Oct 29, 2013
Operator
Thank you for standing by, and welcome to the Lloyds Banking Group Q3 2013 IMS Conference Call. [Operator Instructions] Please note, this call is scheduled for 1 hour.
I must advise you that this conference is being recorded today, the 29th of October 2013, at 9:30 p.m. U.K.
time. The speakers today are António Horta-Osório and George Culmer.
I would now like to hand the conference over to António. Please go ahead, sir.
António Mota de Sousa Horta-Osório
Good morning, everyone, and thank you for joining us for our 2013 third quarter results presentation. I'm joined here today by our Group Finance Director, George Culmer, who will shortly present the financial results in detail.
So turning to Slide 1 for those of you following the website presentation. We continue to make significant progress in the delivery of our strategic plan as we create a lower risk, highly efficient U.K.
Retail and Commercial Bank, focused on our customers' needs and on supporting the U.K. economic recovery.
We are lending more to SMEs and to larger corporates, and in the last quarter, returned our core mortgage net lending to growth. As a result, the group's core loan book is now growing in all divisions, with net lending increasing another GBP 2 billion in the quarter and having increased by GBP 5 billion year-to-date in a falling market for corporate loans.
The third quarter was also a significant one with our launch of a new bank, TSB, the first time this has been done through a spinoff in the U.K., bringing a fresh new competitor to the High Street. And we also launched the rebranded, revitalized Lloyds Bank, building on its history of almost 250 years of serving the people and businesses of Britain.
We are focusing relentlessly on meeting the needs of our customers who are at the heart of our strategy by investing in the products and services they require. As a result, we have seen a further reduction in customer complaints of 20% compared to last year or 50% compared to 2011.
Complaints per thousand accounts are now around 1/3 of the average level of the main U.K. banks.
And we continue to see a strong performance in customer service metrics, with Net Promoter Scores increasing by 13% in the first 9 months of the year. We also further reshaped our business, increasing our focus on our core U.K.
business through further capital-accretive non-core reductions, and sales of International businesses, including Australia. We are now ahead of our twice-revised plan and have effectively met our target for non-core disposals and country exits 15 months ahead of schedule.
I will come back to this shortly. We continue to strengthen our balance sheet and capital position despite a further charge for legacy PPI business in the third quarter, and have now commenced discussions with our regulators on the timetable and conditions for dividend payments.
Turning now to an overview of our financial performance on Slide 2. We have delivered significant improvements in profitability and returns, driven by progress on all lines of the income statement.
The increase in income was supported by core loan growth and by the substantial expansion in margin, primarily driven by improved deposit margins as you will hear from George. At the same time, costs continue to reduce as we further simplify the business, and the impairments fell sharply as we continue to derisk the balance sheet.
As a result, profit increased both in the group and in our core business, with group underlying profit increasing to GBP 4.4 billion and core profit by 20% to GBP 5.5 billion. We delivered a statutory profit of GBP 1.7 billion despite legacy charges and losses on capital-accretive non-core asset sales as you will hear from George.
And with this improved profitability, together with the reduction in non-core RWAs, the group return on risk-weighted assets more than doubled to 2.01%, while the core return has now reached 3.17%. Turning to the balance sheet on Slide 3.
We have taken significant steps this year to further strengthen and derisk the balance sheet. We continue to strengthen our funding position with further growth in customer deposits matching our core loan growth, resulting in our core loan-to-deposit ratio remaining at 100%, and the group ratio reducing by a further 3 percentage points to 114%.
Our wholesale funding is now around half of what it was at June 2011 at GBP 151 billion. And our money markets funding is now GBP 31 billion, which is less than 1/3 of the level at that time.
Simultaneously, we made excellent progress on non-core reductions in a capital-accretive way. We have achieved our revised year-end targets and are now targeting a further reduction to around GBP 66 billion of non-core assets and around GBP 26 billion of nonretail non-core assets by the end of 2013, and to around GBP 15 billion by the end of 2014.
This means the nonretail assets will represent only 3% of our group's balance sheet by the end of this year and less than 2% by the end of 2014. In line with our U.K.-focused strategy, we have also reduced our International presence, most recently selling our remaining Australian operations.
As a result, we are now in 9 countries, having exited or announced the exits from 21 countries, and achieving our targets to be operating in 10 countries or fewer by the end of 2014, down from 30 2 years ago. This means our U.K.
assets now represents 95% of group assets. Therefore, this key element of our June 2011 strategy, the refocusing of the bank on its core U.K.
Retail and Commercial business, has now been delivered 15 months ahead of schedule. We also further increased our fully loaded core Tier 1 capital ratio to 9.9%, an improvement of 1.8% in the first 9 months of the year and remain on track to deliver our guidance for a fully loaded ratio of above 10% by the year end.
Turning now to Slide 4, and looking in more detail at the dynamics of core loan growth. The support we are giving to our customers and the U.K.
economy has been evident in the growth of our core loan book this year. We have grown core loans and advances by GBP 5 billion or around 1%, against the market that has fallen by 1% or around GBP 14 billion.
We have now committed over GBP 28 billion to our U.K. customers through the Funding for Lending Scheme, and has continued to support U.K.
manufacturing by committing over GBP 1 billion of lending in the last 12 months, again, ahead of our target. For SMEs, which are a key driver of employment and economic growth, we have supported nearly 100,000 start-ups this year and have also continued to grow lending strongly to these customers with an accelerated net growth of 5% in the last 12 months, which compares to a market that has declined by 3%.
For our Retail customers, as we show on Slide 5, we returned our core loan book to growth in the third quarter as targeted 1 year ago and after reaching 100% core loan-to-deposit ratio in March of this year. We expect to continue to grow our core mortgage book into 2014.
We are continuing to focus on key areas, which support the housing market and the U.K. economy, particularly first-time buyers.
Here, we have already exceeded our GBP 6.5 billion gross lending target for 2013, with GBP 6.7 billion of lending to the end of September. In October, we also reached our full year-end target of helping over 60,000 customers buy their first home.
After the quarter-end, the government launched the second stage of the Help to Buy scheme. We were one of the first participants to launch a range of products and our Halifax brands, making mortgages accessible to those with small deposits but who are able to afford the monthly payments.
We expect the scheme to help to increase the liquidity in the U.K. housing markets and increase the volume of mortgages available, while offering support to the wider U.K.
economy through increased activity in the construction sector, one of the main drivers of employment in this country. We have already seen significant interest in Help to Buy mortgages from our customers in just the first few weeks of the scheme, with the inquirers running at a very high level and applications growing strongly week after week.
And with that, let me now hand the call over to George for a more detailed look at our financial performance.
Mark George Culmer
Thank you, António, and good morning, everyone. Beginning with P&L on Slide 6.
As you heard, we continue to make substantial progress of our strategy. This is reflected in the group's financial performance in the first 9 months.
The group's underlying profitability has more than doubled on prior year to GBP 4.4 billion, with profit in our core business increasing by 20% to GBP 5.5 billion and losses from the non-core more than halved to GBP 1.1 billion. Underlying income grew 1% to GBP 14 billion.
And within this, net interest income was up 2%, reflecting core loan growth and improved margin, while other income was fully stable despite non-core reductions in a subdued external environment. Costs were down 6% or GBP 427 million, mainly driven by Simplification, and impairment charge was nearly GBP 2 billion lower at GBP 2.5 billion.
Statutory profit was up GBP 2.3 billion to GBP 1.7 billion, and mainly driven by the increase in underlying profit. Looking at movement between underlying and statutory profit in a bit more detail, Slide 7 sets out the key items, starting with asset sales, while losses on disposals totaled GBP 637 million.
This include approximately GBP 330 million from Heidelberger Leben which we announced in August and GBP 256 million from the sale of our Spanish retail operations in Q2. Our disposal program remains capital-accretive, generating approximately GBP 2 billion in the year-to-date.
Gains on government bond sales were GBP 786 million, while volatile items of GBP 39 million was significantly better than last year, mostly driven by positive insurance volatility of GBP 637 million due mostly to rising equity markets. On Simplification, we expensed GBP 608 million in the first 9 months.
This brings cost to date to GBP 1.5 billion, with over GBP 2 billion expected to be directly expensed through the income statement out of an estimated total cost of approximately GBP 2.3 billion. On Verde, we're making good progress towards an IPO in mid-2014.
TSB has been operating a stand-alone business within the group, and the 9 months spend of GBP 586 million brings the total cost to date to just under GBP 1.4 billion. On legacy, we have taken a further PPI provision of GBP 750 million in the third quarter, bringing the total in the first 9 months to GBP 1.25 billion, and I'll cover this in more detail shortly.
The movement in other statutory items mostly reflects, as at the half year, a charge of GBP 104 million related to provisions in pensions benefits. This compares with a GBP 250 million pension gain recognized in the previous year.
Finally, the year-to-date tax charge of GBP 1.4 billion, now this is significantly higher than U.K. tax rate, primarily due to the write down of deferred tax assets of GBP 503 million, the reduction in U.K.
corporate tax rates, and GBP 355 million from the exit from Australian operations. Turning now to Slide 8 in underlying income.
Core income grew 5% in the 9 months to GBP 13.5 billion or up 2% excluding St. James's Place, with income in the third quarter of GBP 4.4 billion, up 4% compared to Q3 2012.
This growth has been driven by net interest income, which is up 5% in the 9 months and on the second quarter due to both margin expansion and loan growth. Other operating income remains challenging and is down 2% year-to-date, excluding St.
James's Place, reflecting the subdued external environment and general trend towards net interest income. With its positive margin continuing to expand and the further reduction of non-core assets, group margin rose to 2.17% in the third quarter, given 2.06% in the 9 months, compared to 2.01% at the half year.
Given this progression, we now expect a full year 2013 margin of 2.11%, with further margin widening in Q4 and a more stable profile in 2014. Slide 9 shows the movement in greater detail.
As you can see, the trends we highlighted at the half year have continued with the widening deposit margin, the results of lower rates, and the ongoing maturity of more expensive fixed-term deposits, and this has more than offset asset margin pressures. The margin impact from the sale of government securities remains in line with expectations at 8 basis points.
We maintained the beneficial impact of the repositioned structural hedge into Q3, resulting in a drag of just 1 basis point compared to the expected 6 basis points at the beginning of the year. Moving now to costs on Slide 10.
As mentioned, costs were down 6% net of inflation and the ongoing investment in our core franchise. This reduction was again primarily driven by Simplification.
We have now achieved annual run rate savings of GBP 1.3 billion out of our end-2014 target of GBP 1.9 billion. So 2013 full year, we continue to target costs of GBP 9.6 billion, and this includes expected FSCS and bank levy charges that we will incur in Q4.
Turning to Slide 11 in impairments. On impairments, you see another further substantial reduction in the P&L charge and a significantly improved AQR, reflecting once again the benefits of non-core reductions and robust credit quality in the core book.
Core impairments of GBP 1.2 billion are down GBP 120 million, due mainly to strong underlying performance across our retail portfolios, while non-core impairments were GBP 1.3 billion compared with over GBP 3 billion last year, with reductions in Commercial Banking and International. The group AQR was 63 basis points year-to-date and 51 basis points in the third quarter, with improvements in both core and non-core.
In terms of impaired loans and coverage, the quality of the group's loan portfolio continues to improve. And impaired loans now stand at 7.2%, a reduction of 0.5% since the half year, while coverage levels have been maintained at 51%.
Moving now to Slide 12 on legacy issues. On PPI, complaint volumes have continued to fall in the third quarter although at a slower pace than projected.
Average monthly complaint volumes are up 8% in Q3, with a weekly average of approximately 11,000 compared to around 12,500 in Q2. Costs are also higher than projected, this was driven by the acceleration of cases with the Financial Ombudsman Service, higher-than-projected reactive volumes, as well as an increased scope of proactive mailings compared with -- combined with higher response rates.
As result of the incremental volumes and costs, we are increasing our full projections and raising the provision by GBP 750 million, which brings the total amount provided for PPI to GBP 8 billion, of which GBP 1.7 billion relates to administration costs. And GBP 1.7 billion remained unutilized as at the end of the quarter.
Turning to non-core portfolio on Slide 13. We continue to make excellent progress in reducing our non-core assets in a capital-accretive manner.
As you've already heard, with the disposal of our Australian operations and German insurance business, we've reached our 2013 year-end target of GBP 70 billion. We also continue to see the reduction in risk outstrip the fall in assets, with non-core RWAs down 39%, well ahead of the 29% fall in assets.
Non-exposed portfolio to be around GBP 66 billion at year end. And within this, we expect the nonretail non-core to be around GBP 26 billion and to fall to around GBP 15 billion by the end of 2014.
Finally, on Slide 14, our progress on capital. As you know, the regulatory framework capital continues to evolve, and we are currently awaiting the finalization of CP 5/13 and the implementation of CRD IV in the U.K..
What matters is that we continue to strengthen our capital position. And as already heard today, our pro forma fully loaded CRD IV core tier 1 ratio now stands at 9.9%, representing a 1.8 percentage point increase since the start of the year and 0.3 percentage points in Q3.
This has been achieved after charging additional legacy costs and adverse pension fund valuation movements, and these more than offset -- are more than offset by strong capital generation in the core business from our capital-accretive non-core reductions. I continue to expect our fully loaded ratio to be above 10% at the end of this year.
On a current rules basis, our ratio stands at 13.5%, which gives us the 7th strongest capital ratio for the top 50 global banks. That concludes my review of the financials, and I'd now like to hand back over to Antonio.
António Mota de Sousa Horta-Osório
Thank you, George. Before we move to Q&A, let me close this morning's presentation by drawing together our forward-looking guidance, which I will follow with a brief summary of our performance so far in 2013.
As you can see on Slide 15, our accelerated progress on our strategic plan has driven the need to enhance our guidance in a number of areas so far this year. Today, we are upgrading our group's margin guidance for 2013 to 2.11%.
On non-core assets, we are now expecting the total portfolio to be reduced to around GBP 66 billion by the end of this year, within which the non-retail assets are expected to be around GBP 26 billion, and then further reduced to around GBP 15 billion by the end of 2014, less than 2% of our balance sheet. The group's fully loaded core tier 1 ratio has continued to increase and we expect it to be over 10% by the end of the year.
Meanwhile, our drive to create a customer-focused and a more efficient bank is reflected in our expectation of continued core lending growth and forecast to end year at around GBP 9.6 billion. Moving to Slide 16 and to summarize our progress.
We have continued to execute strongly on our strategy. The investments we are making in our core franchise to improve our products and services are increasingly benefiting our customers, while supporting the economic recovery.
At the same time, we have made rapid progress in strengthening, derisking and simplifying the business, creating a strongly capitalized, low cost, lower risk business, which should deserve one of the lowest costs of equity in the sector over time. We have returned our core lending to growth with the loan book now growing in all divisions.
We are already the most efficient of the main U.K. banks, and will continue to drive our cost-to-income ratio down, building a sustainable competitive advantage in the U.K.
retail market. This has resulted in a substantial improvement in profitability and returns, both in the core business and in the group as a whole, a trend which we expect to continue.
We therefore remain confident in delivering our strategic plan, which in turn will enable us to deliver strong, stable and sustainable returns to our shareholders over time. We are proud that the improvement in our performance and the progress we have made on our strategy has enabled the U.K.
government to begin the process of returning Lloyds Banking Group to full private ownership and getting taxpayers' money back at a profit. And we have now commenced discussions with our regulators on the timetable and conditions for dividend payments.
Thank you. This concludes our presentation, and I would now like to take any questions you may have.
Operator
[Operator Instructions] And your first question comes from the line of Chris Manners.
Chris Manners
So 2 questions, if I may. Firstly was on the Help to Buy scheme.
Obviously, you're indicating you're seeing good demand so far. It looked like the pricing for some of the products from yourselves and RBS were maybe a little bit higher than people originally anticipated and that may reduce sort of the back book SBR cannibalization.
And just thought I'd ask about how much volume improvements you think you're going to get in the mortgage market from the Help to Buy scheme and also that impact on the margin dynamic? And the second one was, you alluded to CP 5/13, and just trying to work out where you think you can run the steady state capital ratio, because I guess you have Pillar 2A coming in, it looks like it could be quite capital consumptive constrained -- I guess pension volatility is a reasonably big number for you, and given your $0.25 the U.K.
banking system, presumably, your domestic CP Buffer could actually be quite substantial, just maybe some thoughts around those.
António Mota de Sousa Horta-Osório
Okay. Chris, I will answer the Help to Buy question and then George will answer the capital one.
In terms of the Help to Buy, this is quite interesting because, I mean, I have -- this is an [indiscernible] I have been on my mostly branch visits last month where I was in the North of England. And as we expected, as we have said when the scheme was launched, there is a very, very strong interest through the Halifax brand where we launched the scheme first as you know.
Lots of interest from customers and also noncustomers. Mostly from first-time buyers -- some home movers, but mostly first-time buyers, people that can clearly meet their monthly payments but don't have access to a significant deposit to put upfront.
And we see still applications increasing very strongly week after week. We have 3 weeks down the road, so it's early to tell you about numbers, but my expectation as I have said before is that this will be quite significant and will increase significantly, I think, the rate of mortgage growth in the next few quarters, which as per last Bank of England numbers were around 0.7%, 0.8%.
I think we will see growth increasing significantly based on this, and on increase of confidence that this is also instilling in the markets. In terms of specifics of what you asked, our impression is the following.
First in terms of pricing, I think it was logical that the price would have to be higher than 75% or 80% LTVs, because with higher risk, you have higher price, this is normal, and you have to take into consideration that we pay a commercial price for the guarantee of the government. Therefore, as I had already said at Q2, we were not expecting and are not expecting a significant cannibalization from the introduction of the scheme.
What we are expecting, as I had said also at Q2 results, is that there will be significant uplift in volumes, at a 75 or around LTV adjusted -- adjusted LTV with healthy margins at that level, and therefore, you can expect higher volumes and healthy margins. And I think as I thought at the end of Q2, that the cannibalization impact will be small and will be much more offset by what I just told you.
So we are quite positive on the scheme, early indications are quite positive and I will update you in more depth at year-end results.
Mark George Culmer
Chris, and on CP 5/13, as you know, when the paper came out August time, consultation was open till October 2. We're waiting -- I think we're expecting to get sort of the PRA's response on the finalization, probably, I think about December time.
Yes, with regards to the constituents, there are a number of items that we think are genuinely open for consultation. As you say, some of the Pillar 2A staff 56% or 100%.
You've probably seen some of the responses go back, just the overall treatment of pensions and whether that should be covered with going concern capital or going concern-type capital. From our perspective, I can't give you a precise number mainly because the rules are still to be written.
I do think we are in a good position in a sort of absolute sense when you look at our capital ratios and our capital trajectory. I also think we're in a good position in a relative sense when you look at our risk composition, you look where we stand from a capital basis versus our peers.
In terms of managing some of those risks, again, we continue to take action. Again, coming back to pensions and we'll see where the treatments come out, but we've spent a lot of time -- or the bank has spent a lot of time prior to my arrival in the last 1.5 years as well in terms on looking how we can match that and take risk out, and we've been active in that and will continue to be so.
So I can't answer your question precisely and tell you where we expect to come out. But I do think we stand in good stead and we are in a good position to respond to what the PRA comes out with.
And I do think that their deliberations and the way they're heading suits the type of bank that we are constructing with that lower risk and a more certain profile. So I can't give a precise number.
We await feedback, but I'm feeling good about where we stand.
Operator
Your next question comes from the line of Tom Rayner.
Thomas Rayner
I got a couple, please. Just first on the margin.
And I think your full year guidance points us to a Q4 margin of around 2.24%. Clearly, that's up 30 basis points over the 12-month period.
I'm just wondering why George was guiding really to stable margins into '14? Just trying to get a sense whether that's a deliberate decision maybe to sort of add volume rather than generate further margin expansion, whether competition is halting up, have you factored in any interest rate assumptions into that guidance?
Could I, you add a bit of color to that, please? And I have a second question on costs if that's okay.
Mark George Culmer
Tom, it's George here. Yes, I think as I said in the presentation, we expect to be more stable, and you write the math, you come out of Q4 in terms of a sort of 2.22%, 2.23%, that type of stuff.
That's the sort of number. We will give formal, I think, guidance with part of our full year results.
At the moment, that's just a sort of an indicative look at, so we will give formal guidance around 2014 as part of our full year, so we'll firm up on it then. But it's just about the sort of trends that we're seeing.
So in terms of what's driven the margin forward in 2013 has predominantly been the liability repricing. We're still seeing a bit of that, particularly, again as I mentioned in the presentation, is in terms of the sort of fixed term book tends to reprice, and so we're still getting a benefit come through from that.
A bit of mortgage headwinds, although you should note the answer that Antonio gave a couple of moments ago in terms of overall margins in Help to Buy and impact. But predominantly, you will see it coming to the end of in terms of the liability pricing.
And if we do end with that, that 2.11%, which I expect us to, and that 2.22%, 2.23% type range, which is kind of where we set out to be in terms of our long-term strategic margin guidance. What then happens within the group, and you're seeing this now in terms of Q3, again, in terms of the core business returning to growth.
It's sort of that -- it sort of moves on to be about our volumes and about driving up NIIs, so I've now got the margin into the zone where I want it to be, and it's now about fixing the focus to actually driving those core volumes forward. And you've seen all segments of the bank return to growth in Q3 with the mortgage book coming back.
And going forward as we move into 2014, the focus I think will be much more about driving forward net interest income, if you like, rather than just the focus on net interest margin. So that's the...
Thomas Rayner
Is there another angle there that if you do more volume, there will be other associated revenues maybe from insurance sales, et cetera? Is that part of the thinking?
Mark George Culmer
Well, it certainly helps. I mean, there's no doubt.
And as you see, if things -- and as again, we talked about it, it's a slightly tougher world in ROI, and there's no doubt the more connections, the more relationships, that sort of lead-type indicator in terms of ROI potential, it's there, but it is a lead -- pretty much of the sort of a lead indicator on that.
António Mota de Sousa Horta-Osório
And Tom, just to add a little bit of color within the segments so that you have it clear. Our intention is, as we have always said, that we would start growing our mortgage book net terms in Q3 after having reached the 100% core loan-to-deposit ratio in quarter 2, which we actually did exactly at the end of March.
So this started to grow. The book started to grow in Q3, and you will continue to see it growing.
But we want to grow our mortgage book as a whole in line with the market, with a special emphasis, as I have referred to Chris, on first-time buyers, because we think that is a key segment, and because as you just asked, we think those are the more loyal customers that drive the bigger share of wallet because they also need the insurance for the first time, home insurance, life insurance and current accounts. So it's -- those are the customers that have the most number of profits per customer because they are buying their house for the first time.
But as a whole, our intention is to grow our mortgage book in net terms in line with the markets, okay? On the contrary, on SMEs, as we have been doing now for 3 years, and on mid-corporates, as we have been doing since the beginning of the year, we intend to continue growing our market share, which was on SMEs around 19% 3 years ago, and we now estimate to be around 21%.
And so we have room. If you consider that post TSB, we have 25% of the U.K.
Retail market in terms of current accounts, mortgages and savings. In SMEs, we can continue to grow from 21% to 25%, we have a lot room.
And also as George mentioned, a lot in ROI has been developed transaction banking in the commercial bank, and we continue to increase, which has been done very well, our capital markets activities in terms of debt issuance and the provision of swaps in terms of foreign exchange, risk and in terms of interest rates risk. So that is going quite well.
And in terms of mid-corporates, where we have around 20% of the market. We also want it to grow and potentially continue towards the 25% level as well.
So you can expect us, in summary, to grow with the market in mortgages with a special emphasis on first-time buyers, and to continue to grow in SMEs as for the last 3 years, and in mid-corporates from the beginning of the year, to continue to grow those 2 segments on a sustainable basis in spite of having the market falling between 3% and 4% on those 2 segments year-on-year as per Bank of England numbers.
Thomas Rayner
And just on costs, the full year guidance at GBP 9.6 billion is not changed, am I right? Is that -- have you absorbed more sort of one-off type costs, such as a higher bank levy and maybe some of the deposit compensation scheme in there, therefore, the underlying is a little bit better or was that very much part of the original guidance, because I'm trying to get a sense of what you might now tell us 2014 could look like, obviously x the TSB cost, what you think the number you should -- or maybe cost income if not the actual number?
Mark George Culmer
Yes. The GBP 9.6 billion, as I said, that we've been so constant -- no, I think about Q1, I think we first put that out there.
Yes. Within Q4, as I said, the bank levy will be, whatever it is, GBP 230 million, GBP 240 million, maybe a bit north of that; FSCS will be on that numbers up.
No, I don't -- I haven't seen a huge shift in the underlying trends. I don't think I've revised my one-off, if you like, so I'm not seeing a shift between one-offs and underlying.
So I think actually the outlook or the composition of that GBP 9.6 billion hasn't changed materially, certainly, since the first half year, Tom.
Thomas Rayner
Okay. And any sort of stay on going into '14 on the costs side, we've talked GBP 9.15 billion I think before?
Mark George Culmer
Yes. I mean that stays.
And that includes a Verde element within that, so I think that -- as I said, we're not giving guidance for 2014 today, but that certainly -- that remains out there.
Operator
Your next question comes from the line of Raul Sinha.
Raul Sinha
António, George, can I have 2, please? Firstly on your asset quality outlook, given that you're near the bottom end of your normalized range at 51 basis points already, is there anything that we should be aware about that's not helping you take the asset quality ratio lower going forward?
Is there anything that we should be aware about pointing in the other direction or should we just continue to see that go lower going forward? And then I've got a second one on PPI, if I can.
António Mota de Sousa Horta-Osório
Okay. Let me answer yours first on AQR, Raul.
I think this is a fair question. I mean, as there are several other matters, I mean, we are not revising other aspects of our guidance up today, so we will wait for the year end.
But what's happening in terms of color, to let you know, what's happening is the following. So as we have commented every quarter since the beginning of the year, we continue to see the U.K.'
s economic recovery where if you remember, we were always quite firm in saying that it would be -- the economy would progressively recover, but we also said it would be long and difficult. We have seen, since the beginning of the year, an increase in both the breadth and intensity of the economic recovery.
So I do think that now, GDP expectations, sorry, GDP outcome at the end of the year, in my opinion, will be very close to the high end of expectations. So I do expect GDP to grow around 1.5% this year and more next year towards the 2.5%.
So we are seeing -- because when you asked in the beginning of the year, I said the expectations were between 0.5% and 1% and I was more on the upper side. So I now believe it will be close to 1.5%.
And to go to the color on your question. When we look segment by segments, we see, apart from the substantial reduction in non-core as George referred, on the core book, which is a critical one in terms of trend going forward, we see not only the same trends that we saw at quarter 2, but we saw an improvement in those trends, which I believe reinforces this idea I'm telling you that the economic recovery is taking steam.
And now we have all segments in our core book, so mortgages, which were flat, now are slightly down; UPLs continue to go down; SMEs; mid-corporates; all segments are either stable or going down, which is very reassuring from an asset quality perspective. And I think we have already said that we don't see a difference in terms of the yearly trend going forward.
But this is not the moment for us to review AQR guidance for next year.
Raul Sinha
In respect, the question really is, if your economic outlook is correct, and which is clearly consensus as well, then shouldn't we be at a point where you're starting to see some write-backs in portfolios where you have taken big charges? And is that something that's starting to crop up in parts of your portfolio yet?
António Mota de Sousa Horta-Osório
No, I wouldn't say so either, Raul. What I would say actually is -- is exactly -- I mean, as the economic recovery will continue to improve, I think you have to separate the analysis of that in 2 parts.
On the non-core bank, which we now basically completed the main pillar of our June 2011 strategic review of the refocusing, so we are now in 9 countries, and we will be at year-end at GBP 26 billion, so we are now at GBP 30 billion of non-core and non-retail assets, which is less than 5% of our banking balance sheet. So that is basically not significant anymore.
We will continue, as we said, to provide you gradual information on these portfolios going forward. But after the end of the year, they do not deserve -- if you want the non-core reporting, because they are quite small, so we have finished that refocusing in terms of U.K.
focus and non-core exits. And on those, you can expect that a better U.K.
economic recovery will lead to a continued good progress on those as we have been doing, we have been selling much more than we had thought would be possible in a capital-accretive way, which is the difficult part, because it's very easy to sell, but it's much more difficult to sell when you generate significant amounts of capital at the same time. And as George referred to you, we have already generated to the 9 month, GBP 2 billion of capital in a non-core reduction, which was more than the total of last year, GBP 1.6 billion during last year.
So on those ones, you can expect a continued good performance. As I told you, by the end of next year, there will be no more than GBP 15 billion, so less than 2% of the balance sheet.
And on the core book, which is the trend going forward, I think you can expect lower AQR than in the past. And I think we have said already at the Q2 that while the strategic review, we had said 50 to 60 basis points for the group as a whole in the medium-term with the core around 50 basis points, I think we have already said, as per track record so far, that the core bank will be below that.
But we will prepare next year the new strategic plan, and we'll announce the revised metrics and guidance at the end of next year as we will announce the new '15, '17 plan, and we don't want to revise it now. But the trends are clear and more than clear.
As you asked, they are robust because they are across all core segments, and they are accelerating as economic recovery gets more steam.
Raul Sinha
Right. And just the second one I had, probably maybe for George, is on Slide 12 on the PPI data that you very helpfully show us.
There's this one point of concern, George, I had on that. I mean that slide, the top one shows you that complaint volumes are down 48% since Q4 2012, but over the same period, your average PPI costs are broadly flat even when you exclude the one-off costs.
And I suspect some of that is the acceleration of the cases pending at the Ombudsman, but my understanding was it was quite low, so just wondering if you can sort of give us some comfort around why the sort of quarterly run rate at GBP 600 million wouldn't continue at these levels even though you're seeing complaint volumes go down?
Mark George Culmer
You're right, this is sort of a diversion step. I just sort of talk about -- I'm going to talk about what's going on in the complaint level, so I'm going to talk about the costs and why that sort of -- you get slightly different trends on those.
And again, I say we've increased the provision because while complaints are down, the sort of the 8% is slightly lower than we were projecting. We were projecting something closer to -- versus what we've seen in previous quarters.
In terms of reasons for that, we know the moment there is and this is partly linked into your questions, while there is a lot of part business review activity going on at the moment, not just at Lloyds but in other banks, so we know that there's an awful lot of cash payments being made with regards to PPI across the U.K. as a whole at the moment.
I think the FCA got some data out a few weeks back now, which show that actually the level -- I think, last quarter's cash payments was as high as when PPI inbound complaints were at that peak. So you'll see an awful lot of checks.
And the basic things in terms of behavior that actually the receipt of cash causes complaints, if you like, and that's I think -- we think that's one of the things where we're seeing by a slight slowing down of the inbound complaint. Interestingly, it's just since quarter-end, actually, we have seen -- I think, we talked about being about 11,000.
Since quarter-end, actually, we have seen a significant reduction over the last 2 or 3 weeks, down to about sort of 8,500-type level, so almost a 20% reduction. Now it's too early to say that's trend, et cetera, but it's just interesting how variable it can be.
Part of it though, to your question, and part of it is just talking about probably divergence between complaints and cash going out -- within the cash going out, we've obviously got a fixed run of the expense base that goes through, and you've also got a lot of remediation and you also got increased levels of past book reviews. So the top charges, so the inbound, if you like, reactive complaints, what we pick up in the bottom chart, as well as pay the sort of general expenses of the business, and the large amount of the sort of proactive, the PPI-type activity.
Now since the half year -- at the half year, we talked about being about sort of halfway through that PPI activity. What actually happened since then is actually we've increased the scope of that.
So I think we had about GBP 2.5 million. That's now up to about GBP 2.9 million in terms of we just increased the scope and we are now about halfway through that expanded scope.
We'll be about 60%, 63% on the old basis, but it's now about 50%. And it's that past book activity and the costs, as well as things like payment pulling forward, dealing with some of the false cases, that is why I have diverted.
Ultimately, of course, those costs should trend down, and that's what we're looking for, and you'll see those costs follow what we see in terms of reactive complaints as we get through the PPR activity, which we expect to finish roundabouts some Q1 of next year.
Operator
[Operator Instructions] And your next question comes from the line of Andrew Coombs.
Andrew P. Coombs
I have 1 follow-up question on PPI, please, and then 2 further questions, 1 on pensions and 1 on dividend. Firstly on PPI, you mentioned that the response rate has been higher than forecast, and in fact, your comments in response to a previous question.
Perhaps you could just update us on the expected response rate assumption you are now assuming, I think it was 27% in June, so basically how that's increased?
Mark George Culmer
Andrew, it's George here. Antonio said it was now more like about 33% is what we're seeing, that's in terms of what we've noted today.
So the 27% has gone to about 33%.
Andrew P. Coombs
And then on the pension, I just had a quick question with regards to pension revaluations that's been taken through OCI. Perhaps you could just elaborate on exactly what the cause of that is, please?
Mark George Culmer
Oh, it's just the court evaluation, Andrew. And yes, I think it's just been stated, there remains a sort of a relative volatile item from a financial reporting basis.
And what you predominantly see move over the year is the discount rate. So we came in the year with a discount rate of roundabout 4.6%.
By the half year, that have moved up to, I think, it was approaching about 4.9%, and that gave us the sort of benefit that come through. As at Q3, moved down to -- back down to about the 4.6%, and it's that, that drives the impact that you've seen in Q3, which is about an GBP 800 million negative impact to the net asset position.
So it's the discount rate fluctuations, which I'm afraid it's just as a consequence of how you quarterly value your 50-year liability of the stuff, it's just how the accounting works. And it will move around and it will fluctuate.
And of course volatility -- what matters, I think going back and going back right back to sort of Chris's questions, what we're looking at, which we've obviously done a lot of the stuff actually, so economically matching the pension scheme in terms of taking out risk, longevity rates, equities, et cetera, and that's what really matters. But from an accounting perspective, we will continue to get this volatility, I'm afraid.
Andrew P. Coombs
Okay. that's very clear.
And just finally on dividends, and we talked about CP 5/13 at the start and obviously we should have a bit more clarity there in December. But given that we're not getting at the methodology of the bank being on stress test until March, April next year, I'm just wondering how much of the hindrance that is to you when you're deciding upon a dividend policy for this year?
Mark George Culmer
So a good question. I mean, the thing is, but there's always another test, isn't there?
So I think by the end of -- well, at the moment, as we said, we've initiated discussions and they've started well all those sorts of things. I think the discussions will go up a notch as we move towards the back end of this year because we can drop in our plans, et cetera, we can show an update of those.
Alongside those plans, we do actually carry out our own stress test with that, and we will submit that to the PRA as well. So we will have, as we move into November, December, our updated financials -- our stress testing of those financials, and as probably, as you'd expect, given what happened this year, particularly -- with the particular stress testing that occurred in the first 6 months of this year, the SCA -- sorry, the PRA, knows our portfolio pretty well, and I certainly don't see that we'll have to wait for another stress test.
We're clearly in -- I can't prejudge the outcome to those discussions, but we feel we're in a good position, you've seen our capital numbers today, I think they're good in an absolute sense, they're good in a relative sense in terms of where we've come from over the year, and I think they're good in a relative sense in terms of how we compare with a number of our peers numbers, number of whom are obviously already paying dividends. So I won't prejudge the outcome, but we feel we're in a good position.
Operator
And the next question comes from the line of Claire Kane.
Claire Kane
And can I get a question, please, on the movements, kind of in the equity base in the quarter? I think you followed up and you said GBP 800 million negative from the pension, so -- and the equity has gone down by GBP 2.5 billion, but common equity tier 1 capital is only about GBP 1.5 billion.
So is the difference mainly related to the DTA? Can you give us what the updated balance of the DTA, I think it's GBP 5.6 billion at the end of June, please?
And then my second question, just to follow-up on the PPI. Of the kind of GBP 1.6 billion net reserve -- you have a GBP 1.7 billion, sorry.
How much of that have you got in for admin expenses? And given the reduction in complaint volumes, could you start to see the kind of team that you have worked on that start to go down and the admin cost to go down?
Mark George Culmer
Hi, Claire, it's George here. The deferred tax has remained around about the sort of GBP 6 billion or so number.
We reserve some utilization, but things like pension scheme, we would add to that as well, so it's roundabout GBP 6 billion. In terms of sort of net assets and what's going on in terms of net assets, and you're right, I mean there was a movement -- significant movement in quarter.
As I think we sort of called out in terms of the fund issue, what that relate to was a number of things. First up, obviously, we've got the asset sale losses in quarter, which are around about GBP 600 million.
But the point we would make here quite strongly is those asset sales, which are led by Heidelberger Leben, which has come through, but we also had a reduction in shipping go through, we also had some reduction in CRE, all those disposals basically served to move us to a better position with regard to balance sheet. And you see that tangibly in terms of how they actually add to capital accretion from our capital ratios.
So if you like, we sort of take a P&L hit, which goes to the NAV, but it's -- the costs are actually building the capital base of the business. And obviously, they're also improving the financial strength of the business as well.
There are some couple of associated things as well. We talked about, again, some of these are related to the disposals that we're taking.
Whilst the Australian deal hasn't completed, we wrote off GBP 350 million with regards to deferred tax assets, that is directly related to that transaction, which again, impacts the net assets. And then on top of that, obviously, we also got continued spend on Simplification, continued spend on Verde that will come through.
As we move forward, what would I expect to see? I think the GBP 600 million in quarter on asset sales is an exceptional amount, I would expect to see that come down, so it's just I guess seasonality also that Antonio was saying earlier.
As we run down the size, the quantum of that book, I would therefore expect to see as we look to manage it differently, more optimized value, smaller drags in terms -- P&L drags in terms of asset sales. Simplification and Verde.
Simplification, I would expect probably will be something like another couple of hundred million I think the rest of this year, then I think that will leave us with about GBP 600 million to come next year. Verde, I think that's about GBP 100 million build cost, and there's a bit of build cost next year.
There will also with Verde, as we move towards the deal, there will be some IPO costs, just transaction costs, that is on top of that. And we'll also for a while have some duplicate costs of carry as we have business, which is awaiting IPO, and there are some duplication, but also, we will be earning the income at that point on that.
So I hope that sort of helped you in terms of what's happened on the net assets and the size of deferred tax. Oh, PPI, sorry, I forgot.
Oh PPI, sorry, I got carried away. The PPI, yes, potentially, it's roundabout about 20%, and you're dead right in terms of the GBP 1.7 billion is unutilized, about 20% will cover costs.
And you're dead right in terms of when -- as we come to the rundown, we should be able to free up those costs, and there should be a benefit to come through that. That's absolutely correct.
And a lot of the costs, as you expect, a lot of the 6,000 people that are actually working on PPI, a lot of that is contracted out, which gives us, obviously, a variability in terms of that cost base.
Claire Kane
Great. Can I get really one follow up on the capital movement in the quarter?
I would have seen that the DTA coming down would have been the difference between why the capital base on a regulatory sector to reduce as much as the statutory equity base. You did mention Slide 14 changes deductions for excess expected loss and AFS reserves.
Is that what is boosting that line up versus the equity base?
Mark George Culmer
AFS reserves should be going through both the equity base and the capital base, so that shouldn't be a particular difference. EL is obviously a capital solo and that won't -- that will be a differential between capital base and equity base.
Operator
Your next question comes from the line of Jason Napier.
Jason Napier
Just 2 quick ones, if I might. The first, deposit performance in the core bank quarter-on-quarter, the balance is only up about 0.5%, and there's been some talk in the market of a slightly more aggressive stance from yourselves and the market for term deposits, which is obviously somewhat in contrast to what Governor Carney is saying on liquidity requirements and it's also in contrast to your own targets on LDR.
I just wondered, deposit clearly being a source of upside and margin, as the 2. Is there any sort of reason why you'd be looking to be more or less aggressive in the term market?
Do you recognize that as a comment? And where do you see flow pricing for deposits now versus where the book is?
If you could give us just the rough sense to the nearest, I don't know, 30 bps or so, that will be really helpful.
António Mota de Sousa Horta-Osório
Jason, this is Antonio. I'll answer that first question.
That is a comment, to be very frank with you, I have heard before, but which I don't really think it reflects at all our strategy. And let me explain to you why.
I mean first, because everything you said is right, and second, because we follow a multi-brand strategy and also multi-channel. And so it's quite difficult, I believe, for our competitors to really understand our deposit strategy because you'll have to see it as a whole.
And what we are doing is exactly the same that we have been doing with a caveat, and that's why, as you said, our deposits on the core bank increased slightly only in the last quarter, which is as we reached 100% core loan-to-deposit ratio in March, we then started, as I think I have said before in other IMS presentations, we have started to manage all deposits in the bank, mostly on value, except the relationship deposits, so the 3 brands, the 3 core brands, the Bank of Scotland, Halifax and Lloyds, which I think that approach has to be managed also in the context of market share because retails, picky loyal customers have to be treated as customers, and therefore, we have market share considerations. So to summarize, given that we have now 100% core loan-to-deposit ratio, we will continue to increase deposits to the extent that we increase core loans.
Core loans are accelerating because we have accelerated SMEs and mid corps, but we have also returned mortgages to grow, and therefore, you see -- you will see deposits growing accordingly because we will keep the restriction of 100% core loan-to-deposit ratio. It has been and it is continuing to be as we go through October quite easy to attract deposits in the U.K.
at least for us because, as you know, deposits in the U.K. keep growing as people continue to deleverage in percentage terms.
And therefore, although they are spending more, and the economic recovery is improving. In percentage terms, deposits -- they save a bit more on deposits, are continuing to grow.
As in terms of that aggressive thing you mentioned, which I have, as I told you, heard before, I don't think that has any type of substance. We do not need to do it, as you just said, deposits are flowing very well, and I don't see, and I'm sure you will not see any type of difference in our strategy, we do use our non-retail franchise brands like, Birmingham Midshires and others tactically.
And we do use the retail brands on a strategic sense, and you will continue to see these in terms of multi-brands, multi-channel, which, as I said from the start, since June 11, I think it's a key core competitive advantage of our positioning in the U.K., especially in the context of low-interest rates, because it enables us to satisfy different customer preferences in terms of brands, channel and other types of criteria, while at the same time, maximizing, in my opinion, the way that we manage the margin of the assets minus the margin of the liabilities.
Jason Napier
That's helpful. I certainly doesn't -- if we can have a rationale deposit market now as everyone having hit their LDR targets, perhaps we're never getting one probably in this start -- in this place.
So it's just -- the second question that I had was regrettably a sort of on below-the-line costs, and we have sort of attacked PPI, admin costs a number of different ways in various questions, but the -- if you got 6,000 outsourced folks, you're basically looking at annual costs. If that's everything, over GBP 100,000 each.
And if I look at that and the costs of getting Verde done, I just wonder in terms of governance and accounting and so on, can we really draw a line through these things, post Verde IPO that's all gone, post PPI that's kind of all gone, or is there a decent chunk of sort of in-house expertise and effort going on these things? I would have imagined there must be a decent chunk of these sorts of costs relating to folks that will stay on with the group.
Mark George Culmer
Shouldn't, Jason. And I mean the 6,000 as regards to PPI, and I think the figure you posted for cost is significantly higher than the actual.
But when you look at -- this is a general question, when I look at below-the-line items, which ones are going to be with me for life and which ones will drop away, I mean Verde will drop away, Simplification expires 2014, and as I said, I think we have -- I think that's 200 probably this year, 600 then we're through on that one. The PPI, it causes fluctuation to have to put out extra thumbs, extra moneys each quarter.
But the thing we would point to is that complaints do continue to track down, and perhaps not at the rate that we wanted or projected, but they are coming down. And as I said, interestingly, they have come down quite significant since the end of the quarter.
So I wish I could give an end data on that and all those sorts of things. But at least the trend is down.
But I certainly see when you look at the trends below the lines, Verde will go, Simplification will finish, PPI will end. Asset sales, as we were just talking about, we've completed the fundamental restructuring of the balance sheet.
We've taken the big lump. There was a large and unusual charge in Q3, but that was led by Heidelberger Leben, which is a dead right deal to do.
But as we move down to -- more to optimization, I would expect whilst there would be some losses, to be a lower quantum. So yes, they've been the features of the results this time, but I do expect them to fall away.
Operator
Your next question comes from the line of Chintan Joshi.
Chintan Joshi
I've got 2 questions. First one on the NII.
If I look at your deposit margin, asset margin breakdown, it looks like deposit margins have increased in pace, improvement has increased in pace this quarter. Last quarter, you were at 16 bps, this quarter at 28 bps.
But equally, asset margin pressures have increased. Could you give us some color into kind of the driver on both sides?
At the half year stage, you are kind of saying that the pace of deposit improvement should fall off, but actually it's accelerated, and asset margins have tended to be quite resilient, we have seen about a 5 bps deterioration. Some comments on both those would be helpful.
António Mota de Sousa Horta-Osório
Okay. Look, I will take that first question.
I mean I think you are absolutely right on what you say when you look at the slides that you have to take into consideration that you have, when you look at the 2 slides, you have the third quarter of '13 in, but you also have the second quarter of 2012 out. So the fact that you have those different numbers in the comparison does not mean necessarily that there is a big change on the present situation.
As I told to Jason, and I want to reiterate to you, number 1, that what we really manage, as I said many times, is the difference in the margin between the asset size and the deposit size, because given that the loan-to-deposit ratio in the U.K. is still higher than 1, I think that is the right way to look at it because for each GBP 1 of loans that we give, we need GBP 1 of deposits to fund it, especially when we do as really I think we -- at least we do, we have a target of a core loan-to-deposit ratio of 100%.
So the right thing to manage is the difference of the 2 margins. And as I told to Jason as well, I think the trends in terms of deposits are exactly the ones I said to Jason.
I mean, you have to understand, we have a multi-brand, multi-channel strategy, which may look sometimes difficult to understand from the outside, but I think that is the key competitive advantage of our U.K. positioning.
And on the asset side, as I said to Chris in the beginning, although obviously when asset margins come down on mortgages, you have a higher risk of some cannibalization because the prices available for SVI customers are relatively more attractive. I think the way that the Help to Buy scheme is priced, number 1, and the fact that there were no loans available at about 80% loan-to-values before, will mainly imply, as you asked on your question, that we will do significantly higher volumes of 75% adjusted LTV mortgages with quite attractive margins, and that will substantially -- that will improve NII going forward.
And our story, our equity story going forward, now that we have all of our core loan segments growing, is a story that will progressively shift from NIM, which has been increasing throughout the year, to a story of NII where you have to multiply NIM by increasing volumes over time on the core loan book. But relating to your specific technical question, I can tell you that the present situation in terms of margins is very much in line with what I said at quarter 2, and the difference of the 2 slides is more because you take away second quarter of 2012 in your comparison.
Chintan Joshi
Got that one. And the second question was a kind of again a detailed question.
If I look at your NIM, the average interest earning assets, I back out nonbanking and NII about GBP 100 million. Is that the right calculation?
Mark George Culmer
So what was the question again, sorry?
Chintan Joshi
If I look at your NIMs, if I look at your average interest earning assets, I can back out your nonbanking NII of about GBP 100 million in the quarter. Is that the right calculation?
And also how should we think about that line going in the future?
Mark George Culmer
Yes. You can back that amount, but I don't see that there will be any material shift in that going forward.
So we -- we will get -- yes, I'll let -- we'll give you a ring if that's any different from that, okay? So I don't see that there'll be any shift in there.
It's the right way to look at it, but I don't see any material shifting going forward. But if it's different from that, we'll get back to you.
Operator
Next question comes from the line of Arturo de Frias.
António Mota de Sousa Horta-Osório
Can you repeat the name? I haven't heard the name.
Operator
The name is Arturo de Frias.
António Mota de Sousa Horta-Osório
Arturo.
Arturo de Frias Marques
May I ask you for volume growth next year? I think you have repeated already twice in this call that the story into 2014 is going to change from NIM improvement into NII improvement based on volumes.
Can I ask you, specifically, what kind of -- I mean, which of the different areas of lending, mortgages or corporates or SMEs you think can give the positive surprise into 2014? And also on the cost side, I know you have mentioned that you didn't want to give a guidance into 2014, can I ask you in terms of cost to income ratios, because a number of questions during the call have been mentioning reductions in costs coming from PPI management, coming from Verde, coming from a number of cost areas, so I think we should all expect a substantial improvement in cost income ratios in 2014?
António Mota de Sousa Horta-Osório
Right. Thank you very much, Arturo.
So let me tell you something about those 2 questions. On the first one, I mean just to be very precise, I haven't said exactly that the story would change from NIM into volumes.
What I said is that you should change the focus from NIM into NII, which is a multiplication of NIM versus volumes. To be very precise.
And I think it's important. And in terms of the volume-specific part of the NII, the way I see it is quite simple.
So I see mortgage growth in net terms raising from the 0.7% of the latest Bank of England reports on a 12-month basis. I think it will grow into the 2%, 3% in the next 12, 24 months.
That's just an expectation because as I told you many times, I mean as I have said many times, Arturo, what is important for us is to be right on the direction, and the intensity we'll adjust along the way. But -- so it will be up.
It will be clearly be up. We can see that through increased confidence in the Help to Buy scheme.
I think it will logically be up by 2%, 3% in the next 18 months, so 12, 24 months. We want to grow, as I said before, within the market -- in line with the market.
So whatever the market growth will be, we will try to replicate the market, so keeping our mortgage market share around the 25% level, which is our natural market share in the retail U.K. market, with an emphasis in first-time buyers.
So you can expect probably a bigger market in the first-time buyers, as I said before, but overall, growing in line with the market. On the other segments, UPLs, UPLs, which is a focus of our retail division as I said during the year, in terms of preparation of activity for next year in UPLs, and in credit cards, I think you can expect an inflection, both in the market and in ourselves where we see the volumes as a whole to stop falling and increasing slightly, and we want to increase our UPLs and credit card volumes as well, and more than the market, because where we have a 25% market share post TSB in the current accounts, mortgages and savings, we have only around half that market share when you consider their secured markets as a whole and the credit card markets.
So you can expect us to progressively increase volumes next year and to start increasing more than the markets. In terms of SMEs, where we are growing 5% in net terms, and as per Bank of England numbers, the market is falling 3%, this 8% difference versus the market, which if you exclude us from the market, given we are 21% of the market, is like a 10% overperformance -- outperformance of the market.
I don't want it to increase more than 10% of the market. I think that the SME net lending growth of the market will progressively improve as the Funding for Lending Scheme gets through, in SMEs and corporates, it takes longer than in mortgages.
And I think the minus 3%, which is the Bank of England number, will progressively be less negative by year-end and probably positive sometime next year. And you can expect us continue outperforming the market.
But I don't want to increase the difference versus the market in terms of prudence of our approach and in terms of all considerations in the round. So you can expect us to continue to increase by at least 5% and keeping a significant difference versus the market.
Where I think you will see another shift in our performance is in terms of that mid-corporate sector where we started increasing in the beginning of the year and we are gaining momentum. And again, while the Bank of England number is minus 4%, and we are positive, I think the minus 4% will trend to better numbers as the economic recovery improves, and we will also accelerate our growth.
And so I think this covers all the segments. So you can expect, in summary, our core loan growth to continue to accelerate.
And when you see the report of the first of the Funding for Lending Scheme of Q3, which the Bank of England will report in the beginning of December, you will see exactly the numbers that can substantiate that.
Mark George Culmer
And on costs, Arturo, yes, just I mean -- sorry, we do have guidance for 2014, which is the GBP 9.15 billion, the early comment was, well, it was sort of updating it or revising it, and so no, we will stick with existing guidance and we will update at the end of the year as required. But just -- and then just in terms of how the numbers flow through, I mean this is just in terms of how we present and cut the numbers.
But as we stop -- so we're going back to Jason's questions, we stop the below-the-line items, the PPIs, the Simplification, they don't go into the cost income ratio per se because those are exceptionals, one-offs, so they -- the cessation of those activities, which will come, doesn't flow directly into the cost income ratio.
António Mota de Sousa Horta-Osório
Yes, yes, that's a good point. We -- I mean, as you know, I mean, we have given the guidance of GBP 9.150 billion for next year.
I just want to remind you that the reason why it's a very strange number, GBP 9.150 billion is because it's basically GBP 9 billion, plus Verde, and we were assuming in Q2 as, we are assuming now, that the Verde IPO will be around midyear. So if we have Verde more time or less time, you'll have more cost or less cost.
But as George mentioned, we will also have more or less revenues of Verde. So it's the cost we can make, question, Arturo, you were asking, but our guidance is exactly the same, which is around GBP 9 billion for x TSB, assuming TSB media is GBP 9.150 billion.
As you correctly pointed out, our key strategic target is the cost to income, as we do believe, and that's why we have been giving guidance all the way through up to now, we do believe that on the first stages of this strategic plan, you always have to focus on costs, because as you lower the nominal costs through the Simplification of the bank, from the customers point of view, you create the competitive advantage in terms of cost to income that will progressively enable us to offer better value for money for customers, and therefore, to increase on the positive and healthy way our market share and share of wallet in all the segments where we are underrepresented. And this means, insurance, we have 11%; credit cards, UPLs, we have around 15%, as I said before; asset management, sub-10%; LOI of SMEs, introduction banking, debt capital markets, foreign exchange, hedging, et cetera, we are very small.
So all of those will progressively increase, but based on what I think is the right policy, which is sharing the cost savings of Simplification between customers and the investors. And therefore, as you asked me, our cost to income ratio will continue to improve.
As I said in my initial remarks, we are now already at the best of the main U.K. banks, with a 52%, excluding the SAP impact while the [indiscernible] is between 56% and 65%.
And I do believe, just to give you an idea, that our cost-to-income ratio will trend towards the 45% level as interest rates start to normalize and will reach around the 2.5% level. So just to be precise, normal interest rates in the U.K.
context are probably interest rates around 4%. As long as they reach around 2.5%, our cost to income should trend to around 45%.
If they normalize to 4%, it will trend lower, okay? Just to be...
Arturo de Frias Marques
That was extremely helpful. Can I ask you just a very quick follow-on.
You think you can still outgrow the SME U.K. market by 10 points next year?
António Mota de Sousa Horta-Osório
A good question. I mean I'm not sure about that, Arturo, in the sense that the 10% was just an illustration to you of how much we are outperforming the market.
But I do think that our growth to SMEs next year will be higher than this year. So more than the 5%.
Depending on how much the market improves and in which specific subsegment it improves, we will respond accordingly, and again, I don't want to be too precise on intensity. But for me, it's very clear that the U.K.
economic recovery is gathering pace and is spreading throughout the U.K. not only in London and the Southeast, point 1.
Point 2, I think SME net lending to the country as a whole will improve from the minus 3 as per latest Bank of England number, and therefore, we will also increase our pace. If it will be 10% or slightly off, I don't know, but it will be more and I think it's very clear that the economic recovery is coming fast.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.
You may all disconnect your lines. Thank you.