Mar 1, 2013
Executives
António Mota de Sousa Horta-Osório - Group Chief Executive and Executive Director Mark George Culmer - Group Finance Director and Executive Director Mark Fisher - Director of Group Operations
Analysts
Thomas Rayner - Exane BNP Paribas, Research Division Raul Sinha - JP Morgan Chase & Co, Research Division Chris Manners - Morgan Stanley, Research Division Manus Costello - Autonomous Research LLP Ian Gordon - Investec Securities (UK), Research Division Michael Helsby - BofA Merrill Lynch, Research Division Rohith Chandra-Rajan - Barclays Capital, Research Division Peter Toeman - HSBC, Research Division Chintan Joshi - Nomura Securities Co. Ltd., Research Division Sandy Chen - Cenkos Securities plc., Research Division Claire Kane - RBC Capital Markets, LLC, Research Division
António Mota de Sousa Horta-Osório
Okay. Good morning, everyone, and thank you for joining us for our 2012 results presentation.
In the first part of my presentation, I will give an overview of our 2012 financial performance and describe the substantial progress we have made on our 3- to 5-year journey to become the Best Bank for Customers. George, our Group Finance Director, will then give you the detail behind our 2012 financial performance; and Mark, our Group Operations Director, will cover simplification and costs.
I'll return briefly to summarize and cover our expectations on 2013 and beyond. We have significantly improved the group's underlying performance in 2012 by approximately GBP 2 billion, and our core business continues to deliver strong returns above the cost of equity.
I believe we have a very strong core franchise in place, and the work we have then so far throughout the year, including a further 5% reduction in costs, leaves us well positioned for future growth. We have continued to strengthen and derisk the balance sheets.
We have now reached a loan-to-deposit ratio of 121% for the group and of 101% for the core business, and in 2012, we reduced our noncore portfolio by almost 1/3 to under GBP 100 billion, all significantly ahead of plan. I remain confident in our capital position and we have continued to improve our capital ratios, both on current rules and on the fully loaded CRD 4 basis, in spite of the additional legacy provisions.
Whilst we have continued to make progress, I am, of course, disappointed that legacy issues, including PPI, have continued to impact our statutory performance negatively during the year. We remain committed to resolving these issues as soon as possible.
We have also made good progress on project Verde. From this summer, we expect Verde to be operating as a separate business, the TSB Bank, within the group.
This will allow us to continue with the sale to the cooperative group or, if required, pursue our plan b, an IPO, and therefore, ensure we are to invest best value for our shareholders as well as certainty, and also, for our customers and colleagues. As the largest retail and commercial bank in the U.K., our success and of the British economy are inextricably linked as I now said many times.
We are prioritizing actions, which will stimulate economic growth, and we were, therefore, the first bank to access the Funding for Lending Scheme in September. We have committed in excess of GBP 11 billion in gross funds under the scheme to businesses and households since the inception of the scheme in September, having drawn GBP 3 billion so far under the scheme.
Our support for U.K. SME customers is underlined by our net lending, which, for the second year running, grew by 4% in a market that contracted 4%.
Now to an overview of our financial performance in 2012. Group profit and returns increased substantially last year.
This is testament to the actions we have taken in simplifying and derisking our business model. Total cost reductions and the impairments fell by 42%, driven by a further improvement in credit quality with impairments as a percentage of average advances, falling by 60 basis points to around 1%.
These improvements, primarily driven by the substantial reduction in noncore assets more than offset the expected decline in income, given lower margins, in line with our guidance as a result of higher funding costs. As you will hear from George, we have seen encouraging signs of greater stability in both income and margin as the year has progressed.
This improvement in underlying performance meant that we report a much reduced statutory loss for the year, despite further significant provisions for legacy issues. On the core business, we delivered a robust performance in 2012, in spite of the subdued environments.
We had further reductions in costs and impairments which broadly offsets an 80% fall in income. This resulted in a further 10-basis-point increase in the return on core risk-weighted assets to 2.56%, given lower RWAs.
Turning now to the balance sheet. In 2012, we delivered above market deposit growth of 4% through our innovative multibrands, customer-focused products.
This, together with our noncore asset reduction, has allowed us to achieve our loan-to-deposit ratio targets 2 years ahead of schedule, which represents the completion of our funding and liquidity transformation. As you will hear in more detail from George, we have made further substantial capital accretive noncore reductions in the fourth quarter which have further reduced risk.
This progress, combined with the transformation of our funding and liquidity position, leaves us well positioned to lend and to support the U.K. economy whilst continuing to improve our capital ratios.
We have a strongly capital generative business, and in 2012, we further improved our capital ratio. Our core Tier 1 ratio increased by over 1% to 12.0%, and the fully loaded CRD 4 ratio increased to 8.1%, principally as a result of noncore assets reductions and management profits and despite taking further provisions for legacy issues.
Our achievements in fundamentally transforming and derisking the group's balance sheet have clearly not been without costs, as George will mention. However, as already highlighted, our core risk-adjusted returns continue to grow as we improve the risk return profile of the group.
I will now cover our core divisional performance and returns in more detail. In retail, we have made good progress in driving performance.
As a result, we have further increased profits and returns, with underlying profit increasing by 21%. This was driven by strong cost control and the significant reduction in impairments that more than offset a 3% reduction in income.
Credit performance continue to be strong, considering the economic environment. This was supported by our sustainable approach to risk, focusing on lending prudently and to existing customers, and also, the low interest rate environment.
We continue to focus on areas where we can deliver further growth. In 2012, we supported the first-time buyer market, lending 24 first-time buyers.
We have now increased this commitment for 2013. In addition, we delivered strong growth in customer deposit balances, and attracted funds from almost 1 in every 4 savers.
For 2013 and beyond, given the good work there so far, we will also start to show growth where we are underrepresented, such as in personal loans and in credit cards. As a result of the achievements in SMEs over the past 2 years, we created our new Commercial Banking division in the final quarter of 2012, this brings together our previous wholesale division focused on U.K.
midmarket and corporate businesses, and our Commercial business focused in SMEs in order to transfer best practices across areas and accelerate our core business growth with midmarket and corporate clients. Through this, we will also create additional simplicity and generate cost savings, leading to greater capital efficiency and improved returns.
I have given you a brief introduction to the division here today, but we will be providing an in-depth insight into the business during our commercial banking investor events to be held next month, and for which you will receive an invitation shortly. We continue to support our U.K.
SME customers with 4% growth in loans in 2012 against a market that shrank by 4% as I said. This now means a cumulative net lending of 7% over the past 2 years against the market that's full that fell by 8%.
Profits and returns rose as we delivered further reduction in costs, which were down 3%, and risk with impairment, down 33%, causing both underlying profit and returns to increase in the year. In wholesale, we saw a significant reduction in impairments, down 40%, and an improvement in other income which offset much of the effect of lower net interest income from subdued demand and higher funding costs.
Costs were broadly flat as we continue to increase investments. Overall, returns were broadly stable despite the small fall in profit as a result of a reduction in RWAs in this business.
Now turning to Wealth, Asset Finance and International, where we achieved the strong 27% increase in profit driven by our focus on growth areas and further cost reductions. In Wealth, core underlying profit increased by 25%, with income growing despite subdued investment markets.
We believe that we have a strong growth opportunity in Wealth and expect to continue to leverage our offering as a relationship bank and [Audio Gap] share to increase internal customer [Audio Gap] and new external customers. In asset finance, U.K.
profit increased by 13% as we focus on the growth of higher-margin areas, such as mode of finance, where the volume of new business increased by 11%, and in the Lex Autolease, our market share -- our market-leading contract hire business where deliveries also grow by 11%. Regarding Insurance, during 2012, we brought together U.K.
Life Pensions and Investments and general insurance into one Insurance business. This has led to a cost reduction of 80%, and will enable us to drive further synergies between Insurance, and the rest of the group.
We are also actively managing the balance sheet as we look to maximize capital efficiencies between the group and the division. Most of the fall in underlying profits reflects the subdued economic environment, which drove lower return assumptions on our Insurance portfolios, as well as the severe adverse weather we experienced last year.
However, the work we have done in reshaping the business means that we are well positioned to focus on growth markets and optimize opportunities arising from regulatory changes. We are one of the market leaders for corporate pensions, and the investment in our annuities proposition will mean we can compete more effectively in an increasingly open market.
Moving on from our divisional performance, and I would like to focus on how we are building the Best Bank for Customers. As I mentioned at the start of the presentation, the group is now in a far stronger position than it was 18 months ago.
We have reshaped our portfolio by focusing in the U.K. economy, and by lowering noncore assets by almost half.
We have completed the transformation of our funding and liquidity positions. We have significantly simplified the group from the customer's point of view and at an accelerating pace, as you will hear from Mark, and this is generating GBP 2 billion of capital, which we are reinvesting in supporting future growth across the group.
As an example, to support our personal customers, we have further invested in and developed our distribution channels. We have upgraded our service on the high street by refurbishing 421 branches and extending opening hours.
Our digital proposition continues to improve, driving growth to 9.5 million online users and 3.3 million users of our mobile service from 0 users only 18 months ago. These improvements are increasingly being reflected in customer service.
Over 2012, based on performance across branch, telephone and internet banking, Lloyd's TSB has been the leading high street bank for customer service, and our service show that Halifax and Bank of Scotland have significantly climbed in the ratings. To improve the experience for our U.K.
Wealth customers, we launched the Private Banking Client on boarding service. This has streamlined the referral process both for customers and colleagues, with 115,000 referrals into our U.K.
Wealth business in 2012 and is a further step in maximizing opportunities for growth. We have delivered a number of initiatives for our Commercial customers.
To further enhance our offering of capital efficient products, we have continued to invest in debt capital markets, offerings, and also, our transaction banking capabilities, where the number of clients migrating to our foreign exchange and money market e-portal arena tripled in 2012. In Insurance, we have continued to invest in areas where we are building a competitive advantage, such as corporate pensions and annuities, as I referred to you before.
Our strong proposition has enabled to achieve a 23% growth in corporate pensions in 2012. We have extended our current product range across annuities and protection and are well-positioned for opportunities arising from the retail distribution review.
All these actions will be key drivers of our future performance and are central to achieving our strategy going forward. Together with investing for the future and supporting the economic recovery, we have made substantial progress last year in delivering our commitments to help Britain prosper.
We have helped more than 55,000 customers buy their first home, and as evidence of our ongoing commitments, have increased our 2013 target to helping more than 60,000 first-time buyers. We are also continuing to develop our product offering, shared equity and ownership schemes.
On SMEs, we have continued to grow our net lending in the following markets and have helped over 120,000 startups in 2012 alone, exceeding our targets. We have renewed our commitment to be net-lending positive for SME customers again in 2013.
We have also expanded our support for midmarket and corporate clients, committing GBP 1 billion to manufacturing businesses and raising GBP 12.8 billion of finance for our global corporate clients in the debt capital markets. I believe our dedication to helping Britain prosper is underlined by the fact that we were the first to embrace the Funding for Lending Scheme, given our responsibility as the largest retail and commercial bank in this country and have already committed GBP 11 billion of gross funds passing on the scheme's benefits to our customers.
Before I hand over to George, I want to take a moment to highlight the progress we have made in delivering on our strategic plan. In June 2011, we set out our 3- to 5-year plan to transform the group to create a high performing organization focused on our customers' needs and with a prudent appetite for risk.
We said we would invest in our simple, lower risk, customer-focused U.K. retail and commercial banking model and would seek superior cost efficiency and a lower risk premium than our peers as key competitive advantages.
Over the past 18 months, we have progressively accelerated delivery of our strategy, and as a result, are ahead of our plans, and importantly, we have then all of the this, despite a challenging regulatory and economic backdrop, as well as significant legacy issues. As a result of these actions, the group is now in a far stronger position.
We have highlighted here some of our key achievements. Firstly, we have proactively managed the rundown of our noncore portfolio and have now achieved over 90% of our original noncore reduction targets 2 years ahead of expectations.
Importantly, this has been achieved in a capital accretive manner, as committed, while also delivering lower impairment charges than we anticipated. We have also exited or announced the exit from 12 out of the 15 countries we target to achieve by 2014 in this first 18 months.
Secondly, our balance sheet is considerably stronger with our core Tier 1 capital ratio now at 12.0%. With 2 years of above-market deposit growth, thanks to our multibrand strategy and comprehensive pricing, our core loan-to-deposit ratio is now in line with our long-term targets of 100% and the group achieved the 120% level 2 years ahead of our original targets.
We have also transformed our wholesale funding position with the reduction of GBP 126 billion, mostly in short-term funding, which now accounts for GBP 51 billion from around GBP 150 billion only 18 months ago. This means repaying circa GBP 20 billion of wholesale funding each quarter over the last 6 quarters through deposits growth and noncore reductions.
Thirdly, our drive to enhance simplicity and operational efficiency continues at pace. Through simplification, we have achieved the reduction in our cost base of GBP 1 billion since 2010, again, achieving our goal 2 years ahead of target.
Significantly, this has been achieved with a substantial increase in customer service as demonstrated by our NPS course in all brands and by housing complaints in the last 2 years. Mark will highlight in more detail the significant progress we are making across the group in a few moments.
The progress we have made in reducing the cost base [Audio Gap] enabling us to execute GBP 2 billion of incremental investments behind customer focus, growth initiatives, including revitalizing Halifax as a challenger brand and investing in more customer-focused products and services in Retail, Commercial, Wealth and Insurance. As we said in November 2011, we expect the economic recovery to take longer than was generally anticipated at the time of the strategic review.
However, the progress achieved so far, together with the benefits we are seeing from our investments into our core franchise, gives us confidence that we will achieve our income-related targets in the medium term, therefore, achieving returns above our cost of equity. I will now hand over to George who will talk you through our 2012 financial performance in more detail.
Mark George Culmer
Thanks, António, and good morning, everyone. I'll update you on our financial performance and then cover our balance sheet, funding, liquidity and capital positions.
Starting with the P&L. As you have heard from Antonio, in 2012, we delivered a significantly improved performance, with reductions in costs and risks more than offsetting the expected lower income.
Group underlying profit improved to GBP 2.6 billion with another strong performance from the core business at GBP 6.2 billion and a GBP 2 billion reduction in noncore losses. Group management profit was GBP 4.8 billion and includes the benefit of actions following the movement in yields and credit spreads in the second half of the year.
Asset sales comprised gains of GBP 3.2 billion from gilt sales, as we reposition this portfolio given low yields and locked in our capital position. These gains were partly offset by losses on disposals of non-core assets of GBP 660 million, resulting in a net asset sales gain of GBP 2.5 billion.
Liability management and owned debt volatility were GBP 229 million and GBP 270 million, respectively, and reflect the impact of our tighter spreads and buyback activity. Other volatile items were GBP 478 million, while the fair value line [ph] was GBP 650 million and well down on last year due to the lower level of impairments.
Taken all together, these items come to some GBP 2.2 billion in total, in line with last year and offsetting some of the charges in statutory profit. Going forward, we will be simplifying our report.
This is the last time we will be showing management profit as a separate line item, and we will focus instead on underlying and statutory profit. Looking at income.
Group income was GBP 18.4 billion, with the movement on prior year mainly due to lower average balances which are evenly split between core and noncore and lower insurance income primarily due to the changes in economic assumptions that we flagged at the half year. Household funding costs were GBP 239 million, higher than last year, while nonrecurring items of GBP 233 million predominantly relates to some one-off credits received in 2011.
Core income was GBP 17.3 billion, and again was impacted by [Audio Gap] average balances and increased [Audio Gap] In terms of quarterly trends, we've seen improvement in the second half for the stabilization of core loans and advances and an improvement in other operating income, driving increases in underlying income in both Q3 and Q4. Looking next at interest margins, the net interest margin for the year was 1.93% and in line with guidance.
But in this, the core margin has been very stable at around 2.32%, while the decline in the noncore margin largely reflects the impact of higher funding costs and in the latter part of the year, noncore share of the impact from government bond sales. As you know, we expect the group margin to continue the gradual improvement seen in the second half due partly to the decreasing proportion of noncore.
And the guidance for 2013 is a net interest margin of around 1.98%. On impairments, our performance clearly highlights the impact of our ongoing prudent risk appetite, strong management controls and the derisking of our portfolios.
Impairment charge was GBP 5.7 billion, 42% lower than in 2011 and significantly ahead of our original guidance of around GBP 7.2 billion. Group AQR was 1.02% for the full year and 0.95% in the second 6 months, with improvements over the year in both the core and noncore books, and with the overall group ratio, again, benefiting from the decreasing proportion of noncore.
Impaired loans as a percentage of loans and advances were 8.6%, and the average coverage ratio, 48.2%. Within this, we continue to see strong trends in the core book.
The noncore -- the reduction in nonretail assets is the main driver in the movement from 34% to 32% for impaired loans, while the coverage ratio increased from 48% to 51%. We continue to hold high levels of impaired loans and coverage ratios in our key lower quality portfolios.
In Ireland, for example, the overall portfolio is 64% impaired, with a coverage ratio of 69%, up from 62% last year. In corporate real estate BSU, 77% of loans are impaired, up from 72% last year, with the coverage ratio unchanged at 37%.
Looking at performance by division, in Retail, the impairment charge decreased by 36% to GBP 1.3 billion, driven mainly by continued improvements in our unsecured portfolio. The unsecured impairment charge was down 41%, reflecting more proactive approach to collections and recoveries and a further strengthening of our credit management.
In the secured portfolio, impairments were down 19%, with further reductions in impaired loans, driven by an improved performance in the back book. In Commercial Banking, the 30% reduction to GBP 2.9 billion is largely due to lower charges in the noncore Australasian portfolio.
We have now sold most of the lower quality assets, and in acquisition finance where specific large impairments taken in 2011 were not repeated. In the core book, the 33% year-on-year improvement reflects the good experience in the underlying book, and again, the non-recurrence of specific large impairments taken last year.
In Wealth, Asset Finance and International, the impairment charge fell by 59% to GBP 1.5 billion, primarily by lower charges in the Irish wholesale portfolio. With the high credit quality of new lending, the successful management of difficult exposures and the further decrease in noncore, going forward, we expect further improvement in asset quality across the group and a further substantial reduction in the 2013 impairment charge.
Moving now to the statutory results. Here, we show the movement from management profit to the statutory loss after tax of GBP 1.3 billion.
Simplification of Verde costs totaled GBP 1.2 billion. Within this simplification cost was GBP 676 million, with, as you will hear from Mark in a moment, the program contributing run rate cost savings of GBP 847 million by the end of 2012.
Verde build costs were GBP 570 million. The provision for PPI was GBP 3.6 billion, and I will come back to this in a moment.
Within other regulatory provisions, we have provided GBP 300 million for the cost of redress for interest rate hedging products. We've also allowed for associated costs of GBP 100 million.
Also included here was the GBP 150 million provision for German Insurance business litigation taken in Q3 and the U.K. Retail provision, GBP 100 million.
As mentioned at the half year, the past service pension credits of GBP 250 million relates to the move to CPI for discretionary increases within the group's main pension scheme. And volatility arising in Insurance businesses totaled GBP 306 million.
Finally, the tax charge in 2012 was GBP 753 million, reflecting the trends seen earlier in the year, including the impact of the reduction in the U.K. corporation tax rate and changes in life insurance taxation.
On PPI, we've announced the further provision of GBP 1.5 billion in Q4, which brings the provision for PPI in 2012 to GBP 3.6 billion and the total unutilized provision to GBP 2.4 billion. Net volume of complaints and costs of contact and redress continue to trend downwards.
Complaints received in Q4 were approximately 20% lower than in Q3 and around 30% lower than in Q2. On monthly payments there is at similar trend, with the average monthly spend for Q4 in line with expectations around GBP 200 million, a reduction of about 25% on Q3.
Going forward, we expect the average monthly spend to reduce further in the first half of 2013 to around GBP 160 million per month, before reducing again in the second half of the year. Moving then on to the balance sheet.
[Audio Gap] from Antonio, we have continued to strengthen our balance sheet and financial position. In 2012, we've grown deposits by GBP 17 billion and reduced noncore assets by GBP 42 billion.
We've also seen a reduction in core lending of GBP 12 billion, although, as previously mentioned, it was pleasing to see this stabilize in the second half of the year. On liquidity, our balance sheet derisking and changes to regulations have given us more flexibility, allowing us to reduce primarily liquid assets by GBP 7 billion.
With these actions, we've been able to reduce our wholesale funding by GBP 81 billion or around 1/3 in just 12 months. We've also seen a 12% reduction in RWAs, which is ahead of the 8% fall in banking assets due entirely to disposals and derisking with no benefit from model changes.
As Antonio said, all of this action has not been without costs in terms of their income and margin, but in so doing, we have fundamentally transformed our risk profile and balance sheet shape. Looking out at noncore.
The noncore portfolio now stands at GBP 98 billion, significantly ahead of original guidance, and we have already met our overall EC [ph] asset reduction commitment of GBP 181 million, almost 2 years ahead of the deadline. The GBP 42 billion reduction in 2012 includes GBP 12 billion maturities, GBP 6 billion of impairments and other movements and GBP 24 billion of asset sales, which we have continued to achieve in a capital accretive way.
Looking at the reduction by asset type, GBP 37 billion was in nonretail portfolios and included GBP 14 billion treasury assets, GBP 10 billion of other corporate, including shipping, aviation and leveraged finance, GBP 6 billion in U.K. commercial real estate, and a GBP 7 billion reduction in international corporate assets, mostly in our highly impaired Irish and Australasian portfolios.
This reduction in nonretail is reflected in the movement in nonretail RWAs, which were down 42%, ahead of the 30% reduction achieved last year. For the noncore portfolio as a whole, the fall in RWAs was 33%, an excess of the 30% fall in total noncore assets, and clear evidence that we're not simply selling the low-risk elements first.
Going forward, we are targeting a further reduction of noncore assets of GBP 20 billion in 2013, and we are on track to achieve our target of a non-core asset portfolio of GBP 70 billion or less by the end of 2014 with more than 50% of that being retail assets. On funding and liquidity, as already mentioned, we have transformed our profile in 2012.
Wholesale funding now stands at GBP 170 billion, with less than 30% having a maturity of less than 1 year, compared with total funding of GBP 251 billion in 2011, 45% of which matured in less than 12 months. We also fully repaid all debt issues under the U.K.
government's Credit Guarantee Scheme, and we've just repaid GBP 8 billion of LTRO funds. Our liquidity position remains very strong.
In addition to primary liquidity holdings of GBP 88 billion, we have significant secondary holdings of GBP 117 billion, and our total liquid assets represent 4x our short-term wholesale funding compared with less than 2x 12 months ago. With strong position, our reduced wholesale requirements allowed us to repurchase over GBP 15 billion of our term funding in 2012.
For 2013, we envisaged no material wholesale funding activity, but we will continue to look at tactful opportunities. We also look to further optimize our capital structure ahead of the detailed implementation of CRD IV.
Finally, on capital, [Audio Gap] 2012, we further improved our key ratios with a Core Tier 1 ratio of 12%, up from 10.8%, a fully loaded ratio of 8.1%, up from 7.1%. Our total capital ratio of 17.3% is up from 15.6%, and is already in excess of the ICB's [Audio Gap] recommendation.
All ratio benefited from management profits and from RWA reductions in noncore, offset by statutory items and other adjustments, including, of course, legacy provisions. Our fully loaded ratio is based on the July 2011 draft rules within Article 45 for insurance capital.
We had a benefit of approximately 30 basis points from greater certainty on the resolution for corporate exemptions of CVA and the definition of default for retail mortgages. We expect to continue to build our capital ratios in 2013, given our strong core profitability and continued capital accretive noncore reduction.
However, I would expect greater inter-period volatility, partly due to the application of revised IAS 19 rules for pension schemes. As I said at the half year and Q3, we're comfortable with our current capital position and outlook, and we are confident of meeting our capital requirements, and of course, complying fully with CRD IV.
That completes my review of the financials, and I would now like to hand over to Mark.
Mark Fisher
Thank you, George. Good morning, everybody.
I'll give you a brief update on our progress with costs and simplification. Looking at the total costs of 2012, as Antonio said earlier, we've seen the reduction of GBP 539 million, or 5%, to just over GBP 10 billion.
This follows a reduction in 2011 of 4%, and I think the strength of our performance here is reinforced when you consider the downward trajectory of the total cost basis of 2010, where we delivered GBP 1 billion of savings over the period. Indeed, since the acquisition HBOS, we've reduced costs by more than GBP 2 billion or just in the 18%.
If we look into slightly more detail, you can see that the final saving from integration of GBP 177 million and then simplification savings of nearly GBP 600 million, which are the primary driver of the overall reduction, this supports a further investment of another GBP 170 million in our strategic initiatives, in line with our aim of reinvesting 1/3 of simplification savings back into the business. Full year costs of GBP 10.082 billion take us very close to the cost target of around GBP 10 billion by the end of 2014 that we talked about when we launched the strategy in July 2011.
So we've effectively hit this target 2 years early, and we now expect total costs for 2013 to be GBP 9.8 billion or around that. As I've said earlier, simplification is a big part of the cost reduction in 2012.
The annual run rate savings increased by GBP 605 million to GBP 847 million, and we remain bang on track to meet the increased target of GBP 1.9 billion run rate savings at the end of 2014 that we announced last year. And I can tell you the program is already paying for itself.
The savings delivered so far is already more than the cash invested. Simplification, though, is not just about cost savings, it's change in the bank.
And so I'd like to briefly share with you how that is progressing. I've talked before about how we're simplifying the way we buy services from outside the group, and we are seeing some really positive results.
We've reduced the number of suppliers we use by a further 4,700 in 2012, bringing the overall numbers down by 41% from over 18,000 to now around 10,500. We are focusing our spend on a smaller number of key suppliers, and we now have over 75% of spend with the top 100 suppliers, and indeed, over 30% with the top 10.
We're also concentrating on having partnership-based relationships with suppliers rather than the transactional, so they better understand our business, provide better solutions at better prices. All of this is showing through in very real terms, with over GBP 300 million of savings from this source to date.
We're also on track with our plans to consolidate our back office operations into fewer, larger centers of excellence, harnessing technology to automate to move to paperless processing. It gives us more flexibility where we can transfer work easily within and between sites to deal with fluctuations in workload.
To support these within the larger centers, colleagues are much more multi-skilled and this gives them much more variety in their work. For customers, we've actually delivered over 200 initiatives to date.
They range from significantly re-engineered solutions on key customer moments of truth, through to more modest but important changes that make a real difference. These improvements are being noticed by our customer.
You can see 4 examples on the screen of services and processes where we've made significant improvements, and I'll focus on a couple of these to give you a flavor of what we're achieving. As Antonio has mentioned, we're making great strides in developing our Internet banking service.
We now have over 9.5 million customers banking online, and on Saturday, December 8 at 5:22 a.m., one of our customers living in Suri [ph], decided to log on to the Internet and became our 1 billionth log-on during 2012. And that's the first time we've achieved that.
More people are using the service from mobiles and smartphones. We have around 3.3 million active mobile users, conducting 4.2 million transactions per month.
This is impressive when you consider, it was only just over 1 year ago that we launched our mobile banking applications. Not only are customers benefiting from greater self-service, we also start to see real progress in the reduction of paper and post, helping us further to reduce costs.
Turning to specific processes, one of the major enhancements we made has been the re-engineering of our account switching process for new accounts transferring to the bank, which I spoke about last year as one of the key perspective deliveries for 2012. By introducing more automation, we removed 23 process steps, reduced error rates by 2/3 and complaints by 50%.
It's been a key component in the overall net acquisition of more than 170,000 new personal current accounts for the group in 2012, and that's been particularly important in our Halifax brand, supporting our strong challenge of bank proposition. We can see on these charts how simplification is making a difference for our customers.
On the left, you can see the data published only yesterday on banking complaints, which all banks have to report to the regulator. We have reduced the number of reportable complaints per thousand accounts by over 50% since the first half of 2010.
Given the progress we've made, we're bringing forward our targets of 1 reportable complaint per 1,000 accounts from the end of 2014 to the end of this year, 1 year earlier than planned. If we look at customer satisfaction data, we're also seeing real progress.
We surveyed through an independent company around 35,000 customers every month who have recently transacted with us. And the chart on the right shows what we call the Net Promoter Score.
It's essentially a reflection of the number of customers who would recommend the bank to others, offset by those who would not. What you see from this picture is that as well as complaining less, customers are also far more likely now to be talking positively about our brands and our service.
So to summarize, our strong progress on cost [Audio Gap] and we remain ahead of our original targets. This is driven by excellence on simplification program, which is not only reducing costs, but building more efficient, sustainable platform for the group that's centered on the customer.
Thank you. I'd now like to hand back to António.
António Mota de Sousa Horta-Osório
Thank you, Mark. So our strong 2012 progress in a challenging economic and regulatory environment is evidence that we have the right strategy in place to create the best thing for customers and for shareholders and that we have the management team to deliver it.
What do we expect to see in 2013? We expect to see the U.K.
economy grow in 2013, although at a gradual pace as some Eurozone-derived uncertainty remains. Policy initiatives such as the Funding for Lending Scheme are helping to encourage this growth.
In terms of the regulatory matters, we continue to seek further clarity on issues at both European and national levels, including the outcome of CRD IV and the upcoming FEC review. Through our actions, we will continue to achieve cost efficiencies and build a lower-risk model across the group.
And we will be continuing to invest in our customer-focused U.K. Retail and Commercial Banking model, which is based on a very strong multibrand core franchise.
This is not only aligned with the regulatory reform agenda. It will also enable us to differentiate ourselves from our peers and rebuild trusts by focusing on our customer needs, supporting growth in the U.K.
economy and addressing legacy issues. I believe we are increasingly well positioned for success, but we will not be complacent.
We are all well aware, as a team, that this will have to be demonstrated every day with every customer at every direction. This is what successful retail and commercial banking is all about.
So what can you expect for 2013? Well, you can expect much of the same and a bit more.
We expect substantially lower impairments allowing underlying profit to increase substantially and with much reduced legacy issues. In terms of for specific guidance, firstly, we expect NIM to reach around 198 basis points in 2013, in spite of the impact of having sold a substantial part of our gilts portfolio.
Secondly, given the pipeline of further cost savings and despite further investments in the business and inflectionary [ph] pressures, we now expect group total costs to reduce to around GBP 9.8 billion in '13, our previously revised total cost estimate for 2014, so 1 year ahead of the revised plan. Thirdly, we are targeting a further improvement in asset quality and impairment following the better-than-expected reduction in noncore assets.
We are targeting core loan growth in the second half of 2013, as I said last year, driven by our proactive customer-focused approach and the Funding for Lending Scheme, despite the subdued economic environment and expected continue deleverage in the U.K. economy.
And we will continue to reduce noncore at an accelerated pace, and therefore, expect a reduction of at least GBP 20 billion in noncore assets this year. As a result of the substantial progress we are making, we are very confident in having a portfolio of less than GBP 70 billion by the end of 2014 with less than GBP 35 billion in noncore, nonretail assets.
And finally, given the strong progress to date, we remain confident of delivering our medium-term financial targets over time. Thank you, and we are now happy to take any questions you may have.
Thomas Rayner - Exane BNP Paribas, Research Division
It's Tom Rayner from Exane BNP Paribas. Could I have 2 questions, please?
Just first on margin guidance, 198, I mean, could I encourage you to add a core margin guidance to that figure? And I'd also be interested to understand a bit more about how the gilt sales at the end of 2012 is affecting both core and potentially group margin going forward and deposit repricing as well, if you could update us on your thoughts.
And I have a second question on Verde, if possible, please?
António Mota de Sousa Horta-Osório
Okay. Let's start with margin, and George will address that question.
Mark George Culmer
Yes, certainly. First of all, yes, sorry, I -- we're going to bust it out into where the core margin will go and the noncore margin will go.
But I think as you've just seen from the trends for 2012, you can see the strength and stability of that core margin. In terms of the guidance, there are obviously a number of sort of components to this, so numbers sort of pluses and minuses we've got.
So going through the sort of pluses first, obviously, you've got things at that decreasing proportion of noncore that I referred to in my presentation. We've also got the shift in overfunding of the group in terms of moving away from wholesale to the deposit funding.
So those are positives. You've also got the benefits from things like the debt buybacks, et cetera, that we took action on in the second half of last year.
Going the other way though, accessing some of those changes in deposit and wholesale prices will take time. It could take time for the deposit book to churn.
We, as I said in my presentation, we don't expect to be materially active in the wholesale market in 2013. Also going other way, there is the run-off on things like this -- the structural hedge, which will be a slight drag.
And then coming to a particular point on the gilts, yes, as I said in my presentation as Antonio did, we were big seller of gilts through 2012, accelerating that towards the back end as yields came down even further, so we sold out and realized that gave [ph] the GBP 3.2 billion with yields at around 160, 170, et cetera. We did that predominantly for economic reasons.
We saw that there was value at that price, and I think we've been proven right in terms of what's happened to prices since. In terms of impacts of that, yes, the NIM drag, from an accounting perspective, you'll get about -- it's about -- it's not -- it's about 8 basis points of 2013 guidance.
So if we just sat on our hands, that 198 would probably been around about 206, et cetera, we talked about. But the other big benefit it has is in terms of capital.
I mean, as you know, from a capital perspective, on current rules on CRD IV, you basically reflect gains as they are realized, so it's a big a benefit there. But also importantly, I think under the new rules, it's done on a mark-to-market basis, and by locking in, as I said in my presentation, by selling out and locking in, we probably secured up to about GBP 1 billion of capital that if we've just allowed the mark-to-market to basically grow and then contract as we moved into 2013, we would have lost from our capital position.
So there was real economic benefit to do it, there was real capital benefit to do it, probably, because everything comes with a cost, and the cost is the sort of presentational impact, that it does cost us about 8 basis points of NIM in 2013.
Thomas Rayner - Exane BNP Paribas, Research Division
[indiscernible] maybe with changing roles in LCR. You'll be able to switch into some -- well, less liquid, higher -- higher-margin asset [indiscernible].
Mark George Culmer
[indiscernible] is not flexibility. I mean, to your point, we sort of -- we now have that flexibility.
António Mota de Sousa Horta-Osório
I think it is important to add 2 things here, Tom. So we have said here quarter-after-quarter that we thought, as interest rates were going down, we did not think that our shareholders' money should be used in 10-year gilts sub-inflation.
So as George said, as interest rates continue to decrease and reached very, very low levels in quarter 4, we have accelerated that for the reasons you heard. I think it is important to add the following.
Going forward, you have 2 impacts: one is a mere accounting impact, which is gilts on the -- that were in the portfolio have much higher yields and we have switched that through a capital gain. But there is a second impact, which is, given that rates were very low and we still think they are low, we are keeping our liquidity assets much shorter duration than before and then you have, obviously, an opportunity cost, which is the 10-year yield term.
Now with 2 [ph] and short-term money of 50 basis points, that is a real opportunity cost but it has a risk as well, but you have the 2 impacts. So that 8 basis points George is telling you, that would otherwise been added to the NIM guidance, so that 198 plus a 206 is both part of an economic impact and an accounting impact.
On the economic impact, we think we should continue to put your money at lower durations. The accounting impact is just a change between future guidance, and locked-in present capital gains, which are already in the capital position.
Thomas Rayner - Exane BNP Paribas, Research Division
Just on the IPO -- I didn't mean to say that. On the Verde -- I honestly didn't...
António Mota de Sousa Horta-Osório
Come on, you were thinking about another IPO.
Thomas Rayner - Exane BNP Paribas, Research Division
If IPO was to become an option, I'd just like to get a sense of what, if any, incremental costs there might be of going down that route than continuing on the route you want to come.
António Mota de Sousa Horta-Osório
Right. Well, as we've said here before, we are absolutely committed to our plan a, which is to sign the SPA [ph] after the MoU signed with the core [ph] plus [ph] year.
And we have said before that we -- that we're expecting to sign the SPA [ph] by the end of quarter 1, as we are in March 1. So at the same time as we said that, Tom, we also said that we felt the right thing to do was to prepare this bank, prepare this deal to be done as a full-fledged bank, we were building the bank and you are going to see the TSB Bank in the summer in August in the high street competing with the other brands.
So either we proceed with our plan a, which we are absolutely committed to doing, either, we can divert to plan b, which is a IPO as it has always been. But up to now, the path is the same because we are building the bank, we are now putting the cost that was across from all the bank, the branches of Lloyds in Scotland and Wales into Lloyds TSB Scotland.
Lloyds TSB Scotland is what -- is the Verde project and will become the TSB Bank and will be there by the summer. So if you ask the cooperative group, which you should probably ask that question as we have asked, they say they are completely committed to completing this deal, and we are trying to help them as much as possible in order to do it, and that's where we are focused on.
Thomas Rayner - Exane BNP Paribas, Research Division
The incremental costs might not be material, is that fair?
António Mota de Sousa Horta-Osório
It is fair to say that we are under plan a, and so far, we are not so focused in this stage about plan b, but both are following the same path, so they don't change from alternative to alternative at this stage. Please?
Raul Sinha - JP Morgan Chase & Co, Research Division
It's Raul Sinha from JPMorgan. If I can have 2 questions, please.
Firstly, thanks so much for the disclosure on the PPI and the claim rates. It looks like the claim rate that is currently being seen across the market is quite low.
And if I compare that to the relative provision that you have remaining on the balance sheet, I think you say GBP 150 million a month for the first half of the year, you would need a significant pickup in the rate of claims to take another PPI provision. Is that a correct way of thinking about it?
António Mota de Sousa Horta-Osório
I think it's better -- difficult question, let better George handle it.
Mark George Culmer
I've had practice at this one. Look, we said at Q3 that come the year end, we would have more information than we have, and that's part just the -- just the passage of time, but partly, they gave -- gives us a full seasonality.
We've got the full month, actually, of sort of PPI at sort of full throttle coming through. What we've done, as you see -- we sort of at the end of the year had an unutilized provision of 0.9.
As I've said, we've added 1.5 to that, so that gives us an unutilized provision of 2.4. What we've done reflects a bit of what we've seen in terms of uphold rates, costs, et cetera.
Above all, we've sort of taken a sort of a revised view of the ultimate likely costs. Yes, the charts that we've shown show you how complaints are coming down, and consequently, costs are coming down.
And you can see those sort of 20% falls Q4 on Q3, et cetera. The -- on the average spend, that average monthly run rate, I think, we said we expect it to be round about GBP 200 million for Q4 per month.
And it was -- December was about GBP 150 million. There's a December effect in that, and so if you normalize that, you're up about the sort of GBP 160 million, et cetera.
Given the trajectory, I think, as I said in the presentation, I expect that GBP 160 million to stay at about that level because we're going to do some sort of past business reviews of the first half of 2013, and then to fall away after that. Now that's based on our expectations, that's based on our outlook.
And if you do the math, you see that we have significant monthly coverage. Now uncertainties do remain, I should say that, but what we've tried to do is put a provision that provides for a significant number of months of our claims.
Raul Sinha - JP Morgan Chase & Co, Research Division
The second question was on capital for António. I think it was a positive surprise to see the fully loaded bond 3 number up to 8.1, and especially given -- if you note that one of your peers which operates, I would say, a somewhat more risky a business model has just raised the dividend with a similar Core Tier 1 ratio recently on a fully loaded basis, would it be right to think that it's pretty much that shrinking statutory loss that remains [indiscernible] in the dividend?
António Mota de Sousa Horta-Osório
George?
Mark George Culmer
I mean, I didn't -- I'm not sure your question -- what the last part of that question.
Raul Sinha - JP Morgan Chase & Co, Research Division
Is it just the statutory loss that remains between you declaring a restarting of dividend now?
Mark George Culmer
On with the key bit of your question is the [Indiscernible].
António Mota de Sousa Horta-Osório
[indiscernible] This was not agreed with Basel. But I have -- this is the third results presentation where I have to tell you the same thing.
I -- we have a highly capital generative model, as you know, because we have decided, as you know, to -- given the difficult economic environment, lower interest rates, we have decided to focus the bank creating a competitive advantage in costs and in lower risk, and therefore, as a consequence, all the nominal -- the nominal cost decreases we are achieving and the significantly lower impairments, not only from the core bank, but especially from the reduction of non-core assets because as we said, there's no more impairments going forward, all that flows directly through the bottom line as you were saying. So we are generating as much capital as possible, going into that direction, we believe of Basel, we don't know exactly what does that -- what the intensity is, right?
And given that lending in the U.K. is not growing, we are not using capital to support lending because net-net terms, the economy is not growing in terms of lending.
So everything is -- in our strategy is capital generative. So what is going to happen now?
Finally, I think that after this bonus cap approval, the CRD IV [indiscernible] is going to come up, and then the CRD IV [indiscernible] is going to come up. We, that have been going to the right direction, I think, are going to see the specificities of the paper, what's going to happen mainly with the insurance deductions, where we are being very conservative because we are assuming Article 45 and not 46, and as we see the paper, as I said now by the third time, I will be able to discuss with FSA and [indiscernible] what is our capital plan, what is the strategy that FSA wants us to do, and [indiscernible], what is our pass-through dividend policy, which I will come back and tell you.
So I think this is probably the last time I'm giving you this answer. But in any way, we are working more than we thought, so as you said, quicker than we thought, towards debt capital ratio that we thought we will be at the end of 2014.
Please?
Chris Manners - Morgan Stanley, Research Division
Chris Manners from Morgan Stanley. Just 3 questions, if I may.
So I was looking at Page 130 at the fully loaded Basel III leverage ratio, 3.1%, and I thought given António's comment on the treasury side committee about leverage ratios as well being -- are off in is thinking, as well as risk-based capital measures and Parliamentary Commission on Banking Standards suggesting that the Vickers [ph] 4% leverage ratio to be implemented, at what sort of leverage ratio would you like to [Audio Gap] on a consistent basis? I know you gave -- your Core Tier 1, you want to be above 10.
Do you have a leverage ratio in mind?
António Mota de Sousa Horta-Osório
We feel very comfortable with whatever of the ratios is approved. I mean, our ratio that you see in that page as you just mentioned is not comparable with what other banks presented.
It's not presented on the same basis. We are very comfortable either with 3 or 4, and what I think so from an industry point of view that you have to be careful going to 3 instead of 4, because if you go to 3, instead of 4, there are 2 important mainly mortgage banks in the U.K., it would have a restriction.
But for us, given that we are a broader -- much broader commercial and retail bank, either 3 or 4 would not be relevant in our case.
Chris Manners - Morgan Stanley, Research Division
And I had a question on loan growth. Obviously, you're talking about loan growth in second half of the year, just trying to work out where specifically in core that would be, and also, you've got 120% LDR in core.
Are you comfortable with that or would you [indiscernible]
António Mota de Sousa Horta-Osório
We have what, sorry? We have what?
Chris Manners - Morgan Stanley, Research Division
Loan-to-deposit ratio in retail core, 120%. Is that something you're going to continue to run down or you're happy with that?
António Mota de Sousa Horta-Osório
Right. Well, we consider the loan-to-deposit ratio on a group basis, and because I think that's the right thing to do, given that for example, Wealth, which is highly deposit generative, is not included in Retail.
So to look at it in Retail alone, I don't think it's the right thing to do. We also have a on-line deposit business outside of Retail, so -- you have to look at it as a whole.
And this we said in the strategic review, I thought at a time, and remember, this bank came from a loan-to-deposit ratio of 169%, just to put it into perspective, that achieving by '14 less than 120% in the core would be a good achievement. We are now at 101% in the core, and we are at 121% in the total group.
I think this is correct because as we continue to share the non-core assets, the group loan-to-deposit ratio will turn to the core and will become close to 100%. So you can expect us continuing to increase deposits although at a lower pace.
We will probably increase deposits more in line with the market, because we have already 2 years ahead of target to reach our target for '14, and also our long-term target for the core. What will happen in terms of lending?
And my comment in terms of lending, as I said in the presentation, you have to take them in the context that I believe business lending to U.K. non-financial corporations will continue to be negative in 2013.
So as I told you at the Q3 results, I continue to expect SME lending in our case to be positive. It has been positive now for 2 years, 7% against an 8% fall in the market, and we will continue to go at around 4%.
Our pipeline absolutely sustains that, and I'm very comfortable about that. Second segment, mid corps.
That is one of the reasons why we have now put mid corps together with SMEs because we want to put across the best practice of SMEs into the mid corporate space and have it growing. And I think, as I said in November, that mid -- the mid corporate segment and the large corporate segments will both turn positive in terms of net lending in H1, and then finish the color on the total loop.
As you know, we wanted to achieve an around 25% market share in mortgages, in line with our branch market share post Verde, and also to get the core at 100%. I thought, as I told you in November, we would reach it around quarter 2, and therefore, our mortgage growth in net terms will start growing with the market after quarter 2 as the market in the U.K.
is growing 1%, and I think it will continue to grow 1% in net terms. You can expect our mortgages from the third quarter onwards to increase 1%, and therefore, all of our core lending as a whole and each of the segment is going to be positive net lending growth from quarter 3 onwards.
That's quite precise in spite of a falling market. And I see that some research reports still don't believe it, but we will be here.
Right, please?
Manus Costello - Autonomous Research LLP
It's Manus Costello from Autonomous. I just wondered if you can give us some more color on your decision to issue equity to pay the coupons on the Tier 1 bonds, because it seems suddenly the price, given the confidence you're talking about in your capital generation and the fact that you were calling a low Tier 2 the bond the other day, they seem somewhat contradictory actions.
And just as a follow-up on that, I wondered if you can give us an update on what your plans are for the stake and some changes placed and what any sale would do for your capital position?
António Mota de Sousa Horta-Osório
[indiscernible]
Mark George Culmer
Yes, I'll do the first one. And I'm quite happy to reiterate our confidence in our capital position and how that capital is developing, and how that capital position will move as we move forward.
But in terms of those particular instruments, what we're doing is applying a policy that is entirely consistent with last year, and that's all I have to say.
António Mota de Sousa Horta-Osório
And relating to St. James Place, which I am going to reiterate, I find it's a great company.
It's doing very well. I think it will probably be a winner of the RDR.
Prices are increasing in the market in line with good performance, as they delivered yesterday, and we are very happy with the way the share price is going.
Unknown Analyst
Sorry. Just to follow up on that statement, George, except that it's the same policies you adopted last year, but in the numbers you're showing is your capital position is materially stronger this year and your outlook on capital is all optimistic.
So why do you adopt the same position? Is it your decision or is it a regulatory decision?
Mark George Culmer
Well, thank you for those comments on our capital position. It's not material, and we are just being consistent with last year.
Ian Gordon - Investec Securities (UK), Research Division
It's Ian Gordon from Investec. I've got 1 request and 2 questions.
In order to -- the request is, in order just to follow your progress against the core balance sheet, footings, guidance, do you think we could have some divisional disclosure at the quarterly statement, please? And then the 2 questions are, first of all, on other income.
Could you just provide a little bit more color on the expected weak performance in retail other income and the encouraging performance in corporate other income? And then thirdly, I'm not asking for quantification, but would you be prepared to hazard [ph] a guess as to whether the reports of an end of summertime scale for your LIBOR settlement with at least the U.K.
and U.S. authorities is ballpark correct?
António Mota de Sousa Horta-Osório
I'm sorry. Can you repeat your last bit of the question?
I think you asked 3 questions, but the third one wasn't...
Ian Gordon - Investec Securities (UK), Research Division
Yes. I was just asking if you'd hazard [ph] a guess, whether the reports [ph] of a end of summer settlement for your LIBOR settlement with U.K.
and U.S. authorities is likely to be ballpark correct.
I'm not asking for quantification, just a guess in terms of timescale.
Mark George Culmer
Look, LIBOR -- as we said, you'll see from our disclosures, that our position is fundamentally unchanged. We are not the focus of the authorities, be it in London, be it Europe, be it in New York, and that's not something that we passively sit back and wait, and we're very proactive.
So we are not focused to their attentions. They may be others who are a better informed in terms of likely settlements or whatever, but we're not the party to be speaking to.
To your first question, your request on the reporting bit, I'll take that onboard. We are trying to simplify and shorten our reporting, which may fly [ph] in the face of your request, but I'll take it onboard.
António Mota de Sousa Horta-Osório
Okay. And I'll answer to your second bits, which is -- I think the way I look at the divisional performance is, retail have very good performance this year, where impairments and costs more than offsets slight decrease in income, which is basically originated by interest rate movements during the year and also a decrease in volumes, as we have just discussed.
And the LOI [ph] in retail specifically, you have to see it in a context where the markets have not been good, so you have less investment sales. In terms of bancassurance, they also normally go down when economic [indiscernible] are more difficult.
So I would say, it's just particular in the context of the year. I think retail has been very good performance and has set up the prices [ph] to have a much -- an even better year in '13.
And you have to see that we have a very powerful retail franchise with 3 leading brands really complementary between themselves, so with a clear multi-brand approach to our customers with segmentation, where I strongly believe that the additional costs of serving customers in a multi-brand approach are much more than compensated by the higher value that we give to the different needs of the different customers in the different brands. And as you can see, the Halifax brand, for example, has a very different strategy to Lloyd's and that is absolutely in line with the culture and the DNA of each customer's brands.
In commercial, which is in the different stage of development, and you will hear more about this in the Investor Day with Andrew, it's just sitting in front of you. Commercial have to set devices to start growing in a proper way in terms of mid-corporates and large corporates and get a higher share of wallet in the process, where, by the way, as you know, is where we are investing most of our capital in terms of growth initiatives on the commercial area.
So we are -- we have had very good results with the money markets and the FX portal arena where we treat our customer, but yet chooses it. We are substantially enhancing our transaction banking capabilities which are weak and we have to develop them further.
We are the main bank to 20% of the U.K. mid corps and large corporates, but we have weak transaction banking capabilities.
We are investing heavily on those and therefore, you should, no doubt, in the future, see the commercial area increase their profitability, as I said before, through an increase in revenues, especially LOI, and a decrease in RWAs and therefore, capital allocated through the division. Michael?
Michael Helsby - BofA Merrill Lynch, Research Division
It's Michael Helsby from Merrill Lynch. I've got 2 questions and if I can have a request as well actually.
Could you give us an average balance sheet that gives me the yield and the -- on your assets and your liabilities? There's a lot of questions about margin.
I think that would be really, really helpful. So just on the margin, that's the first question.
I think you've helpfully give us the 8 basis points impact from the hedge. So we've got a 13 basis point underlying increase, for want [ph] of a better word.
Could you give us -- you've also identified quite a lot of changes, but could you help us by breaking down that 13 bps into how you see it from asset spread, deposit spread? You mentioned the wholesale funding buybacks and also the negative impact of the hedge.
The reason I ask is clearly, there's been a lot of movement within deposit pricing recently, so I just like to get a gauge of what you're factoring in, that would be really, really helpful. The second question, which I can go now is just on costs.
I was wondering if you could give us a split of where the rest of your simplification costs are going to fall, is that all in core or does an element of that go into non-core? And if you can give us a gauge of how you see the non-core cost base in 2014.
António Mota de Sousa Horta-Osório
I'll start with the costs because that's an easier bit [ph], then I'll leave the difficult one for George on the margin split. Look, on costs, I think what I saw this morning very quickly on the note, I think it's a bit equivocated because what we basically did on costs is very simple.
We brought the guidance of GBP 14 billion [ph] a year earlier into '13. So I saw some people saying, "Oh, this is higher than consensus and then therefore, it's not as good."
I don't think you should read it that way because we have not finished the year yet. What we did is basically bring the guidance of GBP 14 billion, that have been GBP 10 billion, have been brought to GBP 9.8 billion, [ph] we now brought it to '13, which show that we are very confident, that we continue to go ahead of plan, as you see on the rest of the numbers, right, so that's the broad picture.
And in terms of the split between core and non-core, as we said before in these presentations, we try to allocate only variable costs to the non-core, because non-core will disappear. So most of the costs in non-core are variable, and you should expect them to disappear over time, not totally because they cannot all be variable.
For example, if you are a Norwegian, there are costs in that region that only disappear [ph] when you exit the region. But they will be reasonably variable, so you should expect the cost in non-core to go down as the non-core assets go down as well.
Okay? And we feel very confident, as Mark said, that we are only halfway in terms of our simplification benefits.
And I would like Mark to give some color, but before I do that, I want to make an additional point which I think you should really think about. It is very easy to cut costs, very easy.
I mean, I have done it all my life, very easy to cut costs. What is really difficult to do is to cut the [indiscernible] costs and without and with the proper [indiscernible] between costs and revenues and without impact on quality.
And that's why we show you that as we have cut nominal costs now for 2 years in a row and conservatively to the general wisdom, our NPS cores are all going up [ph]. Lloyd's is now independent assessment, the best brand customer service in the high street and our complaints have more than halved in 2 years and are now, per customer, the complaints per customer are now less than 1/3 of our 3 main competitors.
So I think this all combined shows how we industrialize the process we have and how we are doing this in the sense of cutting nominal costs. But as I always said from the customers' point of view and therefore, simplifying the customers' experience and therefore, having their feedback as higher quality and less complaints, and this is really the difficult thing to do.
Mark, can you give some more color on this, please? [indiscernible]
Mark Fisher
Yes. Okay.
The very easy job I have to do of reducing costs. It's really -- if you think of it as a portfolio that I talked about, relationship with the suppliers and sourcing, those things we got on with very quickly at the start of the program because you can do them quickly, things like the -- reshaping the organization through -- it expands less.
So those are the early deliverables that given a lot of the progress that you see to date. Meanwhile, we're working very hard, actually doing the heavy lifting of reengineering customer processes, claims handling, those things, which take time, they're big bills, typically lots of IT, they typically take 12 to 18 months to do.
So clearly, it's only now that those things are starting to mature and flow through. So the latter part of the program has much more coming through of our heavy lifting reengineering point.
Having said that, the supplier side is going so well, we've actually got more to go there as well. So that's why we're confident that the second half of the program, as it were, can hit their targets that we've set.
Mark George Culmer
On your question on margins for [indiscernible], your request for average balance sheet, and so I'm starting a list, obviously, of disclosure things. But on the NIM projections, I'm not going to give you a detailed breakdown of where I see assets or where I see deposit price.
Again, obviously, as you said, that deposit prices are coming off, but it's not just a question of new pricing. It's obviously the interaction between maturing deposits and the new prices.
And we are obviously, as you know, seeing significant movements on the asset side of the balance sheet as well. So -- and I know if I search entirely, the number I will give you though is in terms of the structural hedge.
We would expect that to have about a headwind of about -- round about 6 basis points in 2013.
Michael Helsby - BofA Merrill Lynch, Research Division
Can I just come back on the costs because -- I'm not doubting for one second that you can cut costs, I'm just asking -- maybe I'm misunderstanding, but you've identified the simplification costs that you've got left. So I'm just trying to ask, is that all -- that sounds like it's all in the core that's all going to come off the core cost base.
António Mota de Sousa Horta-Osório
Okay. Well, no, no, that's a good question.
No. The simplification was the main program that we have designed.
We are going ahead of our simplification target as you heard. But at the same time, we are doing a systematic benchmarking of all the bank versus the best area in the world in that specific area.
So we have a best program ongoing on top of simplification, which is to compare productivity metrics, organization. In all the areas we are comparing ourselves with the best in each of the areas and we are continuously reassessing how we benchmark and we want to be either the best in that area in the field or not to be in that field at all.
So that is on top of what we are currently doing and that is a process we've started in the second half of last year and that will have more room to go.
Michael Helsby - BofA Merrill Lynch, Research Division
But you're not prepared to give -- I'm just trying to gauge the non-core, because you've got your plan, so you've got your vision of where non-core assets are going to be. So I'm just trying to gauge what the cost base is, because clearly, then non-core is going to get soaked [ph] back into the bank.
I'm just trying to gauge what that...
António Mota de Sousa Horta-Osório
I cannot tell you everything, Michael. I mean, as you say, the retail assets will come back to the core, so you can make an assumption of how much of the cost are on the retail assets.
They will come back to the core. We have assets that will go to 0 in time, right, so less than 35 by '14, and then to 0 in time, and those are the assumptions you should make and you should also see that they're as variable as possible with the caveat I told you about when they're in a region, it's not totally variable, it's [indiscernible] variable.
Other questions? In the back, please.
We now have to go in the back a little bit. Yes, please?
Rohith Chandra-Rajan - Barclays Capital, Research Division
Rohith Chandra-Rajan at Barclays. A couple just on your impairment guidance, if I could, please.
Just in terms of this significant reduction that you anticipate for 2013, I wondered if you could comment how consistent that is with, I think, consensus for your impairments to fold by close to 20% and whether that's primarily driven by non-core?
António Mota de Sousa Horta-Osório
Speaking about the confidence for impairments?
Rohith Chandra-Rajan - Barclays Capital, Research Division
Yes. Consensus for impairments is down 20% in 2013.
How does that -- is that consistent with your guidance?
António Mota de Sousa Horta-Osório
Well, we are not -- we cannot give you all the variables, okay? We do already gave you the volumes, the managing, the costs.
We are not going to give the impairments. But I think, without looking at the consensus number, I think the way to think about the impairments is our core business will continue to perform at approximately the same level and the non-core reductions will imply an additional significant decrease in impairments, as it happened last year.
So I think the way -- given we have been sharing with [ph] across the board, I think you should split core and non-core. Core is very close to its average long-term AQR and the non-core is going down at an accelerated pace and impairments of non-core will go down with it.
That's the way I would look at it. I don't know if you want to add anything, George.
I think that's the best way to think about it.
Mark George Culmer
I think that's the best way to look at it, yes.
António Mota de Sousa Horta-Osório
Yes.
Rohith Chandra-Rajan - Barclays Capital, Research Division
Now that's very clear. And then just a follow-up to that is, to what degree your guidance reflects any work the FSA has been doing on asset evaluation?
António Mota de Sousa Horta-Osório
Sorry, I don't hear you very well.
Rohith Chandra-Rajan - Barclays Capital, Research Division
So the question is, to what degree your expectation on impairments reflects the work that the FSA has been doing on asset evaluation?
António Mota de Sousa Horta-Osório
That's a very good question, one of my favorites. I think the best confirmation that we have a good and appropriate improvement provisioning policy and the proper marks is the speed at which we sell non-core in a capital-accretive matter.
And we told you last year we would sell GBP 25 billion and we have increased that to GBP 30 billion. When we got to GBP 31 billion, we said GBP 38 billion and we finished at GBP 42 billion.
So we sold GBP 42 billion capital-accretive matter, generating GBP 1.2 billion in the process, which is interesting in an FBC context because we are generating capital as we sell the non-core assets. And when you look at it, you can see that the GBP 42 billion in percentage terms are bigger, are larger than the previous year, as you saw in the presentation.
So we have increased the acceleration, we have increased the rate of decrease of non-core and when you look at risk-weighted assets, you see that assets, the GBP 42 billion, decreased to 30%, the RWA has decreased 33%, so risk decreased even more than the assets. And the 33% decrease in RWAs, which is GBP 36 billion, is larger in absolute terms than the RWAs of the previous year reduction, which was GBP 35 billion.
I think that says everything about our remarks and our capacity to sell non-core assets in a capital-accretive way. Please, and with this, we come to the front of the room again.
Peter Toeman - HSBC, Research Division
Peter Toeman from HSBC. On a similar point, the FBC has been concerned about inappropriate risk weighting for banks and obviously, a lot of commentary about your 16% risk-weighting on the mortgage books.
So I presume you're not expecting any pushback from Andrew Bailey when you have your discussion?
António Mota de Sousa Horta-Osório
Look, as George and myself, we both said -- and George may give some color on that. We are very comfortable with our capital position.
And you can see the capacity of generating capital when quarter after quarter, both our core Tier 1 ratio on normal basis, on a fully-loaded basis, increased by 25 basis points a quarter on average in spite of legacy provisions, which will be substantially lower going forward. So we have an enormous capacity of generating capital.
The marks, I just answered, cumbered [ph] we have answered before. And in terms of the risk-weighted assets and those models, they have been agreed with our regulator.
We think we are reasonably in the middle of the pack, and we are very comfortable as a whole. I think the main point in the U.K.
last year was actually the shift in focus from a pure financial stability view into a balanced view between financial stability and growth and support to the economy when you saw in the summer, substantial changes in the liquidity rules and the implementation of the funding for lending scheme. I think those are the facts, as I said in our Q3 IMS and in our conference call, that changes a balance that shows a much more balanced approach towards a holistic solution of the program, which I think is the right one, and I do not think you are going to see significant changes to that approach.
Chintan Joshi - Nomura Securities Co. Ltd., Research Division
Chintan Joshi from Nomura. Can I ask you on core loan growth from the second half?
In case U.K. GDP doesn't grow, would you still expect to grow core lending?
António Mota de Sousa Horta-Osório
I haven't thought about that. We expect U.K.
GDP growth of around 1%. So we expect some trends, slight improvement and we think the Funding for Lending Scheme will help.
If GDP disappoints and stays like last year around 0, I still think we will grow because what we are [indiscernible] is not GDP driven. What we are is internal policy [ph] driven.
So minor changes of GDP will not change our actions. We may have to make the bigger effort or a slower effort, but I expect to grow our core lending in a fully [ph] lending market.
Small changes of GDP will not change that, they will change the intensity of our actions.
Chintan Joshi - Nomura Securities Co. Ltd., Research Division
So then if I take that forward, you've given some disclosure in the Appendix regarding your share of remortgage, which is one area where it's below the market levels. Is that an area that you would look to pick up your market share in and therefore, might need to be more competitive?
António Mota de Sousa Horta-Osório
No, no, no. As I said before, in mortgages, we only -- our objective is to grow with the market from second quarter onwards because of the reasons of core loan-to-deposit ratio, 25% market share, and we are going to continue to be focused on first-time buyers because we think that is the real important part to support the U.K.
economy. So that is our focus, so -- and the rest, we'll grow with the market.
Where we are going to significantly outpace the market is on the business lending, keeping SMEs for the third year in a row positive in a falling market and turning around the mid corporates and the large corporates into positive in a falling market within prudent risk procedure. [ph]
Chintan Joshi - Nomura Securities Co. Ltd., Research Division
George, if I could just [indiscernible] question. I understand it's very tricky to give this margin moving guidance.
But broadly speaking, deposits are improving, Wholesale funding is improving. So in that mix, it's asset pricing that's probably giving some back, so that net-net, you're at 198.
Is that fair?
Mark George Culmer
That's not bad assessment. There are other headwinds going on as well, other sort of factors, but that assessment's not bad summary.
Sandy Chen - Cenkos Securities plc., Research Division
It's Sandy Chen from Cenkos Securities. Just, well, 2 questions.
One on mortgage arrears and just to read across. Looking at Page -- Slide 19, it looks like the mortgage arrears have been relatively flat for quite a while, trying to put that together with the properties and repossession, which has to come down and also, the guidance on mortgage forbearance which has also come down.
Putting all those things together, does that imply a lot of restructuring of loans into interest only that are not included in the loan forbearance numbers, or have I misread that?
Unknown Executive
No, they are, they are. In forbearance, we include the restructurings in interest-only mortgage.
The important thing in forbearance, as you're saying, is the trends and the trends are decreasing, so they have nothing that is being accommodated behind the number that we have in arrears. So our views on the mortgage portfolio is a flattish trend.
They were in arrears is in the non-core book because as we have said, it is a time for this book to season and it is seasoning. And if you're starting to see the decrease in the arrears of our closed book, which is good news.
So I think what you could expect in a mortgage market is that kind of flattish trend for '13 [indiscernible].
Sandy Chen - Cenkos Securities plc., Research Division
And the other question that I had was on the core Tier 1 ratio, the 8.1% I think that you've given. Does that include the pension -- IAS 19 pension corridor adjustment, the GBP 2.1 billion?
And what would your estimate be of the -- of how much fully-loaded would come down?
Mark George Culmer
No. As I've said in my presentation, that becomes effective from the 1st of January, and one of the things I think it will bring is a bit of interfered [ph] volatility.
What I would say is though that stepping back, I generally expect our core Tier 1 on the current rules under fully loads will continue to increase because of the core earnings and the continued accretive non-core reduction. The IAS 19 will bring some volatility.
It's not the full GBP 2.1 billion in terms of impact, because what happens at the moment is, we will move from -- we've got an asset that we recognize on the balance sheet and we'll move to a deficit, but for capital ratio purposes, you can't count the asset. So actually, it's not the full movement.
So we estimate -- actually the impact on current rules would be around -- it came in at about 40 basis points. It's probably now down to about 30 basis points in terms of the impact.
It will be quite volatile. One of the things that we're doing internally is working with the pension scheme trustees just to save [ph] the way we can actually reduce that volatility, but it will be about 30 basis points on current rules.
António Mota de Sousa Horta-Osório
More questions? The lady on the back.
Claire Kane - RBC Capital Markets, LLC, Research Division
It's Claire Kane from Royal Bank of Canada. I have a question on your -- the best way to really look at liquidity from your perspective.
You've given us some ratios on Slide 21 and your liquidity portfolio is pretty much flat year-on-year, but relative to your Wholesale funding, it's really increased. I was wondering if you could confirm whether you're compliant with the LCR or if that is something you are working towards, and then how we should think about the liquidity portfolio in absolute terms coming down over the course of 2013.
And then my second question, I was wondering if you could give us some more details on your comments on your plans to optimize the capital structure this year, please?
Mark Fisher
Yes. So I will give be very specific on the second point.
Obviously, we've got rule changes coming up and we will continue to scrutinize our balance sheet and plan and to see what is the most appropriate structure for going forward. So sorry but for some very obvious commercial reasons, I mean, I'm not going to sit here and tell you what we might do.
But what we are doing is generally looking at the balance sheet. As I said in my presentation, there's no need for any material Wholesale funding, but we will probably be -- look at tactical opportunities, let's say, and we will continue to scrutinize our balance sheet and see what we can do to make as efficient as possible in the regulatory world to come.
In terms of the first question, liquidity, yes. I mean, we don't disclose in terms of compliance with liquidity requirements, be it ILG and LCR.
Obviously, there's been -- there is some rule changes in LCR. We feel very comfortable in terms of our liquidity position and in terms of compliance with the regulatory requirements and we will always be looking to deploy that liquidity we've got as profitably as possible and look to -- or always, I think, actually looking to put it to use.
But what I can tell you is in terms of regulatory compliance, we are very comfortable with both ILG and LCR compliance.
António Mota de Sousa Horta-Osório
And I think you should look at our liquidity in the context, as I also said in my speech, of the journey. Because 18 months ago, this bank had GBP 300 billion of Wholesale funding; 1/2 of it, GBP 150 billion short-term Wholesale funding, funding the 5 [ph] mortgage portfolio.
And now, of the GBP 150 billion, we only have GBP 50 billion. So we have repaid the GBP 100 billion of short-term Wholesale funding, and the GBP 126 billion of Wholesale funding together, which completely changed the funding and liquidity position of this bank.
Of course, it's a big cost, because short-term funding costs you LIBOR and Wholesale funding or deposits probably cost you 2% over LIBOR. So that implies, as you can imagine, that implies like more than GBP 0.5 billion -- GBP 1.5 billion of less income that I would argue it is income that should never have been there in the first place.
And second, it is complete and therefore, given it is complete, you will no longer see this impact going forward. More questions?
Please, on the back?
Unknown Analyst
It's [indiscernible] speaking from Redburn. I know it's I think about 1 week ago now, there is sale of some non-core asset, countrywide assets to you and Oakshot [ph].
In the sale of the assets, you provided some debt financing to Countrywide. My understanding was vendor isn't done on a non-core business.
I was wanting to get an idea, does that debt as you remain in non-core, or does that get transferring to the core business?
Unknown Executive
No. Well, I will not comment on this specific transaction.
But I can tell you the way we are managing the non-core disposals. So the stable finance that we are going to non-core deposits is minimal if we -- our policy has been not to do it.
I have to tell you, it is not an exclusion, so in the case, if we think it is appropriate, we do it. But our policy has been to do the non-core reductions without any kind of vendor finance.
Unknown Analyst
Does that financing then stay in the non-core to that transported core?
Unknown Executive
It depends on the transaction. It is a minimal type of thing.
It's very, very small.
Unknown Analyst
And just one more question on margin. Obviously, you talked about an 8-bp headwind.
But how much unrealized gains are left in the gilt portfolio? Are you to going to continue to sell them?
And what kind of headwind does that have on margin?
António Mota de Sousa Horta-Osório
Well, we feel -- so as of December 31, we have then, as George said, most of it, but we still had some and we have continued to sell them. So I cannot sell much more.
But we have continued to sell them, although now we stopped because now interest rates are above 2. But we have continued to sell them through January.
Although most of it have been done, so the GBP 3.2 billion you saw was most of it. I mean, to be -- to start to put it to perspective.
So we have some left, we have then part of the sum [ph] left, still have a bit of the sum [ph] left. But again, the point is very clear that I think you should take.
We thought for a long time, and that's why we acted according to what we thought, that we should not have shareholders' money in 10-year gilts of inflation, that was the basic thing. So as rates went down, we saw more and more.
As rates started to come up, we saw less and less but fortunately, we have almost finished. Okay.
Michael, again?
Michael Helsby - BofA Merrill Lynch, Research Division
Michael Helsby of Merrill Lynch. Just 2 points of detail actually.
You mentioned in your comments before about how your CRD IV deduction is still on Article 45, not 46. Can you just remind us again what the benefit of moving from one to the other would be?
António Mota de Sousa Horta-Osório
It would be at least 20%.
Michael Helsby - BofA Merrill Lynch, Research Division
Right. Okay.
And just on your DTA deduction, is that all that on U.K. business, i.e.
so U.K. corporation tax should be also [indiscernible]
Mark George Culmer
It's a very, very vast majority of that, yes, as we guided, yes.
António Mota de Sousa Horta-Osório
Very little international presence most of it is [Indiscernible]. More questions?
Manus, again. What have you found this time?
Manus Costello - Autonomous Research LLP
It's just what I've not found actually, just a quick follow-up. The fair value on mind, we don't have any guidance on it for '13, '14 and '15, and you say it's now moving below the line, so I wonder if you could give us an idea of what the impact will be for the next few years.
António Mota de Sousa Horta-Osório
[Indiscernible] moving forward.
Mark George Culmer
All right. It's by [indiscernible] we used to give guidance on it and then be wrong all the time, so we stopped doing that.
I mean, I think for 2013, it's going to be moved into a negative and I think that will be above a 0.3, or something like, 0.3 negative of that order, but...
António Mota de Sousa Horta-Osório
Any more questions? Okay.
So we are done. Well, again, thank you very much for coming and we'll speak a bit more if you want us to [ph].
Thank you.