. And I say expectations because, as you know, the drawings from the Funding for Lending Scheme have been very small up to date, just because, as normal, it takes 3 months between a loan being approved and the actual disbursement of the loans.
So I think the FLS impact in the market at the moment is just a matter of expectations. The real impact has been, in my opinion, from the significant change in liquidity rules, which we have mentioned several times before, and we thought was exactly the right thing to do.
Therefore, as you have seen deposit prices according to this -- to what happened, deposit prices have been coming accordingly down. Deposit prices are on a downward trend, and I think that trends will continue in the foreseeable future, given that the liquidity rules are still being executed in terms of the bank's decreasing the liquidity buffers.
And the funding for lending scheme will become a reality as the approved loans will be drawn over the next few months.
Thomas Rayner - Exane BNP Paribas, Research Division
I just have one very quick one. Sorry, I didn't advertise the second one.
But did I hear you correctly, you mentioned the noncore one-off as being capital accretive? Is that a slight change in language?
I know the constraint has been previously, as far as possible, within sort of capital neutral. Capital accretive might sound like a slight increase in confidence over how that's going.
Is that better?
António Horta-Osório
Well, I mean we have always said, if you remember at the strategic review, we have always said that we would do the reductions from 12 to 14 in a capital accretive way. Then we actually did 11 reductions in a capital accretive way, as well.
And when I -- I think this is more from a conversation you and I had in one of the meetings we had, where I told you that if I had to arbitrate, I would go as quickly as possible so it could potentially become close to 0. It is a fact that we have been going much faster than we thought, still in a capital accretive way and also with lower impairment guidance, which I really think is quite robust and high quality results from all our teams, and we will continue doing so.
I will continue to go as quickly as possible in a capital accretive way and within the impairment guidance we have just given to you.
Operator
Your next question comes from Claire Kane from RBC.
Claire Kane - RBC Capital Markets, LLC, Research Division
I just have a couple of questions please. The first is on your liquidity management.
You seem to have recorded another quarter of strong gains I think around GBP 650 million on sales of your government bonds. And I was just wondering if you could tell us how much more we could expect to come through from this?
And give us maybe, an update on your unrealized gains in the AFS reserve, which I think were about GBP 1.3 billion at the end of June? And then, my second question really is on capital.
I wonder if you'd be able to give us maybe a bit more color on the potential upside regarding your conservative assumptions relating to the reductions? And whether there is any change in your view relating to the focus on absolute capital levels versus RWAs?
And if you could give us any color on what that absolute target is going forward through 2013?
M. George Culmer
It's George. I will kick off answering your question, a few questions there.
First up, I'd like to deal with them in reverse order. So the capital position, my first comment, I have been in the business now for about 4 or 5 months.
When I first came in May, I said that I thought I was very comfortable with the capital position of the company and the prospects of the company. And I'm very comfortable repeating that today after everything that sort of happened in the summer in terms of press comments and speculations.
I remain very comfortable with the capital position of the business. In terms of some of the specifics, in terms of when we look at things like our fully loaded Basel IIIs, as you said, gone from 7.1 to 7.7 in the first 9 months of the year, and that's after things like the PPI, et cetera that we have taken there.
Within that, we do, we think, show that on a pretty prudent basis. So within that, for example, we do share the insurance on a -- for Article 45 as opposed to an Article 46, and switching from one to the other would give you right about just over a percentage point of improvement in our ratio.
We take full allowance, for example, for things like CVAs, and if there was a carve out for CVA corporate, that would give us another 20 basis points on that. We also assume that we get 90 days default, for example, of mortgages.
If we went to 180, that would give us a further 20 basis points on that. And proposed -- if there was this proposed 25 discount on SME, RWAs, that will be another 10 basis points.
So when we show the fully loaded externally, we use a very, sort of what we believe is a prudent and appropriate way of actually presenting that ratio. And as I said, there are a number of things where there is upside and a number of those matters we are very active in terms of lobbying and hoping to secure on.
So we continue to be capital generative. We continue to throw off 20 to 30 basis points of capital from our management actions.
We continue to benefit from the reduction of risk-weighted assets, and we've managed to drive those capital ratios forward whilst at the same time, putting aside significant sums of PPI. So I think it shows the effectiveness of our strategy.
And the list that I went through, hopefully, also outlines to you the appropriate way with which we present that ratio. To some of your other questions, in terms of things like liquidity management and as such.
Yes, in terms of, again, as I said in the low interest rate environment, we have taken advantage to look at our funding, our liquidity, our balance sheet position. Yes, we've now realized gains of about GBP 1.3 billion over the year.
That's quite deliberately in terms of coming short. We see no benefit in holding some of those longer duration instruments with what the real economic yields are.
So we've taken advantage, actually, of coming out of those instruments and coming shorter and more liquid in the current environment and the current interest rate environment, and we think that's entirely appropriate. I'm not going to give you a forecast for the fourth quarter in terms of precise amounts.
But given where interest rates remain to be, I would expect this to continue to be active, but I'm afraid I won't give you a precise amount. And in terms of available reserves on the balance sheet, there is still a significant amount.
I think, it's of the order of about GBP 3 billion -- GBP 3 billion or so, so there's still significant funds there.
Operator
Your next question comes from Michael Helsby from Merrill Lynch.
Michael Helsby - BofA Merrill Lynch, Research Division
I've got 3 questions, if I can. Firstly, thank you on the cost guidance, GBP 10 billion this year.
It still feels like you got quite a lot of Simplification benefits to come through. I've actually got GBP 10 million for next year.
So was wondering if you could just give us a comment on have you got big investment plans for next year to offset the simplification benefits. So if you could give us some color on that, that would be fantastic.
I think you mentioned, António, the improvements that you can still see coming through in core ROE because of all the things you set out at the strategy review. I think at the heart of that was this GBP 2 billion of incremental OOI.
I know RDR is just around the corner, so I was wondering if you could give us an update on that other income improvement. Because clearly, that's something that we just see no signs of just yet.
And then finally on bad debt. I note that your GBP 6 billion guidance is clearly a lot lower than what it was, and we appreciate that, but it does imply a pickup in the fourth quarter.
I was just -- to be picky, I was wondering is there anything specific that you can see? Or is there anything in the forward looking credit indicators that you can see to suggest that?
Or you're just being prudent because that's your style?
António Horta-Osório
You are being a little bit picky, Michael. It is a very boring retail and commercial bank business, but not absolutely like a clock.
It is done in the same line. But, Juan, we'll ask you -- Juan, our CRO, we'll ask you about the bad debt forecast and guidance for the first quarter.
Juan Colombás
On the impairment performance, as you can see it is going really well, so the cost of credit that we are seeing this year is around 40 basis points and in the core book, I'm speaking of the core book. And compared with the 66 basis points last year, it is true that it is implied Q4 growth in total impairments, but we are not seeing any guidance telling us that things are getting worse.
The opposite -- I would say that the leading indicator that we have in our portfolios are showing that the positive trends that we have seen in the past are still there. So it is -- I would take it -- as we said in Q1, there is between quarters some seasonality the way of accounting for the provisions, but I could not say that there is any change in trend whatsoever.
António Horta-Osório
On the other 2 questions, Michael, in terms of the cost guidance. As we just said, will be close to GBP 10 billion this year.
We have, at the beginning of the year, improved our guidance from the GBP 10 billion for '14 to GBP 9.8 billion. And as we just said, we are a bit ahead of our plans, so I think you should have that message plus the fact, as a consequence, that our nominal costs will go down again next year.
That's what I would say. In terms of core return on equity, correct what you said, it keeps improving.
And we keep investing for the future because we are investing around 1/3 of the cost savings as we committed and said last year. Initiatives for the future, it is also true as we said as well last year, that we would invest as we would see the visibility of the cost savings, and depending on the economic outlook.
Because given we would be driving the car, in the sense, it would first generate the cost savings, and then we would invest. We are doing the investment a bit slower than we had from a year ago because the economic environment has significantly worsened.
And we think that is the right thing to do for our shareholders. And what we have committed was that ROI, with which in the future, around 50% of total income, which we still think it will meet.
Because we said, a year ago, given the significant worsening in economic conditions that happened in the third quarter of last year, we said we would meet these objectives over time, and we still believe they will be met over time. But given that GDP is much worse, Michael, it is normal that we model the investment in our growth initiatives according to that.
And we do a better trade off, which I absolutely think, as I just said, is the right thing to do for our shareholders. The RDR implications, in terms of your last question, of what was recently announced are not very material for us.
It means basically that it is not economically worse for us to offer 100k advice. So for customers holding less than GBP 100,000, it is not worth it for us to offer advice.
We'll do indication only, which we are absolutely prepared to do in terms of the investments in our platform execution only that we were doing. And that the impact of these small changes quite is not material for us basically.
Operator
Your next question comes from Chris Manners from Morgan Stanley.
Chris Manners - Morgan Stanley, Research Division
I had just a couple of questions for you, if I may. The first one was on risk weightings.
And I know the SEC has come out saying that they're looking at potentially introducing a dual reporting of risk-weighted assets with standardized risk-weighted assets, as well as modeled risk-weighted assets being displaced by banks. And also, I know Andy Haldane has been talking about putting floors on certain asset categories.
So I just thought I'd ask what you think about the chances of increasing risk weightings on any of your asset classes, particularly on U.K. mortgage size would be driven by regulation?
The second one was just maybe if you could provide a bit of color on the net interest margins into 2013? I mean, should we expect that to continue to drift up?
Because I guess you've got shrinking noncore, which is a margin, obviously, as well you've been able to take down your liquid asset buffer indicating that maybe there's more leeway with that. So should we be building in maybe a bit more net interest margin build into next year?
And those are the 2 questions.
António Horta-Osório
I will answer the first one and George will take the second one. In relation to your first question, I really think that there is a lot of noise over this issue.
And I really think you should look at the facts. And I think the facts, in terms of regulatory environment in the U.K., are very clear.
And when you think the financial stability, as I have said many times, is a holistic solution of 4 pillars, where you have higher capital requirements, stricter liquidity, stronger supervision and recovery and resolution mechanisms of which, ring fencing is a key part, you should think, in my opinion, that given the U.K. is much better than Europe now in capital, supervision, and recovering resolution - ring fencing, liquidity rules should not be also too strict.
And therefore, as per what happened in July, I think that the release of liquidity rules, the relaxing of liquidity rules was absolutely the proper thing to do in terms of financial stability, in terms of a holistic solution for financial stability. The second very important point that regulators changed together with the government, was the Funding for Lending Scheme, which I think requires a lot of political will in order to be implemented.
And I absolutely think, as I said in Q2, it's the right thing to do for the U.K. economy.
And therefore, as a consequence of this, Chris, I think that when you look at those 2 facts, which are really the facts, you can see what direction the U.K. authorities are taking in terms of financial regulation.
And I do not think, as a consequence, that they will, at this point in time, do any change in terms of risk-weighted assets apart from what is said, which is basically the slotting in CRE, whose impact has been widely discussed. I do think that what they might ask, which I would see as a fair and favorable thing, is for banks to be more transparent in terms of how they calculate their risk-weighted assets in order for the sector and the industry to be more comparable, and that is the feedback I have been perceiving in my high-level discussions with the regulators.
But I do not, as a consequence of being very clear, foresee any change in risk-weighted assets for mortgages, specifically as you ask. And I absolutely think, as per the changes in the Funding for Lending Scheme and the liquidity rules, that the U.K.
authority is absolutely committed now to 2 objectives, both -- first, financial stability; and second, supporting lending and the U.K. economy.
M. George Culmer
And then on the NIM stuff, I mean you've obviously seen from Slide 7 of the presentation in terms of progress to date and the 1.93% and how that breaks down between the discreet quarters and the sort of core and noncore. As you've seen, I mean, our expectation is still for the full year to come in round about for the group, round about 1.93%, and that's on a year-to-date basis rather than discreet looking forward performance, but we would be about 1.93% for the year-to-date for 2012.
In terms of the look forward after that, I think we have been speaking about, we would expect to see the margins improve as you move through 2013, starting from about sort of Q1 onwards. That's our current expectation.
What's driving that? A number of things, which we've also alluded to or covered.
Part as you say is the proportions between the core and the noncore. And again, you've seen that the core being constant at the GBP 232 million and the decreasing proportion of the noncore book, which will continue to run off and continue to run off in an accelerated accretive way.
That's part of it. Then you have the overall sort of funding mix of the group.
And in terms of the shift to the 120% loan-to-deposit ratio with the core at 100%, which we would expect to hit around Q1. And then within that, again, as Antonio has mentioned, the sort of pricing of those funds in terms of easing the pressure on the deposits and the improvement that we've seen in our wholesale funds as well, so we should get a benefit come through from that.
Variables around that would be things like -- I mean, in answer to one of your earlier questions, yes, we've been coming out of some of the long-dated gilts, because we think that's the right thing to do. That has slight drag going the other way.
We've been deploying funds to obviously buyback the Wholesale funding, which is a contra to that. So those are sort of variables that sit around that.
But it's -- we would expect it to start the margin to increase, predominantly driven by the sort of fundamental change in the balance sheet structure of the business.
Chris Manners - Morgan Stanley, Research Division
Okay, fantastic. So maybe a few basis points a quarter or something but nothing really sharp?
M. George Culmer
I'll leave you to decide.
Operator
Our next question comes from Jason Napier from Deutsche Bank.
Jason Napier - Deutsche Bank AG, Research Division
Two questions, please. The first, I notice in the disclosures around noncore run off you make the comment that you think that full year capital accretion from noncore be at a lower level from that of the first 9 months.
I was wondering whether you could say, whether that's just caution or whether there are deals that have closed in the first month of the quarter that sort of make that a fact. And whether you'd be comfortable saying that you feel 2013 would also be executed on a capital neutral or capital accretive basis.
And then secondly, the disclosures around NPL ratios and so on are sort of absent from this quarter, and we always appreciate sort of balance of quantity versus quality on disclosures. But I just wonder whether you could give us a number, the proportion of loans that were impaired at the end of the quarter, as well as the pound figure, just so we can sort of track the sort of roll off of impaired assets for the group.
António Horta-Osório
George will address the first one, and Juan will address the second one.
M. George Culmer
Hi, Jason. George here.
Yes, to answer your question, part caution, part fact would be the answer to that. We will be accretive in regards to the disposals of the duration of the year.
Obviously, as you might expect, there is a multitude of transactions that span those 12 months. And the commitment is that in aggregate, we will be accretive, which might change from deal to deal and from day to day.
So I would expect it to come back slightly from where we sit in terms of the net accretion of the 9-month stage. But please, please, please, don't read anything into that in terms of trends, doability, all those sort of things.
It's just in terms of actually how these deals come along. And I suppose, just to reinforce that, our expectation will be that our commitment will be that in terms of the noncore run down for 2013, yes, that will continue to be accretive, Jason.
Juan Colombás
On impairment levels, you can see in the IMS that we have disclosed a coverage ratio for the noncore book that is going up by 4 points since the beginning of the year. The total impairment levels for the group are coming down as a consequence of cleaning the balance sheet that's going in the noncore book.
In retail, I would say that we are having flattened impaired assets. The good news is that more complicated portfolios, such as, especially, lending that we have in the mortgage book, as we told you in the previous quarters, is flattening as well.
So they are performing as we are expecting in a good sense. And so overall in retail, I would say it's more of the same, so flattening in mortgages and improving performance in the unsecured books.
In the Wholesale book, as I said, nothing new, so also increasing the coverage ratio of the Wholesale core book. So that would be my summary.
Jason Napier - Deutsche Bank AG, Research Division
So you said that the proportion of group impaired assets that were noncore was sort of roughly the same number last quarter, and coverage was about a percent lower. So just to sort of be clear, the 9.6% of loans that were impaired at the half is down again in aggregate?
Juan Colombás
The loans are close to 9%, and the provisions are slightly up as a coverage ratio.
Operator
Your next question comes Arturo de Frias from Santander.
Arturo de Frias Marques - Grupo Santander, Research Division
I have 3 quick questions, if I may. The first one, the kind of long-term strategic question is on core returns.
Looking at your quarterly numbers in terms of what the return on risk weighted assets have been doing at core, we have seen after a few quarters in which it looked to be fairly stable in the region of 2.3%, 2.4%, maybe 2.5% return on risk weighted assets. We have seen in this Q3 a substantial increase.
We have gone to nearly 2.9% on your disclosure, which is, obviously, an extremely interesting return of close to 30%. Listening to your items in terms of stable margins, increasing volumes, falling cost, on falling impairments, one would think that there's only one way for this return on risk-weighted assets at core, and that's up going forward.
So the question would be, do you think this increased RoRWA at core in the region of 2.9% is sticky and will remain in that ballpark in coming quarters? That will be the first question.
The second question is if you can update your position on dividends after all these noise, as you call it, around capital, around RWA, et cetera, you look increasingly comfortable with your RWA trends, and with core Tier 1 trends, and with the positive impact that we might see from CRD 4. So what is the impact of all that on your dividends?
And, well, obviously, if you could tell us when you expect to start paying dividends, that would be fantastic? And finally...
António Horta-Osório
Like how much?
Arturo de Frias Marques - Grupo Santander, Research Division
Exactly, how much per quarter. And finally, at Wholesale, there's no information on the different divisions within core, Retail, Wholesale, et cetera.
I remember that in the previous quarters, we have seen a clear weakness in Wholesale with disappointing returns, et cetera. Could you give us some quick comments on how Wholesale is performing in Q3?
António Horta-Osório
I will take the first question, and George will take the 2 major questions. So in terms of your first question, which is quite comprehensive and very important, by the way, I think you are basically right.
Our core returns, as I said in my speech, are behaving very decently in a difficult economic environment, both from a GDP perspective and from an interest rate perspective. And the way I see it, going forward, is impairments have substantially come down.
We are around 40 basis point in the core book, which is within the guidance we gave you on a long-term view for '14, where we said 50 to 60, the core being on the lower end of the range. So we are inside the guidance, which means we have high coverage on the core book than we thought 15 months ago given all the work that has been done.
And we think it will be around that number, so we are foreseeing, if you want, stable as a percentage in Q1 going forward. Cost will continue to come down and eventually stabilize.
But revenues, as you said, which are coming down, although being more than offset by costs and the impairment and therefore, the return on revenues, has been increasing. The revenues will start flattening as you see in the quarter.
NIM will start to increase, as George said, in our view. From Q1 onwards, the group NIM will start to increase.
And I believe that the core book will start to increase, as I said, in July, around June because we will have finished our repositioning of the mortgage market share, and we are having the impact of good growth in net lending for SMEs. Mid corps should start going up by January, as I said, in July.
And large corporates will start to increase again, given that we no longer have the cost of funding disadvantage with the FLS scheme. So revenues will eventually start to increase, probably after the core book starts to increase in June next year.
And therefore, when you combine all of these, so you have positive jars going forward, and stable RWA are slightly increasing as the core book increases, I do believe that the core returns will increase over time. I think you are absolutely right about that.
George?
M. George Culmer
On the dividends, obviously, it's going to be an ultimately frustrating answer for you. But I mean, as we've said before, I mean there are a number of pieces that need to fall into place.
We have the ICB paper. We're still waiting for the CRD 4 and the detail on the CRD 4, which I know is now being pushed into next year.
But it doesn't mean we're sort of waiting and doing nothing. I mean the -- going back to an earlier answer, the strategy that we pursue is the capital generative strategy, we add through managing profits 20 or 30 basis points per quarter to the capital ratio.
We add to the ratio through the deleveraging of the balance sheet. Yes, those have been mitigated by some of the one-offs, PPIs, et cetera over the last few quarters.
But the strategy we pursue is the right one. And what we await is clarity on the calibration.
We'll be able to respond, I think, more specifically after that.
António Horta-Osório
And just to be very clear, we really think the noise that you saw in the press, we have, as we told you in July, we have spoken to our regulators and told them we would like to have the discussion as soon as we have visibility on the CRD 4 details, which, as George said, may have significant upside impact on what we are assuming at the moment. And they said yes, so will have that discussion with the regulator when the CRD 4 paper is out, and we will then have a path to dividends, which we'll share with you.
unfortunately, and this is totally out of our control, this paper is being [indiscernible] consequently has been repeatedly delayed, which is a bit annoying. But we are, as George is saying, following a capital maximization strategy, which is generating significant capital.
So we are, as I have said many times, going absolutely in the right direction. We have to see the intensity with the CRD 4 paper details, and we will then have a discussion with our regulators in terms of the light with path to dividend.
M. George Culmer
In the last -- but on Wholesale, you're right. In Q2, remember Wholesale had a weak second quarter, mainly following market activities and low levels of activity.
And it was well done. What I can say, you're right, we don't disclose divisional information, but in Q3, Wholesale has come back, good forms in rates, good DCM positions, and you've seen a very material impact -- pickup in Wholesale's performance, if I look at Q3 2012 versus Q2 2012.
So it's a very significant pickup.
Operator
Your next question is from Manus Costello from Autonomous.
Manus Costello - Autonomous Research LLP
I had a couple of questions on the NIM, please. One near term and one longer term.
In the near term, I wondered if you could give us some color on what moved the NIM in 3Q versus 2Q? Particularly, how much benefit you gained from the change in the base LIBOR spread and the SVR repricing, which had a solid quarter.
If you could break down how that moved will be helpful. And on the longer-term NIM, you talked about the benefits the FLS could have on the deposit pricing side of the equation.
I wondered if you had any thoughts on what might happen to asset repricing with the FLS. Because when you were talking about the variable, George, you did not mention asset prices as a variable for NIM next year.
M. George Culmer
It's George. In the short term, for example, on the short-term on NIM, if I look at the 9 months, if I start there, I think some asset pricing has been offset by deposit pricing if I look through the 9 months.
If I look, though, at -- in terms of Q3 in isolation, asset pricing was about double that, actually, over deposit spread and mix. So we actually saw asset pricing pull ahead....
Manus Costello - Autonomous Research LLP
And that was SVR driven basically?
M. George Culmer
In the third quarter. SVR has been part of that.
Just remember SVR was May, so that's been flowing through that. So we saw in Q -- as you say, in Q2, a bit of asset pricing pull ahead.
António Horta-Osório
And relating to the FLS comment, Manus, what I think is the following. I think that Funding for Lending should be, as the name indicates, funding for lending, and that's what we're doing.
So we are estimating that we will have around 100 basis points advantage in the Funding for Lending costs, which we are passing through to customers. And we are using our previous governance and controls of the NLGS scheme, which was, by coincidence, exactly at 100 basis points passed through to customers.
We are using the same scheme, but more broadly because we now use FLS for all customers in SMEs and mid corps, so without exceptions, which is much broader than NLGS. Therefore, I do not think that, in itself, it has a big impact our margins.
It will have an impact in volumes, as is our intention. And therefore, in terms of prices, you can expect, in our case, that our prices to customers are having debt passed through of 100 basis points, which I think is broadly margin neutral.
As I said in the beginning of this call, I think that both the expectations of the FLS scheme and the big changes to the liquidity rules are correctly bringing deposit pricing down, which has a positive impact on our margins, both from a deposit, pricing perspective and also from the possibility of moving this huge amount of liquid assets we have in gilts, as we said, and in banks, central bank deposits into buybacks of our debt, where we have an average pickup of around 150 to 200 basis points.
Manus Costello - Autonomous Research LLP
You think the FLS will only benefit or only bring down prices to the marginal lending, which is FLS funded? It won't have any impact on other lending in the economy, which is not necessarily directly FLS funded?
António Horta-Osório
No, I mean I don't think you can see it that way because it's not on the marginal lending. It is on the gross lending, which is the new lending because the net lending is the objective of this scheme.
But for you to pass through the 100 basis points to customers, you have to do it in all gross new lending. And that's why as also, Paul Fisher from the Bank of England said, he expects the drawdowns of the FLS to be significantly higher than the net lending increase in the economy.
Because for you to pass through the price benefit, you have to do it in gross lending. And given that customers will pay loans, as you know, the net lending impact is much smaller.
So I do expect, at least in our case, all gross new lending to SMEs and to mid corps to follow the Funding for Lending Scheme. All the mortgage market, which is a different story, what we have done is to allow -- to allocate GBP 500 million to a new 7-year fixed rate mortgage to first-time buyers because we do think that it is the best option for clients at the moment, given the very low level of interest rates is to lock out rates for longer.
And that's why we have made the 7-year first-time buyer mortgage fixed rate much cheaper than what we had before, and also, much cheaper than what we had for the 5-year one.
M. George Culmer
I think at that stage, we'll conclude the call, actually, because we're slightly over our time. So Thank you very much, everyone.
If there are further questions, please do come through to the Investor Relations team.
António Horta-Osório
Okay, thank you very much, everyone. And again, thanks for joining us.